Summary
The Supreme Court upheld Sections 35AA and 35AB of the Banking Regulation Act but declared RBI’s 12 February 2018 stressed-assets circular ultra vires. Directions requiring insolvency initiation had to satisfy Section 35AA: Central Government authorisation and specific defaults by specific debtors. A general direction covering a class of debtors could not bypass those limits through broader regulatory powers. Insolvency proceedings initiated solely because of the invalid circular were declared non-est.
Issues
- Whether Sections 35AA and 35AB were constitutionally valid.
- Whether general regulatory powers authorised the circular’s mandatory insolvency directions.
- Whether the circular survived for non-banking institutions or proceedings based solely upon it.
Provisions considered
- Sections 35AA and 35AB, Banking Regulation Act, 1949Upheld constitutionally, but construed as distinct powers: Section 35AA alone governs directions to initiate insolvency, while Section 35AB with Section 35A concerns other stressed-asset resolution directions. (¶¶ 15–17, 29–44)
- Section 45L(3), Reserve Bank of India Act, 1934The required due regard to the institutions’ establishment conditions, objects, statutory responsibilities and market effects was not shown; the circular could not be sustained separately for non-banking institutions. (¶ 45)
Held
- The regulatory provisions were neither manifestly arbitrary nor unguided. Legislative purposes and the wider banking statute supplied adequate guidance, with appropriate latitude for economic legislation. (¶ 16–17)
- The age of a statutory provision alone does not prevent its application to new circumstances within its language. Nevertheless, once Section 35AA specifically prescribed how insolvency directions could issue, general powers could not dispense with its safeguards. (¶¶ 18–31, 38–40)
- RBI could direct insolvency initiation only with Central Government authorisation and in respect of specific defaults by specific debtors. General directions covering debtors by category did not satisfy the statutory scheme or the May 2017 authorisation. (¶ 29–44)
- Section 45L’s requirements were not shown to have been met. Banking and non-banking lenders were inseparable for application of this circular, which was therefore invalid as a whole. Proceedings under Section 7 IBC commenced solely because of it were non-est; other contentions required no decision. (¶ 45–46)
Result
Transferred cases and petitions disposed of. Sections 35AA/35AB upheld; RBI circular of 12 February 2018 declared ultra vires and ineffective. Actions under it fell, including Section 7 insolvency proceedings initiated solely because of its operation.