BOMBAY HIGH COURT

  1. Re-establishes the fact that the circulars/directives issued by the Reserve Bank of India from time to time are statutory in nature and are binding on all financial institutions;
  2. Emphasizes that the inability to pay debts depends on various sets of facts and circumstances and could not become the sole criterion for exercise of the power to wind up; and
  3. Mentions that the interest of creditors, contributories, stakeholders, and workers in majority must be safeguarded before considering the option of winding up on the request of a single creditor.

INTRODUCTION

The Hon'ble Bombay High Court ("Court") in the case of IDFC Bank Limited ("IDFC") v. M/s. Ruchi Soya Industries Limited ("RSIL & Company")1 dismissed a winding-up petition filed by IDFC seeking winding up of RSIL, inter alia, on the following grounds:

  1. Non-compliance of mandatory RBI guidelines that states the due recovery process could not be initiated until the corrective measures of rectification and restructuring are seen as not feasible;
  2. A winding up order could not be made on a creditor's petition simply on the basis that the company is unable to pay its debts temporarily because of conditions out of its control if there's a chance of revival, as it would not benefit him or the company's creditors, contributories, stakeholders, and workers in general because the company could revitalize itself under favourable conditions; and
  3. Wishes of large number of creditors could not be marred, who are trying to revive the company, by allowing the winding-up petition filed by minuscule creditor, as the process of rectification and restructuring on one hand and the process of recovery on the other hand cannot be permitted simultaneously and at the same time.

BRIEF FACTUAL BACKGROUND

RSIL is a public listed company, which processes 15% of the processing capacity of India's edible oil requirements and has more than 25000 shareholders, 8325 employees, a customer base of around 15 Crores, and supports the lives of 7-8 million farmers approx. It provides nutritious and value oriented foods through a network of 21 manufacturing units across the India built over last 30 years.

RSIL took loans from many financial institutions including IDFC. Though the contribution of IDFC comprises only 2% of the total debts owed by RSIL to the consortium lenders and only 1 % of the debts of the total creditors, IDFC served several due recovery notices and finally moved for winding up under section 433 and 434 of the Companies Act, 1956.

As per provisions of RBI circular, Framework for Revitalizing Distressed Assets in the Economy – Guidelines on Joint Lender's Forum ("JLF") and Corrective Action Plans ("CAP"), dated 26th February, 2014, it is said where the amount over Rs.100 Crore is found due and payable by a borrower to the lenders and if the account was not serviced for 60 days, it has to be classified as Special Mention Account-2 and in that event, it is mandatory that a Joint Lenders Forum (JLF) is formed comprising of all the lenders. Hence, a JLF was formed by consortium of financial institutions.

Since JLF was working on the revival of RSIL and IDFC filed a company petition for winding up, Consortium through its leader IDBI filed a petition to oppose the winding up.

ISSUES

  1. Whether the Consortium of Financial Institutions be allowed to intervene in the winding-up proceeding at the stage of admission, before a notice is issued for final hearing;
  2. Whether the circulars issued by Reserve Bank of India are statutory in nature and are required to be complied with during the process of liquidation initiated under Company Act, 1956 (debt recovery); and
  3. Whether a case has been made for the winding up of the company.

HELD

Regarding the first issue, the Court finds that if the creditors, workers, and contributories are allowed to intervene whether they oppose or support the winding-up petition, the Court can take a balance view and hence allowed the Consortium of Financial Institutions to intervene at the stage of admission in light of the observations made by Hon'ble Supreme Court in the cases of National Textile Workers' Union & Ors.2 and M/s. Madhusudan Gordhandas & Co.3 and the judgment of the Hon'ble Bombay High Court in case of Bharat Petroleum Corporation Limited4.

Regarding the second issue, the Court held that the circulars issued by the RBI are statutory in nature and are required to be complied with by the financial institutions, as per findings of Hon'ble Supreme Court in the cases of Canara Bank v. P.R.N. Upadhyaya and Ors.5, Sudhir Shantilal Mehta v. Central Bureau of Investigation6, and Central Bank of India v. Ravindra7.

In this way, it is obligatory for IDFC to abide by JLF Guidelines. The court also pointed that not signing the Inter Creditor Agreement and Debtor Creditor Agreement could not be an excuse to escape from the obligations under JLF Guidelines.

The court stated that the circular dated 24 September, 2015 clearly provided an exit option for dissenting lenders who were not willing to participate in rectification or restructuring of the account. They could sell their exposure to new or existing lender within the prescribed time line for implication of the agreed CAP. It is further stated that it was not open to the dissenting lender to continue with its existing exposure and simultaneously not agree for rectification or restructuring as part of the CAP.

Regarding the third issue, the Court relied on the guidelines set by Hon'ble Gujarat High Court in deciding the winding up petition in the Case of Tata Iron and Steel Co. v. Micro Forge (India) Ltd.8 alongwith the findings of Hon'ble Supreme Court in case of M/s. Madhusudan Gordhandas & Co. v. Madhu Woolen Industries Private Limited (supra), and the judgments of Bombay High Court in cases of Bharat Petroleum Corporation Limited v. National Organic Chemical Industries Ltd. (supra) and Tata Capital Financial Services Ltd. v. Infraprojects Ltd.9

The court observed that RSIL had a temporary setback and was making a sincere attempt of its revival with the assistance of large number of the creditors, and it would not be desirable and in the interest of all the creditors including IDFC to pass any order of winding up against RSIL at this stage.

ANALYSIS

The present judgment dealt with a winding up petition under sections section 433 and 434 of the Companies Act, 1956 and relied heavily on the guidelines laid down by Hon'ble Gujarat High Court in the case of Tata Iron and Steel Co. v. Micro Forge (India) Ltd., which are to be kept in mind before reaching a decision for winding up petition or for passing an order of winding up.

The judgment of Hon'ble Gujarat High Court shows concern regarding the provisions of the clause (e) of section 433, which provides that the company court is empowered to pass an order of winding up if the company is found unable to pay its debts. The Court is of opinion that the inability to pay debts is required to be judged from various sets of facts and circumstances. Inability to pay debts in all cases, ipso facto, could not be construed as an appropriate case for winding up. Inability may arise for a variety of reasons and the court is obliged to consider whether the inability is the outcome of any deliberate or designed action or mere temporary shock and effect of economy and market.

The opinion of the court is that winding up should be the last thing the court would do and not the first thing to do. A winding up petition ought not to be aimed at pressurizing the company to pay the money. Such an attempt would be nothing but tantamount to blackmailing or stigmatizing the concerned company by abusing the process of the court.

Measures should be taken to revive the company first if there is a fair chance of it. This is what reflected in the present judgment of Hon'ble Bombay High Court.

RBI through its JLF Guidelines makes sure that the recovery process only starts when measures taken for rectification and restructuring fails.

The Hon'ble Gujarat High Court while delivering its judgment in the year 2000 felt the need of some Insolvency Law, like the United Kingdom had at that time.

With the introduction of Insolvency and Bankruptcy Code, 2016 in India, it is ensured that no one could demand liquidation directly in case of inability to pay before an attempt for restructuring the dues payable. In Bankruptcy & Insolvency Code, Financial Creditors have to first initiate Insolvency Resolution Process (IRP), which is a revival measure, and if the measures fail then only can proceed for liquidation.

Now the issue is that circular(s) issued by the Reserve Bank of India have not been overridden by the provisions of the Insolvency and Bankruptcy Code, 2016 and both are in simultaneous existence.

The simultaneous existence of both, gives rise to various questions like where Insolvency Resolution Process ("IRP") has to be initiated when JLF is already in existence and CAP is being formulated and if yes, then which process would supersede the other. Similarly, wouldn't the initiation of IRP where JLF has already been formed result in duplication of restructuring process leading to delay in IRP process and thereby defeating the purpose and objective of Bankruptcy and Insolvency Code?

The co-existence of simultaneous process requires co-ordination and synchronization. Therefore the burden is upon the Reserve Bank of India/ Legislature to view the entire situation in practical, realistic and holistic manner to bring about the needed clarity in the process of debt restructuring and recovery to be followed by financial institutions.

Footnotes

1. Company Petition No. 570 of 2016, Company Application No. 455 of 2016 in Company Petition No. 570 of 2016 and Company Application No. 470 of 2016 in Company Petition No. 570 of 2016.

2. National Textile Workers' Union v. P.R. Ramkrishnan & Ors; 1983 SCC (1) 228.

3. M/s. Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd.; 1971 (3) SCC 632.

4. Bharat Petroleum Corporation Limited v. National Organic Chemical Industries Ltd. & Anr; 2004 (2) Mh. L.J. 114.

5. Canara Bank v. P.R.N. Upadhyaya and Ors.; (1998) 6 SCC 526.

6. Sudhir Shantilal Mehta v. Central Bureau of Investigation; (2009) 8 SCC 1.

7. Central Bank of India v. Ravindra; 2002) 1 SCC 367.

8. Tata Iron and Steel Co. v. Micro Forge (India) Ltd; (2001) 104 Comp Cas 533.

9. Company Petition No. 443 of 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.