[Vaibhav Parikh is a banking and finance lawyer]
Due to the Covid-19 pandemic, several states, cities and countries have declared lockdowns for various durations and of varying degrees. Mindful of these exigencies, the Reserve Bank of India (“RBI”) has, by a press release dated 27 March 2020, said that there is to be a moratorium with regard to repayments and classifications as non-performing assets (“NPA”). Such a directive from the RBI on the face of it applies to amounts due after the date of the lockdown. The RBI directive itself would prima facie indicate that the moratorium operates with effect from, that is to say it starts from, 1 March 2020 and, as currently advised, goes on up to 31 May 2020.
Recently, the Bombay High Court in Transcon Skycity Private Ltd v. ICICI Bank[1]and Transcon Iconica Private Ltd v. ICICI Bank[2] (accessible via LiveLaw) interpreted the said RBI directive. There was no dispute that with regard to any instalment due after 1 March 2020, the moratorium fully applies. The question before the Court was whether the moratorium period was excluded in the computation of the 90-day period for amounts that fell due prior to 1 March 2020 and which remains unpaid or in default. To put it even more precisely, if there was a default that triggered the beginning of a countdown for the 90-day NPA-declaration period, would this countdown timer stop on 1 March 2020 and resume only after the end of the lockdown/ moratorium period?
For sake of clarity and brevity, the brief facts as established by the Court are this. Transcon Skycity Private Ltd and Transcon Iconica Private Ltd (together “Transcon”)in the above cases had financed facilities from ICICI Bank. These were to be repaid in instalments. The manner of servicing of the debt was fixed by contractual agreement. If there were indeed any past defaults, these seem to have been resolved at least until December 2019. Transcon agreed that the amounts under the repayment schedule due on 15 January 2020 and again on 15 February 2020 were not paid. Now, the consequences under the respective and applicable RBI circulars and notifications are that if payment is not made and the accounts are not regularized within 90 days of the date of default, then the borrower’s account gets classified as an NPA. Other consequences automatically follow. These include consequences to directors, associated companies, affiliates, etc. The 90-day period in respect of a 15 January 2020 default would take us to 15 April 2020. The 90-day period in respect of a 15 February 2020 default would take us to 15 May 2020.
In light of the Issue, Transcon relied on a decision of the Delhi High Court[3] and stated that the moratorium period must be excluded even for the computation of any balance days of the NPA-declaration 90-days period. The respondents argued that the grant of moratorium of three months would apply to the payment of all installments falling due between 1 March 2020 and not those installments which were due prior thereto.
The Court noted that the RBI Directive prima facie shows that the intention of the RBI is to maintain status quo as on 1 March 2020 with regard to the all the installment payments which had to be made after 1 March 2020 and until 31 May 2020. Paragraphs 5 to 7 of the RBI directive with regards to classification of accounts also indicates that the intention of RBI is to maintain status quo with regard to the classification of accounts of the borrowers as they existed as on 1 March 2020. If the RBI directive is only applicable to standard asset accounts, there was no necessity for the RBI to refer to classification of an account as a NPA in its directive and RBI could have only referred to the change of classification as a special mention account.
The Court held in the cases that the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. Therefore, the period of 1 March 2020 until 31 May 2020 during which there is a lockdown will stand excluded from the 90-day NPA-declaration computation until the lockdown is lifted. Thus, irrespective of the continuance of the moratorium until 31 May 2020, if the lockdown is lifted at an earlier date than 31 May 2020, then this protection vide the order of Court will not be available to Transcon on the lifting of lockdown, and the computing and reckoning of the remainder of 90-day period will start from that earlier lifting of the lockdown-ending date. The whole of the moratorium period is, evidently, excluded for all amounts that fall due during that moratorium period.
Analysis
In my view, the entire purpose of the moratorium and the rationale of it as reflected in the decision of the Delhi High Court[4] would be nullified if the moratorium was not extended. The narrative set out above establishes the fact that Transcon was in default on 1 March 2020, the moratorium start date. That moratorium currently extends to 31 May 2020. It is also undisputable that the 90-day period had not ended by 1 March 2020 for Transcon. As regards the first instalment that was unpaid on 15 January 2020, the clock was at about 45 days before the moratorium was imposed. For the second overdue instalment of 15 February 2020, the clock was at somewhat less about 15 days. Now that the moratorium has started running, there should be a suspension of this countdown timer for NPA-declaration.
Apart from the above, the more pressing issue in this matter is in respect of para 44 of the Court order clarifying that the order in the cases will not serve as a precedent for any other case in regard to any other borrower who is in default or any other bank. I believe that this case-based declaration or finding returned by the Court will have all manner of unintended consequences in respect of other borrowers and it may lead to a dramatic increase in litigation or a ‘flood’ of similar claims. The RBI should not be lax in making an intervention at this stage and issue a clarification which may be construed to apply across the board.
– Vaibhav Parikh
[1] Writ Petition LD-VC No. 28 of 2020 in the High Court of Judicature at Bombay.
[2] Writ Petition LD-VC No. 30 of 2020 in the High Court of Judicature at Bombay.
[3] In Commercial Suit No. LD-VC-7 of 20-20, along with IA No. LD-VC-7(IA) of 2020.
[4] In Commercial Suit No. LD-VC-7 of 20-20, along with IA No. LD-VC-7(IA) of 2020.