Introduction of INSOLVENCY AND BANKRUPTCY CODE, 2016 has done away with overlapping provisions contained in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI ACT) 2002. Let’s distinguish between both Acts.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans. It regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights and for matters connected therewith or incidental thereto. The SARFAESI Act deals with Securitization, Asset reconstruction, Enforcement of security without intervention of the court. The whole procedure is to be regulated by the RBI. The SARFAESI Act allows secured creditors to take possession over collateral against which a loan had been provided upon a default in repayment. This process is undertaken with assistance of the District Magistrate, and does not require the intervention of courts or tribunals. This Act helps the Banks and Financial Institutions who are the secured creditors to enforce securities held as collaterals to loans disbursed by them, if such loans turn to be Non Performing Assets. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non performing Asset.
Under SARFAESI Act, secured creditors which include Banks and Financial institution can refer the Non-Performing Asset (“NPA”) to any Asset Reconstruction Company, established with the Reserve Bank of India under section 3 for the purposes of the Asset Reconstruction or Securitization or both.
The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1,00,000/- (Rupees One Lakh). NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.
NPA should be backed by Securities charged to the bank by way of hypothecation or charge or assignment.
The SARFAESI Act provides for the manner for enforcement of security interests by a secured creditor without the intervention of a court or tribunal. If any borrower fails to discharge his liability in repayment of any secured debt within 60 days from the date of notice by the secured creditor, the secured creditor is conferred with powers under the SARFAESI Act to:
a. take possession of the secured assets of the borrower, including transfer by way of lease, assignment or sale, for realizing the secured assets
b. takeover of the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured assets,
c. appoint any person to manage the secured assets possession of which is taken by the secured creditor, and
d. require any person, who has acquired any of the secured assets from the borrower and from whom money is due to the borrower, to pay the secured creditor so much of the money as if sufficient to pay the secured debt.
Amendment in SARFAESI Act
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 or SARFAESI Act Amendments have been made in 2016 because of “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016”.
“Amendment Act, 2016”), provides for amendment in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”), the Indian Stamp Act, 1899 and the Depositories Act, 1996
The rules pertaining to Security Enforcement, Debt Recovery Tribunal (Procedure) Rules, 1993, The Debt Recovery Appellate Tribunal (Procedure) Rules, 1994 have been amended to that effect To DRT (Procedure) Rules, 2016 and DRT Appellate Tribunal (Procedure) Rules, 2016, respectively.
The act added new definitions to SARFAESI, widened the scope of debts and secured creditors and bestowed upon RBI new powers in relation to making of policies.
The Amending Act provides that the requirement of classification of secured debt as nonperforming asset shall not apply to a borrower who raised funds through issue of debt securities but the provisions for enforcement of security interest shall apply to such borrower.
Further, in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided in section 13 with necessary modifications and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee
The earlier prerequisite for ARC to hold fund not exceeding 15% of total financial asset acquired or to be acquired by company is removed.
The earlier condition for sponsor not to be a holding company of ARC is replaced with a sponsor, fit and proper in accordance with guidelines of RBI.
Mandatory to take RBI’s approval for appointment of director/managing director/chief executive manager of ARC.
Exemption from stamp duty on documents given by banks to ARC for the purpose of securitisation. Also, all rights and interest regarding the unpaid portion which was held by bank earlier, will vest with ARC.
Measures to be taken for asset reconstructions are same. However, ARC will have to act according to the directions and policies formulated by RBI. RBI to also release policies for fee charged/incurred by ARC or transfer of security receipts issued to qualified buyers.
1. Proviso added to section 13(2) – buyer need not classify NPA in case he has raised funds through debt securities. Upon default, he can enforce under this section.
2. Section 13(8) – earlier dues could be paid till sale or transfer. Now it can be paid till the date of auction/publication of notice. The time period for the borrower to make the payment has been reduced considerably.
3. DM/CMM has to pass order for taking possession of the secured assets within 30 days. He is allowed to extend the period by another 30 days but he will have to record reasons for the same.
The RBI may carry out or caused to be carried out audit and inspection of an ARC from time to time.
The Central Government may, by notification, delegate its powers and functions under this Chapter, in relation to establishment, operations and regulation of the Central Registry to the Reserve Bank, subject to such terms and conditions as may be prescribed
The Insolvency and Bankruptcy Code, 2016 (“Code”) offers a uniform comprehensive insolvency legislation to Corporations, Firms and Individuals (other than financial firms).
One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation.
The IBC creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.
To provide easy exit with a painless mechanism in cases of insolvency of individuals as well as companies, the code has significant value for all stakeholders including various Government Regulators. Introduction of this Code has done away with overlapping provisions contained in various laws –
Sick Industrial Companies (Special Provisions) Act, 1985, The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and The Companies Act, 2013.
Applicability of the Code:-
The provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the following entities:-
Any company incorporated under the Companies Act, 2013 or under any previous law. Any other company governed by any special act for the time being in force, except in so far as the said provision is inconsistent with the provisions of such Special Act. Any Limited Liability Partnership under the LLP Act 2008.Any other body being incorporated under any other law for the time being in force, as specified by the Central Government in this regard Partnership firms and individuals.
Code has differentiated liquidation and Insolvency process between Corporate Debtors (which shall be dealt by the NCLT) and Individuals and firms liquidation process (which shall be of the jurisdiction of DRT), the Corporate Debtors default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government).
(i) For the Corporate Debtors’ the Code proposes two independent stages:
(ii) Insolvency Resolution Process for Individuals/Unlimited Partnerships:
Exceptions: There is an exception to the applicability of the Code that it shall not apply to corporate persons who are regulated financial service providers like- Banks; Financial Institutions; and Insurance companies.
Objectives of the Code
A sound legal framework of bankruptcy law is required for achieving the following objectives:-
Improved handling of conflicts between creditors and the debtor
It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.
Set a limit between malfeasance and business failure
It can also provide flexibility for parties to arrive at the most efficient solution to maximize value during negotiations. The bankruptcy law will create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.
Macroeconomic downturns losses to be allocated
An infirm insolvency regime leads to the stereotype of “rich promoters of defaulting entities” generating theories such as:
Misconduct is the reason for all the defaults made ultimately it is the promoters who should personally and financially be held responsible for defaults of the firms which are under their control.
Macroeconomic downturns losses to be allocated
Clear allocation of these losses is a result of a well-defined bankruptcy framework. Taxes, inflation, currency depreciation, expropriation, or wage or consumption suppression are the common practices of loss allocation. These could affect foreign creditors, small business owners, savers, workers, owners of financial and non-financial assets, importers, exporters.
To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals. To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e. 180 days).To maximize the value of assets of interested persons. To promote entrepreneurship. To increase the availability of credit. To balance all stakeholder’s interest (including alteration). Balance to be done in the order of priority of payment of Government dues. To establish an Insolvency and Bankruptcy Board of India as a regulatory body for insolvency and bankruptcy law. To establish higher levels of debt financing across a wide variety of debt instruments. To deal with cross-border insolvency .To resolve India’s bad debt problem by creating a database of defaulter list.
In the case, the NCLAT while referring to Supreme Court’s verdict in Innoventive case has ruled that when two proceedings are initiated, one under the Insolvency and Bankruptcy Code, 2016 (I&B Code) and the other under the SARFAESI Act, 2002, then the proceeding under the I&B code shall prevail.