I. INTRODUCTION

The Coronavirus or COVID-19 pandemic danse macabre is not only taking catastrophic toll on human lives but also causing severe economic dislocation and market turmoil. The outbreak of the pandemic has necessitated imposition of extraordinary measures such as lockdowns in most countries keeping in mind the larger interests of public health.

While India remains under a lockdown and a state of siege prevails, the Reserve Bank of India ("RBI") has, in an attempt to mitigate the adverse impact of the pandemic on the economy and with a view to revive growth and mitigate the burden of debt servicing, released Circulars termed as 'Statement of Development and Regulatory Policies' dated March 27, 20201 and 'COVID-19 – Regulatory Package' dated March 27, 20202 ("RBI Circulars") which inter alia permitted all the lending institutions3 to allow a moratorium of 3 months on instalments in respect of all term loans falling due between March 1, 2020 and May 31, 2020 ("Moratorium Period").

The RBI Circulars further state that repayment schedule and all subsequent due dates, as also the tenor for such loans, may be commensurately shifted across the board by three months. Similarly, in case of Working Capital facilities, the lenders are permitted to allow a deferment of 3 months on payment of interest in respect of all such facilities outstanding as on 1st March 2020, whilst the interest can continue to accrue and will be payable after the expiry of the said period.

II. THE SCOPE AND EXTENT OF SAFE HARBOUR PROVIDED IN THE RBI CIRCULARS:

The objective of this safe harbour of moratorium/deferment is to specifically enable the borrowers to tide over the economic fallout from COVID-19 and hence, a default will not result in asset classification downgrade. The RBI was however mindful to caveat this by providing that this will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers.

It is pertinent to understand here as to what the stages of asset classification are. Asset classification is primarily governed by the Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1st July 2015 (as amended from time to time) (colloquially referred to as "IRAC norms"). As per the IRAC norms, an asset it classified as a Non-Performing Asset (NPA) when the interest and/or instalment of principal remains overdue for a period of more than 90 days. IRAC norms further state that, prior to classifying an account as an NPA, an account shall be first classified as Special Mention Account – 1 (SMA-1) when the account remains overdue between 31-60 days and Special Mention Account – 2 (SMA-2) when the account is overdue between 61-90 days. While this is the basic parameter for declaring an asset as an NPA, the RBI has released various other circulars and guidelines on the classification standards from time to time, which may not be essential for discussions here.

While the RBI Circulars provide a safe harbour to the borrowers so as to not trigger any 'default' during the Moratorium Period, the Borrowers are also protected from any downgrade in classification of their account as per the IRAC norms, during the Moratorium Period. The Circular clearly provides that the asset classification of term loans which are granted relief shall be determined based on revised due dates and revised repayment schedule.

The borrowers have however, knocked the doors of the Courts in respect of issues concerning the interpretation of the said RBI Circulars. Few issues which came up for consideration before the Courts till now are (1) whether the safe harbour under the RBI Circulars apply to Assets which were in default prior to 1st March 2020; (2) whether the time period for Asset Classification/down-gradation continue to run during the Moratorium Period; (3) whether moratorium has any effect on enforcement of security interest for a default occurred prior to 1st March 2020; and (4) whether the Moratorium Period also applies in respect of facilities availed by NBFCs.

1. Whether the safe harbour under the RBI Circulars applies to Assets which were in default prior to 1st March 2020:

This issue came up for consideration in the case of Anant Raj Limited v. Yes Bank Ltd.4 before the Hon'ble High Court of Delhi. In this case, Anant Raj Ltd., the borrower, which is engaged in the business of real estate, had availed credit facilities to the tune of Rs. 1570 crores from YES Bank Ltd. The Borrower filed a writ petition challenging YES Bank's action of classifying the Borrower's account as NPA on 31st March 2020. The Borrower contended that it is squarely covered under the aforesaid RBI Circular to avail moratorium on instalments from 1st March 2020 and that, in this intervening period, status quo qua classification of the account should be maintained. YES Bank contended that the RBI Circulars apply to instalments which fall due after 1st March 2020 and in the present case, as the default had occurred on January 1,2020 and the interest instalment remained overdue for a period of 90 days, the account is to be classified as NPA as per the IRAC norms.

The Delhi High Court, after analysing the RBI Circulars held that, prima facie it appeared that the RBI intended to maintain status quo as on 1st March 2020 with regard to the instalment payments which are to be made between 1st March 2020 and 31st May 2020 as well as the classification of accounts of the borrowers as on 1st March 2020. The Court reasoned by observing that if the RBI Circulars were intended to apply only to Standard Asset accounts, there would be no need for the RBI to even refer to classification of NPA in the said Circulars, and reference to SMA-1 and SMA-2 would have sufficed. In other words, an account which was otherwise a Standard Asset as on 29th February 2020, cannot become an NPA post 1st March 2020 unless it goes through the process of SMA-1 and SMA-2. As the account cannot be classified as SMA for instalments falling due post 1st March 2020, there is no question of stipulating a moratorium for classification as NPA.

With the aforesaid observation and reasoning, the Delhi High Court ordered status quo ante and restored the account classification as it stood on 1st March 2020. In our view, the Delhi High Court rightly observed that the RBI Circulars clearly provide for status quo on asset classification as it existed on 1st March 2020. Whilst the Delhi High Court may have arrived at correct interpretation, the maintainability of the petition itself is required to be examined, as no state instrumentality appears to have been made a party to the writ petition filed.

The issue of maintainability of the writ petition came up for consideration before the Hon'ble Bombay High Court in the matter of Transcon Skycity Pvt. Ltd. & Ors. v. ICICI Bank and Ors.5, when the Court was seized with the question of whether the Moratorium Period is to be excluded from the computation of time period for classification of an account as NPA. However, the Bombay High Court, while passing interim orders under the extraordinary circumstances, is yet to pass any final observation and order on the issue of maintainability of such writ petitions, which is dealt in detail below.

2. Whether the time period for Asset Classification/down-gradation continue to run during the Moratorium Period:

In the case of Transcon Skycity Pvt. Ltd. & Ors. v. ICICI Bank and Ors.(supra), the borrowers viz. Transcon Skycity Pvt Ltd. and Transcon Iconica Pvt Ltd. ("Transcon") approached the Bombay High Court in similar facts as that of the Anant Raj's case, however, the issue which was examined by the Court was whether the countdown for computation of asset classification be suspended during the Moratorium Period. Like in the Anant Raj's case, in the present case Transcon availed credit facilities from ICICI Bank and had committed defaults in payment on 15th January 2020 and 15th February 2020 thereby exposing Transcon to be classified as NPA on 15th April and 15th May 2020 respectively. The Borrowers therefore approached the Court against ICICI Bank and RBI seeking safe harbour under the RBI Circulars along with an injunction against ICICI Bank from taking any coercive steps, including downgrading asset classification of Transcon.

Transcon placed reliance on the judgement of Delhi High Court in Anant Raj's case and contended that from the reading of the said judgment, the duration of the lockdown period is required to be excluded from 90-day countdown, failing which, such moratorium granted by RBI would be rendered meaningless in a situation akin to that of Transcon. On the other hand, ICICI Bank had contended that the writ petition itself was not maintainable as it is a private bank and not a state instrumentality to be amenable to writ jurisdiction. It was also contended by ICICI Bank that at the ad-interim stage, the Court shall proceed cautiously so as to not open the floodgates to the borrowers during these extraordinary circumstances.

The Bombay High Court limiting itself to a prima facie enquiry, attempted to preserve the parties' status quo and ensure minimal prejudice to both sides in these unprecedented and exceptionally difficult times. In an attempt to fashion a workable order limited to the facts of this particular case ensuring that it sets no precedent in other cases, held 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 countdown for NPA declaration.

On the issue of maintainability of the petition itself, which was never challenged before the Delhi High Court, the Court observed that the challenge was to the directive or set of directives issued by an instrumentality of the State, viz. the RBI and what the Borrower seeks is an interpretation of those directives and circulars to bring them into accord with their avowed objective. It was therefore satisfied that, prima facie, the Petition was maintainable to grant ad-interim reliefs, although keeping the issue of maintainability open for contention, at a later date.

It was clarified by the Court that the period of moratorium shall not cease to exist, as on 31st May 2020, as currently advised by the RBI but would extend till complete lifting of the lockdown. Likewise, if the complete lifting of lockdown is lifted before 31st May 2020, the period of moratorium must be construed to end on such day.

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Footnotes

1. https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR21302E204AFFBB614305B56DD6B843A520DB.PDF

2. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI186B27003E9DB3D4FB49BDDF955F4289D68.PDF

3. Lending institutions being all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies)

4. W.P. (C) (Urgent) No. 5 / 2020, delivered on 6th April 2020. Accessible at: http://delhihighcourt.nic.in/writereaddata/OrderSAN_PDF/URGENT/wpcurgent5202006042020.pdf

5. Writ Petition LD-VC No. 28 of2020. Accessible at: https://drive.google.com/file/d/1mLqXrpqr4bdDaV6jhqgp28i2TLzDNshE/view?usp=sharing

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