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Supreme Court strikes down RBI Circular imposing stringent conditions on lenders

02.04.2019

Supreme Court has quashed circular passed by RBI on 12thFebruary, 2018, asking banks to classify a loan account as stressed, if there was even a day of default by Corporate and Industries. The decision rendered in a batch of petitions, transferred to the Supreme Court from various High Courts wherein the RBI's circular of February 12, 2018, was challenged. The Circular imposed stringent conditions on lenders in relation to huge loan accounts. Circular is discriminatory as it applied a 180-day limit to resolve bad debts to all sectors of the economy without going into the special problems faced by each sector. On failing to resolve debts, banks are directed to initiate insolvency proceedings as per impugned Circular.

As per Section 35AA of Banking Regulation Act, 1949, the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. Without such authorisation, the RBI would have no such power. The RBI’s satisfaction in superseding the board of directors of banking companies can only be exercised in consultation with the Central Government, and not otherwise.

Supreme Court observed 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. The RBI can only direct banking institutions to move under the Insolvency Code, if two conditions precedent are specified, namely, (i) that there is a Central Government authorisation to do so; and (ii) that it should be in respect of specific defaults. Supreme Court declared impugned circular as ultra vires. 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.

Tags : Circular Condition Ultra vires

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