Businesses must get moratorium if viability is in question: Court

Krishnaprasad Bengaluru | Updated on July 10, 2020 Published on July 10, 2020

Karnataka HC directs RBI to monitor if banks are implementing circular on payment freeze

All businesses are entitled to loan moratorium if it is a question of their survival. The Karnataka High Court has ruled to this effect, directing the RBI to monitor the uniform extension of this facility by banks.

“All borrowers are eligible to seek a moratorium. If a borrower were to seek for grant of a moratorium on the ground that continuity of its business would be affected and establish the same, the borrower would as a matter of right be entitled to the grant of moratorium so that such continuity is not adversely affected,” the Court said.

Delivering this judgment on Wednesday, while allowing a petition by Velankani Information Systems Ltd (VISL), which owns and manages Velankani Technology Park and The Oterra, a five-star hotel, both located in Bengaluru’s Electronic City, Justice Suraj Govindaraj also directed the RBI to monitor the implementation of the March 27 moratorium circular.

Redress mechanism

The Court asked the RBI to verify if lending institutions have board approved moratorium policies, and to set up an effective grievance redress forum for complaints of improper or non-implementation of the moratorium circular. “The circular having been issued to protect and preserve the economy on account of the Covid- 19 pandemic... is in the public interest, interest of the economy and the country. The enforcement thereof would also come within the purview of enforcing public duty,” the Court said while declining to accept the RBI’s contention that issues raised in the petitions are a dispute between the banks and the borrower.

Further, the Court said that when multiple banks are involved in a loan transaction, one bank cannot deny extension of the moratorium facility, when another or others are willing to extend the benefit to a borrower.


Applicable to all loans

The Court also said that the provision of the moratorium is applicable to all loans/advances and facilities extended by lending institutions, including structured loans like Lease Rental Discounting (LRD), and not just to term loans and working capital facilities.

HDFC Bank, Federal Bank and Aditya Birla Housing Finance Ltd had granted an advance of ₹475 crore in the form of an LRD to VISL. The company had questioned the decision of HDFC Bank in rejecting its multiple pleas for grant of moratorium per the RBI’s circular though the company said it was eligible as its loan account was a standard one without any default.

HDFC Bank said VISL cannot be given moratorium as lease rentals from Tech Park are regularly credited to an escrow account and that the moratorium cannot be extended to an LRD facility.

Federal Bank and Aditya Birla Finance initially declined the moratorium, but later agreed to extend it subject to HDFC Bank coming on board.

In April, Aditya Birla Finance cautioned VISL that its loan account could become NPA as HDFC Bank and Federal Bank were not sharing the EMI amount with it. This led to VISL knocking at the doors of the Court.

While allowing the petition, the Court directed the three institutions to grant moratorium on all payments due by VSIL subject to itpaying interest as contracted for the period of the moratorium and with a condition that the loan account is not, in any manner, reduced.

‘Path-breaking ruling’

Vijay Belavadi, founder, BRK Law Partners called the judgement “path-breaking because most rulings are in favour of banks. But considering the current situation, the Court has taken into consideration the utter helplessness of businesses to sustain operations.

”The consortium per se is not a democratic set up. Precedence does not hold too much importance because it is not a statutory body. When there is a standing order from the RBI, banks have to fall in line. What is the other alternative for businesses except to close if banks do not lend a helping hand in such unprecedented times,” said Belavadi.

Difficult for banks

But a former senior executive with Canara Bank ST Ramachandra said that “It is becoming difficult for banks to extend the moratorium without any additional security. At the same time, they are also not in a situation where they can take decisions without carrying out further due diligence. However, in a consortium, one has to go with the majority.”

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Published on July 10, 2020
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