Elexa - Resolution Advisors

THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) 2002, allow Banks, Financial Institutions and Asset Reconstruction Companies to auction properties when borrowers fail to repay their loans without the intervention of the court.The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and Financial institutions Act, 1993 now (Recovery of Debts and Bankruptcy Act, 1993). SARFAESI Act, 2002 was introduced as a stronger legislation to regulate Securitisation and Reconstruction of Financial Assets and enforcement of Security Interest.

This Act focuses on strengthening the rights of the secured creditors against the defaulting debtors. It was enacted after the recommendations of Narashiman Committee-I and introspecting Committee under Andhyarujna. The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies regulated by RBI to acquire assets from banks and financial institutions. RBI has issued guidelines to banks on the process to be followed for sales of financial assets to Asset Reconstruction Companies.

As per section 13 (2) of SARFAESI Act, Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days once the account has been classified as Non-Performing Asset (NPA). After receipt of such notice, the borrower is entitled to make representation or raise objections to the Secured Creditor under section 13 (3-A), in case secured creditor comes to a conclusion that the objections are not tenable, he shall communicate the same within 15 days of receipt of such objection or representation to the borrower. If borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures under section 13 (4) of SARFAESI Act: take possession of the security for the loan; sale or lease or assign the right over the security; manage the same or appoint any person for managing the same.

In the event, where the Secured Creditor faces resistance by the borrower and is unable to take possession of the Secured Asset, he may take assistance of the Chief Metropolitan Magistrate/District Magistrate under section 14 of the Act to take possession of the Secured Asset and handover the same to the Secured Creditor.

The borrower is entitled to make an application under section 17 of SARFAESI Act, if he is aggrieved by any of the measures taken by Secured Creditor under section 13 (4) of SARFAESI Act before the Debts Recovery Tribunal. An appeal against the order of the DRT lies to DRAT under section 18 of the Act.

INSOLVENCY AND BANKRUPTCY CODE, 2016

The legal framework for resolving Corporate Insolvencies in India has been the subject of much criticism for over two decades. There has been no single law in our country which could deal with Insolvency and Bankruptcy provisions. Under the existing law i.e. Sick Industrial Companies (Special Provisions) Act, 1995, The Recovery of Debts & Bankruptcy Act, 1993, SARFAESI Act, 2002 and Companies Act, 2013, provisions relating to Insolvency & Bankruptcy were dealt with, though not effectively, hence were considered inadequate. Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘Code’) was enacted to consolidate and amend the laws relating to reorganisation and Insolvency Resolution of Corporate Persons, Partnership Firms and Individuals in time bound manner. Speedy disposal of disputes and recovery of assets which would result in attracting more investment in India within a specific time frame. “The principal focus of modern insolvency legislation and business debt restructuring practices is not the liquidation and elimination of insolvent entities but on the re-modelling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.

FEATURES OF THE CODE:

The code creates time bound process for Insolvency resolution of Corporate Persons, Partnership Firms and Individuals. Code also creates time bound process for liquidation in the event of unsuccessful resolution process.
Resolution processes are conducted by licensed professionals. They are member of Insolvency and Professional Agencies (IPA’s).
Information Utilities are established to collect, collate and disseminate financial information to facilitate insolvency resolution.
National Company Law Tribunal (NCLT) adjudicates Insolvency Resolution for companies, Debts Recovery Tribunal (DRT) will adjudicate Insolvency Resolution for individuals.
Insolvency and Bankruptcy Board of India (IBBI) is set up to regulate the functions of Insolvency Professionals (IP’s) and Information Utilities (IU’s).

CORPORATE INSOLVENCY RESOLUTION PROCESS

Application to the NCLT

Chapter II of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with the Corporate Insolvency Resolution Process (CIRP) and has been amended several times since the code was passed. Application for CIRP can be moved by the Financial Creditor or Operational Creditor of the Company or the Company itself. The application for Insolvency is to be made to the National Company Law Tribunal (NCLT) in the event the default exceeds Rupees One Crore. Within 14 days of the application, NCLT is required to pass an order of either accepting or denying the contention of the party who has approached it for the Insolvency process. As per judicial interpretation, this period is directory in nature. Central Government has also notified Chapter-III to VII of Part-III i.e., Insolvency Resolution for Individuals and Partnership Firms vide Gazette Notification No. S.O. 4126 (E) dated November 15, 2019.

Corporate Insolvency Resolution Process Begins

Once the NCLT accepts the application, Corporate Debtor enters into the CIRP, Company’s Board of Director are suspended for the period and the companies’ management is transferred to an independent “interim resolution professional”. from this point, till the end of CIRP, the earlier management terminates (under which the debt arose and the company failed to pay) and cease to have any control over the day to day affairs of the company. Time-period given to the Resolution Professional to complete the CIRP is of 180 days which can be extended by another 90 days. However, maximum time ascribed for the completion of CIRP is 330 days. The Committee of Creditors (CoC) appointed can extend the time of CIRP by a voting share of 66% (earlier it was 75%). After June 6, 2018, the Adjudicating Authority (AA) may permit to withdraw of the CIRP post-admission. However, approval of 90% of CoC is required.

Once CIRP commences, moratorium begins which will exist till the CIRP is in force. The moratorium bars institution and continuation of (a) any legal proceeding (existing or new) against the corporate debtor (b) transfer of asset or enforcement of any of its security (c) taking back possession of any property and (d) deferment or dissolution of the supply of essential goods and services that were made when the management was with the erstwhile board. However, the moratorium period will not cover any key business contracts entered into by the corporate debtor and will not be applicable to properties that are beyond the ownership of corporate debtor.

Verification and Classification of Claims

The AA shall appoint an Interim Resolution professional who will hold the office till the Resolution professional is appointed. The Role of IRP includes to verify claims submitted after the public announcement; access information utility of the corporate debtor to lay down the steps as to how and in what manner can the company be revived; form the CoC that will only comprise of Financial Creditor and take assistance from the personnel of corporate debtor; secure the assets of corporate debtor and take control and custody of it; CoC formed will take the decision of routine nature by a voting share of 51%.

Appointment of the resolution professional

Once the CoC is formed, within seven days of its formation, COC would convene their first meeting and appoint a Resolution Professional who would be an independent person and will function for the rest of the CIRP term. Approval of 66% of the total number of CoC members is required for the appointment of RP (Resolution Professional). At any point in time, the CoC may with a 51% vote change the RP who is acting against their interest or if it is revealed later that he/she is a related party to the corporate debtor.

Resolution Plan approval or Liquidation

RP will put forth the resolution plan before the CoC who by a voting threshold of 66% will either accept or reject the resolution plan. The resolution plan that is approved by the AA and CoC will be binding over all the debtors and creditors. The resolution plan would be submitted to NCLT, who will then take steps for its implementation. The moratorium period will cease to exist once the resolution plan is accepted.

In the event no resolution plan is received, or the CIRP fails for any reason, on an application made by RP, the AA can order for the liquidation or the corporate debtor. In the event of liquidation the proceeds derived from the sale of the assets of the corporate debtor is distributed in accordance with waterfall mechanism provided under Sec 53 read with Sec 52 of IBC, 2016.

MAJOR AMENDMENTS IN THE INSOLVENCY AND BANKRUPTCY CODE, 2016.

Section 29A

Sec 29A has been inserted in the Code setting out the persons not eligible to submit the resolution plan. List includes undischarged insolvent, disqualified for the post of director, convicted of an offense, account declared NPA, wilful defaulter, promoter and connected persons, etc. This disqualification of whose account has been declared NPA can still submit the resolution plan if he pays his dues within 30 days and is no more a defaulter.

Home Buyers

One of the major amendments that was done in the IBC, 2016 was adding home buyers under the definition clause. Now, the home buyers will also fall under the definition of financial creditors and will be able to recover the amount paid as an advance.

Voting share required for extension of CIRP

Voting threshold has been reduced to 66% from 75% for extending the time period of CIRP by the CoC. Post admission of CIRP, AA may allow the withdrawal if 90% of CoC vote in favour of withdrawal.

Moratorium

Moratorium will have an application only on the assets which are within the ownership of the corporate debtor subject to the clause that a personal guarantor if is a connected party to the debt would be included.

Routine Matter

51% of the vote is required for the approval of the decision of routine nature in CoC.

Approval of Resolution Plan

Approval of 66% of the CoC is required for approving the resolution plan submitted by the resolution applicant.

Resolution Plan to include merger, amalgamation and demerger

Resolution plan to include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger as explanation to section 5.

Payment to Operational Creditor and Dissenting Financial Creditor

Section 30 sub-section (2), for clause (b), was amended to substitute that the payment of debts of operational creditors shall not be less than the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53 or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53, whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Liquidation before the confirmation of the Resolution Plan

Section 33 (2) has been amended so as to allow committee of creditors by 66% voting share to take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

RBI

In exercise of the powers conferred by Section 9 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, Asset Reconstruction Companies registered with the Bank were advised to adopt 'Fair Practices Code' so as to ensure transparency and fairness in their operation.

THE ARBITRATION AND CONCILIATION ACT, 1996

The Arbitration and Conciliation Act, 1996 contains the law relating to Arbitration which came into force on January 25th, 1996. This act gives the provisions for International commercial arbitration, domestic arbitration and also enforcement of foreign arbitral awards. It is based on the UN model law to equate with the law adopted by the United Nations Commission on International Trade Law (UNCITRAL). There are two types of arbitration proceedings which are Domestic arbitration and International arbitration.

The arbitration arises due to a dispute between the two parties. To start an arbitration procedure, the contract or the agreement that is executed between the parties must have an arbitration clause. After the counterparty receives the notice from the applicant about commencement of arbitration, arbitrator shall be appointed in a manner that is described in the arbitration clause or as provided under Section 11 of Arbitration and Conciliation Act, 1996. After the commencement of arbitration and appointment of arbitrator, the applicant shall draft a statement of claims which contains all the documents which he think are relevant to the case and also all the evidences supporting the statement.

The counterparty may also submit a counter claim or a statement of defence in support of the case which shall be examined by the arbitral tribunal. The arbitral tribunal shall hear both the parties and examine the evidences. The Tribunal shall decide whether the documents or the evidences produced are valid. Post that the arbitrator shall pass the award. After the award is passed by the arbitral tribunal the same shall be executed as a decree of civil court by the executing court.

THE NEGOTIABLE INSTRUMENTS ACT, 1881

The term “Negotiable Instrument” is defined in Section 13 of the Negotiable Instruments Act, 1881 and pertains to Negotiable Instruments is legal document, such as a cheque, ECS/Standing Instructions or a bill of exchange, that is freely negotiable. Negotiable Instruments Act, 1881 consists of 17 chapters. The provisions under which Financial Institutions take recourse are from Sections 138 – 142 of the Negotiable Instruments Act, 1881. Similar provisions are present under Section 25 of the Payment and Settlement Systems Act, 2007 for dishonour of Electronic Funds Transfer.

Section 138 of the Negotiable Instruments Act, 1881 states the dishonouring of a cheque for reasons stated insufficiency of funds, stale cheque, post-dated cheque, alteration, irregular signature, frozen account and stop payment instruction, etc. When any cheque is drawn by an individual person on a particular bank account is returned by the bank unpaid either because of the reason of the amount of money standing in the credit of that bank account is insufficient to honour or if it exceeds the amount of money arranged to be paid from that bank account by an agreement made with the bank. The offence is said to be committed at the exact moment the cheque is returned unpaid to the holder or drawer of the cheque and carries a criminal liability. Hence, such an individual or person shall be deemed to have committed an offence and shall without prejudice to any other stated provisions of the Act, shall be punished with a maximum of imprisonment for up to one year or with a fine which may be extended to twice the amount mentioned in the cheque, or both.

Upon the dishonour of cheque, the payee (person who receives the payment) in due course of the cheque has made a demand for the payment of the amount of money by providing a notice or in writing to the person who has drawn the cheque within 30 days from the date of return memo of the receipt of information from the bank regarding the returning of the cheque which is unpaid. In the event the amount is not paid as per the demand within 15 days of the receipt of notice, a complaint in writing can be filed within 30 days in the court of Chief Metropolitan Magistrate/Metropolitan Magistrate as the case may be. Detailed act is attached in the PDF.

THE RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993

Banks and FIs duly registered with Reserve Bank of India (RBI) provide loan facility to legal entities and individuals (borrowers). In the event where the borrower fails to repay loan amount or any part thereof which also includes unpaid interests and other charges and/or debt becomes Non-Performing Asset (NPA), banks and financial institutions can recover the debt by approaching appropriate judicial forums.

Under the provisions of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), an Application has to be filed within the local jurisdiction of relevant Debts Recovery Tribunal (DRT), as per section 19(1) of the Act, Application can be filed within the local limit of DRT in whose jurisdiction, the branch or any other office of the bank or financial institution is maintaining an account in which debt claimed is outstanding; the defendant voluntarily resides or carries on his business or works for gain; where the cause of action wholly or partly arose.

After giving both the parties opportunity of being heard, within 30 days of the conclusion of such hearing DRT shall pass its interim or final order. Within 15 days of the passing of the order, DRT will issue Recovery Certificate (RC) and forward the same to Recovery Officer. RC will contain the details of the amount to be paid by recovered by the borrower/Certificate debtor. RC shall have the same effect as the decree of the civil court. An appeal by any aggrieved party against the order of DRT can be filed within the period of 30 days from the date of receipt of the order before the Appellate Tribunal i.e., Debts Recovery Appellate Tribunal (DRAT). DRAT shall endeavour to dispose-off appeal finally within the period of six months.

After receipt of RC from DRT, Recovery Officer will initiate recovery by one or more of following modes- attachment and sale of movable or immovable property of defendants/debtors; taking possession of property over which security interest was created or any other property of defendant/debtor and appointing receiver for the management of the same; arrest of defendant/debtor and his detention in prison; appointment of receiver for management of movable or immovable property of defendant/debtor.

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