2019 (4) TMI 230 - SC - Indian Laws

Constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 - real bone of contention is a Reserve Bank of India (RBI) Circular issued on 12.02.2018, by which the RBI promulgated a revised framework for resolution of stressed assets - Held that - Section 21 makes it clear that the RBI may control advances made by banking companies in public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular. Similarly, under Section 35A, vast powers are given to issue necessary directions to banking companies in public interest, in the interest of banking policy, to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company, or to secure the proper management of any banking company. It is clear, therefore, that these provisions which give the RBI certain regulatory powers cannot be said to be manifestly arbitrary. When it comes to lack of any guidelines by which the power given to the RBI is to be exercised, it is clear from a catena of judgments that such guidance can be obtained not only from the Statement of Objects and Reasons and the Preamble to the Act, but also from its provisions. A cursory reading of Section 35A makes it clear that there is nothing in the provision which would indicate that the power of the RBI to give directions, when it comes to the Insolvency Code, cannot be so given. The width of the language used in the provision which only uses general words such as public interest and banking policy etc. makes it clear that if otherwise available, we cannot interdict the use of Section 35A as a source of power for the impugned RBI circular on the ground that the Insolvency Code, 2016 could not be said to have been in the contemplation of Parliament in 1956, when Section 35A was enacted. Dr. Singhvi s contention must, therefore, fail. Section 35AA makes it clear that the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power. There are many sections in the Banking Regulation Act which enumerate the powers of the Central Government vis- -vis the powers of the RBI. The Banking Regulation Act specifies that the Central Government is either to exercise powers along with the RBI or by itself. The role assigned, therefore, by Section 35AA, when it comes to initiating the insolvency resolution process under the Insolvency Code, is thus, important. Without authorisation of the Central Government, obviously, no such directions can be issued. The default would mean non- payment of a debt when it has become due and payable and is not paid by the corporate debtor. Therefore, what is important to note is that it is a particular default of a particular debtor that is the subject matter of Section 35AA. It must also be observed that the expression issue directions to banking companies generally or to any banking company in particular occurring in Section 35A is conspicuous by its absence in Section 35AA. This is another good reason as to why Section 35AA refers only to specific cases of default and not to the issuance of directions to banking companies generally, as has been done by the impugned circular. The impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law. Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est. The transferred cases and petitions are disposed off.

Summary

Issues Involved:
1. Constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949.
2. Validity of the RBI Circular dated 12.02.2018.
3. Sector-specific challenges, particularly in the power sector.
4. Interpretation of legislative provisions and their applicability.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949:

The petitioners argued that Sections 35AA and 35AB are unconstitutional on the grounds of manifest arbitrariness and lack of guidelines. The Court referred to its judgment in Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors., 2019 (2) SCALE 5, emphasizing that economic legislation should be viewed with great latitude. It was held that these sections are regulatory provisions made in public interest and do not suffer from manifest arbitrariness or lack of guiding principles. The Court noted that the provisions are in line with the RBI's regulatory functions under the Banking Regulation Act and are not excessive or disproportionate.

2. Validity of the RBI Circular dated 12.02.2018:

The Court examined whether the RBI Circular, which mandated the resolution of stressed assets through the Insolvency and Bankruptcy Code (IBC), was within the powers conferred by Sections 35A, 35AA, and 35AB of the Banking Regulation Act. It was noted that the RBI could only direct banks to initiate insolvency proceedings under the IBC if authorized by the Central Government under Section 35AA. The Court held that the RBI Circular was ultra vires as it was issued without such specific authorization and applied generally to all defaults above INR 2000 crore, contrary to the requirement of addressing specific defaults.

3. Sector-specific Challenges, Particularly in the Power Sector:

Dr. Abhishek Manu Singhvi, representing the power sector, argued that the RBI Circular failed to consider the unique challenges faced by the power sector, such as regulatory constraints, fuel shortages, and delayed payments by DISCOMs. The Court acknowledged the sector-specific issues and noted that the RBI Circular's "one size fits all" approach was criticized by various Parliamentary Standing Committee Reports. The Court highlighted the need for sector-specific measures and recognized the difficulties in achieving 100% lender consensus within the stipulated 180-day period.

4. Interpretation of Legislative Provisions and Their Applicability:

The Court discussed the principles of statutory interpretation, emphasizing that statutes should be interpreted as "always speaking" and applicable to contemporary situations. It was held that Section 35A of the Banking Regulation Act could not be used to direct banks to initiate insolvency proceedings under the IBC, as this power is specifically conferred by Section 35AA. The Court also noted that the RBI's powers under Section 45L of the RBI Act, concerning non-banking financial institutions, were not adequately considered in the impugned circular.

Conclusion:

The Supreme Court declared the RBI Circular dated 12.02.2018 as ultra vires Section 35AA of the Banking Regulation Act, rendering it of no effect in law. Consequently, all actions taken under the circular, including insolvency proceedings initiated based on it, were declared non-est. The Court emphasized the need for specific Central Government authorization for the RBI to direct banks to initiate insolvency proceedings under the IBC and highlighted the importance of sector-specific considerations in regulatory measures.