SC quashes circular issued by RBI ordering banks to take defaulting companies to insolvency

The Reserve Bank of India (RBI) issued a notice on February 122019, stating that banks should initiate insolvency proceedings against companies having debts of Rs. 2000 crores and above which has been struck down today by the Hon’ble Supreme Court of India.

The circular issued by the RBI directed the banks to pay off their debts over Rs. 200 crores within 180 days, failing which the defaulter would be taken to the National Company Law Tribunal (NCLT) for insolvency action. Further, the circular directed that the banks should disclose defaults even if the interest repayment is overdue by just one day, and will have to draft a resolution plan to pay off debts within 180 days. All the resolution mechanisms like CDR, SDR, S4A, and JLF were annulled by the RBI.

While the notice is to be implemented on several companies from the field of power, sugar, shipping, etc. which includes, companies like Essar Power, GMR Energy, KSK Energy, and Rattan India Power. 

The Hon’ble bench provided relief to these sectors by quashing the circular today holding that a generic circular directing bank to take recourse to Insolvency and Bankruptcy Code was beyond the powers of Section 35AA of the Banking Regulation Act.The court further stated 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.

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