The Supreme Court of India examined various petitions contesting the constitutional legitimacy of Sections 35AA and 35AB of the Banking Regulation Act, 1949, which were amended on May 4, 2017, ...
No Acts & Articles mentioned in this case
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
TRANSFERRED CASE (CIVIL) NO.66 OF 2018
IN
TRANSFER PETITION (CIVIL) NO.1399 OF 2018
DHARANI SUGARS AND CHEMICALS LTD. … PETITIONER
VERSUS
UNION OF INDIA & ORS. … RESPONDENTS
WITH
WRIT PETITION (CIVIL) NO.339 OF 2018
WRIT PETITION (CIVIL) NO.802 OF 2018
WRIT PETITION (CIVIL) NO.1086 OF 2018
WRIT PETITION (CIVIL) NO.1110 OF 2018
WRIT PETITION (CIVIL) NO.1124 OF 2018
WRIT PETITION (CIVIL) NO.1142 OF 2018
WRIT PETITION (CIVIL) NO.1138 OF 2018
WRIT PETITION (CIVIL) NO.1156 OF 2018
WRIT PETITION (CIVIL) NO.1153 OF 2018
WRIT PETITION (CIVIL) NO.1166 OF 2018
WRIT PETITION (CIVIL) NO.1206 OF 2018
2
WRIT PETITION (CIVIL) NO.1212 OF 2018
WRIT PETITION (CIVIL) NO.1236 OF 2018
WRIT PETITION (CIVIL) NO.1296 OF 2018
SLP(C) NO. 31421 OF 2018
WRIT PETITION (CIVIL) NO.1316 OF 2018
WRIT PETITION (CIVIL) NO.1308 OF 2018
WRIT PETITION (CIVIL) NO.1359 OF 2018
TRANSFERRED CASE (CIVIL) NO.65 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1404 OF 2018
WRIT PETITION (CIVIL) NO.1363 OF 2018
WRIT PETITION (CIVIL) NO.1364 OF 2018
WRIT PETITION (CIVIL) NO.1374 OF 2018
TRANSFERRED CASE (CIVIL) NO.71 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1283 OF 2018
TRANSFERRED CASE (CI VIL) NO.73 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1285 OF 2018
TRANSFERRED CASE (CIVIL) NO.72 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1284 OF 2018
TRANSFERRED CASE (CIVIL) NO.75 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1287 OF 2018
3
TRANSFERRED CA SE (CIVIL) NO.76 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1288 OF 2018
TRANSFERRED CASE (CIVIL) NO.74 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1286 OF 2018
TRANSFERRED CASE (CIVIL) NO.70 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1403 OF 2018
TRANSFERRED CASE (CIVIL) NO.69 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1402 OF 2018
TRANSFERRED CASE (CIVIL) NO.68 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1401 OF 2018
TRANSFERRED CASE (CIVIL) NO.67 OF 2018
IN
TRANSFER PETITION (CIVIL) NO. 1400 OF 2018
WRIT PETITION (CIVIL) NO.1383 OF 2018
WRIT PETITION (CIVIL) NO.1402 OF 2018
WRIT PETITION (CIVIL) NO.1400 OF 2018
WRIT PETITION (CIVIL) NO.1391 OF 2018
WRIT PETITION (CIVIL) NO.1411 OF 2018
WRIT PETITION (CIVIL) NO.1410 OF 2018
WRIT PETITION (CIVIL) NO.1438 OF 2018
WRIT PETITION (CIVIL) NO.22 OF 2019
WRIT PETITION (CIVIL) NO.1502 OF 2018
4
WRIT PETITION (CIVIL) NO.8 OF 2019
WRIT PETITION (CIVIL) NO.9 OF 2019
WRIT PETITION (CIVIL) NO.14 OF 2019
WRIT PETITION (CIVIL) NO.36 OF 2019
WRIT PETITION (CIVIL) NO.50 OF 2019
WRIT PETITION (CIVIL) NO.81 OF 2019
WRIT PETITION (CIVIL) NO.117 OF 2019
WRIT PETITION (CIVIL) NO.246 OF 2019
WRIT PETITION (CIVIL) NO.278 OF 2019
JUDGMENT
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:
5
“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 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. Lenders
1
shall identify incipient stress in loan
accounts, immediately on default
2
, 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
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.
6
aggregate exposure
3
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.
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
restructuring
4
. 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;
3
Aggregate exposure under the guidelines would include all fund based and non-fund based
exposure with the lenders.
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.
7
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 exposure of lenders is ₹ 1 billion
and above), shall require independent credit evaluation
(ICE) of the residual debt
5
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 RP4
6
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.
xxx xxx xxx
D. Timelines for Large Accounts to be Referred
under IBC
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.
8
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 Bankruptcy Code 2016
(IBC)
7
within 15 days from the expiry of the said
timeline
8
.
xxx xxx xxx
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.
xxx xxx xxx
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
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.
9
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
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
10
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
11
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
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 37
th
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
12
policy changes, failure to fulfil commitments by the Government,
delayed regulatory response and non-payment 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. Another setback occurred in August/September,
2014 as coal mines allocated to the power sector were cancelled by
the Supreme Court by a judgment in Manohar Lal Sharma v.
Principal Secretary and Ors., (2014) 9 SCC 516. Remedial
measures such as the SHAKTI Scheme were introduced only after
three years of the Supreme Court judgment on 22.05.2017. Even this
Scheme limited supply of coal to 75 per cent of the assured coal
supply as against what was assured in 2007. All this was commented
on by the 37
th
and 40
th
Parliamentary Standing Committee Reports.
13
In so far as the gas-based plants are concerned, the 42
nd
Parliamentary Standing Committee Report referred to the same tale
of woe as in coal based power plants – gas, in which the power
sector was originally given priority, was later placed in 2013-14 under
a no-cut category, leading to drastic reduction in supply of gas to the
power sector. Dr. Singhvi also referred to various reports showing
that as on October, 2018, DISCOMs only paid INR 8,710 crore
against dues of approximately INR 39,500 crore to generating
companies. This situation gets exacerbated by delay in adjudication
and consequent payment by DISCOMs. He then referred to
preferential treatment that is given to power companies in the public
sector as opposed to power companies in the private sector, and
argued that against total stressed assets of 66,000 MWs in the
private sector, stressed assets in the public sector amount to nil.
Lack of PPAs being entered into was another cause of concern. Out
of the total stressed capacity of 40,130 MWs identified in the 37
th
Parliamentary Standing Committee Report, PPAs have been
executed only for the capacity of 17,708 MWs, as a result of which
long term commitments qua fuel supply etc. are lacking. According to
him, the impact of the RBI Circular was directly focused upon by the
40
th
Parliamentary Standing Committee Report. The 40
th
14
Parliamentary Standing Committee has analysed the suitability and
impact of the impugned RBI Circular after consultation with the RBI,
major banks, and financial institutions as well as the power sector
associations. Key observations in the Report are:
“(a) As per Department of Financial Services, Ministry of
Finance, “one size fits all” approach of the RBI is
erroneous.
(b) Lenders like the Rural Electrification Corporation and
the State Bank of India have submitted that
implementing an optimal solution is impossible within the
180-day time period specified by the impugned RBI
Circular. The State Bank of India has stated that 12
months’ time is required to implement a resolution plan.
As per the prescribed timelines, every stressed project of
the power sector will land in the NCLT.
(c) Arriving at 100 per cent consensus of lenders for
approval and implementation of the resolution plan is
difficult, especially when there are projects with multiple
lenders.
(d) The Power Finance Corporation pointed out that
even in case of a successfully running project like the
Chhattisgarh project, they could only recover INR 2,500
crore out of a total of debt of INR 8,300 crore, i.e., 70 per
cent haircut. Thus, there is significant value erosion.
(e) The State Bank of India highlighted the need for
synchronisation between the RBI’s guidelines and
resolution of the systemic issues of the electricity sector.”
After due examination and enquiry, the 40
th
Parliamentary Standing
Committee Report of August 2018 has made the following
recommendations:
15
“(a) Appropriate, relevant, and sector-specific measures
should be explored to address the issues faced by power
sector. Instead of adopting sector-agnostic approach for
stress-resolution, the RBI should look at sector-friendly
measures.
(b) Revised framework introduced by the RBI has been
done ignoring the prevailing realities.
(c) Repayment of 20 per cent of the outstanding principal
debt as per the RBI Circular is impracticable for power
sector entities, and accordingly, the circular
disincentivizes restructuring with the existing promoters.
(d) Forced sale before the NCLT will cause a big
sacrifice of public money without any benefit to the
economy or the power sector.
(e) The power sector should be protected since it is
going through a transition phase from a low-demand-
low-supply situation to a moderately-high-demand
situation, which is temporary in nature.”
5. Dr. Singhvi then referred to a challenge that was made to the
RBI Circular in the Allahabad High Court in Independent Power
Producers Association of India v. Union of India and Ors., Writ -
C No. 18170 of 2018. He referred to a copy of the order dated
31.05.2018, by which the Allahabad High Court ordered:
“We request the Secretary, Ministry of Finance, Union of
India, to hold a meeting in the month of June, 2018 of
respondents 2 to 5 through their Secretaries and a
representative of the petitioners’ association to consider
their grievance and see whether any solution to the
problem is possible, in the light of observations made by
the Thirty-Seventh Report of Standing Committee on
Energy presented to Lok Sabha on 7.3.2018 with regard
to stressed/non-performing assets in electricity sector.
Though, we could not go through the report, our
16
attention was specifically drawn to some observations in
Part-II of the report, which reads thus:
“The Committee are of the considered view that
providing finances, though vital, to the project is
only one of the several factors essential for the
commissioning of the project. As of now,
commissioned plants worth of thousands of
Mws are under severe financial stress and are
currently under SMA-1/2 stage or on the brink
of becoming NPA. This is due to fuel shortage,
sub-optimal loading, untied capacities, absence
of FSA and lack of PPA, etc. These projects
were commissioned on the basis of national
need/ demand of electricity, availability of all
other essentials required in this regard.
However, due to unforeseen circumstances,
these plants are suffering from cash flows,
credit rating, interest servicing etc. Hence,
simply applying the RBI guidelines
mechanically by the banks, fi nancial
institutions, joint lender forums will push these
plants further into trouble without any hope of
recovery.”
It is needless to mention that the petitioners’
representatives shall supply a copy of this order and of
the writ petition with annexures to all the respondents
within one week from today. We only observe that action
may be avoided on the basis of the impugned circular
dated 12.2.2018 issued by respondent no.2-Reserve
Bank of India addressed to all Scheduled Commercial
Banks and All India Financial Institutions, against
members of the petitioners association, subject to
condition that the member(s) is/are not wilful defaulter(s)
till the meeting is conducted by the Secretary, Ministry of
Finance, Union of India. We also observe that the
Secretary, Ministry of Finance shall communicate the
date and time of the meeting to all concerned, including
the President of the petitioners’ association, well in
advance.”
17
6. Dr. Singhvi then referred to the detailed order passed by the
Allahabad High Court in the aforesaid case on 27.08.2018, in which
he referred to the stand taken by the Union of India as follows:
“24.1. …… As observed earlier, the Central Government
is in favour of granting them some more time so as to
save the power sector in the larger interest. Mr. Tushar
Mehta, learned ASG, submitted that it is desirable, while
considering the “sector (power) specific issues” that a
timeline prescribed under the circular be made effective
after 180 days from 27.08.2018 and subsequent steps
be taken by the parties based upon the reports of the
High Level Empowered Committee presided over by the
Cabinet Secretary. He submitted, the time can be
extended at this stage and not once process under IBC
is set in motion.”
He also referred to the fact that a High Level Empowered Committee
is to be set up as follows:
“42. In this backdrop, I am inclined to direct the High
Level Empowered Committee to submit its report within
two months from the date of its constitution. The Ministry
of Power shall invite a senior officer of the RBI, after
consultation with the Governor of RBI, as a member of
the High Level Empowered Committee forthwith. In the
meantime, I observe that the Central Government should
consider whether it would like to issue directions under
Section 7 of the RBI Act on the basis of the report and
other material, including reports of the Standing
Committee within 15 days from today in the light of the
observations made in this order. In view thereof, it is not
desirable to grant any interim relief at this stage. This
shall not preclude the petitioner-Associations or its
members from applying for urgent relief, if the
circumstances so demand, placing the request and
factual details in respect of such an action. This order
shall not curtail the rights/powers of the financial
18
creditors under Section 7 of IBC or even of the RBI in
issuing directions in specific case(s) under Section 35AA
of BR Act to initiate corporate insolvency resolution
process under Chapter II of Part II of IBC, in any given
case, including the petitioners or members of the
petitioners’ Association.”
7. Dr. Singhvi then referred to the Report dated 12.11.2018 of the
High Level Committee so constituted. This Report made various
recommendations. It stated:
“1. Linkage coal may be allowed to be used against short
term PPAs and power be sold through Discovery of
Efficient Energy Price (DEEP) portal following a
transparent bidding process.
2. A nodal agency may be designated which may invite
bids for procurement of bulk power for medium term for 3
to 5 years in appropriate tranches, against pre-declared
linkage by Coal India Limited (CIL).
3. NTPC can act as an aggregator of power, i.e., procure
power through transparent competitive bidding process
from such stressed power plants and offer that power to
the DISCOMs against PPAs of NTPC till such time as
NTPC’s own concerned plants/units are commissioned.
4. Ministry of Coal may earmark for power, at least 60
per cent of the e-auction coal, and this should be in
addition to the regular coal requirement of the power
sector.
5. If there is a shortfall in the supply of coal and it is
attributable to the Ministry of Coal or Railways; such
shortfall need not lapse and be carried over to the
subsequent months up to a maximum of three months.
6. Old and high heat rate plants not complying with new
environment norms may be considered for retirement in
a phased and timebound manner at the same time
avoiding any demand/supply mismatch.
19
7. Public Financial Institutions (PFIs) providing the Bill
Discounting facility may also be covered by the Tri-
partite Agreement (TPA) i.e. in case of default by the
DISCOM, the RBI may recover the dues from the
account of States and make payment to the PFIs.
8. PPAs, Fuel Supply Agreements (FSA) and LTOA for
transmission of power, EC/FC clearances, and all other
approvals including water, be kept alive and not
cancelled by the respective agencies even if the project
is referred to NCLT or is acquired by any other entity. All
of these may be linked to the plant and not the Promoter.
9. In order to revive gas based power plants, Ministry of
Power and Ministry of Petroleum & Natural Gas may
jointly devise a scheme in line with the earlier e-bid
RLNG Scheme (supported by PSDF).”
Dr. Singhvi, therefore, argued that despite the fact that a
representative of the RBI attended meetings of the Parliamentary
Standing Committee, the RBI Circular was issued in complete
disregard of the recommendations of such Reports, both before and
after the impugned circular. According to him, therefore, to apply a
180-day limit to all sectors of the economy without going into the
special problems faced by each sector would treat unequals equally
and would be arbitrary and discriminatory, and therefore, violative of
Article 14 of the Constitution of India. Also, picking up at random all
defaults amounting to INR 2000 crore and above, as well as the fact
that even a lender whose stake is only 1 per cent can stall a
20
resolution process de hors the Insolvency Code make the circular
manifestly arbitrary and violative of Article 14 on this score as well.
8. Apart from the aforesaid submissions, Dr. Singhvi referred in
great detail to the relevant sections of the Banking Regulation Act
and the RBI Act, and argued that the impugned circular was ultra
vires the provisions of those Acts. According to him, Section 35A and
Section 35AB of the Banking Regulation Act cannot possibly be the
source of power for the impugned circular. Section 35A was
introduced by an Amendment Act of 1956 and cannot, therefore, be
used to empower the RBI to relegate companies to insolvency under
the Insolvency Code as it did not exist at the time, or to give
directions for resolution of stressed assets. He strongly referred to
and relied upon Indian Banks’ Association v. Devkala
Consultancy Service, (2004) 11 SCC 1 [“Indian Banks’
Association”] for the proposition that the RBI’s functions under
Section 35A are confined to the boundaries of the RBI Act and the
Banking Regulation Act and not to other statutes, such as the
Insolvency Code. He also argued that Sections 35AA and 35AB are
part of one composite scheme. Section 35AA alone refers to, and can
alone be the source of power for directing banking and non-banking
21
companies to file applications under the Insolvency Code. Section
35AB clearly refers to resolution of stressed assets in a manner
which is de hors the Insolvency Code. He then referred to the circular
of the Central Government dated 05.05.2017 which empowered the
RBI to issue directions qua individual defaults that are committed.
This being so, a general circular applying to all defaults of loans
above INR 2000 crore, without having reference to the facts of each
individual case would, therefore, be ultra vires and bad in law. For
this purpose, he strongly relied upon the Press Note that introduced
Sections 35AA and 35AB as well as the Statement of Objects and
Reasons introducing the said Sections by the Amending Act of 2017.
He also argued that in any case, Sections 35AA and 35AB, being
manifestly arbitrary provisions, are violative of Article 14 of the
Constitution of India. Further, they are also arbitrary on the ground of
excessive delegation of power.
9. Shri Mukul Rohatgi, Shri Sajan Poovayya, Shri K.V.
Viswanathan, Shri Neeraj Kishan Kaul, Shri Navaniti Prasad Singh,
Shri P.S. Narsimha, Shri Arvind P. Datar, and Shri Gopal Jain,
learned Senior Advocates, and Shri Pulkit Deora, Smt. Purti Marwaha
Gupta, and Shri E.R. Kumar, learned Advocates, have also supported
22
the submissions of Dr. Singhvi. These counsel have appeared in
cases involving many other sectors, such as telecom, steel,
infrastructure, sports infrastructure, sugar, fertiliser, shipyard, etc.
Each of them has highlighted the difficulties faced as a result of
Government policies and other reasons for financial stress in all these
sectors, which have nothing to do with the efficiency of management
of companies operating in these sectors. All of them have adopted
the arguments of Dr. Singhvi in stating that, without looking into each
individual sector’s problems and attempting to solve them, the RBI
circular applies down the board to good and bad alike, and, despite
the fact that some corporate debtors are on the brink of resolution,
the chopper of 180 days comes down on them and they are driven
into the Insolvency Code. The Government has recognised that, for
example, in the sports infrastructure sector, much larger gestation
periods are necessary in which capital infrastructure investments take
place and which consequently require long periods for resolution.
They have also argued with various nuances of their own as to how
the RBI circular is both arbitrary and ultra vires the Banking
Regulation Act and the RBI Act.
23
10. Shri Rakesh Dwivedi, learned Senior Advocate appearing on
behalf of the RBI, has taken us through various provisions of the RBI
Act and Banking Regulation Act and has impressed upon us the fact
that the regulatory regime laid down in these Acts must be construed
broadly, being in public interest, in the interest of banking policy, and
above all, in the interest of depositors. The RBI Act and the
Insolvency Code are intricately related to the operation of the credit
system of the country, and must therefore, be given an expansive
interpretation. According to the learned Senior Advocate, the RBI
Circular is only an attempt 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 assets or
otherwise, if they cannot do so, would only then have to move under
the Insolvency Code. According to him, clause 4 of the RBI Circular
makes it clear that greater flexibility is given in this period of six
months for banking and non-banking financial institutions to resolve
stressed assets even de hors earlier restrictive circulars that have
been done away with by the circular dated 12.02.2018 so that an
effort be made to resolve stressed assets within a reasonable period,
after which it becomes incumbent on such institutions to move the
Insolvency Code. According to him, the circular is not manifestly
24
arbitrary. On the contrary, it is in public interest and in the interest of
the national economy to see that evergreening of debts does not
carry on indefinitely. Therefore, these huge amounts that are due and
owing should come back into the economy for further productive use.
Either they can so come back within the six months’ grace period
granted by the circular or through the route of the Insolvency Code.
He also made it clear that the Parliamentary Standing Committee
Reports are for the purpose of Parliament, which must then act upon
them. None of the Reports that have been referred to have been
acted upon by Parliament, and therefore, that cannot take the matter
much further. Also, it is important to notice that though the executive,
i.e., the Government could also have acted in terms of these Reports,
it has chosen not to do so. For this purpose, he relied upon Section 7
of the RBI Act, under which the Central Government may, from time
to time, give such directions to the RBI that it may consider necessary
in public interest, after consultation with the Governor of the RBI. The
sheet anchor of the petitioners’ case, therefore, disappears as all
these Parliamentary Standing Committee Reports do not take the
petitioners anywhere, not having been acted upon either by the
Parliament or by the Central Government. This is for the very good
reason that ultimately, it is in public interest to either resolve stressed
25
assets within a certain timeframe, or if incapable of such resolution,
the route of the Insolvency Code should then be followed. So far as
the vires of Sections 35AA and 35AB are concerned, Shri Dwivedi
relied upon our recent judgment in Swiss Ribbons Pvt. Ltd. and
Anr. v. Union of India and Ors., 2019 (2) SCALE 5 [“Swiss
Ribbons”], saying that great leeway must be given to Parliament to
deal with the problems which affect the national economy as a whole.
There is adequate guiding principle and there is no manifest
arbitrariness in any of the aforesaid provisions. Further, there is no
question of excessive delegation of power either, as guidance can be
obtained from the Preamble of the Banking Regulation Act together
with its provisions. Insofar as the RBI Circular is concerned, he
argued that it is traceable to four sources of power, namely, Sections
21, 35A, 35AA and 35AB of the Banking Regulation Act. Insofar as
non-banking financial companies are concerned, it is traceable to
Section 45L of the RBI Act. According to the learned Senior
Advocate, a general circular of this kind can certainly be issued in
public interest and in the interest of the national economy. Any
restrictive reading of any of these provisions will only do harm to the
economy of the country as a whole. Broadly read, therefore, the RBI
Circular cannot be said to be ultra vires.
26
11. Shri Tushar Mehta, learned Solicitor General for India, confined
his submissions to the constitutional validity of Sections 35AA and
35AB of the Banking Regulation Act, and the validity of the Central
Government circular dated 05.05.2017. According to the learned
Solicitor General, Sections 35AA and 35AB are regulatory provisions
made in public interest that cannot possibly be said to be manifestly
arbitrary in any way. He relied heavily upon the judgment of Swiss
Ribbons (supra). Further, the aforesaid Sections cannot be said to
be unguided provisions as the RBI gets sufficient guidance from the
Preamble as well as other provisions of the Banking Regulation Act.
He further submitted that the authorisation of the Central Government
with respect to Section 35AA has to be general in nature, after which,
the RBI must exercise such power with due deliberation and with
sector-specific care as the expert financial regulator and central bank
of the country. He submitted that ideally, there ought to be a sector
wise contingency analysis by the RBI before exercising power
provided by the Central Government to it under Section 35AA. In any
case, so far as the power sector is concerned, he was of the view that
the RBI ought to have treated it differently from all other sectors in
view of the steps that the Central Government is taking in order to
bring back the power sector on its feet.
27
12. At this juncture, it is important to note the genesis of the
impugned circular. By a press release dated 13.06.2017, the RBI
identified certain accounts for reference by banks under the
Insolvency Code. This press release reads as follows:
“RBI identifies Accounts for Reference
by Banks under the Insolvency and Bankruptcy
Code (IBC)
The Reserve Bank of India had issued a Press Release
on May 22, 2017 outlining the steps taken and those on
the anvil pursuant to the promulgation of the Banking
Regulation (Amendment) Ordinance, 2017. The Press
Release had mentioned inter alia that the RBI would be
constituting a Committee comprised majorly of its
independent Board Members to advise it in regard to the
cases that may be considered for reference for
resolution under the Insolvency and Bankruptcy Code,
2016 (IBC).
2. An Internal Advisory Committee (IAC) was accordingly
constituted and it held its first meeting on June 12, 2017.
The IAC, in the meeting, agreed to focus on large
stressed accounts at this stage and accordingly took up
for consideration the accounts which were classified
partly or wholly as non-performing from amongst the top
500 exposures in the banking system.
3. The IAC also arrived at an objective, non-discretionary
criterion for referring accounts for resolution under IBC.
In particular, the IAC recommended for IBC reference all
accounts with fund and non-fund based outstanding
amount greater than ₹ 5000 crore, with 60% or more
classified as non-performing by banks as of March 31,
2016. The IAC noted that under the recommended
criterion, 12 accounts totaling about 25 per cent of the
current gross NPAs of the banking system would qualify
for immediate reference under IBC.
28
4. As regards the other non-performing accounts which
do not qualify under the above criteria, the IAC
recommended that banks should finalise a resolution
plan within six months. In cases where a viable
resolution plan is not agreed upon within six months,
banks should be required to file for insolvency
proceedings under the IBC.
5. The Reserve Bank, based on the recommendations of
the IAC, will accordingly be issuing directions to banks to
file for insolvency proceedings under the IBC in respect
of the identified accounts. Such cases will be accorded
priority by the National Company Law Tribunal (NCLT).
6. The details of the resolution framework in regard to
the other non-performing accounts will be released in the
coming days.”
13. At this stage, as a first step, the Internal Advisory Committee
[“IAC”] decided to consider the stressed assets within the top 500
exposures of the banking system as on 31.03.2017. This set of 500
accounts was arrived at as per the statement generated from the
Central Repository of Information on Large Credits [“CRILC”]
database. Of the said top 500 exposures, it was noted that 71
accounts had been partly or wholly classified as NPAs while the other
429 were not classified as NPA by any bank. For the purpose of this
first list, the following criteria were applied:
a. Accounts where the funded plus non-funded
outstanding was more than INR 5000 crore;
29
b. Accounts where more than 60 per cent of the
total outstanding by value was NPA as on March
31, 2016.
Consequently, 12 accounts which met the above criteria were
referred for resolution under the Insolvency Code vide RBI’s direction
dated 15.06.2017. It is pertinent to note that the accounts in the First
List constituted around 25 per cent of the NPAs in the system and the
cumulative fund-based and non-fund-based outstanding therein
amounted to INR 197,769 crore.
14. The IAC subsequently met again and decided, on 25.08.2017,
that out of the 59 remaining NPA accounts of the top 500 exposures,
accounts which are materially NPA (i.e., where 60 per cent of the
total outstanding has become NPA by 30.06.2017) may be given time
till 13.12.2017 for resolution. If the banks fail to finalise and
implement a viable resolution plan by the said date, banks will be
required to file applications under Insolvency Code before
31.12.2017. The IAC noted that applying this criterion will cover 29
NPA accounts, with total outstanding of INR 135,846 crore and total
fund-based NPAs of INR 111,848 crore as on 30.06.2017. It is
pertinent to note that on 28.08.2017, the RBI issued a letter directing
30
banks to attempt resolution of the accounts in this Second List by
13.12.2017. As regards the residual accounts, out of the initially
identified 71 NPA accounts, the IAC recommended that such
accounts may be addressed through a steady-state framework for
resolution of stressed assets in a time-bound manner and failing such
resolution, the accounts be referred to for resolution under the
Insolvency Code. Accordingly, the RBI formulated and issued the
revised framework vide its circular dated 12.02.2018.
15. Meanwhile, the Ministry of Finance issued a notification dated
05.05.2017 under Section 35AA as follows:
“MINISTRY OF FINANCE
(Department of Financial Services)
ORDER
New Delhi, the 5th May, 2017
S.O. 1435(E).―In exercise of the powers conferred by
Section 35AA of the Banking Regulation Act, 1949 (10 of
1949), the Central Government hereby authorises the
Reserve Bank of India to issue such directions to any
banking company or banking companies which may be
considered necessary to initiate insolvency resolution
process in respect of a default, under the provisions of
the Insolvency and Bankruptcy Code, 2016.”
This happened to be on the very next day on which the Banking
Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA
and 35AB as amendments to the Banking Regulation Act. A Press
31
Note of the Ministry of Finance of 05.05.2017 explains the genesis of
the Ordinance thus:
“Press Information Bureau
Government of India
Ministry of Finance
05-May-2017
The promulgation of Banking Regulation (Amendment)
Ordinance, 2017 will lead to effective resolution of
stressed assets, particularly in consortium or multiple
banking arrangements.
The Ordinance enables the Union Government to
authorise the Reserve Bank of India (RBI) to direct
banking companies to resolve specific stressed assets.
The promulgation of the Banking Regulation
(Amendment) Ordinance, 2017 inserting two new
Sections (viz. 35AA and 35AB) after Section 35A of the
Banking Regulation Act, 1949 enables the Union
Government to authorise the Reserve Bank of India
(RBI) to direct banking companies to resolve specific
stressed assets by initiating insolvency resolution
process, where required. The RBI has also been
empowered to issue other directions for resolution, and
appoint or approve for appointment, authorities or
committees to advise banking companies for stressed
asset resolution.
This action of the Union Government will have a direct
impact on effective resolution of stressed assets,
particularly in consortium or multiple banking
arrangements, as the RBI will be empowered to
intervene in specific cases of resolution of non-
performing assets, to bring them to a definite conclusion.
The Government is committed to expeditious resolution
of stressed assets in the banking system. The recent
enactment of Insolvency and Bankruptcy Code (IBC),
2016 has opened up new possibilities for time bound
resolution of stressed assets. The SARFAESI and Debt
Recovery Acts have been amended to facilitate
recoveries. A comprehensive approach is being adopted
32
for effective implementation of various schemes for
timely resolution of stressed assets.”
(emphasis supplied)
The Banking Regulation (Amendment) Ordinance, 2017 was then
enacted as follows:
“MINISTRY OF LAW AND JUSTICE
4
th
May, 2017
An Ordinance further to amend the Banking Regulation
Act, 1949.
WHEREAS the stressed assets in the banking system
have reached unacceptably high levels and urgent
measures are required for their resolution;
AND WHEREAS the Insolvency and Bankruptcy Coe,
2016 has been enacted to consolidate and amend the
laws relating to reorganisation and insolvency resolution
of corporate persons, partnership firms and individuals in
a time bound manner for maximisation of value of assets
to promote entrepreneurship, availability of credit and
balance the interest of all the stakeholders;
AND WHEREAS the provisions of Insolvency and
Bankruptcy Code, 2016 can be effectively used for the
resolution of stressed assets by empowering the banking
regulator to issue directions in specific cases;
AND WHEREAS Parliament is not in session and the
President is satisfied that circumstances exist which
render it necessary for him to take immediate action;
NOW, THEREFORE, in exercise of the powers
conferred by clause (1) of article 123 of the Constitution,
the President is pleased to promulgate the following
Ordinance:
1. (1) This Ordinance may be called the Banking
Regulation (Amendment) Ordinance, 2017.
(2) It shall come into force at once.
33
2. In the Banking Regulation Act, 1949, after section
35A, the following sections shall be inserted, namely:
‘35AA. The Central Government may by
order authorise the Reserve Bank to issue
directions to any banking company or banking
companies to initiate insolvency resolution
process in respect of a default, under the
provisions of the Insolvency and Bankruptcy
Code, 2016.
Explanation. – For the purposes of this
section, “default” has the same meaning
assigned to it in clause (12) of section 3 of the
Insolvency and Bankruptcy Code, 2016.
35AB. (1) Without prejudice to the provisions
of section 35A, the Reserve Bank may, from
time to time, issue directions to the banking
companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or
more authorities or committees with such
members as the Reserve Bank may appoint or
approve for appointment to advise banking
companies on resolution of stressed assets.”
(emphasis supplied)
This Ordinance was replaced by the Banking Regulation
(Amendment) Bill, 2017 dated 14.07.2017. The Statement of Objects
and Reasons for the aforesaid Bill reads as follows:
“THE BANKING REGULATION
(AMENDMENT) BILL, 2017
xxx xxx xxx
STATEMENT OF OBJECTS AND REASONS
Stressed assets in the banking system, or non-
performing assets have reached unacceptably high
levels and hence, urgent measures are required for their
speedy resolution to improve the financial health of
34
banking companies for proper economic growth of the
country. Therefore, it was considered necessary to make
provisions in the Banking Regulation Act, 1949 for
authorising the Reserve Bank of India to issue directions
to any banking company or banking companies to
effectively use the provisions of the Insolvency and
Bankruptcy Code, 2016 for timely resolution of stressed
assets.
2. It was accordingly decided to make amendments to
the Banking Regulation Act, 1949. Since Parliament was
not in session and immediate action was required to be
taken, the Banking Regulation (Amendment) Ordinance,
2017 was promulgated by the President on the 4th May,
2017.
3. The Banking Regulation (Amendment) Bill, 2017
which seeks to replace the Banking Regulation
(Amendment) Ordinance, 2017, provides for the
following, namely:—
(a) to confer power upon the Central
Government for authorising the Reserve Bank
to issue directions to any banking company or
banking companies to initiate insolvency
resolution process in respect of a default, under
the provisions of the Insolvency and Bankruptcy
Code, 2016;
(b) to confer power upon the Reserve Bank to
issue directions to banking companies for
resolution of stressed assets and also allow the
Reserve Bank to specify one or more
authorities or committees to advise banking
companies on resolution of
stressed assets; and
(c) to amend section 51 of the Act so as to
make therein the reference of proposed new
sections 35AA and 35AB.
4. The Bill seeks to replace the said Ordinance.
xxx xxx xxx
14
th
July, 2017.”
(emphasis supplied)
35
Sections 35AA and 35AB were then legislatively introduced as
follows:
“THE BANKING REGULATION
(AMENDMENT) ACT, 2017
[25th August, 2017]
xxx xxx xxx
2. In the Banking Regulation Act, 1949 (hereinafter
referred to as the principal Act), after section 35A, the
following sections shall be inserted, namely:—
‘35AA. The Central Government may, by order,
authorise the Reserve Bank to issue directions to any
banking company or banking companies to initiate
insolvency resolution process in respect of a default,
under the provisions of the Insolvency and Bankruptcy
Code, 2016.
Explanation.—For the purposes of this section,
“default” has the same meaning assigned to it in clause
(12) of section 3 of the Insolvency and Bankruptcy Code,
2016.
35AB. (1) Without prejudice to the provisions of
section 35A, the Reserve Bank may, from time to time,
issue directions to any banking company or banking
companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more
authorities or committees with such members as the
Reserve Bank may appoint or approve for appointment
to advise any banking company or banking companies
on resolution of stressed assets’.
xxx xxx xxx”
CONSTITUTIONAL VALIDITY
16. The petitioners have argued that the aforesaid Ordinance and
Amendment Act are unconstitutional on two grounds; (i) that the
Sections introduced are manifestly arbitrary; and (ii) that they suffer
36
from absence of guidelines. Insofar as the first challenge is
concerned, this Court has, in a recent judgment in Swiss Ribbons
(supra), made it clear that economic legislation is to be viewed with
great latitude. After referring to the Lochner era and its aftermath in
paragraph 7 of the aforesaid judgment, this Court referred to various
judgments of this Court in paragraph 8, and concluded as follows:
“85. The Insolvency Code is a legislation which deals
with economic matters and, in the larger sense, deals
with the economy of the country as a whole. Earlier
experiments, as we have seen, in terms of legislations
having failed, ‘trial’ having led to repeated ‘errors’,
ultimately led to the enactment of the Code. The
experiment contained in the Code, judged by the
generality of its provisions and not by so-called crudities
and inequities that have been pointed out by the
petitioners, passes constitutional muster. To stay
experimentation in things economic is a grave
responsibility, and denial of the right to experiment is
fraught with serious consequences to the nation. We
have also seen that the working of the Code is being
monitored by the Central Government by Expert
Committees that have been set up in this behalf.
Amendments have been made in the short period in
which the Code has operated, both to the Code itself as
well as to subordinate legislation made under it. This
process is an ongoing process which involves all
stakeholders, including the petitioners.”
It is in this background that legislation affecting the economy is to be
viewed. This Court, in Shayara Bano v. Union of India, (2017) 9
SCC 1 has made it clear that Article 14 may be infracted by
37
legislation on the ground of such legislation being manifestly arbitrary.
This Court has said in this behalf:
“101. It will be noticed that a Constitution Bench of this
Court in Indian Express Newspapers (Bombay) (P) Ltd.
v. Union of India [Indian Express Newspapers (Bombay)
(P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC
(Tax) 121] stated that it was settled law that subordinate
legislation can be challenged on any of the grounds
available for challenge against plenary legislation. This
being the case, there is no rational distinction between
the two types of legislation when it comes to this ground
of challenge under Article 14. The test of manifest
arbitrariness, therefore, as laid down in the aforesaid
judgments would apply to invalidate legislation as well as
subordinate legislation under Article 14. Manifest
arbitrariness, therefore, must be something done by the
legislature capriciously, irrationally and/or without
adequate determining principle. Also, when something is
done which is excessive and disproportionate, such
legislation would be manifestly arbitrary. We are,
therefore, of the view that arbitrariness in the sense of
manifest arbitrariness as pointed out by us above would
apply to negate legislation as well under Article 14.”
Short of throwing the mantra of manifest arbitrariness at us, 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, and are not different in quality from any
of the Sections which have already conferred such power. Thus,
38
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.
17. 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. Thus, in Harishankar Bagla v. State of
M.P., (1955) 1 SCR 380, this Court held:
“9. The next contention of Mr. Umrigar that Section 3 of
the Essential Supplies (Temporary Powers) Act, 1946,
amounts to delegation of legislative power outside the
39
permissible limits is again without any merit. It was
settled by the majority judgment in the Delhi Laws Act
case [1951 SCR 747] that essential powers of legislature
cannot be delegated. In other words, the legislature
cannot delegate its function of laying down legislative
policy in respect of a measure and its formulation as a
rule of conduct. The legislature must declare the policy
of the law and the legal principles which are to control
any given cases and must provide a standard to guide
the officials or the body in power to execute the law. The
essential legislative function consists in the
determination or choice of the legislative policy and of
formally enacting that policy into a binding rule of
conduct. In the present case the legislature has laid
down such a principle and that principle is the
maintenance or increase in supply of essential
commodities and of securing equitable distribution and
availability at fair prices. The principle is clear and offers
sufficient guidance to the Central Government in
exercising its powers under Section 3. Delegation of the
kind mentioned in Section 3 was upheld before the
Constitution in a number of decisions of their Lordships
of the Privy Council, vide Russell v. Queen [7 AC 829],
Hodge v. Queen [9 AC 117] and Shannon v. Lower
Mainland Dairy Products Board [1938 AC 708] and since
the coming into force of the Constitution delegation of
this character has been upheld in a number of decisions
of this Court on principles enunciated by the majority in
the Delhi Laws Act case [1951 SCR 747]. As already
pointed out, the preamble and the body of the sections
sufficiently formulate the legislative policy and the ambit
and character of the Act is such that the details of that
policy can only be worked out by delegating them to a
subordinate authority within the framework of that policy.
Mr. Umrigar could not very seriously press the question
of the invalidity of Section 3 of the Act and it is
unnecessary therefore to consider this question in
greater detail.”
40
Similarly, in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The
Assistant Commissioner of Sales Tax and Ors. , this Court
observed:
“13. It may be stated at the outset that the growth of the
legislative powers of the Executive is a significant
development of the twentieth century. The theory of
laissez faire has been given a go-by and large and
comprehensive powers are being assumed by the State
with a view to improve social and economic well-being of
the people. Most of the modern socio -economic
legislations passed by the Legislature lay down the
guiding principles and the legislative policy. The
Legislatures because of limitation imposed upon by the
time factor hardly go into matters of detail. Provision is,
therefore, made for delegated legislation to obtain
flexibility, elasticity, expedition and opportunity for
experimentation. The practice of empowering the
Executive to make subordinate legislation within a
prescribed sphere has evolved out of practical necessity
and pragmatic needs of a modern welfare State. At the
same time it has to be borne in mind that our
Constitution-makers have entrusted the power of
legislation to the representatives of the people, so that
the said power may be exercised not only in the name of
the people but also by the people speaking through their
representatives. The role against excessive delegation of
legislative authority flows from and is a necessary
postulate of the sovereignty of the people. The rule
contemplates that it is not permissible to substitute in the
matter of legislative policy the views of individual officers
or other authorities, however competent they may be, for
that of the popular will as expressed by the
representatives of the people. As observed on p. 224 of
Vol. I in Cooley’s Constitutional Limitations 8
th
Edn.:
“One of the settled maxims in constitutional law
is, that the power conferred upon the
Legislature to make laws cannot be delegated
by that department to any other body or
41
authority. Where the sovereign power of the
State has located the authority, there it must
remain; and by the constitutional agency alone
the laws must be made until the Constitution
itself is changed. The power to whose
judgment, wisdom, and patriotism this high
prerogative has been entrusted cannot relieve
itself of the responsibility by choosing other
agencies upon which the power shall be
devolved, nor can it substitute the judgment,
wisdom, and patriotism of any other body for
those to which alone the people have seen fit to
confide this sovereign trust.”
xxx xxx xxx
“15. The Constitution, as observed by this Court in the
case of Devi Das Gopal Krishnan v. State of Punjab
[AIR 1967 SC 1895 : (1967) 3 SCJ 557 : (1967) 20 STC
430] confers a power and imposes a duty on the
Legislature to make laws. The essential legislative
function is the determination of the legislative policy and
its formulation as a rule of conduct. Obviously it cannot
abdicate its functions in favour of another. But in view of
the multifarious activities of a welfare State, it cannot
presumably work out all the details to suit the varying
aspects of a complex situation. It must necessarily
delegate the working out of details to the Executive or
any other agency. But there is danger inherent in such a
process of delegation. An over-burdened Legislature or
one controlled by a powerful Executive may unduly
overstep the limits of delegation. It may not lay down any
policy at all; it may declare its policy in vague and
general terms; it may not set down any standard for the
guidance of the Executive; it may confer an arbitrary
power on the Executive to change or modify the policy
laid down by it without reserving for itself any control
over subordinate legislation. This self-effacement of
legislative power in favour of another agency either in
whole or in part is beyond the permissible limits of
delegation. It is for a court to hold on a fair, generous
and liberal construction of an impugned statute whether
the Legislature exceeded such limits.”
42
xxx xxx xxx
“17. The matter came up for the first time before this
Court In re The Delhi Laws Act, 1912. [AIR 1951 SC
332 : 1951 SCR 747 : 1951 SCR 527] Although each
one of the learned Judges who heard that case wrote a
separate judgment, the view which emerged from the
different judgments was that it could not be said that an
unlimited right of delegation was inherent in the
legislative power itself. This was not warranted by the
provisions of the Constitution, which vested the power of
legislation either in Parliament or State Legislatures. The
legitimacy of delegation depended upon its being vested
as an ancillary measure which the Legislature
considered to be necessary for the purpose of exercising
its legislative powers effectively and completely. The
Legislature must retain in its own hands the essential
legislative function. Exactly what constituted “essential
legislative function” was difficult to define in general
terms, but this much was clear that the essential
legislative function must at least consist of the
determination of the legislative policy and its formulation
as a binding rule of conduct. Thus where the law passed
by the legislature declares the legislative policy and lays
down the standard which is enacted into a rule of law, it
can leave the task of subordinate legislation like the
making of rules, regulations or by-laws which by its very
nature is ancillary to the statute to subordinate bodies.
The subordinate authority must do so within the
framework of the law which makes the delegation, and
such subordinate legislation has to be consistent with the
law under which it is made and cannot go beyond the
limits of the policy and standard laid down in the law. As
long as the legislative policy is enunciated with sufficient
clearness or a standard is laid down, the courts should
not interfere with the discretion that undoubtedly rests
with the Legislature itself in determining the extent of
delegation necessary in a particular case [ see
observations of Wanchoo, C.J., in Municipal Corporation
of Delhi v. Birla Mills.].
18. In Harishankar Bagla v. State of Madhya Pradesh
[AIR 1954 SC 465 : (1955) 1 SCR 380 : 1954 Cri LJ
43
1322] this Court dealt with the validity of clause 3 of the
Cotton Textile (Control of Movement) Order, 1948
promulgated by the Central Government under Section 3
of the Essential Supplies (Temporary Powers) Act, 1946.
While upholding the validity of the impugned clause, this
Court observed that the Legislature must declare the
policy of the law and the legal principles which are to
control any given cases and must provide a standard to
guide the officials or the body in power to execute the
law, and where the Legislature has laid down such a
principle in the Act and that principle is the maintenance
or increase in supply of essential commodities and of
securing equitable distribution and availability at given
prices, the exercise of the power was valid.”
The Statement of Objects and Reasons of the Banking Regulation
Act, relevant for our purpose, is as follows:
“STATEMENT OF OBJECTS AND REASONS
The provisions of law relating to banking companies
at present form a subsidiary portion of the general law
applicable to companies and are contained in Part XA of
the Indian Companies Act, 1913. These provisions,
which were first introduced in 1936, and which have
undergone two subsequent modifications, have proved
inadequate and difficult to administer. Moreover while
the primary objective of Companies Law is to safeguard
the interests of the stock-holder, that of banking
legislation should be the protection of the interests of the
depositor. It has therefore been felt for some time that
separate legislation was necessary for the regulation of
banking in India. This need has become the more
insistent on account of the considerable development
that has taken place in recent years in banking,
especially the rapid growth of banking resources and of
the number of banks and branches. Regard must also be
had to the fact that the banking system is likely in the
post-war period to be more vulnerable by reason of the
great expansion, both quantitatively and relatively, that
has taken place in demand deposits, as compared with
44
time deposits, during the war years. The enactment of a
separate comprehensive measure has in consequence
now become imperative.”
(emphasis supplied)
In particular, the main features of the Bill are as follows:
“(i) A comprehensive definition of ‘banking’ so as to bring
within the scope of the legislation all institutions which
receive deposits, repayable on demand or otherwise, for
lending or investment:
xxx xxx xxx
(x) Empowering the Central Government to take action
against banks conducting their affairs in a manner
detrimental to the interests of the depositors;
(xi) Provision for bringing the Reserve Bank of India into
closer touch with banking companies;
xxx xxx xxx
(xiv) Widening the powers of the Reserve Bank of India
so as to enable it to come to the aid of banking
companies in times of emergency;
xxx xxx xxx”
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.
45
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. We, therefore, agree with Shri
Dwivedi 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.
ULTRA VIRES
18. Shri Dwivedi referred to and relied upon Sections 21, 35A,
35AA, and 35AB in order to sustain the validity of the impugned
circular. Dr. Singhvi has argued that Section 35A cannot possibly be
relied upon for the reason that it is an old provision, introduced in
1956. Whether or not to invoke the Insolvency Code was certainly not
in Parliament’s contemplation when it enacted Section 35A, and for
this reason, Section 35A cannot possibly be looked at as a source of
power authorising the RBI to issue the impugned circular.
19. Dr. Singhvi’s argument raises an interesting question as to the
“ongoing” interpretation of a statute. Generally, statutes are
recognised as Acts of Parliament that should be deemed to be
“always speaking”. Thus, in Senior Electric Inspector v.
Laxminarayan Chopra, (1962) 3 SCR 146, this Court held that the
46
expression “telegraph line” mentioned in the Indian Telegraph Act,
1885, is comprehensive enough to take in any wire used for the
purpose of an apparatus for post and telegraph, and wireless
stations, even though such wires and wireless stations were not in
the contemplation of Parliament when the 1885 Act was enacted. The
legal position was laid down thus:
“…… The maxim contemporanea exposition as laid
down by Coke was applied to construing ancient
statutes, but not to interpreting Acts which are
comparatively modern. There is a good reason for this
change in the mode of interpretation. The fundamental
rule of construction is the same whether the Court is
asked to construe a provision of an ancient statute or
that of a modern one, namely, what is the expressed
intention of the Legislature. It is perhaps difficult to
attribute to a legislative body functioning in a static
society that its intention was couched in terms of
considerable breadth so as to take within its sweep the
future developments comprehended by the phraseology
used. It is more reasonable to confine its intention only to
the circumstances obtaining at the time the law was
made. But in a modern progressive society it would be
unreasonable to confine the intention of a Legislature to
the meaning attributable to the word used at the time the
law was made, for a modern Legislature making laws to
govern a society which is fast moving must be presumed
to be aware of an enlarged meaning the same concept
might attract with the march of time and with the
revolutionary changes brought about in social, economic,
political and scientific and other fields of human activity.
Indeed, unless a contrary intention appears, an
interpretation should be given to the words used to take
in new facts and situations, if the words are capable of
comprehending them. We cannot, therefore, agree with
the learned Judges of the High Court that the maxim
47
contemporanea expositio could be invoked in construing
the word “telegraph line” in the Act.
For the said reasons, we hold that the expression
“telegraph line” is sufficiently comprehensive to take in
the wires used for the purpose of the apparatus of the
Post and Telegraph Wireless Station.”
(at pp. 156-157)
(emphasis supplied)
20. Guidance on whether a statute can apply to new situations not
in contemplation of Parliament when the statute was enacted was
felicitously set out by Lord Wilberforce in his dissenting judgment in
Royal College of Nursing of the United Kingdom v. Department
of Health and Social Security, [1981] 1 All ER 545 [HL] as follows:
“In interpreting an Act of Parliament it is proper, and
indeed necessary, to have regard to the state of affairs
existing, and known by Parliament to be existing, at the
time. It is a fair presumption that Parliament’s policy or
intention is directed to that state of affairs. Leaving aside
cases of omission by inadvertence, this being not such a
case, when a new state of affairs, or a fresh set of facts
bearing on policy, comes into existence, the courts have
to consider whether they fall within the Parliamentary
intention. They may be held to do so, if they fall within
the same genus of facts as those to which the expressed
policy has been formulated. They may also be held to do
so if there can be detected a clear purpose in the
legislation which can only be fulfilled if the extension is
made. How liberally these principles may be applied
must depend upon the nature of the enactment, and the
strictness or otherwise of the words in which it has been
expressed. The courts should be less willing to extend
expressed meanings if it is clear that the Act in question
was designed to be restrictive or circumscribed in its
operation rather than liberal or permissive. They will be
much less willing to do so where the subject matter is
48
different in kind or dimension from that for which the
legislation was passed.”
(at pp. 564-565)
21. In Comdel Commodities Ltd. v. Siporex Trade S.A., [1990] 2
All ER 552 [HL], Lord Bridge put it thus:
“When a change in social conditions produces a novel
situation, which was not in contemplation at the time
when a statute was first enacted, there can be no a priori
assumption that the enactment does not apply to the
new circumstances. If the language of the enactment is
wide enough to extend to those circumstances, there is
no reason why it should not apply.”
(at p. 557)
22. The phrase “always speaking” is adverted to by the House of
Lords in McCartan Turkington Breen (A Firm) v. Times
Newspapers Ltd., [2000] 4 All ER 913. Lord Steyn, speaking for the
Court, stated as follows:
“The appeal to the original intent of the statute
There is another preliminary matter to be considered.
Counsel for the solicitors emphasised that the wording of
paragraph 9 can be traced back to the Law of Libel
Amendment Act 1888. He observed that at that time the
phenomenon of press conferences was unknown. This
was an invitation to the House to say that press
conferences could not have been within the original
intent of the legislature. There is a clear answer to this
appeal to Victorian history. Unless they reveal a contrary
intention all statutes are to be interpreted as “always
speaking statutes”. This principle was stated and
explained in R v Ireland, R v Burstow [1997] 4 All ER
225 at 233, [1998] AC 147 at 158. There are at least two
strands covered by this principle. The first is that courts
49
must interpret and apply a statute to the world as it exists
today. That is the basis of the decision in R v
Ireland where ‘bodily harm’ in a Victorian statute was
held to cover psychiatric injury. Equally important is the
second strand, namely that the statute must be
interpreted in the light of the legal system as it exists
today. In the classic work of Sir Rupert Cross, Statutory
Interpretation (3rd edn, 1995) pp 51-52, the position is
explained as follows:
“The somewhat quaint statement that a statute
is “always speaking” appears to have originated
in Lord Thring’s exhortations to drafters
concerning the use of the word “shall”: “An Act
of Parliament should be deemed to be always
speaking and therefore the present or past
tense should be adopted, and “shall” should be
used as an imperative only, not as a future”.
But the proposition that an Act is always
speaking is often taken to mean that a statutory
provision has to be considered first and
foremost as a norm of the current legal system,
whence it takes its force, rather than just as a
product of an historically defined Parliamentary
assembly. It has a legal existence
independently of the historical contingencies of
its promulgation, and accordingly should be
interpreted in the light of its place within the
system of legal norms currently in force. Such
an approach takes account of the viewpoint of
the ordinary legal interpreter of today, who
expects to apply ordinary current meanings to
legal texts, rather than to embark on research
into linguistic, cultural and political history,
unless he is specifically put on notice that the
latter approach is required.” (My emphasis.)
In other words, it is generally permissible and indeed
necessary to take into account the place of the statutory
provision in controversy in the broad context of the basic
principles of the legal system as it has evolved. If this
proposition is right, as I believe it to be, it follows that on
50
ordinary principles of construction the question before
the House must be considered in the light of the law of
freedom of expression as it exists today. The appeal to
the original meaning of the words of the statute must be
rejected.”
(at pp. 926-927)
(emphasis supplied)
23. This exposition of the law is to be read along with the judgment
in Birmingham City Council v. Oakley, [2001] 1 All ER 385 [HL],
where Lord Hoffmann cautioned thus:
“Mr. Supperstone argued that section 79(1)(a) must be
construed in the light of modern conditions. When it
speaks of a ‘state ... prejudicial to health’, this does not
mean a state which would have been so regarded in
1846. It requires the application of modern knowledge
and standards of hygiene. The words must be construed
as ‘always speaking’ in the sense used by Lord Steyn
in R v Ireland, R v Burstow [1997] 4 All ER 225 at 233,
[1998] AC 147 at 158-159. I quite agree that when a
statute employs a concept which may change in content
with advancing knowledge, technology or social
standards, it should be interpreted as it would be
currently understood. The content may change but the
concept remains the same. The meaning of the statutory
language remains unaltered. So the concept of a vehicle
has the same meaning today as it did in 1800, even
though it includes methods of conveyance which would
not have been imagined by a legislator of those days.
The same is true of social standards. The concept of
cruelty is the same today as it was when the Bill of
Rights 1688 (1 Will & Mary, sess 2, c 2) forbade the
infliction of ‘cruel and unusual punishments’ (section 10).
But changes in social standards mean that punishments
which would not have been regarded as cruel in 1688
will be so regarded today.
51
This doctrine does not however mean that one can
construe the language of an old statute to mean
something conceptually different from what the
contemporary evidence shows that Parliament must
have intended. So, for example, in the recent case
of Goodes v East Sussex County Council [2000] 3 All ER
603, [2000] 1 WLR 1356, the House of Lords decided
that the statutory duty of highway authorities to ‘maintain’
the highway did not include the removal of ice and snow.
Although the word ‘maintain’ was capable of including
the removal of ice and snow and such removal might be
expected by modern road users, the contemporary
evidence showed that the concept of maintenance in the
legislation was confined to keeping the fabric of the road
in repair. To require the removal of ice and snow would
not be to apply that concept in accordance with modern
standards (such as requiring a metalled surface instead
of gravel) but would be using the word ‘maintain’ to
express a broader concept than Parliament intended.
Such a change would not be in accordance with the
meaning of the statute. Likewise it seems to me in this
case that an extension of the concept of ‘premises in
such a state as to be prejudicial to health’ to the absence
of facilities, as such, is an illegitimate extension of the
statutory meaning.
My Lords, it seems to me that the temptation to
make such an extension should be resisted for much the
same reasons as your Lordships in Southwark London
Borough Council v Mills [1999] 4 All ER 449, [1999] 3
WLR 939 refused to extend the common law of nuisance
and quiet enjoyment so as to require landlords to install
soundproofing. Parliament has dealt expressly with the
obligation to provide toilet facilities in different sections
and usually in different Acts. Until 1991 it did not require
a basin to be installed in the WC even in new
constructions. It has never done so in respect of existing
buildings. For the courts to give section 79(1)(a) an
extended “modern” meaning which required suitable
alterations to be made to existing houses would impose
a substantial financial burden upon public and private
owners and occupiers. I am entirely in favour of giving
52
the 1990 Act a sensible modern interpretation. But I do
not think that it is either sensible or in accordance with
modern notions of democracy to hold that when
Parliament re-enacted language going back to the 19th
century, it authorised the courts to impose upon local
authorities and others a huge burden of capital
expenditure to which the statutory language had never
been held to apply. In my opinion the decision as to
whether or not to take such a step should be made by
the elected representatives of the people and not by the
courts.”
(at pp. 396-397)
24. A cursory reading of Section 35A makes it clear that there is
nothing in the aforesaid provision which would indicate that the power
of the RBI to give directions, when it comes to the Insolvency Code,
cannot be so given. The width of the language used in the provision
which only uses general words such as ‘public interest’ and ‘banking
policy’ etc. makes it clear that if otherwise available, we cannot
interdict the use of Section 35A as a source of power for the
impugned RBI circular on the ground that the Insolvency Code, 2016
could not be said to have been in the contemplation of Parliament in
1956, when Section 35A was enacted. Dr. Singhvi’s contention must,
therefore, fail.
25. Dr. Singhvi then relied upon the judgment in Indian Banks’
Association (supra). In this case, the power of the RBI under Section
53
35A of the Banking Regulation Act was held not to extend to granting
approval to banks under a separate and distinct enactment, namely,
the Interest Tax Act, 1974. In this context, this Court held:
“37. The submission of the learned counsel for the
appellants to the effect that they had been permitted to
enhance the rate of interest by the Reserve Bank of
India, is equally misconceived. The Reserve Bank of
India apparently proceeded on the basis that the mode
of calculation of rate of interest vis-à-vis the tax under
the Act, as contended by Appellant 1, was correct. The
Reserve Bank of India was not an authority for
construction of a statute. Its functions are confined only
to the provisions of the Reserve Bank of India Act and
the Banking Regulation Act and not any other statute.
38. Section 35-A of the Banking Regulation Act
empowers the Reserve Bank of India to issue directions
in relation to matters specified under Section 35-A and
not for any other purpose. The contention of the
appellants to the effect that rate of interest had been
enhanced by them pursuant to or in furtherance of the
directions issued by the Reserve Bank of India must be
held to be self-contradictory inasmuch as according to
them the Reserve Bank of India fixes only the minimum
rate of interest leaving a determination thereof in the
case of each individual borrower upon the bank
concerned. If the matter relating to increase in the rate of
the interest was within the power of the appellants, we
fail to understand as to why the Reserve Bank of India
was approached at all. The same being not permissible
under the Act, any approval given by the Reserve Bank
of India for the satisfaction of the members of the first
appellant herein was futile.”
xxx xxx xxx
“40. In any view of the matter, the purported directions
contained in the letter dated 2-9-1991 of the Reserve
Bank of India are not even in the nature of executive
instruction under the said Act. It was not binding on the
54
banks, far less on the borrowers. In any event, by reason
of a misplaced and misapplied construction of statute, a
third party cannot suffer.
41. Furthermore, having regard to the provisions
contained in Article 265 of the Constitution read with
Article 366(28) thereof, the purported demand from the
borrower for a higher amount of tax and consequently a
higher amount of interest by way of rounding-up was
wholly illegal and without jurisdiction. We also fail to
understand as to why in this modern electronic age, this
difficulty would be encountered while calculating the
exact amount of tax.
42. We, therefore, are of the opinion that the purported
approval granted by the Reserve Bank of India was
wholly without jurisdiction and ultra vires the provisions
of the said Act.”
Based on this judgment, Dr. Singhvi contended that the RBI cannot
possibly give directions as to how the banks must exercise their
discretionary power before filing applications under Section 7 of the
Insolvency Code. Shri Dwivedi, however, distinguished this judgment
by stating that this was a tax case and it must be remembered that
the entries in the Seventh Schedule qua taxation are separate from
general entries. Even otherwise, according to Shri Dwivedi, the RBI
directions are at a stage anterior to the application of the provisions of
the Insolvency Code, as a result of which, this judgment would have
no application.
55
26. We are of the view that Shri Dwivedi is right. If a specific
provision of the Banking Regulation Act makes it clear that the RBI
has a specific power to direct banks to move under the Insolvency
Code against debtors in certain specified circumstances, it cannot be
said that they would be acting outside the four corners of the statutes
which govern them, namely, the RBI Act and the Banking Regulation
Act. On this score, therefore, Dr. Singhvi’s contention must fail.
27. Shri Dwivedi has cited certain judgments stating that
discretionary powers given to the RBI under the Banking Regulation
Act generally, and under Section 35A, in particular, are broad and
expansive, and have been expansively expounded upon by this
Court. He relied, in particular, upon Central Bank of India v.
Ravindra, (2002) 1 SCC 367. In particular, he relied upon paragraph
51 and paragraph 55 (5) which state:
“51. The Banking Regulation Act, 1949 empowers the
Reserve Bank, on it being satisfied that it is necessary or
expedient in the public interest or in the interest of
depositors or banking policy so to do, to determine the
policy in relation to advances to be followed by banking
companies generally or by any banking company in
particular and when the policy has been so determined it
has a binding effect. In particular, the Reserve Bank of
India may give directions as to the rate of interest and
other terms and conditions on which advances or other
financial accommodation may be made. Such directions
are also binding on every banking company. Section 35-
56
A also empowers the Reserve Bank of India in the public
interest or in the interest of banking policy or in the
interests of depositors (and so on) to issue directions
generally or in particular which shall be binding. With
effect from 15-2-1984 Section 21-A has been inserted in
the Act which takes away power of the court to reopen a
transaction between a banking company and its debtor
on the ground that the rate of interest charged is
excessive. The provision has been given an overriding
effect over the Usury Loans Act, 1918 and any other
provincial law in force relating to indebtedness.
xxx xxx xxx
55. During the course of hearing it was brought to our
notice that in view of several usury laws and debt relief
laws in force in several States private moneylending has
almost come to an end and needy borrowers by and
large depend on banking institutions for financial
facilities. Several unhealthy practices having slowly
penetrated into prevalence were pointed out. Banking is
an organised institution and most of the banks press into
service long-running documents wherein the borrowers
fill in the blanks, at times without caring to read what has
been provided therein, and bind themselves by the
stipulations articulated by the best of legal brains.
Borrowers other than those belonging to the corporate
sector, find themselves having unwittingly fallen into a
trap and rendered themselves liable and obliged to pay
interest the quantum whereof may at the end prove to be
ruinous. At times the interest charged and capitalised is
manifold than the amount actually advanced. Rule of
damdupat does not apply. Penal interest, service
charges and other overheads are debited in the account
of the borrower and capitalised of which debits the
borrower may not even be aware. If the practice of
charging interest on quarterly rests is upheld and given a
judicial recognition, unscrupulous banks may resort to
charging interest even on monthly rests and capitalising
the same. Statements of accounts supplied by banks to
borrowers many a times do not contain particulars or
details of debit entries and when written in hand are
worse than medical prescriptions putting to test the eyes
57
and wits of the borrowers. Instances of unscrupulous,
unfair and unhealthy dealings can be multiplied though
they cannot be generalised. Suffice it to observe that
such issues shall have to be left open to be adjudicated
upon in appropriate cases as and when actually arising
for decision and we cannot venture into laying down law
on such issues as do not arise for determination before
us. However, we propose to place on record a few
incidental observations, without which, we feel, our
answer will not be complete and that we do as under:
xxx xxx xxx
(5) The power conferred by Sections 21 and
35-A of the Banking Regulation Act, 1949 is
coupled with duty to act. The Reserve Bank of
India is the prime banking institution of the
country entrusted with a supervisory role over
banking and conferred with the authority of
issuing binding directions, having statutory
force, in the interest of the public in general and
preventing banking affairs from deterioration
and prejudice as also to secure the proper
management of any banking company
generally. The Reserve Bank of India is one of
the watchdogs of finance and economy of the
nation. It is, and it ought to be, aware of all
relevant factors, including credit conditions as
prevailing, which would invite its policy
decisions. RBI has been issuing
directions/circulars from time to time which,
inter alia, deal with the rate of interest which
can be charged and the periods at the end of
which rests can be struck down, interest
calculated thereon and charged and
capitalised. It should continue to issue such
directives. Its circulars shall bind those who fall
within the net of such directives. For such
transaction which are not squarely governed by
such circulars, the RBI directives may be
treated as standards for the purpose of
deciding whether the interest charged is
58
excessive, usurious or opposed to public
policy.”
Similarly, in Sudhir Shantilal Mehta v. Central Bureau of
Investigation, (2009) 8 SCC 1, he relied upon paragraphs 51 and 52
which state as follows:
“51. In terms of Section 35-A of the 1949 Act, Reserve
Bank of India is empowered to issue directions to the
banks in public interest; or in the interest of banking
policy; or to prevent the affairs of any banking company
being conducted in a manner detrimental to the interests
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 generally.
52. Reserve Bank of India in terms of Section 21 of the
1949 Act is empowered to control advances by banking
companies and issue necessary directions in this behalf.
Reserve Bank of India, therefore, has the requisite
power to issue direction to banks in relation to
discounting and rediscounting of bills of exchange and
those directions issued by Reserve Bank of India have
statutory force and, thus, can be termed as law in force.
(See also Corporation Bank v. D.S. Gowda [(1994) 5
SCC 213] and Central Bank of India v. Ravindra [(2002)
1 SCC 367].) All public sector banks are bound thereby.”
Also, in ICICI Bank Ltd. v. APS Star Industries Ltd., (2010) 10 SCC
1, this Court, when it came to whether derivatives could be a
business which banks could do, stated with respect to Sections 21
and 35A of the RBI Act as follows:
“35. Section 21 deals with the power of RBI to control
advances by banking companies. Section 21 empowers
RBI to frame policies in relation to advances to be
followed by banking companies. It further says that once
59
such policy is made all banking companies shall be
bound to follow them. Section 21(1) is once again a
general provision empowering RBI to determine policy in
relation to advances whereas Section 21(2) empowers
RBI to give directions to banking companies as to items
mentioned there i.e. in Section 21(2). Under Section
21(3) every banking company is bound to comply with
directions given by RBI at the peril of penalty being
levied for non-compliance. Section 35-A says that where
RBI is satisfied that in the interest of banking policy it is
necessary to issue directions to banking companies it
may do so from time to time and the banking companies
shall be bound to comply with such directions. Thus, in
exercise of the powers conferred by Sections 21 and 35-
A of the said Act, RBI can issue directions having
statutory force of law. Section 36 deals with further
powers and functions of RBI. Under Section 39 it is RBI
which shall be the Official Liquidator in any proceedings
concerning winding up of a banking company.”
xxx xxx xxx
“38. The BR Act, 1949 basically seeks to regulate
banking business. In the cases in hand we are not
concerned with the definition of banking but with what
constitutes “banking business”. Thus, the said BR Act,
1949 is an open-ended Act. It empowers RBI (regulator
and policy framer in matter of advances and capital
adequacy norms) to develop a healthy secondary
market, by allowing banks inter se to deal in NPAs in
order to clean the balance sheets of the banks which
guideline/policy falls under Section 6(1)(a) read with
Section 6(1)(n). Therefore, it cannot be said that
assignment of debts/NPAs is not an activity permissible
under the BR Act, 1949. Thus, accepting deposits and
lending by itself is not enough to constitute the “business
of banking”. The dependence of commerce on banking is
so great that in modern money economy the cessation
even for a day of the banking activities would completely
paralyse the economic life of the nation. Thus, the BR
Act, 1949 mandates a statutory comprehensive and
formal structure of banking regulation and supervision in
India.”
60
He also referred to the Statement of Objects and Reasons of the
Amendment Act, 1956, which brought in Section 35A in order to
tighten up control over banking companies so as to enable the RBI to
give directions to banking companies in relation to matters of policy or
administration affecting the public interest.
28. There is no doubt that Sections 21 and 35A do confer very wide
powers on the RBI to give directions when it comes to the matters
specified therein. However, this does not answer the precise question
before us. This question can only be answered by referring to
Sections 35AA and 35AB.
29. 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-à-vis the powers of the RBI. Thus, Section 36ACA(1)
provides as follows:
61
“36ACA. Supersession of Board of Directors in
certain cases.—(1) Where the Reserve Bank is
satisfied, in consultation with the Central Government,
that in the public interest or for preventing the affairs of
any banking company being conducted in a manner
detrimental to the interest of the depositors or any
banking company or fo r securing the proper
management of any banking company, it is necessary so
to do, the Reserve Bank may, for reasons to be recorded
in writing, by order, supersede the Board of Directors of
such banking company for a period not exceeding six
months as may be specified in the order:
Provided that the period of supersession of the
Board of Directors may be extended from time to time,
so, however, that the total period shall not exceed twelve
months.
xxx xxx xxx”
This Section makes it clear that the RBI’s satisfaction in superseding
the board of directors of banking companies can only be exercised in
consultation with the Central Government, and not otherwise.
Similarly, under Sections 36AE and 36AF, the Central Government
alone has the power to acquire undertakings of banking companies in
certain cases, on receipt of a report from the RBI. Section 36AE(1)
reads as follows:
“36AE. Power of Central Government to acquire
undertakings of banking companies in certain
cases.—(1) If, upon receipt of a report from the Reserve
Bank, the Central Government is satisfied that a banking
company—
(a) has, on more than one occasion, failed to
comply with the directions given to it in writing
62
under Section 21 or Section 35-A, in so far as
such directions relate to banking policy, or
(b) is being managed in a manner detrimental
to the interests of its depositors,—
and that—
(i) in the interests of the depositors of such
banking company, or
(ii) in the interest of banking policy, or
(iii) for the better provision of credit generally or
of credit to any particular section of the
community or in any particular area;
it is necessary to acquire the undertaking of such
banking company, the Central Government may, after
such consultation with the Reserve Bank as it thinks fit,
by notified order, acquire the undertaking of such
company (hereinafter referred to as the acquired bank)
with effect from such date as may be specified in this
behalf by the Central Government (hereinafter referred
to as the appointed day):
Provided that no undertaking of any banking
company shall be so acquired unless such banking
company has been given a reasonable opportunity of
showing cause against the proposed action.
Explanation.—In this Part,—
(a) “notified order” means an order published
in the Official Gazette;
(b) “undertaking,” in relation to a banking
company incorporated outside India, means the
undertaking of the company in India.
xxx xxx xxx”
Likewise, under Section 36AF, the Central Government may, after
consulting the RBI, make a scheme for carrying out the purpose of
63
acquisition of such undertakings of banking companies. Section
36AF(1) reads as follows:
“36AF. Power of the Central Government to make
scheme.—(1) The Central Government may, after
consultation with the Reserve Bank, make a scheme for
carrying out the purposes of this Part in relation to any
acquired bank.
xxx xxx xxx”
Under Section 45Y, the Central Government may after consulting the
RBI make rules for preservation of records as follows:
“45Y. Power of Central Government to make rules for
the preservation of records.—The Central Government
may, after consultation with the Reserve Bank and by
notification in the Official Gazette, make rules specifying
the periods for which—
(a) a banking company shall preserve its books,
accounts and other documents; and
(b) a banking company shall preserve and keep
with itself different instruments paid by it.”
Under Section 52(1), the Central Government may, after consultation
with the RBI, make rules to give effect to the provisions of the Act as
follows:
“52. Power of Central Government to make rules.—
(1) The Central Government may, after consultation with
the Reserve Bank, make rules to provide for all matters
for which provision is necessary or expedient for the
purpose of giving effect to the provisions of this Act and
all such rules shall be published in the Official Gazette.
xxx xxx xxx”
64
Importantly, the Central Government may, on the recommendation of
the RBI, declare that all or any of the provisions of the Banking
Regulation Act shall not apply to any banking company, either
generally or for a prescribed period. Section 53(1) of the Act reads as
follows:
“53. Power to exempt in certain cases.—(1) The
Central Government may, on the recommendation of the
Reserve Bank, declare, by notification in the Official
Gazette, that any or all of the provisions of this Act shall
not apply to any banking company or institution or to any
class of banking companies either generally or for such
period as may be specified.
xxx xxx xxx”
The power to remove difficulties is also vested in the Central
Government under Section 55A of the Act, which reads as follows:
“55A. Power to remove difficulties.—If any difficulty
arises in giving effect to the provisions of this Act, the
Central Government may, by orde r, as occasion
requires, do anything (not inconsistent with the
provisions of this Act) which appears to it to be
necessary for the purpose of removing the difficulty:
Provided that no such power shall be exercised after
the expiry of a period of three years from the
commencement of Section 20 of the Banking Laws
(Amendment) Act, 1968.”
A conspectus of all these provisions 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,
65
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.
30. 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.
31. 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. This is the well-known rule in Taylor v. Taylor,
[1875] 1 Ch. D. 426, which has been repeatedly followed by this
Court. Thus, in State of U.P. v. Singhara Singh, (1964) 4 SCR 485,
this Court held:
“The rule adopted in Taylor v. Taylor [(1875) 1 Ch D 426,
431] is well recognised and is founded on sound
principle. Its result is that if a statute has conferred a
66
power to do an 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 other manner than
that which has been prescribed. The principle behind the
rule is that if this were not so, the statutory provision
might as well not have been enacted. A Magistrate,
therefore, cannot in the course of investigation record a
confession except in the manner laid down in Section
164. The power to record the confession had obviously
been given so that the confession might be proved by
the record of it made in the manner laid down. If proof of
the confession by other means was permissible, the
whole provision of Section 164 including the safeguards
contained in it for the protection of accused persons
would be rendered nugatory. The section, therefore, by
conferring on Magistrates the power to record
statements or confessions, by necessary implication,
prohibited a Magistrate from giving oral evidence of the
statements or confessions made to him.”
(at pp. 490-491)
Following this principle, therefore, it is clear that the RBI can only
direct banking institutions to move under the Insolvency Code 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.
32. Shri Dwivedi then argued relying upon the Finance Minister’s
speech that Section 35AA was really enacted by way of abundant
caution inasmuch as there was a doubt as to whether such power
67
could be exercised generally or otherwise. He relied, in particular, on
the following statement in the speech of the Finance Minister, Shri
Arun Jaitley, while moving the Bill which introduced Sections 35AA
and 35AB into the Banking Regulation Act. The Finance Minister
stated:
“This issue was discussed at length. There were two
views that the general power may not include this power.
One view was exactly what you are saying. The other
view was this. It is a very short amendment. Therefore,
to obviate any controversy, the RBI will direct the
consortium of banks to go and move an IBC insolvency
petition.”
33. A Finance Minister’s speech, introducing certain provisions, can
certainly shed some light on such provisions, particularly in cases of
ambiguity. In the present case, what is missed is the fact that two
conditions precedent have been introduced in Section 35AA, without
which, power cannot be exercised by the RBI. This itself shows that it
is not possible to say that Section 35AA has been introduced ex
abundanti cautela. Further, it is well settled that Parliament does not
legislate where no legislation is called for. Thus, in Utkal
Contractors & Joinery (P) Ltd. v. State of Orissa, (1987) 3 SCC
279, this Court held:
“9. In considering the rival submissions of the learned
Counsel and in defining and construing the area and the
68
content of the Act and its provisions, it is necessary to
make certain general observations regarding the
interpretation of statutes. A statute is best understood if
we know the reason for it. The reason for a statute is the
safest guide to its interpretation. The words of a statute
take their colour from the reason for it. How do we
discover the reason for a statute? There are external and
internal aids. The external aids are Statement of Objects
and Reasons when the Bill is presented to Parliament,
the reports of committees which preceded the Bill and
the reports of Parliamentary Committees. Occasional
excursions into the debates of Parliament are permitted.
Internal aids are the preamble, the scheme and the
provisions of the Act. Having discovered the reason for
the statute and so having set the sail to the wind, the
interpreter may proceed ahead. No provision in the
statute and no word of the statute may be construed in
isolation. Every provision and every word must be looked
at generally before any provision or word is attempted to
be construed. The setting and the pattern are important.
It is again important to remember that Parliament does
not waste its breath unnecessarily. Just as Parliament is
not expected to use unnecessary expressions,
Parliament is also not expected to express itself
unnecessarily. Even as Parliament does not use any
word without meaning something, Parliament does not
legislate where no legislation is called for. Parliament
cannot be assumed to legislate for the sake of
legislation; nor can it be assumed to make pointless
legislation. Parliament does not indulge in legislation
merely to state what it is unnecessary to state or to do
what is already validly done. Parliament may not be
assumed to legislate unnecessarily. Again, while the
words of an enactment are important, the context is no
less important. For instance:
“...the fact that general words are used in a
statute is not in itself a conclusive reason why
every case falling literally within them should be
governed by that statute, and the context of an
Act may well indicate that wide or general
69
words should be given a restrictive meaning.”
[Halsbury 4
th
Edn., Vol. 44 p. 874]”
This contention of Shri Dwivedi must, therefore, fail.
34. Yet another contention of Shri Dwivedi is that concurrent
powers have been given to the RBI on a combined reading of
Sections 21, 35A, 35AA, and 35AB. Interestingly, when concurrent
powers are given to the same or to two different authorities, the
Banking Regulation Act expressly says so. Thus, Section 35(1) of the
Act is an example of concurrent power given to the RBI as well as to
the Central Government. Section 35(1) of the Act reads as follows:
“35. Inspection.—(1) Notwithstanding anything to the
contrary contained in Section 235 of the Companies Act,
1956, the Reserve Bank at any time may, and on being
directed so to do by the Central Government shall, cause
an inspection to be made by one or more of its officers of
any banking company and its books and accounts; and
the Reserve Bank shall supply to the banking company a
copy of its report on such inspection.
xxx xxx xxx”
When it comes to the inspection of books of accounts, the RBI may,
either by itself or by being directed to do so by the Central
Government, cause an inspection to be made of any banking
company’s books and accounts in the manner specified in the
Section. This is to be contrasted with Section 35AA, which makes it
clear that de hors the authorisation of the Central Government, the
70
RBI has no power to issue directions on its own, unlike Section 35.
This argument also must, therefore, fail.
35. Shri Dwivedi then argued that Section 35AB uses the words
“without prejudice” to indicate that the power granted under the said
Section was to be read as additional to other powers granted by
Sections 35A and 35AA. This Court, in Bharat Sanchar Nigam Ltd.
v. Telecom Regulatory Authority of India and Ors., (2014) 3 SCC
222, at paragraphs 90 to 97, has indicated that the words “without
prejudice” appearing in a Section make it clear that powers that are
enumerated are only illustrative of a general power and do not restrict
such general power. Indeed, in Union of India and Anr. v. Pfizer
Ltd. and Ors., (2018) 2 SCC 39, this Court held:
“14. Having heard the learned counsel for the parties, it
is clear that Section 26-A has been introduced by an
amendment in 1982. A bare reading of this provision
would show, firstly, that it is without prejudice to any
other provision contained in this Chapter (meaning
thereby Chapter IV). This expression only means that
apart from the Central Government's other powers
contained in Chapter IV, Section 26-A is an additional
power which must be governed by its own terms. Under
Section 26-A, the Central Government must be
“satisfied” that any drug or cosmetic is likely to involve (i)
any risk to human beings or families; or (ii) that any drug
does not have the therapeutic value claimed or
purported to be claimed for it; or (iii) contains ingredients
in such quantity for which there is no therapeutic
justification. Obviously, the Central Government has to
71
apply its mind to any or all of these three factors which
has to be based upon its “satisfaction” as to the
existence of any or all of these factors. The power
exercised under Section 26-A must further be exercised
only if it is found necessary or expedient to do so in
public interest. When the power is so exercised, it may
regulate, restrict or prohibit manufacture, sale or
distribution of any drug or cosmetic.”
Thus, the power to issue directions given by Section 35AB is in
addition to the power that is given under Section 35A.
36. 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.
37. All the learned counsel appearing on both sides referred to
external aids to construe the statute at hand. In Eera (through Dr.
Manjula Krippendorf) v. State (NCT of Delhi) and Anr., (2017) 15
SCC 133, Nariman, J. referred to what may be called the theory of
creative interpretation. Instances of creative interpretation are when
the Court looks at both the literal language as well as the purpose or
object of the statute in order to better determine what the words used
72
by the draftsman of legislation mean [see paragraph 122]. He then
concluded:
“127. It is thus clear on a reading of English, US,
Australian and our own Supreme Court judgments that
the “Lakshman Rekha” has in fact been extended to
move away from the strictly literal rule of interpretation
back to the rule of the old English case
of Heydon [Heydon case, (1584) 3 Co Rep 7a : 76 ER
637] , where the Court must have recourse to the
purpose, object, text and context of a particular provision
before arriving at a judicial result. In fact, the wheel has
turned full circle. It started out by the rule as stated in
1584 in Heydon case [Heydon case, (1584) 3 Co Rep 7a
: 76 ER 637] , which was then waylaid by the literal
interpretation rule laid down by the Privy Council and the
House of Lords in the mid-1800s, and has come back to
restate the rule somewhat in terms of what was most
felicitously put over 400 years ago in Heydon
case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637].”
This judgment has since been followed by this Court in ArcelorMittal
India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1 [at paragraph
29]; Asian Resurfacing of Road Agency (P) Ltd. v. Central
Bureau of Investigation, (2018) 16 SCC 299 [at paragraph 51.5];
Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (2018) 2
SCC 674 [at paragraphs 27 and 30]; State (NCT of Delhi) v. Brijesh
Singh, (2017) 10 SCC 779 [at paragraph 13].
38. The Press Note dated 05.05.2017, set out supra, explained the
new Sections 35AA and 35AB as the grant of two distinct and
73
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
74
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.
39. When one section of a statute grants general powers, as
opposed to another section of the same statute which grants specific
powers, the general provisions cannot be utilised where a specific
provision has been enacted with a specific purpose in mind. Thus, in
J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P.,
(1961) 3 SCR 185, this Court held:
“9. There will be complete harmony however if we hold
instead that clause 5(a) will apply in all other cases of
proposed dismissal or discharge except where an inquiry
is pending within the meaning of clause 23. We reach
the same result by applying another well-known rule of
construction that general provisions yield to special
provisions. The learned Attorney-General seemed to
suggest that while this rule of construction is applicable
to resolve the conflict between the general provision in
one Act and the special provision in another Act, the rule
cannot apply in resolving a conflict between general and
special provisions in the same legislative instrument.
This suggestion does not find support in either principle
or authority. The rule that general provisions should yield
75
to specific provisions is not an arbitrary principle made
by lawyers and Judges but springs from the common
understanding of men and women that when the same
person gives two directions one covering a large number
of matters in general and another to only some of them
his intention is that these latter directions should prevail
as regards these while as regards all the rest the earlier
direction should have effect. In Pretty v. Solly (quoted in
Craies on Statute Law at p.m. 206, 6th Edn.) Romilly,
M.R., mentioned the rule thus: “The rule is, that
whenever there is a particular enactment and a general
enactment in the same statute and the latter, taken in its
most comprehensive sense, would overrule the former,
the particular enactment must be operative, and the
general enactment must be taken to affect only the other
parts of the statute to which it may properly apply”. The
rule has been applied as between different provisions of
the same statute in numerous cases some of which only
need be mentioned: De Winton v. Brecon [28 LJ Ch
598], Churchill v. Crease [5 Bing 177], United States v.
Chase [135 US 255] and Carroll v. Greenwich Ins. Co.
[199 US 401].”
This judgment has been followed in Commercial Tax Officer,
Rajasthan v. Binani Cements Ltd. and Anr., (2014) 8 SCC 319 [at
paragraph 39].
40. 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
76
fact, Shri Dwivedi’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.
41. 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”. Default, in the explanation to Section 35AA,
has the same meaning assigned to it under Section 3(12) of the
Insolvency Code. Section 3(12) of the Insolvency Code reads as
under:
“3. Definitions.—In this Code, unless the context
otherwise requires,—
xxx xxx xxx
(12) “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 paid by the debtor or the
corporate debtor, as the case may be;
xxx xxx xxx”
77
“Debt” has been defined under Section 3(11) of the Insolvency Code
as follows:
“3. Definitions.—In this Code, unless the context otherwise
requires,—
xxx xxx xxx
(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and
operational debt;
xxx xxx xxx”
Also, “corporate debtor” has been defined under Section 3(8) of the
Insolvency Code as follows:
“3. Definitions.—In this Code, unless the context otherwise
requires,—
xxx xxx xxx
(8) “corporate debtor” means a corporate person who owes a
debt to any person;
xxx xxx xxx”
A reading of these definitions would make it clear that default would
mean non- payment of a debt when it has become due and payable
and is not paid by the corporate debtor. Therefore, what is important
to note is that it is a particular default of a particular debtor that is the
subject matter of Section 35AA. It must also be observed that the
expression “issue directions to banking companies generally or to any
banking company in particular” occurring in Section 35A is
conspicuous by its absence in Section 35AA. This is another good
78
reason as to why Section 35AA refers only to specific cases of default
and not to the issuance of directions to banking companies generally,
as has been done by the impugned circular.
42. 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.
43. However, Shri Dwivedi argued that “specific cases” would
include specification by category or class. All the definitions given by
him in his written argument, however, belie this. Thus, in the Oxford
Dictionary, the word “specific” is defined as follows:
79
“Specific / adjective 1. clearly defined. 2. relating to
particular subject; peculiar. 3. exact; giving full details. 4.
archaic (of medicine etc.) for a particular disease. noun
1. archaic specific medicine. 2. specific aspect.”
Black’s Law Dictionary also defines the word “specific” as follows:
“specific, adj. 1. Of, relating to, or designating a
particular or defined thing; explicit <specific duties>. 2.
Of, relating to, or involving a particular named thing
<specific item>. 3. Conformable to special requirements
<specific performance>. – specificity, n. – specifically,
adv.”
Shri Dwivedi referred to Maru Ram and Ors. v. Union of India and
Ors., (1981) 1 SCC 107, to argue that specification by category
would be something well-known to law. He relied upon paragraph 33
of the aforesaid judgment which reads as follows:
“33. The anatomy of this savings section is simple, yet
subtle. Broadly speaking, there are three components to
be separated. Firstly, the Procedure Code generally
governs matters covered by it. Secondly, if a special or
local law exists covering the same area, this latter law
will be saved and will prevail. The short-sentencing
measures and remission Schemes promulgated by the
various States are special and local laws and must
override. Now comes the third component which may be
clinching. If there is a specific provision to the contrary,
then that will override the special or local law. Is Section
433-A a specific law contra? If so, that will be the last
word and will hold even against the special or local law.”
A reading of paragraph 33 would show that the specific provision to
the contrary, referred to therein, would refer only to a particular
80
Section, as opposed to a category or Chapter which contains various
Sections. This judgment, therefore, directly militates against the
submission of Shri Dwivedi in this behalf.
44. Shri Dwivedi then relied upon Section 13 of the General
Clauses Act, 1897 [“General Clauses Act”] to state that the singular
would include the plural. There is no doubt whatsoever that this would
be so unless the context otherwise requires, as is provided by
Section 13 of the General Clauses Act itself. In the present case, the
context of Section 35AA makes it clear, as has been correctly argued
by Shri Tushar Mehta, learned Solicitor General, that the power to be
exercised under the authorisation of the Central Government requires
“due deliberation and care” to refer to specific defaults. This argument
also does not take Shri Dwivedi very much further.
45. The impugned circular states as one of its sources, the power
contained in Section 45L of the RBI Act insofar as non-banking
financial institutions are concerned. Non-banking financial institutions
are referred to in Section 45-I(c) as follows:
“45-I. Definitions.—In this Chapter, unless the context
otherwise requires,—
xxx xxx xxx
81
(c) ‘‘financial institution’’ means any non-banking
institution which carries on as its business or part of its
business any of the following activities, namely:–
(i) the financing, whether by way of making
loans or advances or otherwise, of any activity
other than its own;
(ii) the acquisition of shares, stock, bonds,
debentures or securities issued by a
Government or local authority or other
marketable securities of a like nature;
(iii) letting or delivering of any goods to a
hirer under a hire-purchase agreement as
defined in clause (c) of section 2 of the Hire-
Purchase Act, 1972;
(iv) the carrying on of any class of insurance
business;
(v) managing, conducting or supervising, as
foreman, agent or in any other capacity, of chits
or kuries as defined in any law which is for the
time being in force in any State, or any
business, which is similar thereto;
(vi) collecting, for any purpose or under any
scheme or arrangement by whatever name
called, monies in lumpsum or otherwise, by way
of subscriptions or by sale of units, or other
instruments or in any other manner and
awarding prizes or gifts, whether in cash or
kind, or disbursing monies in any other way, to
persons from whom monies are collected or to
any other person,
but does not include any institution, which carries on as
its principal business,–
(a) agricultural operations; or
(aa) industrial activity; or
Explanation.–For the purposes of this clause,
‘‘industrial activity’’ means any activity specified in sub-
clauses (i) to (xviii) of clause (c) of section 2 of the
Industrial Development Bank of India Act, 1964;
82
(b) the purchase or sale of any goods (other
than securities) or the providing of any services;
or
(c) the purchase, construction or sale of
immovable property, so however, that no
portion of the income of the institution is derived
from the financing of purchases, constructions
or sales of immovable property by other
persons;
xxx xxx xxx”
Section 45L reads as follows:
“45L. Power of Bank to call for information from
financial institutions and to give directions.—(1) If
the Bank is satisfied for the purpose of enabling it to
regulate the credit system of the country to its advantage
it is necessary so to do, it may—
(a) require financial institutions either generally
or any group of financial institutions or financial
institution in particular, to furnish to the Bank in
such form, at such intervals and within such
time, such statements, information or
particulars relating to the business of such
financial institutions or institution, as may be
specified by the Bank by general or special
order;
(b) give to such institutions either generally or
to any such institution in particular, directions
relating to the conduct of business by them or
by it as financial institutions or institution.
(2) Without prejudice to the generality of the power
vested in the Bank under clause (a) of sub-section (1),
the statements, information or particulars to be furnished
by a financial institution may relate to all or any of the
following matters, namely, the paid-up capital, reserves
or other liabilities, the investments whether in
Government securities or otherwise, the persons to
whom, and the purposes and periods for which, finance
83
is provided and the terms and conditions, including the
rates of interest, on which it is provided.
(3) In issuing directions to any financial institution under
clause (b) of sub-section (1), the Bank shall have due
regard to the conditions in which, and the objects for
which, the institution has been established, its statutory
responsibilities, if any, and the effect the business of
such financial institution is likely to have on trends in the
money and capital markets.”
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 non-banking 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
84
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.
46. In view of the declaration by this Court that the impugned
circular is ultra vires Section 35AA of the Banking Regulation Act, it is
unnecessary to go into any of the other contentions that have been
raised in the transferred cases and petitions. The transferred cases
and petitions are disposed of accordingly.
…........................... J.
(R.F. NARIMAN)
…........................... J.
(VINEET SARAN)
New Delhi;
April 2, 2019.
Legal Notes
Add a Note....