The Supreme Court order striking down the February 2018 Reserve Bank of India circular will help beleaguered shipbuilders such as the Anil Ambani-led Reliance Naval to resolve debt without being dragged to insolvency courts under the country’s bankruptcy law.
The February 12, 2018 RBI circular mandated banks to initiate insolvency proceedings against companies having a debt of above ₹2,000 crore in case the debt is not resolved within 180 days by approval of 100 per cent (all) lenders.
The Supreme Court order is a shot in the arm for stressed shipbuilders which had last week moved the court seeking to quash the RBI circular.
“Such categorisation of companies by RBI with debts of more or less than ₹2,000 crore is completely arbitrary and without any basis and is a “class” legislation as it seeks to create a class amongst a class,” the Shipyards Association of India (SAI), a 20-member lobby group, had argued, according to court papers reviewed by BusinessLine .
The SAI argued that Reliance Naval and others were “under serious financial stress and on the brink of closure and the RBI circular, rather than aiding the industry is taking it to an eventual closure”.
‘Draconian’
The RBI circular, according to SAI, is also “draconian” as it does not require a long-standing debt to be overdue for such harsh actions to be taken but a single instance of ‘a default even for a day with any one of the lenders’ is enough.
The 180-day timeline is “unrealistic, unachievable and arbitrary because even under IBC, the timeline for resolution of a company is 180 days plus 90 days”.
Besides, by mandating approval of 100 per cent of the lenders, the RBI has created a further impediment to the implementation of resolution plan (outside the scope of IBC) within an already unrealistic timeline of 180 days. In contrast, a resolution plan under IBC has to be approved by only 66 per cent of the committee of creditors.
“With the RBI circular not providing any limitation on the reasons for refusal that can be given by a lender, any lender with minimum exposure can derail the entire process since the consent of all lenders is required under the RBI circular,” the association contended.
Hence, the 180-day timeline is impractical, devoid of reality and arbitrary due to multiple layers of decision making along with the requirement for approval of all lenders to the resolution plan.
“It is a chance for stressed shipyards to get revived without going through the requirement of 100 per cent approval of lenders for resolution plans and the possibility of finding a resolution outside IBC,” said Vijay Kumar, President, SAI.
Lenders of the respective companies before this court, according to the association, have not come forward objecting to and opposing the petition. “This itself shows that they are still attempting to resolve the debt outside IBC. But, the RBI circular has coerced the lenders to approach NCLT, failing which, appropriate action would be taken by RBI,”, it said.
The SAI said that some of its member yards had made “strenuous efforts to resolve the already stressed asset”.
Resolution plans
For instance, Reliance Naval had submitted 13 resolution plans to the lenders (two prior to February 12, 2018 and 11 after the RBI circular) which failed to go through and hence, “Reliance Naval cannot be held liable for lapse of 180 days for debt resolution”.
“Hence, pushing the yards to IBC, which would deprive the present management of their priced asset would be highly inequitable.
“Besides, mandating banks to approach NCLT for resolution, is likely to result in a possible liquidation and less returns for lenders and was against the interests of the company and the lenders.”