Administrator Could Not Have Taken Policy Decision After Yes Bank Reconstruction: Bombay HC While Quashing Write Off Of Bonds Worth Over 8000 Crores

A division bench of acting Chief Justice SV Gangapurwala and Justice S. M. Modak, while deciding a batch of petitions filed by the bond holders, held -

“Yes Bank stood reconstituted on March 13, 2020 upon the Notification of the final Yes Bank Ltd. Reconstruction Scheme, 2020. After the bank was reconstituted, the Administrator could not have taken such a policy decision of writing off the debentures…Nor the RBI had authorized him to do so. The Final Reconstruction Scheme also did not authorize Administrator to write off the AT-1 bonds. It appears that Administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed”.

Tier 1 bonds are unsecured debentures with no maturity date. The bondholder is a creditor to the company who issues the bond. After this decision, Yes Bank will have to pay the dues i.e., principal amount and interest to the bondholders.

In 2016 and 2017, Yes Bank issued Basel III complaint AT-1 capital bonds in the form of non-convertible debentures on a private placement basis. Axis, one of the petitioners, was the debenture trustee to act on behalf of the debenture holders.

The financial position of Yes Bank deteriorated and the RBI, under section 45 of the Banking Regulation Act, 1949 applied to the central government for imposition of moratorium on the Yes Bank. On March 5, 2020 a moratorium was imposed. The RBI appointed an Administrator under section 36ACA of the Act. All powers of the board of directors can be exercised by the Administrator until the board of directors is reconstituted.

The final Yes Bank Reconstruction Scheme was notified on March 13, 2020.

On March 14, 2020 the Administrator informed the Bombay Stock Exchange and the National Stock Exchange the decision to write of the AT-1 bonds. This was under challenge in the present case.

Since the matter is fiscal in nature, the court said that it will not decide whether writing of the bonds was necessary as it doesn't possess the necessary expertise. The court only considered whether decision making process was followed and whether the Administrator had the power to write down the bonds.

The petitioners’ contention was that the Administrator of the Yes Bank had no power to write of the bonds while Yes Bank contended that the issuance of the bonds to the petitioners is a contractual transaction and administrator was within its right as per clause 57 of the contract. Further, it said that it is a private bank and the writ petition is not maintainable against it.

The court noted that Clause 57 of the information brochure is identical to the Clause 2.5 of the Master Circular for guidelines on the Basel III reforms which was issued by RBI in exercise of its statutory powers. RBI invoked section 45 of the 1949 Act for reconstruction of Yes Bank and made the order of moratorium. It also appointed the administrator and placed the scheme of reconstruction in a public domain. Therefore, the information brochure has a “statutory flavour” and the agreement has a statutory base and such an agreement can be enforceable, the court held.

The court noted that the draft reconstruction scheme had a clause for writing of the bonds but in the final scheme the clause was deleted after the petitioner objected to it and suggested conversion of bonds into shares. Thus, the final scheme sanctioned by the central government did not contain any provision for writing down AT-1 bonds.

Section 45 of the Act provides that AT-1 instruments can be written down when the bank is deemed as non-viable or approaching non-viability. However, this should be stipulated in the final reconstruction scheme. Further, clause 57 also suggested that the writing down of the AT-1 bonds could only be done before the bank is reconstructed, the court noted.

The moratorium period was for three working days under the final scheme and the Administrator appointment was for 7 working days. “Only because the moratorium period was extended and or the administrator was continued for further period of 7 days (time for the new Board of Directors to take over), that in itself would not be sufficient to conclude that the reconstruction scheme has not come into effect on March 13, 2020”, the court held.

Case no. – Writ Petition No.785 of 2021

Case Title – Axis Trustee Services Limited v. Union of India and Ors

Citation: 2023 LiveLaw (Bom) 45