New Delhi : On Tuesday, in a huge relief to the regulated sector, the Supreme Court struck down as ultra vires the controversial February 12, 2018, Reserve Bank of India (RBI) circular that mandates lenders to initiate resolution or restructuring of loans of Rs 2,000 crore and above within six months from the date of default. After the expiry of the 180 days, the defaulting borrowers, under the now struck down circular, had to mandatorily face proceedings under Insolvency and Bankruptcy Code (IBC). "We have declared RBI circular ultra vires," said Justice Rohinton Fali Nariman pronouncing the judgement on a batch of petitions by the industries -- power, fertiliser and sugar -- challenging February 12, 2018 apex bank circular.

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Here it is to be noted that Justice Nariman was accompanied by Justice Vineet Saran on the bench. The court verdict would have a bearing on Rs 2.2 lakh crore of bad loans. Justice Nariman said "Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular". As a result, the judgement further said, "All cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est."

To be noted that the RBI circular that was struck today had said that in the pre-Insolvency and Bankruptcy Code (IBC) stage, the moment a commercial entity is in default on a loan of Rs 2,000 crore or more even for a day, the bank would initiate steps for resolving, including restructuring the loan. The RBI's February 12 circular requires banks to finalise a resolution plan in case of a default on large accounts within 180 days, failing which insolvency proceedings will have to be invoked against the defaulter. It also introduced a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day. They have contended that under IBC the resolution plan gives then 270 days but the RBI circular has reduced it to 180.

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However, the RBI's February 12 circular requires banks to finalise a resolution plan in case of a default on large accounts within 180 days, failing which insolvency proceedings will have to be invoked against the defaulter. It also introduced a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day. The regulated sector companies of fertiliser, power and sugar had contended that their prices are regulated by the government and they don't get paid on time and thus they are unable to pay the banks on schedule and are not wilful defaulters and can't be treated as such.