2021 (10) TMI 645 - HC - Insolvency and Bankruptcy

Court upholds RBI's decision to supersede NBFC board, stresses regulatory expertise.

Adisri Commercial Private Limited and another Versus Reserve Bank of India and others

The court dismissed the writ petition challenging the Reserve Bank of India's decision to supersede the Board of Directors of a non-banking financial ... Supersession of Board of Directors of respondent No.2 - appointment of the administrator further mentioning that respondent No.1 intends to shortly initiate the process of resolution of respondent - HELD THAT:- The statutory inspection of respondent No.2 was conducted by Reserve Bank of India under section 45N of the Reserve Bank of India Act, 1934 (RBI Act) with reference to its financial position as on March 31, 2020. Such inspection revealed serious deterioration in its financial position. Respondent No.2 has defaulted in its payment obligations in respect of bank borrowings and market borrowings, which is a matter of serious concern. Because of such defaults, Reserve Bank of India in exercise of powers conferred under section 45IE of the RBI Act has superseded the Board of Directors of respondent No.2 and has appointed Shri. Rajneesh Sharma as its administrator with immediate effect. Coming to the press release dated 04.10.2021, not only Reserve Bank of India has informed about supersession of the Board of Directors and appointment of administrator but it has also informed that it intends to shortly initiate the process of corporate insolvency resolution of respondent Nos.2 and 3 under the Insolvency and Bankruptcy Code, 2016 and more particularly under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 and would apply to the NCLT for appointing the administrator as the insolvency resolution professional. The present is not a fit case where for invocation of extra ordinary jurisdiction under Article 226 of the Constitution of India. The contention made on behalf of the petitioner that there is no proximate cause for issuance of the impugned order, cannot be agreed upon. As a matter of fact there need not be any proximate cause for an action like the impugned one - petition dismissed. Issues:Petition seeking quashing of an order and press release by the Reserve Bank of India superseding the Board of Directors of a non-banking financial company and appointing an administrator.Detailed Analysis:Issue 1: Supersession of Board of DirectorsThe petitioners sought to challenge the impugned order dated 01.10.2021 by the Reserve Bank of India (RBI) under section 45IE of the RBI Act, which superseded the Board of Directors of the non-banking financial company. The RBI appointed an administrator citing serious financial concerns and defaults in payment obligations.Analysis: The RBI's action was based on the statutory inspection revealing financial deterioration and defaults by the company, justifying the supersession of the Board of Directors and the appointment of an administrator for proper management and financial stability.Issue 2: Allegations of MismanagementThe petitioners argued that the RBI's decision was abrupt and unjust, jeopardizing potential investment proposals and the future of the company. They highlighted the impact of COVID-19 restrictions on non-banking financial companies, alleging unfair treatment by the RBI.Analysis: The respondents countered the petitioners' claims, asserting financial mismanagement, non-compliance with regulations, and defaults by the company. The RBI's intervention was justified to address serious financial concerns and poor corporate governance, as per the submissions made by the respondents' counsel.Issue 3: Legal Basis and JustificationThe judgment discussed the legal provisions empowering the RBI to supersede the Board of Directors under section 45IE of the RBI Act in the public interest or to prevent detrimental conduct in the company's affairs. The court considered the RBI's actions within its statutory obligations and competence.Analysis: The court reviewed the impugned order and annexure, which detailed the reasons for the supersession, including defaults, regulatory violations, and financial mismanagement. The court emphasized the RBI's authority to intervene in such matters and discouraged judicial interference in financial and corporate decision-making.Conclusion:The court dismissed the writ petition, upholding the RBI's actions as necessary for financial stability and proper management of the non-banking financial company. The judgment underscored the expertise of regulatory bodies like the RBI in handling financial matters and emphasized the limited scope for judicial intervention in such specialized domains.