SUPREME COURT RESCUES INSOLVENT COMPANIES FROM MANDATORY BANKRUPTCY

In a recent Judgment passed by the Supreme Court of India in the case Dharani Sugars and Chemicals Ltd v Union of India dated 2nd April 2019, the Supreme Court struck down the  Reserve Bank of India ( “RBI”) Circular dated 12.02.2018 as unconstitutional and Ultra Vires.

Pursuant to said Circular the Banks were vested with the power to initiate insolvency proceeding if the board-approved policy for the resolution of stressed assets failed. The Circular entailed banks to start the Resolution Process as soon as a borrower defaulted on a term loan of 2000 crore or more and could not cure it in 180 days.

The source of power for the said Circular was derived from Section 35 AA and 35 AB of the Banking Regulation Act, 1949 (as and when amended). The Section was challenged as it was de hors the Insolvency and Bankruptcy Code, 2016 and thus arbitrary.

The Supreme Court held that without authorisation of the Central Government, no such directions can be issued. The Supreme Court, however, held that the RBI is empowered to exercise its right under Section 35 AA and that the Section, along with Section 35 AB (which gives power to the RBI to issue directions on stressed assets), was not manifestly arbitrary.

The result of this Judgment is that the banks and financial institutions are now free to take an independent call with regard to resolution of debts. Such decisions would depend from  case to case depending on the nature of default made by the borrower. The Judgment now opens avenues to rescue sick Companies outside court rather than forced insolvency proceedings acting detrimental to the interest of the Companies.

The Judgment has resulted in declaring all cases in which borrowers have been proceeded against by Financial Creditors as per the RBI Circular to be declared non- est.

The Judgment came as a major rescue for all industries that were facing action from banks owing to mandatory insolvency vide the circular of the RBI. There were genuine cases where companies unable to resolve stressed assets in such a short period of 180 days even though they were seriously making the efforts. This Judgment comes as a breather to them to help in resolving stressed assets and putting their company back on its feet.

This Judgment, however does not in any manner effect all genuine insolvency proceedings that have been initiated by financial or operational creditors who have not taken action under the RBI Circular.

Sushila Ram Varma

Chief Consultant

The Indian Lawyer

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