Dharani Sugars and Chemicals Ltd. vs Union of India & Ors.

Banking Regulation Act, 1949 – s.35A, 35AA and 35AB – Reserve Bank of India Act, 1934 – s.45L – Reserve Bank of India issued a circular on 12.02.2018, by which RBI promulgated a revised framework for resolution of stressed assets – According to RBI, the said circular attempted to tell banks that insofar as huge debts over INR 2000 crore are concerned, they will be given a reasonable period of six months within which to either resolve stress assests or otherwise, if they cannot do so, would only then have to move under the insolvency and Bankruptcy Code, 2016 – It was also contended that the said circular traced its power from sections 21, 35A, 35AA and 35AB of the Banking Regulation Act and s.45L of the Reserve Bank of India Act – Petitioner contended that impugned RBI Circular dated 12.02.2018 was ultra vires the provisions of the Banking Regulation Act and the RBI Act – Held: Stressed assets can be resolved either through the Insolvency Code or otherwise – When resolution through the Code is to be effected, the specific power granted by s.35AA can alone be availed by the RBI – Prior to the enactment of s.35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have been issued such directions u/ss. 21 and 35A – But after s.35AA, it may do so only within the four corners of s.35AA – And power u/s.35AB r/w. 35A is to be exercised separately from the power conferred by s.35AA – Now, the directions that can be issued u/s. 35AA can only be in respect of specific defaults by specific debtors – This was also the understanding of the Central Government when it issued a notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the insolvency Code – Thus, any directions which are in respect of debtors generally, would be ultra vires s.35AA – In the instant case, impugned circular dated 12.02.2018 stated that as one of its sources, the power contained in s.45L of the RBI Act insofar as non-banking financial institution are concerned – However, there is nothing to show that the provisions of s.45L(3) were satisfied – Further, impugned Circular dated 12.02.2018 applied to banking and nonbanking institutions alike, therefore, they are inseparable insofar as the application of the impugned circular is concerned – It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned – For these reasons also, the impugned circular declared as ultra vires as a whole and declared to be of no effect in law – Insolvency and Bankruptcy Code, 2016. Banking Regulation Act, 1949 – ss.35A, 35AA and 35AB – Scheme of – Held: When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, s.35AA is the only source of power – When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within s.35A r/w. s.35AB – This also becomes clear from the fact that s.35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets – This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed – Insolvency and Bankruptcy Code, 2016

Disposing of the Transferred cases and Petitions, the Court HELD: CONSTITUTIONAL VALIDITY

1. The petitioners have argued that the Banking Regulation (Amendment) Ordinance, 2017 and the Banking Regulation (Amendment) Act, 2017 are unconstitutional on two grounds; (i) that the Sections i.e. 35AA and 35AB introduced are manifestly arbitrary; and (ii) that they suffer from absence of guidelines. [Para 16][340-H; 341-A]

2. None of the petitioners have been able to point out as to how either of these provisions is manifestly arbitrary. They are not excessive in any way nor do they suffer from want of any guiding principle. As a matter of fact, these amendments are in the nature of amendments which confer regulatory powers upon the RBI to carry out its functions under the Banking Regulation Act, 1949, and are not different in quality from any of the Sections which have already conferred such power. Thus, 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. [Para 16][342-C-F]

3. 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. Sections 14A, 17, 18, and

20 impose various restrictions on a banking company. Thus, it is prohibited from having a floating charge on assets; it has to maintain a reserve fund, and a cash reserve; and it cannot grant loans and advances on the security of its own shares, or on behalf of its directors, or any firm in which its directors are interested etc. A banking company is obligated to hold a license that is issued by the RBI, by which the RBI can impose such conditions as it thinks fit under Section 22 of the Act. Section 22(3), in particular, gives guidance as to how the banking company will run its business. These and other regulatory sections such as Sections 25, 29, 30, and 31, all give guidance as to how the RBI is to exercise these powers under the newly added provisions. Therefore, RBI rightly stated that there was no dearth of guidance for the RBI to exercise the powers delegated to it by these provisions. Consequently, the plea of constitutional validity fails. [Para 17][342-G-H; 347-H; 348-A-C]

ULTRA VIRES

4. 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-a-vis the powers of the RBI. [Para 29][360-D-E]

5. A conspectus of all these provisions ss.36AE, 36AF, 45Y, 52, 53 and 55A shows that 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. [Para 29][363-F-G]

6. The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA. [Para 30][363-H; 364-A]

7. The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed. Following this principle, therefore, it is clear that the RBI can only direct banking institutions to move under the Insolvency and Bankruptcy Code, 2016 if two conditions precedent are specified, namely, (i) that there is a Central Government authorisation to do so; and (ii) that it should be in respect of specific defaults. The Section, therefore, by necessary implication, prohibits this power from being exercised in any manner other than the manner set out in Section 35AA. [Para 31][364-B-G; H; 365-A]

8. It is significant that the power to issue directions given by Section 35AB is without prejudice only to the provisions of Section 35A, i.e., it has to be read in conjunction with Section 35A. What is of even greater significance is that Section 35AB is not without prejudice to the provisions contained in Section 35AA. This being so, it is clear that the power under Section 35AB, read with Section 35A, is to be exercised separately from the power conferred by Section 35AA. [Para 36][368-C-D]

9. The Press Note dated 05.05.2017, explained the new Sections 35AA and 35AB as the grant of two distinct and separate powers. Section 35AA has been inserted “to resolve specific stressed assets by initiating insolvency resolution process where required”. On the other hand, Section 35AB has been enacted so that the “RBI has also been empowered to issue other directions for resolution……” It is significant that Section 35AA is enacted exactly as it is in the Ordinance. So is Section 35AB, except for a minor addition in sub-section (1), which adds the words “any banking company or”. Indeed, even the Statement of Objects and Reasons introducing the same Sections by way of an Amendment Act makes it clear that the powers conferred for resolution of stressed assets, either by invoking the Insolvency Code or by other means, are separate and independent powers, as set out in paragraphs 3(a) and 3(b) of the said Statement of Objects and Reasons. Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows: (a) When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power; (b) When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A read with Section 35AB. This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed. [Para 38][369-C-H; 370-A]

10 Stressed assets can be resolved either through the Insolvency Code or otherwise. When resolution through the Code is to be effected, the specific power granted by Section 35AA can alone be availed by the RBI. When resolution de hors the Code is to be effected, the general powers under Sections 35A and 35AB are to be used. Any other interpretation would make Section 35AA otiose. In fact, RBI’s argument that the RBI can issue directions to a banking company in respect of initiating insolvency resolution process under the Insolvency Code under Sections 21, 35A, and 35AB of the Banking Regulation Act, would obviate the necessity of a Central Government authorisation to do so. Absent the Central Government authorisation under Section 35AA, it is clear that the RBI would have no such power. [Para 40][371-B-C]

11. Having grounded the power to issue directions to banking companies so far as the Insolvency Code is concerned, in Section 35AA, what is important to note is that the Section enables the Central Government to authorise the RBI to issue such directions in respect of “a default”. This is clear also from the Press Note dated 05.05.2017, which introduced the Ordinance which specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA. [Paras 41, 42][371-D-E; 372-F-H]

12. The impugned circular states as one of its sources, the power contained in Section 45L of the Reserve Bank of India Act, 1934 insofar as non-banking financial institutions are concerned. However, there is nothing to show that the provisions of Section 45L(3) have been satisfied in issuing the impugned circular. The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets. Further, it is clear that the impugned circular applies to banking and non-banking institutions alike, as banking and nonbanking institutions are often in a joint lenders’ forum which jointly lend sums of money to debtors. Such non-banking financial institutions are, therefore, inseparable from banking institutions insofar as the application of the impugned circular is concerned. It is very difficult to segregate the non-banking financial institutions from banks so as to make the circular applicable to them even if it is ultra vires insofar as banks are concerned. For these reasons also, 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. [Para 45] [374-C; 376-E-H; 377-A]

Harishankar Bagla v. State of M.P. [1955] 1 SCR 380; Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors.; Senior Electric Inspector v. Laxminarayan Chopra [1962] 3 SCR

146 ; State of U.P. v. Singhara Singh [1964] 4 SCR 485; Utkal Contractors & Joinery (P) Ltd. v. State of Orissa (1987) 3 SCC 279 : [1987] 3 SCR 317;

J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P. [1961] 3 SCR 185 – relied on.

Indian Banks’ Association v. Devkala Consultancy Service (2004) 11 SCC 1 : [2004] 1 Suppl. SCR 225 – held inapplicable

Manohar Lal Sharma v. Principal Secretary and Ors. (2014) 9 SCC 516:[2014] 8 SCR 446; Independent Power Producers Association of India v. Union of India and Ors. (Writ - C No. 18170 of 2018 at the Allahabad High Court); Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors. 2019 (2) SCALE 5; Shayara Bano v. Union of India (2017) 9 SCC 1: [2017] 7 SCR 797; Central Bank of India v. Ravindra, (2002) 1 SCC 367: [2001] 4 Suppl. SCR 323 ; Sudhir Shantilal Mehta v. Central Bureau of Investigation (2009) 8 SCC 1:[2009]

12 SCR 682 ; ICICI Bank Ltd. v. APS Star Industries Ltd. (2010) 10 SCC 1: [2010] 12 SCR 644; Bharat Sanchar Nigam Ltd. v. Telecom Regulatory Authority of India and Ors. (2014) 3 SCC 222 : [2013] 12 SCR 999; Union of India and Anr. v. Pfizer Ltd. and Ors. (2018) 2 SCC 39 : [2017] 12 SCR 179 ; Eera (through Dr. Manjula Krippendorf) v. State (NCT of Delhi) and Anr. (2017) 15 SCC 133 : [2017] 7 SCR 924 ; Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta (2019) 2 SCC 1; Asian Resurfacing of Road Agency (P) Ltd. v. Central Bureau of Investigation (2018) 16 SCC 299 : [2018] 2 SCR 1045 ; Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 ; State (NCT of Delhi) v. Brijesh Singh (2017) 10 SCC 779: [2017]

11 SCR 899; Commercial Tax Officer, Rajasthan v. Binani Cements Ltd. and Anr., (2014) 8 SCC 319: [2014]

3 SCR 1; Maru Ram and Ors. v. Union of India and Ors. (1981) 1 SCC 107:[1981] 1 SCR 1196

– referred to.

Royal College of Nursing of the United Kingdom v. Department of Health and Social Security [1981] 1 All ER 545 [HL] ; Comdel Commodities Ltd. v. Siporex Trade S.A. [1990] 2 All ER 552 [HL] ; McCartan Turkington Breen (A Firm) v. Times Newspapers Ltd., [2000] 4 All ER 913 ; Birmingham City Council v. Oakley [2001] 1 All ER 385 [HL] ; Taylor v. Taylor, [1875] 1 Ch. D. 426 – referred to.