Op EdsOP. ED.

Introduction

Non-performing assets (NPA)

The Indian economy and the banking system, in particular, have been weighed down by a sizeable NPA portfolio for a long time now. NPA is an acronym for a non-performing asset and it is used to classify loans or advances that are in default or arrears. Pursuant to Section 2(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 20021 (hereinafter SARFAESI), NPA is an asset or account of a borrower which has been classified by a bank or financial institution as a sub-standard, doubtful or loss asset. According to the Master Circular of Reserve Bank of India (RBI), an asset becomes non-performing when it ceases to generate income for the bank.2

Simply put, when a debtor is unable to honour his obligations with respect to payment of principal or interest as per the loan agreement for a specified period of time, such a loan is classified as an NPA. Due to NPAs, banks find themselves in a position where they do not have adequate funds for promoting other financial activities in the economy. The banks then try to recover their loss by restructuring the loan or liquidating the assets or selling the loans to asset reconstruction companies at steep discounts.

Asset reconstruction company (ARC)

As per Section 2(b) of the SARFAESI Act, 20023, “asset reconstruction” means acquisition by any securitisation or reconstruction company of any right or interest of any bank/financial institution in any financial assistance for the purpose of its realisation. A reconstruction company has further been defined under Section 2(v) of the Act4 as a company formed and registered under the Companies Act, 19565 for the purpose of asset reconstruction.

Asset reconstruction companies (ARCs) are specialised financial institutions that buy NPAs from banks and financial institutions and aid them in cleaning up their balance sheets. This saves the time and effort of banks in going after defaulters and thus allows them to focus on normal banking activities. They function under the regulatory oversight of the Reserve Bank of India.

The ARCs undertake various resolution strategies like:

  1. taking over/changing the management of the business of the borrower;
  2. the sale/lease of the business of the borrower;
  3. entering into settlements;
  4. restructuring or rescheduling of debt; and
  5. enforcement of security interest.6

Among the different entities operating in India, the oldest is Asset Reconstruction Company (India) Limited (ARCIL), owned by several financial institutions including SBI, IDBI Bank, ICICI Bank, PNB and Avenue India Resurgence Pte Limited. It has resolved approximately Rs 78,000 crore NPAs acquired from Indian bank and financial institutions.

Bad bank

The concept of a bad bank originated at the Pittsburgh headquartered Mellon Bank in 1988. The idea and discussions over bad bank are not nascent in India rather have been in place since 2015 when former RBI Governor Raghuram Rajan started a debate on bad bank as a possible solution to the problem of NPAs. Afterwards, former Interim Finance Minister Piyush Goyal put forth the idea of National ARC on a recommendation of the Committee headed by Sunil Mehta. The Economic Survey 2017 also propounded to create a Public Sector Asset Rehabilitation Agency (PARA).

A bad bank is a corporate structure that isolates illiquid and high-risk assets or non-performing loans held by a bank or a financial organisation, or perhaps a group of banks or financial organisations.7 It is also referred to as Asset Management Company (AMC).

Considering the actual as well as an expected increase in NPAs due to the global pandemic in 2020, the Government came up with the model of bad bank to manage the surge of NPAs across the Indian banking sector. Recently announced in the Budget 2021-2022, it is set up by State-owned and private sector banks with no direct equity contribution from the Government. Hence, there will be no direct intervention by the Central Government.

It is aimed at easing the burden of banks holding a pile of stressed assets and allowing them to lend more actively. It generally does not have a primary purpose of generating profits. It will mainly focus on resolving and restructuring Rs 2-2.5 lakh crores of around 70 large accounts.

It works by demarcating assets into good assets (that are repaid within time) and toxic or bad assets (defaulted loans). Such toxic assets are meant to be transferred from the books of banks to bad bank at a price below their book value, for the sole purpose of recovery of risky assets.

It is supposed to have a two-tiered structure. Tier 1 will be a government-backed ARC, offering 15% of net book value upfront in cash and 85% in security receipts. Hence, it is called the 15:85 structure. Tier 2, on the other hand, will be an AMC run by public and private bodies and turnaround professionals.

The Indian Banks Association (IBA) had applied for a licence to RBI to set up Rs 6000 crore National Asset Reconstruction Company Ltd.(NARCL), India’s first-ever Bad Bank, on 22-8-2021, and RBI has recently granted the same on 4-10-2021 under the SARFAESI Act 2002. NARCL is incorporated in Mumbai as a “Union Government Company” with an authorised capital of Rs 100 crore on 7-7-2021. On 15-9-2021, the Cabinet has cleared a Rs 30,600 crore five-year guarantee programme to NARCL for taking over and resolving NPAs to the tune of Rs 2 lakh crores. If the bad bank is unable to sell the bad loan or has to sell it at a loss, then the government guarantee will be invoked. NARCL has received Rs 5000-6000 crores towards the 15% obligation from around 16 public and private sector banks including Canara Bank, State Bank of India (SBI), Union Bank of India, Bank of India (BoI), Bank of Baroda (BoB), Bank of Maharashtra, Punjab National Bank (PNB) and Indian Bank. In NARCL, State-owned banks will hold a 51% stake, while public financial institutions (PFIs) or debt management companies will hold 49%.

Key persons on the Board of NARCL include industry experts like Padmakumar Madhavan Nair, a stressed assets expert from State Bank of India (SBI), as the Managing Director (MD), and Sunil Mehta (IBA’s Chief Executive), Salee Sukumaran Nair (SBI’s Deputy MD) and Ajit Krishnan Nair (Canara Bank’s representative) as Directors.

To manage assets with the help of market professionals and turnaround experts, the Government will also set up India Debt Resolution Company Ltd. (IDRCL) along with NARCL. The IDRCL is a service company or an operational entity wherein public sector banks (PSBs) and PFIs will hold a maximum of 49% stake and the rest will be with private-sector lenders. When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.8

Stumbling blocks of existing alternatives

There are other options of getting rid of bad debts to clean up books, like insolvency resolution under the Insolvency and Bankruptcy Code, 20169 (IBC, 2016) and ARCs in the SARFAESI Act, 2002. However, unlike its initial success in terms of recovering debts over 50%, lately, haircuts have increased and lenders are able to recover hardly 5-6% of debts. Besides, the disproportionate number of National Company Law Tribunal (NCLT) Judges when compared to instituted cases, causes resolutions to take more time than specified under IBC, 2016.

Concerning ARCs under the SARFAESI Act, asset reconstruction has slowed down due to capital issues and downgraded ratings for security receipts. Consequently, ARCs are also reluctant to take up NPAs unless offered very steep discounts.

Difference between bad bank and asset reconstruction companies

  1. Essential character 

While ARCs are primarily of private nature, bad bank will be public in nature.

  1. Majority ownership

Concerning ARCs, the majority ownership is with privately-owned banks. On other hand, it is with State-owned banks in the case of bad bank.

  1. Ability to do cash deals

ARCs are generally small in size and hence, have less ability to do cash deals concerning big accounts, forcing banks to move to NCLT where chances of resolution are relatively less and time-consuming. On other hand, being government-backed, bad bank will have deep pockets to buy out big accounts and thus freeing up banks more readily. Owing to this, RBI might also extend it more relaxation for the applicable rules.

  1. Valuation

ARCs typically take steep discounts on the acquisition of stressed assets. On other hand, owing to acquisition at net book value, valuation hurdles might be eased, and thus banks will be more willing to get their balance sheets cleared in favour of the bad bank.

  1. Costs and delays

ARCs suffer from unnecessary delays and cost overruns as for matters concerning consortium loans, ARCs have to wait for approval from multiple lenders before a deal is concluded. With bad bank, the industry’s bad loans will be consolidated into one entity, and thus the existing ARCs can negotiate deals with the bad bank more effectively.10

  1. Funds

Funds in ARC are brought in by investors at every stage in lieu of security receipts. In the case of bad bank, funds are to be originally brought in by banks and later by investors; hence it puts the initial burden on banks.

  1. Management fee

Apart from exchanging NPAs either for cash or a mix of cash and security receipts redeemable on recovery of the loan by ARC, ARCs charge an asset management fee of 1.5-2 per cent of the asset every year. However, NARCL will charge a managing fee from lenders in lieu of managing their NPAs. The management fee is yet to be finalised but it will depend on the quantum of guarantee the NARCL gets from the Government.

Why bad bank? 

  1. Quicker resolution via consolidation under a single head

It can help aggregate or consolidate all bad loans of banks under a single exclusivity. This helps easier and quicker resolution due to effective management.

  1. Frees management bandwidth

Owing to resolution by experts, it will make them financially healthy via cleaning up bank’s balance sheets and allow banks to focus on its core activity of lending.

  1. Plugs in loopholes in ARC model with its domain expertise

Private-run ARCs have not seen much success in resolving bad debts. The bad bank aims to overcome the shortcomings of ARCs, utilising its domain expertise and public character.

  1. Better price discovery

A bad bank is opined to have the ability to fix the better and appropriate prices. The transferring bank could make additional provisions in case the discovered cost is less than the book value and the Bank wants to retain the asset on its books.

Concerns hovering over bad bank

  1. One of the key concerns is that there must be a sunset clause to this resolution process. The bad bank should not go on in perpetuity and so a definite time period of its existence should be decided upon.11 The intent should clearly be a faster resolution. Therefore, it is quintessential to develop time-bound strategies for the resolution of assets, or else the bad bank will be reduced to a mere parking space of bad loans.
  2. A major criticism is that public sector banks (PSBs) are themselves holding substantial stakes in the NARCL which implies that PSBs are paying to buy their own bad loans.12 This mingling of roles, as PSBs are both investors and customers of NARCL, can blur the objective of this institution and impact decision-making.
  3. A major challenge is the development of a clear resolution strategy. The bad bank is not a panacea in itself and so it remains to be seen whether the bad bank has the requisite resources and operational framework to accomplish its purpose. It is necessary to develop a detailed recovery plan based on reliable data analysis. Prudent management of resources in restructuring and recovery of advances is one of the ways to address this challenge.
  4. A sudden rise in the availability of assets for sale can cause price distortion.13 Such an effect could adversely impact the recovery value of assets.
  5. NARCL will be purchasing assets at net book value (NBV) whereas ARCs purchase NPAs on an arm’s length basis at market-determined prices. This variance in RBI regulations might lead to ambiguity and regulatory uncertainty with reference to the validity of such transfers.
  6. It is required to have a suitable mechanism in place that can facilitate funding for maintaining the quality of assets till their resolution.

Global experience with bad bank

The idea of a bad bank has been previously adopted in countries like the United States, Germany, Japan, Malaysia, Thailand, Korea, Indonesia, China and others. It has been successfully implemented in the European countries post-2007 financial crisis. A few experiences, relevant to India, are illustrated below:

  1. Malaysia – Danaharta-Danamodal

In 1998, it was established with a public AMC regime, in wake of the Asian crisis. With cohesive efforts, it was able to curtail non-performing loans and brought the banking system back on track. Currently, it is inactive.

  1. Indonesia – Indonesian Bank Restructuring Agency (IBRA) 

In 2004, it was established with a public AMC regime. Although it performed well as a bank resolution agency, it was comparatively less successful with respect to maximising recovery through loan restructuring and shareholders’ settlements. It is now inactive.

  1. Ireland –National Asset Management Agency (NAMA)

In 2009, NAMA was established with a mixed but predominantly public regime. It adopted a consensual approach with the debtors and provided funding on a commercial basis to complete existing projects and commence new projects. Consequently, it performed well in the initial years. However, after six years, it faced challenges with respect to the retention of its staff, because unlike before it was not able to remunerate its staff at par with the private sector. Moreover, it could not clean up the bad assets of the banking as it extended beyond land and development loans.14

Concluding remarks

The pandemic has hit the economy hard and has exposed the vulnerabilities of our banking system.  RBI noted in its recent Financial Stability Report that the gross NPAs of the banking sector are predicted to rise to 9.80% by March 2022 from 7.48% in March 2021, under a baseline scenario.15Although a move to manage the surge in NPAs was well timed, however, the concerns and loopholes raised over bad bank (NARCL) make it imperative to clearly lay down a mechanism to set its accountability and to ensure its independence. It must be ensured that bureaucratic delays do not occur in NARCL, unlike other similar entities. Global experiences portray that it must be made flexible as per the needs of the country.


*First-year law student, Campus Law Centre, Faculty of Law, University of Delhi. Author can be reached at deepanshigupta228@gmail.com

**Fifth-year law student, Institute of Law, Nirma University, Ahmedabad. Author can be reached at aadeshshinde666@gmail.com

1 Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

2Reserve Bank of India, Master Circular, 1-7-2009, <https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5154#2>.

3http://www.scconline.com/DocumentLink/68w57S9L.

4http://www.scconline.com/DocumentLink/68w57S9L.

5http://www.scconline.com/DocumentLink/pm3Rt2A0.

6Reserve Bank of India, Report of the Task Force on the Development of a Secondary Market for Corporate Loans,3-9-2019, <https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=940>.

7Gabriel Brenna, Thomas Poppensieker and Sebastian Schneider, Understanding the Bad Bank, McKinsey & Company, December 2009, <https://web.archive.org/web/20160107005934/http:/www.mckinsey.com/insights/financial_services/understanding_the_bad_bank>.

8Sheersh Kapoor, What are NARCL and IDRCL? How do they Work and What is the Plan?, BFSI, 17-9-2021, <https://bfsi.economictimes.indiatimes.com/news/banking/what-are-narcl-and-idrcl-how-do-they-work-and-what-is-the-plan/86282175>.

9http://www.scconline.com/DocumentLink/86F742km.

10Dinesh Unnikrishnan, How is the Proposed “Bad Bank” Different from Existing ARC?, 2-2-2021, <https://www.moneycontrol.com/news/business/how-is-the-proposed-bad-bank-different-from-existing-arc-6436601.html>.

11Pratik Dutta, Lessons from China on Bad Banks, The Indian Express, 25-6-2021, <https://indianexpress.com/article/opinion/columns/india-bad-bank-national-asset-reconstruction-company-china-7374608/>.

12Anand Adhikari,  Shaping India’s Bad Bank, Business Today, 25-7-2021, <https://www.businesstoday.in/magazine/finance/story/shaping-indias-bad-bank-300658-2021-07-08>.

13Deepti George and Madhu Srinivas, How to get the Bad Bank off to a Good Start, Money Control, 3-8-2021, <https://www.moneycontrol.com/news/opinion/how-to-get-the-bad-bank-off-to-a-good-start-7267211.html>.

14Bad Banks in India, Deloitte, November 2020, <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/finance/in-fa-bad-bank-note-noexp.pdf>.

15Reserve Bank of India, The Financial Stability Report, 1-7-2021, <https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51832>.

Experts CornerShardul Amarchand Mangaldas


Introduction


The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was enacted with the objective to enable banks and financial institutions to realise long-term assets, to improve recovery of debts and reduce non-performing assets by taking possession and selling such assets, in the manner and as per the procedure as provided therein and read with the Security Interest (Enforcement) Rules, 2002 (Rules).

 

The SARFAESI read with the Rules, meticulously sets out the step-by-step procedure which is to be adhered to by the banks/financial institutions i.e. the secured creditors, for taking possession and ultimately effecting the transfer of a non-performing asset. Non-adherence to any single procedural step or even non-compliance of a time period stipulated therein by the secured creditor, has lead to a plethora of litigation.

 

A third-party purchaser, being interested in acquiring the secured asset must primarily ensure that the secured creditor has taken all the necessary steps and checked all the boxes as spelt out under the SARFAESI read with the Rules, prior to acquisition of the secured asset.

 


Sale on “As is where is basis”


The sale of secured assets under SARFAESI in most cases takes place on “as is where is basis” which means that the purchaser would be acquiring the asset with all its existing rights, obligations and liabilities. Auction notices which are issued by the secured creditors usually state that “the property is free from all encumbrances known to the secured creditor” and thereby shifting the onus onto the purchaser to make its own independent enquiry. However, the Bombay High Court, Nagpur Bench, in its recent judgment dated 18-2-2021 in Medineutrina (P) Ltd. v. District Industries Centre[1] held that, when a property is sold on “as is where is basis”, though it would be upon the purchaser to make reasonable enquiries about the encumbrances affecting the property, the mere mention of “as is where is basis” or any such phrase should not absolve the secured creditor of its obligation to make proper enquiries about other dues/encumbrances affecting the property, to obtain information about which the secured creditor has the means and which information should be disclosed in the auction notice so that the purchaser can make a conscious decision and not raise a plea of not having been informed. Insofar as encumbrances on account of statutory/government/municipal/ revenue dues are concerned, the responsibility of obtaining the details thereof is of the secured creditor. In spite of the aforesaid directions laid down in the judgment, the Court further held that an encumbrance affecting the secured asset, prior to the issuance of the auction notice, would be the liability of the purchaser in order to obtain a clear and marketable title to the property having purchased the same on “as is where is basis”.

 

Even though the aforesaid judgment directs secured creditors to make a disclosure of statutory encumbrances in the auction notice, it is still to be seen if the directions laid down therein will become a reality and will protect a third-party purchaser who is acquiring the secured asset on “as is where is basis”. It is prudent for the purchaser to make its own independent enquiry with respect to outstanding dues and encumbrances affecting the property, so as to factor in such cost as such additional cost will not form part of the consideration payable to the secured creditor for acquisition of the asset. As per Section 31-B of SARFAESI [as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016], any debt due to a secured creditor by sale of assets over which security interest is created, shall take priority over any debt due to the Central Government, State Government or local authority. Accordingly, any other dues/encumbrances affecting the property, will have to be cleared in addition to the consideration payable to the secured creditor so as to enable the purchaser to obtain a clear and marketable title to the secured asset.

 


Borrowers right to foreclose and redeem the mortgage


As per Section 60 of the Transfer of Property Act, 1882, the mortgagor/borrower has a right to redeem the mortgage on payment of the entire mortgage money to the secured creditor. It has been the contention of borrowers that the right of redemption only stands extinguished on the date of registration of the sale certificate in favour of the purchaser. This point on redemption has been analysed by the Supreme Court of India in its judgment dated 20-8-2019 in Shakeena v. Bank of India[2] wherein it was held that the borrower has a right of redemption only before the time the mortgage is foreclosed or the estate is sold. It was further held that issuance of a sale certificate as per Rule 9(7) of the Rules is a complete and absolute sale for the purpose of SARFAESI and the sale certificate need not be registered, as Section 17(2)(xii) of the Registration Act, 1908 provides that a sale certificate issued by a Civil or Revenue Officer in respect of property sold in a public auction does not require registration. Accordingly, the right to redemption stands obliterated from the date of issuance of the sale certificate as registration of the sale certificate is not mandatory.

 


Borrowers right to prevent transfer of secured assets


In addition to what is stated hereinabove and as per the amended Section 13(8) of the SARFAESI which has come into force with effect from 1-9-2016,  which amended section states that, where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by the secured creditor are tendered by the borrower to the secured creditor prior to the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer of the secured asset, the secured asset shall not be transferred by the secured creditor. The Supreme Court of India in its judgment dated 10-2-2014 in Mathew Varghese v. M. Amritha Kumar[3] held that by virtue of the provisions of Section 13(8) of the SARFAESI, any sale or transfer of a secured asset cannot take place without duly informing the borrower of the time and date of such sale or transfer in order to enable the borrower to tender the dues of the secured creditor and any such sale or transfer effected without complying with the said statutory requirement would be a constitutional violation and nullify the ultimate sale.

 


Conclusion


In light of what is stated hereinabove, acquisition of a secured asset under SARFAESI requires the purchaser to do thorough due diligence to ensure there are no outstanding dues and encumbrances affecting the property and to ensure strict compliance of the procedure along with the time periods as stipulated in SARFAESI read with the Rules. The thorough due diligence will enable the purchaser to obtain a clear and marketable title to the secured asset which is free from all encumbrances and by carrying out such due diligence, the purchaser will ultimately be saved from knocking on the doors of the court to enforce its right to the secured asset.

 


† Partner, Shardul Amarchand Mangaldas

†† Associate, Shardul Amarchand Mangaldas.

[1] 2021 SCC OnLine Bom 222.

[2] 2019 SCC OnLine SC 1059.

[3] (2014) 5 SCC 610.

Case BriefsHigh Courts

Kerala High Court: A.M. Badar, J., while dismissing the present petition, reiterated the observations of the Supreme Court in the words, “In cases relating to recovery of the dues of banks, financial institutions and secured creditors, stay granted by the High Court would have a serious adverse impact on the financial health of such bodies/institutions, which (sic will) ultimately prove detrimental to the economy of the nation. Therefore, the High Court should be extremely careful and circumspect in exercising its discretion to grant stay in such matters.”

 Background

The petitioner who happens to be the Managing Director of one Heera Construction Company; a corporate debtor, is challenging orders namely, P3, P4 and P4(a) and is seeking further direction against the respondent 1 to keep in abeyance all further proceedings pursuant to Ext P3, P4 and P4(a) till the disposal of CP(IB) 4447/2018. It is to be noted that Ext P3 is a notice of sale under Rule 8(6) of Security Interest (Enforcement) Rules, 2002, Ext P4 is a further notice under the said Rules for sale of secured assets and Ext P4 (a) is e-auction sale notice issued in terms of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

 Observations

On the contention that parallel proceedings under SARFAESI is impermissible

“… argument advanced by the learned counsel for the petitioner that because of pendency of proceedings before the NCLT, parallel proceedings under the SARFAESI Act are not maintainable, needs to be rejected. Even otherwise Section 7 of the Insolvency and Bankruptcy Code has application against the corporate debtor. It cannot be said that there is bar for proceedings against the guarantor under the SARFAESI Act because of pendency of corporate insolvency resolution process against the corporate debtor.”

 On interference of Court under Article 226 if an alternative statutory remedy is available

Court placed reliance on the case of, Authorized Officer, State Bank of Travancore v. Mathew K.C., 2018 (1) KLT 784; “…the discretionary jurisdiction under Article 226 is not absolute but has to be exercised judiciously in the given facts of a case and in accordance with law. The normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well defined exceptions…”

Further reference was made to the alternate remedy available under DRT Act through, Punjab National Bank v. O.C. Krishnan, (2001) 6 SCC 569; “The Act has been enacted with a view to provide a special procedure for recovery of debts due to the banks and the financial institutions. There is a hierarchy of appeal provided in the Act, namely, filing of an appeal under Section 20 and this fast-track procedure cannot be allowed to be derailed either by taking recourse to proceedings under Articles 226 and 227 of the Constitution or by filing a civil suit, which is expressly barred. Even though a provision under an Act cannot expressly oust the jurisdiction of the court under Articles 226 and 227 of the Constitution, nevertheless, when there is an alternative remedy available, judicial prudence demands that the Court refrains from exercising its jurisdiction under the said constitutional provisions”

 Decision

Dismissing the present petition, the Court said, “Loans by financial institutions are granted from public money generated at the tax payers expense. Such loan does not become the property of the person taking the loan, but retains its character of public money given in a fiduciary capacity as entrustment by the public. Timely repayment also ensures liquidity to facilitate loan to another in need, by circulation of the money and cannot be permitted to be blocked by frivolous litigation by those who can afford the luxury of the same.”[Dr Abdul Rasheed v. IFCI Limited, 2020 SCC OnLine Ker 8293, decided on 03-12-2020]


Sakshi Shuka, Editorial Assistant has put this story together

Case BriefsSupreme Court Roundups

Did you know? In the year 2020,

    • All the Constitution bench verdicts were unanimous with no dissenting opinion.
    • 9 out of 11 Constitution bench judgments were delivered by benches consisting of Justices Arun Mishra, Indira Banerjee, Vineet Saran and M.R. Shah, followed by Justices Aniruddha Bose and S. Ravindra Bhat who were part of Constitution benches in 5 and 4 cases, respectively.

As we look forward to the new year of 2021, here is a quick recap of the Constitution bench verdicts delivered by the Supreme Court of India in 2020.

1. Questions of law can be referred to larger bench while hearing a review petition

9-judge bench: SA Bobde, CJ and R Banumathi, Ashok Bhushan, L Nageswara Rao, M M Shantanagoudar, S A Nazeer, R Subhash Reddy, B R Gavai and Surya Kant, JJ

After renowned jurist and senior advocate Fali Nariman objected to the manner in which the Supreme Court turned a review of the Sabarimala case into an opportunity to set up a nine-judge Bench and examine whether certain essential religious practices of various faiths, including Islam and Zoroastrianism, should be constitutionally protected, the 9-judge bench held that the Supreme Court can refer questions of law to a larger bench while exercising its review jurisdiction.

The Court had in November last year, suggested that the Sabarimala issue along with other related issues, be heard by a larger bench of at least 7-judges. [Read: Sabarimala Review Petitions Not Referred To A Larger Bench, But Kept Pending. Here’s What Supreme Court Has Actually Held]

Read more…

[Kantaru Rajeevaru v. Indian Young Lawyers Assn, (2020) 3 SCC 52]


2. Pleas challenging the abrogation of Article 370 not referred to a larger bench

5-judge bench: NV Ramana, SK Kaul, R. Subhash Reddy, BR Gavai and Surya Kant, JJ

The bench refused to refer the petitions challenging the constitutional validity of the Centre’s move to abrogate Article 370 to a larger bench. Holding that there is no conflict between the judgments in the Prem Nath Kaul case and the Sampat Prakash casethe bench said that judgments cannot be interpreted in a vacuum, separate from their facts and context. Observations made in a judgment cannot be selectively picked in order to give them a particular meaning. It noted,

the Constitution Bench in the Prem Nath Kaul case did not discuss the continuation or cessation of the operation of Article 370 of the Constitution after the dissolution of the Constituent Assembly of the State. This was not an issue in question before the Court, unlike in the Sampat Prakash case where the contention was specifically made before, and refuted by, the Court. This Court sees no reason to read into the Prem Nath Kaul case an interpretation which results in it being in conflict with the subsequent judgments of this Court, particularly when an ordinary reading of the judgment does not result in such an interpretation.”

Read more…

[Dr. Shah Faesal v. Union of India, (2020) 4 SCC 1]


3. No time limit could be fixed while granting anticipatory bail

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah, and S. Ravindra Bhat, JJ

The bench unanimously ruled that the protection granted to a person under Section 438 Cr.PC should not invariably be limited to a fixed period; it should inure in favour of the accused without any restriction on time.

Read more…

[Sushila Aggarwal v. State of NCT of Delhi,  (2020) 5 SCC 1]


4. No lapse of acquisition proceedings if government has ‘paid’ compensation

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah, and S. Ravindra Bhat, JJ

The bench unanimously held that the land owners who had refused to accept compensation or who sought reference for higher compensation, cannot claim that the acquisition proceedings had lapsed under Section 24(2) of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013

Last year, Justice Arun Mishra, heading the Bench, had refused to recuse himself from hearing the case and had said,

“I would be committing a grave blunder by recusal in the circumstances, on the grounds prayed for, and posterity will not forgive me down the line for setting a bad precedent. It is only for the interest of the judiciary (which is supreme) and the system (which is nulli secundus) that has compelled me not to recuse.”

Justice Mishra’s recusal was sought on the ground that he was heading a Bench meant to re-examine a judgment that he had himself given in 2018 in in Indore Development Authority v. Shailendra, (2018) 3 SCC 412. 

Read more…

[Indore Development Authority v. Manohar Lal Sharma, (2020) 8 SCC 129]


5. States, and not MCI, have power to make reservation for in-service candidates in Post Graduate Medical Course 

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ

The bench unanimously held that States have the legislative competence and/or authority to provide for a separate source of entry for in-service candidates seeking admission to postgraduate degree/diploma courses, in exercise of powers under Entry 25, List III.

“…policy must provide that subsequent to obtaining the postgraduate degree by the concerned in-service doctors obtaining entry  in degree courses through such separate channel serve the State in the rural, tribal and hilly areas at least for five years after obtaining the degree/diploma and for that they will execute bonds for  such  sum the   respective  States  may   consider   fit  and  proper”

 The Court, however, specifically observed and clarified that the present decision shall operate prospectively, and any admissions given earlier taking a contrary view shall not be affected by this judgment.

Read more…

[TN Medical Officers Association v. Union of India, 2020 SCC OnLine SC 699]


6. Sub-classification of Scheduled Castes| E.V. Chinnaiah decision to be revisited; Matter referred to larger bench

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ

After noticing that a 5-Judge Bench in E.V. Chinnaiah v. State of A.P., (2005) 1 SCC 394, is required to be revisited, the bench referred the matter to a larger bench and said,

“Reservation was not contemplated for all the time by the framers of the Constitution.  On the one hand, there is no exclusion of those who have come up, on the other hand, if sub¬classification is denied, it would defeat right to equality by treating unequal as equal.”

Read more…

[State of Punjab v. Davinder Singh, (2020) 8 SCC 1]


7. SARFAESI Act applicable to Co­operative Banks

5-judge bench of Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ

The bench unanimously held that banking’ relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co­operative banks in the SARFAESI Act.

Holding that Co­operative bank’s entire operation and activity of banking are governed by a law enacted under Entry 45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry 38 of List I, the bench said,

“recovery of dues would be an essential function of any banking institution and the Parliament can enact a law under Entry 45 of List I as the activity of banking done by co­operative banks is within the purview of Entry 45 of List I. Obviously, it is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act.”

Read more…  

[Pandurang Ganpati Chaugale v. Vishwasrao Patil Murgud Sahakari Bank Ltd,  (2020) 9 SCC 215]


8. Andhra Pradesh’s 100% reservation for Scheduled Tribe candidates for the post of teachers without rhyme or reason

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and Aniruddha Bose, JJ 

Holding the Government Office Ms. No.3 dated 10.1.2000 issued by the erstwhile State of Andhra Pradesh providing 100% reservation to the Scheduled Tribe candidates out of whom 33.1/3% shall be women for the post of teachers in the schools in the scheduled areas in the State of Andhra Pradesh, unconstitutional, the bench said that there was no rhyme or reason with the State Government to resort to 100% reservation.

“It was least expected from the functionary like Government to act in aforesaid manner as they were bound by the dictum laid down by this Court in Indra Sawhney and other decisions holding that the limit of reservation not to exceed 50%.”

Read more…

[Chebrolu Leela Prasad Rao v. State of Andhra Pradesh, 2020 SCC OnLine SC 383]


9. District Forum can’t extend limitation period of 45 days for filing response under Section 13 of Consumer Protection Act

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and S. Ravindra Bhat, JJ

The bench unanimously held that the District Forum has no power to extend the time for filing the response to the complaint beyond the period of 15 days in addition to 30 days as is envisaged under Section 13 of the Consumer Protection Act, 1986.

The bench was answering the reference relating to the grant of time for filing response to a complaint under the provisions of the Consumer Protection Act, 1986 wherein the answers to the following questions were sought:

  • whether Section 13(2) (a) of the Consumer Protection Act, which provides for the respondent/opposite party filing its response to the complaint within 30 days or such extended period, not exceeding 15 days, should be read as mandatory or directory; i.e., whether the District Forum has power to extend the time for filing the response beyond the period of 15 days, in addition to 30 days.
  • what would be the commencing point of limitation of 30 days stipulated under the aforesaid Section.

Read more…

[New India Assurance v. Hilli Multipurpose Cold Storage Pvt. Ltd., (2020) 5 SCC 757]


10. Accused under NDPS Act not entitled to acquittal as a blanket rule merely because the complainant is the investigating officer

5-judge bench: Arun Mishra, Indira Banerjee, Vineet Saran, MR Shah and S. Ravindra Bhat, JJ

The bench unanimously held that the accused under the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) is not entitled to an acquittal as a blanket rule merely because the complainant is the investigating officer.

“… merely because the informant is the investigator, by that itself the investigation would not suffer the vice of unfairness or bias and therefore on the sole ground that informant is the investigator, the accused is not entitled to acquittal. The matter has to be decided on a case to case basis.”

Read more…

[Mukesh v. State (Narcotic Branch of Delhi), (2020) 10 SCC 120]


11. State Government cannot fix the “minimum price” of sugarcane once Centre has already fixed it

5-judge bench: Arun Mishra, Indira Banerjee and Vineet Saran, M.R. Shah and Aniruddha Bose, JJ,

The bench unanimously held that once the Central Government having exercised the power under Entries 33 and 34 List III of seventh Schedule and fixed the “minimum price”, the State Government cannot fix the “minimum price” of sugarcane.

By virtue of Entries 33 and 34 List III of seventh Schedule, both the Central Government as well as the State Government have the power to fix the price of sugarcane. The Court, however, clarified that

“it is always open for the State Government to fix the “advised price” which is always higher than the “minimum price”, in view of the relevant provisions of the Sugarcane (Control) Order, 1966, which has been issued in exercise of powers under Section 16 of the U.P. Sugarcane (Regulation of Supply and Purchase) Act, 1953.”

Read more…

[West UP Sugar Mills Association v. State of Uttar Pradesh, (2020) 9 SCC 548]


Also read:

Supreme Court year-end roundup| From important judgments to unmissable facts and stories, here’s a comprehensive roundup of all that happened in 2020

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, Hemant Gupta* and Ajay Rastogi, JJ has upheld Kerala High Court’s decision holding that Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) mandating the District Magistrate to deliver possession of a secured asset within 30 days, extendable to an aggregate of 60 days upon reasons recorded in writing, is a directory provision.

Object of SARFAESI Act

It was noticed that the SARFAESI Act was enacted to provide a machinery for empowering banks and financial institutions, so that they may have the power to take possession of secured assets and to sell them. This was done after Recovery of Debts due to Banks and Financial Institutions Act, 1993, which was first enacted to streamline the recovery of public dues, did not give desirous results.

Does inability to take possession of secured assets within time limit renders the District Magistrate Functus Officio?

Taking note of this objective of the SARFAESI Act in mind, the Court noticed that the time limit to take action by the District Magistrate has been fixed to impress upon the authority to take possession of the secured assets. However, inability to take possession within time limit does not render the District Magistrate Functus Officio.

Interpreting Section 14 of the SARFAESI Act, the Court said that

“… the secured creditor has no control over the District Magistrate who is exercising jurisdiction under Section 14 of the Act for public good to facilitate recovery of public dues. Therefore, Section 14 of the Act is not to be interpreted literally without considering the object and purpose of the Act. If any other interpretation is placed upon the language of Section 14, it would be contrary to the purpose of the Act.”

The Court noticed that the time limit is to instill a confidence in creditors that the District Magistrate will make an attempt to deliver possession as well as to impose a duty on the District Magistrate to make an earnest effort to comply with the mandate of the statute to deliver the possession within 30 days and for reasons to be recorded within 60 days. Hence, the remedy under Section 14 of the Act is not rendered redundant if the District Magistrate is unable to handover the possession. The District Magistrate will still be enjoined upon, the duty to facilitate delivery of possession at the earliest.

Limitations on power of High Courts to pass interim orders

On the issue of borrowers and other aggrieved persons invoking the jurisdiction of the High Court under Articles 226 or 227 of the Constitution of India without availing the alternative statutory remedy, the Court said that though the High Courts are well aware of the limitations in exercising their jurisdiction when affective alternative remedies are available, but a word of caution would still be necessary for the High Courts that

“… interim orders should generally not be passed without hearing the secured creditor as interim orders defeat the very purpose of expeditious recovery of public money.”

[C. Bright v. District Collector, 2020 SCC OnLine SC 909, decided on 05.11.2020]


*Justice Hemant Gupta has penned this judgment

Case BriefsHigh Courts

Delhi High Court: A Division Bench of Hima Kohli and Subramonium Prasad, JJ., considered the following question:

Whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), when proceedings under the Insolvency and Bankruptcy Code 2016 (IB Code) have been initiated against the principal borrower and the same are pending adjudication?

Respondent 4 was the principal borrower in the present case who had obtained loans from the State Bank of India. Guarantor was the wife of the promoter of the principal borrower. Further, it has been stated that the bank filed an insolvency petition against the principal borrower under the provisions of the IB Code before the NCLT, Delhi.

At the time of pendency of the insolvency proceedings against the principal borrower, bank issued a notice under Section 13(2) of the SARFAESI Act to the petitioner and another notice under Section 13(4) of the SARFAESI Act was also issued. Both the notices were challenged by the petitioner.

The above-stated notices were challenged before Debts Recovery Tribunal but were later withdrawn in light of negotiation talks between the Bank and the Principal Borrower.

Petitioner alleged that without issuing a Notice under Section 1(4) of SARFAESI Act, the Bank issued  Sale Notice under Rule 8 (6) of Security Interest (Enforcement) Rules for sale of her residential house.

In the instant matter, the prime question for consideration was confined to the action of the Bank of initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the Principal Borrower under the IB Code and the same are pending before the NCLT.

Analysis & Decision

Bench referred to the relevant provisions, Sections 14 and 31 of the IB Code and Section 128 of the Contract Act.

Section 14 of the IB code related to Moratorium, Section 31 of the IB Code refers to the approval of the resolution plan and Section 128 of the Contract Act provides the Surety’s liability.

Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor.

Bench cited the decision of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478.

Court held that since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

Bench stated that the question raised with regard to whether the bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled and is squarely covered by the Supreme Court’s decision in SBI v. V. Ramakrishan, (2018) 17 SCC 394.

The above-cited decision holds that Sections 14 and 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

View of the Supreme Court amply demonstrated that neither Section 14 nor Section 31 of the IB Code place any fetters on banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.

Therefore, Court held that,

“…petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”

In view of the above, no merit was found in the petition and hence was dismissed. [Kiran Gupta v. State Bank of India, 2020 SCC OnLine Del 1390, decided on 02-11-2020]

Op EdsOP. ED.

When we study the origins and functioning of the Indian credit recovery infrastructure, it can be seen that originally the only remedy was suits under the provisions of CPC[1] which was long and cumbersome. Here, the process had two parts i.e. debt adjudication which end in a judgment/decree followed by execution proceedings under Order 21 CPC for recovery of decreed amount. Later, with the enactment of the RDBFI Act, 1993[2], DRTs[3] were established as exclusive forums for speedy adjudication and recovery of debts due to Banks and Financial Institutions (FIs). As per the RDBFI Act, DRTs had the power to issue a Recovery Certificate certifying the amount payable by the debtor after debt adjudication in a summary procedure. This amount was thereafter recovered by the Recovery Officer attached to DRT as per the procedure of recovery of tax under Schedule II of the Income Tax Act, 1961. So, the design was to speed up the recovery once the debt adjudication by DRTs. Although, the RDDBFI Act gave 180 days for disposal of recovery applications, cases have been pending for many years due to prolonged hearings. Almost 70,000 cases involving more than Rupees 5 lakh crore were pending in DRTs as of April 2016[4]. Majority of the delay is at the debt adjudication stage with long drawn processes and adjournments in DRTs. It was for overcoming this hurdle and to further speed up recovery that the SARFAESI Act[5] was enacted. This Act give the Banks and FIs the power to recover their debts classified as non-performing assets by various modes including taking possession and sale of the security, without approaching any Court or Tribunal. Interestingly, the SARFEASI Act dispenses the requirement of debt adjudication and the debt amount stated by the creditor in their demand notice issued under Section 13(2) is conferred sanctity to trigger recovery actions under the Act. When we read through the provisions of the aforesaid Acts and the procedure laid down by them for recovery, it is clear that one of the major causes for delay in securing recovery was the time taken for ascertaining the debt amount payable[6].

Most of the litigation in money recovery laws are in the nature of disputes on the amount claimed for recovery by the creditors. This kind of litigation and resultant delay in recovery can be avoided if there is a mechanism for collection, collation, authentication and dissemination of information regarding debts/defaults by independent third parties that are reliable as evidence of debt/default.

The law-makers of the country seem to have appreciated this point while enacting the Insolvency and Bankruptcy Code, 2016 (IBC) which in its Chapter V under Part IV talks about ‘Information Utilities’ (IUs) which is a first of its kind in the world. In this regard, it is significant to note the following statements in the Report of the Bankruptcy Law Reforms Committee[7]:

“Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court. Hence, the Committee envisions a competitive industry of information utilities who hold an array of information about all firms at all times. When the IRP commences, within less than a day, undisputed and complete information would become available to all persons involved in the IRP and thus address this source of delay.”

This article attempts to understand the concept and working of IUs as contemplated under the IBC regime and its utilities in securing the objectives of IBC.

What is ‘Information Utility’?

IUs are entities that would act as data repositories of financial information which would receive, authenticate, maintain and deliver financial information pertaining to a debtor with a view to facilitate the insolvency resolution process in a time-bound manner. IU maintains an information network which would store financial data like borrowings, default and security interests among others of debtors for providing such information to businesses, financial institutions, adjudicating authorities, insolvency professionals and other stakeholders.

As per Section 3(21) of IBC, ‘Information Utility’ is defined as a person registered with the IBBI[8] under Section 210. Furthermore, as per Section 209 of IBC, a person shall be eligible to carry on business as IU only if a certificate of registration is obtained from the IBBI. As per Section 210 of IBC, a certificate of registration shall be issued to an entity to function as IU if all the technical formalities are completed as prescribed by the IBBI.

Historical perspective of ‘Information Utilities’

The setting up of IUs was preceded by a regime of Credit Information Companies (CICs) and Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) that provided credit-related information services including details of security interests.

In his Budget speech made in  Parliament on 28th February 1994, the then Finance Minister of India announced that Reserve Bank of India (RBI) would put in place arrangements for circulating names of defaulting borrowers among the Banks and FIs. The purpose of the same was to alert them and to put them on guard against the borrowers who have defaulted in their dues to other lending institutions. Pursuant to the above announcement, a Working Group was set up under the Chairmanship of Mr N.H. Siddiqui (Chief General Manager, RBI) which submitted its Report in 1999 recommending the establishment of CICs[9]. Accordingly, Credit Information Bureau (India) Ltd. (CIBIL) was incorporated in August 2000. Later, pursuant to the enactment of the Credit Information Companies (Regulation) Act, 2005[10], three other CICs have also been set up in India[11]. Further, in 2013, RBI constituted another Committee under the Chairmanship of Mr Aditya Puri (Managing Director, HDFC Bank) to examine the reporting formats used by CICs and other related issues. This Committees’ report led to the standardisation of data formats for reporting corporate, consumer and MFI[12] data by all credit institutions and streamlining the process of data submission by credit institutions to CICs[13]. In 2015, all credit institutions were directed by RBI to become members of all the CICs and submit current and historical data about specified borrower to them and to update it regularly.

Later, in the year 2011 the then Finance Minister declared in his budget speech about creation of a central registry of equitable mortgages. Pursuant to the same, the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) was established to maintain and operate a registration system for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest over property, as contemplated under the SARFAESI Act. CERSAI is providing a platform for filing registrations by the Banks and FIs with an option for other lenders and the public to search its database.

The idea to establish IUs appears to be an outcome of the research and efforts to set up a hybrid model unique to India by incorporating the best features of CICs, CERSAI and other similar agencies across the world that are engaged in financial information services.

How an ‘Information Utility’ can be created under IBC?

As per Section 196 of IBC, IBBI is entrusted with the power to grant, renew, withdraw, suspend or cancel registration to IUs. This provision further empowers IBBI to make regulations for registration and matters connected therewith. In exercise of the said power, IBBI has notified the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017[14] (“the IU Regulations”) which provide detailed regulations for registration and working of IUs.

As per Regulation 3 of the IU Regulations, registration can be applied by any public company having a minimum net worth of fifty crore rupees and; (a) whose sole object is to provide core services and other services under the IU Regulations, and discharge such functions as may be necessary for providing these services; (b) its shareholding and governance is in accordance with Chapter III of the IU Regulations; (c) its bye-laws are in accordance with Chapter IV of the IU Regulations; (d) its promoters, directors, key managerial personnel, and persons  holding more than 5%, directly or indirectly, of its paid-up equity share capital or its total voting power, are fit and proper persons[15].

A person eligible for registration as aforesaid may make an application to IBBI in Form A of the Schedule to the IU Regulations, along with a non-refundable application fee of five lakh rupees. After due enquiry as contemplated under the IU Regulations, IBBI shall issue a Certificate of Registration in Form B of the Schedule within sixty days of receipt of the application excluding the time taken for removal of difficulties and for obtaining additional documents, if any. Such certificate of registration is valid for a period of five years from the date of issue and it may be renewed by filing an application for renewal at least six months before the expiry of its registration along with the renewal fees of five lakh rupees. IUs are also required to pay annual fee of fifty lakh rupees to IBBI, within fifteen days from commencement of the financial year. However, no annual fee shall be payable in the financial year in which an IU is granted registration or renewal[16].

The shareholding pattern and governance of IUs should be in compliance to the requirements under Chapter III of the IU Regulations. Furthermore, all changes in the shareholding and voting power of IUs are to be reported to the IBBI. As per Regulation 8 of the IU Regulations, no person shall at any time, directly or indirectly, either by itself or together with persons acting in concert, acquire or hold more than 10% of the paid-up equity share capital or total voting power of an IU. However, there are certain exemptions to the said restriction as follows:

  • None of the restrictions on shareholding are applicable to the holding of shares or voting power by the Central Government or a State Government[17].
  • A government company, stock exchange, depository, bank, insurance company and public financial institution either by themselves or together in concert, acquire or hold up to 25% of the paid-up equity share capital or total voting power of an IU[18].
  • Holding up to 51% of paid-up equity share capital or total voting power of an IU by a person directly or indirectly, either by itself or together with persons acting in concert, is allowed up to 3 years from the date of its registration[19], if the IU is registered before 30th September, 2018.
  • Indian companies (i) which are listed on a recognised stock exchange in India, or (ii) where no individual, directly or indirectly, either by himself or together with persons acting in concert, holds more than 10% of the paid-up equity share capital, may hold up to 100% of the paid-up equity share capital or total voting power of an information utility up to three years from the date of its registration[20], if such IU is registered before 30th September, 2018.

Importance and Utility of Information Utilities

The Bankruptcy Law Reforms Committee (BLRC) led by Mr T. K. Viswanathan which designed the IBC, visualised four pillars of supporting institutional infrastructure to make the processes under IBC to work efficiently. They are:  (1) a private industry of IUs, (2) a private industry of Insolvency Professionals (IPs) with oversight by private insolvency professional agencies (IPAs), (3) adjudication infrastructure at the National Company Law Tribunal (NCLT) and DRT, and (4) a regulator i.e.  IBBI[21]. As noted rightly by the BLRC, IU is a very significant institution for the successful operation of the processes under IBC.

IBC was enacted with a view to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of the value of assets of such persons[22]. Section 12 of IBC thus mandates that the Corporate Insolvency Resolution Process (CIRP) of a corporate debtor (CD) must conclude within 330 days[23] from the insolvency commencement date which includes (a) normal CIRP period of 180 days, (b) one-time extension, if any, up to 90 days of such CIRP period granted by the adjudicating authority, and (c) the time taken in legal proceedings in relation to the CIRP of the corporate debtor. This ambitious time-limit prescribed for concluding CIRP appears to be based on an assumption that information relevant for the process will be easily accessible to the parties involved viz. creditors, adjudicating authorities, insolvency resolution professionals, etc. This assumption appears to be based on the confidence of the framers of the law in the idea of IUs envisaged under IBC. As the timelines specified by IBC are strict, they can be met only if the IUs stand ready to provide all relevant information quickly.

The relevant financial information in this stage includes the details of the default, disputes on the same, other financial information of debtors such as records of its debt, liabilities at the time of solvency, assets over which the security interest is created by debtor, timely records of its default and its financial statements of preceding years. Furthermore, it is quintessential for the adjudicating authority to ascertain the existence of default as claimed by the applicant and such existence would decide the fate of the application for CIRP.

As per the scheme of IBC, once CIRP gets initiated against any  corporate debtor, the management of its affairs vest in the Interim Resolution Professional (IRP) and thereupon all the powers of its Board of Directors stands suspended and the same is exercised by the IRP. During such phase, there is every possibility for the Resolution Professionals to face non-cooperation from the management and the suspended Board of the  corporate debtor in disseminating relevant financial information. In these circumstances, an independent and reliable third party which is a repository of validated information regarding debt/default that is capable of providing the same quickly can add significant value to the process.

IBBI has now strengthened the role of IUs by allowing it to access the data of MCA-21[24] database and CERSAI portals to speed up the process of debtor default authentication[25]. By ensuring access of MCA-21 and CERSAI portal data to an IU, IBBI is also providing the mechanism for quick and reliable data for all the stake-holders in the processes under IBC. It may also be noted that RBI has directed all the Scheduled Commercial Banks (Including RRBs), small finance banks, local area banks, non-banking financial companies and all the co-operative banks of the country to put in place appropriate systems and procedures for submission of financial information to IUs[26].

Functions of ‘Information Utility’ as contemplated under the IBC

As per Section 213 of IBC, IUs shall provide services which include core services to any person, if such person complies with the terms and conditions of the IU Regulations. Furthermore, as per Section 3(9) of IBC, “core  services” means – (a) accepting electronic submission of financial information; (b) safe and accurate recording of financial information; (c) authenticating and verifying financial information submitted by person; and (d) providing access to information stored with IUs to persons as may be specified.

As per Section 3(13) of IBC, “financial information”, in relation to a person, means one or more of the following categories of information, namely:  (a) records of the debt of the person; (b) records of liabilities when the person is solvent; (c) records of assets of person over which security interest has been created; (d) records, if any, of instances of default by the person against any debt; (e) records of the balance sheet and cash-flow statements of the person; and (f) such other information as may be specified.

Section 214 of the IBC elaborate the functions to be performed by IUs for the purpose of providing core services. The major obligations of IUs as per Section 214 can be summarised as follows:

  • Acceptance of financial information in electronic form from persons who are under obligation to submit the same under IBC and also from other persons who intend to submit the same. This acceptance is to be in such form and manner as specified under the IU Regulations.
  • Authentication of the financial information so received by all the parties concerned.
  • Storage of the financial information received as aforesaid in a universally accessible format after the same is duly authentication by all the parties concerned.
  • Providing the financial information stored by it as aforesaid to any person who intend to access such information in such manner as may be specified by the IU Regulations.
  • Publication of such statistical information as may be specified by the IU Regulations.

While performing aforesaid obligations, IUs are required to meet such minimum service quality standards as may be specified by IBBI and they are also required to ensure systems to facilitate inter-operatability with other IUs[27]. As per Section 215 of IBC, while it is mandatory for the financial creditors[28] to submit financial information and information relating to assets in relation to which any security interest has been created; submission of information is optional for the operational creditors[29]. Insolvency professionals also may submit reports, registers and minutes in respect of any insolvency resolution, liquidation or bankruptcy proceedings to an IU for storage[30].

Significance of Information Utility in the operation of processes under IBC

As per the scheme of IBC, a CIRP can be triggered by the corporate debtor itself or by the financial or operational creditors of such corporate debtor[31]. Application for CIRP by a financial creditor is governed by Section 7 of the IBC read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016[32].  The application is to be filed as per Form 1 of the said Rules along with the record of the default recorded with the IU or such other record or evidence of default as may be specified. As per Part V of the said Form 1, record of default with IU is listed among the documents acceptable as evidence of default. Upon submission of application, NCLT is required to ascertain the existence of default from the records of an IU or on the basis of other evidence furnished by the financial creditor. It is significant to note that this activity is to be completed by NCLT within fourteen days of the receipt of application. This timeline can be met only if such ascertainment can be done from the records of an IU. Furthermore, upon initiation of CIRP when public announcement is made by the IRP calling for claims, financial creditors may submit their claims along with sufficient proof of such claims. In this regard, it may be noted that the records available with an IU is accepted as a proof of existence of debt due[33].

Whereas, application for CIRP by operational creditors is governed by Section 9 of the IBC read with Rules 5 & 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. On the occurrence of a default, operational creditors are required to deliver either a demand notice of the unpaid debt to the debtor as per Form 3 of the said Rules or a copy of an invoice attached with a notice in Form 4. On receipt of notice, the debtor may, within 10 days, bring to the notice of the creditor about any pre-existing dispute on such debt and get out of the clutches of IBC. On expiry of 10 days from the said notice, if the payment is not done by the defaulter, the operational creditor can file application for CIRP in Form 5 of the aforesaid Rules. As per the aforesaid Forms 3 and 5, record of default with IU is listed as one of the documents to prove the debt. Furthermore, upon initiation of CIRP when the public announcement is made by the IRP calling for claims, operational creditors may submit their claims along with records available with IU which are acceptable as proof for the debt.

Similarly, in an application for CIRP by corporate applicants and in the claims submitted by the other categories of claimants/creditors including workmen, records with IU is accepted as proof of such debt/default. Furthermore, as per IBC and the Rules, the records with IUs can be accessed and relied by the adjudicating authority as evidence for the default/debt in their proceedings. Hence, IUs play a very significant role in enabling timely completion of the processes under IBC.

Operating Procedure of ‘Information Utility’ under IBC

IBC provides little guidance on how IUs are to function, leaving the details to subordinate regulation. Section 240 of IBC empowers the IBBI to make regulations by notification with regard to the registration of IUs, their functioning and on matters connected thereto. The IU Regulations were notified in exercise of this power in order to prescribe the details on how IUs shall operate to meet their objectives as contemplated under IBC.

As per the IU Regulations, a person shall register itself with an IU for submitting information to; or for accessing information stored with any of the IUs. Upon such registration, IU shall verify the identity of the applicant and assign him with a unique identifier and intimate the same to him. A person registered once with an IU shall not register itself with any IU again. A registered user may submit information to any IU and not only to the IU with which he is registered. Different parties to the same transaction may use different IUs to submit, or access information in respect of the same transaction and a user may access information stored with an IU through any IU[34].

A user can submit information of debts or defaults to the IU[35] and on receipt of the same, IU is to assign a unique identifier to the information and intimate the same to the user along with an acknowledgement. In the case of information of default, IU is to expeditiously undertake the process of authentication and verification of the information of default. For this purpose, IU is to deliver the information of default to the debtor seeking confirmation of the same within the specified time. If the debtor fails to respond, IU is to send three reminders giving 3 days’ time in each case for the debtor to respond. If the debtor do not respond even after three reminders as aforesaid, the information is deemed to be authenticated[36]. In case if the debtor confirms the information of default, the information is treated as authenticated and green colour is assigned to the status. If the debtor disputes the information of default the information is treated as disputed and red colour is assigned to the status. Whereas, in cases where the debtor does not respond even after three reminders, the information is‘Deemed to be authenticated’ and yellow colour is assigned to the status. After recording the status of information of default, IU is to communicate the status of authentication in physical or electronic form of the relevant colour, as aforesaid, to the registered users who are- (a) creditors of the debtor who has defaulted; (b) parties and sureties, if any, to the debt in respect of which the information of default has been received[37].

IUs are required to store the information received by it in their facilities located in India and they shall allow the following persons to access the information stored with it- (a) the user which has submitted the information; (b) all the parties to the debt and the host bank[38], if any, if the information is regarding record of debts or assets or instances of default by a person against any debt; (c) the corporate person and its auditor, if the information is of liabilities of a person during solvency or balance sheet and cash-flow statements of the person; (d) the insolvency professional; (e) the adjudicating authority; (f) the IBBI; (g) any person authorised to access the information under any other law; and (h) any other person who the persons referred to in (a), (b) or (c) have consented to share the information.

Provisions to ensure protection of the data with Information Utilities

As per the provisions of IBC, data entrusted with the IUs by the users are to be held as a custodian and hence they shall not have ownership over the data available with them. As such, it is one of the most important duties of the IUs to ensure safety of the data and its protection from unauthorised interferences and data theft. To ensure safety of the data, the IU Regulations prescribe the following to be complied by the IUs:

  • Establish adequate procedures and facilities to ensure that its records are protected against loss or destruction and adopt secure systems for information flows.
  • Storage of all information in a facility located in India shall be governed by the laws of India.
  • Not to outsource the provision of core services to a third-party service provider.
  • Not to use the information stored with it for any purpose other than providing services under these Regulations, without the prior approval of the Board.
  • Not to seek data/details of users except as required for the provision of services under IBC[39].
  • Adequate arrangements, including insurance is to be made for indemnifying the users for losses that may be caused to them by any wrongful act, negligence or default of the IU, its employees or any other person whose services are used for the services[40].
  • Appoint external auditor having relevant qualifications to audit its information technology framework, interface and data processing systems every year. The auditor’s report along with the comments of the Governing Board of IU is to be submitted to the IBBI within one month from the receipt of the same[41].
  • Establish an appropriate risk management framework in line with the Technical Standards[42].
  • Declare a Preservation Policy providing for the form, manner and duration of preservation of information stored with it; and details of the transactions of the IU with each user in respect of the information stored with it[43].
  • Inspection by the IBBI with such periodicity as may be considered necessary[44]. Disciplinary actions can be taken by IBBI including imposition of penalty under Section 220(3) of IBC.

Evidentiary Value of Information with Information Utilities

Authenticated information stored by IUs with regard to a debt or its default amounts to admission of such debt and default thereto by and between the parties to such debt or default. In the light of this fact, evidentiary value of information with IUs can be appreciated by referring to certain provisions of the Evidence Act, 1872. As per Section 65-B of the Evidence Act, information contained in any electronic record shall be deemed to be a document and shall be admissible in the court of law. Furthermore, Section 31 of the Evidence Act state that admissions are not conclusive proof of the matters admitted, but they may operate as estoppels under the provisions hereinafter contained.  In the context of information with IUs, Section 115 of the Evidence Act is significant, which state as follows:  “When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.”

When we examine the provisions of IBC with regard to IUs as explained in the preceding paragraphs of this article, it can be noted that the adjudicating authorities are given the option to accept records with IUs as proof/evidence of debts and defaults. This is on the basis of estoppel which would operate against the parties as per the aforesaid provisions of the Evidence Act. In Swiss Ribbons Pvt. Ltd. v. Union of India[45], constitutional validity of the various provisions of IBC was considered by the Supreme Court of India. One of the arguments in the matter was that IBC provides for private information utilities not only to collect financial data, but also to check whether a default has occurred or not. It was also argued that certification of debt/default by IUs is in the nature of a preliminary decree issued without any hearing and without any process of adjudication. On this ground along with others, the constitutional validity of IBC was challenged in this matter. However, the  Supreme Court of India upheld the constitutional validity of IBC and on the basis of statements made by the then Attorney General of India, declared at para 57 of the judgment that the record of default with IU is only a prima facie evidence of default, which is rebuttable by the  corporate debtor. So, the records with IUs are not conclusive proof and they are only a prima facie evidence of default, which is rebuttable by the corporate debtor.

Conclusion

It can be concluded that creation of IU is definitely a step towards ensuring an information-rich environment for the working of IBC. IUs certainly provide an infrastructure which ensure relevant financial information of debtors easily accessible at anytime from anywhere. This infrastructure undoubtedly empower the creditors and lenders to make informed choices and also provide essential financial information enabling time-bound insolvency resolution process. While, the purpose of setting up the above regime of IUs was to reduce information asymmetry; IUs not only reduce information asymmetry, but it is also enable the processes of IBC to meet the strict timelines prescribed. It can also be seen that the IUs are significant as they provide for improved credit risk assessment and improve the recovery processes. Though there is no doubt about the significance of the IUs; it may take a while before they become relevant as expected. As the first step, IBBI has registered National E-Governance Services Limited (a Union Government company) as the first IU of the country on September 25, 2017. Being sanguine about the developments thus far, we can expect that the data available with the IUs will grow in terms of quantity and quality over a period of time making them an important pillar in the overall resolution process.


* BA LLB (Hons.), LLM, currently working as Manager-Legal with Hindustan Petroleum Corporation Limited at Zonal Administrative Office, Chennai.

[1] Civil Procedure Code, 1908 (Act  5 of 1908).

[2] Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act  51 of 1993).

[3] Debts Recovery Tribunal.

[4]Indu Bhan, “Long Due – Banks can now confiscate security in case of a loan default”, Financial Express, August 19, 2016, available at https://www.financialexpress.com/opinion/long-due/351486/, last visited on 15.05.2020.

[5]Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act  54 of 2002).

[6] Prasanth V. Regy and Shubho Roy, “Understanding Judicial Delays in Debt Tribunals”, Paper No. 195 in the Working Paper Series of National Institute of Public Finance and Policy at New Delhi, May 2, 2017, available at https://www.nipfp.org.in/media/medialibrary/2017/05/WP_2017_195.pdf, last visited on 15.05.2020.

[7] Government of India, “Report of the Bankruptcy Law Reforms Committee” (Ministry of Finance, November 2015).

[8] Insolvency and Bankruptcy Board of India established under Section 188 of the Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016).

[9]Reserve Bank of India, “Report of the Working Group to explore the possibilities of setting up a Credit Information Bureau in India” (Department of Banking Operations and Development, October 1999)

[10] Credit Information Companies (Regulation) Act, 2005 

[11] Equifax Credit Information Services Private Limited, Experian Credit Information Company of India Private Limited and CRIF High Mark Credit Information Services Private Limited have been granted Certificate of Registration by RBI.

[12]Monetary Financial Institutions.

[13]Reserve Bank of India, “Report of the Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies”, (Department of Banking Operations and Development, January 2014)

[14] Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017

[15]As per Explanation to Regn. 3 of Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, a person is considered as fit and proper, if he (a) is having integrity, reputation, character and financial solvency (b) has never been convicted by a Court for an offence or sentenced to imprisonment for a period less than 6 months, and (c) has not suffered any restraint order issued by financial sector regulator or adjudicating authority.

[16] IBBI (Information Utilities) Regulations, 2017, Regns. 5 and 6.

[17]Id, Regn.  8(3).

[18]Id,  proviso to Regn. 8(1)

[19]Id, Regn. 8(2)(a).

[20]Id,  Regn. 8(2)(b).

[21]Supra Note 7.

[22]Government of India, “Report of the Working Group on Information Utilities” (Ministry of Corporate Affairs, January 2017).

[23] This cap of 330 days was brought by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (w.e.f. 16-8-2019).

[24]MCA-21 is an e-Governance initiative of Ministry of Company Affairs (MCA), Government of India that enables an easy and secure access of the MCA services to the corporate entities, professionals and citizens of India. It is designed to fully automate all processes related to the enforcement and compliance of the legal requirements under the Companies Act, 1956, the New Companies Act, 2013 and the Limited Liability Partnership Act, 2008. Its database will contain the master data and the charges registered on companies and LLP.

[25]Insolvency and Bankruptcy Board of India, Circular No. IBBI/IU/025/2019 dated 07-09-2019.

[26] Notification No: DBR.No.Leg.BC.98/09.08.019/2017-18 dated December 19, 2017 issued by Reserve Bank of India, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11189&Mode=0, last accessed on 16.05.2020.

[27] Insolvency and Bankruptcy Code, 2016 (31 of 2016), Ss. 214(d) and (h).

[28] As per Section 5(7) of IBC, “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. Eg. – Banks and financial lenders.

[29] As per Section 5(20) of IBC, “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Eg. – Suppliers and vendors.

[30]Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 38.

[31] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S.6.

[32] Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[33]Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regn. 8(2)(a)

[34]Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Chapter V (Regns.17 to 27).

[35]Id, Form C of the Schedule.

[36]Deemed authentication was inserted by Notification No. IBBI/2019-20/GN/REG046 dated 25/07/ 2019. Prior to this, there was no option for deemed authentication when debtor do not respond to notice for authentication.

[37] Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 21.

[38] Host bank means the financial institution hosting the repayment account.

[39] Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 30.

[40]Id, Regn. 31.

[41]Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn 34.

[42]Id,  Regn. 33.

[43]Id, Regn. 35.

[44]Id,  Regn.37.

[45] 2019 SCC OnLine SC 73.

Case BriefsHigh Courts

Karnataka High Court: P.S. Dinesh Kumar, J., rejects the petition seeking the writ of certiorari against the order of NCLT imposing heavy costs.

Facts

The petitioner company availed a loan from the Bank of Maharashtra towards its infrastructure development and various other works. Upon delay in payment of interest, the bank issued a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Sale notice and public notice were subsequently published. By an interim order passed by the present court, the Bank was allowed to proceed with the auction provided it shall not confirm the sale.

Subsequently, the respondent also moved to the NCLT under Section 7 of the Insolvency and the Bankruptcy Code, 2016 wherein the tribunal appointed an Insolvency Resolution Professional (IRP) to facilitate the process. Noticeably, while the case was before NCLT, the petitioner sought time for settling the issue and submitting its objections on several occasions through as many as thirteen adjournment orders.

Petitioner’s Contentions

It was submitted by the counsel for the petitioner, Vivek Holla, that despite sincere attempts, the interest amount could not be deposited either before the NCLT or the present Court. Further, no adequate opportunity of filing the counter was provided at the hearing before NCLT. Lastly, the tribunal was devoid of any jurisdiction upon the instant matter as on the date of application under Section 7, the debt was time-barred.

 Respondent’s Contentions

The counsel for the respondent, M. Jagadeesh submitted that the petition by an erstwhile Director of the Company is not maintainable and further the conduct of the petitioner also disentitles him from any other discretionary relief. The counsel relying on the case of Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, contended that once IRP is appointed, the erstwhile directors who are no longer in management cannot stand in appeal.

Court’s Observation

The Court rejected the present petition recognizing several reasons. Firstly, the petitioner company is represented by its erstwhile director, secondly, the petitioner company has willfully defaulted on several occasions, giving false assurances with regards to the settlement before the NCLT and thirdly, the impugned order is an appealable order. With respect to the court order and an undertaking, the court remarked, ‘An assurance is a promise and stands on a higher footing than an order passed by Tribunals or Courts because promises or undertakings are given voluntarily whereas orders are imposed by an authority.’ Further relying on the judgment of Prestige Lights Ltd. v. State Bank of India, (2007) 8 SCC 449, it was held that an order passed by a competent court, interim or final, has to be obeyed without reservation.[Alpine Wineries (P) Ltd. v. Pridhvi Asset Reconstruction Company, WP No. 1631 of 2020, decided on 04-09-2020]

COVID 19Op EdsOP. ED.

The current articles deals with RBI’s announcement on 27.03.2020 and 22.05.2020 regarding moratorium on term loans up to 31.08.2020. It points to certain areas of concern and provides pointers for further consideration by RBI and policy-makers. 

The outbreak of the COVID-19 pandemic has brought the economic activity in the country to a grinding halt. An already debilitated banking environment now faces the new challenges for maintaining liquidity and servicing borrowers many of whom are facing a near collapse on both demand and supply side. The problem will be more acute for SME, MME and small entrepreneurs who may not possess the staying power to tide over the present phase of uncertainty.

Reserve Bank of India in the immediate aftermath of the outbreak and lockdown came out with a press statement on 27.03.2020 regarding moratorium on term loan and working capital loan. The objective it appears is to provide some immediate relief to the borrowers facing liquidity crunch. The relevant portion of the statement was:

“STATEMENT ON DEVELOPMENT AND REGULATORY POLICIES

II. Regulation and Supervision

    *                                 *                                               *

5. Moratorium on Term Loans

All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

6. Deferment of Interest on Working Capital Facilities

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.

In respect of Paras 5 and 6 above, the moratorium/deferment is being provided specifically to enable the borrowers to tide over the economic fallout from COVID-19. Hence, the same will not be treated as change in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade. The lending institutions may accordingly put in place a Board approved policy in this regard.

7. Easing of Working Capital Financing

In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.

In respect of Paras 5, 6 and 7, the rescheduling of payments will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.”

This “moratorium” now stands extended for a further 3 month period announced by RBI on 22.05.2020, RBI Statement on “Development and Regulatory Policy”. The new statement provides extension of export credit from 1 year to 15 months, permits banks to allow deferment on working capital payment up to 31.08.2020, conversion of the accumulated interest on working capital loans up to the extension period up to 31.08.2020 into a interest term loan repayable by the end of the financial year and extends the previous moratorium on payment of EMIs on term loans up to 31.08.2020.

The previous press statement was necessary to provide immediate succor, in the background of the sudden pandemic and announcement of a pan India lockdown. The subsequent announcement on 22.05.2020 merely extends the same.

RBI now may additionally consider a more medium to long term objective of facilitating the sector/business wise revival of the economy. The salient points of concern are as follows:

              1. While the moratorium announced on 27.03.2020 was ostensibly for a three month period, most borrowers would have paid their EMI for the month of March, 2020 before the statement.

There is no reduction in repayment liability as interest and principal will have to be serviced but after the three month moratorium period up to 31.08.2020.

              2. Interest will continue to be charged for the moratorium period and hence, one’s outstanding EMI payment will be higher after the moratorium period than had one paid on a monthly basis. This is likely to be a cause of immediate stress for many borrowers.

              3. While RBI expects borrowers to tide over the liquidity problem, it is unlikely that the same can be overcome by most borrowers as there is still uncertainty surrounding how the lockdown will actually be rolled back. Consumer demand is expected to remain very low and cautious even post lockdown and hence the expectation of prompt revival of demand close to previous levels is unlikely.

            4. In most sectors the supply chain or/and labour force have been disrupted. Any revival in production and ergo liquidity will therefore necessary have to await restoration of the same post lockdown. Only such revival will help enterprises in servicing their credit facilities.

            5. The Government of India has issued an advisory asking all public and private enterprises to ensure that their workers are not retrenched on the pretext of the pandemic and are paid full wages for the period of the lockdown. The Supreme Court in Alakh Alok Srivastava v. Union of India[1], in the context of the Disaster Management Act, stated in its order dated 31.03.2020:

Disobedience to an order promulgated by a public servant would result in punishment under Section 188 of the Penal Code. An advisory which is in the nature of an order made by the public authority attracts Section 188 of the Penal Code.

The Government advisory will be very difficult to enforce, however if the same is strictly enforced it will be another factor of stress that will affect liquidity.

           6. It may be prudent that the banks assess the situation borrower wise/sector wise. This aspect would require RBI’s earnest consideration.

            7. A separate framework may also be formulated for bona fide borrowers with transient default/minor defaults or undergoing a reschedulement of their credit facilities who were servicing their credit facilities but have been hampered by the lockdown and pandemic.

Thus while summarising the above it is clear that while RBI press statement was aimed to be a limited immediate step further flexibility ought to be allowed to the banks that would help them make a clear and detailed assessment of both demand, production and supply side factors borrower/segment wise to assist in revival of the bona fide borrowers. 

Many enterprises in the present face peculiar problems. The credit facilities were availed envisaging a certain level of demand and supply. Currently there is a lack of availability of raw materials, labour, transport incapacitating production and distribution. The current near collapse of demand in many sectors has lead to the absence of potential to service the credit facilities. It may also lead to perishing of final goods and atrophy of stocks and assets.

A grim but very likely consequence is that many enterprises may not be able to bear the burden of near collapse of projected demand even post 31.08.2020. They will not be able to service their outstanding EMIs and in a few months thereafter will fall into the NPA category. This will further bar trade for many in terms of their contractual stipulations that require them to be solvent. It many cases it will create stress on their stock value and adversely affect investor confidence.  It will affect the credit ratings of the borrowers. In such a scenario the inevitable legal proceedings under the Insolvency Code, SARFAESI and for debt recovery, will lead to collapse of numerous industries that may have a chance at revival, if they given the necessary helping hand. It will overburden an already overloaded judicial system. The same will have ramifying effects on ancillary units and ultimately the health of the economy.

Further increase in NPAs, costly legal proceedings will also impact the profit and loss statement of the banks and their market perception.

With an objective to revive the borrower out of the current imbroglio I suggest that RBI may consider to formulate a more detailed medium to long term plan focusing on revival of the borrower after taking inputs from industry and banks. The following points may be kept in mind while framing its response for borrowers who were servicing their credit facilities but for the pandemic or those who even while servicing their EMIs are in need of easing repayment schedules:

  1. While the complete lockdown may be ended, lockdown may continue in certain areas or industrial sectors and therefore a flexible approach needs to adopted by RBI and banks;
  2. Allow banks greater flexibility to assess the default borrower /sector wise taking into account factors both on the supply side and demand side  and the bona fides of the borrower;
  3. Allow banks upon assessment to shape and support and if necessary reschedule loans synchronised with the pace of revival of economic activity;
  4. The benefit of the recent reduction in REPO rate and CRR granted by RBI to banks should be passed on to the ultimate consumer/borrower;
  5. RBI may consider to review and consider relaxation of norms for provisioning and classification of accounts as NPA, allowing banks greater window to work with the borrower for standardisation of the account without any stress on the assets available with the banks;
  6. RBI may also formulate a plan for borrowers with minor or transient defaults, or whose credit facilities were reschedule immediately prior to the lockdown to avail the necessary support from the lending bank;
  7. Assist banks to work together on the above mentioned lines in cases of consortium loans.

* Author is a graduate from National Law School of India University and has been practicing before the Supreme Court for past 17 years. He works in area of Banking and taxation laws.

[1] 2020 SCC OnLine SC 345  

Case BriefsHigh Courts

Kerala High Court: Raja Vijayaraghavan V., J., disposed of this writ petition filed under Article 226 of the Constitution of India.

The petitioner here is the accused in the suit filed under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The petitioner took a loan from the Co-operative Urban Bank Ltd (Respondent 1). The petitioner committed some default in the re-payment, hence the initial suit was filed under SARFAESI. The present petition is against the measures initiated under SARFAESI for recovery of the loan amount by the Bank. This Act enables the secured creditors to take possession of the securities of the defaulters, without any intervention of the Court and also alternatively to authorize any Securitization or Reconstruction Company to acquire financial assets of any Bank or Financial Institutions. 

The counsel for the petitioner, K.V. Anil Kumar, contended that default was committed because of some reasons beyond the control of the petitioner. The only prayer of the petitioner is that some time may be granted so that he can clear all the arrears and regularize his account in the bank.

The counsel for the respondent, Deepa Arun V., contended that the bank is only interested in realizing the arrears amounting to Rs 9,23,000, expeditiously. 

The Court referred to the judgments of the Supreme Court- Union Bank of India v. Stayawati Tandon, (2010) 8 SCC 110 and State Bank of Travancore v. Mathew K.C., 2018 (1) KLT 784. The judgment in the above-mentioned case was that, where any alternate remedy is available, the petition under Article 226  should not be entertained by the High Court. Section 17 of the SARFAESI Act provides for the right to appeal. It enumerates that any person who is aggrieved by the measures referred in Section 13(4) of the Act shall make an application to the Debt Recovery Tribunal within 45 days from the date on which measures have been taken. Though the rule of exhaustion of alternate remedy is a rule of discretion and not one of compulsion.

The Court held that it will be indulging for the last and final time as the respondents are also agreeable for an opportunity to salvage the property of the petitioner. Further, the Court directed the petitioner to deposit the total arrears in easy installments divided into 10 equal and monthly installments starting from 15-01-2020. Only after compliance with the said order, the bank account was supposed to be regularized. It was directed that the petitioner has to simultaneously pay regular EMIs without any default. In case of non- compliance on behalf of the petitioner, the benefit granted by this Court would stand vacated and the Bank will be entitled to proceed to recover the loan amount through the procedure stated in the SARFAESI Act. [Abdul Salam v. General Manager, Co-operative Urban Bank Ltd., 2019 SCC OnLine Ker 5762, decided on 27-12-2019]

Case BriefsSupreme Court

Supreme Court: A Bench comprising of CJ Ranjan Gogoi and Navin Sinha and K.M. Joseph, JJ. dismissed an appeal filed against the appellate order whereby interference in the order of Company Judge was declined.

The appellant was an assignee of debt by Industrial Finance Corpn. of India Ltd. for the outstandings of Mahendra Petrochemical Ltd. Earlier, a company petition was filed for winding up of MPL. Subsequently, after assignment of debt by IFCI in its favour, the appellant filed another company appeal for substitution of its name in place of IFCI as a secured creditor. The Company Judge rejected the application holding that the appellant was neither a bank or a banking company or a financial institution or a securitisation company or a reconstruction company, and therefore could not be substituted in place of IFCI as a secured creditor for the purpose of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI). It was also held that in the nature of the relief sought under the SARFAESI Act, the appellant could not draw any benefit from Section 130 of the Transfer of Property Act. The review application filed to the Company Court under Section 9 of the Companies (Court) Rules, 1959 was rejected. The appellant submitted that it never sought substitution as a secured creditor, but simply desired substitution as a transferee of an actionable claim under Section 130 of Transfer of Property Act.

The Supreme Court, after considering the submissions and perusing the record, was of the view that the submissions made before the Company Judge left no room for doubt that as an assignee of debt from IFCI, the appellant essentially sought substitution as a secured creditor under SARFAESI Act and for that purpose sought to draw sustenance from Section 130 of Transfer of Property Act. After the claim of the appellant of being a secured creditor was rejected, it realised the unsustainability of its claim and made a complete volte face from its earlier stand contrary to its own pleadings. The contention of the appellant was belied from its own recitals before the Company Court. Referring to Amar Singh v. Union of India, (2011) 7 SCC 69 and Joint Action Committee for Airline Pilots’ Assn. of India v. Director General of Civil Aviation, (2011) 5 SCC 435, the Supreme Court held that a litigant can different stands at different times but cannot take contrary stands in the same cases. A party cannot be permitted to approbate and reprobate on the same facts and take inconsistent shifting stands. [Suzuki Parasrampuria Suitings (P) Ltd. v. Official Liquidator of Mahendra Petrochemicals Ltd.,2018 SCC OnLine SC 1798, dated 08-10-2018]

Case BriefsHigh Courts

Bombay High Court: A Single Judge Bench comprising of A.S. Chandurkar, J. allowed a civil revision application filed by the tenant — Dena Bank, against the order of the trial court whereby its application under Order 7 Rule 11(d) CPC for rejection of the plaint filed by the landlord for its eviction was dismissed.

The Bank filed the abovesaid application stating that in the light of provisions of Section 17(4-A) read with Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002 (SARFAESI), the civil court had no jurisdiction in the suit. However, the application was rejected. Aggrieved thus, the Bank approached the High Court.

The High Court noted that according to Section 17(4-A), any person who is aggrieved by any of the measures referred to in Section 13(4) of  SARFAESI being taken by a secured creditor can approach Debts Recovery Tribunal and can raise a grievance. A person claiming tenancy or leasehold is also entitled to make such application under Section 17. As per Section 34, a civil court has no jurisdiction to entertain any suit or proceeding with regard to any matter which the DRT is empowered to adjudicate under SARFAESI. The High Court, on the basis of the above, held that the trial court rejected the application of the Bank without having regard to Section 17(4-A) and therefore committed a jurisdictional error. Hence, the order impugned was quashed and set aside. The application filed by the Bank under Order 7 Rule 11(d) was allowed. However, it was open to the landlord to take such other steps as permitted under law. The civil revision was accordingly allowed. [Dena Bank v. Pravin Vithalrao Dorkhande,2018 SCC OnLine Bom 2800, decided on 26-09-2018]

Case BriefsSupreme Court

Supreme Court: Dealing with a matter under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the bench of RF Nariman and Navin Sinha, JJ said:

“In financial matters grant of ex-parte interim orders can have a deleterious effect and it is not sufficient to say that the aggrieved has the remedy to move for vacating the interim order.”

The Court said that it is the solemn duty of the Court to apply the correct law without waiting for an objection to be raised by a party, especially when the law stands well settled. Any departure, if permissible, has to be for reasons discussed, of the case falling under a defined exception, duly discussed after noticing the relevant law.

Explaining the concept of loans by financial institutions, the Court said that these loans are granted from public money generated at the tax payers expense. It was observed:

“Such loan does not become the property of the person taking the loan but retains its character of public money given in a fiduciary capacity as entrustment by the public. Timely repayment also ensures liquidity to facilitate loan to another in need, by circulation of the money and cannot be permitted to be blocked by frivolous litigation by those who can afford the luxury of the same.”

It was said that the writ petition ought not to have been entertained and the interim order granted for the mere asking without assigning special reasons, and that too without even granting opportunity to the Appellant to contest the maintainability of the writ petition and failure to notice the subsequent developments in the interregnum. The opinion of the Division Bench that the counter affidavit having subsequently been filed, stay/modification could be sought of the interim order cannot be considered sufficient justification to have declined interference.

The Court was hearing appeal arising out of interim orders in the the writ petition under Article 226 of the Constitution, staying further proceedings at the stage of Section 13(4) of SARFAESI Act on deposit of Rs.3,50,000/-within two weeks. An appeal against the same was also dismissed by the Division Bench observing that counter affidavit having been filed, it would be open for the Appellant Bank to seek clarification/modification/variation of the interim order. [Authorized Officer, State Bank of Travancore v. Mathew KC, 2018 SCC OnLine SC 55, decided on 30.01.2018]

Case BriefsHigh Courts

Allahabad High Court: The petitioner before the Court appealed against the order of Debt Recovery Appellate Tribunal. The petitioner was serving in Punjab National Bank, Branch Mahmoorganj, Varanasi. During his service period, he availed a housing loan of Rs. 10 lacs in the year 2007 for construction of house and deposited title deed of his property in District Varanasi as security and had committed defaults in payment of instalments. Consequently, the account was declared as ‘Non-Performing Asset’.

The respondent bank issued a notice under Section 13(2) of the SARFAESI Act. The notice inviting tender for sale of security was published in the newspaper subsequent to this and the security was sold. The counsel for petitioner submitted  that an application was filed under Section 17(1) of the SARFAESI Act before the DRT for quashing the sale certificate dated January 6, 2012 alleging that the petitioner was not served with the notice for auctioning the property nor was he given a possession notice. Along with that, the property in question (that was being auctioned) was grossly undervalued and that the petitioner had no knowledge of the recovery proceedings.

The counsel pleaded on petitioner’s behalf that the Appellate Tribunal had failed to appreciate that the petitioner was the employee of the respondent bank and his dues were sufficient to meet out the loan taken by the petitioner, even then due to personal prejudice the officers had initiated the proceeding under Section 13 of SARFAESI Act and the Tribunal had not recorded any finding on that point.

Shri M.M. Sahai, counsel for the petitioner, placed emphasis on clear 30 days’ notice, which is required to be given to the borrower by placing reliance on the judgment of Supreme Court in Mathew Varghese v. M. Amritha Kumar, (2014) 5 SCC 610 in which it was held that until a clear 30 days’ notice is given to the borrower, no sale or transfer can be resorted to by a secured creditor.

The submission of petitioners were accepted by the Bench of Tripathi, J. who observed that the requirement to cause publication in ‘vernacular language’ in the newspaper is fundamental and the statutory requirement which cannot be compromised. The Court quashed all the proceedings subsequent to notice under Section 13(4) of the Act, 2002 for being violative of statutory provisions. It ordered the respondent bank to refund the amount deposited by the buyer of the security of petitioner with interest @ 10% per annum to her within four weeks from today. [Ashok Kumar v. Authorized Officer, Punjab National Bank, 2017 SCC OnLine All 333, decided on 10.2.2017]

Case BriefsSupreme Court

Supreme Court: Deciding the question as to the fate of the deposit on the disposal of the appeal in case of an appeal under Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) before the Debt Recovery Appellate Tribunal(DRAT), the bench of Kurian Joseph and R.F. Nariman, JJ held that the partial deposit before the DRAT as a pre-condition for considering the appeal on merits in terms of Section 18 of the Act, is not a secured asset.

It was further held that It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such pre-deposit in favour of the secured creditor. If that be so, on disposal of the appeal, either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of the pre-deposit, the same has to be allowed and the pre-deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor but with the consent of the depositors, had already appropriated the pre-deposit towards the liability of the borrower, or with the consent, had adjusted the amount towards the dues, or if there be any attachment on the pre-deposit in any proceedings under Section 13(10) of the Act read with Rule 11 of The Security Interest (Enforcement) Rules, 2002, or if there be any attachment in any other proceedings known to law.

As per Section 18 of SARFAESI Act, an appeal before the DRAT can be entertained only if the borrower deposits fifty per cent of the amount in terms of the order passed by the DRT under Section 17 of the Act or fifty per cent of the amount due from the borrower as claimed by the secured creditor, whichever is less. The said amount can be reduced to 25% by DRAT. [Axis Bank v. Sbs Organics Pvt. Ltd., 2016 SCC OnLine SC 353decided on 22.04.2016]

High Courts

Jammu and Kashmir High Court– Giving a landmark judgment regarding the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) in the State of Jammu and Kashmir (hereinafter State), a division bench of M.H. Attar and A.M. Magrey JJ, held that the SARFAESI Act, 2002 cannot be enforced in the State as the Union Parliament does not have legislative competence to enact laws contained in Sections 13, 17(A), 18(B), 34, 35 and 36 so far they relate to the State. Giving reasons, the Court observed that the SARFAESI Act modifies the State transfer of property Act, State Civil Procedure Code, Civil Courts Act, State Limitation Act and adversely impacts the inalienable property rights of State Subjects, hence is beyond legislative competence of the Parliament to the extent of State of Jammu and Kashmir.

The petition is in the backdrop of SARFAESI Act wherein banks can seize property of the borrowers and dispose it off. Learned Counsel, A. Haqani, on behalf of the petitioners argued that the authority created and mechanism prescribed by the SARFAESI Act is covered by the expression “administration of justice” and the Parliament has no power to legislate any law on this subject. While Zafar A. Shah, learned Senior Advocate, appearing for respondent Bank, argued that in view of Entry 45 of List I, (Union List) of 7th Schedule of the Constitution of India, the Parliament is competent to legislate the SARFAESI Act.

The Court pointed out that Parliament has no power to legislate law on the subjects of administration of justice, the land and other immovable properties. The Court further observed that the Constitution of Jammu and Kashmir is sovereign in character and the State Assembly exercises sovereign power to legislate laws. Referring to Prem Nath Koul vs. State of J&K, 1959 Supp (2) SCR 270:AIR 1959 SC 749, the Court also held that the State of Jammu and Kashmir occupies a distinct, unique and special position and constitutes a class in itself, thus cannot be compared to other states in the country. The Court further explained that the constitutional provisions and laws extended to the State of Jammu and Kashmir in accordance with the mechanism and procedure under Article 370 and those constitutional provisions and laws which have been made applicable to the State with modifications make the distinct and special position of the State more clear. The Court also gave liberty to the State to enact law similar to SARFAESI Act for securing the interest of banks or financial institutions. Bhupinder Singh Sodhi v. Union of India, decided on 16.07.2015