The Supreme Court has in the matter of Dharani Sugars and Chemicals Ltd. v Union of India1 ("the Judgment") struck down a circular issued by the Reserve Bank of India ("RBI") titled "Resolution of Stressed Assets- Revised Framework" ("RBI Circular") as ultra vires the provisions of the Banking Regulation Act 1949 ("Banking Regulation Act"). The RBI Circular had mandated banking companies to initiate action under the IBC under certain strict timelines, which the Petitioners claimed was arbitrary and unconstitutional. The ruling comes as a respite to various debtors against whom action had been taken pursuant to the RBI Circular. However, the ruling does not impact proceedings under the Insolvency and Bankruptcy Code (IBC) that have been initiated outside of the purview of the RBI Circular.

Brief Background of the RBI Circular

The RBI Circular stated that it had been issued under sections 35A, 35AA and 35AB of the Banking Regulation Act and s. 45(L) of RBI Act, 1934. It claimed its purpose as that of providing a harmonized and simplified generic framework for resolution of stressed assets, pursuant to the enactment of the IBC. The Circular mandated that in case of accounts with aggregate exposure of the lenders at Rs. 20 billion and above, on or after March 1, 2018 ('reference date'), the resolution plan necessarily needs to be implemented as per the following timelines:

  • If in default as on the reference date, then 180 days from the reference date.
  • If in default after the reference date, then 180 days from the date of first such default.

The RBI Circular further mandated that if a resolution plan in respect of such large accounts is not implemented with the concurrence of 100% of the lenders as per the timelines specified above, lenders shall file an insolvency application, singly or jointly, under IBC within 15 days from the expiry of the said timeline.

Reasons for challenge

The Petitioners in the matter represented various sectors such as the power, telecom, steel, infrastructure, sports infrastructure, sugar, fertiliser, shipyard, etc. which were directly impacted by the RBI Circular.

The Petitioners emphasized that the issues faced by these sectors were the result of various government policies and other reasons which are not attributable to operational efficiency of companies operating in these sectors. With regard to power sector it was specifically submitted that a large chunk NPAs in the private sector is primarily on account of Government policy changes, failure to fulfil commitments by the Government, delayed regulatory responses and non-payment of dues by DISCOMs. The Petitioners also submitted that despite the fact that some corporate debtors are on the brink of resolution, the time limit of 180 days leaves the parties with no choice but to proceed under the IBC.

The RBI argued that it is in public interest and in the interest of the national economy to see that evergreening of debts is not allowed; and to support its submission on leeway to be given to Parliament to deal with problems affecting national economy, it relied on the judgment of the Hon'ble Supreme Court in Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors. ("Swiss Ribbons"),2 in which the Supreme Court had upheld the constitutional validity of the IBC.

The SC Judgment

A key issue raised before the Supreme Court was whether s. 35A of the Banking Regulation Act which deals with RBI's power to give directions, introduced in 1956 can be the source of power with regard to the RBI Circular that directs invocation of proceedings under IBC which was introduced only in 2016.

The Supreme Court referred to earlier cases on "ongoing" interpretation of statute and observed that statutes are recognized as Acts of Parliament that should be deemed to be "always speaking". The Supreme Court observed that the width of the language of s. 35A of the Banking Regulation Act makes it clear that if otherwise available, the court cannot interdict the use of Section 35A as a source of power for the RBI Circular on the ground that the IBC could not be said to have been in the contemplation of Parliament in 1956, when Section 35A was enacted.

The Supreme Court further observed that although the power granted to RBI to issue directions under s. 21 (power of RBI to control advances by baking companies) and s. 35A of the Banking Regulation Act are very wide, the question of Ultra Vires can be answered only with reference to s. 35AA and s. 35AB.

  • S. 35AA as the Source of Power for the Impugned RBI Circular
    • Procedure prescribed under s.35AA

S. 35AA of the Banking Regulation Act makes it clear that the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the IBC in respect of "a default", which means that without such authorisation, the RBI would have no such power.

The Supreme Court further observed that consequently, prior to the enactment of Section 35AA, it may have been possible to say that RBI could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA.

Footnotes

1. (2019) 5 SCC 480

2. 2019 (2) SCALE 5

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