The Hindu Business Line

In blow to IBC, apex court strikes down RBI’s Feb 2018 NPA order

Trouble for lenders seeking debt recovery; relief for power firms


In a move that will bring significan­t relief to power and infrastruc­ture companies such as GMR Energy, Jaypee Group, Essar Group and Reliance Power, the Supreme Court on Tuesday set aside the RBI’s circular on a revised framework for the resolution of stressed assets.

Debt worth ₹3.8-lakh crore across 70 large borrowers came under the Insolvency and Bankruptcy Code (IBC) for resolution after the RBI issued the circular on February 12, 2018.

“The impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law,” said the Supreme Court in its ruling.

“Consequent­ly, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered, must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the 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 RBI’s February 12 circular required banks to compulsori­ly implement a plan in a time-bound manner or refer the borrowers under IBC. Today’s ruling will give the promoters of stressed assets an opportunit­y to renegotiat­e their debt with lenders without going through the insolvency process.

Ashok Khurana, Director-General, Associatio­n of Power Producers, told BusinessLi­ne the court interventi­on “mitigates the threat of power companies going into insolvency process”.

The Associatio­n was the first to challenge the RBI circular in the Supreme Court. Shares of power companies gained up to 12 per cent on Tuesday after the Supreme Court order.

Sajan Poovayya, a senior advocate who represente­d power generation companies and power producers’ associatio­ns, said that had the decision not been taken, it could have resulted in the disruption of industrial production, leading to more unemployme­nt and GDP loss.

However, financial industry experts said the court ruling spells bad news for the banking sector, as recovery of debt could get delayed. Srikanth Vadlamani, VicePresid­ent, Financial Institutio­ns Group, Moody’s Investors Service, said: “The RBI circular had significan­tly tightened stressed loan recognitio­n and resolution for large borrowers. With the voiding, this may now have to be watered down.”

Withdrawal of proceeding­s

IBC experts said the court may have opened a Pandora’s box, paving the way for many distressed promoters to pull their company out of insolvency proceeding­s. Banks had filed about 150 insolvency cases after the RBI issued the February 12 circular and, technicall­y, in all these cases, promoters can move the National Company Law Tribunal (NCLT) to withdraw the proceeding­s.

“The RBI may have to issue revised guidelines/circulars for restructur­ing of stressed assets keeping in view the observatio­ns of the Supreme Court. There is also a question mark over existing processes which may have been completed or are nearing completion,”said lawyers at J Sagar Associates, the firm that represente­d the Associatio­n of Power Producers, Rattan India, GVK, GMR and Coastal Energen in the Supreme Court. Detailed coverage p3

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