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RBI's CIRCULAR ASKING THE BANKS TO TAKE DEFAULTING COMPANIES TO INSOLVENCY STRUCK DOWN BY SUPREME COURT

Team SoOLEGAL 2 Apr 2019 4:18pm

RBI's CIRCULAR ASKING THE BANKS TO TAKE DEFAULTING COMPANIES TO INSOLVENCY STRUCK DOWN BY SUPREME COURT

RBI Circular dated February 12 directed the banks to resolve debts of over Rs 2000 crores within 180 days. If they failed to do so, the corporate debtor would have to be taken to the National Company Law Tribunal (NCLT) for insolvency action.

The circular also mandated the banks to disclose defaults even if the interest repayment is overdue by just one day and 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.

Several companies like  Power, GMR Energy, KSK Energy and Rattan India Power would have become insolvent after implementation of the circular.

The petitioners The Association of Power Producers (APP) and Independent Power Producers Association of India challenged the petition as they were 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. 
The Supreme Court bench comprising of Justice R F Nariman and Justice Vineet Saran quashed the circular. They held 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. It was 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. 

The Supreme Court today, thus struck down the circular which was 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. 

Tagged: Reserve Bank of India   Supreme Court  
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