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Delhi High Court stays RBI’s show cause notice to UVARCL

The Delhi High Court on Friday stayed a Reserve Bank of India notice warning of possible cancellation of UV Asset Reconstruction Company Ltd’s (UVARCL) registration, over what the central bank termed an illegal bankruptcy resolution proposal moved by the ARC for telecom firm Aircel. Mere submission of a resolution plan cannot be held illegal, Justice Navin Chawla held on a petition filed by UVARCL, while seeking response from the RBI, Ministry of Corporate Affairs, Insolvency and Bankruptcy Board of India (IBBI) and the union government within 15 days.

The RBI had in a notice last week warned UVARCL that its certificate of registration could be cancelled unless it explained by this weekend why it did not inform the bankruptcy court that the regulator had rejected its resolution plan for Aircel. UVARCL approached the court against the show-cause notice this week.
Appearing for UVARCL, senior lawyer Mukul rohatgi argued that the regulator was intimated repeatedly about the ARC’s intent to submit a resolution plan for the bankrupt telecom player, lawyers present in the court told ET. Also, the company had written to the central bank seeking approval to invest in Aircel’s shares, and the RBI’s stand that UVARCL should not have gone to it without a direction from the bankruptcy court was incorrect, Rohatgi said, according to the lawyers.

ET in its November 21 edition reported that in its notice to UVARCL, the banking regulator had alleged that the rehabilitation company had failed to alert the insolvency court that the RBI had rejected its resolution plan for Aircel. According to the regulator, the ARC had flouted the rules laid down by the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act and wilfully violated the RBI’s guidelines.

A cancellation of UVARCL’s registration at this stage would mean the resolution plans of bankrupt telcos Reliance Communications (RCom) and Aircel could get scrapped and set back State Bank of India’s plans to recover Rs 12,000 crore loaned to the two telcos. In the case of RCom, lenders have approved UVARCL as a key bidder and the proposal is currently before the bankruptcy court.

According to the Sarfaesi Act, asset reconstruction companies that take over stressed assets from lenders cannot infuse equity into an insolvent company at the resolution stage. They also cannot act as resolution applicants. UVARCL is contesting that, arguing that the Insolvency and Bankruptcy Code — which allows for such investments — supersedes the rules stated in the Sarfaesi Act.

According to the lawyers ET spoke to, Rohatgi said ARCs were the only specialised agencies in the country to handle stressed assets. Specific provisions under Section 29A of the IBC contemplate a bigger role for ARCs in stressed assets, he said. The senior lawyer asked why should ARCs not be allowed to submit resolution plans or invest in fresh share capital, especially when the objective was the reconstruction of stressed assets.

The RBI and UVARCL did not respond to ET’s queries till press time Friday.

In its writ petition, UVARCL has sought appropriate court directions to the finance and corporate affairs ministries, RBI, and the IBBI for resolving what it called a policy gap arising due to the lack of guidelines on the participation of ARCs as resolution applicants. The company has also stated in its petition that since it had expressly revealed that it aimed to invest equity in Aircel, there had been no violation of the guidelines laid down by the banking regulator.

Asset Reconstruction ComHaving regard to the fact that the IBC envisages such participation, it has been emphasised that all authorities must work together to issue necessary guidelines on this issue.

While clearing UVARCL’s resolution plan for Aircel in June 2020, the National Company Law Tribunal had asked the ARC to send its plan to the RBI for its approval since ARCs are governed by the central bank.
UVARCL sent the NCLT-approved plan to the RBI, which rejected it, citing the Sarfaesi Act, a legislation that allows banks and other financial institutions to auction residential or commercial properties to recover loans.

In its notice to UVARCL, the central bank said it had denied permission to the company to make such an offer as early as October 2019, much before the NCLT cleared it.

The RBI’s rejection of the Aircel resolution plan brought into focus the conflict between the insolvency law and the Sarfaesi Act.

The finance ministry is said to be open to amending the Sarfaesi Act. ARCs have asked the RBI to consider this a regulation issue and come up with fresh guidelines, since amending the Act would take time. Business Journal

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