Supreme Court quashes RBI’s circular Mandating Insolvency Proceedings

The Supreme Court has struck down a February 2018 Reserve Bank of India (RBI) circular which gave lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over Rs 2000 crore.

The RBI had defended the circular by citing public interest and “in the interest of the national economy to see that evergreening of debts does not carry on indefinitely”. RBI had argued that huge amounts that are due should come back into the economy for further productive use”.

Observations made by the Supreme Court

• The Court accepted the argument made by the petitioners that the applying the 180-day limit to all sectors, without going into the special problems faced by each sector, would “treat unequals equally” and is violative of Article 14 of the Constitution.
• The RBI circular sourced its power from Section 35AA of the Banking Regulation (Amendment) Act of 2017. It states that central government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016”.
• But the RBI circular missed two vital factors viz. authorisation of the government and the general nature of the circular which did not concern a “specific default”.

The Judgment even recorded submission that Rs 34,044 crore of their non-performing assets was primarily due to government policy changes, failure to fulfil commitments by the government, delayed regulatory response and non-payment of dues by DISCOMs and were hardly caused by mismanagement. Hence the power companies had asked the circular to be quashed as it was in the nature of “one-solution-fits-all”.

Month: Current Affairs - April, 2019