In Brief
Dharani Sugars & Chemicals Ltd and others challenged the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949, and an RBI Circular dated 12 February 2018 that prescribed a revised framework for resolution of stressed assets. The Circular required banks to implement resolution plans within 180 days for accounts with exposure ₹2000 crore and above, failing which insolvency proceedings must be filed. The Supreme Court held that Sections 35AA and 35AB are constitutional and do not suffer from manifest arbitrariness or excessive delegation. However, the Court declared the RBI Circular ultra vires because Section 35AA limits RBI's power to issuing directions in respect of "specific defaults" of specific debtors, not categorical directions applying uniformly to all defaults above a threshold. The Court applied the principle that when a statute prescribes a specific method for exercising power, it prohibits exercise in any other manner. Consequently, all insolvency proceedings initiated solely under the impugned Circular were declared void ab initio.
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