India: Abandonment Of Projects – Promoters' Responsibility Or Not?

(a) 2002: As per the RBI's 2002 Circular on Financing of Infrastructure Projects¹ , promoters' obligations were limited to provide standby support for cost-overruns in the projects, provided the quantum of such support crystallised prior to financial closure. Additionally, insofar as security is concerned, the RBI contemplated pledge of promoters' holdings in the Project Company. RBI vide Guidelines on Infrastructure Financing² has clarified that infrastructure projects are often financed through a special purpose vehicle model who are 'financially viable and not acting as mere financial intermediaries' in order to ensure that the financial difficulties of the parent/sponsor should not affect the financial health of the special purpose vehicle. Additionally, RBI has recognized³ that "infrastructure projects are often financed through Special Purpose Vehicles. Financing of these projects would, therefore, call for special appraisal skills on the part of lending agencies. Identification of various project risks, evaluation of risk mitigation through appraisal of project contracts and evaluation of creditworthiness of the contracting entities and their abilities to fulfill contractual obligations will be an integral part of the appraisal exercise." It has therefore, always been quite clear that the lenders are required to separately appraise/evaluate the project contractors and promoters' creditworthiness, thereby clearly establishing a distinction (insofar as project implementation is concerned) inasmuch as the promoters (when viewed from a regulatory perspective) were of importance for financial support, but the 'project execution risk' always lay on the credibility and capability of the contractors and the Special Purpose Vehicle itself.

(b) 2008⁴ : RBI vide its 2008 Circular on Prudential Guidelines on Restructuring of Advances by Banks⁵ introduced some additional conditions, inter alia, promoter's sacrifice and additional funds brought by the promoters in case of restructuring should be a minimum of 15% of banks' sacrifice and that the restructured loan should additionally be secured by way of a personal guarantee except when the borrower was affected by external factors pertaining to the economy and industry.

(c) 2010: RBI⁶ in addition to the existing norms mandated that the promoter's contribution be brought up front and not be phased over a period of time.

(d) 2011: RBI, based on the representations received from Banks and Indian Banks' Association, that corporates under stress find it difficult to bring in the promoters share of sacrifice and additional funds upfront on some occasions, decided⁷ that the promoter's sacrifice and additional funds required to be brought in by the promoters should generally be brought in upfront. However, if banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfill their commitments, the promoters could be allowed to bring in 50% of their sacrifice, i.e. 50% of 15%, upfront and the balance within a period of one year.

(e) 2013: The principal changes brought about by RBI vide the 2013 Circular on Review of Prudential Guidelines of Restructuring of Advances by Banks and Financial Institutions⁸ were:

Essentially, the idea was that if the lenders are to implement restructuring (and take a risk on an asset that had already deteriorated) with a view to turnaround/revival of the business, there should be sufficient 'skin in the game' of the promoters as well.

(f) 2014: The regulatory intent became clearer inasmuch as more and more stringent norms were put in to place to ensure participation by promoters prior to lenders taking exposure. Vide the 2014 JLF Circular⁹ , RBI required that banks, in situations of cost overrun, limit their funding to: (1) additional interest during construction; and (2) funding to a maximum of 10 per cent of the original project cost for other line items of the construction costs, subject to the conditions: (1) debt equity ratio (as agreed at the time of initial financial closure) remaining unchanged subsequent to funding of the cost overruns; or (2) the debt to equity ratio improving for the benefit of the lenders; (3) the revised debt service coverage ratio being acceptable to the lenders; and (4) promoters bringing in their share of contribution prior to the lenders taking exposure.

(g) 2015: Vide the 2015 Circular¹⁰ , RBI reiterated (in the context of restructuring) that the extent of funding by promoters be the higher of: (1) 20% (twenty per cent) of the lenders' sacrifice; or (2) 2% (two per cent) of the restructured debt, and mandated that the promoters' sacrifice should invariably be brought upfront¹¹ while extending the restructuring benefits to the borrowers.

(h) 2019: RBI vide the Prudential Framework for Resolution of Stressed Assets bearing reference DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 has enumerated various conditions that need to be complied in case change in ownership is implemented pursuant to the said Framework, such as: (a) the acquirer is not a person disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016 ("IBC"), (b) new promoter should not be a person/entity/subsidiary/associate etc. (domestic as well as overseas), from the existing promoter/promoter group, and (c) the conditions for implementation of RP as per Section I-C of the covering circular are complied with. It is evident from a bare reading of the said Circular that the capabilities of execution of a particular kind of project or the technical knowledge of the project is not one of the requirements of the circular nor the criterion or pre-requisite that needs to be met before change in ownership of a Project Company is considered and approved by lenders.

(a) how often do SPVs implement project themselves, as opposed to farming out turnkey EPC contracts¹⁴ ?

(b) if EPC contractors implement projects, and especially those that do not belong to the 'promoter group' so to say, how can borrowers or promoters be held accountable or liable for abandonment (discontinuance of project execution) that would fall under the ambit of an EPC contractor's scope of work, when the lenders themselves would have, in consonance with RBI norms, appraised the project execution capabilities of the EPC contractor? and

(c) if the RBI itself has recognized that time period for project execution can be extended for reasons beyond the control of promoters without additional provisioning or implications on borrowers, can the promoters be held liable during the period when RBI itself has permitted time extension on this account?

a. Distinct Legal Entity: The Project Company is a separate legal entity, and one of the reasons for incorporation of a separate company by any parent company for the purpose of developing a project is to ensure bankruptcy remoteness as also the fact that the promoter will not be involved in the day to day affairs of any one Project Company. It is a well-established principle, one that cannot be disputed in law, that a company is a legal entity distinct from its members (that is the promoters for present purposes). It was so laid down by the House of Lords in 1897 in the leading case of Salomon v. Salomon & Co. (1897) A.C. Ever since this decision has been followed by the Courts in England as well as in this country¹⁵ . The Hon'ble Supreme Court of India in Tata Engineering and Locomotive Company Ltd. v. State of Bihar & Ors.¹⁶ , has observed that a company is entirely separate from its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation.

That said, it should also be borne in mind that the 'corporate veil' is not impregnable and may be lifted in certain circumstances. The Hon'ble Supreme Court of India has clarified that generally, and broadly speaking, the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc¹⁷ .

b. Functioning of the Project Company: From the bare reading of the Companies Act, 2013 (the "Act") it is quite clear and evident that the functioning of any company is the responsibility of the board of directors of the company and not the shareholders of the company. Essentially the directors of a company are the hands of the company and the business decisions including the day to day operations of a company are meant to be taken by (or as delegated by) the directors. By virtue of Section 180 of the Act, subject to the consent of the shareholders, the directors have the power to deal with any undertakings¹⁸ of the company including the assets. There is no room for doubt that a company acts through its officers who are its real organs and the directors are the brain of the company. Other than the specific instances under the Act where the board of directors are meant to seek approval of shareholders, there is no recognition of the role to be discharged by shareholders in the day to day running of the company. Infact, it is a settled position in law that the interests of a company and those of its members need not always be aligned.

c. Estoppel: In any given financing transaction (involving provision of security/guarantee by promoters), lenders normally seek confirmation for compliance of Section 185 of the Act which prescribes compliances as to processes and limits for liability/obligation undertaken by a promoter towards its subsidiaries. It is only once such confirmation is obtained (and it is noteworthy that in some cases there are specific due diligence mandates awarded to this effect) that lenders believe that borrowers have, along with other relevant items of compliance, requisite authorizations in place to be considered eligible for disbursement. Now, having crossed this specific compliance threshold and having made an independent determination regarding this aspect, it belies logic and is fundamentally not reconcilable that the lenders themselves negate the independence (as between promoters and the SPV) established through the above compliance test by then requiring that the promoters be responsible for ensuring that no abandonment takes place.

The above practical argument could be coloured with a legal brush by relying on the doctrine of estoppel. In order for rule of estoppel to apply, the following conditions¹⁹ have to be satisfied:

In view of the fact that the lenders would disburse only after ascertaining compliance with Section 185 and seeking (where relevant) confirmations regarding independence of the promoters and the SPV, the SPV/promoters can argue that the lenders are precluded from subsequently taking the plea that the degree of overlap between, and the nature of interdependence of, the promoters and the SPV is of such an extent as would justify the promoters being liable for decisions taken (or abstention) regarding termination/waiver of project construction/operation contracts.

d. Casus Omissus: Courts in India have ruled that words and phrases in statutes are references to be used for ascertaining the intention of the legislature enacting it and thus attention must be paid to what has and (equally) has not been said. It is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so. The rules of interpretation only allow reading words into a provision or stipulation when the provision as it stands is meaningless or of doubtful meaning. This is because while interpreting a provision the court only interprets the law and cannot legislate it. It is usually supplied if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature²⁰ . The first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself. The question is not what may be supposed and has been intended but what has been said.²¹ This legal maxim and doctrine could be applied contextually to the evolution of RBI norms (as elucidated above) to say that, despite several revisions and clear intention to tighten the noose around promoters, RBI has consciously refrained from blurring the boundaries and attaching obligations extracted from the territory of technical competence and compliance to promoters. Therefore, it can safely be stated that even the regulator does not expect the lenders to ensure project completion obligations rest with promoters and consequences arising from failure in project completion fasten upon promoters.

Another indirect example (and cornerstone of argument) of this doctrine coming into play qua project execution by promoters would be the (when viewed from the promoters' perspective) draconian IBC. Even under IBC, where the legislature intended that promoters be disbarred from taking over companies, Section 29A was specifically enacted. Other than Section 29A of IBC, the only other provisions that would fasten liability upon promoters would be Section 19 (non-cooperation) and Section 66 (fraudulent activities). Even under a law with far reaching consequences, save for certain identified circumstances, the legislature has refrained from viewing promoters and the SPV from the same prism. This would lend further credence to the argument that promoters cannot be obligated to ensure no abandonment takes place.