3 April 2019: The Reserve Bank of India (RBI) could revise its bankruptcy circular to ensure that an amended version of the directive complies with norms, although the regulator cannot dictate a blanket order for taking all companies above a threshold to insolvency courts, lawyers said.
On Tuesday, the Supreme Court quashed the RBI’s February 12, 2018 circular, putting a 180-day deadline to refer bad loan accounts over Rs. 2,000 crore to the Insolvency and Bankruptcy Code (IBC). The apex court order was in response to a petition filed by power producers in August last year, challenging the constitutional validity of the RBI circular.
“This order means that the RBI cannot issue a blanket guideline without the approval of the government. But the majority part of the February 12 circular is still valid,” said Sapan Gupta, national head, banking and finance practice at Shardul Amarchand Mangaldas. “The RBI can rework the circular after consultation with the government. The only thing clear is that the RBI has to come up with specific guidelines for industries and not a general direction.”
The central bank is unlikely to challenge the SC order.
“We do not want to challenge an order which is already passed now. Our legal team is studying the order minutely and we may decide on the future course of action depending on that. The governor will meet the press after the policy announcement on Thursday where he may address the issue,” said a senior RBI official.
RBI will announce its monetary policy decision on Thursday.
Lawyers, however, believe that Tuesday’s judgement will not affect cases filed before the February 12 circular was announced.
“This judgement will affect the applications filed solely on the basis of the RBI circular. This means all applications filed on the basis of default or account being NPA can proceed under IBC,” said KP Sreejith, manging partner at IndiaLaw LLP.
In other words, this ruling will not affect the 12 cases, such as those of Essar Steel. These constituted 25 per cent of the NPAs and were directed to be specifically taken to the insolvency courts by the RBI. The 28 large cases which made up 40 per cent of the NPAs, referred late 2017, will also not be effected.
“But this ruling has now opened a Pandora’s box. It is entirely possible that anyone can approach the courts and seek exemption from being dragged into insolvency by quoting this order,” said Babu Sivaprakasam, partner at ELP Law.