Issues;
i. Constitutional validity of sections 35AA and 35AB introduced by the Banking Regulation (Amendment) Act, 2017.
ii. Scope of power of the RBI under section 35AA vis-a-vis the impugned circular.
iii. Constitutional validity of the impugned circular issued by the RBI.
Excerpts of the order;
# 2. It will be noticed that the salient features of this circular are that restructuring in respect of borrower entities de hors the Insolvency and Bankruptcy Code, 2016 [“Insolvency Code”] can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 per cent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code. It will be noticed that the sources of power for issuance of the aforesaid circular have been stated to be Section 35A of the Banking Regulation Act read with the Central Government’s circular dated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section 45L of the Reserve Bank of India Act, 1934 [“RBI Act”]. It may be stated here that by an order dated 11.09.2018, this Court allowed various transfer petitions and made orders in Writ Petition No. 1086 of 2018, by which it was ordered that status quo as of today shall be maintained in the meantime. As a result, insofar as the petitions and transferred cases in this Court are concerned, the circular has, in effect, been stayed on and from 11.09.2018.
1. Constitutional validity, of sections 35AA and 35AB introduced by the Banking Regulation (Amendment) Act, 2017.
# 16.. ……….. They (provisions) are not excessive in any way nor do they suffer from want of any guiding principle. These are in the nature of amendments which confer regulatory powers upon the RBI to carry out its functions under the Act and are not different in quality from any of the sections which have already conferred such power. For example, section 21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular. Similarly, under section 35A, vast powers are given to issue necessary directions to banking companies in public interest, in the interest of banking policy, to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company, or to secure the proper management of any banking company. Therefore, these provisions which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary.
# 17. When it comes to lack of any guidelines by which the power given to the RBI is to be exercised, it is clear from a catena of judgments that such guidance can be obtained not only from the Statement of Objects and Reasons and the Preamble to the Act, but also from its provisions. …………. A banking company is obligated to hold a license that is issued by the RBI, by which the RBI can impose such conditions as it thinks fit under Section 22 of the Act. Section 22(3), in particular, gives guidance as to how the banking company will run its business. These and other regulatory sections such as Sections 25, 29, 30, and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions. We, therefore, agree with Shri Dwivedi that there was no dearth of guidance for the RBI to exercise the powers delegated to it by these provisions. Consequently, the plea of constitutional validity fails.
2. Scope of power of the RBI under section 35AA vis-a-vis the impugned circular.
# 24. A cursory reading of section 35A makes it clear that there is nothing in the aforesaid provision which would indicate that the power of the RBI to give directions, when it comes to the Insolvency Code, cannot be so given. The width of the language such as ‘public interest’, ‘banking policy’, etc. used in section 35A makes it clear that if otherwise available, use of section 35A as a source of power for the impugned circular cannot be interdicted on the ground that the Insolvency and Bankruptcy Code, 2016 (Code) could not have been in the contemplation of Parliament in 1956, when section 35A was enacted.
# 26. …. If a specific provision of the Banking Regulation Act makes it clear that the RBI has a specific power to direct banks to move under the Code against debtors in certain specified circumstances, it cannot be said that they would be acting outside the four corners of the statutes which govern them, namely, the RBI Act and the Banking Regulation Act. …..
# 29. Section 35AA makes it clear that 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. The first thing to be noted is that without such authorisation, the RBI would have no such power. There are many sections in the Banking Regulation Act which enumerate the powers of the Central Government vis-à-vis the powers of the RBI.
# 30. The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA.
# 31. The matter can be looked at from a slightly different angle. 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.
# 31. ……… therefore, it is clear that 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. The Section, therefore, by necessary implication, prohibits this power from being exercised in any manner other than the manner set out in Section 35AA.
# 35. …… the words “without prejudice” appearing in a Section make it clear that powers that are enumerated are only illustrative of a general power and do not restrict such general power. …… Thus, the power to issue directions given by Section 35AB is in addition to the power that is given under Section 35A.
# 38. ……….. Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows:
(a) When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power.
(b) When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A read with Section 35AB.
This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed.
# 39. When one section of a statute grants general powers, as opposed to another section of the same statute which grants specific powers, the general provisions cannot be utilised where a specific provision has been enacted with a specific purpose in mind.
# 40. Stressed assets can be resolved either through the Insolvency Code or otherwise. When resolution through the Code is to be effected, the specific power granted by Section 35AA can alone be availed by the RBI. When resolution de hors the Code is to be effected, the general powers under Sections 35A and 35AB are to be used. Any other interpretation would make Section 35AA otiose.
3. Constitutional validity of the impugned circular issued by the RBI.
# 41. Having grounded the power to issue directions to banking companies so far as the Insolvency Code is concerned, in Section 35AA, what is important to note is that the Section enables the Central Government to authorise the RBI to issue such directions in respect of “a default”.. Default would mean non-payment of a debt when it has become due and payable and is not paid by the corporate debtor.
# 42. …….. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA.
# 44. ……. In the present case, the context of Section 35AA makes it clear, as has been correctly argued by Shri Tushar Mehta, learned Solicitor General, that the power to be exercised under the authorisation of the Central Government requires “due deliberation and care” to refer to specific defaults.
# 45. ……. There is nothing to show that the provisions of Section 45L(3) have been satisfied in issuing the impugned circular. The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets.
. ………...Further, it is clear that the impugned circular applies to banking and non-banking institutions alike, as banking and non-banking institutions are often in a joint lenders’ forum which jointly lend sums of money to debtors. Such non-banking financial institutions are, therefore, inseparable from banking institutions insofar as the application of the impugned circular is concerned. It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned.
. ……… For these reasons also, the impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law. 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. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.
# 46. In view of the declaration by this Court that the impugned circular is ultra vires Section 35AA of the Banking Regulation Act,
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