Real judgements, distilled

Legal Case Shots

Court judgements broken down into the case type, how the decision played out, and the lesson worth remembering, with the full judgement available as a PDF.

Banking & Debt Recovery LawSupreme Court of India

Dharani Sugars and Chemicals Ltd v. Union of India

Transferred Case (Civil) · 2019 INSC 457Decided 2 Apr 2019
Transferred Case (Civil) No. 66 of 2018
Justice Rohinton Fali Nariman · Justice Vineet Saran

Background

On 12 February 2018, the Reserve Bank of India issued a circular directing banks to treat loan accounts above a threshold as in "default" and to initiate a time-bound resolution process, failing which lenders were required to file insolvency proceedings under the Insolvency and Bankruptcy Code. Numerous corporate borrowers and lenders across the country challenged this circular, and all the related writ petitions and transfer petitions were brought together before the Supreme Court as a single batch (with Dharani Sugars' transferred case treated as the lead matter). The core challenge was that the RBI lacked the statutory power to issue such a blanket, sector-wide directive forcing insolvency action.

Decision Breakdown

The Court held that the RBI's general regulatory powers under Sections 35A and 35AB of the Banking Regulation Act could not be used to issue the circular, because Section 35AA, a specific provision inserted by Parliament to empower the RBI to direct banks to initiate insolvency proceedings, required prior authorisation from the Central Government for each specific default, which had not been obtained. The Court also found the circular failed to show the regard required by Section 45L(3) to the varying conditions and statutory responsibilities of the different categories of institutions it swept in. Because the circular exceeded the RBI's statutory authority, it was declared wholly ultra vires and of no legal effect, and all insolvency proceedings triggered solely because of the circular were declared non-est (void from inception).

Lesson Learnt

Even a powerful regulator like the RBI must act strictly within the specific statutory power Parliament has given it; a general rule-making power cannot be stretched to do what only a more specific, conditions-attached provision authorises, and action taken beyond that authority is void, not merely irregular.

Dharani Sugars and Chemicals Ltd v. Union of India – Legal Case Shots | LegalAware