Breaking: Supreme Court declares February 12 RBI Circular ultra vires [Read Judgment]

Breaking: Supreme Court declares February 12 RBI Circular ultra vires [Read Judgment]

Shruti Mahajan

The Supreme Court today declared the Reserve Bank of India Circular of February 12 relating to loan repayment of stressed accounts ultra vires.

The judgment was rendered by a Bench led by Justice Rohinton Nariman.

The decision rendered today comes in a batch of petitions, transferred to the Supreme Court from various High Courts where the RBI’s circular of February 12, 2018, was challenged. This circular imposed very stringent conditions on lenders in relation to large loan accounts.

The Supreme Court today held that in light of section 35AA of the Banking Regulation Act, the RBI could not have issued a generic circular mandating reference under the Insolvency and Bankruptcy Code (IBC). The Court also held that reference under IBC has to be on case specific basis and with authorisation of Central Government. Since the circular has now been quashed, all consequential proceedings including IBC proceedings initiated under section 7 of IBC are also non est and quashed.

The RBI, through this circular, had directed the Banks to declare a borrowing Company a defaulter if a resolution plan was not arrived at within a period of 180 days. This resolution plan was to be formulated by all the lenders of the company should the company default in the payment of interest to any one of its lenders. Such a stressed account would then have to be referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code by the Banks if a unanimous resolution plan was not made.

This circular was made applicable to all loan accounts over Rs 2000 Crore and also abolished all existing debt restructuring schemes for stressed accounts. Effectively, it left IBC as the only mechanism to deal with stressed accounts.

Under the circular, companies which were unable to implement a resolution plan by August 27, 2018, were scheduled to be referred to NCLT under IBC by September 11.

This circular had a bearing mainly on the power companies and also affected companies in the textile, sugar and, shipping sector.

The lobby groups for the power sector challenged the said circular in various High Courts. They argued that due to their peculiar situation, they cannot be treated similarly as all other sectors. They asserted that they are heavily regulated and have been facing stress due to factors which are beyond their control, such as non-availability of fuel and cancellation of coal blocks.

The Allahabad High Court did not find merit in their arguments and refused to offer any relief against the circular. Similar petitions were moved at the Madras High Court and the Delhi High Court.

The Supreme Court had then transferred all pleas filed before the various High Courts to itself while asking the RBI and parties to maintain status quo with regard to insolvency proceedings.

JSA represented the Association of Power Producers, RATTANINDIA, GVK, GMR and Coastal Energen and briefed Senior Advocates Abhishek Manu Singhvi and Sajan Poovayya. The JSA team included Joint Managing Partner Amit Kapur, Partner Vishrov Mukerjee and Associates Catherine Ayallore and Ameya Vikram Mishra.

Charter Law Chambers represented Independent Power Producers Association of India and briefed Senior Advocate Sajan Poovayya and the team included Partner Hemant Singh, Senior Associate Nishant Kumar, Associates Ambuj Dixit and Lakshyajit Singh.

Link Legal represented Independent Power Producers Association of India, GMR Chhattisgarh Energy Limited and GMR Rajahmundry Energy Limited and briefed Senior Advocate Abhishek Manu Singhvi. The Link Legal team included Managing Partner Atul Sharma, Partners Milanka Chaudhury and Sarojanand Jha and Senior Associate Ashly Cherian.

Senior Advocate Arvind Datar and advocate Shikhil Suri appeared on behalf of sugar companies.

Read Judgment

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