AVENUES TO LENDERS IN CASE OF DEFAULT
I. MECHANISMS AVAILABLE TO DEAL WITH INSOLVENCY AND BANKRUPTCY OTHER THAN INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC)
INDIVIDUAL BANKRUPTCY AND INSOLVENCY:
It is legislated under two Acts:
a) The Presidency Towns Insolvency Act, 1909, and
b) The Provincial Insolvency Act, 1920.
In Chennai, Kolkata and Mumbai, High courts have the jurisdiction over insolvency related matters. In all other areas subordinate courts hear cases, with the district court being the court of appeal.
Note: Sec.243 of IBC, 2016 is yet to be notified, which repeals the above said two Acts. Till it is notified the above Acts shall be in force and on notification, the pending proceedings shall continue under the same Acts.
CORPORATE BANKRUPTCY AND INSOLVENCY:
It is covered under the following:
a) Companies Act, 2013 & 1956
b) Sick Industrial Companies Act, 1985 (SICA) – deals with restructuring of distressed industrial firms. However, SICA is repealed. The Sick Industrial Companies (Special Provision) Repeal Act, 2003 (“SICA Repeal Act”) has been notified by the Central Government on November 25, 2016 and is effective from December 1, 2016.
c) Limited Liability Partnership Act, 2008 – Chapter XII - Compromise, Arrangement or Reconstruction of limited liability partnerships and Chapter XIII – Winding up and Dissolution
OTHERS APPLICABLE TO INDIVIDUAL OR CORPORATE:
d) Indian Trusts Act, 1882
e) Various state laws on state cooperative societies
f) Multi-state Cooperative Societies Act, 2002
g) Trade Union Act, 1926
h) Laws governing incorporation of statutory corporations (whether created by parliament or by state legislative assemblies)
II. LAWS DEALING WITH RECOVERY OF DUES
These laws have provisions dealing with recovery of dues, either by financial and non-financial creditors.
1. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)
The SARFAESI Act has been the most important means for recovery of NPAs.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act was enacted in 2002 for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors. The SARFAESI Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.
The SARFAESI Act provides three alternative methods for recovery of non-performing assets, namely: –
Enforcement of Security without intervention of the court
Secured creditors are given the power to take possession of the securities in the event of default and sell such securities for the purpose of recovery of the loan. The Act provides for enforcement of Security interest by a secured creditor without intervention of the court, in cases of default in repayment of instalments and non-compliance with the notice period of 60 days after the declaration of the loan as a non-performing asset. RBI timelines are to be followed.
SARFAESI Extends to NBFCs by Notification dated 5th August 2016.
2. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI)
It was enacted for expeditious recovery of loans of Banks & Financial Institutions.
The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and SARFAESI.
3. Other Acts/Regulations
a. Recovery provisions of the Income Tax Act 1961
b. Enforcement provisions of the Contract Act, 1872
c. Laws related to tort dues.
These include rules made by government departments or regulations by financial sector or other regulatory bodies that may impact the effective implementation of the Code. Some of these are:
i. SEBI Substantial Acquisition of Shares and Takeovers Regulation.
ii. SEBI Issue of Capital and Disclosure Requirement Regulation.
iii. SEBI Issue and Listing of Debt Securities Regulation
iv. SEBI Public Offer and Listing of Securitised Debt Instruments Regulation.
v. Companies Rules under the Companies Act.
vi. MSME guidelines on various matters
vii. *RBI Norms applicable to Restructurings
*RBI vide its notification dated 12th February, 2018, has substituted the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets. As a result, Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued.
III. ISSUES WITH THE CURRENT ARRANGEMENTS:
1. The insolvency laws dealing with companies and institutional creditors such as banks and financial institutions have been amended several times. However, laws relating to other debtors such as individuals, unlimited liability partnerships and sole proprietorship has remained unchanged. Currently, the loan recovery rates in India are among the lowest in the world. Creditors averse lending due to low recovery rates
2. In case of unsecured loan recovery one has to file money recovery suit under common law under the civil procedure in the Civil Court which will take years to decide.
3. For unsecured loans by banks the law which specifically deal with the recovery matters like Recovery of Debts Due to Banks and Financial Institutions Act 1993 through Debt Recovery Tribunal, is available, but, inadequacy of infrastructure at DRT shall not resolve the matters quickly.
4. Proceeding under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 deals specifically with the secured loan and there are lots of complications under the Act for obtaining possession without the intervention of the court
5. Overall, the time taken for resolution is high and the recovery rate is very low.
IV. OBJECTIVES OF INSOLVENCY AND BANKRUPTCY CODE, 2016:
The main objects of IBC are as follows:
1. Maximise the value of assets
2. Low time to resolution.
3. Promotion of entrepreneurship
4. Availability of credit.
V. WHETHER TO GO FOR IBC OR NOT
Points to be considered to decide whether to go with conventional remedies or initiate Insolvency Resolution Process under IBC:
1. On mere happening of default, the creditor / corporate debtor can file an application to initiate insolvency resolution. One need not wait till the asset changes to Non Performing Asset (NPA) unlike provision under SARFAESI.
2. Estimated loss on Recovery – mostly under conventional remedies recovery is 20% of value of debt on an NPV basis.
3. Time of resolution - As per IBC the resolution should be within 180 days of application – need to look at practicalities – if not in 180 days, there could be possibilities of resolving cases in shorter periods compared to other remedies.
4. Viability of running the business as going concern than to go for liquidation.
5. Borrower once in insolvency resolution process cannot do any settlement with the lender. Also, enforcement of security interests, including SARFAESI proceedings, will be stalled during the moratorium period.