SC Strikes Down RBI Circular dated February 12, 2018

In Dharani Sugars and Chemicals Limited v. Union Of India[1], the SC dealt with various petitions challenging the constitutional validity of RBI circular dated February 12, 2018 (‘RBI Circular’). The SC struck down the RBI Circular and declared it as ultra-vires.

With respect to the scope of RBI’s power to issue the RBI Circular under Section 35AA of the Banking Regulation Act, 1949 (‘BR Act’), the SC held that RBI can direct banking institutions to initiate insolvency proceedings if two conditions are fulfilled, namely if: (i) there is a Central Government authorization to do so, and (ii) the direction is in respect of specific defaults. Section 35AA, by necessary implication, prohibits RBI to exercise the power in any manner other than as set out in Section 35AA. Whilst prior to the enactment of Section 35AA of the BR Act, RBI could have issued directions under Section 21 and Section 35A of the BR Act to initiate an insolvency resolution process under the IBC; after the enactment of Section 35AA, this can be done only within the four corners of Section 35AA.

With respect to the scope of Section 35AB of the BR Act, the SC interpreted the words “without prejudice” appearing in Section 35AB to be only illustrative of a general power which does not restrict such general power. Therefore, the power to issue directions under Section 35AB is in addition to the power under Section 35A. Additionally, Section 35AB is not without prejudice to the provisions contained in Section 35AA and, therefore, the power under Section 35AB (read with Section 35A) is to be exercised separately from the power conferred by Section 35AA. The SC held that the scheme of Sections 35A, 35AA, and 35AB of the BR Act is as follows:

i.         Section 35AA is the only source of power to issue directions to initiate the insolvency resolution process under IBC;

ii.     When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving the problem of stressed assets under IBC, such power falls within Section 35AB (read with Section 35A).

The SC was of the view that all actions taken under the RBI Circular, including actions by which IBC has been triggered, falls along with this RBI Circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of IBC, only because of the operation of the RBI Circular, have been declared to be non-est.

[1] Dharani Sugars and Chemicals Limited v. Union Of India, Transferred Case (Civil) No. 66 of 2018 in Transfer Petition (Civil) No. 1399 of 2018.

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]
Date: March 31, 2019