Dharani Sugars And Chemicals Ltd. Vs Union of India & Ors. (Supreme Court of India)
Conclusion –
Hon’ble Supreme Court held that RBI Circular directing bank to take recourse to Insolvency and Bankruptcy Code (IBC) is ultra vires to Section 35AA of the Banking Regulation Act.
Facts –
On 12th February, 2018, RBI issued a circular and had directed banks to resolve debts over INR 2000 crores within 180 days, failing which the corporate debtor would have to be taken to the National Company Law Tribunal (NCLT) for insolvency action within 15 days from the expiry of 180 days. Further, the Circular mandated that banks will have to disclose defaults even if the interest repayment is overdue by just one day, and will have to put a resolution plan in place within 180 days.
Held –
Section 35AA enables the central government to authorize RBI to issue directions in respect of ‘a default’. Default would mean non- payment of a debt when it has become due and payable and is not paid by the corporate debtor. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA.
It is clear that the impugned circular applies to banking and non-banking institutions alike, as banking and non-banking institutions are often in a joint lenders’ forum which jointly lend sums of money to debtors. Such non-banking financial institutions are, therefore, inseparable from banking institutions insofar as the application of the impugned circular is concerned.
It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned. For these reasons also, the impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law.
FULL TEXT OF THE SUPREME COURT JUDGEMENT
1. The present batch of petitions and transferred cases raise questions as to the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 [“Banking Regulation Act”] introduced by way of amendment w.e.f. 04.05.2017. The real bone of contention is a Reserve Bank of India [“RBI”] Circular issued on 12.02.2018, by which the RBI promulgated a revised framework for resolution of stressed assets. The important clauses of the aforesaid circular are set out here in below:
“Resolution of Stressed Assets – Revised Framework
1. The Reserve Bank of India has issued various instructions aimed at resolution of stressed assets in the economy, including introduction of certain specific schemes at different points of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets. The details of the revised framework are elaborated in the following paragraphs.
I. Revised Framework
A. Early identification and reporting of stress
2. Lenders1shall identify incipient stress in loan accounts, immediately on default2, by classifying stressed assets as special mention accounts (SMA) as per the following categories:
