Default on loan – Courts intervene to give relief to borrower

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Default on loan – Courts intervene to give relief to borrower

Shruti Sodhi

6 May 2020, 15:54 — 8 min read

The Reserve Bank of India (“RBI”) has announced a “COVID 19 Regulatory Package” vide a Circular dated March 27, 2020 (further supplemented by subsequent circulars) (the “Regulatory Package”). Broadly, the reliefs that the Lending Institutions have been “permitted” to grant to borrowers are (i) For term loan facilities: moratorium of three months (from March 1, 2020 to May 31, 2020 (the “Specified Period”) on payment of instalments due under term loan facilities; and (ii) For cash credit / overdraft facilities: rescheduling of repayment by way of deferment and recalculation of ‘drawing power’ for accounts facing stress as a fallout of the pandemic.

Pertinently, the Regulatory Package also provides that if a borrower has been granted moratorium or deferred interest, (i) asset classification of such term loan account will be determined on the basis of revised due dates and the revised repayment schedule; and (ii) For working capital facilities, special mention account (“SMA”) and/or the ‘out of order’ status will be decided considering the application of accumulated interest immediately after the completion of the deferment period as well as the revised terms (if applicable).

Additionally, the RBI on April 17, 2020, gave further relaxation on asset classification and provisioning by clarifying that for term loan facilities in respect of all accounts classified as ‘standard’ as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the Lending Institutions from the number of days past-due for the purpose of asset classification under the IRAC norms. Similarly, for deferment of interest in working capital facilities, such deferment period, (wherever granted in respect of all facilities classified as standard), including SMA, as on February 29, 2020, is required to be excluded for the determination of ‘out of order’ status. Relaxation in asset classification will reduce capital charge for Lending Institutions and give flexibility and open a window for restructuring as accounts continue to be treated as standard. 

Borrowers on the basis the Regulatory Package, have approached Courts to force Banks to give relaxations as envisaged in the Regulatory Package. The views of the Delhi and the Bombay High Court are discussed below.  

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Common facts in issue

In the two cases discussed in this note (Anant Raj Ltd. vs. Yes Bank Ltd. before the Delhi High Court & Transcon Skycity Pvt. Ltd. & Ors. vs. ICICI Bank Ltd. & Ors. along with Transcon Iconica Pvt. Ltd. & Ors. vs. ICICI Bank Ltd. & Ors. before the Bombay High Court), there is a common line of facts and similar submissions that had been advanced which are as follows. 

The Borrower in question had availed a term loan facility from the Lender in question and default in repayment of instalment had occurred for a period even prior to the Specified Period. However, the 90 day default period which would result in Non-Performing Asset (“NPA”) classification of the Borrower’s account was falling in the Specified Period.

As such, in each case, the Borrowers sought to argue that on applying moratorium as envisaged under the Regulatory Package, the concerned Bank ought to automatically withhold declaring the Borrowers’ account as NPA. The Lenders, in each case, per se argued that the default having taken place prior to the Specified Period, NPA classification should follow as per the standard IRAC norms.  

The Delhi View

The Delhi High Court, laying emphasis on the apparent intent of the RBI in issuing the Regulatory Package, inter alia, concluded that a plain reading of the RBI Circular shows that the intention of the RBI is to maintain status quo as on March 1, 2020 with regard to all instalments payable and asset classification falling due in the Specified Period.

The Court in fact went a step ahead and held that the restriction on change in classification shows that the RBI has stipulated that accounts which have been classified as SMA-2 cannot further be classified as NPAs in case any part of the 90 day default period is falling within the Specified Period and that status quo qua the classification will have to be maintained.

Pertinently, the Court also held that, if post the moratorium period, the Borrower defaults in making payment, asset classification would then automatically change as per IRAC norms.

With these findings, the Court passed an order of status quo ante restoring the position as it stood prior to March 1, 2020, effectively reversing the NPA classification of the account of the Borrower.

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The Bombay View

With a view to issue directions that protect the interest of both parties, the Court directed that the period of the moratorium be excluded for calculating the 90 (ninety) day period for NPA classification subject to the lockdown being in force for the entire duration of the moratorium. Further, it was also clarified that should the lockdown be lifted anytime during the moratorium period, the clock on the 90 (ninety) day period would once again start to tick and the protection made available to the Borrower would cease to operate. As a necessary corollary, it was held that if the lockdown were to be extended beyond May 31, 2020 (i.e. the moratorium period), the protection available to the Borrower will also extend irrespective of formal extension of moratorium by the RBI.

Pertinently, in issuing the above directions, the Court has clarified that this Order is being passed in the facts specific to this case and will not have any precedential value whether for subsequent cases of the Lender who was party to this case or to any other case for that matter.

Conclusion

On comparing the findings of the two High Courts, it seems that while the Delhi High Court arrived at a blanket interpretation of the Regulatory Package and stayed NPA classification of the Borrower’s account for the entire moratorium period, the Bombay High Court linked such stay to the subsistence of national lockdown (irrespective of the moratorium under the Regulatory Package). In our view, given the unprecedented circumstances in which the Regulatory Package has been announced, the view taken by the Delhi High Court is more palatable though not consistent with the Regulatory Package, where discretion is given to the Lending Institutions. Interestingly, it appears that the argument of discretion was not made before the Delhi or the Bombay High Court.

Further, the view of the Bombay High Court, while also may not find its feet in the regulatory framework, has been expressly made per incuriam and therefore, will not impact any other cases. This is a classic case of Judge made law basis equitable considerations.

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Shruti Dvivedi Sodhi

Shruti is a Partner based in the Delhi office of Khaitan Legal Associates. With over 25 years of experience across leading law firms, multinational organizations and a niche...

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