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In a latest, landmark and laudable judgment with far reaching consequences and authored by Justice R.F. Nariman for himself and Justice Vineet Saran, the Supreme Court two Judge Bench on April 2, 2019 in Dharani Sugars and Chemicals Ltd v Union of India & Ors. in Transferred Case (Civil) No. 66 of 2018 in Transfer Petition (Civil) No. 1399 of 2018 struck down the controversial circular issued by the Reserve Bank of India (RBI) on February 12, 2018 directing banks to initiate insolvency proceedings against companies having bad debts of Rs 2000 crores or above. The Bench also minced no words in explicitly stating that the RBI acted beyond its powers in issuing the February 12, 2018 circular. It also held that the RBI’s February 12 circular was ultra vires of Section 35AA of the Banking Regulation Act, 1949. This has certainly come as a major relief for those banks who were directed to do so!

Needless to say, the implementation of the RBI circular would have taken several companies in the fields of power, sugar, shipping etc., including giants like Essar Power, GMR Energy, KSK Energy and Rattan India Power to insolvency. The controversial RBI February 12 circular had directed banks to resolve debts over Rs. 2000 crores within 180 days, failing which the corporate debtor would have to be taken to the National Company Law Tribunal (NCLT) for insolvency action. It would be imperative to mention here that among other things, the RBI circular mandated that banks will have to disclose defaults even if the interest repayment is overdue just by one day. In other words, a borrower not repaying interest for even one day was to be declared a defaulter.  Banks then had 180 days to put together a resolution plan. Defaulter had to be taken to the insolvency court if the plan failed. All the extant debt resolutions mechanisms such as the CDR, SDR, S4A and JLF were also abolished by the RBI.

Simply put, para 2 of this noteworthy judgment points out that, “It will be noticed that the salient features of this circular are that restructuring in respect of borrower entities de hors the Insolvency and Bankruptcy Code, 2016 [“Insolvency Code”] can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 percent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications or financial creditors under the Insolvency Code. It will be noticed that the sources of power for issuance of the aforesaid circular have been stated to be Section 35A of the Banking Regulation Act read with the Central Government’s circular dated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section 45L of the Reserve Bank of India Act, 1934 [“RBI Act”]. It may be stated here that by an order dated 11.09.2018, this Court allowed various transfer petitions and made orders in Writ Petition No. 1086 of 2018, by which it was ordered that status quo as of today shall be maintained in the meantime. As a result, insofar as the petitions and transferred cases in this Court are concerned, the circular has, in effect, been stayed on and from 11.09.2018.”

To put things in perspective, para 3 then brings out that, “The charge on behalf of the petitioners was led by Dr. Abhishek Manu Singhvi, learned Senior Advocate. Dr. Singhvi appears on behalf of the Association of Power Producers, representing the power sector in general. According to the learned Senior Advocate, the Electricity Act, 2003 [“Electricity Act”] was enacted as a complete code to regulate the private sector. According to him, unlike sectors such as the steel and cement sector, the power sector is fully regulated and tariffs that are fixed can only be after they are so determined / adopted by Electricity Regulatory Commissions under Section 62 or Section 63 of the Electricity Act. The power sector, therefore, is a player in a restricted market – power can only be purchased by distribution licensees or trading licensees under Section 12 of the Electricity Act, which can only be done with the prior approval of State Electricity Regulatory Commissions. Even transmission of power requires prior approval of transmission licensees, and therefore, substitutability of buyers is impossible since the means to supply power are not readily available. To buttress his submissions, Dr. Singhvi relied heavily upon the reports of the Parliamentary Standing Committees which were looking into the problems of the power sector from time to time. Thus, the 37th Parliamentary Standing Committee Report on Stressed / Non-performing Assets in the Electricity Sector dated 07.03.2018 recorded that in the private sector, there were 34 stressed projects amounting to 40,130 MWs out of 85,550.30 MWs which have a debt exposure of INR 1,74,468 crore. Out of these, non-performing assets [“NPAs”] amounting to 34,044 crores are primarily on account of Government policy changes, failure to fulfil commitments by the Government, delayed regulatory response and non-payment of dues by DISCOMs. This Report, therefore, recommended the setting up of a task force to look into the NPA problem in the power sector.”

While continuing in the same vein, para 4 then brings out that, “Dr. Singhvi then went into non-availability of fuel and took us through the New Coal Distribution Policy of 18.10.2007, by which Thermal Power Projects were assured supply of 100 percent coal. This changed drastically as a result of Government of India restrictions in 2013, which restricted supply of coal to only those Independent Power Producers (IPPs) with long term Power Purchase Agreements (PPAs) and otherwise limited supply to 65 percent of coal requirement. Another setback occurred in August/September, 2014 as coal mines allocated to the power sector were cancelled by the Supreme Court by a judgment in Manohar Lal Sharma . Principal Secretary and Ors., (2014) 9 SCC 516. Remedial measures such as the SHAKTI Schemes were introduced only after three years of the Supreme Court judgment on 22.05.2017. Even this Scheme limited supply of coal to 75 percent of the assured coal supply as against what was assured in 2007. All this was commented on by the 37th and 40th Parliamentary Standing Committee Reports. In so far as the gas-based plants are concerned, the 42nd Parliamentary Standing Committee Report referred to the same tale of woe as in coal based power plants – gas, in which the power sector was originally given priority, was later placed in 2013-14 under a no-cut category, leading to drastic reduction in supply of gas to the power sector. Dr. Singhvi also referred to various reports showing that as on October, 2018, DISCOMs only paid INR 8,710 crore against dues of approximately INR 39,500 crore to generating companies. This situation gets exacerbated by delay in adjudication and consequent payment by DISCOMs. He then referred to preferential treatment that is given to power companies in the public sector as opposed to power companies in the private sector, and argued that against total stressed assets of 66,000 MWs in the private sector, stressed assets in the public sector amount to nil. Lack of PPAs being entered into was another cause of concern. Out of the total stressed capacity of 40,130 MWs identified in the 37th Parliamentary Standing Committee Report, PPAs have been executed only for the capacity of 17,708 MWs, as a result of which long term commitments qua fuel supply etc. are lacking. According to him, the impact of the RBI Circular was directly focused upon by the 40th Parliamentary Standing Committee Report. The 40th Parliamentary Standing Committee has analysed the suitability and impact of the impugned RBI Circular after consultation with the RBI, major banks, and financial institutions as well as the power sector associations. Key observations in the Report are:

“(a) As per Department of Financial Serices, Ministry of Finance, “one size fits all” approach of the RBI is erroneous.

(b) Lenders like the Rural Electrification Corporation and the State Bank of India have submitted that implementing an optimal solution is impossible within the 180-day time period specified by the impugned RBI Circular. The State Bank of India has stated that 12 months’ time is required to implement a resolution plan. As per the prescribed timelines, every stressed project of the power sector will land in the NCLT.

(c) Arriving at 100 percent consensus of lenders for approval and implementation of the resolution plan is difficult, especially when there are projects with multiple lenders.

(d) The Power Finance Corporation pointed out that even in case of a successfully running project like the Chhattisgarh project, they could only recover INR 2,500 crore out of a total of debt of INR 8,300 crore, i.e., 70 percent haircut. Thus, there is significant value erosion.

(e) The State Bank of India highlighted the need for synchronization between the RBI’s guidelines and resolution of the systemic issues of the electricity sector.”

After due examination and enquiry, the 40th Parliamentary Standing Committee Report of August 2018 has made the following recommendations:

“(a) Appropriate, relevant, and sector-specific measures should be explored to address the issues faced by power sector. Instead of adopting sector-agnostic approach for stress-resolution, the RBI should look at sector-friendly measures.

(b) Revised framework introduced by the RBI has been done ignoring the prevailing realities.

(c) Repayment of 20 percent of the outstanding principal debt as per the RBI Circular is impracticable for power sector entities, and accordingly, the circular disincentivizes restructuring with the existing promoters.

(d) Forced sale before the NCLT will cause a big sacrifice of public money without any benefit to the economy or the power sector.

(e) The power sector should be protected since it is going through a transition phase from a low-demand-low-supply situation to a moderately-high-demand situation, which is temporary in nature.”

As it turned out, para 5 then states that, “Dr. Singhvi then referred to a challenge that was made to the RBI Circular in the Allahabad High Court in Independent Power Producers Association of India . Union of India and Ors., Writ-C No. 18170 of 2018. He referred to a copy of the order dated 31.05.2018, by which the Allahabad High Court ordered:

“We request the Secretary, Ministry of Finance, Union of India, to hold a meeting in the month of June, 2018 of respondents 2 to 5 through their Secretaries and a representative of the petitioners association to consider their grievance and see whether any solution to the problem is possible, in the light of observations made by the Thirty-Seventh Report of Standing Committee on Energy presented to Lok Sabha on 7.3.2018 with regard to stressed/non-performing assets in electricity sector. Though, we could not go through the report, our attention was specifically drawn to some observations in Part-II of the report, which reads thus:

“The Committee are of the considered view that providing finances, though vital, to the project is only one of the several factors essential for the commissioning of the project. As of now, commissioned plants worth of thousands of Mws are under severe financial stress and are currently under SMA-1/2 stage or on the brink of becoming NPA. This is due to fuel shortage, sub-optimal loading, untied capacities, absence of FSA and lack of PPA, etc. These projects were commissioned on the basis of national need/demand of electricity, availability of all other essentials required in this regard. However, due to unforeseen circumstances, these plants are suffering from cash flows, credit rating, interest servicing etc. Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery.”

It is needless to mention that the petitioners’ representatives shall supply a copy of this order and of the writ petition with annexures to all the respondents within one week from today. We only observe that action may be avoided on the basis of the impugned circular dated 12.2.2018 issued by respondent no. 2 – Reserve Bank of India addressed to all Scheduled Commercial Banks and All India Financial Institutions, against members of the petitioners association, subject to condition that the member(s) is/are not willful defaulter(s) till the meeting is conducted by the Secretary, Ministry of Finance, Union of India. We also observe that the Secretary, Ministry of Finance shall communicate the date and time of the meeting to all concerned, including the President of the petitioners’ association, well in advance.”

To be sure, it is then mentioned in para 6 that, “Dr. Singhvi then referred to the detailed order passed by the Allahabad High Court in the aforesaid case on 27.08.2018, in which he referred to the stand taken by the Union of India as follows:

“24.1. ………..As observed earlier, the Central Government is in favour of granting them some more time so as to save the power sector in the larger interest. Mr. Tushar Mehta, learned ASG, submitted that it is desirable, while considering the “sector (power) specific issues” that a timeline prescribed under the circular be made effective after 180 days from 27.08.2018 and subsequent steps be taken by the parties based upon the reports of the High Level Empowered Committee presided over by the Cabinet Secretary. He submitted, the time can be extended at this stage and not once process under IBC is set in motion.”

He also referred to the fact that a High Level Empowered Committee is to be set up as follows:

“42. In this backdrop, I am inclined to direct the High Level Empowered Committee to submit its report within two months from the date of its constitution. The Ministry of Power shall invite a senior officer of the RBI, after consultation with the Governor of RBI, as a member of the High Level Empowered Committee forthwith. In the meantime, I observe that the Central Government should consider whether it would like to issue directions under Section 7 of the RBI Act on the basis of the report and other material, including reports of the Standing Committee within 15 days from today in the light of the observations made in this order. In view thereof, it is not desirable to grant any interim relief at this stage. This shall not preclude the petitioner – Associations or its members from applying for urgent relief, if the circumstances so demand, placing the request and factual details in respect of such an action. This  shall not preclude the petitioner-Associations or its members from applying for urgent relief, if the circumstances so demand, placing the request and factual details in respect of such an action. This order shall not curtail the right/powers of the financial creditors under Section 7 of IBC or even of the RBI in issuing directions in specific case(s) under Section 35AA of BR Act to initiate corporate insolvency resolution process under Chapter II of Part II of IBC, in any given case, including the petitioners or members of the petitioners Association.”

Furthermore, it is then pointed out in para 7 that, “Dr. Singhvi then referred to the Report dated 12.11.2018 of the High Level Committee so constituted. This Report made various recommendations. It stated:

“1. Linkage coal may be allowed to be used against short term PPAs and power be sold through Discovery of Efficient Energy Price (DEEP) portal following a transparent bidding process.

2. A nodal agency may be designated which may invite bids for procurement of bulk power for medium term for 3 to 5 years in appropriate tranches, against pre-declared linkage by Coal India Limited (CIL).

3. NTPC can act as an aggregate of power, i.e., procure power through transparent competitive bidding process from such stressed power plants and offer that power to the DISCOMs against PPAs of NTPC till such time as NTPC’s own concerned plants/units are commissioned.

4. Ministry of Coal may earmark for power, at least 60 percent of the e-auction coal, and this should be in addition to the regular coal requirement of the power sector.

5. If there is a shortfall in the supply of coal and it is attributable to the Ministry of Coal or Railways; such shortfall need not lapse and be carried over to the subsequent months up to a maximum of three months.

6. Old and high heat rate plants not complying with new environment norms may be considered for retirement in a phased  and timebound manner at the same time avoiding any demand/supply mismatch.

7. Public Financial Institutions (PFIs) providing the Bill Discounting facility may also be covered by the Tripartite Agreement (TPA) i.e. in case of default by the DISCOM, the RBI may recover the dues from the account of States and make payment to the PFIs.

8. PPAs, Fuel Supply Agreements (FSA) and LTOA for transmission of power, EC/FC clearances, and all other approvals including water, be kept alive and not cancelled by the respective agencies even if the project is referred to NCLT or is acquired by any other entity. All of these may be linked to the plant and not the Promoter.

9. In order to revive gas based power plants, Ministry of Power and Ministry of Petroleum & Natural Gas may jointly devise a scheme in line with the earlier e-bid RLNG Scheme (supported by PSDF).”

Dr. Singhvi, therefore, argued that despite the fact that a representative of the RBI attended meetings of the Parliamentary Standing Committee, the RBI Circular was issued in complete disregard of the recommendations of such Reports, both before and after the impugned circular. According to him, therefore, to apply a 180-day limit to all sectors of the economy without going into the special problems faced by each sector would treat unequals equally and would be arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution of India. Also, picking up at random all defaults amounting to INR 2000 crore and above, as well as the fact that even a lender whose stake is only 1 percent can stall a resolution process de hors the Insolvency Code make the circular manifestly arbitrary and violative of Article 14 on this score as well.”

What’s more, para 8 then elucidates that, “Apart from the aforesaid submissions, Dr. Singhvi referred in great detail to the relevant sections of the Banking Regulation Act and the RBI Act, and argued that the impugned circular was ultra vires the provisions of those Acts. According to him, Section 35A and Section 35AB of the Banking Regulation Act cannot possibly be the source of power for the impugned circular. Section 35A was introduced by an Amendment Act of 1956 and cannot, therefore, be used to empower the RBI to relegate companies to insolvency under the Insolvency Code as it did not exist at the time, or to give directions for resolution of stressed assets. He strongly referred to and relied upon Indian Banks’ Association v. Devkala Consultancy Service (2004) 11 SCC 1 [“Indian Banks Association”] for the proposition that the RBI’s functions under Section 35A are confined to the boundaries of the RBI Act and the Banking Regulation Act and not to other statutes, such as the Insolvency Code. He also argued that Sections 35AA and 35AB are part of one composite scheme. Section 35AA alone refers to, and can alone be the source of power for directing banking and non-banking companies to file applications under the Insolvency Code. Section 35AB clearly refers to resolution of stressed assets in a manner which is de hors the Insolvency Code. He then referred to the circular of the Central Government dated 05.05.2017 which empowered the RBI to issue directions qua individual defaults that are committed. This being so, a general circular applying to all defaults of loans above INR 2000 crore, without having reference to the facts of each individual case would, therefore, be ultra vires and bad in law. For this purpose, he strongly relied upon the Press Note that introduced Sections 35AA and 35AB as well as the statement of Objects and Reasons introducing the said Sections by the Amending Act of 2017. He also argued that in any case, Sections 35AA and 35AB, being manifestly arbitrary provisions, are violative of Article 14 of the Constitution of India. Further, they are also arbitrary on the ground of excessive delegation of power.”

As if this was not enough, it is then further pointed out in para 9 that, “Shri Mukul Rohatgi, Shri Sajan Poovayya, Shri KV Viswanathan, Shri Neeraj Kishan Kaul, Shri Navaniti Prasad Singh, Shri P.S. Narsimha, Shri Arvind P. Datar and Shri Gopal Jain, learned Senior Advocates and Shri Pulkit Deora, Smt. Purti Marwaha Gupta, and Shri E.R. Kumar, learned Advocates, have also supported the submissions of Dr. Singhvi. These counsel have appeared in cases involving many other sectors, such as telecom, steel, infrastructure, sports infrastructure, sugar, fertilizer, shipyard, etc. Each of them has highlighted the difficulties faced as a result of Government policies and other reasons for financial stress in all these sectors which have nothing to do with the efficiency of management of companies operating in these sectors.”

More importantly, it is then pointed out very rightly in this same para 9 that, “All of them have adopted the arguments of Dr. Singhvi in stating that, without looking into each individual sector’s problems and attempting to solve them, the RBI circular applies down the board to good and bad alike, and, despite the fact that some corporate debtors are on the brink of resolution, the chopper of 180 days comes down on them and they are driven into the Insolvency Code. The Government has recognised that, for example, in the sports infrastructure sector, much larger gestation periods are necessary in which capital infrastructure investments take place and which consequently require long periods for resolution. They have also argued with various nuances of their own as to how the RBI circular is both arbitrary and ultra vires the Banking Regulation Act and the RBI Act.”

On the contrary, para 10 then envisages that, “Shri Rakesh Dwivedi, learned Senior Advocate appearing on behalf of the RBI, has taken us through various provisions of the RBI Act and Banking Regulation Act and has impressed upon us the fact that the regulatory regime laid down in these Acts must be construed broadly being in public interest, in the interest of banking policy, and above all, in the interest of depositors. The RBI Act and the Insolvency Code are intricately related to the operation of the credit system of the country and must therefore, be given an expansive interpretation. According to the learned Senior Advocate, the RBI Circular is only an attempt to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assets or otherwise, if they cannot do so, would only then have to move under the Insolvency Code. According to him, clause 4 of the RBI Circular makes it clear that greater flexibility is given in this period of six months for banking and non-banking financial institutions to resolve stressed assets even de hors earlier restrictive circulars that have been done away with by the circular dated 12.02.2018 so that an effort be made to resolve stressed assets within a reasonable period, after which it becomes incumbent on such institutions to move the Insolvency Code. According to him, the circular is not manifestly arbitrary. On the contrary, it is in public interest and in the interest of the national economy to see that evergreening of debts does not carry on indefinitely. Therefore, these huge amounts that are due and owing should come back into the economy for further productive use. Either they can so come back within the six months’ grace period granted by the circular or through the route of the Insolvency Code. He also made it clear that the Parliamentary Standing Committee Reports are for the purpose of Parliament, which must then act upon them. None of the Reports that have been referred to have been acted upon by Parliament, and therefore, that cannot take the matter much further. Also, it is important to notice that though the executive, i.e., the Government could also have acted in terms of these Reports, it has chosen not to do so. For this purpose, he relied upon Section 7 of the RBI Act, under which the Central Government may, from time to time give such directions to the RBI that it may consider necessary in public interest, after consultation with the Governor of the RBI. The sheet anchor of the petitioners’ case, therefore, disappears as all these Parliamentary Standing Committee Reports do not take the petitioners anywhere, not having been acted upon either by the Parliament or by the Central Government. This is for the very good reason that ultimately, it is in public interest to either resolve stressed assets within a certain timeframe, or if incapable of such resolution, the route of the Insolvency Code should then be followed. So far as the vires of Sections 35AA and 35AB are concerned, Shri Dwivedi relied upon our recent judgment in Swiss Ribbons Pvt. Ltd and Anr. v. Union of India and Ors., 2019 (2) SCALE 5 [“Swiss Ribbons”], saying that great leeway must be given to Parliament to deal with the problems which affect the national economy as a whole. There is adequate guiding principle and there is no manifest arbitrariness in any of the aforesaid provisions. Further, there is no question of excessive delegation of power either, as guidance can be obtained from the Preamble of the Banking Regulation Act together with its provisions. Insofar as the RBI Circular is concerned, he argued that it is traceable to four sources of power, namely, Sections 21, 35A, 35AA and 35AB of the Banking Regulation Act. Insofar as non-banking financial companies are concerned, it is traceable to Section 45L of the RBI Act. According to the learned Senior Advocate, a general circular of this kind can certainly be issued in public interest and in the interest of the national economy. Any restrictive reading of any of these provisions will only do harm to the economy of the country as a whole. Broadly read, therefore, the RBI Circular cannot be said to be ultra vires.”

Going ahead, it is then observed in para 11 that, “Shri Tushar Mehta, learned Solicitor General for India, confined his submissions to the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, and the validity of the Central Government circular dated 05.05.2017. According to the learned Solicitor General, Sections 35AA and 35AB are regulatory provisions made in public interest that cannot possibly be said to be manifestly arbitrary in anyway. He relied heavily upon the judgment of Swiss Ribbons (supra). Further, the aforesaid Sections cannot be said to be unguided provisions as the RBI gets sufficient guidance from the Preamble as well as other provisions of the Banking Regulation Act. He further submitted that the authorisation of the Central Government with respect to Section 35AA has to be general in nature, after which, the RBI must exercise such power with due deliberation and with sector-specific care as the expert financial regulator and central bank of the country. He submitted that ideally, there ought to be a sector wise contingency analysis by the RBI before exercising power provided by the Central Government to it under Section 35AA. In any case, so far as the power sector was concerned, he was of the view that the RBI ought to have treated it differently from all other sectors in view of the steps that the Central Government is taking in order to bring back the power sector on its feet.”

Be it noted, it is then laid bare in para 12 that, “At this juncture, it is important to note the genesis of the impugned circular. By a press release dated 13.06.2017, the RBI identified certain accounts for reference by banks under the Insolvency Code. This press release reads as follows:

“RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC)

1.  The Reserve Bank of India had issued a Press Release on May 22, 2017 outlining the steps taken and those on the anvil pursuant to the promulgation of the Banking Regulation (Amendment) Ordinance, 2017. The Press Release had mentioned inter alia that the RBI would be constituting a Committee comprised majority of its independent Board Members to advise it in regard to the cases that may be considered for reference for resolution under the Insolvency and Bankruptcy Code 2016 (IBC).

2.  An Internal Advisory Committee (IAC) was accordingly constituted and it held its first meeting on June 12, 2017. The IAC, in the meeting, agreed to focus on large stressed accounts at this stage and accordingly took up for consideration the accounts which were classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system.

3.  The IAC also arrived at an objective, non-discretionary criterion for referring accounts for resolution under IBC. In particular, the IAC recommended for IBC reference all accounts with fund and non-fund based outstanding amount greater than Rs 5000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016. The IAC noted that under the recommended criterion, 12 accounts totaling about 25 percent of the current gross NPAs of the banking system would qualify for immediate reference under IBC.

4.  As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.

5.  The Reserve Bank, based on the recommendations of the IAC, will accordingly be issuing directions to banks to file for insolvency proceedings under the IBC in respect of the identified accounts. Such cases will be accorded priority by the National Company Law Tribunal (NCLT).

6.  The details of the resolution framework in regard to the other non-performing accounts will be released in the coming days”.”

Of course, it is then unfolded in para 13 that, “At this stage, as a first step, the Internal Advisory Committee [“IAC”] decided to consider the stressed assets within the top 500 exposures of the banking system as on 31.03.2017. This set of 500 accounts was arrived at as per the statement generated from the Central Repository of Information on Large Credits [“CRILC] database. Of the said top 500 exposures, it was noted that 71 accounts had been partly or wholly classified as NPAs while the other 429 were not classified as NPA by any bank. For the purpose of this first list, the following criteria were applied:

a.  Accounts where the funded plus non-funded outstanding was more than INR 5000 crore;

b.  Accounts where more than 60 percent of the total outstanding by value was NPA as on March 31, 2016.

Consequently, 12 accounts which met the above criteria were referred for resolution under the Insolvency Code vide RBI’s direction dated 15.06.2017. It is pertinent to note that the accounts in the First List constituted around 25 percent of the NPAs in the system and the cumulative fund-based and non-fund-based outstanding therein amounted to INR 197,769 crore.”

In continuation of para 13, it is then envisaged in para 14 that, “The IAC subsequently met again and decided on 25.08.2017, that out of the 59 remaining NPA accounts of the top 500 exposures, accounts which are materially NPA (i.e., where 60 percent of the total outstanding has become NPA by 30.06.2017) may be given time till 13.12.2017 for resolution. If the banks fail to finalise and implement a viable resolution plan by the said date, banks will be required to file applications under Insolvency Code before 31.12.2017. The IAC noted that applying this criterion will cover 29 NPA accounts, with total outstanding of INR 135,846 crore and total fund-based NPAs of INR 111.848 crore as on 30.06.2017. It is pertinent to note that on 28.08.2017, the RBI issued a letter directing banks to attempt resolution of the accounts in this Second List by 13.12.2017. As regards the residual accounts, out of the initially identified 71 NPA accounts, the IAC recommended that such accounts may be addressed through a steady-state framework for resolution of stressed assets in a time-bound manner and failing such resolution, the accounts be referred to for resolution under the Insolvency Code. Accordingly, the RBI formulated and issued the revised framework vide its circular dated 12.02.2018.”

It would be significant to mention here that in para 41 we see that first the definitions of debt as defined under Section 3(11) of the Insolvency Code is mentioned which stipulates that, “Debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” Also, “corporate debtor” has been defined under Section 3(8) of the Insolvency Code as “Corporate debtor means a corporate person who owes a debt to any person.”

What follows next in para 41 is this: “A reading of these definitions would make it clear that default would mean non-payment of a debt when it has become due and payable and is not paid by the corporate debtor. Therefore, what is important to note is that it is a particular default of a particular debtor that is the subject matter of Section 35AA. It must also be observed that the expression “issue directions to banking companies generally or to any banking company in particular” occurring in Section 35A is conspicuous by its absence in Section 35AA. This is another good reason as to why Section 35AA refers only to specific cases of default and not to the issuance of directions to banking companies generally, as has been done by the impugned circular.”

Moving on, it is then further illustrated in para 42 that, “This is clear also from the Press Note dated 05.05.2017, which introduced the Ordinance which specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of a “default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA.”

It would be instructive to narrate what para 45 states about Section 45L. It states that, “Section 45L reads as follows:

“45L. Power of Bank to call for information from financial institutions and to give directions – (1) If the Bank is satisfied for the purpose of enabling it to regulate the credit system of the country to its advantage it is necessary to do so, it may –

(a)          require financial institutions either generally or any group of financial institutions or financial institution in particular, to furnish to the Bank in such form, at such intervals and within such time, such statements, information or particulars relating to the business of such financial institutions or institution, as may be specified by the Bank by general or special order;

(b)         give to such institutions either generally or to any such institution in particular, directions relating to the conduct of business by them or by it as financial institutions or institution.

(2) Without prejudice to the generality of the power vested in the Bank under clause (a) of sub-section (1), the statements, information or particulars to be furnished by a financial institution may relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom and the purposes and periods for which finance is provided and the terms and conditions including the rates of interest, on which it is provided.

(3) In issuing directions to any financial institution under clause (b) of sub-section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets”.”

It would be of utmost importance to now also mention here that it is then further very rightly enumerated in this same para 45 that, “There is nothing to show that the provisions of Section 45L(3) have been satisfied in issuing the impugned circular. The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets. Further, it is clear that the impugned circular applies to banking and non-banking institutions alike, as banking and non-banking institutions are often in a joint lenders’ forum which jointly lend sums of money to debtors. Such non-banking financial institutions are, therefore, inseparable from banking institutions insofar as the application of the impugned circular is concerned. It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned. For these reasons also, the impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law. Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”

Lastly, it is then held in para 46 that, “In view of the declaration by this Court that the impugned circular is ultra vires Section 35AA of the Banking Regulation Act, it is unnecessary to go into any of the other contentions that have been raised in the transferred cases and petitions. The transferred cases and petitions are disposed of accordingly.”

No doubt, this latest ruling has come as a great respite to all those defaulting companies who were directly affected adversely by the RBI circular. For this the full credit goes to the teamwork of senior lawyers led by Abhishek Manu Singhvi along with many others like former Attorney General Mukul Rohatgi. It was Abhishek Manu Singhvi who argued the case exceptionally well by leading from the front and not leaving any valid point to buttress his stand and so no prizes for guessing that what the outcome would have been! The arguments forwarded by senior advocate Rakesh Dwivedi along with Solicitor General Tushar Mehta just simply failed to cut ice with the two Judge Bench of the Apex Court – Justice RF Nariman and Justice Vineet Saran who were hearing this crucial case and the result is now out there for all of us to see for ourselves in the form of a 84-page noteworthy  judgment!

Sanjeev Sirohi,


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