Case Analysis: Dharani Sugars and Chemicals Ltd. v. Union of India (2019) 5 SCC 480

FACTS OF THE CASE:

1. The case at hand is a follow-up of a circular issued on 12 February 2018 by the Reserve Bank of India (RBI) entitled Resolution of Stressed Assets – Revised Framework. According to this circular, all banks and other financial institutions were to declare accounts having any overdue worth 2000 crore or more as stressed assets in case it was delayed by more than 180 days and against the debtor to begin an Insolvency and Bankruptcy Code (IBC), 2016 proceeding in case they failed to use the resolution plan in time kept aside.
2. The appellant Dharani Sugars and Chemicals Ltd. was such company which suffered due to the circular. The company dealt in the sugar business which was experiencing economic setbacks as a result of a number of sectorial as well as policy related problems. The appellant had huge pending loan amounts with various banks such as State bank of India etc., and falling within the new RBI categories as a non-performing asset (NPA). The circular stipulated that the banks were mandated to take up Corporate Insolvency Resolution Process (CIRP) against the company within the mandatory timeline of 180 days irrespective of its particular business situation and any effort of the company towards restructuring.
3. The appellant stated that the circular was unlawful and unconstitutional considering a number of reasons. It argued that RBI had come out with a generic and binding order to all banks without a distinction amongst the sectors, and without the prior approval of the Central Government as mandated by Section 35AA of the Banking Regulation Act, 1949. It was the argument of the appellant that a circular like this would result in forced insolvency without restructure or a shot at resurrection, which involves the right to practice business under the Article 19(1)(g) of the Constitution of India.
4. Such respondents were Union of India, RBI, and a number of public sector banks. They maintained that it was an action by RBI in its capacity as a regulator and the circular was necessary to correct the problem of NPAs which was getting bigger. The circular was viewed as a policy measure to have immediate measures in settling bad debts and bring about financial prudence among debtors.
5. The legal effort here was that the RBI had overstepped its legislative authority by insisting on a standard resolution mechanism across all industries without the consent of the government and without keeping in view specific economic conditions as is metered to individual industries. The Supreme Court was asked to determine the powers of the RBI under Section 35A, 35AA, 35 AB of the Banking Regulation Act and to determine the legality of 12 February 2018 circular in the context of the Insolvency and Bankruptcy Code, 2016.

ISSUES OF THE CASE:

The case raised significant constitutional and statutory questions. The core legal issues were:

3.1. Did the RBI circular 12 February 2018, exceed the powers bestowed on the RBI under the Banking Regulation Act of the year 1949? 

3.2. Whether the RBI was entitled by any legal power to give blanket direction to all the banks to open insolvency proceedings under the IBC without getting proper authorization to the Central Government as envisaged in Section 35AA of the Banking Regulation Act?

3.3. Did the circular happen to breach the aesthetics of proportionality by imposing similar treatments to all the loading bankers who defaulted in their payment despite its actions and considerations towards the sector?

JUDGMENT

The Supreme Court of India in the case of Dharani Sugars and Chemicals Ltd. v. Union of India, had the ordered case on the correctness of the Reserve Bank of India (RBI) circular (issued on 12 February 2018), which had made a directive to the banks and financial institutions to commence proceedings, under the Insolvency and Bankruptcy Code, 2016 (IBC), against the defaulting companies, including large corporate borrowers. And the Court decided there are cases when the RBI can issue a circular that is ultra vires and therefore void in law which was the case with this circular.

The finding of the central point was that the RBI had exceeded its jurisdiction under the purview of the Banking Regulation Act, 1949, under the Section 35AA. This segment, initiated through an amendment in 2017, requires that express authorisation by the Central Government be accorded to the RBI in respect to giving a direction to banks to take an insolvency action concerning a particular case. Without such authorisation, the RBI was not at liberty to independently come out with a generic direction covering all defaults of a certain size. In view of the fact that such authorization by Central Government under each case is as yet unknown in this case, the circular by the RBI was held to be in excess of the powers vested in the latter.

Moreover, the Court also added that the impugned circular was not one that was advisory only. Rather it forced them to reflect each default of 2000 crores or more as a circumstance to begin insolvency processes within 180 days without considering the possibility of other alternatives to insolvency to include restructuring. This one size fit all formula was seen to be too hard-line and not in indulgence with the legislative framework as envisioned under the IBC and the Banking Regulation Act.

Before compelling organizations into the insolvency procedure, the Supreme Court vocalized that a case by case assessment is important. It maintained that the powers exercised by the RBI to issue its directions in relation to the resolution of stressed assets need to be exercised within the statutory bounds and policy determination ought to be based upon the legislative support. The Court further warned that the economic policy should never be permitted to operate over the statutory procedure despite it being due to an attempt to create healthy banking conditions.

Nevertheless, the Court also took care to restrict the retrospective of its action. It made it clear that any proceedings that had already been filed in terms of IBC in pursuant with the RBI circular would not be automatically declared as invalid. It was only the insolvency proceedings that were only reliant on the now overruled circular and had not yet been finalised and might be questioned. This maintained the sanctity of the continuous insolvency procedures and stopped the hustle of the operations of the IBC ecosystem.

Essentially, the judgement reasserted the tenet that even though the financial regulators such as RBI have been given a key responsibility of keeping the banking discipline in check, they should do so within the extent of the law which is determined by the Parliament. The decision was a mirror of the fact that statutory bodies may not usurp to themselves powers not delegated to them by statute, however high the policy motive, however paramount the policy purpose may be.

REASONING:

The Supreme Court has resorted to statutory interpretation of the sections 35A, 35AA and 35AB of Banking Regulation Act in a fine detail. It observed that although Section 35A enables the RBI to issue any general or special directions in the interest of the general public, the said provision could not preclude the detailed restrictions provided in Section 35AA and introduced by an amendment in 2017.

The distinct requirement of Section 35AA is that the Central Government will give RBI authority to ask a banking company to move insolvency proceedings under the IBC. The Court noted that the circular of 12 February 2018 was a blanket order extending to all borrowers, that did not undertake any analysis case-wise or debtor-wise. This is a big blanket and binding direction which needed to be earlier approved by the Central Government and not in the case of RBI.

According to the Court, Section 35AA is a provision that is controlling and it has been introduced to make sure that extreme measures of making companies insolvent are done with the involvement of the government. The Court ruled against the argument that Sections 35A and 35AB could be applied without the Section 35AA as a basis of bringing insolvency proceedings.

The Court further indicated that the circular employed a one size fits all model, which was oblivious to various financial and operational problems experienced by various sectors like sugar, power and infrastructure sectors. This was inequitable treatment of unequals that did not fall in line with the principle of proportionality that was incorporated in Article 14 of the constitution.

The Court has accepted that although the RBI plays a most vital role in the upkeep of financial stability and controlling the banking system in the sector, its activities must be based on statutory grounds. Lack of governmental approval of such a binding circular jeopardized the constitutional balance of power among the legislature, executive and regulatory authorities.

The following conclusion was recorded in the judgement that even though the RBI has the power to act appropriately under the Banking Regulation Act, it also has to act in accordance with the procedure as provided in the act. Namely, any new guidelines given out in the future to engage insolvency proceedings under IBC shall be preceded by such authorisation given by the Central Government under Section 35AA.

REFERENCES:

1. Dharani Sugars and Chemicals Ltd v Union of India (2019) 5 SCC 480, [48].

2. Banking Regulation Act 1949, ss 35A, 35AA and 35AB.

3. Insolvency and Bankruptcy Code 2016.

4. Constitution of India 1950, art 14 and art 19(1)(g).

5. RBI Circular, ‘Resolution of Stressed Assets – Revised Framework’ (12 February 2018).

6. Ritu Sarin, ‘Supreme Court strikes down RBI circular on insolvency’ Indian Express (New Delhi, 2 April 2019) https://indianexpress.com accessed 17 July 2025.

7. Vinod Kothari, ‘RBI Circular Struck Down: Supreme Court on RBI’s Limited Powers under IBC’ (2019) IndiaCorpLaw Blog https://indiacorplaw.in accessed 17 July 2025.

8. https://indiankanoon.org/doc/15876695/ 

Written by Prerna Puthela from Lovely Professional University as an intern under Legal Vidhiya

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