The Supreme Court on Tuesday struck down a Reserve Bank of India circular dated 12 February 2018, that had imposed a number of strict conditions for classifying and dealing with ‘stressed assets’ – loan accounts on which there has been a default.
The bench of Justices Rohinton Nariman and Vineet Saran had considered a number of petitions against the circular, which had been transferred from various high courts, and which had been filed by large power companies (which had been hit particularly badly by the circular), as well as shipping and sugar companies.
What Did the Circular Do?
The circular said that banks and other lenders would have to classify loan accounts as stressed assets even if there was a default of a single day. If the loan amount was more than Rs 2,000 crore, the lender had to refer the matter to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) if a resolution plan hadn’t been agreed within 180 days of the loan becoming a stressed asset.
Alternative loan resolution mechanisms like ‘Corporate Debt Restructuring’ and ‘Strategic Debt Restructuring’ were also withdrawn by the circular.
Why Did the Court Strike Down the Circular?
The power sector had been hit the worst by the circular, but this had also affected companies in the iron and steel, textile, sugar and shipping industries.
The power sector, whose outstanding loans till March 2018 were Rs 5.65 lakh crore, had argued that these large figures were a result of factors beyond their control, like unavailability of fuel and cancellation of coal blocks. Essentially, they argued that the circular was unfair because it failed to take into account reasonable exceptions to its rules.
The circular was also challenged on the basis that the Rs 2,000 crore threshold was arbitrary, and that the RBI couldn’t make a generic set of rules for reference of cases under the IBC.
The Supreme Court eventually held that the circular was ‘ultra vires’ the RBI’s powers, ie, it went beyond the scope of what the RBI can do when coming up with rules and regulations.
According to Bar & Bench, the court held that the RBI didn’t have the power to issue a generic circular mandating IBC reference, and that such references to the insolvency process had to be “on a case specific basis and with authorisation of the Central Government.”
As a result of this judgment, all insolvency proceedings under the IBC that had been initiated as a result of the RBI circular (which had been stayed by the court back in September 2018), now stand closed. The judgment is not restricted to the power sector.
(With inputs from Bar & Bench.)
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