Circular has no effect in law: Apex court

New Delhi: Quashing the circular, a Bench of Justices Rohinton Nariman and Vineet Saran held that a generic circular directing banks to take recourse to the Insolvency and Bankruptcy Code was beyond the powers of Section 35AA of the Banking Regulation Act. The court held that reference to IBC can be made only on a case-to-case basis and that there cannot be a blanket direction to that effect.

Writing the judgment, Justice Nariman said, "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 non-banking institutions are often members 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.

While declaring the circular as ultra vires as a whole, the bench declared it 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, the court stalled further proceedings before the tribunal of all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code.