The Hindu Business Line
IBBI delves into SC order striking down RBI circular on stressed assets
The insolvency regulator Insolvency and Bankruptcy Board of India (IBBI) has summarised the Supreme Court’s landmark judgment that struck down the RBI’s February 12 circular last year on stressed assets, raising awareness on how the apex court has dealt with the issues concerned.
The analysis brings to the fore that, on various counts as held by the apex court, the circular is ultra vires and how the constitutionality of Section 35AA and 35AB of the Banking Regulation Act 1949 has been upheld.
The IBBI has, in its website, published an analysis of the SCruling on the fate of this circular in Dharani Sugars and Chemicals Ltd vs Union of India and others.
The analysis shows that the apex court has upheld the Banking Regulation (Amendment) Act 2017, introducing Sections 35AA and Sections 35AB as being constitutional (constitutionally valid).
While Section 35AA conferred the discretionary power on the RBI to instruct banks to commence insolvency proceedings against a defaulter, Section 35AB permits the RBI to frame policies for stressed asset resolution.
Commenting on the IBBI’s move to analyse the apex court ruling, Aseem Chawla, Managing Partner, ASC legal, told BusinessLine that the update which reflects the views of the legal division of the IBBI summarises the SC’s verdict suggesting that on various counts as held by the apex court the circular is ultra vires.
Many legal experts feel that although the SC may have struck down the RBI’s February 12 circular on stressed assets, the apex court has not curtailed the rights of banks to initiate insolvency proceedings on their own. This is a statutory right available to them under the Insolvency and Bankruptcy Code (IBC) as a financial creditor, they said.
This can continue to incentivise pre-bankruptcy restructurings, however with reduced compulsion / time constraints, according to a note by Khaitan & Co, a leading law firm.
The apex court ruling is likely to provide flexibility for preinsolvency restructurings. The banks and promoters of defaulting companies may welcome the flexibility to enter into consensual restructuring schemes and the availability of a lengthier window can also help achieve complex restructuring transactions in more realistic timetables (without the pressure of time periods set out in the circular).
However, it remains to be seen if the exemptions which were applicable to such restructuring schemes from applicability of SEBI regulations regarding change of control situations would continue to apply to contractual restructurings without the circular being in force, the Khaitan & Co note added.
Regardless of the technical merits of the judgment from a legislative competency and regulatory power perspective, as a policy matter, the RBI’s actions have been undermined in this specific sphere, according to the note. The ruling precludes the RBI from issuing any general directions to banks to initiate insolvency under the code.
Therefore, under Sections 35AA and 35AB, in the present form, the RBI can now only analyse specific cases of defaults and issue directions in respect of those pursuant to requisite authorisation of the Centre in this regard.
“Given that the RBI’s approach has encouraged parties to take meaningful action to resolve the distressed debt situation in India (and notwithstanding the highly litigated nature of the Corporate Insolvency Resolution Process ), it is debateable as to whether this judgment is a step in the right direction from a policy perspective”, the note from Khaitan & Co added.