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IN THE HIGH COURT OF MADHYA PRADESH, JABALPUR
HEMANT GUPTA, CJ, AKHIL KUMAR SRIVASTAVA, J.
M/s Kesar Multimodal Logistics Ltd. - Petitioner
Versus
Union of India & Others - Respondents
Writ Petition No. 12620 of 2018
Decided On : 22-06-2018
Strategic Debt Restructuring - Construction of Composite Logistic Hub - Banking Regulations Act, 1949, Reserve Bank of India Act, 1934, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - 35AB, 45(L), 13(2)
Fact of the Case:
The petitioner, a special purpose vehicle, entered into an agreement with the Madhya Pradesh State Agriculture Marketing Board for the construction of a logistic hub. The petitioner obtained a credit facility from a consortium of banks for the construction, but due to cost overruns and operational inefficiencies, the project faced financial stress. The Joint Lenders Forum decided to restructure the petitioner's finances and invoked the Strategic Debt Restructuring Mechanism (SDR). However, the petitioner failed to comply with the obligations set by the lenders and the Reserve Bank of India's circulars, leading to the banks initiating proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Finding of the Court:
The court found that the Reserve Bank of India had the statutory jurisdiction to issue circulars to scheduled banks under the Banking Regulations Act, 1949. The court held that the decision of the Joint Lenders Forum had not been implemented, and therefore, the circular issued by the Reserve Bank of India on 12.02.2018, which withdrew the earlier instructions on stressed asset resolution, was applicable to the petitioner's case. The court also rejected the petitioner's argument of promissory estoppel and found that the banks' decision to treat the petitioner's account under the SDR mechanism or initiate recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was a commercial decision within their rights.
Issues: The issues involved the applicability of the Reserve Bank of India's circulars, the implementation of the Strategic Debt Restructuring Scheme, and the banks' decision to treat the petitioner's account as a stressed asset.
Ratio Decidendi: The court held that the circular issued by the Reserve Bank of India on 12.02.2018, withdrawing the earlier instructions on stressed asset resolution, was applicable to accounts where any of the schemes had been invoked but not yet implemented. The court also emphasized the statutory jurisdiction of the Reserve Bank of India to issue circulars to scheduled banks under the Banking Regulations Act, 1949.
Final Decision: The court dismissed the writ petition, finding no merit in the petitioner's arguments and upholding the banks' decision to treat the petitioner's account as a stressed asset and initiate proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
ORDER :
Hemant Gupta, CJ.
The petitioner is a special purpose vehicle incorporated for construction of a composite logistic hub on 88.30 Acres of land pursuant to an agreement signed with Madhya Pradesh State Agriculture Marketing Board on 24.10.2011 for a period of 33 years, which could be further extended by another 15 years.
2. The petitioner has obtained a credit facility of Rs. 108.11 Crore including a Term Loan of Rs. 99.11 Crore and Non-fund based limit of Rs.9.00 Crore for the construction of composite logistic hub from the Consortium of Banks such as Dena Bank, Union Bank of India and Allahabad Bank.
3. It is the stand of the petitioner that the construction of composite logistic hub could not be completed as per plan though the rail operations commenced on 19.04.2016. Thus, it led to increase in the cost of development of the requisite infrastructure. It is further pleaded that due to loss and unavailability of expected business and backlog of interest, the Joint Lenders Forum (JLF) constituted in terms of circular issued by the Reserve Bank of India (for short “the RBI”) decided to restructure the petitioner's finances and invoked the Strategic Debt Restructuring Mechanism (SDR) in its meeting held on 20.11.2017. It was decided by the Joint Lenders Forum that the petitioner's case is fit for debt restructuring rather than declaring it as “Special Mention Account”. It may be pointed out that the Joint Lenders Forum was constituted in terms of circular dated 08.06.2015 (Annexure P24) issued by the RBI constituting a Forum for corrective action plan on framework for revitalising the distressed assets in the economy. This Strategic Debt Restructuring Scheme inter alia had the following features:
“2. It has been observed that in many cases of restructuring of accounts, borrower companies are not able to come out of stress due to operational/managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be a preferred option. Henceforth, the Joint Lenders’ Forum (JLF) should actively consider such change in ownership under the above Framework issued vide the circular dated February 26, 2014.
3. Further, paragraph 5.1 of the circular states that both under JLF and CDR mechanism, the restructuring package should also stipulate the timeline during which certain viability milestones (e.g. improvement in certain financial ratios after a period of time, say, 6 months or 1 year and so on) would be achieved. The JLF must periodically review the account for achievement/non-achievement of milestones and should consider initiating suitable measures including recovery measures as deemed appropriate. With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the projected viability milestones, banks may, at their discretion, undertake a ‘Strategic Debt Restructuring (SDR)’ by converting loan dues to equity shares, which will have the following features:
i. At the time of initial restructuring, the JLF must incorporate, in the terms and conditions attached to the restructured loan/s agreed with the borrower, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones and/or adhere to ‘critical conditions’ as stipulated in the restructuring package. This should be supported by necessary approvals/authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable the lenders to exercise the said option effectively. Restructuring of loans without the said approvals/authorisations for SDR is not permitted. If the borrower is not able to achieve the viabi
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