Remanded

Parthas Taxtiles v. the South India Bank Ltd.

Kerala HC27 Jan 2021WP(C)/174/2021

Case brief

AI extract

What is this about?

Petitioner firm sought restructuring and moratorium under RBI Covid-19 guidelines. Bank rejected based on existing stress and ratio non-compliance. Court directed bank to reconsider, noting circulars apply when pandemic impact aggravates stress or continues viability.

What did the court decide?

Directed 1st respondent Bank to reconsider petitioner's application and pass fresh orders within two weeks.

Parthas Taxtiles Vs the South India Bank Ltd. — Banking and Recovery | Kerala HC (2021)

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IN THE HIGH COURT OF KERALA AT ERNAKULAM

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PRESENT

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THE HONOURABLE SMT. JUSTICE P.V.ASHA

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

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

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PETITIONER:

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

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BY ADV. SRI.C.AJITH KUMAR

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RESPONDENTS:

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

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

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

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

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THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 27.01.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

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

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P.V.ASHA, J .

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W.P(c) No.174 of 2021-V

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Dated this the 27^th day of January, 2021

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J U D G M E N T

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Petitioner is aggrieved by the rejection of its

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application for one time restructuring and 2 years' moratorium.

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

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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

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months after the moratorium period. In respect of

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working capital facilities sanctioned in the form of CC/OD to borrowers facing stress on account of the

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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

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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 creditfacility-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

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

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was issued thereafter on 06.08.2020 providing for a

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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

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lenders to implement a resolution plan in respect of eligible corporate exposures subject to certain conditions. Each lending institutions were to put in a

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Board approved policy detailing the manner of

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evaluation and the objective criteria which would be applied while considering the resolution plan in each

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case. The 2^nd respondent thereafter constituted an expert committee to make recommendations to the Reserve Bank. After accepting the recommendations of the

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expert committee the 2^nd respondent issued Ext.P4

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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

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eligible borrowers under part B of the Annexure to the Resolution Framework.

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The petitioner is a partnership firm engaged in

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

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the business of textiles and has been enjoying various financial facilities from the 1^st 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

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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 1^st respondent on 12.10.2020 seeking one time restructuring and 2 years of moratorium. It was followed by Exts.P6 and P7 reminders.

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The 1^st 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

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under this facility is available only to a borrower having stress on account of Covid 19. The further

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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.

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Thereupon, the petitioner submitted Ext.P9

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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

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the resolution plan by 31.03.2022 only. It was pointed

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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

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and profitability and the observation of the bank that the profitability was on a declining trend for the

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previous 2 years, the petitioner stated that there was

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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

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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 1^st 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

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become eligible for restructuring, four key ratios

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

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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

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was stated that there was an overdue of Rs.1,26,02,430.80 in petitioner's account.

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The learned Counsel for the petitioner points

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out that the rejection of the application by Ext.P14 is without properly understanding the circulars issued by

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the Reserve Bank as also the eligibility of the petitioner. It is stated that despite the

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unprecedented floods of 2018 and 2019, which seriously affected the petitioner, it could manage the business

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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

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and 31.3.2019. It was also stated that the rejection

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on the ground of non compliance of key ratios is

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contrary to the guidelines in Ext.P4 circular.

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

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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.

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respondent filed a statement reiterating the stand of the Bank in the impugned letters. According to the 1^st 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

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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

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provided only to the borrowers having stress on account

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

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is mandatory for the lending institutions to consider the key ratios detailed therein while finalising the

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resolution plans. In clause 4, the sector specific

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thresholds for each of the key ratios are specified.

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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

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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

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lending institutions are to ensure compliance to the TOL/ATNW ratios at the time of implementation and other

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ratios by 31^st 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

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ratios and in the determination of financial

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institutions the stress is not Covid related, the

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borrower would become eligible for restructuring. Clause 9 also provides that compliance with agreed

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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

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of the petitioner was 41.93, 39.88 and 33.28 respectively and the profit after tax was 0.18, 0.74

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and 0.32 respectively. The ratio position as on 31.03.2019 was 8.24 against total debt/EBIDTA and 1.13

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against interest coverage ratio. It is further stated

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that the footfalls in the show room were not satisfactory on physical visit. Therefore, according to the 1^st 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.

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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

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interest under Covid moratorium, rescheduling payment for the year.

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Heard Sri. C.Ajith Kumar, the learned Counsel appearing for the petitioner and Sri. Sunil Sankar the learned Standing Counsel for the 1^st respondent.

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A reading of Exts.P2 to P4 circulars issued by the 2^nd respondent would show that the purpose behind

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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.

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

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The 2^nd respondent takes note of the potential impact on

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the long term viability of many firms, otherwise having good track record. Paragraph 3 of Ext.P3 circular provides that the 2^nd respondent has decided to provide

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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.

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Ext.P3 circular enables the lenders to

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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 1^st 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.

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Para.4 of Ext.P3 circular based on which the

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2^nd respondent has denied the facility to the petitioner reads as follows:

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“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.”

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

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lending institutions may allow extension of the residual tenor of the loan with or without payment

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moratorium by a period not more than two years. The contention of the 1^st respondent is that the petitioner

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was having stress even before Covid-19 pandemic. But the respondent has no case that the petitioner's case

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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

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criteria for denying the benefit under Ext.P3 circular.

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The 1^st respondent has not considered the case

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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

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which it is stated as follows: “ It is submitted that the compliant ratios (TOL/ATNW, etc) shall be

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applicable only when the account is eligible under Resolution framework for Covid-19 related stress. In

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the present case stress in the account was evident at

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the time of last renewal, hence the account was not considered for Resolution Framework for Covid-19 related stress. ” It appears that the 1^st respondent did not consider whether there is any stress on account of Covid-19, in cases where the Covid-19 impact has

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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

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the benefit provided under the circulars Exts.P1 to P4

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cannot be denied in cases where impact of Covid-19 is also a reason for stress or when it has aggravated the

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stress provided, the account continues to be standard

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

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stress on account of Covid-19 pandemic would be satisfied. When it is admitted that there is stress

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and the account continues to be standard as on

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01.03.2020, the diminishing trend in annual financial statement by itself does not exclude the petitioner from the definition of eligible borrower.

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The 1^st respondent has also stated that the

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petitioner satisfies only two key ratios. But a

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reading of Clause 9 would show that the compliance of

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

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Clause 8 reads as follows:

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“8. Lending institutions are expected to ensure

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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.”

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

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steps for resolution plan apparently because it

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excluded the petitioner from the category of eligible

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borrower. No Board approved policy is also seen put in

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place as required in para.4 of Ext.P3 circular and

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Clause 3 of its Annex, for implementation of viable resolution plans. Hence no steps are taken for intercreditor agreements or any other requirement for implementation of the resolution under the framework.

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Though the bank has stated that the lending

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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

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case of the petitioner admittedly the TOL/ATNW is complied with. It is seen that the case of the

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petitioner is not at all considered because of preexisted stress even with a standard account.

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All these circulars Exts.P1 to P4 are seen

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issued by the 2^nd 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

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institutions have to take steps for extending the

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benefits conferred under those schemes in the correct perspective taking note of the intention behind the

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scheme. It is seen that the 1^st respondent Bank has not considered the request of the petitioner having regard to the purpose for which the circulars are issued.

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Therefore, I direct the 1^st 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.

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The Writ Petition is disposed of accordingly.

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Sd/- (P.V.ASHA, JUDGE)

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rtr/

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

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APPENDIX

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PETITIONER'S EXHIBITS:

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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 EXHIBIT P14	TRUE COPY OF THE LETTER DATED 21/12/2020 ISSUED BY PETITIONER TO THE 1ST RESPONDENT. TRUE COPY OF THE LETTER DATED 01/01/2021

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

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ISSUED BY THE 1ST RESPONDENT TO THE PETITIONER.

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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.

Parthas Taxtiles v. the South India Bank Ltd.

Case brief

What is this about?

What did the court decide?

Parthas Taxtiles v. the South India Bank Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Statutes considered

Parties & counsel

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Case details

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