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

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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.

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