Supreme Court Permits Withdrawal Of SLP Filed By Jayaswal Neco Industries Ltd. Against RBI , Imposing A Cost Of Rs - 10 Lakh

Background Facts

Jayaswal Neco Industries Ltd. ("Petitioner") had a large quantum of stressed assets and it was classified as Non Performing Assets (NPA) on 31.01.2015. The Reserve Bank of India had released the framework for revitalizing distressed assets in the economy and had accordingly issued guidelines for formation of Joint Lenders Forum (JLF) and adoption of Corrective Action Plan (CAP) for operationalizing the framework.

In context of the Petitioner, the JLF consisted of 12 banks including the State Bank of India (SBI) as the lead lender and PNB, Union Bank of India, Central Bank of India, Oriental Bank of Commerce, Indian Overseas Bank, IDBI Bank, Bank of India, Bank of Maharashtra, ICICI Bank, Andhra Bank and UCO Bank. The JLF's first meeting was held on 17.03.2017 wherein, it was decided to hold back National Company Law Tribunal ("NCLT") proceedings till April 2017 and on 07.09.2017 the restructuring scheme of the Petitioner was approved with supermajority.

On 28.08.2017, the RBI issued directions stating that any resolution plan finalized outside Insolvency and Bankruptcy Code, 2016 ("IBC"), will be subject to the rating requirement i.e. the residual debt must be rated as an investment grade by two external Credit Rating Agency ("CRA") accredited by the RBI. Further, the RBI vide circular dated 13.06.2017 had prescribed time limit of 6 months for finalizing the resolution plan outside the IBC and through its communication dated 30.11.2017 it had informed SBI that the deadline for finalization and implementation of resolution plan was 13.12.2017 and the following three conditions were to be fulfilled by the due date:

1. Obtaining required credit opinions for the resolution plans from two CRAs;
2. The Master Restructuring Agreement signed by all the parties and;

iii. The requirements relating to the promoter's contribution to be brought upfront and personal guarantees to be provided by the promoters.

The SBI appointed two accredited CRAs i.e. CARE and SMERA on 21.09.2017 and 28.09.2017. However, the RBI issued a circular on 29.09.2017 and decided that it would assign two CRAs for each proposal and make payment to such CRAs.

Before issuance of directions dated 29.09.2017 by the RBI, the SBI on behalf of JLF had already appointed the two CRAs and the work had also commenced. Therefore, SBI tendered two representations to RBI dated 17.10.2017 and 06.12.2017, highlighting that two CRAs i.e. CARE and SMERA have already been appointed and they must be ratified. The RBI did not respond to the representations and hence there was no instruction to the SBI to discontinue with such appointment.

On 07.12.2017, the RBI confirmed the credit opinion obtained from CARE and directed the SBI to obtain a fresh rating from India Ratings and Research Private Limited ("IRRPL"). In a meeting of JLF conducted on 12.12.2017, it was confirmed that 10 out of 12 lenders of the Petitioner barring Oriental Bank of Commerce and IDBI Bank, with around 92% of the value had sanctioned the restructuring scheme. The Lender Legal Council (LLC) had advised that the Master Restructuring Agreement ("MRA") could be signed in the absence of sanction from 2 member banks. Accordingly, the MRA was executed by ten lenders on 12.12.2017 and was handed over to the SBI. However, the RBI issued a circular dated 12.02.2018, whereby it revised its policy on stressed asset restructuring and discontinued the JLF scheme by stating that the accounts where the JLF schemes was invoked but not yet implemented, shall be governed by the revised framework. RBI was of the opinion that the Petitioner had failed to implement the MRA and therefore, shall now be governed by revised guidelines.

Proceedings Before The Bombay High Court

The Petitioner filed a writ petition before the Bombay High Court challenging the following actions by RBI:

9. Retrospective application of internal communications dated 29.09.2017 and 30.11.2017;
10. Stalling of the implementation of Master Restructuring Agreement (MRA) dated 12.12.2017,
11. Failure to consider Petitioner's representations dated 15.12.2017, 16.12.2017, 22.12.2017 and 26.12.2017; and

iv. Failure to consider the credit opinion obtained from SMERA, which is one of the accredited CRA, in terms of its circular dated 13.06.2017 and directing SBI to appoint third CRA i.e. (IRRPL) on 07.12.2017, for the purpose of obtaining fresh credit rating by SBI, knowing well that the deadline is 13.12.2017.

The Petitioner had also prayed for grant of interim relief, restraining the other lender banks from initiating proceedings under the IBC, pursuant to the directives issued by the RBI.

As per the Petitioner, all three conditions were met before the deadline of 13.12.2017 and the MRA had already been implemented. Therefore, there was no need to approach the NCLT. Further, the CRAs had certified the residuary debt of the Petitioner as 'investment grade' and thus the revised guidelines were not applicable to the Petitioner. The RBI had contended that the MRA was not implemented and that the Petitioner failed to comply with all the conditions i.e. (i) bringing in upfront contribution by the promoters, (ii) the credit ratings of accredited CRAs, that the residuary debt of the company is of investment grade (iii) the CRA appointed by the RBI i.e. IRRPL has recorded the creditworthiness as 'low safety regarding timely servicing of financial obligations'. Since the scheme was not implemented, in view of the policy prescribed by the RBI on 12.02.2018, there cannot be any implementation of any MRA outside the IBC.

The Bombay High Court vide an order dated 05.03.2018 dismissed the writ petition and upheld RBI's contention that the three conditions were not fulfilled by the JLF and its revised guidelines are binding on the Petitioner. The Court also paid attention to the fact that SBI had already initiated insolvency proceedings against the Petitioner under IBC. It was observed that the Court's function is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority; it cannot interfere with economic policy which is the function of experts. Further, under the provisions of the IBC, the very object of formation of the JLF and the execution of MRA by majority members and stakeholders of the JLF, can be taken care of, even under the proceedings initiated before the NCLT.

It was observed that the CRAs in respect of which the Petitioner had raised an objection were appointed by the JLF and the Petitioner itself failed to bring in upfront contribution under directives of the RBI which became a reason for non-implementation of the MRA. Moreover, IRRPL (CRA appointed by RBI) did not find the residual debt of the Petitioner to be 'investment grade' and the MRA has not been signed by all the lenders. Considering these factors, it cannot be said that the MRA has been operationalized. In view of the policy declared by the RBI on 12.02.2018, since the JLF scheme itself has been withdrawn, any direction for implementation and enforcement of the said scheme, cannot be issued. The new policy appears to have been declared by RBI for the reason that the NPA, in the Nationalized Banks, have touched almost 8,00,000 Crores.

Proceedings Before The Supreme Court

The Petitioner filed a Special Leave Petition ("SLP") before the Supreme Court challenging the Order dated 05.03.2018 passed by the Bombay High Court in Writ Petition (Lodging) No. 56 of 2018. The Supreme Court Bench had heard the matter on 16.04.2018, wherein notice was issued and status quo was ordered to be maintained by the parties.

Between December 2018 to June 2021, eleven out of twelve lenders of the Petitioners had assigned their debts to Assets Care & Reconstruction Enterprise Ltd. ("ACRE"), while the 12^th lender entered into One Time Settlement with the Petitioners. As a result of which, ACRE became the only Financial Creditor. Consequently, ACRE and the Petitioners reached an arrangement whereby ACRE agreed to withdraw proceedings filed under IBC before the NCLT against the Petitioners. In turn, the Petitioners agreed to withdraw the instant Special Leave Petitions. In pursuance of the said arrangement, two interim applications were filed. One was filed by the Petitioners seeking withdrawal of the SLP and another was filed by ACRE seeking directions.

Objections By RBI

The RBI opposed the two applications and submitted that the matter be taken up for hearing on merits. It was further submitted that Petitioners and ACRE have taken advantage of the status quo order and entered into arrangements behind the back of the RBI.

Decision Of The Court

The Bench opined that though the submissions of RBI have force but the applications for withdrawal and directions are being allowed mainly because out of eleven lenders, who assigned the debts to ACRE, nine lenders are Public Sector Financial Corporations/Banks. If the permission to withdraw the Special Leave Petitions is not granted and the status quo is permitted to continue, it may lead to a situation where huge sums of money may be required to be refunded by such lenders.

The Bench allowed the withdrawal of the Special Leave Petition and also allowed the application filed by ACRE. A cost of Rs.10,00,000/- was imposed on the Petitioners, to be deposited with the Supreme Court Middle Income Group 4 Legal Aid Society.

Case title: Jayaswal Neco Industries Limited & Another v Reserve Bank of India & Ors., Special Leave Petition (Civil) Nos.9286-9287 of 2018.

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