Case Note & Summary
The present batch of petitions and transferred cases challenged the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949, introduced by amendment w.e.f. 04.05.2017, and the RBI Circular dated 12.02.2018 which promulgated a revised framework for resolution of stressed assets. The petitioners, including Dharani Sugars and Chemicals Ltd. and various other companies, contended that the circular was ultra vires the Banking Regulation Act and the Insolvency and Bankruptcy Code, 2016, and that it was arbitrary and unreasonable. The Union of India and the RBI defended the provisions and the circular. The Supreme Court, after considering the submissions, upheld the constitutional validity of Sections 35AA and 35AB, holding that they are not excessive delegation and are within legislative competence. The Court also upheld the validity of the RBI circular, holding that it is within the powers of RBI under Section 35A, 35AA, 35AB of the Banking Regulation Act and Section 45L of the RBI Act, 1934. The Court found that the circular does not suffer from arbitrariness or unreasonableness, and that the requirement of 100% lender consent for restructuring and mandatory reference to IBC for large accounts within 180 days is reasonable and in public interest. The Court dismissed all petitions and transferred cases.
Headnote
A) Constitutional Law - Delegated Legislation - Validity of Sections 35AA and 35AB - Sections 35AA and 35AB of the Banking Regulation Act, 1949 were introduced by amendment w.e.f. 04.05.2017. The Court upheld their constitutional validity, holding that they are not excessive delegation and are within the legislative competence of Parliament. The provisions empower the Central Government to authorize RBI to issue directions to banks for resolution of stressed assets, and the RBI to issue such directions. (Paras 1-10) B) Banking Law - RBI Circular - Validity of Circular dated 12.02.2018 - The RBI circular issued under Sections 35A, 35AA, 35AB of the Banking Regulation Act, 1949 and Section 45L of the RBI Act, 1934 was held to be valid. The Court held that the circular is within the powers of RBI and does not suffer from arbitrariness or unreasonableness. The requirement of 100% lender consent for restructuring and mandatory reference to IBC for large accounts (₹20 billion and above) within 180 days was upheld. (Paras 11-30) C) Insolvency and Bankruptcy Code - Interaction with Banking Regulation Act - The circular does not override the IBC but works in tandem with it. The mandatory reference to IBC under the circular is not ultra vires the IBC as the IBC itself allows financial creditors to file applications. The circular merely sets a timeline for banks to do so. (Paras 31-40) D) Administrative Law - Arbitrariness - Timelines for Resolution - The timelines prescribed in the circular (180 days for large accounts) were held to be reasonable and not arbitrary. The Court noted that the circular provides a clear framework for early identification of stress and time-bound resolution, which is in public interest. (Paras 41-50)
Issue of Consideration
Whether Sections 35AA and 35AB of the Banking Regulation Act, 1949 are constitutionally valid; whether the RBI Circular dated 12.02.2018 is ultra vires the Banking Regulation Act and the Insolvency and Bankruptcy Code, 2016; whether the circular is arbitrary and unreasonable.
Final Decision
The Supreme Court dismissed all petitions and transferred cases, upholding the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 and the RBI Circular dated 12.02.2018.
Law Points
- Constitutional validity of Sections 35AA and 35AB of Banking Regulation Act
- 1949
- RBI's power to issue directions under Section 35A
- validity of RBI circular dated 12.02.2018
- requirement of 100% lender consent for restructuring
- mandatory reference to IBC for large accounts
- non-arbitrariness of timelines
- no requirement of prior government approval under Section 35AA
