Supreme Court strikes down RBI’s Feb 12 circular on debt resolution

SC struck down a RBI circular that gave defaulting companies 180 days to agree on a resolution plan with lenders or be taken to bankruptcy court to recover debt of Rs 2,000 crore and above. The bench said the February 12, 2018, circular was beyond the scope of the RBI’s powers.

“The impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law,” said the two-judge bench led by justice RF Nariman. “Consequently, all actions taken under the said circular, including actions by which Insolvency Code has been triggered must fall along with the said circular.”

The court’s decision restored the discretion of banks on debt resolution. The ruling may affect stressed assets worth around Rs 2.2 lakh crore in many sectors and mean unwinding the insolvency resolution process in some instances, legal experts said. Also on the bench was justice Vineet Saran.

Senior advocate Abhishek Manu Singhvi, who opposed the circular on behalf of the stressed

power sector, said the verdict would possibly have a knock-on effect on the resolution process, depending on the circumstances in which it was invoked.

“Once the court declares a circular as ultra vires, all necessary consequences will follow unless the court specifically chooses to make it prospective,” he said. “All action taken up to now either by banks or creditors under the circular and not been consummated will stand unravelled. Individual cases pending under IBC(Insolvency and Bankruptcy Code) so long as they were entirely under the circular would be withdrawn.”

Proceedings will not lapse automatically and instances of companies changing hands in the IBC may not have to be unwound, he said.

The order came as a relief to companies in stressed sectors such as power, shipping, steel, telecom, infrastructure, sugar, fertiliser and sports infrastructure, which had blamed extraneous reasons such as regulatory controls that capped prices.