Allahabad HC grants temporary relief to power firms from insolvency proceedings

The Allahabad High Court today issued a temporary injunction against a circular issued by the RBI, which gave borrowers 180 days’ time to clear their dues, beyond which the borrowers faced insolvency proceedings under the IBC.

The grant of injunction against insolvency proceedings, however, is limited to firms belonging to the power sector.
The Independent Power Producers Association of India challenged the RBI circular of 12 February 2018 as being violative of Articles 14 and 19 of the Constitution. It has also challenged the vires of Sections 35AA and 35AB of the Banking Regulation Act.
These provisions were inserted by through an ordinance last year to empower the central government to issue directions to RBI to effectively deal with stressed assets. RTBI has also issued two circulars – one issued on 13 June 2017, which listed 12 large accounts to be proceeded against under IBC, and another issued on 12 February 2018, which said that banks will have to disclose defaults even if the interest repayment is overdue by just one day and have to put a resolution plan in place within 180 days.
It further said that failing to find a resolution within this stipulated time, the defaulting company will have to be referred to NCLT as the RBI had abolished all the extant debt resolution mechanisms such as the S4A, SDR, JLF etc.
The petitioner had challenged various elements of the circular as being unconstitutional. The primary grievance of the petitioner was that the circular was a result of non-application of mind, inasmuch as it painted all forms of ‘stressed assets’ from various industrial sectors with the same brush.
They have argued that no distinction had been made between genuine and wilful defaulters. They say that they are genuine borrowers who are unable to service their loans for reasons beyond their control, such as want of government support in respect of allocation of natural resources, power purchase agreement etc.
The Petitioner Association also cited the report of the 31-members committee of parliament on energy, constituted in October 2017, which submitted its findings in March 2018. The parliamentary standing committee has analysed, in great detail the issues crippling the power sector, the reasons for their becoming NPAs/Stressed Assets and recommended consideration of the precarious and unique distress of the power sector in the country.
Further, the 180 days time period for implementation of a resolution plan has also been challenged as being arbitrary insofar as this timeline is prescribed only for accounts with a debt of over Rs2000 crore and not less than that. The said quantum has also been challenged as having no rational nexus to the object sought to be achieved either by Sections 35AA and 35AB.
The Petitioner Association further challenges the Circular as it seeks to introduce the consent of all lenders, which according to them completely destroys the concept of the majority and makes it virtually impossible for a restructuring proposal to be approved. They say that as a consequence of this provision, a single lender holding 1 per cent can also derail the process.
The Petitioners also argue that the RBI has exceeded its authority in issuing such a circular, in view of its clear mandate, “to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in lndia and generally to operate the currency and credit system of the country to its advantage ”
Senior advocate Sajan Poovayya appearing for the Petitioner Association, took the Court through the impractical timelines under the circular for resolution and reference under IBC, of the stressed assets, in case of defaults.
Poovayya, submitted further that the withdrawal of the extant instructions would imply that there would be no manner of a possible revival of these stressed assets.
He further submitted that while an illusory period of 180 days has been provided under the circular for reference under IBC, this particular clause, in effect, pushes these stressed assets to an inevitable liquidation under the Code.
In light of the submissions by the parties, the Allahabad High Court Bench of Chief Justice Dilip Bhosale and Justice Suneet Kumar was pleased to observe that “action may be avoided on the basis of the impugned Circular”. Consequently, vide the order dated 31 May 2018, stressed assets pertaining to the power sector are now immediately protected from insolvency proceedings, subject to the condition that the member(s) is/are not wilful defaulter(s).
The Allahabad High Court has, accordingly, directed the ministry of finance to conduct a meeting in June, along with RBI and the secretaries in the ministry of power, ministry of petroleum and gas, and ministry of coal along with a representative of the Petitioner Association, to consider their grievance and see whether any solution to the problem is possible, in the light of observations made by Standing Committee Report.
The matter has now been adjourned for further hearing on 10 July 2018.