Smoke rises from a chimney as electricity pylons stand at a thermal power station in India. (Photographer: Dhiraj Singh/Bloomberg)

Power Producers Vs RBI: Banks Can Initiate Insolvency Proceedings, Say Experts

The Supreme Court’s oral order on Tuesday in the private power producers case led to conflicting views among experts. The written order, which was made available a day later, clarifies the situation on whether lenders can initiate insolvency proceedings against power producers, experts told BloombergQuint.

Power companies had challenged the validity of the Reserve Bank of India’s Feb. 12 circular in various high courts. The circular directs banks to file insolvency and bankruptcy proceedings against all large loan accounts above Rs 2,000 crore if a resolution plan is not agreed upon in 180 days.

The Allahabad High Court, while hearing the matter of several power producers, declined to grant their plea for a stay on the circular. A similar challenge was mounted by the Shipyards Association of India and the South Indian Sugar Mills Association before the Gujarat and Madras High Courts, respectively. Since several high courts were hearing cases on the same issue, the RBI filed a transfer petition before the Supreme Court.

The apex court has directed that all the pending cases on the challenge to the Feb. 12 circular stand transferred to it and until the next hearing on Nov. 14, a status quo should be maintained.

This means that if under the February 12 circular, the banks haven’t proceeded against any of the companies that are parties to the litigation, they can’t do that now, senior advocate Sajjan Poovaiya, who represents some of the power companies that have challenged the RBI’s circular, told BloombergQuint.

If action has been initiated against these companies, then as a result of this Supreme Court order, banks won’t be able to further precipitate those proceedings. The gist of the order is that no further action can be initiated by banks under the RBI circular.
Sajjan Poovaiya, Senior Advocate.

Senior Advocate Sidharth Luthra agreed. He also said that if there are proceedings that have been or are sought to be initiated by banks outside of the Feb. 12 circular, the apex court order doesn’t restrict them.

There is nothing preventing the banks or other creditors from initiating proceedings under the Insolvency Code outside of the Feb. 12 circular, Poovaiya concurred. But some of the largest creditors have gone on record in court to indicate that the Feb. 12 circular—which mandates them to take these companies to insolvency—is not a solution, he said.

This order may prompt other companies, affected by the Feb. 12 circular, to approach the apex court and get their petition tagged along with the existing cases so that they can have the benefit of a similar status quo order, Luthra said.

Here’s the full interview