2021 (7) TMI 778 - HC - Insolvency and Bankruptcy

Rejection of restructuring plan - Restructuring of debt - rejection due to delay in issuance of tariff plan - outstanding dues on supply of generated power to the WBSEDCL - identification of Stressed Assets - Case of petitioner is that cancellation of the restructuring plan was never communicated formally to the petitioner - formal recall notice of the loans and advances was never issued by the respondent - HELD THAT - Merely because an instrumentality of State is engaged in business it cannot be put to any more disadvantage than a private player. The State cannot also be required to grant concessions outside the contract and outside what a private player would ordinarily be required to give. Under the garb of requiring fairness in action even State business entities cannot be imposed with terms conditions for non-commercial considerations - One must note that the State entities are required to compete with private corporations who are far too quick opportunistic in commercial matters. While it is indeed true that a State instrumentality is expected to act fairly and in a non-arbitrary manner, the PFC REC are also driven by a profit motive and their functions cannot be fettered to drive them towards financial disadvantage. This would lead to their ruin endanger large number of other power companies and persons dependent on them. Any restructuring proposal or contract like a loan contract is time bound. Time is the essence of such contract. The Petitioners should have known this while accepting the restructuring proposal. The Petitioners did not appear serious about benefitting from the restructuring proposal and the same was a subterfuge to delay the inevitable consequences of its financial failure - The petitioners cannot be allowed to use the model code of conduct, as a rule to cover up their own omissions. The petitioners have not demonstrated that they have fulfilled the conditions of the Initial DSRA or the main DSRA. The petitioner could not have any legitimate expectation of continuation of the restructuring proposal indefinitely. The omissions and failures of the petitioners were duly recorded in the minutes of meeting dated 17th February, 2021, there was substantial notice of cancellation of restructuring proposal. No prejudice could therefore have been caused to the petitioners by non-issuance of a formal recall notice of the loans or cancellation of restructuring proposal. The Petitioners have not been able to indicate exactly which Directions has been violated or has not been followed by the REC and PFC - The 2019 Directions appear to have been referred to in a desperate attempt to attract cause of action under Art. 226. The petitioners were afforded a restructuring proposal essentially by reason of the 2019 Directions and could not take advantage thereof. There is some doubt as to whether the Directions have statutory or binding force. This Court therefore finds no arbitrariness or unfairness in the actions of the respondent no. 3 and 4. There is no violation of Article 14 of the Constitution of India. No violation of Natural Justice is found - this Court is of the view that the disputes between the writ petitioners and the respondent nos.3 and 4 cannot be entertained or decided in the writ jurisdiction of the High Court under Article 226 of the Constitution of India. Petition dismissed.

Issues Involved:
1. Maintainability of the writ petition under Article 226 of the Constitution.
2. Alleged arbitrariness and unfairness in the cancellation of the debt restructuring proposal by respondents.
3. Compliance with the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019.
4. Appropriateness of respondents' actions under the Insolvency and Bankruptcy Code, 2016.

Issue-wise Detailed Analysis:

1. Maintainability of the writ petition under Article 226 of the Constitution:
The petitioners argued that the actions of respondents 3 and 4, being state instrumentalities, were arbitrary and unfair, thus maintainable under Article 226. They cited several Supreme Court cases to support that even in contractual matters, state actions can be questioned if they violate constitutional mandates. However, the court concluded that the relationship between the petitioners and respondents was purely contractual with no public law element. The court emphasized that the jurisdiction under Article 226 is not appropriate for resolving commercial disputes where specialized tribunals like the National Company Law Tribunal (NCLT) exist under the Insolvency and Bankruptcy Code, 2016.

2. Alleged arbitrariness and unfairness in the cancellation of the debt restructuring proposal by respondents:
The petitioners claimed that the cancellation of the restructuring plan was never formally communicated, and no recall notice for loans was issued. They argued that the delay in issuing the tariff plan was not their fault but due to the model code of conduct during the Assembly Elections. The court found that the respondents acted within their rights under the contractual terms and were guided by commercial considerations. The petitioners failed to fulfill critical conditions of the restructuring proposal, including maintaining the Debt Service Reserve Account (DSRA) and providing a priority debt margin. The court ruled that the cancellation was neither arbitrary nor unfair.

3. Compliance with the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019:
The petitioners contended that the restructuring was done under the 2019 RBI Directions, thus making the respondents' actions scrutinizable under Article 226. However, the court noted that the petitioners did not specify which particular direction was violated. The restructuring proposal was extended multiple times, and the respondents had already provided significant leverage. The court found no evidence of non-compliance with the RBI Directions by the respondents.

4. Appropriateness of respondents' actions under the Insolvency and Bankruptcy Code, 2016:
The respondents initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, claiming a debt of about ?2,183 crores. The court highlighted that the IBC aims at the revival and restructuring of financially distressed companies and not merely debt recovery. The court ruled that the NCLT is the appropriate forum to address the petitioners' concerns and that the writ court lacks the expertise to evaluate commercial decisions related to debt restructuring. The court referenced several Supreme Court decisions to support the view that the IBC provides a comprehensive framework for resolving such disputes.

Conclusion:
The writ petition was dismissed, and the court emphasized that the NCLT should independently handle the proceedings initiated under the IBC without being influenced by the court's observations. The court found no arbitrariness or unfairness in the respondents' actions and ruled that the petitioners' claims did not warrant intervention under Article 226. The court also clarified that it did not delve into the merits of the claims between the parties.

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