RBI Circular Taking Companies To NCLT For Insolvency Struck Down By Supreme Court

Must Read

Bombay High Court Passes Order To Clarify and Modify Previous Order When State of Maharashtra Moved Praecipe

Division Bench of Bombay High Court consisting of Justice S. V. Gangapurwala and Justice Shrikant D. Kulkarni had passed...

The European Court of Human Rights Orders Germany To Pay Non-Pecuniary Damages for Prison Strip-Searches 

A serving German prisoner was repeatedly stripped searched for non-legitimate purposes. The European Court of Human Rights (ECHR) found...

Lack of Independent Witness Doesn’t Vitiate Conviction: Supreme Court

A three-judge Bench of the Supreme Court in Rajesh Dhiman v State of Himachal Pradesh clarified the law in...

Madras High Court Observes Unexplained Delay in Procedural Safeguards, Quashes Detention Through Writ Petition

A Writ Petition was filed under Article 226 to issue a writ of Habeas Corpus. The petitioner P. Lakshmi,...

UK Court of Appeal Rules Home Department’s Deportation Policy of Immigrants Unlawful

Britain’s Court of Appeal quashed the Home Department’s deportation policy, declaring it unlawful; criticizing it for being too stringent...

Supreme Court Stays Order Restraining Physical Campaigns in the Madhya Pradesh Bye-Elections

On the 26th of October, a Bench was set up which comprised Justice AM Khanwilkar, Justice Dinesh Maheshwari, and...

Follow us

Case Name: Dharani Sugars and Chemical Ltd. v. Union of India and Ors.

Bench: Justice R.F Nariman and Justice Vineet Saran

Supreme Court of India struck down the circular dated 12.02.2018 released by RBI which instructed the banks to initiate corporate insolvency proceedings against companies whose non-performing assets are equal to or more than Rs.2000 Crore for 180 days from 01.03.2018 or 180 days from the date of default if default occurred after 01.03.2018. This decision is a major life-saver for many cash-strapped power companies and other regulatory companies.

Brief Facts, Issues, and Contentions

Petitioner challenged the validity of circular dated 12.02.2018 issued by Reserve Bank of India by way of which it instructed banks to start insolvency proceeding against companies whose non-performing assets were more than or equal to 2000 Crore for a period 180 days from 01.03.2018 or 180 days from date default if the default occurs after 01.03.2018.

The major issue before the Supreme Court was whether the RBI Circular dated 12.02.2018 is unconstitutional, ultra vires or not?

Learned Senior Advocate Abhishek Manu Singhvi appearing for Petitioner contented that circular in question was arbitrary and violative of Article 14 as it specifies a general limit of 180 days to all business units across the country not keeping in mind the specific problem to a particular sector and the limit of 2000 Crore rupees is without any basis or reason. Learned Counsel for Petitioner also contended that impugned circular could not be issued under section 35AA and 35AB of the Banking Regulation Act,1946. On the flip side, Learned Senior Counsel Rakesh Dwivedi appearing for Respondent argues that RBI circular was only an attempt to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assets or otherwise move to NCLT. On second point Counsel for Respondent argued that the impugned circular can be traced to Sections 21, 35A, 35AA and 35AB of the Banking Regulation Act and section 45L for non-banking financial companies.

Learned Solicitor General submitted before the bench that Sections 35AA and 35AB are regulatory provisions made in public interest and cannot possibly be said to be manifestly arbitrary in any way.

The verdict of Court

Division Bench of the Supreme Court after listening to both the sides, examining the relevant provisions held that Circular dated 12.02.2018 was ultra vires of the provision of Banking Regulation Act. The bench further observed that any direction under section 35AA can be issued only after obtaining authorization from the Central Government.

Furthermore, Bench dealt with the same issue using a different lens and said that

if a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed…….

…………therefore, it is clear that the RBI can only direct banking institutions to move under the IBC if two conditions precedent are specified, namely, (i) that there is a Central Government authorization to do so; and (ii) that it should be in respect of specific defaults…….”

Moreover, Bench also clarified that impugned order was applicable to non-banking financial institutions but does not follow provisions of section 45L(3).

Consequently, Bench declared that impugned order as ultra-vires and declared all cases in which proceeding against the debtor had started in NCLT by the financial creditor to be non-est.

Author’s Opinion

This Judgment gives major relief to power companies and other business units who have very high non-performing assets and at the same time clarifies that prior government approval is necessary, if banks want to start insolvency proceeding against such companies. This judgment is bad for banks as now they have to seek permission of the government to start insolvency proceedings to stressed assets. Keeping in mind the slow pace of government machinery and rampant corruption, prior authorization may never come or may take a dreadfully long time.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Latest News

Bombay High Court Passes Order To Clarify and Modify Previous Order When State of Maharashtra Moved Praecipe

Division Bench of Bombay High Court consisting of Justice S. V. Gangapurwala and Justice Shrikant D. Kulkarni had passed an Order on 25th October...

The European Court of Human Rights Orders Germany To Pay Non-Pecuniary Damages for Prison Strip-Searches 

A serving German prisoner was repeatedly stripped searched for non-legitimate purposes. The European Court of Human Rights (ECHR) found that Germany had violated the...

Lack of Independent Witness Doesn’t Vitiate Conviction: Supreme Court

A three-judge Bench of the Supreme Court in Rajesh Dhiman v State of Himachal Pradesh clarified the law in case of lack of independent...

Madras High Court Observes Unexplained Delay in Procedural Safeguards, Quashes Detention Through Writ Petition

A Writ Petition was filed under Article 226 to issue a writ of Habeas Corpus. The petitioner P. Lakshmi, called for records of the...

UK Court of Appeal Rules Home Department’s Deportation Policy of Immigrants Unlawful

Britain’s Court of Appeal quashed the Home Department’s deportation policy, declaring it unlawful; criticizing it for being too stringent on immigrants to comply with. Background The...

Supreme Court Stays Order Restraining Physical Campaigns in the Madhya Pradesh Bye-Elections

On the 26th of October, a Bench was set up which comprised Justice AM Khanwilkar, Justice Dinesh Maheshwari, and Justice Sanjiv Khanna. They heard...

Inordinate and Unexplained Delay in Considering Representation by Government Renders Detention Order Illegal: Madras High Court

A Petition under Article 226 of the Constitution was filed in the Madras High Court to declare the detention order of the husband of...

Supreme Court Asks Petitioner to Approach Bombay High Court in PIL for CBI Probe in Disha Salian Case

On the 26th of October 2020, the Apex Court heard the PIL praying for a CBI probe into the death of Disha Salian. The...

Privy Council Clarifies Approach To Winding up in “Deadlock” Cases in the Case of Chu v. Lau

The Judicial Committee of the Privy Council clarified several aspects of the law concerning just and equitable winding-up petitions, as well as shareholder disputes...

Madras High Court Directs Hospital To Submit Necessary Medical Reports to Authorization Committee for Approval of Kidney Transplant

A Writ Petition was filed under Article 226 to issue a Writ of Mandamus to K.G. Hospital, Coimbatore by P. Sankar & V. Sobana....

More Articles Like This

- Advertisement -