SC holds ultra vires RBI’s February 12 circular mandating insolvency proceedings

The judgment is a relief for stressed industries, including those in the power and sugar sectors.

A view of the Supreme Court of India, in New Delhi.

The Supreme Court on Tuesday struck down a February 2018 Reserve Bank of India (RBI) circular giving lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over ₹2000 crore.

The 84-page judgment by a Bench of Justices Rohinton Nariman and Vineet Saran spells relief across sectors, ranging from power to telecom to steel, infrastructure, sugar and fertiliser. All insolvency proceedings initiated against debtors under the circular have been declared non est . The RBI countered the petitioner-companies’ claim that its February 12, 2018 circular was “manifestly arbitrary”. On the contrary, the central banker said, the circular was in the public interest and “in the interest of the national economy to see that evergreening of debts does not carry on indefinitely”.

The RBI argued that “these huge amounts that are due should come back into the economy for further productive use”.

But the court found favour with the arguments made by the companies that a general direction by the RBI, applying the 180-day limit to all sectors, without going into the special problems faced by each sector, would “treat unequals equally”. The companies argued that the circular was arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.

RBI order lacked govt nod: SC

The SC Bench of Justices Rohinton Nariman and Vineet Saran on Tuesday said the February 2018 circular giving banks a 180-day deadline to either resolve stressed assets or proceed against defaulters in loans worth over ₹2,000 crore, missed two vital factors required under Section 35AA of the Banking Regulation (Amendment) Act of 2017.

Justice Nariman, writing the judgment, said the RBI circular sourced its power from Section 35AA of the Banking Regulation (Amendment) Act of 2017.

This provision says the “central government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016”.

However, two vital factors — authorisation of the government and the general nature of the circular which did not concern a “specific default” — were missing from the 2018 central bank order. ”Any directions which are in respect of debtors generally, would be ultra vires Section 35AA,” the Supreme Court concluded.

Parliament report

In their challenge, the power sector companies, which chiefly argued the case, pointed to the 37th Parliamentary Standing Committee Report of March 7 last year, titled the Stressed/Nonperforming Assets in the Electricity Sector.

It had recorded that there were 34 stressed projects amounting to 40,130 MWs out of 85,550.30 MWs which have a debt exposure of ₹1,74,468 crore.

The judgment recorded their submission that ₹34,044 crore of their non-performing assets were primarily due to government policy changes, failure to fulfil commitments by the government, delayed regulatory response and non-payment of dues by DISCOMs. They were hardly caused by mis-management. The power companies said the circular should be quashed as it was a in the nature of “one-solution-fits-all”.