SC's order on RBI circular: Banks retain right to initiate IBC proceedings

Legal experts share implications of the recent Supreme Court stay on the RBI's February circular regarding insolvency and bankruptcy proceedings.

The Supreme Court order must be interpreted in the correct legal perspective while appreciating its commercial impact. The SC has not stayed the RBI circular but ordered a status quo till the next date of hearing, scheduled on November 14. 

Second, the status quo only applies to the associations/entities that were parties to the SC proceeding (ie Prayagraj Power Generation Co, Independent Power Producers Association of India, Association of Power Producers, South Indian Sugar Mills Association, All India Bank Officers Confederation, Dharani Sugars & Chemicals Limited, and Shipyards Association). In these specific cases, the banks are for the time being not compelled to file insolvency proceedings until the SC hears the matter in November. Banks are still required to initiate insolvency proceedings under the RBI circular against entities whose names do not form part of the SC order.

Bahram N Vakil, Co-founder and senior partner, AZB & Partners

Third, regardless of the specific status quo order, it is important to note that banks still retain the right to initiate insolvency proceedings against any defaulting borrower under the bankruptcy code on a payment default of Rs 100,000, including against the parties which were parties to the SC order. Therefore, although in these limited instances, the compulsion of RBI circular does not apply till November, the right that the banks have under the bankruptcy code continues to exist. In fact, banks have already initiated insolvency proceedings against three large defaulting power companies, including those which were subject to the SC order (GMR Rajahmundry and Prayagraj Power Generation Co.)

It appears that notwithstanding the SC order, banks will continue to use the bankruptcy code wherever it makes commercial sense. If this does not happen, it would be particularly unfortunate at a time with heightened global volatility and given India’s acute need for capital inflows at this stage. At present, India is considered one of the most exciting destinations for global distressed asset funds which have large pools of capital, and have made and will hopefully continue to make, large investments in the country. In this context, it could cause a significant loss to the country if the SC order is not interpreted correctly and discourages inbound investments. 

The views expressed are personal