3 April 2019: Even though, the Supreme Court has quashed the RBI circular of last year that pertains to the provisions for declaring a company bankrupt even on a one-day overdue, it is unlikely to have major impact on cases which are ongoing in the normal course.
On Tuesday, division bench of the Supreme Court comprising of Justice RF Nariman and Justice Vineet Saran declared the RBI circular ultra-vires and said all proceedings under the rule are invalid.
“All cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”
The banking regulator RBI on February 12, 2018 had issued a circular saying that lenders have to provide for resolution plan within 180 days in case of large account of Rs. 2,000 crore and above. The circular had further clarified that if a resolution was not found by August 27, Non Performing Asset (NPA) accounts should be sent for the Corporate Insolvency Resolution Process (CIRP).
“I don’t see a major impact of this ruling on the Insolvency and Bankruptcy Code (IBC) as a whole,’’ said L Vishwanathan, Partner, Cyril Amarchand Mangaldas. “All those cases, which were filed before the issuance of this circular will continue to be in the stages where they were. Even cases which were filed due to the said circular can also be initiated afresh by lenders by following the IBC process if they choose so.”
Last year, on September 11 the Apex Court had asked banks to maintain status quo and not to initiate insolvency proceedings against loan defaulting companies until further order.
According to Sapan Gupta, National Practice Head at Banking & Finance at the law firm Shardul Amarchand Mangaldas & Co, with this Supreme Court order, now it is no longer compulsory for banks to follow the impugned circular.
“The lenders can now take commercial decisions with regards to taking companies to Corporate Insolvency Resolution Process (CIRP). The impact of this ruling will be only on those cases where the process was initiated due to this circular. However, cases where banks are able to convince NCLTs that they took independent view and initiated the resolution process irrespective of the impugned circular, the process may continue in tribunals in normal course,” adds Gupta.
Lawyers involved in the dispute are of the view that this ruling brings much needed clarity for lenders and borrowers both.
“In light of the Supreme Court judgment, RBI may have to determine such issues on a case-to-case basis keeping in view the observations of the Supreme Court,” said Amit Kapur, Joint Managing Partner of law firm JSA who was advising Association of Power Producers, Rattan India, GMR, GVK and Coastal Energen in the dispute.
There is also a question mark over assets where restructuring processes which are completed or nearing completion. “With the threat of IBC proceedings mitigated, and recent CCEA, MoP and MoC notifications implementing the recommendations of the High Level Empowered Committee, there is now room for regulatory and policy action to salvage or reform the sectoral issues and revive the power companies,” adds Kapur.
However, this ruling may also lead to further litigation and counter-litigation as well.
“This is definitely a setback for the time being in so far as action initiated IBC pursuant to the circular is concerned,” said Rajesh Narain Gupta, managing partner at law firm SNG & Partners.