In response to a transfer petition filed by the RBI, the Supreme Court today issued a status quo order. But in absence of a written order being made public on the court website, there is confusion regarding the implications of the apex court order.
The genesis of the matter is this. The Reserve Bank of India had sought to transfer cases filed in various high courts, against its Feb. 12 circular, to the Supreme Court. Many of these cases were filed by power companies who have challenged the validity of the Feb. 12 circular. The circular directs banks to file insolvency and bankruptcy proceedings against all large loan accounts above Rs 2,000 crore if a resolution plan is not agreed upon in 180 days. The Allahabad High Court hearing one such challenge against the dispute had declined to grant the stay of the circular as sought by the power companies. The high court order also did not inhibit financial creditors to proceed under section 7 of Insolvency and Bankruptcy Code.
When the RBI transfer petition came up in the Supreme Court on Tuesday, Sep. 11, power companies argued that their very existence was in peril if relief was not forthcoming. “If the Supreme Court doesn't act today and grant some relief, then the entire power industry will completely go down the drain by virtue of facing insolvency,’’ said Senior Counsel Mukul Rohatgi while recounting the arguments in court. Rohatgi is representing one of the power companies in the matter.
According to Rohatgi, the Supreme Court’s status quo order brings to halt any insolvency proceedings against power companies pursuant to the RBI circular. Any insolvency proceedings “if filed, there will be a freeze, if not filed there'll again be a freeze—which is to say they cannot be filed,” Rohatgi told BloombergQuint in an interview on the phone.
The Power Companies’ Case
Rohatgi’s client and others in the power industry intend to make the case to the apex court that the RBI has no powers to direct banks to file insolvency proceedings against companies. He argued that the RBI deadline, which expired today, was like a “guillotine”. It would push even those power assets that were close to achieving loan restructuring in to insolvency.
It’s not a question of more time. We’ll tell the Supreme Court to lay down some guidelines. In what situation should a bank be compelled to move against the power producers?Mukul Rohatgi, Senior Counsel (Lawyer to a power company).
When asked why the government had not stepped in to rescue power companies from the RBI circular Rohatgi said there was a “rift” between the government and the regulator. “ From the way the hearings have gone on in the High Court, and even in the transfer petitions, I got a feeling that there is some kind of a conflict between the central government and the RBI.”
Lawyers in court suggested that, along with power companies, a few sugar and shipping companies were also impacted by the apex court order.
Status Quo On Writ Petitions Not RBI Circular, Says Shroff
Offering a contrasting opinion on the implication of the Supreme Court status quo order, leading lawyer Shardul Shroff said it only pertained to the transfer petition and pending writ petitions. Clarifying his view Shroff, chairman of law firm Shardul Amarchand Mangaldas, said “unless the RBI wants to shoot a self goal, why would it seek an order which is contrary to the very order in its favour by the Allahabad High Court.’’
It is erroneous to conclude that the banks will not be able to approach the National Company Law Tribunal until further orders of the apex court.Shardul Shroff, Chairman, Shardul Amarchand Mangaldas.
The Supreme Court will hopefully clarify its directions in the written order that will be posted on its website. The next date of hearing of the case is November 11, 2018.
Watch the interviews with Mukul Rohatgi and Shardul Shroff here.
Here’s an edited transcript of the Mukul Rohatgi interview.
Can you explain to us exactly why the Supreme Court decided to put in this order of status quo? What exactly it means for power companies?
Look it is like this. The RBI had issued a circular dated February 12 which mandates that within six months of the circular and fifteen days thereafter, if power companies or other companies which are in a debt of more than Rs 2,000 crores are not able to sort out their affairs with their bankers satisfactorily, then the bankers will be mandated to compulsorily move insolvency petitions after six months and fifteen days no matter whether the bankers and the companies are nearing resolution of the problems. So that six months and fifteen days expire today actually.
So the power producers in India through their association have moved the Allahabad High Court that such a circular is illegal and the RBI has no power to do it and more so when the bank have a right to independently deal with their clients, then why should there be a compulsion? And why should the guillotine fall on one particular date just because the RBI wants to say that? Therefore they moved the Allahabad High Court. But unfortunately the High Court did not grant them any relief. And said that since some transfer petitions filed by RBI against the repetitions filed by the producers in Allahabad were pending in the Supreme Court.
So the High Court expressed helplessness. So those transfer petitions seeking transfer of those cases to the Supreme Court came up today for hearing before the court. So some lawyers including myself appeared for the power producers and told the Supreme Court that if the Supreme Court does not act today and grant some interim relief, then the entire power industry in this country will completely go down the drain by virtue of facing insolvency. So after a brief hearing the Supreme Court heard the RBI, heard the government and it heard us for power producers and the Supreme Court granted status quo order which means a halt to the proceedings to be initiated pursuant to the circular. So the companies will not face insolvency as of today. And the matter will be heard after sometime. So that is how interim protection or interim relief was granted by the Supreme Court.
We understand that the Supreme Court said that the matter will be heard in November and that sort of suggests that there will for two months a period of status quo that exists on this. Now, putting in the status quo order, has the Supreme Court ordered any comment whatsoever on the Feb. 12 circular and its validity. Or is there no such thing?
No question of the Supreme Court offering any comment. This was a brief hearing called a miscellaneous hearing which happened today in which the matter was heard for 10-15 minutes. It will then be threshed out when the court has time. Now we want to have Dussehra break in the next month for ten days and then there’s Diwali break early November for ten days. So effectively there’s so many parties, so many lawyers. It will take couple of days for a full and a final hearing of this matter. It can only take place in November. So till November there is a freeze. It’s just a freeze. It’s not a decision. So it’s a freeze saying that people stay where they are and the court will rule upon who’s right and who’s wrong.
So if there were any insolvency petitions filed against any of these power companies, they stay in freeze and if there were any insolvency petitions about to be filed against any of these?
Yes, absolutely right. If filed there will be a freeze, if not filed there’ll again be a freeze which will say not to be filed.
We also understand some other industries were clubbed with power industry today?
No, the only thin I know is that some industries from Tamil Nadu which were clubbed, and probably they will also get the same relief.
In fighting for relief is not the power industry attempting to dilute the powers of the RBI?
No, I don’t think so. It is our contention that the RBI has no power under the Insolvency Act, Banking regulation or the RBI Act to issue such directives. Please understand that if a particular company has debt it doesn’t mean that it is always because of negligence or diversion. It can happen because of unfavourable economic conditions. Look at petrol, today its nearly Rs 90 a litre. And if your main fuel is petrol then no industry can be profitable. If issues like that happen and you are pushed into a negative cash flow situation then it is possible for you to work something out with the bank by deferring some interest, or reducing it. These things happen cyclically. They always happen like that. If a solution can be found between a banker and a client then why should somebody say that whether you find a solution or not, the guillotine must fall in six months and fifteen days. It is rather abrupt. And you cannot push huge amount of industries in insolvency. Tens and thousands jobs depend on it. Imagine if one job feeds five mouths, so you have to look at everything.
But many of these power companies have been pending resolution for months if not for years?
I agree. I am not saying that it should go on forever. But it can’t be a guillotine falling on one day. There has to be some staggered approach to it. The banks will have to be asked to take call. Supposed you are 95 percent through in restructuring, should the guillotine be allowed to fall just because some loose ends need to be tied up? In a case where you are not able to restructure at all, then certainly the guillotine must fall. But it needs to be on a case to case basis.
What is the government’s position in the matter?
Let me tell you the Centre has power to direct the RBI to take a particular line or a policy. For that there is no doubt. From the way the hearings have gone on in the High Court, and even in the transfer petitions, I got a feeling that there is some kind of a conflict between the central government and the RBI. The central government is cognizant of the fact that if the RBI’s circular goes through as it is then a great deal of damage will be done. Unfortunately they are hesitant to take action. But there is definitely a rift between the Centre and RBI, that’s my sense. The matter of the fact is that they haven’t acted, I hope they do because we have got a breather.
In effect what this case might do is give other companies and industries the courage to challenge RBI, the entire process and delay resolution.
Look, IBC is a welcome step. There are some teething troubles that we have found in the implementation of IBC. It will take a year or two but it will settle down. It is not a bad thing. It will swiftly provide resolution. But it also doesn’t mean that it will be a streamroller. You can’t have that. Both sides have some perspective to put forth and that is why courts exist. As you know the Supreme Court has already given several verdicts on the IBC, about 10-odd rulings which have been delivered mainly by Justice Nariman’s bench before whom this case is also being listed. Things will iron out. It is not one way traffic.
When this matter comes up again will you all be agitating for more time?
It is not a question of more time. We will tell the Supreme Court to lay down some guidelines. In what situation should a bank be compelled to move against the power producers.
But how can the Supreme Court have more commercial wisdom in this matter than the RBI itself?
Is there any doubt about that?
But the Supreme Court usually keeps itself out of commercial matters leaving the regulators in charge.
That’s all right but it all depends on what the regulator does.
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