Jayaswal Neco challenges RBI directive in Supreme Court, gets ‘status quo’ on insolvency proceedings

Jayaswal Neco, a company which is a part of Reserve Bank of India’s (RBI) second list has today obtained status quo on its insolvency proceedings at the NCLT, by the Supreme Court..Senior Counsel Harish Salve along with Mahesh Agarwal argued for Jayaswal Neco before a bench of Justice Ranjan Gogoi and Justice R Banumathi..Jayaswal is challenging the whole chain of RBI’s directive to banks for initiating insolvency against it. It is questioning the applicability of the internal communications, which the RBI is making to banks under the Banking Regulation (Amendment) Act, 2017, contents of which in some cases are retrospectively overriding published circulars..Jayaswal had failed in obtaining relief from the Bombay High Court earlier this year for the same cause. This Special Leave Petition has been filed against the said judgment of the Bombay High Court passed in March, which refused to interfere with the economic policy of the RBI, which is the function of experts. .The High Court also ruled that the decision of the RBI, which is a Banking Regulatory Authority, cannot be a matter of review under the writ jurisdiction. Firstly, because the decision making process involves a specialized expertise and secondly, the satisfaction arrived at by the regulatory bank, need not be substituted by the opinion of the Court..By way of background, upon the promulgation of the Banking Regulation Ordinance, 2017 on May 4, 2017, the RBI on May 22 published a circular. The circular stated that a decision agreed upon by minimum 60% of creditors by value and 50% of the creditors by number in Joint Lenders Forum (JLF), would be considered as the basis for deciding the Corrective Action Plan and will be binding on all lenders. It also permitted an exit to the dissenting creditors under this circular. At the same time, it also indicated that a committee will evaluate cases that need to be referred to the IBC..On June 13, 2017 the said committee published a press circular identifying 12 accounts that need to be referred to IBC. It also gave time until December 13, 2017 to another set of accounts, which if not resolved by then, would also be referred to the IBC. Jayaswal was one of the accounts under this second list..It is Jayaswal’s argument that they went ahead with formulating a debt resolution plan basis the extant guidelines and were able to arrive at a Master Restructuring Agreement (MRA) on December 12, 2017, which was signed by 92% of the lenders..During this period, on August 28, the RBI also internally communicated that any such debt restructuring plan will be subject to a rating requirement and must be rated by two external Credit Rating Agencies (CRA), accredited by the RBI for bank loan rating. Accordingly, CARE and SMERA were assigned this task by SBI, and both gave a BBB- rating to Jayaswal’s remainder debt..On September 29, however, the RBI directed that the rating would be done by only two named CRAs. And on November 30, 2017, the RBI internally communicated ‘for the first time’ the criteria for considering a resolution plan to have been approved by the December 13 deadline, which is now what is essentially being challenged..Retrospective application with respect to credit rating.That the required credit opinions can be obtained from only 2 identified CRAs. Further, the direction to appoint IRRPL was made on December 7, 2017, just a few days before the December 13 deadline. And IRRPL downgraded the rating given by SMERA. This is where Jayaswal is contending retrospective application of its decision insofar as it directed the new appointment only after the contract with SMERA had been executed..Consent of all lenders.That the MRA has to be signed by ‘all parties’. Jayaswal says that this criteria is completely contrary to its May 22 circular, where it kept the thresholds much lower and allowed an exit to the dissenting lenders..Compliance of pre-conditions.That all pre-conditions with respect to the RBI guidelines relating to specific resolution scheme being adopted have been complied before the deadline. RBI says that bringing promoter’s contribution upfront and personal guarantees to be provided by the promoters, has not been complied with. The difference of opinion, here, seems to be with respects to the amounts that need to be contributed..The Supreme Court has now ordered status quo, which in effect has halted the insolvency proceedings initiated by the State Bank of India at the NCLT against Jayaswal Neco.