RBI: Supreme Court strikes down RBI’s February 12 circular on defaulting firms, calls it illegal | RBI february 12 circular–Economic Times

Highlights

  • The circular asked banks to either resolve or file for insolvency.
  • Reference under IBC will be done on case specific basis and with authorisation of Centre.
  • All consequential proceedings including IBC proceedings are also quashed.
The Supreme Court has struck down a controversial RBI circular that mandated banks to immediately resolve all bad loans above Rs 2000 crore or file for insolvency resolution under the IBC.

The circular asked banks to either resolve or file for insolvency taking away their discretion to not to act on bad loans. The apex court held that in light of section 35AA of the Banking Regulation Act, 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 circular has been quashed, all consequential proceedings including IBC proceedings initiated under section 7 of IBC are also quashed, sources told ET.

Several sectors such as power, sugar and fertiliser especially the unregulated sectors challenged the RBI circular as ultra vires on the ground that it wrongly classified them as wilful defaulters. They argued that they were stressed because of extraneous reasons beyond their control and cannot be treated as wilful defaulters.

They also contended that the circular reduced the 270 resolution window further to 180 days.

A copy of the detailed judgement is awaited. “The circular is ultra vires, ” Justice RF nariman with Justice Vineet Saran said.

The order came as a huge relief to the unregulated sectors. The order will impact bad loans to the tune of Rs 2.2 lakh crore.

via RBI: Supreme Court strikes down RBI’s February 12 circular on defaulting firms, calls it illegal | RBI february 12 circular

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