[Yes Bank Reconstruction] Bombay HC Sets Aside Order of Administrator Writing Off AT-1 bonds worth Rs. 8300 crores

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The High Court set aside the order of the administrator while noting that the administrator did not have the power to write off the bonds nor did the RBI authorize him to do so.

A Division Bench of the Bombay High Court comprising Acting Chief Justice SV Gangapurwala and Justice Sandeep Marne on Friday quashed and set aside the decision of the Administrator, who was appointed by RBI for Yes Bank Pvt. Ltd. The said administrator had passed an order writing off the Additional Tier 1 Bonds worth Rs. 8300 crores. 

The bondholders who had filed a writ petition against the decision of writing down the Rs. 8300 crore bond included Axis Trustee Service Limited, India Bulls Housing Finance Limited, Yes Bank ATI Bondholders Association, and other retail investors.

The Additional Tier 1 Bonds were issued to the holders of the bonds at a coupon rate of 9.5% and the claims of the bondholders were superior to the claims of the investors in equity shares and perpetual non-cumulative prescribes shares issued by the bank.

The contention of the petitioners was that the Information Memorandum pursuant to which the debentures (AT-1 Bonds) were issued had a statutory flavor and that upon the reconstruction of the bank pursuant to the final reconstruction scheme, the administrator of the Yes Bank had no power to write off these AT-1 bonds.

Whereas, the contention of the defendants was that the AT 1 bonds were contractual transactions and that as per Clause 57 of the contract, the administrator was well within his right to write off the bonds as it is purely a contractual matter. Further, Yes Bank being a private bank, the Writ Petition would not be maintainable under Article 226 of the Constitution of India, they argued.

The RBI had invoked its power under section 45 of the Banking Regulation Act 1949 for restructuring Yes Bank and ordered a moratorium on Yes Bank commencing from March 5, 2020. RBI had also appointed an administrator and placed the restructuring scheme for public comment. The scheme also included provisions for writing down AT 1 Bond. Objections were raised against the same. In the draft scheme the writing down of bonds was included, however, the same was deleted from the final scheme. The final scheme was notified on March 13, 2020.

The court noted that the scheme came into force on March 13, 2020 and the bank was reconstituted on the same day. Therefore, the bonds could only be written off as per the information memorandum before the bank was reconstituted.

The court observed that only because the period of administrator was extended for 7 days the same could not be sufficient to conclude that reconstitution did not take place on March 13, 2020.

The court said that the administrator could not have taken the policy decision to write off the bonds. The order stated,

“The Administrator could not have taken such a policy decision of writing off the debentures. The Board of Directors were notified in the final scheme. However, actual time period was given for the Board of Directors to take over from the Administrator and for that purpose, tenure of the Administrator was also extended to seven days from the date of reconstitution of the bank.”

Further, the court said the RBI had also not authorized the administrator to write off the bonds. The court said,

“During this period, the Administrator could not have taken such a policy decision of writing down the AT-1 bonds. Nor the RBI had authorized him to do so. The Final Reconstruction Scheme also did not authorize Administrator to write off the AT-1 bonds. It appears that Administrator exceeded his powers and authority in writing off AT-1 bonds after the bank was reconstructed on March 13, 2020.”

However, the court stayed its own order for a period of 6 weeks allowing the respondent to file an appeal against the order of the court.

Case Title: Axis Trustee Services Limited vs. UOI & Ors