JLF or IBC? – Can a single dissenting lender derail the process adopted by other lenders under extant JLF Guidelines?

Reserve Bank of India (“RBI”) and Government of India (“GoI”) have been relentlessly showing their willingness to resolve the near about 6 Lakh Crores worth of Non Performing Assets in the country. Manifesting such willingness, GoI has passed the Banking Regulation (Amendment) Ordinance, 2017 to equip RBI to direct insolvency resolution of specific companies to the National Company Law Tribunal (“NCLT”) under Insolvency and Bankruptcy Code, 2016 (“IBC”). Prior to this, because of the failure of Corporate Debt Restructuring mechanism, RBI has introduced a plethora of schemes starting from Joint Lenders Forum (“JLF”) and Corrective Action Plan (“CAP”) Guidelines,[1] Strategic Debt Restructuring Scheme,[2] Outside SDR scheme,[3] Scheme for Sustainable Structuring of Stressed Assets[4] and subsequent amendments to the same. The extant guidelines under JLF and CAP Circular requires a time bound recognition of stressed accounts and mandatory formation of JLF and taking measures to rectify or restructure the account; or start recovery proceedings should the rectification and restructuring fail.[5]

Recently, RBI released a circular which stated that the decision to arrive at a particular solution (rectification, restructuring or recovery) can be taken by 60% of the creditors by value and 50% by number.[6] Under the extant JLF Guidelines, if any lender in the JLF doesn’t agree to the solution being adopted by the JLF, it will have an ‘exit option’ by virtue of which it can exit the JLF by selling its exposure to other lenders of the JLF.[7] It is to be noted that the dissenting lender shall not be allowed to hold its exposure and not agree for rectification or restructuring as CAP.[8] Moreover, if the dissenting lender is not able to exit by arranging a buyer before the CAP is finalised within prescribed time, it has to necessarily adhere to the agreed CAP.[9]

This was further upheld by the Bombay High Court in the case of IFDC v. Ruchi Soya[10]. In this case, while the JLF was still formulating the CAP, IDFC, a holder of debt equivalent to 2% of the total debts of other lenders, prayed before the Court that Ruchi Soya be wound up according to (then) applicable provisions of Companies Act, 1956. The Hon’ble Court reiterated the consistence stance of Supreme Court that the circulars issued by RBI carry statutory force and are binding in nature.[11] It was held by the High Court in clear terms that IDFC cannot take independent steps towards recovery when other members of JLF are formulating a CAP in terms of the extant JLF Guidelines. It was held that the process of rectification and restructuring on one hand and the process of recovery by one of the members of the said JLF on the other hand cannot be permitted simultaneously and at the same time.

However, without referring to the Ruchi Soya case, National Company Law Appellate Tribunal (“NCLAT”) vide its judgment in the case of M/s Innoventive Industries Ltd. v. ICICI Bank & Anr.,[12] held that the ‘adjudicating authority’, i.e., NCLT only need to satisfy itself on three grounds whenever an application under Section 7(5) of IBC is filed by a Financial Creditor. These three grounds are whether (a) a default has occurred, (b) the application is complete and (c) any disciplinary proceedings are pending against the proposed insolvency resolution professional. The NCLAT held that apart from these grounds, the adjudicating authority is not required to look into any other factor, including the question whether the consent of JLF has been obtained before filing of such application. By virtue of this reasoning, the argument of the Corporate Debtor that the ICICI should have obtained the consent of the JLF, as the proceedings would adversely affect loan of other members, was rejected.

It is to be noted that the in the Ruchi Soya case, (a) the petition was filed under the provisions of the Companies Act, 1956 and (b) the dissenting lender was holder of around 2% of the total debts of other lenders. However, in the case of Innoventive Industries, the application was filed under Section 7(5) of IBC and the debt held by ICICI was not provided for in the judgment.

It is indispensable, at this stage, to ask that whether a single dissenting lender (irrespective of the amount of debt owed) can derail a rectification or restructuring process being adopted by other lenders under the extant JLF and CAP Guidelines or any other scheme of RBI for such rectification or restructuring, by filing an application under Section 7(5) of IBC? Although, the facts of Ruchi Soya judgment are not pertaining to IBC, the ratio of the case applies to any ‘legal recovery process’, which of course, includes recovery under IBC. However, after strict construction of IBC and its provisions, NCLAT’s judgment opens flood gates for the dissenting lenders who do not concur with the method(s) adopted by JLF. Although not specified in the judgment, the presence of the non-obstante clause of Section 238 which states that the provisions of IBC shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law, can boost the reasoning of the NCLAT judgment.

Innoventive Industries does not state the correct law as it does not take into consideration the standstill clause agreed between the Lenders and the Borrower; and if one Lender independently goes on to file an application under IBC, it does not act in the best interest of other Lenders. In both the situations, there is a contractual breach as well as patent ignorance of the regulatory framework.

Hence, in absence of any authoritative pronouncement of the Supreme Court on the issue and in the light of above conflicting, it seems that a single dissenting lender can, for now, derail a rectification or restructuring process being adopted by other lenders by filing an application under the IBC.

[1] Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP), RBI/2013-14/503 dated February 26, 2014.

[2] Strategic Debt Restructuring Scheme, RBI/2014-15/627 dated June 8, 2015.

[3] Prudential Norms on Change in Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme), RBI/2015-16/187, dated September 24, 2015.

[4] Scheme for Sustainable Structuring of Stressed Assets, RBI/2015-16/422 dated June 13, 2016.

[5] Paras 2 and 3, Supra Note 1.

[6] Para 4, Timelines for Stressed Assets Resolution, RBI/2016-17/299 dated May 5, 2017.

[7] Para 5.2, Framework for Revitalising Distressed Assets in the Economy – Review of the Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP), RBI/2015-16/182 dated September 24, 2015.

[8] Ibid.

[9] Para 18, Review of Prudential Guidelines – Revitalising Stressed Assets in the Economy, RBI/2015-16/330 dated February 25, 2016.

[10] [2017] 201 Comp Cas 114 (Bom) decided on February 14, 2017.

[11] For instance, Central Bank of India v. Ravindra, (2002) 1 SCC 367.

[12] Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017, decided on May 15, 2017.

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