TaxTMI 
TaxTMI 
2018 (11) TMI 1047
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....ation/compliance of RBI Guidelines/Circulars dated 30.01.2014, 26.02.2014 and 05.05.2017 vis-a-vis Joint Lenders Restructuring Agreement dated 27.06.2015 invoked and implemented qua the Petitioner Company herein." 2. The petitioner also impugns the proceedings of the Joint Lenders Forum (hereafter 'JLF') dated 09.02.2018 wherein the minutes of the JLF's meeting held earlier on 23.01.2018 were confirmed. 3. The petitioner is a company incorporated under the Companies Act, 1956 and is engaged, inter alia, in the business of processing paddy and exporting rice. The petitioner had availed of certain financial assistance from respondent nos. 2 to 5 (hereafter collectively referred to as 'the respondent banks'). Respondent no.2 (Punjab National Bank - hereafter 'PNB') is the lead banker in respect of the said assistance. The petitioner has failed to repay its dues as demanded by the respondent banks and the same has led some of the respondent banks to institute proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereafter 'SARFAESI Act'). Respondent no.3 (hereafter 'ICICI Bank') had issued a demand notice under....
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.... report on the value of the stocks and the respondent banks accepted his view that the drawing power on the basis of the stocks be fixed at Rs.439.91 crores. In the aforesaid backdrop, the petitioner approached the consortium of the respondent banks for re-structuring of the financial assistance granted to it. 8. As noticed above, the drawing power available to the petitioner had dropped significantly (to Rs.439.91 crores against an outstanding of approximately Rs.863 crores). In view of the above and in conformity with the Circular dated 26.02.2014 issued by the RBI, the respondent banks formed a JLF. The JLF, in its meeting held on 19.03.2015, considered the petitioner's request for implementing and adopting a CAP (Corrective Action Plan) involving financial re-structuring of the loans and assistance. At the meeting held on 19.03.2015, the JLF decided to proceed with the petitioner's request for implementing the CAP and decided to get a Techno Economic Viability (TEV) Study done by an independent consultant - M/s Dunn and Bradstreet. 9. M/s Dunn and Bradstreet submitted its report dated 27.03.2015 (hereafter 'D&B TEV Report'), which included a re-structuring proposal. In te....
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....s.59.68 crores and thereafter, also released Rs.30 crores. The petitioner claims that the balance amount was required to be sanctioned and released by other lenders but none of the respondent banks (other than PNB) released any further working capital. 14. The petitioner sent several letters to the respondent banks repeatedly requesting the respondent banks to release additional working capital. However, admittedly, no further limits/funds were released. 15. The petitioner had also raised the issue of non-release of additional working capital during the subsequent meetings of the JLF. The respondent banks, on the other hand, raised several other issues including alleging financial indiscipline and accusing the petitioner of not routing the transactions through the designated account (Trust Retention Account - 'TRA'). 16. At the meeting of the JLF held on 22.12.2016, the petitioner requested that a re-structuring scheme under the RBI Circular dated 13.06.2016 (S4A) be framed, as given the petitioner's revenue, its debt was unsustainable. 17. The consortium of the respondent banks also agreed that a S4A re-structuring scheme be considered and a forensic audit be conducted....
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....the respondent banks had made a commitment to enhance the working capital but had failed to disburse the additional working capital as required. He referred to the TEV Study prepared by PNBISL in December, 2017 (PNBISL TEV Report) and pointed out that the PNBISL TEV Report clearly concluded that the petitioner had complied with all the conditions of the CAP but the respondent banks had not released the working capital limits as per the approved re-structuring scheme - the CAP. Consequently, the petitioner could not procure paddy to the desired extent, which in turn had adversely affected its production and profitability. Resultantly, the petitioner could not achieve the projections as made in the earlier TEV Study submitted by M/s Dunn and Bradstreet (D&B TEV Report). This in turn resulted in the amounts payable to the respondent banks becoming overdue and the petitioner's accounts were classified as Non-Performing Assets (NPA) by the respondent banks. 27. He submitted that the PNBISL TEV Report clearly established that the respondent banks were responsible for non-payment of the dues and, therefore, they could not be permitted to take advantage of their own wrong and initiate r....
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....) 1 SCC 407 and Chitra Sharma v. Union of India: W.P. (C) 744/2017, decided on 09.08.2018 in support of his contention that proceedings under the IBC could not be interfered with. Mr Srinivasan also referred to various RBI Circulars, D&B TEV Report and various clauses of the JLRA. 33. The learned counsel appearing for other respondent banks advanced contentions similar to those advanced by Mr Srinivasan. Reasons and Conclusion 34. At the outset, it is relevant to observe that there is no dispute that the Circulars issued by the RBI are binding on banks. In Central Bank of India v. Ravindra & Ors: (2002) 1 SCC 367, the Supreme Court had observed as under:- "(5) The power conferred by Section 21 and 35-A of the Bank Regulation Act, 1949 is coupled with duty to act. Reserve Bank of India is the prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of the public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally." 35. Bearing the aforesa....
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....ss in the accounts and to arrive at an early and feasible solution to preserve the economic value of the underlying assets. The RBI further indicated that the CAP would generally include either: (a) Rectification, (b) Restructuring or (c) Recovery. Rectification would entail measures intended to turn around the borrowing entity/company without any change in the conditions of the loan. Restructuring would be restructuring of the financial assets and loans. In the event, rectification or restructuring was not feasible, the JLF was required to resort to a recovery process for recovery of their loans. In the present case, sub-paragraph (b) of Paragraph 3.1 of the said Circular is relevant and is set out below:- "(b)Restructuring - Consider the possibility of restructuring the account if it is prima facie viable and the borrower is not a willful defaulter, i.e., there is no diversion of funds, fraud or malfeasance, etc. At this stage, commitment from promoters for extending their personal guarantees along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would ....
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.....2017, the RBI issued another Circular in exercise of powers conferred under Section 35-A and 35AB of the Banking Regulation Act, 1949 (hereafter 'the Banking Regulation Act'), whereby the lenders were directed to scrupulously adhere to time lines prescribed in the framework in implementing the CAP. The said Circular also specified that the decisions agreed upon by a minimum of 60% of creditors by value and 50% of creditors in number constituting the JLF would be considered as the basis for deciding the CAP and would be binding on all lenders. 42. At this stage, it is also relevant to mention that Section 35AB of the Banking Regulation Act was introduced by the Banking Regulation (Amendment) Act, 2017, which came into effect on 04.05.2017. In terms of Section 35AB of the Banking Regulation Act, the RBI was authorized to issue directions to banks for resolution of stressed assets. Subsequently, the Ordinance was replaced by the Banking Regulation (Amendment) Act, 2017, which came into effect on 04.05.2017. Section 35AB of the Banking Regulation Act, as introduced by the aforementioned enactment reads as under:- "35AB. (1) Without prejudice to the provisions of section 35....
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.... the Circulars sought to be relied upon by the petitioner have been withdrawn by virtue of the RBI's Circular dated 12.02.2018 and, therefore, no relief in this regard can be granted to the petitioner. It is further claimed that the respondent banks have not failed in discharging any of their obligations under the "approved JLF Package" in terms of the JLRA. On the contrary, they claim that the petitioner has failed to adhere to its obligations under the JLRA inasmuch as: (i) the promoters of the petitioner did not bring their contribution upfront; (ii) the petitioner did not route all its transactions to the TRA; and (iii) the petitioner has defaulted in its repayment obligation under the JLRA. 47. In view of the above, the first and foremost issue to be addressed is whether any directions can be issued with regard to implementation of the Circulars dated 26.02.2014 and 05.05.2017, in view of the RBI's subsequent Circular dated 12.02.2018. As noticed above, the relief claimed by the petitioner is directed towards seeking implementation of the Circulars dated 26.02.2014 and 05.05.2017 for enforcing the obligations of the respondent banks in terms of the JLRA. 48. It is common....
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....rgin for meeting other expenses necessary for the company to maintain its market share and be competitive; (ii) inventory loss due to fall in price of paddy and rice resulting in reducing the drawing power of the petitioner to the extent of Rs. 436 crores and translating to a loss of Rs. 295 crores (including moisture loss); and (iii) decline in import of basmati rice by Gulf countries. The said consultant submitted a restructuring proposal taking a cut-off date as 01.10.2014. The total outstanding loan as on the cut-off date was indicated at Rs. 320 million and the outstanding cash credit was Rs. 8,638.80 million. The restructuring proposal entailed: (i) restructuring of the then existing term loan of Rs. 320 million; (ii) conversion of irregularity or Rs. 4,360 million as a Working Capital Term Loan (WCTL-I); (iii) Working Capital Term Loan-II; (iv) providing Fund Based Working Capital (Cash Credit - 'CC') of Rs. 3,869.20 million; and (v) providing Funded Interest Term Loan (FITL) for funding the interest due on sustainable part of CC on Fund Based Working Capital, (WCTL) and Term Loan (TL). 51. The restructuring proposal as set out in the D&B TEV Report is reproduced below: ....
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....h the restructuring tenure. * Moratorium on Principal repayment is proposed to be 24 months (upto 30th September, 2016) from Cut-off Date. * The interest moratorium is proposed to be 24 months from cut-off date and is proposed to be funded and converted into FITL. * Repayment of WCTL proposed to be made in 32 quarterly installments commencing from quarter ended December 2016. The detailed repayment is as exhibited under - (INR Millions) Particulars Mar -15 Mar -16 Mar -17 Mar -18 Mar -19 Mar -20 Mar -21 Mar -22 Mar -23 Mar -24 Mar -25 Opening Balance 4,360.0 4,360.00 4,360.00 4,251.00 4,033.00 3,706.00 3,270.00 2,834.00 2,180.00 1,308.0 Addition /Disbursement 0 Repayment 0.00 109.00 218.00 327.00 436.00 436.00 654.00 872.00 872.00 Closing Balance 4,360. 00 4,360.00 4,251.0 0 4,033.00 3,706.00 3,270.00 28....
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.... -22 Mar -23 Mar -24 Mar -25 Opening Balance Addition/ Disbursement 3,869.2 0 3,869.20 3,869.2 0 3,869.20 3,869.20 3,869.20 3,869.20 3,869.20 3,869.20 3,869.2 0 3,869.2 0 Repayment Interest Rate 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% 10.75% Interest Charged to P&L 415.94 415.94 415.94 415.94 415.94 415.94 415.94 415.94 415.94 415.94 Interest Converted to FITL - II 415.94 207.97 v. Funded Interest Term Loan (FITL) * Interest on sustainable part CC/fund based working capital, WCTL and TL is proposed to be funded for 24 months from cut-off date and converted to FITL. * Interest on FITL is proposed to be charged at 10.75% annually. * Interest on FITL shall be paid as and when due. * Principal repayment moratorium up to quarter ended December 2016. * Repayment in 32 quarterly instalments commencing from quarter ended December 2016. ....
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.... 0.00 1.92 3.84 5.76 7.67 7.67 11.51 15.35 15.35 7.67 Closing Balance 25.00 59.49 74.82 70.98 65.23 57.56 49.88 38.37 23.02 7.67 0.00 Interest Charged to P&L 3.88 7.47 5.91 7.45 6.70 5.89 5.00 3.51 1.85 0.31 The detailed repayment schedule of FITL - IV (on WCTL - II) is as under - (INR Million) Particulars Mar -15 Mar -16 Mar -17 Mar -18 Mar -19 Mar -20 Mar -21 Mar -22 Mar -23 Mar -24 Mar -25 Opening Balance 24.50 24.50 36.76 34.87 32.05 28.28 24.51 18.85 11.31 3.77 Addition/Disbursement 13.20 Disbursement Repayment 0.00 0.00 0.94 1.89 2.83 3.77 3.77 5.66 7.54 7.54 3.77 Closing Balance - 24.50 36.76 ....
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.... 13,039.7 Secured Loan 9,777.92 12,195.78 13,238.72 9 13,304.64 13,108.35 12,812.06 12,235.24 11,340.73 9,981.41 9,303.43 Unsecured Loan 190.00 190.00 190.00 190.00 190.00 190.00 190.00 190.00 190.00 190.00 190.00 Debt-Equity Ratio 2.57 3.51 4.07 3.70 3.39 2.81 2.16 1.67 1.27 0.94 0.76 Total Outside Liabilities (TOL) 10,830.60 13,164.72 14,083.63 13,809.1 9 13,887.52 13,565.37 13,265.20 12,697.13 11,809.04 10,454.06 9,778.53 TOL/TNW 2.79 3.74 4.27 3.84 3.49 2.86 2.21 1.70 1.30 0.97 0.78 Cash/Bank Balance 93.50 245.07 384.57 624.43 698.21 1,093.03 1,429.04 1,619.99 1,639.75 1,938.43 3,044.13 53. The D&B TEV Report was submitted on 27.03.2015. Thereafter, the respondent banks (other than Axis Bank) issued sanction letters for restructuring of the existing facilities. PNB and Syndicate Bank issued their respective sanction letters on 30.03.2015; ICICI Bank issue....
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....s Rs. 34.22 crores. The petitioner also provided the status of the compliances and further impressed upon PNB the urgency for disbursal of additional working capital of Rs. 75 crores. The petitioner expressly stated that "the restructuring package will not be complete without the funding of Rs. 75 crores as per the approved package and TEV study". In addition, the petitioner also stated that "the credit facilities were restructured as per approved package by respective lenders on 31.03.2015 barring the release of additional working capital limit of Rs. 75 Cr (PNB share Rs. 36.83 Cr.) which is stipulated to be released only after the package is vetted by the IEC against the company's request to release before 31.03.2015." 56. The aforesaid letter also supports the view that the agreed restructuring did not include provision of any additional working capital other than Rs. 75 crores, which was subject to the approval of the IEC. 57. In terms of Paragraph 4.3.3 of the RBI's Circular dated 26.02.2014, the restructuring package was evaluated by an IEC. The IEC approved the restructuring with additional working capital limit of Rs. 75 crores. The relevant extract of the Min....
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....es had reduced their agreement in writing by entering into the JLRA. Thus, the question whether the respondent banks had any commitment to provide additional funding must be examined on the basis of the express terms of the JLRA. 62. The term "approved JLF Package" is defined under Article 1 of the JLRA to have the same meaning as given to the said term in recital 'F' of the JLRA. Recital 'F' of the JLRA reads as under:- "F. At the request of the Borrower and in consideration of the Borrower's commitment to improve its operations, the request of the Borrower was referred to the joint lenders forum (hereinafter referred to as the "JLF"), a non-statutory voluntary mechanism for the efficient restructuring of corporate debt. Pursuant thereto, the Lenders at their meeting held on March 19, 2015 agreed for restructuring of Existing Loans as corrective action plain. Pursuant thereto Dun & Bradstreet (D&B) was requested to draw a Techno Economic Viability Report (the "TEV Report") on the restructuring of Existing Loans and it submitted its TEV Report on March 27, 2015 along with the final restructuring package and after perusal of the said report, the Lende....
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....e extended to the Borrower by continuation of regular portion of existing fund based working capital limits, more specifically defined in Schedule X.' 66. The particulars of working capital facility were set out in Schedule X. Part B of the said Schedule included the terms and conditions of such facility. 67. Part A of the Schedules II and III and Schedule X to the JLRA are relevant and are set out below: "SCHEDULE II Particulars of Existing Lenders and Existing Loan A. Existing Loans Secured term loans (Rs. in Crore) Lender O/s Principal Punjab National Bank 32.0 Total 32.0 Working capital dues (Rs. in Crore) Lenders Sanctioned Limits FB NFB Total Punjab National Bank 360.00 25.00 385.00 Syndicate Bank 240.00 - 240.00 ICICI Bank 125.00 - 125.00 Axis Bank 64.00 5.00 within FB 64.00 Total 789.00 25.00 814.00 "SCHEDULE III PART A Details of Facilities Particulars of facility A - Term Loans (Rs. in Crore) Bank TL PNB 32.00 ICICI Bank - Syndicate Bank - Total 32.00 Pa....
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.... 3.77 4.51 210.77 598.93 ICICI Bank - 64.97 - 12.47 14.09 - -9.70 68.47 169.69 Syndicat e Bank - 117.09 - 25.38 25.48 - -- 140.52 308.47 Axis bank - 29.79 - 6.46 6.79 - *5.00 37.47 80.51 "SCHEDULE X PART A Particulars of facility H-Fund Based Working Capital facilities (Rupees in crores) Bank FBWC-1 FBWC-2 TOTALFBWC PNB 176.55 34.22 210.77 ICICI Bank 57.35 11.12 68.47 Syndicate Bank 117.70 22.82 140.52 Axis Bank 31.39 6.08 37.47 Total 382.99 74.24 457.23 *ICIII ICICI Bank has sanctioned single limit with additional facilities. PART B Terms and Conditions of Facility H (a) Facility H shall carry an interest rate of Base Rate+ 0.50% payable monthly. Lenders shall have right to reset interest rate every year from the date of approval. Interest would be payable monthly, on the last date of each month or as and when levied. However interest on existing working capital facitielies for a period of two years from cut of date will be....
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.... The Lenders may at their sole discretion, agree to sanction additional working capital limits in proportion to their respective exposure.-" 72. Paragraph 2.6.1 of the JLRA must be read in its context. It is apparent that the respondent banks had agreed to provide working capital limits as per the approved JLF package and the details of such facilities were expressly mentioned in Schedule III to the JLRA. Insofar as any additional working capital is concerned, it was expressly provided that the same would be at the sole discretion of the lenders. 73. In terms of paragraph 2.6.1 of the JLRA, the respondent banks were required to reassess the working capital limits. However, that does not mean that they were obliged to provide additional funding. The decision whether to provide additional funding would depend on various factors including the confidence in the business and the management. Funding an ongoing business is a dynamic process and requires to be re-evaluated and reassessed. Whilst the respondent banks had agreed to reassess the same, they had also made it expressly clear that additional funding would be at their discretion. 74. It also evident from the Minutes of th....
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....nd not an informed finding. The PNBISL TEV Report also does not indicate any analysis of the effect of non provision of the additional working capital and, therefore, the observation that the petitioner could not achieve the financial projections due to lack of additional funding is not supported by any reasons/analysis. 77. Having stated the above, there is no reason not to believe that the petitioner did require additional working capital for meeting the projections as set out in the D&B TEV Report. PNB had also agreed to enhance the working capital and had sanctioned a sum of Rs. 59.68 crores. It had also disbursed Rs. 30 crores. However, it is contended on behalf of PNB that the same was a separate transaction. Be that as it may, even if it is accepted that PNB had released additional working capital based on the assessment of the petitioner's requirement for such capital in terms of the projections set out in the D&B TEV Report, it is difficult to accept that the same was part of its obligations under the JLRA. 78. Even if it is accepted (which this Court does not) that the respondent banks were obliged to provide additional working capital as claimed by the petition....
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.... resolution strategy. The petitioner company also circulated a note for the reference of the JLF. At the said meeting, the whether a S4A scheme could be sanctioned was discussed and the petitioner company was called upon to establish its eligibility for such a scheme. Thereafter, at the meeting held on 21.06.2017, the JLF agreed to implement the S4A Scheme and adopted 21.06.2017 as a reference date. PNBISL was also directed to conduct a TEV Study for the said purposes. However, there was a delay in completion of the TEV Study and the S4A Scheme could not be implemented within the period of 180 days as required. 81. There is much controversy with regard to the proceedings for a S4A Scheme. The petitioner claims that the respondent banks had no intention to adopt any S4A scheme and had intentionally delayed the implementation of the same. It was finally abandoned by them on grounds, which the petitioner claims are untrue. The respondent banks, on the other hand claim that the S4A scheme was subject to a forensic audit and the draft Forensic Audit Report contained adverse observations against the petitioner and, thus, the petitioner was disentitled for any such scheme. The petition....
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....o default in infusing the promoters contribution and in fact the same was brought even prior to entering into the JLRA. 84. In terms of sub-paragraph 7.3.1 of the JLRA, the lenders were required to inform the JLF about the event of default and the action proposed to be taken by such lenders. In terms of sub-paragraph 7.3.2, occurrence of an event of default would result in the principal and approved interests on the facilities being due and payable forthwith. Prima facie, it does not appear that any such notice of default had been issued and, therefore, the contention that the respondent banks ought not to be permitted to raise any such issue in these proceedings appears merited. 85. However, this Court is not called upon to adjudicate any of the aforesaid contentions. These are plainly disputed questions of facts and it is also apposite to examine the same in these proceedings. In this view, this Court is refraining from commenting upon the same and has considered this matter on the assumption that there is no default on the part of the petitioner in complying with its obligations under the JLRA. 86. In view of the above, the relief as sought for by the petitioner cannot ....
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....r sanctioning additional working capital as discussed earlier. The JLRA also does not oblige the respondent banks to disburse additional working capital. And, even if it is accepted that the respondent banks had an obligation to provide additional working capital, no such directions to provide additional funding can be granted, as there is a fundamental change in the financials of the petitioner company and the petitioner company is admittedly, not in a position to service its existing loans. 89. The contention that since the respondent banks have not disbursed additional working capital, they should be restrained from proceeding under the SARFAESI Act or the IBC, is not merited. This is so because there is no dispute that the petitioner company owes substantial amount to the respondent banks and as financial creditors they are entitled to seek remedies under the IBC. 90. The Supreme Court in Innoventive Industries Ltd. (supra) had explained that the IBC is an exhaustive code on the subject matter of insolvency. It was also noticed that Section 238 of IBC contained an non-obstante provision and it was expressly provided that"..the provisions of IBC would have effect notwithst....
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.... decision. Thus, the view expressed by the Supreme Court would be applicable in this case as well. 93. Mr Sibal had contended that the decision in the case of Innoventive Industries Ltd. (supra) was not applicable in this case for two reasons. First, that the petitioner has raised the issue of failure on the part of the respondent banks to disburse the amount in terms of the obligations under the JLRA at the threshold and unlike in the case of Innoventive Industries Ltd. (supra), there is no delay on the part of the petitioner in raising such plea. Second, he submitted that the decision was rendered prior to the issuance of the Banking Regulations (Amendment) Ordinance, 2017, which expressly authorized the RBI to issue directions to banks regarding resolution of stressed assets. 94. The said contentions are unpersuasive. First of all, the question whether the petitioner can challenge the demand raised by the respondent banks on the ground that they had failed to disburse the amount due is required to be canvassed before the NCLT. The said contention cannot be a ground for this Court to interdict proceedings under the IBC. 95. Secondly, the decision in Innoventive Industrie....