# DHARANI SUGARS AND CHEMICALS LTD v. UNION OF INDIA & ORS

- **Citation:** [2019] 6 S.C.R. 307
- **Court:** Supreme Court of India
- **Decided:** 2019-04-02
- **Bench:** R. F. Nariman, Vineet Saran
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/dharani-sugars-and-chemicals-ltd-v-union-of-india-ors-33860
- **Pages:** 71

## Headnote

Banking Regulation Act, 1949 - ss.35AA and 35AB - Validity
of - Petitioners contended that the Banking Regulation (Amendment)
Act, 2017, which introduced ss.35AA and 35AB are unconstitutional
on two grounds: (i) that the sections introduced are manifestly
arbitrary; and (ii) that they suffer from absence of guidelines -
Held: The Banking Regulation (Amendment) Act, 2017 brought these
amendments which confer regulatory powers upon the RBI to carry
out its functions under the Banking Regulation Act and are not
different in quality from any of the sections which have already
conferred such power - S.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, u/
s.35A, vast powers are given to issue necessary directions to banking
companies in public interest - Therefore, ss.35AA and 35AB which
give the RBI certain regulatory powers cannot be said to be manifestly
arbitrary - Insofar, guidelines by which the power given to the RBI
is to be exercised are concerned, there are catena of judgments that
such guidance can be obtained not only from the statement of objects
and reasons and preamble to the Act but also from its provisions -
There are other regulatory ss.25, 29, 30 and 31, all give guidance
as to how the RBI is to exercise these powers under the newly added
provisions - Consequently, plea of constitutional validity failed -
Banking Regulation (Amendment) Act, 2017.
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
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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,

## Text

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DHARANI SUGARS AND CHEMICALS LTD.
v.
 UNION OF INDIA & ORS.
(Transferred Case (Civil) No.66 of 2018)
In
(Transfer Petition (Civil) No.1399 of 2018)
APRIL 02, 2019
[R. F. NARIMAN AND VINEET SARAN, JJ.]
Banking Regulation Act, 1949 - ss.35AA and 35AB - Validity
of - Petitioners contended that the Banking Regulation (Amendment)
Act, 2017, which introduced ss.35AA and 35AB are unconstitutional
on two grounds: (i) that the sections introduced are manifestly
arbitrary; and (ii) that they suffer from absence of guidelines -
Held: The Banking Regulation (Amendment) Act, 2017 brought these
amendments which confer regulatory powers upon the RBI to carry
out its functions under the Banking Regulation Act and are not
different in quality from any of the sections which have already
conferred such power - S.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, u/
s.35A, vast powers are given to issue necessary directions to banking
companies in public interest - Therefore, ss.35AA and 35AB which
give the RBI certain regulatory powers cannot be said to be manifestly
arbitrary - Insofar, guidelines by which the power given to the RBI
is to be exercised are concerned, there are catena of judgments that
such guidance can be obtained not only from the statement of objects
and reasons and preamble to the Act but also from its provisions -
There are other regulatory ss.25, 29, 30 and 31, all give guidance
as to how the RBI is to exercise these powers under the newly added
provisions - Consequently, plea of constitutional validity failed -
Banking Regulation (Amendment) Act, 2017.
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
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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.
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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
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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]
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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]
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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
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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
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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
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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.
Case Law Reference
[2014] 8 SCR 446
referred to
Para 4
2019 (2) SCALE 5
referred to
Para 10
[2017] 7 SCR 797
referred to
Para 16
[1955] 1 SCR 380
relied on
Para 17
[1962] 3 SCR 146
relied on
Para 19
[2004] 1 Suppl. SCR 225 held inapplicable
Para 25
[2001] 4 Suppl. SCR 323 referred to
Para 27
[2009] 12 SCR 682
 referred to
Para 27
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[2010] 12 SCR 644
referred to
Para 27
[1875] 1 Ch. D. 426
 referred to
Para 31
(1964) 4 SCR 485
relied on
Para 31
[1987] 3 SCR 317
 relied on
Para 33
[2013] 12 SCR 999
 referred to
Para 35
 [2017] 12 SCR 179
 referred to
Para 35
[2017] 7 SCR 924
referred to
Para 37
 (2019) 2 SCC 1
referred to
Para 37
[2018] 2 SCR 1045
 referred to
Para 37
(2018) 2 SCC 674
referred to
Para 37
[2017] 11 SCR 899
 referred to
Para 37
 (1961) 3 SCR 185
relied on
Para 39
[2014] 3 SCR 1
referred to
Para 39
[1981] 1 SCR 1196
referred to
Para 43
CIVIL ORIGINAL/APPELLATE JURISDICTION: Transferred
Case (Civil) No.66 of 2018 in Transfer Petition (Civil) No.1399 of 2018
Under Article 139A (1) of The Constitution of India.
WITH
W.P.(C) Nos. 339, 802, 1086, 1110, 1124, 1142, 1138, 1156, 1153,
1166, 1206, 1212, 1236, 1296 of 2018, SLP(C) No. 31421 of 2018, W.P.
(C) Nos. 1316, 1308 and 1359 of 2018 T.C.(C) No. 65 of 2018 in T.P.
(C) No. 1404 of 2018, W.P.(C) No. 1363, 1364, 1374 of 2018, T.C.(C)
No. 71 of 2018 in T.P. (C) No. 1283 of 2018 T.C.(C) No. 73 of 2018 in
T.P. (C) No. 1285 of 2018 T.C.(C) No. 72 of 2018 in T.P. (C) No. 1284
of 2018, T.C.(C) No.75 of 2018 in T.P. (C) No. 1287 of 2018, T.C.(C)
No. 76 of 2018 in T.P. (C) No.1288 of 2018, T.C.(C) No. 74 of 2018 in
T.P. (C) No. 1286 of 2018, T.C.(C) No.70of 2018 in T.P. (C) No. 1403
of 2018, T.C.(C) No.69 of 2018 in T.P. (C) No. 1402 of 2018, T.C.(C)
No. 68 of 2018 in T.P. (C) No. 1401 of 2018, T.C.(C) No. 67 of 2018 in
T.P. (C) No. 1400/2018, W.P.(C) Nos. 1383, 1402, 1400, 1391, 1411,
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1410, 1438 of 2018, W.P.(C) No. 22 of 2019, W.P.(C) No. 1502 of 2018,
W.P.(C) No. 8, 9, 14, 36 50, 81, 117, 246 and 278 of 2019.
Attorney General for India, Tushar Mehta, SG, Vikramjit Banerjee
and Ms. Madhavi Diwan, ASGs, Navaniti Prasad Singh, Mukul Rohtagi,
K.V. Viswanathan, Rakesh Dwivedi, P.S. Narasimha, Sajjan Poovayya,
Dhruv Mehta, Arvind Datar, Sr. Advs., R. Balasubramanian, Rajat Nair,
Kanu Agrawal, Rajeev Ranjan Ranvijay Singh, G.S. Makker, Shraddha
Deshmukh, Ms. Haripriya, Arvind Kumar Sharma, M.K. Maroria, Birjesh
Kumar Sinha, Hitesh Kumar Sharma, Meetali Patel, Jeewesh Prakash,
Shantanu Sagar, T. Mahipal, Pulkit Deora, Udit Gupta (for M/s Udit
Kishan and Associates), Arvind Kumar Gupta, Mrs. Purti Marawaha
Gupta, Mrs. Heena George, Mrs. V. S. Lakshmi, A. Venayagam Balan,
Alok Dhir, Ms. Maneesha Dhir, Ms. Varsha Banerjee, Ashu Kansal,
Ms. Stuti Vats, T.V.S. Raghavendra Sreyas, Abhishek Singh, Ytharth
Kumar, J. Amal Anand, Ms. Aayushi Mishra, Vanshdeep Dalmia, Ms.
Shalini Kaul, Prasanna S., Aakarsh Kamra, Rajiv Shankar Dvivedi,
Sushant Sankar, Ms. Sweta Singh, Ms. Neha Mishra, Ms. Aarti Dwivedi,
Mahesh K. Chaudhary, Ms. Kusum Lata, P.V. Dinesh, Ms. T.P. Sindhu,
Mukund P. Unny, Lakshman R.S., Bineesh K., M/s Indialaw, Hemant
Singh, Nishant Kumar, Lakshyajit Singh Bagdwal, Ambuj Dixit, Ms. Divya
Roy, Anil Kumar Sangal, Siddharth Sangal, Ms. Nilanjani Tandon, Amar
Gupta, Mayank Mishra, Ashish Joshi, Divyam Agarwal, Ms. Diksha Rai,
Ishan Bisht, Ms. Palak Mahajan, Dhananjay Bhaskar Ray, Ravi
Raghunath, Mukunda Rao, Ms. Vrinda Bhandari, R. Venkatraman,
Ms. Praveena Gautam, Jitesh P. Gupta, Pawan Shukla, Raja Ram,
Ms. Liz Mathew, Rajendra Barot, Vivek Shetty, Jahan Chokshy, Ms.
Sansriti Pathak, Eklavya Dwivedi, Siddharth Iyer, Navneet R., Raghav
Mehrotra, Ananga Bhattacharyya, Rohit Rao N., Shourya Garg (for M/
s Veritas Legis), Dhruv Mohan, Ms. Astha Sharma, E.R. Kumar, Ms.
Sonal Gupta, Ishan Nagar, Raghav Bansal (for M/s Parekh & Co.),
Mrs. Garima Bajaj, Sudarsh Menon, Ms. Nimisha Menon, Vikram Hegde,
Chanchal Kumar Ganguli, Rahul Kumar, Ms. Hima Lawrence, Vishrov
Mukherjee, Pukhrambam Ramesh Kumar, Ms. Catherine Ayallore,
Priyardarshi Banerjee, Pratibhanu Singh Kharola, Ameya Vikram Mishra,
Rajesh Kumar-I, Anant Gautam, Ms. Shruti Vats, Ms. Khushboo
Aggarwal, Debayan Banerjee, Anmol Mehta, Sanjay Kapur, Ms. Megha
Karnwal, Bharath Gangadharan, Ms. Shubhra Kapur, Vipin Kumar Jai,
Vipul Jai, Dushyant Parashar, Shailly Dinkar, Som Raj Choudhary,
DHARANI SUGARS AND CHEMICALS LTD. v. UNION OF
INDIA & ORS.
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Prashant Kumar, Sovi Bipneet Singh, Ms. Vandana Sehgal, Iqram Govind
Singh, Pranaya Goyal, Aman Raj Gandhi, Abhishek Sharma, Yash Badkur,
Ritin Rai, Abhipsit Mishra, S.B. Arjun, Ms. Ishita Bist, Ms. Kritika
Bhardwaj, Ms. Meera Mathur, Vaijayant Paliwal, S.S. Shroff, Bishwajit
Dubey, Ms. Srideepa Bhattacharyya, Manpreet Lamba, Ms. Ruchi
Choudhury, Aman Singhania(for M/s Cyril Amarchand Mangaldas, O.P.
Gaggar, Aditya Gaggar, Milanka Chaudhury, Sarojanand Jha, Ashly
Cherian, Sanket Tiwari, Ms. Pragya Ohri, Abhirup Dasgupta, Ishaan
Duggal, Mohit D. Ram, Rajendra Beniwal, Rajesh P., Kaustubh Shukla,
Mrs. Lalita Kaushik, Nikhil Jain, Mahesh Agrawal, Sikhil Suri, Soumik
Ghosal, Himanshu Satija, Nishant Rao, Divyang Gobind Chandiramani,
Sandeep Ladda, Gaurav Singh, Ms. Neeha Nagpal, Arshit Anand, Ajay
Bhargava, Ms. Shally Bhasin, Ms. Aastha Mehta, Rajesh Kumar, Milinka,
Nidhi Ram Sharma, Jay Zaveri, Rishi Agrawala, Sumesh Dhawan,
Vatsala Kak, Ms. Wamika Trehan, Ms. Maithli Mundra, E.C. Agrawala,
Ms. Suruchii Aggarwal, Ms. Usha Nandini V., Ms. Reetu Sharma, Alok
Shukla, Neeraj Shekhar, Satish Kumar, Amit Kumar Pathak, Shiv Kumar
Suri, Puneet Singh Bindra, Balaji Srinivasan, Abhishek Agarwal, Anand
Shankar Jha, M/s Dharmaprabhas Law Associates, Rajesh Singh, Ashish
Rana, Arun Aggarwal, Dr. Vinod Kumar Tewari, Brijesh Kumar Tamber,
Rabin Majumder, Mrs. Anil Katiyar, Gaurav Agrawal, Advs. for the
appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J. 1. The present batch of petitions and
transferred cases raise questions as to the constitutional validity of
Sections 35AA and 35AB of the Banking Regulation Act, 1949
["Banking Regulation Act"] introduced by way of amendment w.e.f.
04.05.2017. The real bone of contention is a Reserve Bank of India
["RBI"] Circular issued on 12.02.2018, by which the RBI promulgated
a revised framework for resolution of stressed assets. The important
clauses of the aforesaid circular are set out hereinbelow:
"Resolution of Stressed Assets - Revised Framework
1. The Reserve Bank of India has issued various instructions aimed
at resolution of stressed assets in the economy, including
introduction of certain specific schemes at different points of time.
In view of the enactment of the Insolvency and Bankruptcy Code,
2016 (IBC), it has been decided to substitute the existing guidelines
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with a harmonised and simplified generic framework for resolution
of stressed assets. The details of the revised framework are
elaborated in the following paragraphs.
I. Revised Framework
A. Early identification and reporting of stress
2. Lenders1 shall identify incipient stress in loan accounts,
immediately on default2, by classifying stressed assets as special
mention accounts (SMA) as per the following categories:
SMA Sub-categories Basis for classification -
 Principal or interest payment or
 any other amount wholly or
 partly overdue between
 SMA-0
 1-30 days
 SMA-1
 31-60 days
 SMA-2
 61-90 days
3. As provided in terms of the circular DBS.OSMOS.No.14703/
33.01.001/2013-14 dated May 22, 2014 and subsequent
amendments thereto, lenders shall report credit information,
including classification of an account as SMA to Central Repository
of Information on Large Credits (CRILC) on all borrower entities
having aggregate exposure3 of 50 million and above with them.
The CRILC-Main Report will now be required to be submitted on
a monthly basis effective April 1, 2018. In addition, the lenders
shall report to CRILC, all borrower entities in default (with
aggregate exposure of 50 million and above), on a weekly basis,
at the close of business on every Friday, or the preceding working
day if Friday happens to be a holiday. The first such weekly report
shall be submitted for the week ending February 23, 2018.
1 Lenders under these guidelines would generally include all scheduled commercial
banks (excluding RRBs) and All India Financial Institutions, unless specified otherwise.
2 'Default' means non-payment of debt when whole or any part or instalment of the
amount of debt has become due and payable and is not repaid by the debtor or the
corporate debtor, as the case may be. For revolving facilities like cash credit, default
would also mean, without prejudice to the above, the outstanding balance remaining
continuously in excess of the sanctioned limit or drawing power, whichever is lower,
for more than 30 days.
DHARANI SUGARS AND CHEMICALS LTD. v. UNION OF
INDIA & ORS. [R.F. NARIMAN, J.]
3Aggregate exposure under the guidelines would include all fund based and non-fund
based exposure with the lenders.
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B. Implementation of Resolution Plan
4. All lenders must put in place Board-approved policies for
resolution of stressed assets under this framework, including the
timelines for resolution. As soon as there is a default in the borrower
entity's account with any lender, all lenders " singly or jointly "
shall initiate steps to cure the default. The resolution plan (RP)
may involve any actions / plans / reorganisation including, but not
limited to, regularisation of the account by payment of all over
dues by the borrower entity, sale of the exposures to other entities
/ investors, change in ownership, or restructuring4. The RP shall
be clearly documented by all the lenders (even if there is no change
in any terms and conditions).
C. Implementation Conditions for RP
5. A RP in respect of borrower entities to whom the lenders
continue to have credit exposure, shall be deemed to be
'implemented' only if the following conditions are met:
a. the borrower entity is no longer in default with any of the
lenders;
b. if the resolution involves restructuring; then
i. all related documentation, including execution of necessary
agreements between lenders and borrower / creation of
security charge / perfection of securities are completed by
all lenders; and
ii. the new capital structure and/or changes in the terms of
conditions of the existing loans get duly reflected in the books
of all the lenders and the borrower.
6. Additionally, RPs involving restructuring / change in ownership
in respect of 'large' accounts (i.e., accounts where the aggregate
4 Restructuring is an act in which a lender, for economic or legal reasons relating to the
borrower's financial difficulty (An illustrative non-exhaustive list of indicators of
financial difficulty are given in the Appendix to Annex-I), grants concessions to the
borrower. Restructuring would normally involve modification of terms of the advances
/ securities, which may include, among others, alteration of repayment period / repayable
amount / the amount of instalments / rate of interest; roll over of credit facilities;
sanction of additional credit facility; enhancement of existing credit limits; and,
compromise settlements where time for payment of settlement amount exceeds three
months.
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exposure of lenders is 1 billion and above), shall require
independent credit evaluation (ICE) of the residual debt5 by credit
rating agencies (CRAs) specifically authorised by the Reserve
Bank for this purpose. While accounts with aggregate exposure
of 5 billion and above shall require two such ICEs, others shall
require one ICE. Only such RPs which receive a credit opinion of
RP46 or better for the residual debt from one or two CRAs, as
the case may be, shall be considered for implementation. Further,
ICEs shall be subject to the following:
a. The CRAs shall be directly engaged by the lenders and the
payment of fee for such assignments shall be made by the
lenders.
b. If lenders obtain ICE from more than the required number
of CRAs, all such ICE opinions shall be RP4 or better for the
RP to be considered for implementation.
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D. Timelines for Large Accounts to be Referred under IBC
8. In respect of accounts with aggregate exposure of the lenders
at 20 billion and above, on or after March 1, 2018 ('reference
date'), including accounts where resolution may have been
initiated under any of the existing schemes as well as accounts
classified as restructured standard assets which are currently in
respective specified periods (as per the previous guidelines), RP
shall be implemented as per the following timelines:
i. If in default as on the reference date, then 180 days from the
reference date.
ii. If in default after the reference date, then 180 days from the
date of first such default.
9. If a RP in respect of such large accounts is not implemented as
per the timelines specified in paragraph 8, lenders shall file
insolvency application, singly or jointly, under the Insolvency and
DHARANI SUGARS AND CHEMICALS LTD. v. UNION OF
INDIA & ORS. [R.F. NARIMAN, J.]
5 The residual debt of the borrower entity, in this context, means the aggregate debt
(fund based as well as non-fund based) envisaged to be held by all the lenders as per
the proposed RP.
6 Annex - 2 provides list of RP symbols that can be provided by CRAs as ICE and
their meanings.
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Bankruptcy Code 2016 (IBC)7 within 15 days from the expiry of
the said timeline8.
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12. For other accounts with aggregate exposure of the lenders
below 20 billion and, at or above 1 billion, the Reserve Bank
intends to announce, over a two-year period, reference dates for
implementing the RP to ensure calibrated, time-bound resolution
of all such accounts in default.
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V. Withdrawal of extant instructions
18. The extant instructions on resolution of stressed assets such
as Framework for Revitalising Distressed Assets, Corporate Debt
Restructuring Scheme, Flexible Structuring of Existing Long Term
Project Loans, Strategic Debt Restructuring Scheme (SDR),
Change in Ownership outside SDR, and Scheme for Sustainable
Structuring of Stressed Assets (S4A) stand withdrawn with
immediate effect. Accordingly, the Joint Lenders' Forum (JLF)
as an institutional mechanism for resolution of stressed accounts
also stands discontinued. All accounts, including such accounts
where any of the schemes have been invoked but not yet
implemented, shall be governed by the revised framework.
19. The list of circulars/directions/guidelines subsumed in this
circular and thereby stand repealed from the date of this circular
is given in Annex - 3.
20. The above guidelines are issued in exercise of powers
conferred under Section 35A, 35AA (read with S.O.1435 (E) dated
May 5, 2017 issued by the Government of India) and 35AB of the
Banking Regulation Act, 1949; and, Section 45L of the Reserve
Bank of India Act, 1934."
2. It will be noticed that the salient features of this circular are
that restructuring in respect of borrower entities de hors the Insolvency
7 Applicable in respect of entities notified under IBC.
8 The prescribed timelines are the upper limits. Lenders are free to file insolvency
petitions under the IBC against borrowers even before the expiry of the timelines, or
even without attempting a RP outside IBC.
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and Bankruptcy Code, 2016 ["Insolvency Code"] can only occur if
the resolution plan that involves restructuring is agreed to by all lenders,
i.e., 100 per cent concurrence. Secondly, what has been chosen to be
the subject matter of the circular is debts with an aggregate exposure of
INR 2000 crore and over on or after 01.03.2018. With respect to such
debts, if default persists for 180 days from 01.03.2018, or if the date of
first default is after 01.03.2018, then 180 days calculated with effect
from that date, lenders shall file applications singly or jointly under the
Insolvency Code within 15 days from the expiry of the aforesaid 180
days. In short, unless a restructuring process in respect of debts with an
aggregate exposure of over INR 2000 crore is fully implemented on or
before 195 days from the reference date or date of first default, the
lenders will have to file applications as financial creditors under the
Insolvency Code. It will be noticed that the sources of power for issuance
of the aforesaid circular have been stated to be Section 35A of the
Banking Regulation Act read with the Central Government's circular
dated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section
45L of the Reserve Bank of India Act, 1934 ["RBI Act"]. It may be
stated here that by an order dated 11.09.2018, this Court allowed various
transfer petitions and made orders in Writ Petition No. 1086 of 2018, by
which it was ordered that status quo as of today shall be maintained in
the meantime. As a result, insofar as the petitions and transferred cases
in this Court are concerned, the circular has, in effect, been stayed on
and from 11.09.2018.
3. The charge on behalf of the petitioners was led by Dr. Abhishek
Manu Singhvi, learned Senior Advocate. Dr. Singhvi appears on behalf
of the Association of Power Producers, representing the power sector
in general. According to the learned Senior Advocate, the Electricity
Act, 2003 ["Electricity Act"] was enacted as a complete code to
regulate the private sector. According to him, unlike sectors such as the
steel and cement sector, the power sector is fully regulated and tariffs
that are fixed can only be after they are so determined / adopted by
Electricity Regulatory Commissions under Section 62 or Section 63 of
the Electricity Act. The power sector, therefore, is a player in a restricted
market - power can only be purchased by distribution licensees or trading
licensees under Section 12 of the Electricity Act, which can only be
done with the prior approval of State Electricity Regulatory Commissions.
Even transmission of power requires prior approval of transmission
DHARANI SUGARS AND CHEMICALS LTD. v. UNION OF
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licensees, and therefore, substitutability of buyers is impossible since the
means to supply power are not readily available. To buttress his
submissions, Dr. Singhvi relied heavily upon the reports of the
Parliamentary Standing Committees which were looking into the problems
of the power sector from time to time. Thus, the 37th Parliamentary
Standing Committee Report on Stressed / Non-performing Assets in the
Electricity Sector dated 07.03.2018 recorded that in the private sector,
there were 34 stressed projects amounting to 40,130 MWs out of
85,550.30 MWs which have a debt exposure of INR 1,74,468 crore.
Out of these, non-performing assets ["NPAs"] amounting to 34,044 crores
are primarily on account of Government policy changes, failure to fulfil
commitments by the Government, delayed regulatory response and nonpayment of dues by DISCOMs. This Report, therefore, recommended
the setting up of a task force to look into the NPA problem in the power
sector.
4. Dr. Singhvi then went into non-availability of fuel and took us
through the New Coal Distribution Policy of 18.10.2007, by which Thermal
Power Projects were assured supply of 100 per cent coal. This changed
drastically as a result of Government of India restrictions in 2013, which
restricted supply of coal to only those Independent Power Producers
(IPPs) with long term Power Purchase Agreements (PPAs) and
otherwise limited supply to 65 per cent of coal requirement.