SARFAESI Act, Methods of recovery of NPA’s

Recently updated on April 13th, 2023 at 06:26 pm

The legal status of an entity or a person where the debt owed to the creditors cannot be repaid is known as Bankruptcy. A court order imposes bankruptcy in most of the jurisdictions. It is mostly initiated by the debtor. It is important to note that bankruptcy is not synonymous with insolvency. It is not the only legal status that could be applicable to an insolvent individual or an entity. In countries like the UK, bankruptcy is exclusive to individuals. Liquidation, administration and other such insolvency proceedings are applicable to entities and companies.

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

The 2016 Code provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency within 180 days. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The insolvency resolution process can be initiated by any one of out of following three

  • Financial creditor
  • Operational creditor
  • Corporate debtor himself

IBS Facilitator

  • The Insolvency Professionals: These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.
  • Insolvency Professional Agencies: insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance.
  • Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.
  • Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
  • Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.

Issues with IBC 2016

  • Missing the deadline: IBC mandates that an insolvent asset must be resolved in 270 days. Out of the 12 big accounts initially referred to IBC, five cases are pending for more than 600 days due to continuous litigation by some party or the other. Among the most prominent examples of this chequered journey for the IBC is the Essar Steel insolvency. It has been more than 600 days since the Rs 50,000-crore account entered the IBC.
  • Lack of benches and judges: India has 14 NCLTs, and two are yet to start functioning. The government had a couple of years back announced to set up 24 bankruptcy courts. The NCLT judge roster shows 27 members have been sharing the workload against the target of appointing 60 judicial and technical members. Delhi and Kolkata are sharing the workloads of Jaipur, Chandigarh, Guwahati and Cuttack benches. Recently the government highlighted that it has been taking steps to increase the capacity of National Company Law Tribunal (NCLT) and increased its benches from 10 to 15. Also, 26 new members have been added taking the total strength to 52.
  • Haircuts: It is the extent of write off that banks undertake as part of a resolution plan to get the company back on track. So far financial creditors have got 43 per cent of their claims and 188 per cent of the liquidation value. Steps should be taken so that haircuts are reduced.
  • All these factors are raising concerns that IBC will meet the same fate as DRT and SARFAESI and banks will eventually lose confidence in IBC
  • The recent Supreme Court order setting aside RBI’s decision to send all power companies to the NCLT has also set a wrong precedent.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

  • The Ordinance amends the Insolvency and Bankruptcy Code, 2016 to clarify that allottees under a real estate project should be treated as financial creditors.
  • The voting threshold for routine decisions taken by the committee of creditors has been reduced from 75% to 51%. For certain key decisions, this threshold has been reduced to 66%.
  • The Ordinance allows the withdrawal of a resolution application submitted to the NCLT under the Code. This decision can be taken with the approval of 90% of the committee of creditors.

The Code proposes the following steps to resolve insolvency:

Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The decision to resolve insolvency: A committee consisting of the financial creditors will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.

Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the already established order of precedence.

Insolvency resolution process by creditor under section 7 of Insolvency and Bankruptcy Code, 2016

  • Financial creditor himself or jointly will initiate by filing an application for the insolvency proceedings against the corporate debtor before NCLT.
  • Along with the application, he has to submit the proof of default and the name of the proposed resolution professional to be appointed
  • If NCLT is of the opinion that there is no default on the part of the corporate debtor or there is a proceeding pending against the proposed resolution professional NCLT may reject the application.
  • NCLT has to entertain the application within 14 days of making the application.

Initiation of insolvency resolution process by operational creditor under section 8 of the code

Before initiating insolvency resolution process operational creditor will serve the corporate debtor with a prior notice of 10 days to the corporate debtor asking him to pay back the dues.

If the corporate debtor does not pay back in that time period or does not bring to the attention of the operational creditor about any dispute or any arbitration proceeding pending against the business or any record of repayment of unpaid operational debt, then the operational creditor can file an application for the insolvency resolution process.

Resolution of insolvency by the corporate debtor under section 10 of the code

Where the corporate debtor is at fault, the corporate debtor or any corporate applicant can file an application for the initiation of the insolvency resolution process along with the books of accounts and other financial documents of the business. The corporate debtor shall also file the name of the proposed resolution professional along with the application.

Time period for the completion of the insolvency resolution process under section 12 of the code

Insolvency resolution process will have to be completed within the time period of 180 days after the admission of the application and can extend the time period to 90 days in addition to 180 days only if NCLT thinks fit that the resolution process will take more point of view.

In all the above three situations NCLT has to either admit or reject the application for initiation of insolvency resolution process within 14 days.

Within 14 days of admitting the application, NCLT will appoint the interim insolvency professional with the consent of the insolvency and bankruptcy board.

Public announcement and moratorium under section 13 & 14 of the code

Public announcement

Once the application for the insolvency resolution process has been admitted the NCLT will make a public announcement for the submission of claims by the creditors also the adjudicating authority i.e. NCLT will appoint the interim resolution professional.

Moratorium

NCLT will declare the moratorium for prohibiting the following

  • The institution of any suit or pending suit including execution of any judgment or decree against the corporate debtor.
  • Transferring, encumbering, alienating or disposing of any property or right or beneficial interest.
  • Any action to foreclose, recover or any security interest created by the corporate debtor in respect of its property.
  • Recovery of any property by the owner or lessor which is in the possession of the corporate debtor.
  • Terminate the supply of goods and services to the corporate debtor.

The moratorium shall cease to have the effect on the date on which the resolution process is approved or on the date of the liquidation order.

Appointment of interim resolution professional and his role under section 16-20 of the code

Role of insolvency professional

  • Interim insolvency professional will have the control over the assets and the financial details of the corporate debtor.
  • Interim insolvency professional is empowered to admit or reject the claims based on the verification of the claims from the database of the corporate debtor held by the insolvency professional with the claims submitted by the creditors.
  • Interim resolution professional shall manage the affairs of the corporate debtor.
  • He will have the powers of the board of directors or partners of the corporate debtor.
  • He shall have access to the books of accounts of the corporate debtor.
  • He will act as a supervisory body for the officers and managers and the financial institutions of the corporate debtor.  
  • Any other function which is deemed necessary for proper appropriation of assets of the corporate debtor.
  • The interim professional resolution shall be appointed for the tenure of 30 days.

Appointment of resolution professional and committee of creditors including their functions under section 21-25 of the code

Formation of the creditor’s committee of the code

After submission of the claims, the insolvency professional shall form a creditors committee and all the creditors whose claims get admitted shall be the part of creditors committee. The creditor’s committee will decide upon the question of the reason for the inability of the corporate debtor to pay back its debts and if they are justified that the reason is a business crisis but not the financial crisis, then creditors committee shall either go for restructuring repayment plan to the creditors or for the liquidation process.

  • All the members of the creditor’s committee will be allotted the voting rights as per their voting share that will be based upon the financial debts owed to the corporate debtor.
  • Creditors committee will hold their first meeting within seven days of appointment and may appoint a final insolvency resolution professional or may give their affirmation to the interim insolvency professional to be appointed as insolvency professional with the approval of 75% of votes of the creditors of creditors committee.
  • All the meetings of creditors committee will be conducted by the resolution professional.
  • The partners, directors shall attend the meeting but won’t have the voting rights.
  • One representative of the operational creditors shall also join the meeting but without any right to vote. Only the operational creditors whose aggregate dues is not less than 10% of the total debt.

Resolution professional have to prepare an information memorandum to enable the resolution applicant to form a resolution plan. A resolution applicant will submit the restructuring of repayment plan to the resolution professional and the resolution professional after its satisfaction will present the same plan to the creditor’s committee for approval. The plan will be confirmed only if it gets the affirmation of 75% of votes of the creditors of creditors committee in favor.

If the above approval has been obtained then NCLT will order the execution of the restructuring plan in a prescribed manner.

After the order of approval by NCLT, the moratorium shall cease to have an effect and resolution professional will forward all the records and documents to the board of directors to conduct the insolvency resolution process effectively.  

Liquidation under section 33 of the code

Liquidation is the process of acquiring the assets of the corporate debtor and releasing them in the market and then distributing the sale proceeds to the creditors as per their priority list described under Insolvency and Bankruptcy Code, 2016.

There are several reasons to the liquidation of the corporate debtor –

  • That the resolution plan was not presented to the NCLT within prescribed time period i.e., 180 days and if the extension of 90 days was provided including those 90 days.
  • When NCLT does not approve the resolution plan and rejects it.
  • If the resolution plan is contravened by the corporate debtor or any other person whose interests are prejudicially affected by such contravention files an application for liquidation.
  • If committee of creditors before giving approval to the resolution plan orders for the liquidation process.
  • If a corporate debtor fails to comply with the resolution plan then NCLT can order for liquidation process.

After the affirmation to the liquidation process, NCLT shall order for the liquidation of the corporate debtor in accordance with the prescribed rules and shall make a public announcement regarding the liquidation of the corporate debtor.

Process of Liquidation

  • Resolution professional will act as a liquidator if not replaced by the approval of 75% votes of the committee of the creditors.
  • The liquidator will form an estate of assets of the corporate debtor which will include all the properties, rights or interests of the corporate debtor.
  • The liquidation process will take place in accordance with the rules and regulations as prescribed under this code.
  • The liquidator will verify all the claims submitted by the creditors and then he will either approve or reject the claim.
  • Liquidator after verifying the claims will sell the immovable or immovable assets of the corporate debtor through public auction or private contract.
  • The liquidator will satisfy the claims of the creditors as per the priority list of the creditors or debts to be satisfied under the section 53 of Insolvency and Bankruptcy Code, 2016.

Fast Track Corporate Insolvency

Fast track corporate insolvency can take place in case of following corporate debtors:

  1. The corporate debtor having income and assets below a certain level ascertained by the central government.
  2. A corporate debtor with such class of creditors or such amount of debt notified by the central government.
  3. Any other corporate debtors which the government may time to time notify.

Fast track corporate insolvency process usually takes place with the small scale or medium sized enterprises. Fast track insolvency has to be completed within the time period of 90 days from the commencement of the corporate insolvency resolution process and if required NCLT can extend the time period but not more than 45 days.

Voluntary Liquidation Process

Voluntary liquidation process can take place if the corporate debtor intends to voluntarily liquidate the company or occurring of an event which was mentioned in articles of association will result in a liquidation of the company.

If the corporate debtor desires to liquidate its company and does not intend to defraud any of its creditors he can voluntarily liquidate the company.

For voluntary liquidation process, the corporate debtor has to submit a declaration stating that the corporate debtor does not intend to defraud anyone and either the company has no debts or he will be able to satisfy all the debts from the proceeds of the assets of the company.  

Through a resolution by the members of the company, an official liquidator will be appointed and NCLT on the application of the liquidator shall pass an order that the corporate debtor shall be dissolved. Corporate debtor will be declared dissolved from the date of such orders

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