Banking Sector
COVID 19OP. ED.

In order to soften the global impact of COVID-19 on the banking sector, Reserve Bank of India on 27-3-2020 announced a moratorium for a period of 3 months starting from 1-3-2020 to 31-5-2020 on repayment of all term loans by borrowers including individuals and companies. Clause 5 of RBI statement did not make the moratorium mandatory rather discretionary meaning thereby if a borrower wants, he can pay the EMI with interest and opt out of the moratorium option. On the other hand, if a borrower does avail such a moratorium then that would not lead to downgrading of the borrower’s credit rating or affect the risk classification of the loan. Further, availing the moratorium will not entail any change in the existing terms and conditions of the loan. The interest on EMI, however, shall continue to accrue on the outstanding amount and the collective interest for the 3 months shall become due and payable only after the expiry of deferment period.

This article addresses a set of peculiar issues that have arisen in view of the arrangement of repayment of loans in terms of RBI guidelines and the view taken by Courts in a few cases. The most glaring issue relates to the date of coinciding of an account becoming NPA with the declaration of 3 months moratorium period starting from 01.03.2020.

The Income Recognition and Asset Classification Guidelines (IRAC Guidelines) of RBI provide for a three-stage process before an account is declared as NPA. On default of the first 30 days, the borrower’s account is classified as Special Mention Account–1 (SMA-1) and if the instalment is overdue by 60 days, the account is classified as Special Mention Account–2 (SMA-2) and if the instalment is overdue by a period of 90 days, the account is classified as Non-performing Asset (NPA).

The case of Anant Raj Ltd. v. Yes Bank[1] filed before the Delhi High Court appears to be the first case on the issue as to whether an account having being declared SMA-2 on 01.03.2020 would be eligible to avail the moratorium period or not? The Delhi High Court interpreted the Guidelines in a manner that it provides a status quo even in the classification of any account which is already in default. The Court held that:

“The restriction on change in classification as mentioned in the regulatory package shows that RBI has stipulated that the account which has been classified as SMA-2 cannot further be classified as a non-performing asset in case the instalment is not paid during the moratorium period i.e. between 01.03.2020 and 31.05.2020 and status quo qua the classification as SMA-2 shall have to be maintained.

The Court further held that:

‘…for a period of three months there will be a moratorium from payment of that instalment. However, stipulated interest and penal charges shall continue to accrue on the outstanding payment even during the moratorium period. If post the moratorium period, borrower fails to pay the said instalment, classification would then automatically change as per the IRAC Guidelines.”

A similar proposition arose before the Bombay High Court in Transcon Sky City Pvt. Ltd. v. ICICI Bank [2], where the question for consideration was whether the moratorium period is excluded in the computation of the 90-day period for amounts that fell due prior to 1-3-2020 and which remain unpaid or in default. The Court prima facie held that the protection sought to be availed by Transcon Sky City by virtue of RBI circulars would clearly apply to all amounts due after 01.03.2020.

Another interesting yet distinct controversy has arisen before the Delhi High Court in Indiabulls Commercial Credit Ltd. v. SIDBI[3] where ICCL challenged the demand raised by Small Industrial Development Bank of India (SIDBI) for the month of April 2020. The Court considered whether the 3-months’ RBI moratorium is applicable to Non-Banking Financial Institutions (NBFC) or not? Unfortunately, RBI has not given any clarity on this issue and to twist the knife, the Indian Bank’s Association (IBA) circular leaves out NBFCs as beneficiaries of 3 month moratorium period. An indisputable argument of the NBFCs is that money is borrowed from the financial institutions in order to disburse loans to low income earners and smaller sectors. Naturally, these sectors will default in repayment by availing moratorium and if the financial institutions do not ease the repayment terms by NBFCs then it would be calamitous.

The orders passed by Delhi High Court and Bombay High Court have met with some criticism from the banking industry, apprehending its possible rippling effect on other accounts, and a possibility of other defaulters taking a shield of such orders to protect their accounts from any further downgrading.

The borrowers claim that the Courts have correctly interpreted RBI circulars to mean that status quo shall be maintained for all term loan accounts maintained with the banks as on 01.03.2020.

It would be interesting to see if the judgments are challenged by the banks or financial institutions, and what is the outcome. For the present however, the Courts have acted with a pragmatic approach to find a solution to the economic and financial difficulties of the borrowers.


*Arjun Garg is Advocate on Record and Partner at GSL Chambers

**Rati Tandon is an Advocate and Associate at GSL Chambers

[1] 2020 SCC OnLine Del 543 

[2] 2020 SCC OnLine Bom 626 

[3] 2020 SCC OnLine Del 573

Case BriefsCOVID 19High Courts

Delhi High Court: Sanjeev Sachdeva, J. addressed the urgent matter with regard to a direction being sought to Yes Bank regarding not taking any coercive steps against petitioner.

Yes Bank Limited had through emails informed the petitioner that his account will be declared as non-performing asset, due to non-payment of installments for the months of January and February, 2020.

Advocates for the petitioner, Saket Sikri and Nikhil Singhvi, contended that in view of the RBI Circular dated 27-03-2020, respondent cannot declare the account of petitioner as a non-performing asset and any action in that regards needs to be deferred till 01-06-2020.

Advocate for the respondent Ashwani Chawla submitted that,

Moratorium is applicable only with regard to instalments which fell due after 01-03-2020 and are not applicable in respect of the instalments that had fallen due as on 01-03-2020

Further the advocate has asked time to file response for the same.

Thus Court while providing time for response has listed the matter for 03-04-2020. [Anant Raj Ltd. v. Yes Bank Ltd., 2020 SCC OnLine Del 493 , decided on 01-04-2020]

COVID 19Hot Off The PressNews

Significant pointers placed by RBI Governor Shaktikanta Das in the press conference:

  • Liquidity in markets
  • 150 RBI Staff quarantined.
  • Minimise market volatility.
  • Sizeable reduction in repo rate.
  • Relax repayment pressures.
  • Food prices expected to soften further.
  • Lending institutions to allow moratorium of 3 months.
  • Reduction in repo rate to 4.4%
  • Reduction in reverse repo rates by 90 basis points
  • 3 Month interest deferment on loans
  • Governor states that the Indian Banking System is safe and sound
  • Volatility in markets  would
  • Cash Reserve Ratio reduced by 3%
  • Banks can defer EMI Payments.

[To be updated with official press release]

What all does the Press Release statement consists? Read below:

  • MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target. While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent.
  • Simultaneously, the fixed rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, was reduced by 90 basis points to 4.0 per cent, thus creating an asymmetrical corridor. The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy. It may be recalled that during the month of March so far, banks have been parking close to Rupees 3 lakh crore on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down.
  • This decision and its advancement has been warranted by the destructive force of the corona virus. It is intended to (a) mitigate the negative effects of the virus; (b) revive growth; and above all, (c) preserve financial stability.
  • We are living through an extraordinary and unprecedented situation. Everything hinges on the depth of the COVID-19 outbreak, its spread and its duration. Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode. Life in the time of COVID-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do.
  • In the recent period, the Reserve Bank has been in action on a daily basis with efforts to alleviate financial stress, build confidence and keep the financial system sound and functioning. Measures taken by the Reserve Bank are given below.

 -a cumulative reduction in the policy repo rate of 135 basis points;

-accommodative stance of monetary policy as long as necessary to revive growth, while keeping inflation within the target. – two USD buy/sell swap auction of USD 5 billion each conducted on March 26 and April 23, 2019, injecting liquidity into the banking system amounting to ?34,561 crore and ?34,874 crore, respectively.

– seven open market purchases, injecting ?92,500 crore into the system.

– four simultaneous purchase and sale of government securities under Open Market Operations (special OMOs or what is known as operation twist) during December and January (December 23 and 30, 2019 and January 6 and 23, 2020) to ensure better monetary policy transmission.

– five long term repo operations (LTROs) between February 17 and March 18, 2020 for one-year and three-year tenors amounting to ?1,25,000 crore of durable liquidity at reasonable cost (fixed repo rate).

– exemption on incremental credit disbursed by banks between January 31-July 31, 2020 on retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) from the maintenance of cash reserve ratio (CRR).

– two 6-month US Dollar sell/buy swap auction providing dollar liquidity amounting to USD 2.71 billion.

– fine-tuning variable rate repo auctions of ?50,000 crore and ?25,000 crore of 8 days and 3 days maturity on March 26 and March 31, respectively, with standalone primary dealers (SPDs) allowed to participate.

– fine-tuning variable rate Repo auction of 16-day maturity amounting to ?81,585 crore on March 23-24, 2020.

-The amount under the Standing Liquidity Facility (SLF) available for standalone primary dealers was enhanced from ?2,800 crore to ?10,000 crore on March 24, 2020 and this will be available till April 17, 2020.

*To read the detailed press note, please follow the link given below:

PRESS NOTE


Reserve Bank of India

Business NewsNews

The financial position of Yes Bank Ltd. (the bank) has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering the invocation of bond covenants by investors, and withdrawal of deposits.

The bank has also experienced serious governance issues and practices in recent years which have led to steady decline of the bank. The Reserve Bank has been in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the Reserve Bank that it was in talks with various investors and they were likely to be successful. The bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020. These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

After taking into consideration these developments, the Reserve Bank came to the conclusion that in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative but to apply to the Central Government for imposing a moratorium under section 45 of the Banking Regulation Act, 1949. Accordingly, the Central Government has imposed moratorium effective from today.

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank will explore and draw up a scheme in the next few days for the bank’s reconstruction or amalgamation and with the approval of the Central Government, put the same in place well before the period of moratorium of thirty days ends so that the depositors are not put to hardship for a long period of time.

The Reserve Bank has also issued certain directions to the bank under section 35A of the Act ibid.


Reserve Bank of India

[Press Release dt. 05-03-2020]

Business NewsNews

The Reserve Bank filed an application for initiation of corporate insolvency resolution process against Dewan Housing Finance Corporation Limited (DHFL) under Section 227 read with clause (zk) of sub-section (2) of Section 239 of the Insolvency and Bankruptcy Code (IBC), 2016 read with Rules 5 and 6 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 (“FSP Insolvency Rules”).

As per Rule 5 (b) (i) of the FSP Insolvency Rules, an interim moratorium shall commence on and from the date of filing of the application till its admission or rejection. The explanation to Rule 5 (b) provides that “interim moratorium” shall have the effect of the provisions of sub-sections (1), (2) and (3) of Section 14. Sub-sections (1), (2) and (3) of Section 14 of the IBC have been reproduced below:

“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to —

(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;

(b) a surety in a contract of guarantee to a corporate debtor.


Reserve Bank of India

[Press Release dt. 29-11-2019]

Hot Off The PressNews

Bar Council of India (BCI) has unanimously approved the proposal of Sh. Ved Prakash Sharma, Member, BCI to put moratorium for three years w.e.f the academic year 2020-21, on approval of affiliation of new Law Colleges in the country except for State-run NLUs’.

About Bar Council of India:

The Bar Council of India is a statutory body created by Parliament to regulate and represent the Indian bar. They perform the regulatory function by prescribing standards of professional conduct and etiquette and by exercising disciplinary jurisdiction over the bar and also sets standards for legal education and grants recognition to Universities whose degree in law will serve as qualification for enrolment as an advocate.

In addition, they also perform certain representative functions by protecting the rights, privileges and interests of advocates and through the creation of funds for providing financial assistance to organise welfare schemes for them.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) allowed an appeal filed against an order of National Company Law Tribunal (Mumbai).

The respondent preferred an application under Sections 433 and 434 of the Companies Act, 1956 before the Bombay High Court for winding up of the Corporate Debtor pertaining to a debt of Rs 21,63,359. The case was transferred pursuant to Rule 5 of the Companies (Transfer of Pending Proceedings) Rule, 2016 before National Company Law Tribunal (Mumbai). The respondent therein filed Form 5 to treat the same as an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. By the order impugned, NCLT admitted the application, passed an order of moratorium and appointed Interim Resolution Professional. The appellant – Director of the Corporate Debtor, challenged the order on the ground that notice under Section 8(1) was issued on the same date when Form 5 was filed.

The Appellate Tribunal perused Section 9 of the I&B Code and observed that an application under Section 9 preferred before the completion of 10 days from the giving of notice under Section 8(1) cannot be entertained and admitted by the Adjudicating Authority. Holding the application under Section  9 as not maintainable on the date on which it was filed, the High Court set aside the order impugned. Resultantly, the order passed by NCLT appointing Interim Resolution Professional, declaring moratorium, freezing of account, etc. were declared illegal. The appeal was, thus, allowed. [Jaya Patel v. Gas Jeans (P) Ltd., 2018 SCC OnLine NCLAT 783, dated 08-10-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), allowed an appeal filed against the order of the National Company Law Tribunal, Chennai whereby the appellant was directed to withdraw the complaint case filed under Section 138 of the Negotiable Instruments Act, 1881.

The appellant had filed a complaint case under Section 138 against the defendants before the Metropolitan Magistrate after initiation of Corporate Insolvency Resolution Process and the order of moratorium. The respondents-Directors moved the NCLT which directed the appellants to withdraw the case treating it as a proceeding filed after order of moratorium with observations that such action amounts to misuse of power. Aggrieved thus, the appellant approached the Appellate Tribunal. The question that arose for consideration was ‘whether the order of moratorium covers a criminal proceeding under Section 138 of the NI Act which provides punishment of imprisonment or imposition of fine’.

It is pertinent to note that Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits any proceeding or judgment or decree of money claim against the corporate debtor after the order of moratorium which is passed on the insolvency commencement date. The Appellate Tribunal observed that Section 138 is a penal provision; the imposition of a fine cannot be held to be a money claim or recovery against the Corporate Debtor. As such, the said section is not covered within the purview of Section 14 I&B Code. In fact, no criminal proceeding is covered under the section. It was held that the NCLT failed to appreciate the law, and therefore, the order impugned was set aside. [Shah Brothers Ispat (P) Ltd. v. P. Mohanraj,2018 SCC OnLine NCLAT 415, dated 31-07-2018]

 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: In the judgment delivered by S.J. Mukhopadhaya (Chairperson), A.I.S. Cheema (Judicial Member) and Balvinder Singh (Technical Member) dismissed all the appeals arising out of the Corporate Insolvency Resolution Process initiated against the appellants (corporate debtors).

National Company Law Tribunal had admitted the application against the appellants under Section 7 of the Insolvency and Bankruptcy Code, 2016 and passed an order of moratorium and had further appointed an ‘Interim Resolution Professional’ with certain directions.

The corporate debtor thereafter filed a writ before the Rajasthan High Court, but the High Court refused to look into the merits, so he then moved before the Supreme Court challenging the order passed by the Adjudicating Authority, but the Apex Court also dismissed it, and then further moved before the Appellate Tribunal which was withdrawn later. In the end, the Corporate Debtor, moved before the Arbitral Tribunal and against this action the Insolvency Resolution Professional moved NCLT which decided the matter against the corporate debtor. The Financial Creditor moved before the Supreme Court which allowed the appeal and stated that the arbitration clause cannot be invoked during the period of moratorium.

This Tribunal held the judgment of the Supreme Court to be final and imposed a cost of Rs 25,000 each on the appellants in the present case, to be paid by bank draft in favour of the Registrar, National Company Law Appellate Tribunal within thirty days of the receipt of this order. [M/s. Hotel Gaudavan Pvt. Ltd. v. Alchemist Asset Reconstruction Co. Ltd., 2017 SCC OnLine NCLAT 439, decided on 30- 11-2017]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: Canara Bank, the appellant-financial creditor, challenged the impugned order passed by National Company Law Tribunal, Hyderabad Bench whereby while admitting the application preferred by Appellant under Section 7 of the Insolvency and Bankruptcy Code, 2016 passed an order of moratorium thereby prohibiting the institution of suits or continuation of pending suits or proceedings except before the High Courts and Supreme Court of India, against the Corporate Debtor including execution of any judgment, decree or order in any court of law, Tribunal, arbitration panel or other authority.

The counsel appearing on behalf of the appellant contended that the Adjudicating Authority cannot exclude any court from the purview of moratorium for the purpose of recovery of amount or execution of any judgment or decree, including the proceeding, if any, pending before the High Courts and Supreme Court of India against a ‘corporate debtor’. NCLAT while adjudicating the matter opined that Section 14 relates to ‘Moratorium’ which the Adjudicating Authority is required to declare at the time of admission of the application for ‘corporate insolvency resolution The NCLAT stated that,

“from Section 14(1) (a), it was clear that institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order by any court of law, tribunal, arbitration panel or other authority come within the purview of ‘moratorium’ and that the said provision specifically did not exclude any Court, including the Hon’ble High Courts or Hon’ble Supreme Court of India.”

The NCLAT, dismissing the appeal, and further clarifying the impugned order passed by Tribunal relating to ‘moratorium’ held in clear terms that,

“The Hon’ble Supreme Court has power under Article 32 of the Constitution of India and Hon’ble High Court under Article 226 of Constitution of India which power cannot be curtailed by any provision of an Act or a Court. In view of the aforesaid provision of law, we make it clear that ‘moratorium’ will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. ‘Moratorium’ will also not affect the power of the High Court under Article 226 of Constitution of India. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the ‘corporate debtor’ such suit cannot proceed after declaration of ‘moratorium’, under Section 14 of the I&B Code.”

 [Canara Bank v. Deccan Chronicle Holdings Limited, 2017 SCC OnLine NCLAT 255, decided on 14.9.2017]

 

Case BriefsSupreme Court

Supreme Court: Dealing with the question relating to applicability of the Maharashtra Relief Undertakings (Special Provisions Act), 1958 vis-a-vis the Insolvency and Bankruptcy Code of 2016, the bench of RF Nariman and SK Kaul, JJ held that the State law is repugnant to the Parliamentary enactment as under the said State law, the moratorium imposed under Section 4 of the Maharashtra Act directly clashes with the moratorium to be issued under Sections 13 and 14 of the Code.

Explaining the scheme of both the Laws, the Court said that the moment initiation of the corporate insolvency resolution process takes place, a moratorium is announced by the adjudicating authority vide Sections 13 and 14 of the Code, by which institution of suits and pending proceedings etc. cannot be proceeded with. This continues until the approval of a resolution plan under Section 31 of the said Code. In the interim, an interim resolution professional is appointed under Section 16 to manage the affairs of corporate debtors under Section 17 of the Code.

It was further explained that whereas the moratorium imposed under the Maharashtra Act is discretionary and may relate to one or more of the matters contained in Section 4(1), the moratorium imposed under the Code relates to all matters listed in Section 14 and follows as a matter of course. Hence, unless the Maharashtra Act is out of the way, the Parliamentary enactment will be hindered and obstructed in such a manner that it will not be possible to go ahead with the insolvency resolution process outlined in the Code. Further, the non-obstante clause contained in Section 4 of the Maharashtra Act cannot possibly be held to apply to the Central enactment, inasmuch as a matter of constitutional law, the later Central enactment being repugnant to the earlier State enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-à-vis action taken under the later Central enactment

It was, hence, held that by giving effect to the State law, the aforesaid plan or scheme which may be adopted under the Parliamentary statute will directly be hindered and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional. Hence, the Code would prevail against the Maharashtra Act in view of the non-obstante clause in Section 238 of the Code. [Innoventive Industries Ltd. v. ICICI Bank, 2017 SCC OnLine SC 1025, decided on 31.08.2017]