DHARANI SUGARS AND CHEMICALS LTD. versus UNION OF INDIA & ORS.

[2019] 6 S.C.R. 307

DHARANI SUGARS AND CHEMICALS LTD.

UNION OF INDIA & ORS.

(Transferred Case (Civil) No.66 of 2018)

(Transfer Petition (Civil) No.1399 of 2018)

APRIL 02, 2019

[R. F. NARIMAN AND VINEET SARAN, JJ.]

Banking Regulation Act, 1949 – ss.35AA and 35AB – Validityof – Petitioners contended that the Banking Regulation (Amendment)Act, 2017, which introduced ss.35AA and 35AB are unconstitutionalon two grounds: (i) that the sections introduced are manifestlyarbitrary; and (ii) that they suffer from absence of guidelines –Held: The Banking Regulation (Amendment) Act, 2017 brought theseamendments which confer regulatory powers upon the RBI to carryout its functions under the Banking Regulation Act and are notdifferent in quality from any of the sections which have alreadyconferred such power – S.21 makes it clear that the RBI may controladvances made by banking companies in public interest, and in sodoing, may not only lay down policy but may also give directions tobanking companies either generally or in particular – Similarly, u/s.35A, vast powers are given to issue necessary directions to bankingcompanies in public interest – Therefore, ss.35AA and 35AB whichgive the RBI certain regulatory powers cannot be said to be manifestlyarbitrary – Insofar, guidelines by which the power given to the RBIis to be exercised are concerned, there are catena of judgments thatsuch guidance can be obtained not only from the statement of objectsand reasons and preamble to the Act but also from its provisions –There are other regulatory ss.25, 29, 30 and 31, all give guidanceas to how the RBI is to exercise these powers under the newly addedprovisions – Consequently, plea of constitutional validity failed –Banking Regulation (Amendment) Act, 2017.

Banking Regulation Act, 1949 – s.35A, 35AA and 35AB –Reserve Bank of India Act, 1934 – s.45L – Reserve Bank of Indiaissued circular on 12.02.2018, by which RBI promulgated revised

Aframework for resolution of stressed assets – According to RBI, thesaid circular attempted to tell banks that insofar as huge debts overINR 2000 crore are concerned, they will be given reasonable periodof six months within which to either resolve stress assests orotherwise, if they cannot do so, would only then have to move underthe insolvency and Bankruptcy Code, 2016 – It was also contendedBthat the said circular traced its power from sections 21, 35A, 35AAand 35AB of the Banking Regulation Act and s.45L of the ReserveBank of India Act – Petitioner contended that impugned RBI Circulardated 12.02.2018 was ultra vires the provisions of the BankingRegulation Act and the RBI Act – Held: Stressed assets can beCresolved either through the Insolvency Code or otherwise – Whenresolution through the Code is to be effected, the specific powergranted by s.35AA can alone be availed by the RBI – Prior to theenactment of s.35AA, it may have been possible to say that when itcomes to the RBI issuing directions to banking company to initiateinsolvency resolution process under the Insolvency Code, it couldDhave been issued such directions u/ss. 21 and 35A – But after s.35AA,it may do so only within the four corners of s.35AA – And power u/s.35AB r/w. 35A is to be exercised separately from the powerconferred by s.35AA – Now, the directions that can be issued u/s.35AA can only be in respect of specific defaults by specific debtorsE– This was also the understanding of the Central Government whenit issued notification dated 05.05.2017, which authorised the RBIto issue such directions only in respect of “a default” under theinsolvency Code – Thus, any directions which are in respect ofdebtors generally, would be ultra vires s.35AA – In the instant case,impugned circular dated 12.02.2018 stated that as one of its sources,Fthe power contained in s.45L of the RBI Act insofar as non-bankingfinancial institution are concerned – However, there is nothing toshow that the provisions of s.45L(3) were satisfied – Further,impugned Circular dated 12.02.2018 applied to banking and non-banking institutions alike, therefore, they are inseparable insofarGas the application of the impugned circular is concerned – It is verydifficult to segregate the non-banking financial institutions frombanks so as to make the circular applicable to them even if it is ultravires insofar as banks are concerned – For these reasons also, theimpugned circular declared as ultra vires as whole and declaredto be of no effect in law – Insolvency and Bankruptcy Code, 2016.H

Banking Regulation Act, 1949 – ss.35A, 35AA and 35AB –Scheme of – Held: When it comes to issuing directions to initiate theinsolvency resolution process under the Insolvency and BankruptcyCode, 2016, s.35AA is the only source of power – When it comes toissuing directions in respect of stressed assets, which directions aredirections other than resolving this problem under the InsolvencyCode, such power falls within s.35A r/w. s.35AB – This also becomesclear from the fact that s.35AB(2) enables the RBI to specify one ormore authorities or committees to advise any banking company onresolution of stressed assets – This advice is obviously de hors theInsolvency Code, as once an application is made under theInsolvency Code, such advice would be wholly redundant, as theInsolvency Code provisions would then take over and have to befollowed – Insolvency and Bankruptcy Code, 2016

Disposing of the Transferred cases and Petitions, the Court

HELD: CONSTITUTIONAL VALIDITY

1. The petitioners have argued that the Banking Regulation(Amendment) Ordinance, 2017 and the Banking Regulation(Amendment) Act, 2017 are unconstitutional on two grounds; (i)that the Sections i.e. 35AA and 35AB introduced are manifestlyarbitrary; and (ii) that they suffer from absence of guidelines.[Para 16][340-H; 341-A]

2. None of the petitioners have been able to point out as tohow either of these provisions is manifestly arbitrary. They arenot excessive in any way nor do they suffer from want of anyguiding principle. As matter of fact, these amendments are inthe nature of amendments which confer regulatory powers uponthe RBI to carry out its functions under the Banking RegulationAct, 1949, and are not different in quality from any of the Sectionswhich have already conferred such power. Thus, Section 21 makesit clear that the RBI may control advances made by bankingcompanies in public interest, and in so doing, may not only laydown policy but may also give directions to banking companieseither generally or in particular. Similarly, under Section 35A,vast powers are given to issue necessary directions to bankingcompanies in public interest, in the interest of banking policy, toprevent the affairs of any banking company being conducted in

Amanner detrimental to the interest of the depositors or in amanner prejudicial to the interest of the banking company, or tosecure the proper management of any banking company. It isclear, therefore, that these provisions which give the RBI certainregulatory powers cannot be said to be manifestly arbitrary.[Para 16][342-C-F]B

3. When it comes to lack of any guidelines by which thepower given to the RBI is to be exercised, it is clear from acatena of judgments that such guidance can be obtained not onlyfrom the Statement of Objects and Reasons and the Preamble tothe Act, but also from its provisions. Sections 14A, 17, 18, andC20 impose various restrictions on banking company. Thus, it isprohibited from having floating charge on assets; it has tomaintain reserve fund, and cash reserve; and it cannot grantloans and advances on the security of its own shares, or on behalfof its directors, or any firm in which its directors are interestedDetc. banking company is obligated to hold license that is issuedby the RBI, by which the RBI can impose such conditions as itthinks fit under Section 22 of the Act. Section 22(3), in particular,gives guidance as to how the banking company will run itsbusiness. These and other regulatory sections such as Sections25, 29, 30, and 31, all give guidance as to how the RBI is toEexercise these powers under the newly added provisions.Therefore, RBI rightly stated that there was no dearth of guidancefor the RBI to exercise the powers delegated to it by theseprovisions. Consequently, the plea of constitutional validity fails.[Para 17][342-G-H; 347-H; 348-A-C]FULTRAVIRES

4. Section 35AA makes it clear that the Central Govern-ment may, by order, authorise the RBI to issue directions to anybanking company or banking companies when it comes to initiat-ing the insolvency resolution process under the provisions ofGthe Insolvency Code. The first thing to be noted is that withoutsuch authorisation, the RBI would have no such power. Thereare many sections in the Banking Regulation Act which enumer-ate the powers of the Central Government vis-a-vis the powersof the RBI. [Para 29][360-D-E]

5. conspectus of all these provisions ss.36AE, 36AF,45Y, 52, 53 and 55A shows that the Banking Regulation Act speci-fies that the Central Government is either to exercise powersalong with the RBI or by itself. The role assigned, therefore, bySection 35AA, when it comes to initiating the insolvency resolu-tion process under the Insolvency Code, is thus, important.Without authorisation of the Central Government, obviously, nosuch directions can be issued. [Para 29][363-F-G]

6. The corollary of this is that prior to the enactment ofSection 35AA, it may have been possible to say that when it comesto the RBI issuing directions to banking company to initiateinsolvency resolution process under the Insolvency Code, it couldhave issued such directions under Sections 21 and 35A. Butafter Section 35AA, it may do so only within the four corners ofSection 35AA. [Para 30][363-H; 364-A]

7. The matter can be looked at from slightly differentangle. If statute confers power to do particular act and haslaid down the method in which that power has to be exercised, itnecessarily prohibits the doing of the act in any manner otherthan that which has been prescribed. Following this principle,therefore, it is clear that the RBI can only direct banking institu-tions to move under the Insolvency and Bankruptcy Code, 2016if two conditions precedent are specified, namely, (i) that there isa Central Government authorisation to do so; and (ii) that it shouldbe in respect of specific defaults. The Section, therefore, by nec-essary implication, prohibits this power from being exercised inany manner other than the manner set out in Section 35AA.[Para 31][364-B-G; H; 365-A]

8. It is significant that the power to issue directions givenby Section 35AB is without prejudice only to the provisions ofSection 35A, i.e., it has to be read in conjunction with Section35A. What is of even greater significance is that Section 35AB isnot 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 thepower conferred by Section 35AA. [Para 36][368-C-D]

A9. The Press Note dated 05.05.2017, explained the newSections 35AA and 35AB as the grant of two distinct and separatepowers. Section 35AA has been inserted “to resolve specificstressed assets by initiating insolvency resolution process whererequired”. On the other hand, Section 35AB has been enactedso that the “RBI has also been empowered to issue otherBdirectionsfor resolution……” It is significant that Section 35AAis enacted exactly as it is in the Ordinance. So is Section 35AB,except for minor addition in sub-section (1), which adds thewords “any banking company or”. Indeed, even the Statement ofObjects and Reasons introducing the same Sections by way of anCAmendment Act makes it clear that the powers conferred forresolution of stressed assets, either by invoking the InsolvencyCode or by other means, are separate and independent powers,as set out in paragraphs 3(a) and 3(b) of the said Statement ofObjects and Reasons. Therefore, the scheme of Sections 35A,

35AA, and 35AB is as follows: (a) When it comes to issuingDdirections to initiate the insolvency resolution process under theInsolvency 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 problemunder the Insolvency Code, such power falls within Section 35AEread with Section 35AB. This also becomes clear from the factthat Section 35AB(2) enables the RBI to specify one or moreauthorities or committees to advise any banking company onresolution of stressed assets. This advice is obviously de horsthe Insolvency Code, as once an application is made under theInsolvency Code, such advice would be wholly redundant, as theFInsolvency Code provisions would then take over and have tobe followed. [Para 38][369-C-H; 370-A]10 Stressed assets can be resolved either through theInsolvency Code or otherwise. When resolution through the Codeis to be effected, the specific power granted by Section 35AA canGalone be availed by the RBI. When resolution de hors the Codeis to be effected, the general powers under Sections 35A and35AB are to be used. Any other interpretation would makeSection 35AA otiose. In fact, RBI’s argument that the RBI canissue directions to banking company in respect of initiating

insolvency resolution process under the Insolvency Code underSections 21, 35A, and 35AB of the Banking Regulation Act, wouldobviate the necessity of Central Government authorisation todo so. Absent the Central Government authorisation underSection 35AA, it is clear that the RBI would have no such power.[Para 40][371-B-C]

11. Having grounded the power to issue directions tobanking companies so far as the Insolvency Code is concerned,in Section 35AA, what is important to note is that the Sectionenables the Central Government to authorise the RBI to issuesuch directions in respect of “a default”. This is clear also fromthe Press Note dated 05.05.2017, which introduced the Ordinancewhich specifically referred to resolution of “specific” stressedassets which will empower the RBI to intervene in “specific”cases of resolution of NPAs. The Statement of Objects andReasons for introducing Section 35AA also emphasises thatdirections are in respect of “a default”. Thus, it is clear thatdirections that can be issued under Section 35AA can only be inrespect of specific defaults by specific debtors. This is also theunderstanding of the Central Government when it issued thenotification dated 05.05.2017, which authorised the RBI to issuesuch directions only in respect of “a default” under the Code.Thus, any directions which are in respect of debtors generally,would be ultra vires Section 35AA. [Paras 41, 42][371-D-E;372-F-H]

12. The impugned circular states as one of its sources, thepower contained in Section 45L of the Reserve Bank of IndiaAct, 1934 insofar as non-banking financial institutions areconcerned. However, there is nothing to show that the provisionsof Section 45L(3) have been satisfied in issuing the impugnedcircular. The impugned circular nowhere says that the RBI hashad due regard to the conditions in which and the objects forwhich such institutions have been established, their statutoryresponsibilities, and the effect the business of such financialinstitutions is likely to have on trends in the money and capitalmarkets. Further, it is clear that the impugned circular applies tobanking and non-banking institutions alike, as banking and non-banking institutions are often in joint lenders’ forum which jointlylend sums of money to debtors. Such non-banking financial

314SUPREME COURT REPORTS

Ainstitutions are, therefore, inseparable from banking institutionsinsofar as the application of the impugned circular is concerned.It is very difficult to segregate the non-banking financialinstitutions from banks so as to make the circular applicable tothem even if it is ultra vires insofar as banks are concerned. Forthese reasons also, the impugned circular will have to be declaredBas ultra vires as whole, and be declared to be of no effect in law.Consequently, all actions taken under the said circular, includingactions by which the Insolvency Code has been triggered mustfall along with the said circular. As result, all cases in whichdebtors have been proceeded against by financial creditors underCSection 7 of the Insolvency Code, only because of the operationof the impugned circular will be proceedings which, being faultedat the very inception, are declared to be non-est. [Para 45][374-C; 376-E-H; 377-A]Harishankar Bagla v. State of M.P. [1955] 1 SCR 380;DGwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The AssistantCommissioner of Sales Tax and Ors.; Senior ElectricInspector v. Laxminarayan Chopra [1962] 3 SCR146 ; State of U.P. v. Singhara Singh [1964] 4 SCR485; Utkal Contractors & Joinery (P) Ltd. v. State ofOrissa (1987) 3 SCC 279 : [1987] 3 SCR 317;EJ.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Stateof U.P. [1961] 3 SCR 185 – relied on.

Indian Banks’ Association v. Devkala ConsultancyService (2004) 11 SCC 1 : [2004] 1 Suppl. SCR 225– held inapplicable

Manohar Lal Sharma v. Principal Secretary and Ors.(2014) 9 SCC 516:[2014] 8 SCR 446; IndependentPower Producers Association of India v. Union of Indiaand Ors. (Writ - No. 18170 of 2018 at the AllahabadHigh Court); Swiss Ribbons Pvt. Ltd. and Anr. v. UnionGof India and Ors. 2019 (2) SCALE 5; Shayara Bano v.Union of India (2017) 9 SCC 1: [2017] 7 SCR 797;Central Bank of India v. Ravindra, (2002) 1 SCC 367:[2001] 4 Suppl. SCR 323 ; Sudhir Shantilal Mehta v.Central Bureau of Investigation (2009) 8 SCC 1:[2009]H12 SCR 682 ; ICICI Bank Ltd. v. APS Star Industries

Ltd. (2010) 10 SCC 1: [2010] 12 SCR 644; BharatSanchar Nigam Ltd. v. Telecom Regulatory Authority ofIndia and Ors. (2014) 3 SCC 222 : [2013] 12 SCR999; Union of India and Anr. v. Pfizer Ltd. and Ors.(2018) 2 SCC 39 : [2017] 12 SCR 179 ; Eera (throughDr. Manjula Krippendorf) v. State (NCT of Delhi) andAnr. (2017) 15 SCC 133 : [2017] 7 SCR 924 ; ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta (2019) 2SCC 1; Asian Resurfacing of Road Agency (P) Ltd. v.Central Bureau of Investigation (2018) 16 SCC 299 :[2018] 2 SCR 1045 ; Macquarie Bank Ltd. v. ShilpiCable Technologies Ltd. (2018) 2 SCC 674 ; State (NCTof Delhi) v. Brijesh Singh (2017) 10 SCC 779: [2017]11 SCR 899; Commercial Tax Officer, Rajasthan v.Binani Cements Ltd. and Anr., (2014) 8 SCC 319: [2014]3 SCR 1; Maru Ram and Ors. v. Union of India andOrs. (1981) 1 SCC 107:[1981] 1 SCR 1196– referred to.

Royal College of Nursing of the United Kingdom v.Department of Health and Social Security [1981] 1 AllER 545 [HL] ; Comdel Commodities Ltd. v. SiporexTrade S.A. [1990] 2 All ER 552 [HL] ; McCartanTurkington Breen (A Firm) v. Times Newspapers Ltd.,[2000] 4 All ER 913 ; Birmingham City Council v.Oakley [2001] 1 All ER 385 [HL] ; Taylor v. Taylor,[1875] 1 Ch. D. 426 – referred to.

Case Law Reference

CIVIL ORIGINAL/APPELLATE JURISDICTION: TransferredECase (Civil) No.66 of 2018 in Transfer Petition (Civil) No.1399 of 2018

Under Article 139A (1) of The Constitution of India.

WITH

W.P.(C) Nos. 339, 802, 1086, 1110, 1124, 1142, 1138, 1156, 1153,F1166, 1206, 1212, 1236, 1296 of 2018, SLP(C) No. 31421 of 2018, W.P.(C) Nos. 1316, 1308 and 1359 of 2018 T.C.(C) No. 65 of 2018 in T.P.(C) No. 1404 of 2018, W.P.(C) No. 1363, 1364, 1374 of 2018, T.C.(C)No. 71 of 2018 in T.P. (C) No. 1283 of 2018 T.C.(C) No. 73 of 2018 inT.P. (C) No. 1285 of 2018 T.C.(C) No. 72 of 2018 in T.P. (C) No. 1284Gof 2018, T.C.(C) No.75 of 2018 in T.P. (C) No. 1287 of 2018, T.C.(C)No. 76 of 2018 in T.P. (C) No.1288 of 2018, T.C.(C) No. 74 of 2018 inT.P. (C) No. 1286 of 2018, T.C.(C) No.70of 2018 in T.P. (C) No. 1403of 2018, T.C.(C) No.69 of 2018 in T.P. (C) No. 1402 of 2018, T.C.(C)No. 68 of 2018 in T.P. (C) No. 1401 of 2018, T.C.(C) No. 67 of 2018 inT.P. (C) No. 1400/2018, W.P.(C) Nos. 1383, 1402, 1400, 1391, 1411,

1410, 1438 of 2018, W.P.(C) No. 22 of 2019, W.P.(C) No. 1502 of 2018,W.P.(C) No. 8, 9, 14, 36 50, 81, 117, 246 and 278 of 2019.

Attorney General for India, Tushar Mehta, SG, Vikramjit Banerjeeand Ms. Madhavi Diwan, ASGs, Navaniti Prasad Singh, Mukul Rohtagi,K.V. Viswanathan, Rakesh Dwivedi, P.S. Narasimha, Sajjan Poovayya,Dhruv Mehta, Arvind Datar, Sr. Advs., R. Balasubramanian, Rajat Nair,Kanu Agrawal, Rajeev Ranjan Ranvijay Singh, G.S. Makker, ShraddhaDeshmukh, Ms. Haripriya, Arvind Kumar Sharma, M.K. Maroria, BirjeshKumar Sinha, Hitesh Kumar Sharma, Meetali Patel, Jeewesh Prakash,Shantanu Sagar, T. Mahipal, Pulkit Deora, Udit Gupta (for M/s UditKishan and Associates), Arvind Kumar Gupta, Mrs. Purti MarawahaGupta, Mrs. Heena George, Mrs. V. S. Lakshmi, A. Venayagam Balan,Alok Dhir, Ms. Maneesha Dhir, Ms. Varsha Banerjee, Ashu Kansal,Ms. Stuti Vats, T.V.S. Raghavendra Sreyas, Abhishek Singh, YtharthKumar, J. Amal Anand, Ms. Aayushi Mishra, Vanshdeep Dalmia, Ms.Shalini Kaul, Prasanna S., Aakarsh Kamra, Rajiv Shankar Dvivedi,Sushant Sankar, Ms. Sweta Singh, Ms. Neha Mishra, Ms. Aarti Dwivedi,Mahesh K. Chaudhary, Ms. Kusum Lata, P.V. Dinesh, Ms. T.P. Sindhu,Mukund P. Unny, Lakshman R.S., Bineesh K., M/s Indialaw, HemantSingh, Nishant Kumar, Lakshyajit Singh Bagdwal, Ambuj Dixit, Ms. DivyaRoy, Anil Kumar Sangal, Siddharth Sangal, Ms. Nilanjani Tandon, AmarGupta, Mayank Mishra, Ashish Joshi, Divyam Agarwal, Ms. Diksha Rai,Ishan Bisht, Ms. Palak Mahajan, Dhananjay Bhaskar Ray, RaviRaghunath, Mukunda Rao, Ms. Vrinda Bhandari, R. Venkatraman,Ms. Praveena Gautam, Jitesh P. Gupta, Pawan Shukla, Raja Ram,Ms. Liz Mathew, Rajendra Barot, Vivek Shetty, Jahan Chokshy, Ms.Sansriti Pathak, Eklavya Dwivedi, Siddharth Iyer, Navneet R., RaghavMehrotra, Ananga Bhattacharyya, Rohit Rao N., Shourya Garg (for M/s Veritas Legis), Dhruv Mohan, Ms. Astha Sharma, E.R. Kumar, Ms.Sonal Gupta, Ishan Nagar, Raghav Bansal (for M/s Parekh & Co.),Mrs. Garima Bajaj, Sudarsh Menon, Ms. Nimisha Menon, Vikram Hegde,Chanchal Kumar Ganguli, Rahul Kumar, Ms. Hima Lawrence, VishrovMukherjee, Pukhrambam Ramesh Kumar, Ms. Catherine Ayallore,Priyardarshi Banerjee, Pratibhanu Singh Kharola, Ameya Vikram Mishra,Rajesh Kumar-I, Anant Gautam, Ms. Shruti Vats, Ms. KhushbooAggarwal, Debayan Banerjee, Anmol Mehta, Sanjay Kapur, Ms. MeghaKarnwal, Bharath Gangadharan, Ms. Shubhra Kapur, Vipin Kumar Jai,Vipul Jai, Dushyant Parashar, Shailly Dinkar, Som Raj Choudhary,

APrashant Kumar, Sovi Bipneet Singh, Ms. Vandana Sehgal, Iqram GovindSingh, Pranaya Goyal, Aman Raj Gandhi, Abhishek Sharma, Yash Badkur,Ritin Rai, Abhipsit Mishra, S.B. Arjun, Ms. Ishita Bist, Ms. KritikaBhardwaj, Ms. Meera Mathur, Vaijayant Paliwal, S.S. Shroff, BishwajitDubey, Ms. Srideepa Bhattacharyya, Manpreet Lamba, Ms. RuchiChoudhury, Aman Singhania(for M/s Cyril Amarchand Mangaldas, O.P.BGaggar, Aditya Gaggar, Milanka Chaudhury, Sarojanand Jha, AshlyCherian, Sanket Tiwari, Ms. Pragya Ohri, Abhirup Dasgupta, IshaanDuggal, Mohit D. Ram, Rajendra Beniwal, Rajesh P., Kaustubh Shukla,Mrs. Lalita Kaushik, Nikhil Jain, Mahesh Agrawal, Sikhil Suri, SoumikGhosal, Himanshu Satija, Nishant Rao, Divyang Gobind Chandiramani,CSandeep Ladda, Gaurav Singh, Ms. Neeha Nagpal, Arshit Anand, AjayBhargava, Ms. Shally Bhasin, Ms. Aastha Mehta, Rajesh Kumar, Milinka,Nidhi Ram Sharma, Jay Zaveri, Rishi Agrawala, Sumesh Dhawan,Vatsala Kak, Ms. Wamika Trehan, Ms. Maithli Mundra, E.C. Agrawala,Ms. Suruchii Aggarwal, Ms. Usha Nandini V., Ms. Reetu Sharma, AlokShukla, Neeraj Shekhar, Satish Kumar, Amit Kumar Pathak, Shiv KumarDSuri, Puneet Singh Bindra, Balaji Srinivasan, Abhishek Agarwal, AnandShankar Jha, M/s Dharmaprabhas Law Associates, Rajesh Singh, AshishRana, Arun Aggarwal, Dr. Vinod Kumar Tewari, Brijesh Kumar Tamber,Rabin Majumder, Mrs. Anil Katiyar, Gaurav Agrawal, Advs. for theappearing parties.EThe Judgment of the Court was delivered byR. F. NARIMAN, J. 1. The present batch of petitions andtransferred cases raise questions as to the constitutional validity ofSections 35AA and 35AB of the Banking Regulation Act, 1949[“Banking Regulation Act”] introduced by way of amendment w.e.f.F04.05.2017. The real bone of contention is Reserve Bank of India[“RBI”] Circular issued on 12.02.2018, by which the RBI promulgateda revised framework for resolution of stressed assets. The importantclauses of the aforesaid circular are set out hereinbelow:

“Resolution of Stressed Assets – Revised Framework

1. The Reserve Bank of India has issued various instructions aimedat resolution of stressed assets in the economy, includingintroduction 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 harmonised and simplified generic framework for resolutionof stressed assets. The details of the revised framework areelaborated 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 specialmention accounts (SMA) as per the following categories:

3. As provided in terms of the circular DBS.OSMOS.No.14703/33.01.001/2013-14 dated May 22, 2014 and subsequentamendments thereto, lenders shall report credit information,including classification of an account as SMA to Central Repositoryof Information on Large Credits (CRILC) on all borrower entitieshaving aggregate exposure[3] of 50 million and above with them.The CRILC-Main Report will now be required to be submitted ona monthly basis effective April 1, 2018. In addition, the lendersshall report to CRILC, all borrower entities in default (withaggregate exposure of 50 million and above), on weekly basis,at the close of business on every Friday, or the preceding workingday if Friday happens to be holiday. The first such weekly reportshall be submitted for the week ending February 23, 2018.

1 Lenders under these guidelines would generally include all scheduled commercialbanks (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 theamount of debt has become due and payable and is not repaid by the debtor or thecorporate debtor, as the case may be. For revolving facilities like cash credit, defaultwould also mean, without prejudice to the above, the outstanding balance remainingcontinuously in excess of the sanctioned limit or drawing power, whichever is lower,for more than 30 days.

3Aggregate exposure under the guidelines would include all fund based and non-fundbased exposure with the lenders.

AB. Implementation of Resolution Plan

4. All lenders must put in place Board-approved policies forresolution of stressed assets under this framework, including thetimelines for resolution. As soon as there is default in the borrowerentity’s account with any lender, all lenders “ singly or jointly “Bshall initiate steps to cure the default. The resolution plan (RP)may involve any actions / plans / reorganisation including, but notlimited to, regularisation of the account by payment of all overdues by the borrower entity, sale of the exposures to other entities/ investors, change in ownership, or restructuring[4]. The RP shallbe clearly documented by all the lenders (even if there is no changeCin any terms and conditions).

C. Implementation Conditions for RP

5. RP in respect of borrower entities to whom the lenderscontinue to have credit exposure, shall be deemed to beD‘implemented’ only if the following conditions are met:

a. the borrower entity is no longer in default with any of thelenders;

b. if the resolution involves restructuring; then

i. all related documentation, including execution of necessaryEagreements between lenders and borrower / creation ofsecurity charge / perfection of securities are completed byall lenders; and

ii. the new capital structure and/or changes in the terms ofconditions of the existing loans get duly reflected in the booksFof all the lenders and the borrower.

6. Additionally, RPs involving restructuring / change in ownershipin respect of ‘large’ accounts (i.e., accounts where the aggregate

4 Restructuring is an act in which lender, for economic or legal reasons relating to theGborrower’s financial difficulty (An illustrative non-exhaustive list of indicators offinancial difficulty are given in the Appendix to Annex-I), grants concessions to theborrower. Restructuring would normally involve modification of terms of the advances/ securities, which may include, among others, alteration of repayment period / repayableamount / 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 threeHmonths.

exposure of lenders is 1 billion and above), shall requireindependent credit evaluation (ICE) of the residual debt[5] by creditrating agencies (CRAs) specifically authorised by the ReserveBank for this purpose. While accounts with aggregate exposureof 5 billion and above shall require two such ICEs, others shallrequire one ICE. Only such RPs which receive credit opinion ofRP4[6] or better for the residual debt from one or two CRAs, asthe 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 thepayment of fee for such assignments shall be made by thelenders.

b. If lenders obtain ICE from more than the required numberof CRAs, all such ICE opinions shall be RP4 or better for theRP to be considered for implementation.

xxx xxx xxx

D. Timelines for Large Accounts to be Referred under IBC

8. In respect of accounts with aggregate exposure of the lendersat 20 billion and above, on or after March 1, 2018 (‘referencedate’), including accounts where resolution may have beeninitiated under any of the existing schemes as well as accountsclassified as restructured standard assets which are currently inrespective specified periods (as per the previous guidelines), RPshall be implemented as per the following timelines:

i. If in default as on the reference date, then 180 days from thereference date.

ii. If in default after the reference date, then 180 days from thedate of first such default.

9. If RP in respect of such large accounts is not implemented asper the timelines specified in paragraph 8, lenders shall fileinsolvency application, singly or jointly, under the Insolvency and

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 perthe proposed RP.

6 Annex – 2 provides list of RP symbols that can be provided by CRAs as ICE andtheir meanings.

Bankruptcy Code 2016 (IBC)[7] within 15 days from the expiry ofthe said timeline[8].

xxx xxx xxx

12. For other accounts with aggregate exposure of the lendersbelow 20 billion and, at or above 1 billion, the Reserve Bankintends to announce, over two-year period, reference dates forimplementing the RP to ensure calibrated, time-bound resolutionof all such accounts in default.

xxx xxx xxx

V. Withdrawal of extant instructions

18. The extant instructions on resolution of stressed assets suchas Framework for Revitalising Distressed Assets, Corporate DebtRestructuring Scheme, Flexible Structuring of Existing Long TermProject Loans, Strategic Debt Restructuring Scheme (SDR),Change in Ownership outside SDR, and Scheme for SustainableStructuring of Stressed Assets (S4A) stand withdrawn withimmediate effect. Accordingly, the Joint Lenders’ Forum (JLF)as an institutional mechanism for resolution of stressed accountsalso stands discontinued. All accounts, including such accountswhere any of the schemes have been invoked but not yetimplemented, shall be governed by the revised framework.

19. The list of circulars/directions/guidelines subsumed in thiscircular and thereby stand repealed from the date of this circularis given in Annex - 3.

20. The above guidelines are issued in exercise of powersconferred under Section 35A, 35AA (read with S.O.1435 (E) datedMay 5, 2017 issued by the Government of India) and 35AB of theBanking Regulation Act, 1949; and, Section 45L of the ReserveBank of India Act, 1934.”

2. It will be noticed that the salient features of this circular arethat restructuring in respect of borrower entities de hors the Insolvency

7 Applicable in respect of entities notified under IBC.

8 The prescribed timelines are the upper limits. Lenders are free to file insolvencypetitions under the IBC against borrowers even before the expiry of the timelines, oreven without attempting RP outside IBC.

and Bankruptcy Code, 2016 [“Insolvency Code”] can only occur ifthe resolution plan that involves restructuring is agreed to by all lenders,i.e., 100 per cent concurrence. Secondly, what has been chosen to bethe subject matter of the circular is debts with an aggregate exposure ofINR 2000 crore and over on or after 01.03.2018. With respect to suchdebts, if default persists for 180 days from 01.03.2018, or if the date offirst default is after 01.03.2018, then 180 days calculated with effectfrom that date, lenders shallfile applications singly or jointly under theInsolvency Code within 15 days from the expiry of the aforesaid 180days. In short, unless restructuring process in respect of debts with anaggregate exposure of over INR 2000 crore is fully implemented on orbefore 195 days from the reference date or date of first default, thelenders will have to file applications as financial creditors under theInsolvency Code. It will be noticed that the sources of power for issuanceof the aforesaid circular have been stated to be Section 35A of theBanking Regulation Act read with the Central Government’s circulardated 05.05.2017, Sections 35AA and 35AB of the said Act, and Section45L of the Reserve Bank of India Act, 1934 [“RBI Act”]. It may bestated here that by an order dated 11.09.2018, this Court allowed varioustransfer petitions and made orders in Writ Petition No. 1086 of 2018, bywhich it was ordered that status quo as of today shall be maintained inthe meantime. As result, insofar as the petitions and transferred casesin this Court are concerned, the circular has, in effect, been stayed onand from 11.09.2018.3. The charge on behalf of the petitioners was led by Dr. AbhishekManu Singhvi, learned Senior Advocate. Dr. Singhvi appears on behalfof the Association of Power Producers, representing the power sectorin general. According to the learned Senior Advocate, the ElectricityAct, 2003 [“Electricity Act”] was enacted as complete code toregulate the private sector. According to him, unlike sectors such as thesteel and cement sector, the power sector is fully regulated and tariffsthat are fixed can only be after they are so determined / adopted byElectricity Regulatory Commissions under Section 62 or Section 63 ofthe Electricity Act. The power sector, therefore, is player in restrictedmarket – power can only be purchased by distribution licensees or tradinglicensees under Section 12 of the Electricity Act, which can only bedone with the prior approval of State Electricity Regulatory Commissions.Even transmission of power requires prior approval of transmission

Alicensees, and therefore, substitutability of buyers is impossible since themeans to supply power are not readily available. To buttress hissubmissions, Dr. Singhvi relied heavily upon the reports of theParliamentary Standing Committees which were looking into the problemsof the power sector from time to time. Thus, the 37[th] ParliamentaryStanding Committee Report on Stressed / Non-performing Assets in theBElectricity Sector dated 07.03.2018 recorded that in the private sector,there were 34 stressed projects amounting to 40,130 MWs out of85,550.30 MWs which have debt exposure of INR 1,74,468 crore.Out of these, non-performing assets [“NPAs”] amounting to 34,044 croresare primarily on account of Government policy changes, failure to fulfilCcommitments by the Government, delayed regulatory response and non-payment of dues by DISCOMs. This Report, therefore, recommendedthe setting up of task force to look into the NPA problem in the powersector.

4. Dr. Singhvi then went into non-availability of fuel and took usDthrough the New Coal Distribution Policy of 18.10.2007, by which ThermalPower Projects were assured supply of 100 per cent coal. This changeddrastically as result of Government of India restrictions in 2013, whichrestricted supply of coal to only those Independent Power Producers(IPPs) with long term Power Purchase Agreements (PPAs) andotherwise limited supply to 65 per cent of coal requirement. AnotherEsetback occurred in August/September, 2014 as coal mines allocated tothe power sector were cancelled by the Supreme Court by judgmentin Manohar Lal Sharma v. Principal Secretary and Ors., (2014) 9SCC 516. Remedial measures such as the SHAKTI Scheme wereintroduced only after three years of the Supreme Court judgment onF22.05.2017. Even this Scheme limited supply of coal to 75 per cent ofthe assured coal supply as against what was assured in 2007. All thiswas commented on by the 37[th] and 40[th] Parliamentary Standing CommitteeReports. 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 wasGoriginally given priority, was later placed in 2013-14 under no-cutcategory, 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 approximatelyINR 39,500 crore to generating companies. This situation getsH

exacerbated by delay in adjudication and consequent payment byDISCOMs. He then referred to preferential treatment that is given topower companies in the public sector as opposed to power companies inthe private sector, and argued that against total stressed assets of 66,000MWs in the private sector, stressed assets in the public sector amount tonil. 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 executedonly for the capacity of 17,708 MWs, as result of which long termcommitments qua fuel supply etc. are lacking. According to him, theimpact of the RBI Circular was directly focused upon by the 40[th]Parliamentary Standing Committee Report. The 40[th] ParliamentaryStanding Committee has analysed the suitability and impact of theimpugned RBI Circular after consultation with the RBI, major banks,and financial institutions as well as the power sector associations. Keyobservations 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 StateBank of India have submitted that implementing an optimal solutionis impossible within the 180-day time period specified by theimpugned RBI Circular. The State Bank of India has stated that12 months’ time is required to implement resolution plan. As perthe prescribed timelines, every stressed project of the power sectorwill land in the NCLT.

(c) Arriving at 100 per cent consensus of lenders for approvaland implementation of the resolution plan is difficult, especiallywhen there are projects with multiple lenders.

(d) The Power Finance Corporation pointed out that even in caseof successfully running project like the Chhattisgarh project,they could only recover INR 2,500 crore out of total of debt ofINR 8,300 crore, i.e., 70 per cent haircut. Thus, there is significantvalue erosion.

(e) The State Bank of India highlighted the need for synchronisationbetween the RBI’s guidelines and resolution of the systemic issuesof the electricity sector.”

AAfter due examination and enquiry, the 40[th] Parliamentary StandingCommittee Report of August 2018 has made the followingrecommendations:

“(a) Appropriate, relevant, and sector-specific measures shouldbe explored to address the issues faced by power sector. InsteadBof adopting sector-agnostic approach for stress-resolution, the RBIshould look at sector-friendly measures.

(b) Revised framework introduced by the RBI has been doneignoring the prevailing realities.

(c) Repayment of 20 per cent of the outstanding principal debt asper the RBI Circular is impracticable for power sector entities,and accordingly, the circular disincentivizes restructuring with theexisting promoters.

(d) Forced sale before the NCLT will cause big sacrifice ofpublic money without any benefit to the economy or the powerDsector.

(e) The power sector should be protected since it is going througha transition phase from low-demand-low-supply situation to amoderately-high-demand situation, which is temporary in nature.”

5. Dr. Singhvi then referred to challenge that was made to theERBI Circular in the Allahabad High Court in Independent PowerProducers Association of India v. Union of India and Ors.,Writ - No. 18170 of 2018. He referred to copy of the order dated31.05.2018, by which the Allahabad High Court ordered:

“We request the Secretary, Ministry of Finance, Union of India,to hold meeting in the month of June, 2018 of respondents 2 to 5through their Secretaries and representative of the petitioners’association to consider their grievance and see whether any solutionto the problem is possible, in the light of observations made by theThirty-Seventh Report of Standing Committee on Energy presentedto Lok Sabha on 7.3.2018 with regard to stressed/non-performingassets in electricity sector. Though, we could not go through thereport, our attention was specifically drawn to some observationsin Part-II of the report, which reads thus:

“The Committee are of the considered view that providingfinances, though vital, to the project is only one of the severalfactors essential for the commissioning of the project. As ofnow, commissioned plants worth of thousands of Mws are undersevere financial stress and are currently under SMA-1/2 stageor on the brink of becoming NPA. This is due to fuel shortage,sub-optimal loading, untied capacities, absence of FSA and lackof PPA, etc. These projects were commissioned on the basisof national need/ demand of electricity, availability of all otheressentials required in this regard. However, due to unforeseencircumstances, these plants are suffering from cash flows,credit rating, interest servicing etc. Hence, simply applying theRBI guidelines mechanically by the banks, financial institutions,joint lender forums will push these plants further into troublewithout any hope of recovery.”

It is needless to mention that the petitioners’ representatives shallsupply copy of this order and of the writ petition with annexuresto all the respondents within one week from today. We only observethat action may be avoided on the basis of the impugned circulardated 12.2.2018 issued by respondent no.2-Reserve Bank of Indiaaddressed to all Scheduled Commercial Banks and All IndiaFinancial Institutions, against members of the petitionersassociation, subject to condition that the member(s) is/are not wilfuldefaulter(s) till the meeting is conducted by the Secretary, Ministryof Finance, Union of India. We also observe that the Secretary,Ministry of Finance shall communicate the date and time of themeeting to all concerned, including the President of the petitioners’association, well in advance.”

6. Dr. Singhvi then referred to the detailed order passed by theAllahabad High Court in the aforesaid case on 27.08.2018, in which hereferred to the stand taken by the Union of India as follows:

“24.1. …… As observed earlier, the Central Government is infavour of granting them some more time so as to save the powersector in the larger interest. Mr. Tushar Mehta, learned ASG,submitted that it is desirable, while considering the “sector (power)specific issues” that timeline prescribed under the circular bemade effective after 180 days from 27.08.2018 and subsequent

steps be taken by the parties based upon the reports of the HighLevel Empowered Committee presided over by the CabinetSecretary. He submitted, the time can be extended at this stageand not once process under IBC is set in motion.”

He also referred to the fact that High Level EmpoweredBCommittee is to be set up as follows:

“42. In this backdrop, I am inclined to direct the High LevelEmpowered Committee to submit its report within two monthsfrom the date of its constitution. The Ministry of Power shall invitea senior officer of the RBI, after consultation with the GovernorCof RBI, as member of the High Level Empowered Committeeforthwith. In the meantime, I observe that the Central Governmentshould consider whether it would like to issue directions underSection 7 of the RBI Act on the basis of the report and othermaterial, including reports of the Standing Committee within 15days from today in the light of the observations made in this order.DIn view thereof, it is not desirable to grant any interim relief at thisstage. This shall not preclude the petitioner-Associations or itsmembers from applying for urgent relief, if the circumstances sodemand, placing the request and factual details in respect of suchan action. This order shall not curtail the rights/powers of theEfinancial creditors under Section 7 of IBC or even of the RBI inissuing directions in specific case(s) under Section 35AA of BRAct to initiate corporate insolvency resolution process underChapter II of Part II of IBC, in any given case, including thepetitioners or members of the petitioners’ Association.”

7. Dr. Singhvi then referred to the Report dated 12.11.2018 of theHigh Level Committee so constituted. This Report made variousrecommendations. It stated:

“1. Linkage coal may be allowed to be used against short termPPAs and power be sold through Discovery of Efficient EnergyPrice (DEEP) portal following transparent bidding process.

2. nodal agency may be designated which may invite bids forprocurement of bulk power for medium term for 3 to 5 years inappropriate tranches, against pre-declared linkage by Coal IndiaLimited (CIL).

3. NTPC can act as an aggregator of power, i.e., procure powerthrough transparent competitive bidding process from suchstressed power plants and offer that power to the DISCOMsagainst PPAs of NTPC till such time as NTPC’s own concernedplants/units are commissioned.

4. Ministry of Coal may earmark for power, at least 60 per centof the e-auction coal, and this should be in addition to the regularcoal requirement of the power sector.

5. If there is shortfall in the supply of coal and it is attributable tothe Ministry of Coal or Railways; such shortfall need not lapseand be carried over to the subsequent months up to maximumof three months.

6. Old and high heat rate plants not complying with newenvironment norms may be considered for retirement in phasedand timebound manner at the same time avoiding any demand/supply mismatch.

7. Public Financial Institutions (PFIs) providing the Bill Discountingfacility may also be covered by the Tri-partite Agreement (TPA)i.e. in case of default by the DISCOM, the RBI may recover thedues from the account of States and make payment to the PFIs.

8. PPAs, Fuel Supply Agreements (FSA) and LTOA fortransmission of power, EC/FC clearances, and all other approvalsincluding water, be kept alive and not cancelled by the respectiveagencies even if the project is referred to NCLT or is acquired byany other entity. All of these may be linked to the plant and not thePromoter.

9. In order to revive gas based power plants, Ministry of Powerand Ministry of Petroleum & Natural Gas may jointly devise ascheme in line with the earlier e-bid RLNG Scheme (supportedby PSDF).”

Dr. Singhvi, therefore, argued that despite the fact that arepresentative of the RBI attended meetings of the ParliamentaryStanding Committee, the RBI Circular was issued in complete disregardof the recommendations of such Reports, both before and after theimpugned circular. According to him, therefore, to apply 180-day limitto all sectors of the economy without going into the special problems

Afaced by each sector would treat unequals equally and would be arbitraryand discriminatory, and therefore, violative of Article 14 of the Constitutionof India. Also, picking up at random all defaults amounting to INR 2000crore and above, as well as the fact that even lender whose stake isonly 1 per cent can stall resolution process de hors the InsolvencyCode make the circular manifestly arbitrary and violative of Article 14Bon this score as well.

8. Apart from the aforesaid submissions, Dr. Singhvi referred ingreat detail to the relevant sections of the Banking Regulation Act andthe RBI Act, and argued that the impugned circular was ultra vires theprovisions of those Acts. According to him, Section 35A and SectionC35AB of the Banking Regulation Act cannot possibly be the source ofpower for the impugned circular. Section 35A was introduced by anAmendment Act of 1956 and cannot, therefore, be used to empower theRBI to relegate companies to insolvency under the Insolvency Code asit did not exist at the time, or to give directions for resolution of stressedDassets. 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’sfunctions under Section 35A are confined to the boundaries of the RBIAct and the Banking Regulation Act and not to other statutes, such asthe Insolvency Code. He also argued that Sections 35AA and 35AB areEpart of one composite scheme. Section 35AA alone refers to, and canalone be the source of power for directing banking and non-bankingcompanies to file applications under the Insolvency Code. Section 35ABclearly refers to resolution of stressed assets in manner which is dehors the Insolvency Code. He then referred to the circular of the CentralFGovernment dated 05.05.2017 which empowered the RBI to issuedirections qua individual defaults that are committed. This being so, ageneral 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 stronglyrelied upon the Press Note that introduced Sections 35AA and 35AB asGwell as the Statement of Objects and Reasons introducing the saidSections by the Amending Act of 2017. He also argued that in any case,Sections 35AA and 35AB, being manifestly arbitrary provisions, areviolative of Article 14 of the Constitution of India. Further, they are alsoarbitrary 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, ShriP.S. Narsimha, Shri Arvind P. Datar, and Shri Gopal Jain, learned SeniorAdvocates, and Shri Pulkit Deora, Smt. Purti Marwaha Gupta, and ShriE.R. Kumar, learned Advocates, have also supported the submissions ofDr. Singhvi. These counsel have appeared in cases involving many othersectors, such as telecom, steel, infrastructure, sports infrastructure, sugar,fertiliser, shipyard, etc. Each of them has highlighted the difficulties facedas result of Government policies and other reasons for financial stressin all these sectors, which have nothing to do with the efficiency ofmanagement of companies operating in these sectors. All of them haveadopted the arguments of Dr. Singhvi in stating that, without looking intoeach individual sector’s problems and attempting to solve them, the RBIcircular applies down the board to good and bad alike, and, despite thefact that some corporate debtors are on the brink of resolution, the chopperof 180 days comes down on them and they are driven into the InsolvencyCode. The Government has recognised that, for example, in the sportsinfrastructure sector, much larger gestation periods are necessary inwhich capital infrastructure investments take place and whichconsequently require long periods for resolution. They have also arguedwith various nuances of their own as to how the RBI circular is botharbitrary and ultra vires the Banking Regulation Act and the RBI Act.

10. Shri Rakesh Dwivedi, learned Senior Advocate appearing onbehalf of the RBI, has taken us through various provisions of the RBIAct and Banking Regulation Act and has impressed upon us the factthat the regulatory regime laid down in these Acts must be construedbroadly, being in public interest, in the interest of banking policy, andabove all, in the interest of depositors. The RBI Act and the InsolvencyCode are intricately related to the operation of the credit system of thecountry, and must therefore, be given an expansive interpretation.According to the learned Senior Advocate, the RBI Circular is only anattempt to tell banks that insofar as huge debts over INR 2000 crore areconcerned, they will be given reasonable period of six months withinwhich to either resolve stress assets or otherwise, if they cannot do so,would only then have to move under the Insolvency Code. According tohim, clause 4 of the RBI Circular makes it clear that greater flexibility isgiven in this period of six months for banking and non-banking financialinstitutions to resolve stressed assets even de hors earlier restrictive

Acirculars that have been done away with by the circular dated 12.02.2018so that an effort be made to resolve stressed assets within reasonableperiod, after which it becomes incumbent on such institutions to movethe Insolvency Code. According to him, the circular is not manifestlyarbitrary. On the contrary, it is in public interest and in the interest of thenational economy to see that evergreening of debts does not carry onBindefinitely. Therefore, these huge amounts that are due and owing shouldcome back into the economy for further productive use. Either they canso come back within the six months’ grace period granted by the circularor through the route of the Insolvency Code. He also made it clear thatthe Parliamentary Standing Committee Reports are for the purpose ofCParliament, which must then act upon them. None of the Reports thathave been referred to have been acted upon by Parliament, and therefore,that cannot take the matter much further. Also, it is important to noticethat though the executive, i.e., the Government could also have acted interms of these Reports, it has chosen not to do so. For this purpose, herelied upon Section 7 of the RBI Act, under which the Central GovernmentDmay, from time to time, give such directions to the RBI that it may considernecessary in public interest, after consultation with the Governor of theRBI. The sheet anchor of the petitioners’ case, therefore, disappears asall these Parliamentary Standing Committee Reports do not take thepetitioners anywhere, not having been acted upon either by the ParliamentEor by the Central Government. This is for the very good reason thatultimately, it is in public interest to either resolve stressed assets within acertain timeframe, or if incapable of such resolution, the route of theInsolvency Code should then be followed. So far as the vires of Sections35AA and 35AB are concerned, Shri Dwivedi relied upon our recentjudgment in Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India andFOrs., 2019 (2) SCALE 5 [“Swiss Ribbons”], saying that great leewaymust be given to Parliament to deal with the problems which affect thenational economy as whole. There is adequate guiding principle andthere is no manifest arbitrariness in any of the aforesaid provisions.Further, there is no question of excessive delegation of power either, asGguidance can be obtained from the Preamble of the Banking RegulationAct together with its provisions. Insofar as the RBI Circular is concerned,he argued that it is traceable to four sources of power, namely, Sections21, 35A, 35AA and 35AB of the Banking Regulation Act. Insofar asnon-banking financial companies are concerned, it is traceable to Section45L of the RBI Act. According to the learned Senior Advocate, generalHcircular of this kind can certainly be issued in public interest and in the

interest of the national economy. Any restrictive reading of any of theseprovisions will only do harm to the economy of the country as whole.Broadly read, therefore, the RBI Circular cannot be said to be ultravires.

11. Shri Tushar Mehta, learned Solicitor General for India,confined his submissions to the constitutional validity of Sections 35AAand 35AB of the Banking Regulation Act, and the validity of the CentralGovernment circular dated 05.05.2017. According to the learnedSolicitor General, Sections 35AA and 35AB are regulatory provisionsmade in public interest that cannot possibly be said to be manifestlyarbitrary in any way. He relied heavily upon the judgment of SwissRibbons (supra). Further, the aforesaid Sections cannot be said to beunguided provisions as the RBI gets sufficient guidance from thePreamble as well as other provisions of the Banking Regulation Act. Hefurther submitted that the authorisation of the Central Government withrespect to Section 35AA has to be general in nature, after which, theRBI must exercise such power with due deliberation and withsector-specific care as the expert financial regulator and central bank ofthe country. He submitted that ideally, there ought to be sector wisecontingency analysis by the RBI before exercising power provided bythe Central Government to it under Section 35AA. In any case, so far asthe power sector is concerned, he was of the view that the RBI ought tohave treated it differently from all other sectors in view of the steps thatthe Central Government is taking in order to bring back the powersector on its feet.

12. At this juncture, it is important to note the genesis of theimpugned circular. By press release dated 13.06.2017, the RBIidentified certain accounts for reference by banks under the InsolvencyCode. This press release reads as follows:

“RBI identifies Accounts for Reference

by Banks under the Insolvency and BankruptcyCode (IBC)

The Reserve Bank of India had issued Press Release on May22, 2017 outlining the steps taken and those on the anvil pursuantto the promulgation of the Banking Regulation (Amendment)Ordinance, 2017. The Press Release had mentioned inter alia thatthe RBI would be constituting Committee comprised majorly of

its independent Board Members to advise it in regard to the casesthat may be considered for reference for resolution under theInsolvency and Bankruptcy Code, 2016 (IBC).

2. An Internal Advisory Committee (IAC) was accordinglyconstituted and it held its first meeting on June 12, 2017. TheBIAC, in the meeting, agreed to focus on large stressed accountsat this stage and accordingly took up for consideration the accountswhich were classified partly or wholly as non-performing fromamongst the top 500 exposures in the banking system.

3. The IAC also arrived at an objective, non-discretionary criterionCfor referring accounts for resolution under IBC. In particular, theIAC recommended for IBC reference all accounts with fund andnon-fund based outstanding amount greater than 5000 crore, with60% or more classified as non-performing by banks as of March31, 2016. The IAC noted that under the recommended criterion,12 accounts totaling about 25 per cent of the current gross NPAsDof the banking system would qualify for immediate reference underIBC.

4. As regards the other non-performing accounts which do notqualify under the above criteria, the IAC recommended that banksshould finalise resolution plan within six months. In cases wherea viable resolution plan is not agreed upon within six months, banksshould be required to file for insolvency proceedings under theIBC.

5. The Reserve Bank, based on the recommendations of the IAC,will accordingly be issuing directions to banks to file for insolvencyproceedings under the IBC in respect of the identified accounts.Such cases will be accorded priority by the National CompanyLaw Tribunal (NCLT).

6. The details of the resolution framework in regard to the othernon-performing accounts will be released in the coming days.”

13. At this stage, as first step, the Internal Advisory Committee[“IAC”] decided to consider the stressed assets within the top 500exposures of the banking system as on 31.03.2017. This set of 500accounts was arrived at as per the statement generated from the Central

Repository of Information on Large Credits [“CRILC”] database. Ofthe said top 500 exposures, it was noted that 71 accounts had beenpartly or wholly classified as NPAs while the other 429 were not classifiedas NPA by any bank. For the purpose of this first list, the followingcriteria were applied:

a. Accounts where the funded plus non-funded outstanding wasmore than INR 5000 crore;

b. Accounts where more than 60 per cent of the total outstandingby value was NPA as on March 31, 2016.

Consequently, 12 accounts which met the above criteria werereferred for resolution under the Insolvency Code vide RBI’s directiondated 15.06.2017. It is pertinent to note that the accounts in the First Listconstituted around 25 per cent of the NPAs in the system and thecumulative fund-based and non-fund-based outstanding therein amountedto 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 totaloutstanding has become NPA by 30.06.2017) may be given time till13.12.2017 for resolution. If the banks fail to finalise and implement aviable resolution plan by the said date, banks will be required to fileapplications under Insolvency Code before 31.12.2017. The IAC notedthat applying this criterion will cover 29 NPA accounts, with totaloutstanding of INR 135,846 crore and total fund-based NPAs of INR111,848 crore as on 30.06.2017. It is pertinent to note that on 28.08.2017,the RBI issued letter directing banks to attempt resolution of the accountsin this Second List by 13.12.2017. As regards the residual accounts, outof the initially identified 71 NPA accounts, the IAC recommended thatsuch accounts may be addressed through steady-state framework forresolution of stressed assets in time-bound manner and failing suchresolution, the accounts be referred to for resolution under the InsolvencyCode. Accordingly, the RBI formulated and issued the revised frameworkvide its circular dated 12.02.2018.

15. Meanwhile, the Ministry of Finance issued notification dated05.05.2017 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 Section35AA of the Banking Regulation Act, 1949 (10 of 1949), the Cen-tral Government hereby authorises the Reserve Bank of India toissue such directions to any banking company or banking compa-nies which may be considered necessary to initiate insolvencyresolution process in respect of default, under the provisions ofthe Insolvency and Bankruptcy Code, 2016.”

This happened to be on the very next day on which the BankingRegulation (Amendment) Ordinance, 2017 introduced Sections 35AAand 35AB as amendments to the Banking Regulation Act. Press NoteDof the Ministry of Finance of 05.05.2017 explains the genesis of theOrdinance 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 ofstressed assets, particularly in consortium or multiplebanking arrangements.

The Ordinance enables the Union Government toauthorise the Reserve Bank of India (RBI) to directbanking 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 enablesthe Union Government to authorise the Reserve Bank of India(RBI) to direct banking companies to resolve specificstressedassets 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 orcommittees to advise banking companies for stressed assetresolution.

This action of the Union Government will have direct impact oneffective resolution of stressed assets, particularly in consortiumor multiple banking arrangements, as the RBI will be empoweredto intervene in specific cases of resolution of non-performingassets, to bring them to definite conclusion.

The Government is committed to expeditious resolution of stressedassets in the banking system. The recent enactment of Insolvencyand Bankruptcy Code (IBC), 2016 has opened up new possibili-ties for time bound resolution of stressed assets. The SARFAESIand Debt Recovery Acts have been amended to facilitate recov-eries. comprehensive approach is being adopted for effectiveimplementation of various schemes for timely resolution of stressedassets.”

(emphasis supplied)

The Banking Regulation (Amendment) Ordinance, 2017 was thenenacted 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 havereached unacceptably high levels and urgent measures are re-quired for their resolution;

AND WHEREAS the Insolvency and Bankruptcy Coe, 2016has been enacted to consolidate and amend the laws relating toreorganisation and insolvency resolution of corporate persons,partnership firms and individuals in time bound manner formaximisation of value of assets to promote entrepreneurship,availability of credit and balance the interest of all thestakeholders;

AND WHEREAS the provisions of Insolvency and BankruptcyCode, 2016 can be effectively used for the resolution of stressedassets by empowering the banking regulator to issue directions inspecific cases;

AND WHEREAS Parliament is not in session and the Presidentis satisfied that circumstances exist which render it necessary forhim to take immediate action;

NOW, THEREFORE, in exercise of the powers conferred byclause (1) of article 123 of the Constitution, the President is pleasedto 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.

2. In the Banking Regulation Act, 1949, after section 35A, thefollowing sections shall be inserted, namely:

‘35AA. The Central Government may by order authorise theReserve Bank to issue directions to any banking company orbanking companies to initiate insolvency resolution process inrespect of default, under the provisions of the Insolvencyand Bankruptcy Code, 2016.

Explanation. – For the purposes of this section, “default” hasthe same meaning assigned to it in clause (12) of section 3 ofthe 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 tothe banking companies for resolution of stressed assets.

(2) The Reserve Bank may specify one or more authorities orcommittees with such members as the Reserve Bank mayappoint or approve for appointment to advise bankingcompanies 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 Objectsand 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-performingassets have reached unacceptably high levels and hence, urgentmeasures are required for their speedy resolution to improve thefinancial health of banking companies for proper economic growthof the country. Therefore, it was considered necessary to makeprovisions in the Banking Regulation Act, 1949 for authorising theReserve Bank of India to issue directions to any banking companyor banking companies to effectively use the provisions of theInsolvency and Bankruptcy Code, 2016 for timely resolution ofstressed assets.

2. It was accordingly decided to make amendments to the BankingRegulation Act, 1949. Since Parliament was not in session andimmediate action was required to be taken, the Banking Regulation(Amendment) Ordinance, 2017 was promulgated by the Presidenton the 4th May, 2017.

3. The Banking Regulation (Amendment) Bill, 2017 which seeksto replace the Banking Regulation (Amendment) Ordinance, 2017,provides for the following, namely:—

(a) to confer power upon the Central Government for authorisingthe Reserve Bank to issue directions to any banking companyor banking companies to initiate insolvency resolution processin respect of default, under the provisions of the Insolvencyand Bankruptcy Code, 2016;

(b) to confer power upon the Reserve Bank to issue directionsto banking companies for resolution of stressed assets and alsoallow the Reserve Bank to specify one or more authorities orcommittees to advise banking companies on resolution of

stressed assets; and

(c) to amend section 51 of the Act so as to make therein thereference of proposed new sections 35AA and 35AB.

340SUPREME COURT REPORTS

[2019] 6 S.C.R.

A4. The Bill seeks to replace the said Ordinance.

xxx xxx xxx14[th] July, 2017.”(emphasis supplied)

Sections 35AA and 35AB were then legislatively introduced asBfollows:

“THE BANKING REGULATION

(AMENDMENT) ACT, 2017

[25th August, 2017]

xxx xxx xxxC

2. In the Banking Regulation Act, 1949 (hereinafter referred toas the principal Act), after section 35A, the following sectionsshall be inserted, namely:—

‘35AA. The Central Government may, by order, authoriseDthe Reserve Bank to issue directions to any banking company orbanking companies to initiate insolvency resolution process inrespect of default, under the provisions of the Insolvency andBankruptcy Code, 2016.

Explanation.—For the purposes of this section, “default” hasthe same meaning assigned to it in clause (12) of section 3 of theEInsolvency 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 anybanking company or banking companies for resolution of stressedassets.

(2) The Reserve Bank may specify one or more authorities orcommittees with such members as the Reserve Bank may appointor approve for appointment to advise any banking company orbanking companies on resolution of stressed assets’.

Gxxx xxx xxx”

CONSTITUTIONAL VALIDITY

16. The petitioners have argued that the aforesaid Ordinance andAmendment Act are unconstitutional on two grounds; (i) that the

Sections introduced are manifestly arbitrary; and (ii) that they sufferfrom absence of guidelines. Insofar as the first challenge is concerned,this Court has, in recent judgment in Swiss Ribbons (supra), made itclear that economic legislation is to be viewed with great latitude. Afterreferring to the Lochner era and its aftermath in paragraph 7 of theaforesaid judgment, this Court referred to various judgments of this Courtin paragraph 8, and concluded as follows:

“85. The Insolvency Code is legislation which deals witheconomic matters and, in the larger sense, deals with the economyof the country as 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. Theexperiment contained in the Code, judged by the generality of itsprovisions and not by so-called crudities and inequities that havebeen pointed out by the petitioners, passes constitutional muster.To stay experimentation in things economic is graveresponsibility, and denial of the right to experiment is fraught withserious consequences to the nation. We have also seen that theworking of the Code is being monitored by the CentralGovernment by Expert Committees that have been set up in thisbehalf. Amendments have been made in the short period in whichthe Code has operated, both to the Code itself as well as tosubordinate legislation made under it. This process is an ongoingprocess which involves all stakeholders, including the petitioners.”

It is in this background that legislation affecting the economy is tobe viewed. This Court, in Shayara Bano v. Union of India, (2017) 9SCC 1 has made it clear that Article 14 may be infracted by legislationon the ground of such legislation being manifestly arbitrary. This Courthas said in this behalf:

“101. It will be noticed that Constitution Bench of this Court inIndian Express Newspapers (Bombay) (P) Ltd. v. Union ofIndia [Indian Express Newspapers (Bombay) (P) Ltd. v. Unionof India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that itwas settled law that subordinate legislation can be challenged onany of the grounds available for challenge against plenarylegislation. This being the case, there is no rational distinction

Abetween the two types of legislation when it comes to this groundof challenge under Article 14. The test of manifest arbitrariness,therefore, as laid down in the aforesaid judgments would apply toinvalidate legislation as well as subordinate legislation underArticle 14. Manifest arbitrariness, therefore, must be somethingdone by the legislature capriciously, irrationally and/or withoutBadequate determining principle. Also, when something is donewhich is excessive and disproportionate, such legislation wouldbe manifestly arbitrary. We are, therefore, of the view thatarbitrariness in the sense of manifest arbitrariness as pointed outby us above would apply to negate legislation as well underCArticle 14.”Short of throwing the mantra of manifest arbitrariness at us, noneof the petitioners have been able to point out as to how either of theseprovisions is manifestly arbitrary. They are not excessive in any way nordo they suffer from want of any guiding principle. As matter of fact,Dthese amendments are in the nature of amendments which conferregulatory powers upon the RBI to carry out its functions under theBanking Regulation Act, and are not different in quality from any of theSections which have already conferred such power. Thus, Section 21makes it clear that the RBI may control advances made by bankingcompanies in public interest, and in so doing, may not only lay downEpolicy but may also give directions to banking companies either gener-ally or in particular. Similarly, under Section 35A, vast powers are givento issue necessary directions to banking companies in public interest, inthe interest of banking policy, to prevent the affairs of any banking com-pany being conducted in manner detrimental to the interest of theFdepositors or in manner prejudicial to the interest of the banking com-pany, or to secure the proper management of any banking company. It isclear, therefore, that these provisions which give the RBI certain regula-tory powers cannot be said to be manifestly arbitrary.

17. When it comes to lack of any guidelines by which the powerGgiven to the RBI is to be exercised, it is clear from catena of judg-ments that such guidance can be obtained not only from the Statementof Objects and Reasons and the Preamble to the Act, but also from itsprovisions. Thus, in Harishankar Bagla v. State of M.P., (1955) 1SCR 380, this Court held:

“9. The next contention of Mr. Umrigar that Section 3 of theEssential Supplies (Temporary Powers) Act, 1946, amounts todelegation of legislative power outside the permissible limits isagain without any merit. It was settled by the majority judgmentin the Delhi Laws Act case [1951 SCR 747] that essential powersof legislature cannot be delegated. In other words, the legislaturecannot delegate its function of laying down legislative policy inrespect of measure and its formulation as rule of conduct.The legislature must declare the policy of the law and the legalprinciples which are to control any given cases and must providea standard to guide the officials or the body in power to executethe law. The essential legislative function consists in thedetermination or choice of the legislative policy and of formallyenacting that policy into binding rule of conduct. In the presentcase the legislature has laid down such principle and that principleis the maintenance or increase in supply of essential commoditiesand of securing equitable distribution and availability at fair prices.The principle is clear and offers sufficient guidance to the CentralGovernment in exercising its powers under Section 3. Delegationof the kind mentioned in Section 3 was upheld before theConstitution in number of decisions of their Lordships of thePrivy Council, vide Russell v. Queen [7 AC 829], Hodge v. Queen[9 AC 117] and Shannon v. Lower Mainland Dairy ProductsBoard [1938 AC 708] and since the coming into force of theConstitution delegation of this character has been upheld in anumber of decisions of this Court on principles enunciated by themajority in the Delhi Laws Act case [1951 SCR 747]. As alreadypointed out, the preamble and the body of the sections sufficientlyformulate the legislative policy and the ambit and character of theAct is such that the details of that policy can only be worked outby delegating them to subordinate authority within the frameworkof that policy. Mr. Umrigar could not very seriously press thequestion of the invalidity of Section 3 of the Act and it isunnecessary therefore to consider this question in greater detail.”

Similarly, in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. TheAssistant Commissioner of Sales Tax and Ors., this Court observed:

“13. It may be stated at the outset that the growth of the legislativepowers of the Executive is significant development of the

ABC

twentieth century. The theory of laissez faire has been given ago-by and large and comprehensive powers are being assumedby the State with view to improve social and economicwell-being of the people. Most of the modern socio-economiclegislations passed by the Legislature lay down the guidingprinciples and the legislative policy. The Legislatures because oflimitation imposed upon by the time factor hardly go into mattersof detail. Provision is, therefore, made for delegated legislation toobtain flexibility, elasticity, expedition and opportunity forexperimentation. The practice of empowering the Executive tomake subordinate legislation within prescribed sphere has evolvedout of practical necessity and pragmatic needs of modern welfareState. At the same time it has to be borne in mind that ourConstitution-makers have entrusted the power of legislation tothe representatives of the people, so that the said power may beexercised not only in the name of the people but also by the peoplespeaking through their representatives. The role against excessivedelegation of legislative authority flows from and is necessarypostulate of the sovereignty of the people. The rule contemplatesthat it is not permissible to substitute in the matter of legislativepolicy the views of individual officers or other authorities, howevercompetent they may be, for that of the popular will as expressedby the representatives of the people. As observed on p. 224 ofVol. I in Cooley’s Constitutional Limitations 8[th] Edn.:

“One of the settled maxims in constitutional law is, that thepower conferred upon the Legislature to make laws cannot bedelegated by that department to any other body or authority.Where the sovereign power of the State has located theauthority, there it must remain; and by the constitutional agencyalone the laws must be made until the Constitution itself ischanged. The power to whose judgment, wisdom, andpatriotism this high prerogative has been entrusted cannotrelieve itself of the responsibility by choosing other agenciesupon which the power shall be devolved, nor can it substitutethe judgment, wisdom, and patriotism of any other body forthose to which alone the people have seen fit to confide thissovereign trust.”

xxx xxx xxx

“15. The Constitution, as observed by this Court in the case ofDevi Das Gopal Krishnan v. State of Punjab [AIR 1967 SC1895 : (1967) 3 SCJ 557 : (1967) 20 STC 430] confers powerand imposes duty on the Legislature to make laws. The essentiallegislative function is the determination of the legislative policyand its formulation as rule of conduct. Obviously it cannotabdicate its functions in favour of another. But in view of themultifarious activities of welfare State, it cannot presumablywork out all the details to suit the varying aspects of complexsituation. It must necessarily delegate the working out of detailsto the Executive or any other agency. But there is danger inherentin such process of delegation. An over-burdened Legislature orone controlled by powerful Executive may unduly overstep thelimits of delegation. It may not lay down any policy at all; it maydeclare its policy in vague and general terms; it may not set downany standard for the guidance of the Executive; it may confer anarbitrary power on the Executive to change or modify the policylaid down by it without reserving for itself any control oversubordinate legislation. This self-effacement of legislative powerin favour of another agency either in whole or in part is beyondthe permissible limits of delegation. It is for court to hold on afair, generous and liberal construction of an impugned statutewhether the Legislature exceeded such limits.”

xxx xxx xxx

“17. The matter came up for the first time before this Court In reThe Delhi Laws Act, 1912. [AIR 1951 SC 332 : 1951 SCR 747 :1951 SCR 527] Although each one of the learned Judges whoheard that case wrote separate judgment, the view whichemerged from the different judgments was that it could not besaid that an unlimited right of delegation was inherent in thelegislative power itself. This was not warranted by the provisionsof the Constitution, which vested the power of legislation either inParliament or State Legislatures. The legitimacy of delegationdepended upon its being vested as an ancillary measure whichthe Legislature considered to be necessary for the purpose ofexercising its legislative powers effectively and completely. TheLegislature must retain in its own hands the essential legislativefunction. Exactly what constituted “essential legislative function”

ABC

Awas difficult to define in general terms, but this much was clearthat the essential legislative function must at least consist of thedetermination of the legislative policy and its formulation as abinding rule of conduct. Thus where the law passed by thelegislature declares the legislative policy and lays down thestandard which is enacted into rule of law, it can leave the taskBof subordinate legislation like the making of rules, regulations orby-laws which by its very nature is ancillary to the statute tosubordinate bodies. The subordinate authority must do so withinthe framework of the law which makes the delegation, and suchsubordinate legislation has to be consistent with the law underCwhich it is made and cannot go beyond the limits of the policy andstandard laid down in the law. As long as the legislative policy isenunciated with sufficient clearness or standard is laid down,the courts should not interfere with the discretion that undoubtedlyrests with the Legislature itself in determining the extent ofdelegation necessary in particular case [see observations ofDWanchoo, C.J., in Municipal Corporation of Delhi v. BirlaMills.].

18. In Harishankar Bagla v. State of Madhya Pradesh [AIR1954 SC 465 : (1955) 1 SCR 380 : 1954 Cri LJ 1322] this Courtdealt with the validity of clause 3 of the Cotton Textile (Control ofMovement) Order, 1948 promulgated by the Central Governmentunder 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 policyof the law and the legal principles which are to control any givencases and must provide standard to guide the officials or thebody in power to execute the law, and where the Legislature haslaid down such principle in the Act and that principle is themaintenance or increase in supply of essential commodities andof securing equitable distribution and availability at given prices,

the exercise of the power was valid.”

The Statement of Objects and Reasons of the Banking RegulationAct, relevant for our purpose, is as follows:

“STATEMENT OF OBJECTS AND REASONS

The provisions of law relating to banking companies at presentform subsidiary portion of the general law applicable to

companies and are contained in Part XA of the Indian CompaniesAct, 1913. These provisions, which were first introduced in 1936,and which have undergone two subsequent modifications, haveproved inadequate and difficult to administer. Moreover while theprimary objective of Companies Law is to safeguard the interestsof the stock-holder, that of banking legislation should be theprotection of the interests of the depositor. It has therefore beenfelt for some time that separate legislation was necessary for theregulation of banking in India. This need has become the moreinsistent on account of the considerable development that hastaken place in recent years in banking, especially the rapid growthof banking resources and of the number of banks and branches.Regard must also be had to the fact that the banking system islikely in the post-war period to be more vulnerable by reason ofthe great expansion, both quantitatively and relatively, that hastaken place in demand deposits, as compared with time deposits,during the war years. The enactment of separatecomprehensive measure has in consequence now become im-perative.”

(emphasis supplied)

In particular, the main features of the Bill are as follows:“(i) comprehensive definition of ‘banking’ so as to bring withinthe 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 againstbanks conducting their affairs in manner detrimental to theinterests of the depositors;

(xi) Provision for bringing the Reserve Bank of India into closertouch with banking companies;

xxx xxx xxx

(xiv) Widening the powers of the Reserve Bank of India so as toenable it to come to the aid of banking companies in times ofemergency;

xxx xxx xxx”

Sections 14A, 17, 18, and 20 impose various restrictions on bank-ing company. Thus, it is prohibited from having floating charge on

Aassets; it has to maintain reserve fund, and cash reserve; and itcannot grant loans and advances on the security of its own shares, or onbehalf of its directors, or any firm in which its directors are interestedetc. banking company is obligated to hold license that is issued bythe RBI, by which the RBI can impose such conditions as it thinks fitunder Section 22 of the Act. Section 22(3), in particular, gives guidanceBas to how the banking company will run its business. These and otherregulatory sections such as Sections 25, 29, 30, and 31, all give guidanceas to how the RBI is to exercise these powers under the newly addedprovisions. We, therefore, agree with Shri Dwivedi that there was nodearth of guidance for the RBI to exercise the powers delegated to it byCthese provisions. Consequently, the plea of constitutional validity fails.

ULTRAVIRES

18. Shri Dwivedi referred to and relied upon Sections 21, 35A,35AA, and 35AB in order to sustain the validity of the impugned circu-lar. Dr. Singhvi has argued that Section 35A cannot possibly be reliedDupon for the reason that it is an old provision, introduced in 1956. Whetheror not to invoke the Insolvency Code was certainly not in Parliament’scontemplation when it enacted Section 35A, and for this reason, Section35A cannot possibly be looked at as source of power authorising theRBI to issue the impugned circular.

19. Dr. Singhvi’s argument raises an interesting question as to the“ongoing” interpretation of statute. Generally, statutes are recognisedas 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 expression “telegraph line” men-Ftioned in the Indian Telegraph Act, 1885, is comprehensive enough totake in any wire used for the purpose of an apparatus for post andtelegraph, and wireless stations, even though such wires and wirelessstations were not in the contemplation of Parliament when the 1885 Actwas enacted. The legal position was laid down thus:

G“…… The maxim contemporanea exposition as laid down byCoke was applied to construing ancient statutes, but not tointerpreting Acts which are comparatively modern. There is agood reason for this change in the mode of interpretation. The

fundamental rule of construction is the same whether the Court isasked to construe provision of an ancient statute or that of amodern one, namely, what is the expressed intention of theLegislature. It is perhaps difficult to attribute to legislative bodyfunctioning in static society that its intention was couched interms of considerable breadth so as to take within its sweep thefuture developments comprehended by the phraseology used. Itis more reasonable to confine its intention only to the circumstancesobtaining at the time the law was made. But in modernprogressive society it would be unreasonable to confine theintention of Legislature to the meaning attributable to the wordused at the time the law was made, for modern Legislaturemaking laws to govern society which is fast moving must bepresumed to be aware of an enlarged meaning the same conceptmight attract with the march of time and with the revolutionarychanges brought about in social, economic, political and scientificand other fields of human activity. Indeed, unless contraryintention appears, an interpretation should be given to the wordsused to take in new facts and situations, if the words are capableof comprehending them. We cannot, therefore, agree with thelearned Judges of the High Court that the maxim contemporaneaexpositio 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 thepurpose of the apparatus of the Post and Telegraph WirelessStation.”

(at pp. 156-157) (emphasis supplied)

20. Guidance on whether statute can apply to new situations notin contemplation of Parliament when the statute was enacted was felici-tously set out by Lord Wilberforce in his dissenting judgment in RoyalCollege of Nursing of the United Kingdom v. Department ofHealth and Social Security, [1981] 1 All ER 545 [HL] as follows:

“In interpreting an Act of Parliament it is proper, and indeednecessary, to have regard to the state of affairs existing, and known

Aby Parliament to be existing, at the time. It is fair presumptionthat Parliament’s policy or intention is directed to that state ofaffairs. Leaving aside cases of omission by inadvertence, this beingnot such case, when new state of affairs, or fresh set offacts bearing on policy, comes into existence, the courts have toconsider whether they fall within the Parliamentary intention. TheyBmay be held to do so, if they fall within the same genus of facts asthose to which the expressed policy has been formulated. Theymay also be held to do so if there can be detected clear purposein the legislation which can only be fulfilled if the extension ismade. How liberally these principles may be applied must dependCupon the nature of the enactment, and the strictness or otherwiseof the words in which it has been expressed. The courts shouldbe less willing to extend expressed meanings if it is clear that theAct in question was designed to be restrictive or circumscribed inits operation rather than liberal or permissive. They will be muchless willing to do so where the subject matter is different in kindDor 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 change in social conditions produces novel situation,which was not in contemplation at the time when statute wasfirst enacted, there can be no priori assumption that theenactment does not apply to the new circumstances. If thelanguage of the enactment is wide enough to extend to thosecircumstances, there is no reason why it should not apply.”

(at p. 557)

22. The phrase “always speaking” is adverted to by the House ofLords in McCartan Turkington Breen (A Firm) v. TimesNewspapers Ltd., [2000] 4 All ER 913. Lord Steyn, speaking for theGCourt, stated as follows:

“The appeal to the original intent of the statute

There is another preliminary matter to be considered. Counsel forthe solicitors emphasised that the wording of paragraph 9 can be

traced back to the Law of Libel Amendment Act 1888. Heobserved that at that time the phenomenon of press conferenceswas unknown. This was an invitation to the House to say thatpress conferences could not have been within the original intentof the legislature. There is clear answer to this appeal to Victorianhistory. Unless they reveal contrary intention all statutes are to“”be interpreted as always speaking statutes. This principle wasstated and explained in R v Ireland, R v Burstow [1997] 4 All ER225 at 233, [1998] AC 147 at 158. There are at least two strandscovered by this principle. The first is that courts must interpretand apply statute to the world as it exists today. That is the basisof the decision in R v Ireland where ‘bodily harm’ in Victorianstatute was held to cover psychiatric injury. Equally important isthe second strand, namely that the statute must be interpreted inthe light of the legal system as it exists today. In the classic workof Sir Rupert Cross, Statutory Interpretation (3rd edn, 1995) pp51-52, the position is explained as follows:“The somewhat quaint statement that statute is “alwaysspeaking” appears to have originated in Lord Thring’sexhortations to drafters concerning the use of the word “shall”:“An Act of Parliament should be deemed to be always speakingand therefore the present or past tense should be adopted, and“shall” should be used as an imperative only, not as future”.But the proposition that an Act is always speaking is oftentaken to mean that statutory provision has to be consideredfirst and foremost as norm of the current legal system, whenceit takes its force, rather than just as product of an historicallydefined Parliamentary assembly. It has legal existenceindependently of the historical contingencies of its promulgation,and accordingly should be interpreted in the light of itsplace within the system of legal norms currently in force.Such an approach takes account of the viewpoint of theordinary legal interpreter of today, who expects to apply ordinarycurrent meanings to legal texts, rather than to embark onresearch into linguistic, cultural and political history, unless heis specifically put on notice that the latter approach is required.”(My emphasis.)

In other words, it is generally permissible and indeed necessary totake into account the place of the statutory provision in controversyin the broad context of the basic principles of the legal system asit has evolved. If this proposition is right, as I believe it to be, itfollows that on ordinary principles of construction the questionbefore the House must be considered in the light of the law offreedom of expression as it exists today. The appeal to the originalmeaning 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 judg-ment 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 construedin the light of modern conditions. When it speaks of ‘state ...Dprejudicial to health’, this does not mean state which wouldhave been so regarded in 1846. It requires the application of mod-ern knowledge and standards of hygiene. The words must beconstrued as ‘always speaking’ in the sense used by Lord Steynin R v Ireland, R v Burstow [1997] 4 All ER 225 at 233, [1998]EAC 147 at 158-159. I quite agree that when statute employs aconcept which may change in content with advancing knowledge,technology or social standards, it should be interpreted as it wouldbe currently understood. The content may change but the con-cept remains the same. The meaning of the statutory languageremains unaltered. So the concept of vehicle has the same mean-Fing today as it did in 1800, even though it includes methods ofconveyance which would not have been imagined by legislatorof those days. The same is true of social standards. The conceptof cruelty is the same today as it was when the Bill of Rights 1688(1 Will & Mary, sess 2, 2) forbade the infliction of ‘cruel andGunusual punishments’ (section 10). But changes in socialstandards mean that punishments which would not have been re-garded as cruel in 1688 will be so regarded today.

This doctrine does not however mean that one can construethe language of an old statute to mean something conceptually

different from what the contemporary evidence shows thatParliament must have intended. So, for example, in the recentcase of Goodes v East Sussex County Council [2000] 3 All ER603, [2000] 1 WLR 1356, the House of Lords decided that thestatutory duty of highway authorities to ‘maintain’ the highwaydid not include the removal of ice and snow. Although the word‘maintain’ was capable of including the removal of ice and snowand such removal might be expected by modern road users, thecontemporary evidence showed that the concept of maintenancein the legislation was confined to keeping the fabric of the road inrepair. To require the removal of ice and snow would not be toapply that concept in accordance with modern standards (such asrequiring metalled surface instead of gravel) but would be usingthe word ‘maintain’ to express broader concept than Parlia-ment intended. Such change would not be in accordance withthe meaning of the statute. Likewise it seems to me in this casethat an extension of the concept of ‘premises in such state as tobe prejudicial to health’ to the absence of facilities, as such, is anillegitimate extension of the statutory meaning.

My Lords, it seems to me that the temptation to make suchan extension should be resisted for much the same reasons asyour Lordships in Southwark London Borough Council v Mills[1999] 4 All ER 449, [1999] 3 WLR 939 refused to extend thecommon law of nuisance and quiet enjoyment so as to requirelandlords to install soundproofing. Parliament has dealt expresslywith the obligation to provide toilet facilities in different sectionsand usually in different Acts. Until 1991 it did not require basin

to be installed in the WC even in new constructions. It has neverdone so in respect of existing buildings. For the courts to givesection 79(1)(a) an extended “modern” meaning which requiredsuitable alterations to be made to existing houses would impose asubstantial financial burden upon public and private owners andoccupiers. I am entirely in favour of giving the 1990 Act asensible modern interpretation. But I do not think that it is eithersensible or in accordance with modern notions of democracy tohold that when Parliament re-enacted language going back to the19th century, it authorised the courts to impose upon local

authorities and others huge burden of capital expenditure towhich the statutory language had never been held to apply. In myopinion the decision as to whether or not to take such step shouldbe made by the elected representatives of the people and not bythe courts.”

(at pp. 396-397)

24. cursory reading of Section 35A makes it clear that there isnothing in the aforesaid provision which would indicate that the powerof the RBI to give directions, when it comes to the Insolvency Code,cannot be so given. The width of the language used in the provisionCwhich only uses general words such as ‘public interest’ and ‘bankingpolicy’ etc. makes it clear that if otherwise available, we cannot interdictthe use of Section 35A as source of power for the impugned RBIcircular on the ground that the Insolvency Code, 2016 could not be saidto have been in the contemplation of Parliament in 1956, when Section35A 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 Section35A of the Banking Regulation Act was held not to extend to grantingapproval to banks under separate and distinct enactment, namely, theInterest Tax Act, 1974. In this context, this Court held:

“37. The submission of the learned counsel for the appellants tothe effect that they had been permitted to enhance the rate ofinterest by the Reserve Bank of India, is equally misconceived.The Reserve Bank of India apparently proceeded on the basisthat the mode of calculation of rate of interest vis-à-vis the taxFunder the Act, as contended by Appellant 1, was correct. TheReserve Bank of India was not an authority for construction of astatute. Its functions are confined only to the provisions of theReserve Bank of India Act and the Banking Regulation Act andnot any other statute.

38. Section 35-A of the Banking Regulation Act empowers theReserve Bank of India to issue directions in relation to mattersspecified under Section 35-A and not for any other purpose. Thecontention of the appellants to the effect that rate of interest hadbeen enhanced by them pursuant to or in furtherance of thedirections issued by the Reserve Bank of India must be held to be

self-contradictory inasmuch as according to them the ReserveBank of India fixes only the minimum rate of interest leaving adetermination thereof in the case of each individual borrower uponthe bank concerned. If the matter relating to increase in the rateof the interest was within the power of the appellants, we fail tounderstand as to why the Reserve Bank of India was approachedat all. The same being not permissible under the Act, any approvalgiven by the Reserve Bank of India for the satisfaction of themembers of the first appellant herein was futile.”

xxx xxx xxx

“40. In any view of the matter, the purported directions containedin the letter dated 2-9-1991 of the Reserve Bank of India are noteven in the nature of executive instruction under the said Act. Itwas not binding on the banks, far less on the borrowers. In anyevent, by reason of misplaced and misapplied construction ofstatute, third party cannot suffer.

41. Furthermore, having regard to the provisions contained inArticle 265 of the Constitution read with Article 366(28) thereof,the purported demand from the borrower for higher amount oftax and consequently higher amount of interest by way ofrounding-up was wholly illegal and without jurisdiction. We alsofail to understand as to why in this modern electronic age, thisdifficulty would be encountered while calculating the exact amountof tax.

42. We, therefore, are of the opinion that the purported approvalgranted by the Reserve Bank of India was wholly withoutjurisdiction and ultra vires the provisions of the said Act.”

Based on this judgment, Dr. Singhvi contended that the RBI cannotpossibly give directions as to how the banks must exercise theirdiscretionary power before filing applications under Section 7 of theInsolvency Code. Shri Dwivedi, however, distinguished this judgment bystating that this was tax case and it must be remembered that theentries in the Seventh Schedule qua taxation are separate from generalentries. Even otherwise, according to Shri Dwivedi, the RBI directionsare at stage anterior to the application of the provisions of the InsolvencyCode, as result of which, this judgment would have no application.

A26. We are of the view that Shri Dwivedi is right. If specificprovision of the Banking Regulation Act makes it clear that the RBI hasa specific power to direct banks to move under the Insolvency Codeagainst debtors in certain specified circumstances, it cannot be said thatthey would be acting outside the four corners of the statutes which gov-ern them, namely, the RBI Act and the Banking Regulation Act. On thisBscore, therefore, Dr. Singhvi’s contention must fail.

27. Shri Dwivedi has cited certain judgments stating that discre-tionary powers given to the RBI under the Banking Regulation Act gen-erally, and under Section 35A, in particular, are broad and expansive,and have been expansively expounded upon by this Court. He relied, inCparticular, upon Central Bank of India v. Ravindra, (2002) 1 SCC367. In particular, he relied upon paragraph 51 and paragraph 55 (5)which state:

“51. The Banking Regulation Act, 1949 empowers the ReserveBank, on it being satisfied that it is necessary or expedient in theDpublic interest or in the interest of depositors or banking policy soto do, to determine the policy in relation to advances to be followedby banking companies generally or by any banking company inparticular and when the policy has been so determined it has abinding effect. In particular, the Reserve Bank of India may giveEdirections as to the rate of interest and other terms and conditionson which advances or other financial accommodation may bemade. Such directions are also binding on every banking company.Section 35-A also empowers the Reserve Bank of India in thepublic interest or in the interest of banking policy or in the interestsof depositors (and so on) to issue directions generally or in particularFwhich shall be binding. With effect from 15-2-1984 Section 21-Ahas been inserted in the Act which takes away power of the courtto reopen transaction between banking company and its debtoron the ground that the rate of interest charged is excessive. Theprovision has been given an overriding effect over the Usury LoansGAct, 1918 and any other provincial law in force relating toindebtedness.

xxx xxx xxx

55. During the course of hearing it was brought to our notice thatin view of several usury laws and debt relief laws in force in

several States private moneylending has almost come to an endand needy borrowers by and large depend on banking institutionsfor financial facilities. Several unhealthy practices having slowlypenetrated into prevalence were pointed out. Banking is anorganised institution and most of the banks press into service long-running documents wherein the borrowers fill in the blanks, attimes without caring to read what has been provided therein, andbind themselves by the stipulations articulated by the best of legalbrains. Borrowers other than those belonging to the corporatesector, find themselves having unwittingly fallen into trap andrendered themselves liable and obliged to pay interest the quantumwhereof may at the end prove to be ruinous. At times the interestcharged and capitalised is manifold than the amount actuallyadvanced. Rule of damdupat does not apply. Penal interest, servicecharges and other overheads are debited in the account of theborrower and capitalised of which debits the borrower may noteven be aware. If the practice of charging interest on quarterlyrests is upheld and given judicial recognition, unscrupulous banksmay resort to charging interest even on monthly rests andcapitalising the same. Statements of accounts supplied by banksto borrowers many times do not contain particulars or details ofdebit entries and when written in hand are worse than medicalprescriptions putting to test the eyes and wits of the borrowers.Instances of unscrupulous, unfair and unhealthy dealings can bemultiplied though they cannot be generalised. Suffice it to observethat such issues shall have to be left open to be adjudicated uponin appropriate cases as and when actually arising for decision andwe cannot venture into laying down law on such issues as do notarise for determination before us. However, we propose to placeon record 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 theBanking Regulation Act, 1949 is coupled with duty to act. TheReserve Bank of India is the prime banking institution of thecountry entrusted with supervisory role over banking andconferred with the authority of issuing binding directions, havingstatutory force, in the interest of the public in general and

ABC

preventing banking affairs from deterioration and prejudice asalso to secure the proper management of any banking companygenerally. The Reserve Bank of India is one of the watchdogsof finance and economy of the nation. It is, and it ought to be,aware of all relevant factors, including credit conditions asprevailing, which would invite its policy decisions. RBI hasbeen issuing directions/circulars from time to time which, interalia, deal with the rate of interest which can be charged andthe periods at the end of which rests can be struck down,interest calculated thereon and charged and capitalised. It shouldcontinue to issue such directives. Its circulars shall bind thosewho fall within the net of such directives. For such transactionwhich are not squarely governed by such circulars, the RBIdirectives may be treated as standards for the purpose ofdeciding whether the interest charged is excessive, usuriousor opposed to public policy.”

Similarly, in Sudhir Shantilal Mehta v. Central Bureau of In-vestigation, (2009) 8 SCC 1, he relied upon paragraphs 51 and 52 whichstate as follows:

“51. In terms of Section 35-A of the 1949 Act, Reserve Bank ofIndia is empowered to issue directions to the banks in public interest;or in the interest of banking policy; or to prevent the affairs of anybanking company being conducted in manner detrimental to theinterests of the depositors or in manner prejudicial to the interestof the banking company; or to secure the proper management ofany banking company generally.

52. Reserve Bank of India in terms of Section 21 of the 1949 Actis empowered to control advances by banking companies and is-sue necessary directions in this behalf. Reserve Bank of India,therefore, has the requisite power to issue direction to banks inrelation to discounting and rediscounting of bills of exchange andthose directions issued by Reserve Bank of India have statutoryforce and, thus, can be termed as law in force. (See also Corpo-ration Bank v. D.S. Gowda [(1994) 5 SCC 213] and CentralBank of India v. Ravindra [(2002) 1 SCC 367].) All public sec-tor 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 abusiness which banks could do, stated with respect to Sections 21 and35A of the RBI Act as follows:

“35. Section 21 deals with the power of RBI to control advancesby banking companies. Section 21 empowers RBI to frame policiesin relation to advances to be followed by banking companies. Itfurther says that once such policy is made all banking companiesshall be bound to follow them. Section 21(1) is once again generalprovision empowering RBI to determine policy in relation toadvances whereas Section 21(2) empowers RBI to give directionsto banking companies as to items mentioned there i.e. in Section21(2). Under Section 21(3) every banking company is bound tocomply with directions given by RBI at the peril of penalty beinglevied for non-compliance. Section 35-A says that where RBI issatisfied that in the interest of banking policy it is necessary toissue directions to banking companies it may do so from time totime and the banking companies shall be bound to comply withsuch directions. Thus, in exercise of the powers conferred bySections 21 and 35-A of the said Act, RBI can issue directionshaving statutory force of law. Section 36 deals with further powersand functions of RBI. Under Section 39 it is RBI which shall bethe Official Liquidator in any proceedings concerning winding upof banking company.”

xxx xxx xxx

“38. The BR Act, 1949 basically seeks to regulate bankingbusiness. In the cases in hand we are not concerned with thedefinition of banking but with what constitutes “banking business”.Thus, the said BR Act, 1949 is an open-ended Act. It empowersRBI (regulator and policy framer in matter of advances and capitaladequacy norms) to develop healthy secondary market, byallowing banks inter se to deal in NPAs in order to clean thebalance sheets of the banks which guideline/policy falls underSection 6(1)(a) read with Section 6(1)(n). Therefore, it cannot besaid that assignment of debts/NPAs is not an activity permissibleunder the BR Act, 1949. Thus, accepting deposits and lending by

itself is not enough to constitute the “business of banking”. Thedependence of commerce on banking is so great that in modernmoney economy the cessation even for day of the bankingactivities would completely paralyse the economic life of the nation.Thus, the BR Act, 1949 mandates statutory comprehensive andformal structure of banking regulation and supervision in India.”

He also referred to the Statement of Objects and Reasons of theAmendment Act, 1956, which brought in Section 35A in order to tightenup control over banking companies so as to enable the RBI to give di-rections to banking companies in relation to matters of policy or admin-istration affecting the public interest.

28. There is no doubt that Sections 21 and 35A do confer verywide powers on the RBI to give directions when it comes to the mattersspecified therein. However, this does not answer the precise questionbefore us. This question can only be answered by referring to Sections35AA and 35AB.

29. Section 35AA makes it clear that the Central Governmentmay, by order, authorise the RBI to issue directions to any banking com-pany or banking companies when it comes to initiating the insolvencyresolution process under the provisions of the Insolvency Code. Thefirst thing to be noted is that without such authorisation, the RBI wouldEhave no such power. There are many sections in the Banking Regula-tion Act which enumerate the powers of the Central Government vis-à-vis the powers of the RBI. Thus, Section 36ACA(1) provides as fol-lows:

“36ACA. Supersession of Board of Directors in certaincases.—(1) Where the Reserve Bank is satisfied, in consultationwith the Central Government, that in the public interest or forpreventing the affairs of any banking company being conductedin manner detrimental to the interest of the depositors or anybanking company or for securing the proper management of anybanking company, it is necessary so to do, the Reserve Bank may,for reasons to be recorded in writing, by order, supersede theBoard of Directors of such banking company for period notexceeding six months as may be specified in the order:

Provided that the period of supersession of the Board of Directorsmay be extended from time to time, so, however, that the totalperiod shall not exceed twelve months.

xxx xxx xxx”

This Section makes it clear that the RBI’s satisfaction in super-seding the board of directors of banking companies can only be exer-cised in consultation with the Central Government, and not otherwise.Similarly, under Sections 36AE and 36AF, the Central Government alonehas the power to acquire undertakings of banking companies in certaincases, on receipt of report from the RBI. Section 36AE(1) reads asfollows:

“36AE. Power of Central Government to acquireundertakings of banking companies in certain cases.—(1)If, upon receipt of report from the Reserve Bank, the CentralGovernment is satisfied that banking company—

(a) has, on more than one occasion, failed to comply with thedirections given to it in writing under Section 21 or Section 35-A, in so far as such directions relate to banking policy, or

(b) is being managed in manner detrimental to the interestsof 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 anyparticular 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 theReserve Bank as it thinks fit, by notified order, acquire theundertaking of such company (hereinafter referred to as theacquired bank) with effect from such date as may be specified inthis behalf by the Central Government (hereinafter referred to asthe appointed day):

Provided that no undertaking of any banking company shallbe so acquired unless such banking company has been given areasonable opportunity of showing cause against the proposedaction.

Explanation.—In this Part,—

(a) “notified order” means an order published in the OfficialGazette;

(b) “undertaking,” in relation to banking company incorporatedoutside India, means the undertaking of the company in India.

xxx xxx xxx”C

Likewise, under Section 36AF, the Central Government may, af-ter consulting the RBI, make scheme for carrying out the purpose ofacquisition of such undertakings of banking companies. Section 36AF(1)reads as follows:

“36AF. Power of the Central Government to makescheme.—(1) The Central Government may, after consultationwith the Reserve Bank, make scheme for carrying out the pur-poses of this Part in relation to any acquired bank.

xxx xxx xxx”E

Under Section 45Y, the Central Government may after consultingthe RBI make rules for preservation of records as follows:

“45Y. Power of Central Government to make rules for thepreservation of records.—The Central Government may, afterconsultation with the Reserve Bank and by notification in theFOfficial Gazette, make rules specifying the periods for which—

(a) banking company shall preserve its books, accounts andother documents; and

(b) banking company shall preserve and keep with itselfdifferent instruments paid by it.”

Under Section 52(1), the Central Government may, after consul-tation with the RBI, make rules to give effect to the provisions of theAct as follows:

“52. Power of Central Government to make rules.—(1) TheHCentral Government may, after consultation with the Reserve

Bank, make rules to provide for all matters for which provision isnecessary or expedient for the purpose of giving effect to theprovisions of this Act and all such rules shall be published in theOfficial Gazette.

xxx xxx xxx”

Importantly, the Central Government may, on the recommenda-tion of the RBI, declare that all or any of the provisions of the BankingRegulation Act shall not apply to any banking company, either generallyor for prescribed period. Section 53(1) of the Act reads as follows:

“53. Power to exempt in certain cases.—(1) The CentralGovernment may, on the recommendation of the Reserve Bank,declare, by notification in the Official Gazette, that any or all ofthe provisions of this Act shall not apply to any banking companyor institution or to any class of banking companies either generallyor for such period as may be specified.

xxx xxx xxx”

The power to remove difficulties is also vested in the CentralGovernment under Section 55A of the Act, which reads as follows:

“55A. Power to remove difficulties.—If any difficulty arisesin giving effect to the provisions of this Act, the CentralGovernment may, by order, as occasion requires, do anything (notinconsistent with the provisions of this Act) which appears to it tobe necessary for the purpose of removing the difficulty:

Provided that no such power shall be exercised after the expiryof period of three years from the commencement of Section 20of the Banking Laws (Amendment) Act, 1968.”

conspectus of all these provisions shows that the Banking Regu-lation Act specifies that the Central Government is either to exercisepowers along with the RBI or by itself. The role assigned, therefore, bySection 35AA, when it comes to initiating the insolvency resolution pro-cess under the Insolvency Code, is thus, important. Without authorisationof the Central Government, obviously, no such directions can be issued.

30. The corollary of this is that prior to the enactment of Section35AA, it may have been possible to say that when it comes to the RBI

Aissuing directions to banking company to initiate insolvency resolutionprocess under the Insolvency Code, it could have issued such directionsunder Sections 21 and 35A. But after Section 35AA, it may do so onlywithin the four corners of Section 35AA.

31. The matter can be looked at from slightly different angle. IfBa statute confers power to do particular act and has laid down themethod in which that power has to be exercised, it necessarily prohibitsthe doing of the act in any manner other than that which has beenprescribed. This is the well-known rule in Taylor v. Taylor, [1875] 1Ch. D. 426, which has been repeatedly followed by this Court. Thus, inState of U.P. v. Singhara Singh, (1964) 4 SCR 485, this Court held:C

“The rule adopted in Taylor v. Taylor [(1875) 1 Ch 426, 431] iswell recognised and is founded on sound principle. Its result isthat if statute has conferred power to do an act and has laiddown the method in which that power has to be exercised, itnecessarily prohibits the doing of the act in any other manner thanDthat which has been prescribed. The principle behind the rule isthat if this were not so, the statutory provision might as well nothave been enacted. Magistrate, therefore, cannot in the courseof investigation record confession except in the manner laiddown in Section 164. The power to record the confession hadEobviously been given so that the confession might be proved bythe record of it made in the manner laid down. If proof of theconfession by other means was permissible, the whole provisionof Section 164 including the safeguards contained in it for theprotection of accused persons would be rendered nugatory. Thesection, therefore, by conferring on Magistrates the power to recordFstatements or confessions, by necessary implication, prohibited aMagistrate from giving oral evidence of the statements orconfessions made to him.”

(at pp. 490-491)

GFollowing this principle, therefore, it is clear that the RBI can onlydirect banking institutions to move under the Insolvency Code if twoconditions precedent are specified, namely, (i) that there is CentralGovernment 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 themanner set out in Section 35AA.

32. Shri Dwivedi then argued relying upon the Finance Minister’sspeech that Section 35AA was really enacted by way of abundant cautioninasmuch as there was doubt as to whether such power could beexercised generally or otherwise. He relied, in particular, on the followingstatement in the speech of the Finance Minister, Shri Arun Jaitley, whilemoving the Bill which introduced Sections 35AA and 35AB into theBanking Regulation Act. The Finance Minister stated:

“This issue was discussed at length. There were two views thatthe general power may not include this power. One view wasexactly what you are saying. The other view was this. It is veryshort amendment. Therefore, to obviate any controversy, the RBIwill direct the consortium of banks to go and move an IBCinsolvency petition.”

33. Finance Minister’s speech, introducing certain provisions,can certainly shed some light on such provisions, particularly in cases ofambiguity. In the present case, what is missed is the fact that twoconditions precedent have been introduced in Section 35AA, withoutwhich, power cannot be exercised by the RBI. This itself shows that it isnot possible to say that Section 35AA has been introduced ex abundanticautela. Further, it is well settled that Parliament does not legislate whereno 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 Counseland in defining and construing the area and the content of the Actand its provisions, it is necessary to make certain generalobservations regarding the interpretation of statutes. statute isbest understood if we know the reason for it. The reason for astatute is the safest guide to its interpretation. The words of astatute take their colour from the reason for it. How do we discoverthe reason for statute? There are external and internal aids.The external aids are Statement of Objects and Reasons whenthe 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 arepermitted. Internal aids are the preamble, the scheme and theprovisions of the Act. Having discovered the reason for the statuteand so having set the sail to the wind, the interpreter may proceedahead. No provision in the statute and no word of the statute maybe construed in isolation. Every provision and every word mustbe looked at generally before any provision or word is attemptedto be construed. The setting and the pattern are important. It isagain important to remember that Parliament does not waste itsbreath unnecessarily. Just as Parliament is not expected to useunnecessary expressions, Parliament is also not expected toexpress itself unnecessarily. Even as Parliament does not use anyword without meaning something, Parliament does not legislatewhere no legislation is called for. Parliament cannot be assumedto legislate for the sake of legislation; nor can it be assumed tomake pointless legislation. Parliament does not indulge in legislationmerely to state what it is unnecessary to state or to do what isalready validly done. Parliament may not be assumed to legislateunnecessarily. Again, while the words of an enactment areimportant, the context is no less important. For instance:

“...the fact that general words are used in statute is not initself conclusive reason why every case falling literally withinthem should be governed by that statute, and the context of anAct may well indicate that wide or general words should begiven 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 concurrentpowers have been given to the RBI on combined reading of Sections21, 35A, 35AA, and 35AB. Interestingly, when concurrent powers aregiven to the same or to two different authorities, the Banking RegulationAct expressly says so. Thus, Section 35(1) of the Act is an example ofconcurrent 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 contrarycontained in Section 235 of the Companies Act, 1956, the Reserve

Bank at any time may, and on being directed so to do by theCentral Government shall, cause an inspection to be made by oneor more of its officers of any banking company and its books andaccounts; and the Reserve Bank shall supply to the bankingcompany copy of its report on such inspection.

xxx xxx xxx”

When it comes to the inspection of books of accounts, the RBImay, either by itself or by being directed to do so by the CentralGovernment, cause an inspection to be made of any banking company’sbooks and accounts in the manner specified in the Section. This is to becontrasted with Section 35AA, which makes it clear that de hors theauthorisation of the Central Government, the RBI has no power to issuedirections 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 saidSection was to be read as additional to other powers granted by Sections35A and 35AA. This Court, in Bharat Sanchar Nigam Ltd. v. TelecomRegulatory Authority of India and Ors., (2014) 3 SCC 222, atparagraphs 90 to 97, has indicated that the words “without prejudice”appearing in Section make it clear that powers that are enumeratedare only illustrative of general power and do not restrict such generalpower. 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 clearthat Section 26-A has been introduced by an amendment in 1982.A bare reading of this provision would show, firstly, that it is withoutprejudice to any other provision contained in this Chapter (meaningthereby Chapter IV). This expression only means that apart fromthe Central Government’s other powers contained in Chapter IV,Section 26-A is an additional power which must be governed byits own terms. Under Section 26-A, the Central Government mustbe “satisfied” that any drug or cosmetic is likely to involve (i) anyrisk to human beings or families; or (ii) that any drug does nothave the therapeutic value claimed or purported to be claimed forit; or (iii) contains ingredients in such quantity for which there isno therapeutic justification. Obviously, the Central Government

368SUPREME COURT REPORTS

Ahas to apply its mind to any or all of these three factors which hasto be based upon its “satisfaction” as to the existence of any or allof these factors. The power exercised under Section 26-A mustfurther be exercised only if it is found necessary or expedient todo so in public interest. When the power is so exercised, it mayregulate, restrict or prohibit manufacture, sale or distribution ofBany drug or cosmetic.”

Thus, the power to issue directions given by Section 35AB is inaddition to the power that is given under Section 35A.

36. It is significant that the power to issue directions given byCSection 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 evengreater significance is that Section 35AB is not without prejudice to theprovisions contained in Section 35AA. This being so, it is clear that thepower under Section 35AB, read with Section 35A, is to be exercisedseparately from the power conferred by Section 35AA.D

37. All the learned counsel appearing on both sides referred toexternal aids to construe the statute at hand. In Eera (through Dr.Manjula Krippendorf) v. State (NCT of Delhi) and Anr., (2017) 15SCC 133, Nariman, J. referred to what may be called the theory ofcreative interpretation. Instances of creative interpretation are whenEthe Court looks at both the literal language as well as the purpose orobject of the statute in order to better determine what the words used bythe draftsman of legislation mean [see paragraph 122]. He then concluded:“127. It is thus clear on reading of English, US, Australian andour own Supreme Court judgments that the “Lakshman Rekha”Fhas in fact been extended to move away from the strictly literalrule of interpretation back to the rule of the old English case ofHeydon [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637] , wherethe Court must have recourse to the purpose, object, text andcontext of particular provision before arriving at judicial result.GIn fact, the wheel has turned full circle. It started out by the ruleas stated in 1584 in Heydon case [Heydon case, (1584) 3 CoRep 7a : 76 ER 637] , which was then waylaid by the literalinterpretation rule laid down by the Privy Council and the Houseof Lords in the mid-1800s, and has come back to restate the rulesomewhat 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 inArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC1 [at paragraph 29]; Asian Resurfacing of Road Agency (P) Ltd. v.Central Bureau of Investigation, (2018) 16 SCC 299 [at paragraph51.5]; 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, explainedthe new Sections 35AA and 35AB as the grant of two distinct and sepa-rate powers. Section 35AA has been inserted “to resolve specific stressedassets by initiating insolvency resolution process where required”. Onthe other hand, Section 35AB has been enacted so that the “RBI hasalso been empowered to issue other directionsfor resolution……” It issignificant that Section 35AA is enacted exactly as it is in the Ordi-nance. So is Section 35AB, except for minor addition in sub-section(1), which adds the words “any banking company or”. Indeed, even theStatement of Objects and Reasons introducing the same Sections byway of an Amendment Act makes it clear that the powers conferred forresolution of stressed assets, either by invoking the Insolvency Code orby other means, are separate and independent powers, as set out inparagraphs 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 insolvencyresolution process under the Insolvency Code, Section 35AAis the only source of power.

(b) When it comes to issuing directions in respect of stressedassets, which directions are directions other than resolvingthis problem under the Insolvency Code, such power fallswithin Section 35A read with Section 35AB. This alsobecomes clear from the fact that Section 35AB(2) enablesthe RBI to specify one or more authorities or committees toadvise any banking company on resolution of stressedassets. 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 befollowed.

39. When one section of statute grants general powers, asopposed to another section of the same statute which grants specificpowers, the general provisions cannot be utilised where specificprovision has been enacted with specific purpose in mind. Thus, inJ.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 insteadthat clause 5(a) will apply in all other cases of proposed dismissalor discharge except where an inquiry is pending within themeaning of clause 23. We reach the same result by applyinganother well-known rule of construction that general provisionsyield to special provisions. The learned Attorney-General seemedto suggest that while this rule of construction is applicable toresolve the conflict between the general provision in one Act andthe special provision in another Act, the rule cannot apply inresolving conflict between general and special provisions in thesame legislative instrument. This suggestion does not find supportin either principle or authority. The rule that general provisionsshould yield to specific provisions is not an arbitrary principle madeby lawyers and Judges but springs from the commonunderstanding of men and women that when the same persongives two directions one covering large number of matters ingeneral and another to only some of them his intention is thatthese latter directions should prevail as regards these while asregards all the rest the earlier direction should have effect. InPretty v. Solly (quoted in Craies on Statute Law at p.m. 206, 6thEdn.) Romilly, M.R., mentioned the rule thus: “The rule is, thatwhenever there is particular enactment and generalenactment in the same statute and the latter, taken in its mostcomprehensive sense, would overrule the former, the particularenactment must be operative, and the general enactment must betaken to affect only the other parts of the statute to which it mayproperly apply”. The rule has been applied as between differentprovisions of the same statute in numerous cases some of whichonly need be mentioned: De Winton v. Brecon [28 LJ Ch 598],Churchill v. Crease [5 Bing 177], United States v. Chase [135US 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 [atparagraph 39].

40. Stressed assets can be resolved either through the InsolvencyCode or otherwise. When resolution through the Code is to be effected,the specific power granted by Section 35AA can alone be availed by theRBI. When resolution de hors the Code is to be effected, the generalpowers under Sections 35A and 35AB are to be used. Any otherinterpretation would make Section 35AA otiose. In fact, Shri Dwivedi’sargument that the RBI can issue directions to banking company inrespect of initiating insolvency resolution process under the InsolvencyCode under Sections 21, 35A, and 35AB of the Banking Regulation Act,would obviate the necessity of Central Government authorisation to doso. 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 bankingcompanies so far as the Insolvency Code is concerned, in Section 35AA,what is important to note is that the Section enables the Central Govern-ment to authorise the RBI to issue such directions in respect of “a de-fault”. Default, in the explanation to Section 35AA, has the same mean-ing assigned to it under Section 3(12) of the Insolvency Code. Section3(12) of the Insolvency Code reads as under:

“3. Definitions.—In this Code, unless the context otherwiserequires,—

xxx xxx xxx

(12) “default” means non-payment of debt when whole or anypart or instalment of the amount of debt has become due andpayable and is not paid by the debtor or the corporate debtor, asthe case may be;

xxx xxx xxx”

“Debt” has been defined under Section 3(11) of the InsolvencyCode as follows:

“3. Definitions.—In this Code, unless the context otherwiserequires,—xxx xxx xxx

372SUPREME COURT REPORTS

A(11) “debt” means liability or obligation in respect of claimwhich is due from any person and includes financial debt andoperational debt;

xxx xxx xxx”

Also, “corporate debtor” has been defined under Section 3(8) ofBthe Insolvency Code as follows:

“3. Definitions.—In this Code, unless the context otherwiserequires,—

xxx xxx xxx

C(8) “corporate debtor” means corporate person who owes adebt to any person;

xxx xxx xxx”

reading of these definitions would make it clear that defaultwould mean non- payment of debt when it has become due andDpayable and is not paid by the corporate debtor. Therefore, what isimportant to note is that it is particular default of particular debtorthat is the subject matter of Section 35AA. It must also be observed thatthe expression “issue directions to banking companies generally or toany banking company in particular” occurring in Section 35A isEconspicuous by its absence in Section 35AA. This is another goodreason as to why Section 35AA refers only to specific cases of defaultand not to the issuance of directions to banking companies generally, ashas been done by the impugned circular.

42. This is clear also from the Press Note dated 05.05.2017, whichFintroduced 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 andReasons for introducing Section 35AA also emphasises that directionsare in respect of “a default”. Thus, it is clear that directions that can beissued under Section 35AA can only be in respect of specific defaults byGspecific debtors. This is also the understanding of the CentralGovernment when it issued the notification dated 05.05.2017, whichauthorised the RBI to issue such directions only in respect of “a default”under the Code. Thus, any directions which are in respect of debtorsgenerally, would be ultra vires Section 35AA.

43. However, Shri Dwivedi argued that “specific cases” wouldinclude specification by category or class. All the definitions given byhim in his written argument, however, belie this. Thus, in the OxfordDictionary, the word “specific” is defined as follows:

“Specific / adjective 1. clearly defined. 2. relating to particularsubject; peculiar. 3. exact; giving full details. 4. archaic (of medicineetc.) for particular disease. noun 1. archaic specific medicine.2. specific aspect.”

Black’s Law Dictionary also defines the word “specific” asfollows:

“specific, adj. 1. Of, relating to, or designating particular ordefined thing; explicit <specific duties>. 2. Of, relating to, orinvolving particular named thing <specific item>. 3. Conformableto special requirements <specific performance>. – specificity, n.– specifically, adv.”

Shri Dwivedi referred to Maru Ram and Ors. v. Union of In-dia and Ors., (1981) 1 SCC 107, to argue that specification by categorywould be something well-known to law. He relied upon paragraph 33 ofthe 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 coveredby it. Secondly, if special or local law exists covering the samearea, this latter law will be saved and will prevail. Theshort-sentencing measures and remission Schemes promulgatedby the various States are special and local laws and must override.Now comes the third component which may be clinching. If thereis specific provision to the contrary, then that will override thespecial or local law. Is Section 433-A specific law contra? If so,that will be the last word and will hold even against the special orlocal law.”

reading of paragraph 33 would show that the specific provisionto the contrary, referred to therein, would refer only to particularSection, as opposed to category or Chapter which contains variousSections. This judgment, therefore, directly militates against thesubmission of Shri Dwivedi in this behalf.

A44. Shri Dwivedi then relied upon Section 13 of the General ClausesAct, 1897 [“General Clauses Act”] to state that the singular wouldinclude the plural. There is no doubt whatsoever that this would be sounless the context otherwise requires, as is provided by Section 13 ofthe General Clauses Act itself. In the present case, the context ofSection 35AA makes it clear, as has been correctly argued by Shri TusharBMehta, learned Solicitor General, that the power to be exercised underthe authorisation of the Central Government requires “due deliberationand care” to refer to specific defaults. This argument also does not takeShri Dwivedi very much further.

45. The impugned circular states as one of its sources, the powerCcontained in Section 45L of the RBI Act insofar as non-bankingfinancial institutions are concerned. Non-banking financial institutionsare referred to in Section 45-I(c) as follows:

“45-I. Definitions.—In this Chapter, unless the context otherwiserequires,—D

xxx xxx xxx

(c) ‘‘financial institution’’ means any non-banking institutionwhich carries on as its business or part of its business any ofthe following activities, namely:–

(i) the financing, whether by way of making loans or advancesor otherwise, of any activity other than its own;

(ii) the acquisition of shares, stock, bonds, debentures orsecurities issued by Government or local authority or othermarketable securities of like nature;

(iii) letting or delivering of any goods to hirer under ahire-purchase agreement as defined in clause (c) of section 2of the Hire-Purchase Act, 1972;

(iv) the carrying on of any class of insurance business;

(v) managing, conducting or supervising, as foreman, agent orin any other capacity, of chits or kuries as defined in any lawwhich 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 orarrangement by whatever name called, monies in lumpsum orotherwise, by way of subscriptions or by sale of units, or otherinstruments or in any other manner and awarding prizes orgifts, whether in cash or kind, or disbursing monies in any otherway, to persons from whom monies are collected or to anyother person,

but does not include any institution, which carries on as its principalbusiness,–

(a) agricultural operations; or

(aa) industrial activity; or

Explanation.–For the purposes of this clause, ‘‘industrialactivity’’ means any activity specified in sub-clauses (i) to (xviii)of clause (c) of section 2 of the Industrial Development Bank ofIndia Act, 1964;

(b) the purchase or sale of any goods (other than securities) orthe 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 isderived from the financing of purchases, constructions or salesof immovable property by other persons;

xxx xxx xxx”

Section 45L reads as follows:

“45L. Power of Bank to call for information from financialinstitutions and to give directions.—(1) If the Bank is satisfiedfor the purpose of enabling it to regulate the credit system of thecountry to its advantage it is necessary so to do, it may—

(a) require financial institutions either generally or any groupof financial institutions or financial institution in particular, tofurnish to the Bank in such form, at such intervals and withinsuch time, such statements, information or particulars relatingto the business of such financial institutions or institution, asmay be specified by the Bank by general or special order;

(b) give to such institutions either generally or to any suchinstitution in particular, directions relating to the conduct ofbusiness by them or by it as financial institutions or institution.

(2) Without prejudice to the generality of the power vested in theBank under clause (a) of sub-section (1), the statements,information or particulars to be furnished by financial institutionmay relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether inGovernment securities or otherwise, the persons to whom, andthe purposes and periods for which, finance is provided and theterms and conditions, including the rates of interest, on which it isprovided.

(3) In issuing directions to any financial institution under clause(b) of sub-section (1), the Bank shall have due regard to theconditions in which, and the objects for which, the institution hasbeen established, its statutory responsibilities, if any, and the effectthe business of such financial institution is likely to have on trendsin 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 circularnowhere says that the RBI has had due regard to the conditions in whichEand the objects for which such institutions have been established, theirstatutory responsibilities, and the effect the business of such financialinstitutions 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 areFoften in joint lenders’ forum which jointly lend sums of money to debtors.Such non-banking financial institutions are, therefore, inseparable frombanking institutions insofar as the application of the impugned circular isconcerned. It is very difficult to segregate the non-banking financialinstitutions from banks so as to make the circular applicable to themeven if it is ultra vires insofar as banks are concerned. For these reasonsGalso, the impugned circular will have to be declared as ultra vires as awhole, and be declared to be of no effect in law. Consequently, all actionstaken under the said circular, including actions by which the InsolvencyCode has been triggered must fall along with the said circular. As aresult, all cases in which debtors have been proceeded against by financial

creditors under Section 7 of the Insolvency Code, only because of theoperation of the impugned circular will be proceedings which, beingfaulted at the very inception, are declared to be non-est.

46. In view of the declaration by this Court that the impugnedcircular is ultra vires Section 35AA of the Banking Regulation Act, it isunnecessary to go into any of the other contentions that have been raisedin the transferred cases and petitions. The transferred cases and petitionsare disposed of accordingly.

Ankit Gyan

Tranferred Cases and Petitions disposed of.