The Supreme Court halted insolvency proceedings against defaulters in the power, sugar, shipping and textile sectors, providing relief to borrowers hours before the deadline for referring them to insolvency court expired by staying a Reserve Bank of India (RBI) circular issued in February.
Bankers said the decision will delay the process at least until November 14, when the next hearing is scheduled. They welcomed the intervention of the top judicial authority as it would help give final shape to questions of law and bring together multiple suits in courts across the country, which were complicating the process.
The order is expected to lead to borrowers that have so far not sought judicial relief against the controversial RBI circular–which tightened default norms–to rush to the Supreme Court to halt, at least temporarily, debt resolution under the Insolvency and Bankruptcy Code (IBC).
The bench, comprising Justices RF Nariman and Indu Malhotra, directed banking regulator RBI to maintain the status quo on insolvency proceedings while transferring all pending cases on the matter in various lower courts to itself.
‘Not a General Order’
The decision will lead to clarity, said Indian Banks’ Association chief VG Kannan.
“IBC as a process has proven effective in resolution of stressed assets,” he said. “It is a new law and there are precedents which are being set. While delays are not good and this order will likely delay some resolutions for another two months, it will give clarity on resolving these issues in the long run.” Senior advocate Jayant Bhushan said that the ruling would only apply against those companies that had moved court.
“It is not a general order,” he said, suggesting that it may not stand in the way of lenders initiating insolvency proceedings against those borrowers that have no such court protection as of now. Senior advocate Mahesh Agarwal, who represented the power companies, said the decision will provide relief to them.
“Where cases have been referred to NCLT (National Company Law Tribunal) after the RBI circular, there will be a status quo and where they have not been filed, they will not be referred to NCLT now,” he said.
Members of the Association of Power Producers, Independent Power Producers Association of India, South Indian Sugar Mills Association along with groups representing shipyards and textile makers got relief, he said.
Power companies welcomed the Supreme Court verdict saying it will prevent about 13 GW of stressed power plants from insolvency.
They are averse to go to NCLT because they feel it will not fetch the assets a fair price.
“SC order has provided a great relief to power sector stressed assets,” Association of Power Producers director general Ashok Khurana said.
“This would provide time for bankers to finalise resolution plans for about 13 GW of projects which are presently in their final stages and the high-level empowered committee under cabinet secretary to submit its report on corrective actions that the government intends to initiate to mitigate stress factors.”
Lawyer Saurav Kumar, Partner, law firm IndusLaw, also said the order would allow companies to negotiate with the bankers and arrive at mutual arrangements in the interim to sort out their bad loans.
“While we don’t know whether the lenders would be interested, the challenge is to ensure that this is done without losing much time,” he said.
The other challenge, Kumar said, would be to ensure that the insolvency proceedings kick in much before the assets are rendered unviable.
“As it is, not many are interested in buying power companies,” he said.
Advocate Abhishek Singhvi, who argued for GMR Energy, said the RBI’s circular was rightly stayed.
“For highly stressed assets in the power sector, for whom I appeared, even the government of India supported a stay of the circular,” he said.
“This blanket approach of RBI is very regrettable. It required the robust approach of the Supreme Court to grant status quo.
“Even the high court order impugned by us recorded six-seven findings in favour of the writ petitioner but did not grant interim relief so I argued that it was a case of ‘operation successful but patient must die.’ ”
