Supreme Court Rescues Insolvent Companies From Mandatory Bankruptcy

Insolvent Companies-bankruptcy

Now India ranked as one of the fastest growing economies in the world. With numerous big and small industries developing each day it is on the rise. The Indian money market runs on the scheduling banking sector. These are located in different parts of the country from urban to rural areas. And unorganized or non-banking financial companies and individual indigenous money lenders also have a part in this. Thus, the scheduled banks follow the rules set by the Reserve Bank of India (RBI). Loans for business development for the companies are easily available with proper proceedings from these banks. These are also available from other financial creditor companies. Hence, it is often seen as a failure to make repayment of the loans has led to mandatory bankruptcy.

A recent verdict declared by the SC has put a restriction on insolvency of stressed assets by the Bank. In the Dharani Sugars and Chemicals Ltd v Union of India case, dated 2nd April 2019, the apex court has overruled a Reserve Bank of India (RBI) Circular dated 12th February 2018 as unconditional and Ultra Vires.

According to the Circular, Banks have the power to conduct immediate insolvency proceedings against problematic assets. This only happens if it fails to maintain the board–approved policy for the resolution. The bank can initiate a Resolution Process against the borrower. This happens on failure to pay off a term loan of 2000 crore or more and unable to cure it in 180 days. This has resulted in detrimental consequences on the interest of the defaulter companies which lead to bankruptcy. The Circular obtained the power from Section 35 AA and 35 AB of the Banking Regulation Act, 1949 (rights to issue direction regarding stressed assets). This Section was challenged based on the Insolvency and Bankruptcy Code, 2016. The apex court verdict will be applicable to all such cases. Mostly, where the financial creditors have taken action following the RBI Circular. Therefore, the scenario is changing.

According to the SC declaration, without the authorization of the Central Government, organizations cannot take such steps. However, the Reserve Bank of India can implement its rights under Section 35 AA and 35 AB varying from case to case depending on the nature of default by the debtor. Thus, insolvency cases are taking hits.

This judgment resulted in a better way of resolving the issues related to insolvent companies failure to settle their debts. The banks from now on can take an independent decision on such cases. It has opened opportunities to make an out of court settlement without harming the interest of the defaulter companies.

The proceedings of any genuine insolvency cases initiated by financial creditors will not be affected by any means with this judgment who has not taken action under the RBI Circular. It will precede as it ought to be without any restrictions.

This judgment has come as a relief to those companies who make sincere efforts to settle their debts but were unable to do so in the given short period of 180 days. Hence, it will definitely benefit these companies to resolve the issues regarding their stressed assets and can make a fresh effort to strengthen the company.


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