A chance for promoters to pull out distressed companies

Suresh P. Iyengar | | Updated on: Apr 02, 2019

Corporate debtors and promoters can now seek relief

The Supreme Court order striking down the controversial RBI circular has paved the way for many distressed promoters to pull their companies out of insolvency proceedings.

In fact, banks have filed about 150 insolvency cases after the RBI issued the February 12 circular and technically in all these cases promoters can move the NCLT to withdraw the proceedings.

Moreover, lawyers feel the grounds on which the Supreme Court has struck down the RBI circular may lead many promoters whose insolvency cases have been resolved with fresh investment by new investors to also seek relief.

The contentious RBI circular had instructed banks to resolve debt default cases above ₹2,000 crore as of March 1 within 180 days and if not initiate insolvency proceedings immediately.

It had also directed banks to include accounts restructured under different schemes and classified as restructured standard assets besides acting on companies which had delayed interest payment even by a day.

The RBI circular was challenged in the Supreme Court by power companies claiming it to be arbitrary and beyond the RBI’s legal power (ultra vires) under the Banking Regulation Act.

Babu Sivaprakasam, Partner, Economic Law Practice, said it is not easy for banks to show that the insolvency cases filed after February 12 are independent of the RBI circular and hence need to be continued. “Some of the debtors from other sectors whose insolvency cases were accepted after February 12 can also seek relief under the Supreme Court order,” he said.

If the Supreme Court had questioned the RBI’s power to issue such harsh direction, lawyers said promoters of the initial 42 cases can also object to the basis on which their companies were selected for insolvency proceedings.

Power sector to benefit

Vishrov Mukerjee, Partner, of J Sagar Associates, said the ruling will benefit about four cases in the power sector and many companies will get more time to resolve the issue.

It will also help banks as in most insolvency cases banks have taken a huge haircut, he added.

For instance, the entire debt resolution was almost done in the IL&FS power project in Tamil Nadu but it has to be called off since it was executed after the February 12 circular of the RBI.

Published on April 02, 2019
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