India: Supreme Court Strikes Down The RBI Circular of 12th February 2018

Last Updated: 17 May 2019
Article by Krrishan Singhania and Sarjana Pandey

The Hon'ble Supreme Court in the matter of Dharani Sugar and Chemicals Ltd. vs. Union of India ("the Judgment") on 2nd April 2019, quashed the much debated Circular of the Reserve Bank of India (RBI) dated 12th February 2018 on "Resolution of Stressed Assets –Revised Framework (the Circular). The Circular was introduced to substitute the existing framework for Revitalizing Distressed Assets in the Economy-Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP) with a more harmonized and simplified generic framework. However, the Supreme Court struck down the entire Circular on the grounds of it being ultra vires to Section 35AA of the Banking Regulation Act, 1949 (BR Act). The authors in this article have analyzed the RBI Circular and the effect of the Supreme Court judgment quashing the circular.

BACKGROUND

The RBI through its Circular of 12th February, 2018 made it mandatory for all banks and financial institutions to initiate corporate insolvency resolution plan (CIRP) against defaulting companies having a significant loan exposure of more than Rs. 2000 crore, if the banks failed to implement a resolution plan within 180 days of the such default . The Circular brought the banks under the obligation to identify and classify stressed assets as Special Mention Account (SMA), immediately on default and that even a single day's default of the repayment schedule would require reporting to the RBI and implementation of Resolution Plan.

The Circular also withdrew the existing loan resolution mechanism such as Corporate debt restructuring scheme (CDR), Flexible structuring of existing long term project loans, Strategic Debt Restructuring Scheme (SDR) and change in ownership outside SDR and Scheme for Sustainable Structuring of Stressed Assets (S4A).

ISSUE WITH THE CIRCULAR

Aggrieved by the one-day default norm brought by the Circular, many petitions were filed before various courts in the country, the petitioners were mainly comprised from the power sector, textile industries and shipbuilding industries which stated that the circular was arbitrary and discriminatory on the ground that a 180-day timeline was imposed by RBI without considering the issues faced by specific sectors of the economy. It was also the contention of the petitioners that the circular derived its power from Section 35AA of BR Act which authorizes RBI to issue directions to "any banking company" or "banking companies" to initiate insolvency resolution process in respect of "a default" under the provisions of Insolvency Code, 2016 and hence the introduction of the Circular under Section 35AA falls beyond the power of the RBI as the prior authorization from the Central Government was not adhered by the apex bank.

JUDGMENT

The Supreme Court while addressing the question of legality of the Circular upheld the regulatory power of the RBI under Section 21 and 35A of the BR Act to issue directions to banking companies which are similar in nature to that of Section 35AA and 35AB and therefore, the said provisions cannot be said to be manifestly arbitrary. However, the Court declared the circular of the RBI to be ultra vires to Section 35 AA as the Section specifically stated that RBI requires to take prior authorization from the Central Government to issue any circular under section 35 AA for issuing any directions to the banking companies to initiate proceedings under the Insolvency and Bankruptcy Code, 2016 (Code) with respect to "debtors generally" and not as to 'specific' defaults by 'specific' debtors as mentioned under Section 35AA.

The Supreme Court declared the Circular to be ultra vires and having no effect in law. In lieu of the judgment all the proceedings filed under Section 7 of the Code based on the Circular would become non-existent from the very inception and the financial creditors are required to withdraw all such proceedings. All the resolutions which had been commenced or was in progress following the Circular was declared to be non-implementable by the Court.

Though the Court has declared the initiation of the insolvency proceedings as per the Circular to be void ab intio, the resolution plans that have already been implemented on consensual basis by the bank will be unaffected by the judgment as the initiation of an insolvency proceedings lie well within the statutory rights of the Bank provided under the Code giving it a discretionary power to approach the National Company Law Tribunal (NCLT) if the assets of the debtor is impaired in the view of the bank.

COMMENTS

The Supreme Court judgment will provide flexibility and time to the banks and the promoters of the defaulting companies to formulate restructuring plans for resolving stressed assets on case to case basis. The availability of a wider timeline would enable the restructuring transactions to be completed in a more realistic timeline without any specified period as prescribed by the Circular which is a relief to the companies going through a complex restructuring transaction.

The ruling of the Court against the Circular was only on the technical grounds of the RBI issuing the circular without the prior authorization of the Central Government as per section 35 AA of the BR Act, however the RBI can issue revised guideline/ circulars for restricting of stressed assets after following the due process under the BR Act. The Circular introduced by RBI with the sole intention of directing the banks to resolve the accounts of non-performing assets (NPAs) in a time bound manner and providing a faster resolution of stressed assets by laying down checks and balances to ensure effective implementation of the circular which would have a had a long term positive effect on the banking sector in the country.

The area of concern which laid post the apex court's ruling was whether the loan resolution mechanism repealed by the RBI Circular will revive after it being declared as void. The order did not change the status quo in respect of the pending proceeding and hence the resolution mechanism available to banks prior to the coming in force of the Circular would revive and be in existence until the same gets repealed by the RBI by a new revised circular. However, these resolution mechanisms have not proved to be effective as the restructuring plan were not implemented in a time-bound manner which again raises the risk of delay in the resolution of financial distress in the industries. The banks can still opt for Project Sashakt as a resolution mechanism for stressed assets apart from the other measures. The Project Sashakt inter-creditor agreement was itself implemented with an intention to speed up the resolution of stressed assets that are under Rs. 500 crore loan bracket. The RBI is in the process of revising the circular on resolution of stressed assets after the above judgment and it is expected that the same would be resultant in reforming the NPA framework into a expeditious and effective resolution of stressed assets.

[The authors recognize the efforts put by Maitry Gandhi, 1st year, GLC Mumbai for the assistance]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions