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05 April 2019

RBI circular triggering IBC on debtors in general, declared ultra vires


5th April 

Supreme Court has declared the RBI Circular dated 12-02-2018, by which the RBI promulgated a revised framework for resolution of stressed assets, ultra vires Section 35AA of the Banking Regulation Act. It declared all actions proceeded against debtors, triggered under Section 7 of the Insolvency Code, as a result of the said circular as non-est.

The Court however held that the Banking Regulation (Amendment) Act, 2017, which inserted Section 35AA, i.e., provisions which give the RBI certain regulatory powers, is not manifestly arbitrary.

The Court in Dharani Sugars & Chemicals Ltd. v. UoI observed that directions issued by RBI to call for insolvency of a debtor can only be done for specific defaults by specific debtors and such directions cannot be issued for debtors in general. It noted that it is a particular default of a particular debtor that is the subject matter of Section 35AA.

Observing that after insertion of Section 35AA, RBI could do so only within the four corners of Section 35AA, the Court reiterated that if a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed.

It also found that provisions of Section 45L(3) relating to power of banks to call for information from financial institutions were not satisfied in issuing the impugned circular.

Further, finding the impugned RBI circular ultra vires insofar as the banks are concerned, the court declared the circular ultra vires as a whole. It was observed that non-banking financial institutions are inseparable from banking institutions insofar as the application of the impugned RBI circular is concerned.

It also observed that when one section of the statute grants general powers as opposed to another section of same statute which grants specific powers, the general provisions cannot be utilised where a specific provision has been enacted with a specific purpose in mind.