Parthas Taxtiles vs The South India Bank Ltd
2021 Latest Caselaw 2888 Ker

               IN THE HIGH COURT OF KERALA AT ERNAKULAM

                               PRESENT

                 THE HONOURABLE SMT. JUSTICE P.V.ASHA

    WEDNESDAY, THE 27TH DAY OF JANUARY 2021 / 7TH MAGHA, 1942

                       WP(C).No.174 OF 2021(V)


PETITIONER:

               PARTHAS TAXTILES
               P.B.NO.1774, M.G.ROAD, JOSE JUNCTION,
               ERNAKULAM - 682 016 REPRESENTED BY ITS MANAGING
               PARTNER, PRAVEEN RAJ RAJENDRAN.

               BY ADV. SRI.C.AJITH KUMAR

RESPONDENTS:

      1        THE SOUTH INDIA BANK LTD
               MARKET ROAD BRANCH, ERNAKULAM,
               REPRESENTED BY ITS CHIEF MANAGER, PIN - 682 011.

      2        THE REVENUE BANK OF INDIA
               21ST FLOOR, CENTRAL OFFICE BUILDING, SHAHID BHAGAT
               SINGH ROAD, MUMBAI - 400 001, REPRESENTED BY ITS
               CHIEF GENERAL MANAGER.

      3        UNION OF INDIA
               MINISTRY OF HOME AFFAIRS, NORTH BLOCK,
               NEW DELHI - 110 001, REPRESENTED BY ITS SECRETARY.

               BY ADV. SRI.SUNIL SHANKER
               BY ADV. SMT.VIDYA GANGADHARAN
               BY SRI.V.R.RAKESH, CGC

     THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD           ON
11.01.2021, THE COURT ON 27.01.2021 DELIVERED THE FOLLOWING:
 WP(C).No.174 OF 2021(V)

                                              2


                                        P.V.ASHA, J.
                     -----------------------------------------------------
                                W.P(c) No.174 of 2021-V
                      ----------------------------------------------------
                        Dated this the 27th day of January, 2021

                                    JUDGMENT

Petitioner is aggrieved by the rejection of its

application for one time restructuring and 2 years'

moratorium.

2. On 27.03.2020 the Reserve Bank of India-the 2nd

respondent issued Ext.P1 circular announcing various

regulatory measures, in order to mitigate the burden of

debt servicing brought about by disruptions in the wake

of Covid-19 pandemic and to ensure the continuity of

viable businesses. All commercial banks, co-operative

banks, all India financial institutions and NBFCs were

permitted to grant a moratorium of three months, on

payment of all instalments falling due between

01.03.2020 to 31.05.2020, in respect of all term loans.

The repayment schedule was to be shifted by three

months after the moratorium period. In respect of

working capital facilities sanctioned in the form of

CC/OD to borrowers facing stress on account of the WP(C).No.174 OF 2021(V)

economic fallout of the pandemic, lending institutions

could recalculate the drawing power by reducing the

margin/re-assessing the working capital cycle. The

lending institutions were directed to frame Board

approved policies for providing the reliefs provided in

the circular to all eligible borrowers. Wherever the

exposure of a lending institution to a borrower is Rs.5

crore or above as on 01.03.2020, the bank shall develop

an MIS on the reliefs provided to its borrowers which

shall inter-alia include borrower-wise and credit-

facility-wise information regarding the nature and

amount of relief granted. As per Ext.P2 circular

issued on 23.05.2020, the moratorium was permitted to

be extended by another 3 months from 01.06.2020 to

31.08.2020. Similar modification was made in respect of

working capital facilities also providing that the

lending institutions may as a one time measure

recalculate the drawing power by reducing the margins

till 31.08.2020 and review the working capital

sanctioned limits upto 31.03.2021 based on a

reassessment of working capital cycle. Ext.P3 circular WP(C).No.174 OF 2021(V)

was issued thereafter on 06.08.2020 providing for a

resolution frame work with intent to facilitate revival

of real sector activities and to mitigate the impact on

the ultimate borrowers. It was decided to provide a

window under the Prudential Framework to enable the

lenders to implement a resolution plan in respect of

eligible corporate exposures subject to certain

conditions. Each lending institutions were to put in a

Board approved policy detailing the manner of

evaluation and the objective criteria which would be

applied while considering the resolution plan in each

case. The 2nd respondent thereafter constituted an

expert committee to make recommendations to the Reserve

Bank. After accepting the recommendations of the

expert committee the 2nd respondent issued Ext.P4

circular on 07.09.2020, directing that all the lending

institutions shall mandatorily consider the key ratios

while finalising the resolution plans in respect of

eligible borrowers under part B of the Annexure to the

Resolution Framework.

3. The petitioner is a partnership firm engaged in WP(C).No.174 OF 2021(V)

the business of textiles and has been enjoying various

financial facilities from the 1st respondent which is a

private sector Bank, in the form of cash credit, term

loan facility, packing credit, bill discounting, etc.

to the tune of Rs.37,10,00,000/- (Rupees Thirty seven

crore ten lakhs only). It is stated that as on

29.02.2020 there is no overdue in its account. Claiming

the benefit under circulars, the petitioner submitted

Ext.P5 application before the 1st respondent on

12.10.2020 seeking one time restructuring and 2 years

of moratorium. It was followed by Exts.P6 and P7

reminders.

4. The 1st respondent as per Ext.P8 letter dated

04.11.2020, informed the petitioner that its account

cannot be included under the restructuring quality

frame work relating to Covid 19 stress since the 2

criteria mentioned therein were not satisfied. It was

stated that as per Ext.P3 circular dated 06.08.2020,

lending institutions should ensure that the resolution

under this facility is available only to a borrower

having stress on account of Covid 19. The further WP(C).No.174 OF 2021(V)

reason stated was that the petitioner's position as per

the last submitted audited financial statement as on

31.03.2019 does not fulfill the sector wise key ratio

for the purpose of restructuring. Out of the 4 factors

given therein, the respondents found that 2 of the key

ratios alone were complied with. The total debt/EBDITA

as well as interest coverage ratio were not complied

with while other 2 ratios were complied with.

5. Thereupon, the petitioner submitted Ext.P9

representation stating that the bank has not considered

the request of the petitioner in the correct

perspective; while considering the financial parameters

bank need consider only TOL/ATNW and to ensure

compliance of the same alone. Regarding the other

financial parameters, ratio has to be maintained as per

the resolution plan by 31.03.2022 only. It was pointed

out that since the petitioner had already ensured

compliance to TOL/ATNW, the other parameters need not

be insisted. Further regarding the borrower's top line

and profitability and the observation of the bank that

the profitability was on a declining trend for the WP(C).No.174 OF 2021(V)

previous 2 years, the petitioner stated that there was

no instance of any irregularity committed by the

petitioner in the loan account with the respondent bank

and the decline of profitability was due to the Kerala

Floods, 2018 and that since a recessionary trend

occurred in view of the natural calamities followed by

Covid 19 Pandemic, it was trying to regain business

and there was no occasion for any default in repayment.

The petitioner pointed out that it is eligible for

restructuring of its various loans with the bank and

also for the moratorium facilities. The petitioner

thereafter furnished all the particulars, which the

Bank had thereafter called for. Again, as per Ext.P11

letter the Bank informed their inability to include

petitioner's account for restructuring package.

Pursuant to Exts.P12 and P13 letters of the petitioner,

the 1st respondent issued Ext.P14 letter reiterating

that as per circular dated 6.8.2020 the lending

institutions have to ensure that the borrower is having

stress on account of Covid 19 and that in order to

become eligible for restructuring, four key ratios WP(C).No.174 OF 2021(V)

have to be complied and as against the same only 2 of

the key ratios complied with by the petitioner, as per

annual financial statement 2019. It was also stated

that the petitioner's top line and profitability was on

a declining trend for the previous 2 years and that

stress was there even prior to Covid 19 pandemic. It

was stated that there was an overdue of

Rs.1,26,02,430.80 in petitioner's account.

6. The learned Counsel for the petitioner points

out that the rejection of the application by Ext.P14 is

without properly understanding the circulars issued by

the Reserve Bank as also the eligibility of the

petitioner. It is stated that despite the

unprecedented floods of 2018 and 2019, which seriously

affected the petitioner, it could manage the business

under control and also to earn profit in those years as

evident from Exts.P15 to P17 profit and loss account

statement of the years ending on 31.3.2017, 31.3.2018

and 31.3.2019. It was also stated that the rejection

on the ground of non compliance of key ratios is

contrary to the guidelines in Ext.P4 circular. WP(C).No.174 OF 2021(V)

Pointing out that the petitioner did not request for

restructuring of export facilities of packing credit

and bill discounting, the petitioner seeks a direction

to the respondent bank to provide the facility of one

time restructuring and 2 years moratorium.

7. The learned Standing Counsel for the 1st

respondent filed a statement reiterating the stand of

the Bank in the impugned letters. According to the 1st

respondent, Exts.P1 to P4 circulars are issued only

towards the resolution frame work of Covid 19. Ext.P4

circular lays down the financial parameters with

sector specific bench mark ranges; such parameters are

to be factored in the resolution plans in respect of

borrowers eligible under part B of the annex to the

resolution frame work. In Ext.P3, the annex to the

resolution frame work provides that the lending

institutions are to ensure that such facility is

provided only to the borrowers having stress on account

of the Covid 19. As per clause 3 of Ext.P4 circular it

is mandatory for the lending institutions to consider

the key ratios detailed therein while finalising the WP(C).No.174 OF 2021(V)

resolution plans. In clause 4, the sector specific

thresholds for each of the key ratios are specified.

Clause 5 provides that the lending institutions can

consider other financial parameters as well while

considering the resolution plans, apart from the key

ratios provided therein. As per clause 6, the

resolution plans shall take into account the pre-Covid

operating and financial performance of the borrower and

the impact of Covid 19 on the operating and financial

performance, to assess the cash flow in subsequent

years. Clause 8 provides that after the borrower is

found eligible and resolution plan is agreed upon, the

lending institutions are to ensure compliance to the

TOL/ATNW ratios at the time of implementation and other

ratios by 31st March, 2022 and on an ongoing basis

thereafter. According to the respondent, clause 8

applies only in a case where a resolution plan is

agreed upon and it does not state that even if the

borrower is ineligible in terms of not meeting key

ratios and in the determination of financial

institutions the stress is not Covid related, the WP(C).No.174 OF 2021(V)

borrower would become eligible for restructuring.

Clause 9 also provides that compliance with agreed

ratios has to be monitored as financial covenants on an

ongoing basis. The circular is issued for the purpose

of regulating the financial institutions as to the

purpose of restructuring and to lay down parameters

thereof. It is also stated that financial institutions

have been advised not to restructure the loans where

the borrower's ratios are not in compliance with the

minimum standards in terms of ratios prescribed by the

RBI. The financial institutions are also permitted to

opt for ratios which are higher, in the case of floors

and lower in the case of ceilings than the standards

prescribed. It is stated that the account of the

petitioner would show that the stress in it was not on

account of Covid 19 as it was available for the pre

Covid period also. Pointing out the audited accounts

of the petitioner as on 31.03.2017, 31.03.2018 and

31.03.2019, it is stated that the net operating income

of the petitioner was 41.93, 39.88 and 33.28

respectively and the profit after tax was 0.18, 0.74 WP(C).No.174 OF 2021(V)

and 0.32 respectively. The ratio position as on

31.03.2019 was 8.24 against total debt/EBIDTA and 1.13

against interest coverage ratio. It is further stated

that the footfalls in the show room were not

satisfactory on physical visit. Therefore, according

to the 1st respondent, there was an inherent stress in

the account of the petitioner since the financial year

2017-18 and stress was not on account of Covid 19.

Further it is stated that the petitioner has already

been granted facility of ECLGS by extending a loan of

Rs.5.87 crores and the funded interest term loan for

interest under Covid moratorium, rescheduling payment

for the year.

8. Heard Sri. C.Ajith Kumar, the learned Counsel

appearing for the petitioner and Sri. Sunil Sankar the

learned Standing Counsel for the 1st respondent.

9. A reading of Exts.P2 to P4 circulars issued by

the 2nd respondent would show that the purpose behind

these circulars is to mitigage the hardship of the

borrowers on account of disruptions caused by Covid-19

pandemic and to ensure continuity of viable business. WP(C).No.174 OF 2021(V)

The 2nd respondent takes note of the potential impact on

the long term viability of many firms, otherwise having

good track record. Paragraph 3 of Ext.P3 circular

provides that the 2nd respondent has decided to provide

a window under the Prudential Framework to enable the

lenders to implement a resolution plan in respect of

eligible corporate exposures. The reason for denying

the benefit of these circulars is that stress is not on

account of Covid-19 and only 2 key ratios out of 4 in

Ext.P4 are complied.

10. Ext.P3 circular enables the lenders to

implement a resolution plan. Para.4 provides that each

lending institution shall put in place a Board approved

policy detailing the manner of evaluation and criteria

being applied while considering the resolution plan. No

steps are seen taken by the 1st respondent to implement

the resolution plan. No Board approved policy with the

method of evaluation or criteria for the evaluation is

also seen issued, apart from stating that petitioner's

stress is not on account of Covid-19.

11. Para.4 of Ext.P3 circular based on which the WP(C).No.174 OF 2021(V)

2nd respondent has denied the facility to the petitioner

reads as follows:

"4. The lending institutions shall ensure that the resolution under this facility is extended only to borrowers having stress on account of Covid-19. Further the lending institutions will be required to assess the viability of the resolution plan, subject to prudential boundaries laid out in this Annex. Towards this end, each lending institution shall put in place a Board approved policy detailing the manner in which such evaluation may be done and the objective criteria that may be applied while considering the resolution plan in each case."

Clause 28 of the Annex to Ext.P3 circular provides that

lending institutions may allow extension of the

residual tenor of the loan with or without payment

moratorium by a period not more than two years. The

contention of the 1st respondent is that the petitioner

was having stress even before Covid-19 pandemic. But

the respondent has no case that the petitioner's case

was ever in default or as on 01.03.2020. It would

appear that the first respondent did not consider the

question of implementation of resolution plan at all on

the ground that there was a diminishing trend in the

annual profit of the petitioner. But the diminishing

trend in annual profit alone cannot be the relevant WP(C).No.174 OF 2021(V)

criteria for denying the benefit under Ext.P3 circular.

12. The 1st respondent has not considered the case

of the petitioner for implementation of resolution plan

on the ground that the petitioner is not an eligible

borrower, as evident from the statement in para .8 in

which it is stated as follows: "It is submitted that

the compliant ratios (TOL/ATNW, etc) shall be

applicable only when the account is eligible under

Resolution framework for Covid-19 related stress. In

the present case stress in the account was evident at

the time of last renewal, hence the account was not

considered for Resolution Framework for Covid-19

related stress." It appears that the 1st respondent

did not consider whether there is any stress on account

of Covid-19, in cases where the Covid-19 impact has

aggravated the stress. The diminishing trend in profit

coupled with Covid-19 impact can also be a ground for

stress on account of Covid-19. I am of the view that

the benefit provided under the circulars Exts.P1 to P4

cannot be denied in cases where impact of Covid-19 is

also a reason for stress or when it has aggravated the WP(C).No.174 OF 2021(V)

stress provided, the account continues to be standard

as on the relevant date, as the condition that there is

stress on account of Covid-19 pandemic would be

satisfied. When it is admitted that there is stress

and the account continues to be standard as on

01.03.2020, the diminishing trend in annual financial

statement by itself does not exclude the petitioner

from the definition of eligible borrower.

13. The 1st respondent has also stated that the

petitioner satisfies only two key ratios. But a

reading of Clause 9 would show that the compliance of

all the 4 key ratios need be attained by 31.03.2022..

Clause 8 reads as follows:

"8. Lending institutions are expected to ensure compliance to TOL/ATNW agreed as per the resolution plan at the time of resolution plan at the time of implementation itself. Neverthless, in all cases, this ratio shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter."

But in this case the 1st respondent has not taken any

steps for resolution plan apparently because it

excluded the petitioner from the category of eligible

borrower. No Board approved policy is also seen put in

place as required in para.4 of Ext.P3 circular and WP(C).No.174 OF 2021(V)

Clause 3 of its Annex, for implementation of viable

resolution plans. Hence no steps are taken for inter-

creditor agreements or any other requirement for

implementation of the resolution under the framework.

14. Though the bank has stated that the lending

institutions are permitted to opt for the ratios which

are higher and lower than the standards prescribed,

clause 8 of Ext.P4 provides that the key ratios except

TOL/ATNW shall be maintained by March, 2022. In the

case of the petitioner admittedly the TOL/ATNW is

complied with. It is seen that the case of the

petitioner is not at all considered because of pre-

existed stress even with a standard account.

15. All these circulars Exts.P1 to P4 are seen

issued by the 2nd respondent for facilitating the

revival of real sector activities and to ensure

continuity of viable business by mitigating the impact

of stress on the borrowers. Therefore, the lending

institutions have to take steps for extending the

benefits conferred under those schemes in the correct

perspective taking note of the intention behind the WP(C).No.174 OF 2021(V)

scheme. It is seen that the 1st respondent Bank has

not considered the request of the petitioner having

regard to the purpose for which the circulars are

issued.

16. Therefore, I direct the 1st respondent Bank to

re-consider the application of the petitioner and to

pass fresh orders, taking note of the above

observations within a period of two weeks.

The Writ Petition is disposed of accordingly.

Sd/-

(P.V.ASHA, JUDGE) rtr/ WP(C).No.174 OF 2021(V)

APPENDIX PETITIONER'S EXHIBITS:

EXHIBIT P1 TRUE COPY OF CIRCULAR NO.RBI/2019-20/186 DATED 27/03/2020 OF THE 2ND RESPONDENT.

EXHIBIT P2 TRUE COPY OF CIRCULAR NO.RBI/2019-20/244 DATED 23/05/2020 OF THE 2ND RESPONDENT.

EXHIBIT P3 TRUE COPY OF CIRCULAR NO.RBI/2020-21/16 DATED 06/08/2020 OF THE 2ND RESPONDENT.

EXHIBIT P4 TRUE COPY OF CIRCULAR NO.RBI/2020-21/34 DATED 07/09/2020 OF THE 2ND RESPONDENT.

EXHIBIT P5 TRUE COPY OF THE LETTER DATED 12/10/2020 SUBMITTED BY PETITIONER TO THE 1ST RESPONDENT FOR DESTRUCTING.

EXHIBIT P6 TRUE COPY OF THE LETTER DATED 22/10/2020 SUBMITTED BY PETITIONER TO THE 1ST RESPONDENT FOR RESTRUCTURING.

EXHIBIT P7 TRUE COPY OF THE LETTER DATED 23/10/2020 ISSUED BY THE PETITIONER.

EXHIBIT P8 TRUE COPY OF THE LETTER DATED 04/11/2020 ISSUED TO THE PETITIONER BY THE JOINT GENERAL MANAGER OF THE 1ST RESPONDENT.

EXHIBIT P9 TRUE COPY OF THE LETTER DATED 12/11/2020 ISSUED BY THE PETITIONER TO THE JOINT GENERAL MANAGER OF THE 1ST RESPONDENT.

EXHIBIT P10 TRUE COPY OF THE E-MAIL DATED 12/11/2020 ISSUED BY THE 1ST RESPONDENT TO THE PETITIONER.

EXHIBIT P11 TRUE COPY OF THE LETTER DATED 18/11/2020 ISSUED BY THE 1ST RESPONDENT TO PETITIONER.

EXHIBIT P12 TRUE COPY OF THE LETTER DATED 11/12/2020 ISSUED BY THE PETITIONER TO THE 1ST RESPONDENT.

EXHIBIT P13 TRUE COPY OF THE LETTER DATED 21/12/2020 ISSUED BY PETITIONER TO THE 1ST RESPONDENT. WP(C).No.174 OF 2021(V)

EXHIBIT P14 TRUE COPY OF THE LETTER DATED 01/01/2021 ISSUED BY THE 1ST RESPONDENT TO THE PETITIONER.

EXHIBIT P15 TRUE COPY OF THE PROFIT AND LOSS ACCOUNT STATEMENT SUBMITTED BY PETITIONER FOR THE FINANCIAL YEAR ENDED ON 31/03/2017.

EXHIBIT P16 TRUE COPY OF THE PROFIT AND LOSS ACCOUNT STATEMENT SUBMITTED BY PETITIONER FOR THE FINANCIAL YEAR ENDED ON 31/03/2018.

EXHIBIT P17 TRUE COPY OF THE PROFIT AND LOSS ACCOUNT STATEMENT SUBMITTED BY PETITIONER FOR THE FINANCIAL YEAR ENDED ON 31/03/2019.

EXHIBIT P18 TRUE COPY OF FITL LOAN ACCOUNT STATEMENT OF PETITIONER FROM 01/02/2020 TO 31/12/2020.