Stressed asset resolution powers: statutory guidance upheld, but a class-wide insolvency referral circular exceeded RBI authority.

Sections 35AA and 35AB of the Banking Regulation Act were upheld as part of a stressed-asset resolution framework, with the Court holding that economic legislation enjoys wide constitutional latitude and that adequate guidance existed in the statutory scheme, object and connected provisions. The Court also clarified that Section 35AA is the exclusive source of power for directions to initiate insolvency resolution under the Insolvency and Bankruptcy Code, and that such power operates only with Central Government authorisation and for a specific default. A general, class-wide RBI circular could not be sustained under that provision, and Section 45L did not save it. The circular was therefore ultra vires and without legal effect.

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Issues: (i) Whether Sections 35AA and 35AB of the Banking Regulation Act, 1949 were constitutionally valid; (ii) whether the RBI circular dated 12.02.2018 was ultra vires Section 35AA and the Reserve Bank of India Act, 1934.

Issue (i): Whether Sections 35AA and 35AB of the Banking Regulation Act, 1949 were constitutionally valid.

Analysis: The challenged provisions were enacted as part of a regulatory framework for resolution of stressed assets and use of the Insolvency and Bankruptcy Code, 2016. The Court held that economic legislation is entitled to wide latitude, and that manifest arbitrariness must be shown by clear absence of principle, capriciousness, or disproportionality. It found that the provisions were supported by the statutory scheme, including the powers already conferred on the banking regulator under the Act, and that sufficient guidance was available from the Act's preamble, object, and connected provisions. The plea of absence of guidelines and excessive delegation was rejected.

Conclusion: Sections 35AA and 35AB were upheld as constitutionally valid.

Issue (ii): Whether the RBI circular dated 12.02.2018 was ultra vires Section 35AA and the Reserve Bank of India Act, 1934.

Analysis: The Court held that Section 35AA is the exclusive source of power for directions to initiate insolvency resolution under the Insolvency and Bankruptcy Code, 2016, and that such power exists only upon authorisation by the Central Government and only in respect of a specific default. A general circular applicable across borrowers and sectors could not be sustained under that provision. The Court also held that Section 35AB concerns resolution of stressed assets de hors the Insolvency and Bankruptcy Code, while Section 45L could not save the circular, especially since the statutory requirements governing directions to financial institutions were not shown to have been satisfied. Since the circular was ultra vires insofar as its core application to banks was concerned, it could not be upheld as a whole.

Conclusion: The circular was declared ultra vires and of no effect in law.

Final Conclusion: The impugned circular could not lawfully compel reference of stressed accounts to insolvency merely on the basis of a class-wide framework, and actions taken solely under that circular could not survive.

Ratio Decidendi: Where a statute confers a specific power to initiate insolvency proceedings only for a specific default and upon prior governmental authorisation, that power cannot be exercised through a general, class-based direction under broader enabling provisions.

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