Supreme Court strikes down RBI's 12 February circular on bankruptcy proceedings, declares it illegal

In a major relief to stressed power, sugar and infrastructure firms, the Supreme Court on Tuesday quashed the Reserve Bank of India’s (RBI) 12 February, 2018 circular on bankruptcy proceedings and declared it ultra vires_,_ said media reports.

Supreme Court in its order today declared the February 12 RBI Circular relating to loan repayment of stressed accounts as ultra vires. The decision comes in a batch of petitions, transferred to Supreme Court from various High Courts where RBI’s circular was challenged. pic.twitter.com/3b5sQFt63r

— ANI (@ANI) April 2, 2019

A two-judge bench of Justice Rohinton Fali Nariman and Justice Vineet Saran pronounced the judgement while hearing a bunch of petitions on the maintainability of the RBI circular, said a report in Moneycontrol. Ultra vires means when a body or an individual is acting beyond its legal power or authority. Several companies, especially power firms, had sought the intervention of the Supreme Court saying the time given by the central bank was not enough to tackle the debt issue, said a Reuters report. Essar Power, GMR Energy, KSK Energy, and Rattan India Power, as well as the Association of Power Producers (APP) and Independent Power Producers Association of India (IPPAI) challenged the RBI circular, said a CNBC TV18 report. [caption id=“attachment_5534481” align=“alignleft” width=“380”] File image of the Supreme Court of India. PTI[/caption] Last month, the RBI had maintained that there was no dilution in its stand with regard to 12 February circular on stressed assets recognition and resolution. RBI’s 12 February circular The RBI on 12 February, 2018 came out with a revised framework for the expeditious resolution of bad loans, harmonising the existing guidelines with the norms specified in the Insolvency and Bankruptcy Code (IBC). The new guidelines have specified framework for early identification and reporting of stressed assets, said a PTI report. “In view of the enactment of the Insolvency and Bankruptcy Code (IBC), 2016, it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for the resolution of stressed assets,” the RBI said in a notification. Among other things, the RBI has decided to do away with the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued. The notification further said all accounts, including those where any of the schemes have been invoked but not yet implemented, will be governed by the revised framework. As per the revised guidelines, the banks will be required to identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) depending upon the period of default.   — With inputs from agencies