Shipbuilders drag Centre and RBI to apex court over orders on stressed assets

P Manoj Mumbai | Updated on March 29, 2019

File petition seeking quashing of order on debt resolution mechanism outside IBC

The Shipyards Association of India (SAI) has dragged the Centre and the RBI to the Supreme Court, seeking “special provisions” to resolve the acute financial stress facing the shipbuilding industry.

In a petition filed before the apex court, the 20-member group — that includes L&T Shipbuilding Ltd and Reliance Naval and Engineering Ltd — has sought the court’s direction to quash and set aside circulars issued by the Finance Ministry in 2017 and the RBI in 2018 on the resolution of stressed assets outside the mechanism of the Insolvency and Bankruptcy Code (IBC).

The legal challenge comes days after the collapse of two of India’s top private yards — Bharati Defence and Engineering Ltd and ABG Shipyard Ltd.

While a bankruptcy court in Mumbai had ordered the liquidation of Bharati in January, a similar process is under way in a court in Ahmedabad for ABG. The adverse impact on the shipbuilding industry is expected to also have a cascading effect on the ancillary industries including direct and indirect employment.

Pragmatic view

“Under such circumstances, a pragmatic view is required to be taken to safeguard the interests of about five lakh families directly or indirectly dependent on these yards,” said the petition.

SAI has challenged the government’s powers to authorise the RBI to issue directions to any bank to initiate insolvency proceedings as per IBC, and the RBI’s powers to issue directions to any bank for the resolution of stressed assets.

These are ultra vires Article 14 of the Constitution, since they confer “unfettered powers upon the Central government to authorise the RBI to issue any directions, leading to arbitrariness and abuse of power”, said the petition.

The RBI circular of February 12, 2018 mandates banks to initiate insolvency proceedings against companies having 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 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”, the SAI petition said.

Besides, by mandating the approval of 100 per cent of lenders, the RBI has created a further impediment to the implementation of a resolution plan (outside the scope of IBC) within an already unrealistic timeline of 180 days, it added.

In contrast, a resolution plan under IBC has to be approved by only 66 per cent of the committee of creditors.

Consent of lenders

“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, according to court papers reviewed by BusinessLine.

It further said lenders of the respective companies have not come forward before the court, objecting to and opposing its 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 the NCLT, failing which, appropriate action would be taken by the RBI,” it added.

Published on March 29, 2019

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