SC scraps 12 February RBI circular: Legal fraternity divided over apex court order on NPA diktat

Mumbai: Legal experts have given mixed views on the Supreme Court judgement quashing the Reserve Bank’s circular on bad loan recognition saying while the ruling is a “great” setback for banks, it also offers relief to the troubled companies. Earlier in the day, the apex court, on a petition filed by power firms, held the 12 February, 2018 circular of the Reserve Bank as unconstitutional. A detailed verdict is awaited as to what would be status of the resolution of those companies already arrived at under the circular. The most salient feature of the circular is that it mandates banks to recognize even one-day defaults and resolve the issue within 180 days failing which the account in question should be sent to NCLTs for bankruptcy process. Leading law firm Cyril Amarchand Mangaldas termed the order as a major development. “While it is too early to say but if banks voluntarily still invoke the IBC, practical impact will be minimal,” Cyril Shroff, managing partner at Cyril Amarchand Mangaldas said. [caption id=“attachment_5129811” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] The Supreme Court order holding the circular as unconstitutional is a great set back in respect of the actions initiated by banks before NCLTs against the defaulting companies which were covered under the impugned circular, said Rajesh Narain Gupta, managing partner at the city-based law firm SNG & Partners. The order may require banks to decide on case-to-case basis to initiate action under the IBC at their discretion as per policy and not being guided by the RBI circular on such a decision, he said. A legal expert who specialises in bankruptcy laws opined that the RBI circular was considered a bit too stern by many in the industry, especially the 180 days deadline. “The 180 days deadline and default by a day causing mandatory bankruptcy action irrespective of business and sector-specific issues were probably considered severe,” Babu Sivaprakasam, a partner at the city-based law firm Economic Laws Practice said. “A blanket direction for mandatory initiation of insolvency proceedings and simultaneous withdrawal of other resolution and restructuring options has probably left banks with few other options other than bankruptcy resolution against a defaulting debtor,” Sivaprakasam said. Gupta also noted that large resources and costs have been put in by banks as well as borrowers in various matters pending before NCLTs and the NCLAT. The time already spent by the industry including in the courts has been unprecedented. “The ruling shows that how a questionable administrative decision can be immensely counterproductive. This is certainly a setback to IBC initiatives at least for the short-term,” Gupta added. On the other hand, Ashish Pyasi, a principal associate with Dhir & Dhir Associates, opined that it will be a relief for some companies where the CDR was at an advanced stage but due to the RBI circular they couldn’t take that forward and instead taken to NCLT. “With the RBI circular being struck down, the earlier circulars of RBI would stand revived which were changed by the impugned circular and now those companies can request the lenders to reconsider their restructuring plans,” he added. Details from the order are yet to be seen as to what will happen to the companies which are already before NCLT due to impugned circular, he pointed out. Though the petition was filed by some of the companies from specific sectors like power the benefit of this judgement will be available to all, he added.