Government retains power on referring defaulters to NCLT

New Delhi: The Supreme Court's order quashing the RBI's February 12 circular will give the government discretionary power to issue direction to the apex bank for referring a defaulting company to the NCLT on case by case basis in public interest, official sources said.

The Supreme Court on Tuesday quashed the RBI circular of last year that pertains to the provisions for referring the defaulter to the National Company Law Tribunal (NCLT) even on a one-day overdue. However, the SC had upheld the constitutional validity of Section 35AA of the Banking Regulation Act, which empowers the Centre to act, either directly or by directing RBI to take action against defaulters.

Section 35AA empowers the central government to authorise the RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the IBC.

Sections 35AA and 35AB were introduced by an amendment to the Banking Regulation Act in May 2017. The Reserve Bank of India (RBI) had on February 12, 2018 issued the circular saying that lenders have to provide for resolution plan within 180 days in case of large account of Rs 2,000 crore and above.

According to sources, the Supreme Court order on the RBI's circular does not limit government powers to give directions to PSU banks in resolving non-performing assets. Prior to February 12 circular, the resolution mechanism available to banks were Corporate Debt Restructuring Scheme (CDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), and Joint Lenders' Forum (JLF).