While RBI's position is somewhat clear on a few aspects, the role of the judiciary has been even more fascinating in terms of extending the arm to debtors.
By Satvik Kulshrestha and Karan Kalra
Facing unprecedented times, India, like most countries, is struggling to reduce the impact of the impending economic slump.
Soon after India went into a nationwide lockdown on March 24, RBI came out with its Covid-19 Regulatory package on March 27, 2020 together with a press release on the same date incorporating several measures to curb the impact of the pandemic on the financial sector and inter alia, allowing for repayment moratoriums and relaxed norms for working capital facilities. What ensued was a flurry of queries and legal pronouncements that seem to indicate the intention of different courts to pass 'equity-based' judgements and at some level question the sanctity of a borrower – lender relationship. More importantly, they raise a very core debate on 'where does the buck stop?'
Dealing first with the RBI circular and some developments around the same.
The circular provides that for all term loans (including credit card dues), all commercial banks, including regional rural banks, co-operative banks, all-India financial institutions, non-banking finance companies and housing financing companies (collectively, "Financial Institutions") 'are permitted' to grant a moratorium for up to 3 months on the payment of all installments failing due between March 1, 2020 and May 31, 2020 ("moratorium period") to their borrowers ("moratorium").
For working capital facilities sanctioned as cash credit or overdraft facilities, Financial Institutions 'are permitted' to defer the recovery of interest during the Moratorium Period. It goes on to provide that if such Moratoriums are indeed granted, the financial institutions would be safe guarded from a prudential norms perspective as they would not need to treat such deferred payment terms as defaults and consequently downgrade the exposer. Pertinently, the moratorium has now been extended for another three months - to August 31, 2020.
A plain reading of the RBI Circular makes it quite apparent and clear that this is an option given to the Financial Institutions and there is no directive for them to necessarily accord the Moratorium. Interestingly, though some media reports and discussions with market players suggest that financial institutions are 'bound' to give the moratorium to all borrowers who opt for it, taking away the bank's own judgement and discretion.
The uncertainty continues as the RBI Governor while clarifying in his address to the country on April 17, 2020 stated that "in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020".
On May 1, 2020, while the Delhi High Court was hearing a matter, the counsel for RBI clarified that indeed it was the intent of the RBI to only give an option to lenders to grant moratoriums and that it was not mandated. However, the submissions in court opened another question as to whether the RBI circular is applicable to NBFCs and same is pending clarifications.
While RBI's position is somewhat clear on a few aspects, the role of the judiciary has been even more fascinating in terms of extending the arm to debtors. This has come to light through a series of orders over the last month or so.
Anant Raj Limited v Yes Bank Limited was the first important case where a judicial authority (the Delhi High Court interpreted the RBI Covid-19 Regulatory Package. In this case, the debtor who was already in default since January 2020 (i.e. before the beginning of the Moratorium Period) argued that the default in January 2020 occurred due to economic slowdown caused by the COVID-19 outbreak.
The court, focusing on the intent of the RBI Circular to ‘relieve financial stress’, held that the debtor’s loan could not have been classified as a NPA by Yes Bank. This view seems excessive from the point of view of the text of the RBI circular, irrespective of whether the borrower’s financial distress was due to the pandemic or not.
The Bombay High Court took a similar view in the Idea Toll Case. A related discussion came up in Transcon Skycity Pvt Ltd & Ors v ICICI Bank & Ors. where the Bombay High Court, while acknowledging that the debtor was in default of its first and second installments (falling due before the commencement of the moratorium period), passed an interim order stating that the lockdown period should be excluded while computing the 90-day period for a loan account to be declared as NPA. This is an interesting view taken by the Bombay Court where it can be debated whether the intent of RBI was to cover such situations even though the RBI circular falls short of spelling it out.
Another interesting scenario has emerged in the security enforcement domain. In Rural Fairprice Wholesale Limited v IDBI Trusteeship Services Limited, the Bombay High Court passed an ad-interim order in favor of the Future Group, restraining the lender from invoking its pledge of shares and holding the notices of event of default, notice of redemption and notice of pledge invocation to be illegal, improper and invalid. This decision comes as a surprise to the financial sector since it is a well settled law that pursuant to Section 176 of the Indian Contract Act, 1872, it is the discretion of the pledgee to sell the pledged goods (shares in this case) in case there has been a default in payment of the underlying debt and it is well within the powers of the pledgee to sell the goods after giving a reasonable notice to the pledgor.
The court seems to have passed this interim relief keeping in mind the Covid-19 outbreak and its impact on share prices, though it questions the very sanctity of a negotiated commercial transaction and the rights of a secured party. Soon after this decision, the Bombay Court in Idea Toll & Infrastructure Pvt. Ltd v ICICI Home Finance Co. Ltd while recognised the vested right of the lender (pledgee) to sell shares again restrained the lender (pledgee) from selling the pledged shares and instructed the borrower to pay the outstanding amounts in staggered manner. This decision by the Bombay Court again raises concerns over contractual sanctity. Where the court could have suspended or delayed the notice of event of default, notice of invocation of pledge and notice of redemption, going a step further and calling these notices as illegal and invalid seems overarching.
RBI and courts don't seem to be as sympathetic towards financial institutions in situations where these institutions are the payers. This is further highlighted in the IMP Powers Ltd case where the Bombay Court while granting relief to the petitioner stated that “the Reserve Bank of India has granted moratorium not only for term loans but all kinds of financial arrangements between a customer and the bank” and the Bombay Court further in the case of Standard Retail Pvt. Ltd went on to order that the Moratorium Period will not be applicable to letters of credit since the transaction takes place between the two banks involved and not between the borrower and lender directly. While this stance seems to uphold the black letter of the RBI Circular, it begs to question whether the intent of the different pillars of our democratic system is only safeguard the interests of entities that are not financial institutions?
The COVID-19 pandemic will affect creditors as much as debtors and one must be mindful of the long-term effects of such decisions on the economy. We should be reminded that these financial institutions form the backbone of our financial system and given they are already facing stress, making them bear the brunt of the Covid-19 pandemic could discourage lending further and hurt these institutions severely and short terms measures such as the TLRO etc. may not be enough to save the system from a meltdown.
(Views are personal)
Satvik Kulshrestha is Associate, Bombay Law Chambers and Karan Kalra, founder, Bombay Law Chambers)