SC Ultra Vires RBI’s Framework for the Resolution of Stressed Assets

The controversial February 12 circular of RBI which laid out a Framework for the resolution of stressed assets was quashed by the Supreme Court.

In the circular, the RBI had revised the framework for the resolution of stressed assets.
It had with immediate effect replaced all the previous instructions regarding the resolution of stressed assets.
The circular has brought a new one-day default norm which calls the lender or lenders to initiate the resolution process immediately after finding the default in borrower entity’s account.
Banks have to initiate the resolution plan for accounts over Rs. 2000 crore.
The process has to be finalized in 180 days.
In cases where there is non-implementation of resolution plan then insolvency application is to be filed.
As per the Insolvency and Bankruptcy Code, 2016 (IBC) a resolution plan needs to be finalized in 180 days with a grace period of 90 days.
RBI stated that the notification will harmonized and simplify the framework for resolution.

With the circular, RBI has replaced all its previous stressed asset resolution mechanisms like – Framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long term project loans, strategic debt restructuring scheme, Scheme for sustainable structuring of stressed assets (S4A), etc.
These schemes have lenient terms of resolution. But the RBI Circular had called for immediate resolution plan and banks not following the timeline will have to face stringent punishments of RBI.

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The resolution plan of RBI had not gone down well with several companies which challenged the circular in the Allahabad High Court.
The court denied any interim relief and thus the case landed with the Supreme Court.
RBI argued that the circular is to speed up the process of resolution in the interests of the public and avoid evergreening of loans where a new loan is taken to pay for the old loan.
The SC called the circular Ultra Vires.

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Experts are concerned that the order by the SC will delay resolution process that might further stress the banks.
As per the IBC, banks can devise resolution plans at their own pace and thus the urgency of the RBI to start resolution plans with the immediate effect.

Though the SC verdict will not impact the ongoing cases at the National Company Law Tribunal (NCLT), but any new cases will get delayed.
With the circular, there was an upswing in banks framing resolution plans and loan recovery moving ahead.
Getting back to the same pace will take some time.