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SC Strikes Down RBI Circular Asking Banks To Take Defaulting Companies To Insolvency [Read Judgment]

LIVELAW NEWS NETWORK
2 April 2019 7:25 AM GMT
SC Strikes Down RBI Circular Asking Banks To Take Defaulting Companies To Insolvency [Read Judgment]
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The Supreme Court today struck down the circular issued by the Reserve Bank of India on February 12, 2018 directing banks to initiate insolvency proceedings against companies having bad debts of Rs 2000 crores or above.The February 12 circular had directed banks to resolve debts over Rs 2000 crores within 180 days, failing which the corporate debtor would have to be taken to the...

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The Supreme Court today struck down the circular issued by the Reserve Bank of India on February 12, 2018  directing banks to initiate insolvency proceedings against companies having bad debts of Rs 2000 crores or above.

The February 12 circular had directed banks to resolve debts over Rs 2000 crores within 180 days, failing which the corporate debtor would have to be taken to the National Company Law Tribunal (NCLT) for insolvency action.Among other things, the Circular mandated that banks will have to disclose defaults even if the interest repayment is overdue by just one day, and will have to put a resolution plan in place within 180 days. All the extant debt resolutions mechanisms such as the CDR, SDR, S4A and JLF were also abolished by the RBI.

The implementation of the circular would have taken  several companies in the fields of power, sugar, shipping etc., including giants like Essar Power, GMR Energy, KSK Energy and Rattan India Power to insolvency.

In a major relief to these sectors, the SC bench of Justices R F Nariman and Vineet Saran today quashed the circular holding that a generic circular directing banks to take recourse to Insolvency and Bankruptcy Code was beyond the powers of Section 35AA of the Banking Regulation Act. The Court held that reference to IBC can be made only on a case to case basis, and that there cannot be a blanket direction to that effect. Detailed judgment is awaited.

The Circular was challenged by petitioners such as The Association of Power Producers (APP) and Independent Power Producers Association of India as suffering from non-application of mind, as it failed to draw a distinction between various forms of "stressed assets" from different industrial sectors. They further contended that the circular failed to distinguish between genuine and wilful defaulters.


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