Karnataka High Court directs Reserve Bank of India (RBI) to monitor implementation of loan moratorium circular- [Mandatory for banks to ensure continuity of businesses]

The Court added that borrowers may seek the moratorium as a matter of right if they could establish that the growth and continuity of their business would be affected.

The Karnataka High Court yesterday held that the Reserve Bank of India (RBI) is required to monitor the implementation of its March 27 circular granting a loan moratorium to borrowers in the face of the COVID-19 pandemic.

The Court directed three private banks to extend the benefit of the moratorium on loan repayment to a borrower in line with the RBI’s circular, and directed RBI itself to ensure that the circular is implemented.

The order was passed by the Single Judge Bench of Justice Suraj Govindaraj.

Factual Matrix

The Court was hearing a plea filed by the owner of a Technology Park and a five-star hotel in Bangalore, who had procured term loans from three different banks – HDFC BankFederal Bank, and Aditya Birla Finance – amounting to a total of Rs. 475 crore.

In order to service the loans, escrow accounts were set up to deposit the money earned by the petitioner through lease rentals and revenues from the hotel. Additionally, a pari passu hypothecation of all of petitioner’s securities was created in favour of the banks.

When the nationwide COVID-19 lockdown was imposed, the petitioner’s business establishments had to be closed down. The RBI had, on March 27, issued a circular which called for banks to grant a moratorium on payment of installments of term loans taken by borrowers for a period of three months. The period of moratorium was subsequently extended by the RBI.

When the petitioner approached the banks for availing the moratorium, the request was denied. HDFC Bank claimed that since there were rentals being received by the petitioner from the IT Park, there was no need for the moratorium.

The issue was raised before an Ombudsman where Federal Bank said that while it is not opposed to granting moratorium provided HDFC Bank granted the same. Aditya Birla said that the charge created on securities is parri passu and the other two banks had been unilaterally appropriating the petitioner’s cash flow.

The same contentions were made before the High Court, wherein both Federal Bank and Aditya Birla Finance Ltd argued that they didn’t oppose the grant of the moratorium, provided HDFC Bank also extended the benefit.

Before the High Court, the RBI said that it had allowed the banks to exercise their discretion in granting moratorium, given that the banks are best suited to assess the requirements and conditions of their lenders. It was, therefore, incumbent on the banks to justify their decision to deny loan moratorium to the petitioner, the RBI had submitted.

What the Court held

The Court was faced with a number of questions to be answered in this matter.

Whether a writ of mandamus can be issued against private banks to implement RBI’s March 27 circular?

The Court noted that the aim of issuing the circular was to ease the burden on the public, and it can be said that the circular was issued in the public interest. Therefore, it would attract a public law element.“The said circular having been issued to protect and preserve the economy of the country on account of COVID-19 pandemic. The issuance of the circular is in public interest, interest of the economy and the country. The enforcement thereof would also come within the purview of enforcing a public duty.”Karnataka High Court

Therefore, a writ of mandamus in such a case would be maintainable, the Court concluded.

Whether the March 27 circular was mandatory, directory, or discretionary?

Whether the grant of moratorium is at the discretion of the bank or as a corollary would it be a right to be exercised by the borrower?

In answering this question, the Court examined the circular’s phraseology and the details pertaining to the FAQs published by the three banks on their websites. The banks had declared on their websites that all borrowers were eligible to avail the moratorium.

The Court thus said,

“…the banks cannot take one stand in the public domain and a contradictory stand while implementing what they have stated in the public domain.”

It is the discretion of the borrower to avail the benefit of the loan moratorium, the Court said. It added that while the RBI’s circular gives discretion to the banks to grant the moratorium,

“it is mandatory for the Banks to ensure the continuity of viable businesses, in that, the non-grant of moratorium should not result in adversely affecting the survival and continuity of a viable business.”

Karntaka High Court

The Court added that borrowers may seek the moratorium as a matter of right if they could establish that the growth and continuity of their business would be affected.

The contention of the banks that since the loan was structured, the borrower did not need to avail the moratorium, was rejected. The Court held that since the RBI circular does not specifically address the question of whether it would be applicable to structured loans, the ambit would have to be considered to be extended for structured loans also.

The Court was also faced with the question whether one bank can deny a moratorium request when other Banks in the consortium are agreeable to the same.It was held that the banks, keeping in mind the viability of a business, cannot refuse to grant moratorium when other banks are willing to extend the benefit.

As regards the responsibility of the RBI in ensuring implementation of the circular, the Court said that its contention that the dispute is between the borrower and the lender banks cannot be accepted.

“…the dispute arises out of the implementation or not of a circular issued by the RBI. RBI is therefore directed to monitor the implementation of the Circular, including verification of whether there are Board approved policies formulated by each of the lenders, direct all the banks to submit the Board-approved policies for approval to the RBI, to approve such board-approved policy, verify if such a board-approved policy contains objective criteria, set up a proper and effective grievance redressal forum for any aggrieved borrower to approach on account of the improper or non-implementation of the policy and/or circular etc.”

The Court therefore directed the RBI to enforce the recovery package as put forth in its March 27 circular.

The communications sent by HDFC Bank to the petitioner in the instant case rejecting the moratorium request have been quashed by the Court. All three banks have been directed to grant moratorium as requested by the borrower, subject to the petitioner making payment of interest.

The moratorium is directed to be granted for the entire period as stipulated by the RBI’s circular and the money recovered by the respondent banks towards loan instalments are directed to be returned to the petitioner.

The petitioner was represented by Senior Counsel Basavaprabhu S Patil and Advocate Smitha Singh.

The Centre was represented by Additional Solicitor General MB Nargund and Advocate MN Kumar.RBI was represented by Senior Counsel RVS Nailk and Advocate T Suranarayanawith King and Partridge.

HDFC Bank was represented by Senior Counsel Udaya Holla and Advocate HN Vasudevan.

Federal Bank was represented by Advocate Vijay Kumar V and Aditya Birla Housing Finance Ltd was represented by Senior Counsel Dhyan Chinnappa and Advocate Rawley Muddappa.

Read Judgement

Published by Sneha Vishwakarma

Advocate, Bombay High court.

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