ARCs Cannot Be Forced To Grant Moratorium Under RBI Circular, Says Madras High Court

Companies cannot play the public interest card to compel asset reconstruction companies to grant them relief under the Reserve Bank of India’s moratorium circular, the Madras High Court has held.

The RBI on March 27, 2020 had issued the circular allowing banks to grant a moratorium on all loans that became due between March and May 2020 due to the disruptions caused by the lockdown to curb the coronavirus pandemic. This was later extended till Aug. 31.

Under this circular, the high court pointed out, financial institutions have been given the latitude and discretion to consider extending the moratorium benefit to its borrowers. Consequently, the entitlement to this relief will depend on the contractual agreement between a lender and borrower.

The key takeaway from this order is that courts should be reluctant to apply their writ jurisdiction in commercial disputes, Divyanshu Pandey, partner at S&R Associates, told BloombergQuint. "The high court has clearly held that public law remedy should not be available to be exploited in case of private disputes in the disguise of upholding public interest."

The dispute here was between Puducherry-based Karaikal Port Pvt. Ltd and Edelweiss ARC. Karaikal Port’s promoter entity had approached the court against the ARC saying:

• The company is not seeking any waiver of loan or reduction in the loan amount but only a deferment in payment schedule which would not adversely impact the ARC in any manner.

• The debt was assigned to Edelweiss ARC by nine nationalised banks. As a result, the non-bank lender was discharging a public duty as well.

• And, any adverse action by the ARC may inevitably lead to paralysing the port activities in the region, affecting the public interest at large.

The high court found no merit in these arguments.

If these arguments are accepted, it will open the doors to judicial review of private agreements on grounds that the government or the RBI has given instructions to regulate financial relationship of the parties, the high court said in its order.

Merely because the RBI had issued the circulars during the pandemic won’t change the core character of the relationship of the parties and assume the coloration of public interest, the court said.

No public duty or compulsion is imposed on the ARC, the court pointed out, while denying relief to Karaikal Port.

On principles, the Madras High Court ruling is contrary to what the Karnataka High Court had ruled last year in July.

But the lenders in that case were banks. While saying that RBI’s circular gave them discretion, the Karnataka High Court had concluded that it’s mandatory for banks to ensure continuity of a viable business. As such, all borrowers are eligible to seek moratorium so that their continuity is not adversely impacted, it had said.