Fate of the accounts covered by the decision of the Supreme Court of February 2018

The bone of contention for the question was whether RBI had the power to give such a directive to banks and financial institutions. The Supreme Court badyzed the extent of the RBI's powers under Section 35 AA of the BR Act and ruled that it could order banking and financial institutions to move under the IBC. if two preconditions were specified: (i) the central government should allow the RBI to issue a directive; and (ii) it should be due to a specific defect. Therefore, only the central government is empowered to authorize the RBI to issue instructions regarding banking and financial insights when initiating BAC proceedings for certain defaulters. Therefore, without the authorization of the central government, the RBI can not give such instructions.

In view of the above, the Court has held that "the incriminated circular is ultra vires and has no legal effect. Therefore, all actions under this Circular, including those by which the Code was triggered, must fall with that Circular. Therefore, all cases in which financial creditors have commenced proceedings against debtors under section 7 of the Code, solely because of the application of the Circular in issue, are."

This circular RBI estimated to have an impact on the total debt due to Rs. 3.8 million crores of lakh for 70 major borrowers, the majority of them in the energy sector. Since the Supreme Court invalidated the RBI circular in one fell swoop, there is uncertainty about the fate of IBC's lawsuits against these borrowers. There are debates about the fact that all these procedures will be closed and the banks will have to initiate the ab initio procedure.

However, in our opinion, the Supreme Court's order does not change the status quo, at least as far as the ongoing procedure is concerned. Instead, the order puts the ball directly on the banks' field to decide whether to continue the proceedings. The order says that the circular is ultra vires and that, therefore, the entire IBC procedure opened solely because of the circular does not exist in law. In fact, the circular is only a directive for banks and financial insights, and their right to take action against these borrowers does not flow from the circular. Such a right derives from the provision of the IBC; and as financial creditors, they have the right to sue themselves against defaulters even in the absence of such a directive on the part of RBI. Therefore, the banks can argue before the NCLT that they have initiated a lawsuit against a defaulter under IBC not only because of the circular, but also for their own account, by exercising their right under IBC as financial creditors because of the default of a particular borrower. In addition, the format of the request to initiate the proceedings before the IBC does not oblige the applicant to indicate whether the application was filed in accordance with the RBI circular.

The actual impact of the judgment will be felt on RBI, as it significantly restricts its power to act against distressed accounts and leaves that power entirely to the central government. Ideally, the government should give a general directive and RBI, as financial regulator, should be allowed to take a call on specific accounts to initiate an IBC procedure. The judgment puts RBI entirely at the mercy of the government, which can only act against the cases specified by the government.