The IL&FS Crisis: An Analysis of the Order dated May 2, 2019 Passed by the NCLAT

What is IL&FS?

The Infrastructure Leasing & Finance Services (IL&FS) Ltd. is a core investment company with most business operations domiciled in separate companies which form an ecosystem of expertise across infrastructure, finance and social and environmental services. Its central mandate is “catalyzing the development of innovative world-class infrastructure in the country”.1

IL&FS was founded in 1987, initially promoted by the Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Over the years, it has inducted institutional shareholders including State Bank of India, Life Insurance Corporation of India, ORIX Corporation Japan, and Abu Dhabi Investment Authority (ADIA).2

The Crisis

The IL&FS group’s debt burden is estimated to be more than Rs. 94,000 crore and various entities, including some former officials and auditors, are under the scanner for widespread irregularities and huge loan defaults 3 . The IL&FS group had its board superseded by the corporate affairs ministry in October last year. Since then, the National Company Law Tribunal (NCLT) appointed board is managing the affairs to ensure orderly settlement. As part of the resolution efforts, the group companies have been classified into three categories mainly based on their financial positions – green, amber and red. 4

There are almost 55 companies in the green category and they have a loan exposure of about Rs. 12,000 crore. ‘Amber’ companies are those that have enough money to pay senior secured creditors but not unsecured ones. They have debt obligations worth around Rs. 20,000 crore.5 The matter is presently before the National Company Law Appellate Tribunal (NCLAT) for adjudication.

The Order passed by NCLT

On 12 October, 2018 the Union of India filed an application under sections 241 and 242 of the Companies Act, 2013, in public interest, alleging ‘oppression and mismanagement’ of Infrastructure Leasing and Financial Services Limited (IL&FS) and its Group Companies before the National Company Law Tribunal (NCLT). In the said case, NCLT passed an interim order by changing the management of IL&FS, but rejected the application filed by the Union of India praying therein to pass order of moratorium.

The Union of India preferred an appeal challenging the order rejecting the prayer of granting moratorium before the National Company Law Appellate Tribunal (NCLAT).

The Order passed by NCLAT

The NCLAT in its order dated 15 October, 2018, impleaded the five largest creditors as party respondents to the appeals, in the representative capacity of the creditors. The appellate tribunal amid other things ordered the stay of:
The institution or continuation of suits or any other proceedings by any party or person or bank or company, etc. against IL&FS and its 348 group companies in any Court of Law/Tribunal/Arbitration Panel or Arbitration Authority; and
Any action by any party or person or bank or company, etc. to foreclose, recover or enforce any security interest created over the assets of IL&FS and its 348 group companies including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
Any and all banks, financial institutions from exercising the right to set off or lien against any amounts lying with any creditor against any dues whether principal or interest or otherwise against the balance lying in any bank accounts and deposits, whether current or savings or otherwise of the ‘IL&FS’ and its 348 group companies.

Further, with regard to the ‘green entities’, the moratorium was lifted and out of 348 Group Companies of IL&FS, 178 ‘Offshore Group Companies’ were released.

On 25th February, 2019 when it was brought to the notice of the appellate tribunal that a number of Banks were declaring the loan accounts of IL&FS Group Companies as ‘Non-Performing Assets’ (NPA), the appellate tribunal passed an order restraining the Banks from declaring the loan accounts as ‘NPA’.The Reserve Bank of India (RBI), the regulatory body of the Banks filed an interlocutory application for vacating the interim order dated 25th February, 2019.

Submissions made by RBI

The Reserve Bank of India being represented through Senior Advocate Shri Gopal Jain (briefed by Advocates Ramesh Babu M.R. and Manisha Singh) contended that ‘NPA’ affect the financial health of Banks and Financial Institutions, which is ultimately against the public interest. Identifying ‘NPAs’ and treating them properly in the books of accounts of the lender banks is necessary to show a clear and true financial position of the lender Banks. It is also necessary to identify ‘NPAs’ and to make provisions for non-recovery or under recovery so that the Banks will not face a situation of sudden dip in their financial strength.

Further, the Reserve Bank’s Prudential Norms on ‘Income Recognition, Asset Classification and Provisioning’ pertaining to Advances’ first issued on 27th April, 1992, primarily based on international standards clearly set out the parameters for classification of loan accounts as ‘NPA’. Classifying a loan account as ‘NPA’ is actually an indicator to the lenders to follow the guidelines with regard to income recognition and provisioning. The latest master circular in this regard was issued on 1st July, 2015 by RBI. Clause 2.1 of the Master Circular pertaining to ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to advances’ as issued by RBI on 1st July, 2015 provides detailed definition w.r.t. ‘NPA’. Clause 4.2.4 of the same circular deals with classification of an asset as ‘NPA’ with regard to ‘Accounts with temporary deficiencies’. Thus, detailed guidelines and directions have been issued by RBI for treatment of NPAs.

Emphasis was laid on the fact that the provisioning on ‘NPAs’ has to be made on the basis of the period for which the asset has remained non-performing or the availability of security and the realizable value thereof or both. A ninety days’ delinquency is uniformly applicable to all loans and advances, as is done internationally, as it is essential to identify impairment in order to provide for it. Any deferment in asset classification and provisioning as against the ‘Reserve Bank of India’ norms will lead to non-recognition of stress in the books of the lenders which will distort the financial statements published by them.

It was highlighted that identifying and classifying a defaulted loan account in the Books of the Bank as ‘NPA’ is only a process of treating the account as such and following the guidelines in making provisions etc. in the books of the lender Bank. It doesn’t mean that there will be an immediate recovery process. Even after classifying a loan account as ‘NPA’, all options of re-scheduling or Resolution Process are open and there is no impediment to any Resolution Process. RBI has not barred banks from sanctioning need based additional finance to borrowers whose accounts are classified as ‘NPA’. On the contrary, the Reserve Bank’s extant guidelines envisage a situation where banks may need to sanction additional finance to borrowers under stress to revive / rehabilitate the borrower and top reserve the economic value of the asset.

Revised Order Passed by NCLAT

Acting on the plea by the Reserve Bank, the NCLAT bench headed by chairperson S. J.Mukhopadhaya lifted the embargo on Banks to declare the accounts of IL&FS and its group companies as ‘NPAs’. In accordance with the submissions made by the Reserve Bank, the NCLAT came to the conclusion that “NPA is a loan or an advance where interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan; or where the account remains ‘out of order’ in respect of an Overdraft/ Cash Credit (OD/ CC) etc.”

Contention was raised on behalf of IL&FS that “if the asset of the ‘Corporate Debtor’ is declared as ‘NPA’ then it will be contrary to the provisions of the ‘Insolvency Resolution’ as per which the ‘Corporate Debtor’ should continue as a going concern”. However, NCLAT concluded that ‘NPA’ relates to an asset i.e. loan or advance which becomes non-performing when it ceases to generate income for the Bank. Thus, it relates to the Banks and the appellate tribunal was satisfied that declaration of ‘NPA’ by the Bank in no manner will affect the Company (‘Corporate Debtor’) to continue as a going concern.

In lieu of the aforesaid position of law, the order dated 25th February, 2019 was modified and accordingly the Banks were allowed to classify loan accounts of any of the Group Companies of IL&FS as ‘NPA’ without debiting any amount from the account of the ‘Amber Entities’ and ‘Red Entities’, if defaulted to pay after order of ‘moratorium’ was passed on 15th October, 2018. The appellate tribunal further directed that the classification of an account as ‘NPA’ should not result in withdrawal of support to viable borrowal accounts.

Implications of the revised order by NCLAT

Regulation of the monetary system and banking business is one of the fundamental responsibilities of any modern State and essential for the economic and political stability the State. In lieu of the complexities involved in such regulation, the Reserve Bank undertakes such function as the prime regulator of Indian economy and has been accordingly issuing guidelines and directions not only to the banks but various other financial institutions, which are amenable to its jurisdiction as well. Thea fore mentioned order passed by the NCLAT makes it evident that the Prudential Norms issued by RBI in its Master Circular dated 1st July, 2015 are constitutionally as well as legally valid and no order or direction maybe passed restraining the financial institutions from complying with these norms as envisaged by RBI, since the same shall have far reaching overall repercussions and cascading effects in the banking sector of the country and the interest of the depositors would be jeopardized. Thus, this circular is binding on banking companies in India.

1 IL&FS group profile, available at:
2 Supra note 1.
3 IL&FS auditors have many questions to answer, says Corp Affairs Secy, 05/05/2019, available at:
4 Resolution on track, Rs 12,000-cr debt may be settled by July: MCA secy, 09/05/2019, available at:
5 Supra note 4.