In Brief
The Supreme Court held that while Sections 35AA and 35AB of the Banking Regulation Act, 1949 are constitutionally valid, the RBI Circular of February 2018 mandating referral of accounts with exposure exceeding ₹2000 crore to insolvency after 180 days is ultra vires Section 35AA. The Court found that Section 35AA exclusively governs directions to initiate insolvency proceedings and requires government authorization applied to specific defaults of particular debtors, not general categorical rules. The circular's application to all large defaults violated this requirement. Consequently, all insolvency proceedings initiated solely under the circular were declared void from inception, though the constitutional validity of the statutory sections themselves was upheld.
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