2020 (2) TMI 586 - HC - Indian Laws

Court dismisses writ petitions over bank debt assignment, emphasizing bank discretion in financial matters.

GTL Infrastructure Limited Versus Canara Bank Corporation Bank, Indian Bank, Union of India, through Secretary, Ministry of Finance, Reserve Bank of India, Department of Banking Regulations and Others

GTL Infrastructure Limited Versus Canara Bank Corporation Bank, Indian Bank, Union of India, through Secretary, Ministry of Finance, Reserve Bank of ... Issues Involved:1. Compliance with the Reserve Bank of India's (RBI) Master Circular dated July 1, 2015.2. Obligations of banks under the Strategic Debt Restructuring (SDR) Scheme.3. Classification of the petitioner's account as a Non-Performing Asset (NPA).4. Sale of financial assets to Asset Reconstruction Companies (ARCs).5. Legal standing and locus of the petitioner to seek relief.6. Maintainability of the writ petition.7. Allegations of arbitrariness and mala fides against respondent banks.8. Application of Prudential Norms on Income Recognition, Asset Classification, and Provisioning (IRAC) guidelines.9. Proceedings under the Insolvency and Bankruptcy Code (IBC).Detailed Analysis:1. Compliance with the RBI's Master Circular:The petitioner sought a writ of mandamus directing respondent banks to comply with paragraph 6.4 of the RBI's Master Circular dated July 1, 2015. The court examined the circular, which provides guidelines for the sale of financial assets to ARCs, including valuation and pricing aspects. Specifically, clause 6.4(d)(ii) mandates that if 75% (by value) of banks in a consortium accept an offer, the remaining banks are obligated to accept it. However, the court noted that these guidelines are advisory and not binding rules or regulations. The discretion of the banks in financial matters cannot be overridden by issuing a writ of mandamus.2. Obligations of Banks under the SDR Scheme:The petitioner argued that the SDR scheme required the conversion of debt into equity and the sale of equity to new investors. The court noted that the SDR scheme's success depended on the induction of a new investor and a change in management, which did not materialize. The court found that the banks had exercised their discretion in evaluating the petitioner's proposals and were not obligated to accept them.3. Classification of the Petitioner's Account as an NPA:Respondent banks classified the petitioner's account as an NPA with retrospective effect from July 1, 2011, due to the failure of the SDR scheme. The petitioner contested this classification, arguing that it had not defaulted under the SDR scheme. The court found that the classification was based on the RBI's guidelines and the petitioner's failure to meet its obligations under the SDR and CDR packages.4. Sale of Financial Assets to ARCs:The petitioner contended that since more than 75% of its lenders had assigned their debts to respondent No.7 (an ARC), the remaining banks were obligated to do the same under the IRAC guidelines. The court noted that the decision to sell financial assets involves multiple factors and risks, and banks have the discretion to accept or reject offers based on their assessments. The court found no basis to compel the banks to assign their debts to the ARC.5. Legal Standing and Locus of the Petitioner:Respondent banks argued that the petitioner, as a borrower, had no locus to seek a direction for the sale of their assets to an ARC. The court agreed, stating that the petitioner could not dictate the terms of the sale or restructuring of its debt, which are matters of commercial discretion for the banks.6. Maintainability of the Writ Petition:The court addressed the preliminary objection that the petition sought similar relief to that sought in proceedings before the Supreme Court, which had been disposed of without granting such relief. The court found that the writ petition was not maintainable as it sought to re-litigate issues already decided by the Supreme Court.7. Allegations of Arbitrariness and Mala Fides:The petitioner alleged that respondent No.1 (Canara Bank) acted arbitrarily and with mala fides in opposing the sale of its debt to the ARC. The court found that the bank's actions were based on its assessment of the petitioner's financial situation and the risks involved. The court held that the bank's cautious approach could not be deemed arbitrary or mala fide.8. Application of IRAC Guidelines:The petitioner relied on the IRAC guidelines to argue that respondent banks were obligated to assign their debts to the ARC. The court noted that these guidelines provide a framework for asset classification and provisioning but do not impose a mandatory obligation on banks to accept offers for the sale of financial assets.9. Proceedings under the IBC:Respondent No.1 had filed an application under Section 7 of the IBC to initiate corporate insolvency resolution proceedings against the petitioner. The petitioner argued that this was in violation of the IRAC guidelines. The court found that the proceedings under the IBC were separate and independent of the guidelines and that the banks were entitled to pursue legal remedies under the IBC.Conclusion:The court dismissed the writ petitions, holding that the petitioner had not established a legal right to compel the respondent banks to assign their debts to the ARC or to comply with the petitioner's proposals. The court emphasized the discretionary nature of the banks' decisions in financial matters and the lack of a binding mandate in the RBI's guidelines. The court also noted that the petitioner could pursue its objections in appropriate legal forums, including the NCLT.