Case Note & Summary
The petitioners, Jayaswal Neco Industries Limited and Jayaswal Holdings Private Limited, filed a writ petition under Article 226 of the Constitution of India before the Bombay High Court challenging the validity of a circular dated 12.02.2018 issued by the Reserve Bank of India (RBI). The circular directed banks to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) against defaulting borrowers with outstanding amounts of Rs. 2000 crore and above, as part of a framework for resolution of stressed assets. The petitioners contended that the circular was ultra vires the Banking Regulation Act, 1949, as it exceeded RBI's powers and was arbitrary, violating Articles 14 and 19(1)(g) of the Constitution. They argued that the circular effectively mandated a one-size-fits-all approach without considering the viability of individual businesses. The respondents, including RBI and various banks, defended the circular as a necessary measure to tackle the growing problem of non-performing assets (NPAs) and to ensure financial stability. The court analyzed the scope of RBI's powers under Sections 35A and 35AB of the Banking Regulation Act, which empower RBI to issue directions in public interest and to prevent the affairs of banking companies from being conducted in a manner detrimental to depositors' interests. The court held that the circular was a valid exercise of these powers, as it aimed at timely resolution of stressed assets and was in public interest. The court also rejected the argument that the circular violated Article 19(1)(g), noting that the right to carry on business is subject to reasonable restrictions, and the circular was a reasonable measure to address systemic risks. The court further observed that the circular did not override the IBC but merely required banks to initiate proceedings under that Code, which is a valid legislative framework. Consequently, the court dismissed the writ petition and the notice of motion, upholding the validity of the circular.
Headnote
A) Banking Law - RBI's Power to Issue Directions - Sections 35A and 35AB of the Banking Regulation Act, 1949 - The court examined whether the RBI circular dated 12.02.2018 requiring banks to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 for defaulting accounts of Rs. 2000 crore and above was within RBI's powers. Held that the circular is a valid exercise of power under Sections 35A and 35AB, which empower RBI to issue directions in public interest and to prevent the affairs of any banking company from being conducted in a manner detrimental to depositors' interests. (Paras 10-15) B) Constitutional Law - Right to Carry on Business - Article 19(1)(g) of the Constitution of India - The petitioners argued that the circular infringed their right to carry on business. The court held that the right under Article 19(1)(g) is subject to reasonable restrictions in public interest, and the circular was a reasonable measure to address the problem of non-performing assets and ensure financial stability. (Paras 16-20) C) Insolvency and Bankruptcy Code, 2016 - Applicability of RBI Circular - The court held that the circular does not override the provisions of the IBC but merely requires banks to initiate proceedings under the IBC, which is a valid legislative scheme for resolution of insolvency. (Paras 21-25)
Issue of Consideration
Whether the RBI circular dated 12.02.2018 on resolution of stressed assets is ultra vires the Banking Regulation Act, 1949 and violative of Article 14, 19(1)(g) of the Constitution of India.
Final Decision
The writ petition and notice of motion are dismissed. The RBI circular dated 12.02.2018 is held to be valid and within the powers of RBI under the Banking Regulation Act, 1949.
Law Points
- RBI's power to issue directions under Sections 35A and 35AB of the Banking Regulation Act
- 1949
- validity of circulars
- resolution of stressed assets
- Insolvency and Bankruptcy Code
- 2016
- Article 226 of the Constitution of India
