Supreme Court quashes RBI circular on insolvency

Supreme Court quashes RBI circular on insolvency

Agency News

The Supreme Court on Tuesday quashed the RBI circular of last year that pertains to the provisions for declaring a company bankrupt even on a one-day overdue.

In its circular on February 12, 2018, the Reserve Bank of India(RBI) has directed banks to initiate insolvency proceedings against companies having bad debts of Rs.2000 crores or above. The bench headed by Justice R.F. Nariman said, “We have declared the RBI circular ultra vires.”

The February 12 circular had directed the 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. The Circular also mandated that banks will have to disclose defaults even if the interest repayment is overdue by just one day, and will have to put a resolution plan within 180 days.

The implementation of the RBI circular would have forced to take action on several companies in the field of power, sugar, shipping etc. including giants like Essar Power, GMR Energy, KSK energy and Rattan India Power to insolvency. But the SC Bench of Justices RF Nariman and Vineet Saran on Tuesday quashed the RBI ciruclar holding that a generic circular directing the banks to take recourse to Insolvency and Bankruptcy Code was beyond the powers of Section 35AA of the Banking Regulation Act.

It said that if a resolution was not found by August 27, Non Performing Asset (NPA) accounts should be sent to bankruptcy courts. However, during the pendency of the matter, the apex court on September 11 last year asked banks to maintain status quo and not to initiate insolvency proceedings against loan defaulting companies.