The Insolvency and Bankruptcy Code (IBC), which received presidential assent on 28th May, 2016 is a game-changer for insolvency procedures, where India earlier would take on an average 4.3 years to resolve proceedings, countries like UK and US, take roughly 1.5 years to deal with the proceedings[i]. How the IBC helps is through its provision given under Section 5, definition 14th, the Insolvency Resolution Process Period is to be 180 days. Comparing this with the earlier period of resolution, the expediency and framework has definitely improved. Under Section 5, given in Chapter 1, the “adjudicating authority” is the NCLT(National Company Law Tribunal).
The Insolvency Resolution Process can be broken down into three brief steps-
- After Application by Financial Creditor/Operational Creditor, an IRP(Interim Resolution Professional) is appointed by NCLT(National Company Law Tribunal) within 14 days from the ‘commencement date’.[ii]
- The Board of Directors is suspended, and management vests with the Interim Resolution Professional. IRP determines actual financial position of debtor, and collates the claims. A ‘fair value’ and also the Liquidation value has to be determined.[iii]
- The Committee of Creditors (CoC) must approve the resolution plan submitted for an insolvent company. Withdrawal of insolvency application is allowed, subject to an approval of 90% of the voting share of the CoC.[iv]
The question arises, whether Courts can intervene with RBI policies. This was dealt with in the case of Jayaswal Neco Industries Limited v. Reserve Bank of India[v], by the Bombay High Court.
JNIL (Jayaswal Neco Industries Limited) had opted for a MRA, in concurrence with its JLF (Joint Lenders Forum). A Master Restructuring Agreement (MRA) can be resorted to, by a company when it struggles with debt payments[vi], and thus requires restructuring of those debts through a formal document with the consent of all major stakeholders.
However, JNIL as a petitioner, sued for interim relief against the RBI guidelines to go for resolution under IBC code. The contention was that RBI, should not retrospectively apply its circular dated 13 June, 2017, wherein the timeline for obtaining new credit rating was stipulated as 13 Dec 2017.
The Court ultimately did not directly deal with the question whether RBI can act retrospectively, however it did state that this question does not have to be dealt with, for the main conditionality laid down by RBI were not fulfilled, and so RBI was empowered to act according to its guidelines. The three main conditions that were not upheld by the debt-ridden company was
a) the required Credit Rating opinions were not obtained by CRA(Credit Rating Agency) approved by RBI, for it had its concerns of ‘rating-shopping’,
b) the MRA was not signed by all creditors, and especially two lending banks had neither signed it, nor exited from the MRA with the proper procedure of withdrawal.
c) the promoters contributions and personal guarantees could not be brought before the deadline of 13 Dec 2017, prescribed by the RBI guidelines. For this main issue, the Court relied on the minutes of the meeting of the JLF(Joint Lenders Forum), where it was pointed out that as late as 12th Dec 2017, the promoter’s contribution had only been agreed upon, and in lack of its actual implementation, “the restructuring package has not come into operation, much less, it has not been implemented.”[vii]
The other main point iterated by the court while supporting the respondent RBI, that “the function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority[viii].” The ‘authority’ referred to here, is obviously the RBI, and in subsequent paragraphs it is explained that the economic expertise required in these decisions could not be subverted by the opinions of the Court, and “the financial policies and the financial matters falling within the exclusive jurisdiction of the RBI, need not be scrutinized by the Cour.[ix]”
Furthermore, the time-limit prescribed by RBI, vide its notification dated 25th Feb, 2016, points to the necessity that the, “JLFs are required to adhere to certain prescribed timelines during SDR(Strategic Debt Restructuring) process.[x]”
Given these notifications and the Court upholding the economic expertise of RBI, it can be seen that specialized authorities can hold an upper hand where the Courts interfere not.
[i] “The Insolvency and Bankruptcy Code: All You Need to Know” , PRS Legislative Research, https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know.
[ii] “A Primer on the Insolvency and Bankruptcy Code”, Nishith Desai Associates, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/A-Primer-on-the-Insolvency-and-Bankruptcy-Code.pdf, Pg 4-5.
[v] Jayaswal Neco Industries Limited v. Reserve Bank of India, 2018 SCC OnLine Bom 573.
[vi] Master Restructuring Agreement, https://www.agreements.org/master-restructuring-agreement.html/.
[vii] Jayaswal Neco Industries Limited v. Reserve Bank of India , 2018 SCC OnLine Bom 573, Para 16.
[viii] Jayaswal Neco Industries Limited v. Reserve Bank of India, 2018 SCC OnLine Bom 573, Para 18.
[ix] Jayaswal Neco Industries Limited v. Reserve Bank of India , 2018 SCC OnLine Bom 573, Para 21.
[x] Review of Prudential Guidelines – Revitalising Stressed Assets in the Economy, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10293&Mode=0.