Supreme Court strikes down RBI circular on debt resolution

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The Supreme Court declared the Reserve Bank of India Circular of February 12 relating to loan repayment of stressed accounts ultra vires. It is considered as a big win for power, sugar and infrastructure companies. This circular imposed very stringent conditions on lenders in relation to large loan accounts.

The Supreme Court 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.

Power companies such as Essar Power, GMR Energy, KSK Energy, and Rattan India Power, as well as the Association of Power Producers (APP) and Independent Power Producers Association of India (IPPAI) had in August moved the apex court, challenging the constitutional validity of the circular.

The power firms alleged that the central bank’s notification was based on a ‘one-size-fits-all’ approach and it does not take to account factors such as the reasons for non-payment.

Some challenged the validity of the Insolvency and Bankruptcy Code itself, while others raised concerns on the constitutional validity of the February 12 circular.

The RBI, however, in defense said that 157 companies stood to be affected by the circular and not one company has been resolved in the given period or comply with the August 31, 2018 deadline.