India: Can The Lenders Spin The Sword And Stick At The Same Time To Recover Their Dues? - Judiciary Clears The Air Of Confusion

Last Updated: 10 May 2017
Article by Sneha Bhawnani

In the recent past, the financial sector has witnessed an alarming rise in the number of stressed assets. Undoubtedly, the ability of the lender to deal with stressed assets has been time and again tested. Nevertheless, there is existence of informal as well as formal regulatory framework which enables the lenders or creditors to recover all outstanding dues from the defaulting borrower. The informal regulatory framework of the country provides for various avenues to the lenders for the purpose of revitalising the stressed assets of the borrower, that is to say, the lenders may explore various options to achieve a viable solution to preserve the economic value of such assets along with the lender's loans. In other words, the lenders have an option to adopt corrective action plans in order to monitor the stressed assets closely for the purpose of effective resolution. The said corrective action plans include rectification, restructuring and recovery mechanisms, as detailed later in this article. Also, the Reserve Bank of India ("RBI") issues, from time to time, various circulars, guidelines and directions in order to notify various schemes for rectification or restructuring the stressed assets. On the other hand, the formal regulatory framework includes various laws, elucidated below, as enacted by the legislature, from time to time, in order to entitle the lenders or creditors to take legal actions against the defaulting borrowers for realising all amounts due and payable to the lenders by such borrowers.

In this context, reference must be made to the case of IDFC Bank Limited v Ruchi Soya Industries Limited1 in order to highlight the mandatory nature of the RBI guidelines in relation to rectification, restructuring of stressed assets and to enumerate that the action of recovery can be initiated by the lender only after the rectification and restructuring mechanisms to revitalise the stressed assets are not found feasible. The aim, scope and ambit of this article is to delve into the key aspects of the aforementioned case which has brought much clarity as to how and when the lenders can utilise the sharp weapons in their hands to realise and recover the dues from their debtors.


Earlier, there were several scattered guidelines issued by the RBI for dealing with stressed assets, however, all such guidelines and directions were brought under a single umbrella called the Framework for Revitalising Distressed Assets in the Economy in January, 2014. This framework primarily provides three ways of tackling the stressed assets – rectification, restructuring and recovery. While the first two are meant for the purpose of revival of a stressed borrower, the last one is used when both of these fail to pass the feasibility test.

Rectification of Stressed Assets

Rectification refers to obtaining a specific commitment from the borrower to regularise the account so that the account comes out of Special Mention Account ("SMA") status or does not slip into the category of non-performing assets; whereas, the lenders are required to recognise signs of incipient stress in the loan account by way of creating three sub-categories, namely, SMA-0 ( in this sub-category, the principal or interest payment is not overdue for a period beyond 30 days but the loan account is showing signs of incipient stress, SMA-1 (in this sub-category the principal component of the loan or the interest on the loan is overdue for a period between 31-60 days) and SMA-2 (in this sub-category the principal component of the loan or the interest on the loan is overdue for a period between 61-90 days) under the SMA category. Further, the commitment of the borrower should be supported with identifiable cash flows within the required time period and without involving any loss or compromise on the part of the existing lenders. If the existing promoters lack the ability to bring in additional capital or take any measures to regularise the account, the possibility of getting some other equity/strategic investors to the borrower company may be explored by the lenders in the Joint Lenders Forum ("JLF") in consultation with the borrower. These measures are intended to turn-around the borrower company without any change in terms and conditions of the loan.

Restructuring of Stressed Assets

In order to understand the restructuring of stressed assets necessary reference must be made to the RBI notification on Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)2. At the very outset, it must be noted that the JLF may consider the possibility of restructuring the loan account provided such restructuring is prima facie viable and the borrower is not a wilful defaulter. During this level, commitment from promoters for extending their personal guarantees along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would alienate assets without the permission of the JLF. Any deviation from the commitment by the borrowers affecting the security/recoverability of the loans may be treated as a valid factor for initiating recovery process under applicable laws of the land. For this action to be sustainable, the lenders in the JLF may sign a Inter Creditor Agreement ("ICA") and also require the borrower to sign the Debtor Creditor Agreement ("DCA") which would provide the legal basis for any restructuring process.

In a nutshell, the general principles of restructuring the stressed assets are that the shareholders or the owners of the defaulter company must bear the first loss rather than the debt holders and therefore in order to ensure more stake of promoters for reviving the stressed assets, the lenders have the option to undertake Strategic Debt Restructuring (SDR) by converting the loans into equity shares3 or they can force the existing promoters to exit the company and cause change in management under the Prudential Norms for Change in Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme)4. Further, in order to strengthen the ability of the lenders or creditors to deal with the stressed assets, the RBI issued the scheme for Sustainable Structuring of Stressed Assets5.


The formal regulatory framework includes various statutes enacted and implemented by the Government, from time to time, for the purpose of dealing with default by the borrower company.

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("DRT Act")

The banks and financial institutions have experienced much difficulty in recovering their dues from their borrowers. The lack of efficient procedure for recovery of debts has significantly contributed towards the funds of the lenders being blocked for a long period of time. Thus, the legislature enacted the DRT Act for the purpose of establishing tribunals and appellate tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. It must be noted that the DRT Act provides special rights to banks to recover debts from their defaulting borrowers.

Civil Procedure Code, 1908 ("CPC")

Apart from the DRT Act, the lenders also have an option to file a suit for recovery of any amount due from their debtors in accordance with Order XXXVII of the CPC. Further, in the event of dishonour of such bills of exchange which were issued by the borrower company in favour of its creditors for the purpose of discharging debt, the creditors have an option to avail the remedy provided in Section 138 of the Negotiable Instruments Act, 1881 and initiate civil as well as criminal proceedings against the defaulting borrower.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act")

The SARFAESI Act has been enacted for the purpose of regulating the securitisation and reconstruction of financial assets and enforcement of such security interest which is created on the asset of the borrower in favour of the banks and financial institutions. It must be noted that enforcement of security interests depends on the nature of asset on which the security interest has been created by the lenders. For instance, security interest is created on shares of an company by means of creating a pledge on such shares; whereas, hypothecation is created on the physical assets of the company.

Common law principles for enforcement of security interests

Also, the lenders have the option to invoke the common law principles for enforcement of security interests, especially when the lenders desire to take over the possession of the moveable properties of the debtor company to realise all dues from the debtors.

Insolvency and Bankruptcy Code, 2016 ("Code, 2016")

Recently, the legislature has enacted the "Code, 2016" which consolidates laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. In other words, in the event non-payment of debt by the corporate debtor, the financial and/or the operational creditors have the option to initiate corporate insolvency resolution process. Thereafter, the decision of 75 percent consent of financial creditors in value shall decide whether a resolution plan can be formulated and implemented for the revival of the corporate debtor or whether the assets and liabilities of the borrower must be liquidated by means of a liquidation process for paying the stakeholders of the corporate debtor in accordance with the waterfall mechanism under Section 53 of the Code, 2016. It must be noted that the Code, 2016 is holistic in nature and therefore takes into account the interest of all creditors of the borrower.


In order to understand the recent position of law with regards to the legal position on the application of mechanisms available to the creditors under the formal and informal regulatory framework, reference must be made to the landmark judgement of the Bombay High Court in the case of IDFC Bank Limited v Ruchi Soya Industries Limited6. Before discussing the case in detail, it is pertinent to note that the borrowers have a common complaint that the banks and other lenders initially show much inclination towards undertaking restructuring mechanisms in accordance with the RBI guidelines but subsequently show reluctance in restructuring the stressed assets of the defaulter company. The Courts have time and again held that the RBI regulates and exercises control over the banking companies and therefore the circulars issued by the RBI are binding on the banking companies7.

In the case of Central Bank of India v. Ravindra8 the Apex Court has held that the RBI is the primary banking institution of the country which is entrusted with a supervisory role and is conferred with the authority of issuing restrictive directions, having statutory force, to the banks in public interest and preventing the banking affairs from any kind of deterioration to secure proper management of all banking companies. Further, in the case of Sardar Associates v. Punjab and Sind Bank9   it has been held that the RBI guidelines are not directory but mandatory in nature10.

In the case of Shyam Ice and Cold Storage (P) Ltd. & Ors v. Syndicate Bank & Ors11 the Andhra Pradesh High Court held that during the pendency of a proposal of One Time Settlement ("OTS"), it is not permissible for the bank to proceed against the borrower under the provisions of the SARFAESI Act. Further, in the case of Shakuntla Educational & Welfare Society v Punjab & Sind Bank & Ors12 the Allahabad High Court held that the JLF must identify incipient stress and explore the options to resolve such stress in accordance with the RBI guidelines in order to restructure the loan account of the borrower before resorting to the recovery process under the SARFAESI Act.

Background of the Case

In this case, pursuant to a Master Facility Agreement ("MFA") executed between IDFC Bank Limited ("IDFC") and M/s. Ruchi Soya Industries Limited ("RSIL"), IDFC had granted a loan of Rs. 20 crores to RSIL. Thereafter, RSIL defaulted in repaying its outstanding liability and had accumulated significant debt. Subsequently, the loans of RSIL were classified as SMA-2 under the JLF guidelines. The JLF stipulated the formulation of the CDR scheme for restructuring of the stressed assets of RSIL. However, pending the formation of such CDR scheme, IDFC initiated winding up proceedings of RSIL for the purpose of recovering its dues.

Central Issues

  1. Whether the JLF Guidelines have statutory force and therefore compliance with such guidelines is mandatory for the banks?
  2. Whether the right of IDFC against RSIL permitted IDFC to undertake recovery measures even though the CDR scheme for RSIL was feasible for realisation of dues?
  3. Whether the Court must admit the petition for winding up of RSIL solely on the ground that RSIL had defaulted in making payments, or whether the views and interests of the creditors of RSIL must be taken into consideration?

Ratio Decidendi

In relation to the first issue, the Bombay High Court held that the RBI is one of the watchdogs of finance and economy. The circulars, directives and guidelines are issued by the RBI, from time to time, on various moot issues and such circulars shall bind those who fall within the scope of such directives. The Court made necessary reference to certain provisions of the Banking Regulation Act, 1949 in order to highlight the legal sanctity of the RBI directives, that is to say, Section 35-A of the Act, 1949 empowers the RBI to issue directions in the interest of banking policy and as per Section 23(1) of the Banking Regulation Act, 1949, banking companies have an obligation to conform to such directions of the RBI.  It was also held that although IDFC was not a party to the Inter Creditor Agreement and Debtor Creditor Agreement, as per the CDR scheme, but that does not imply that IDFC is absolved of its obligations under the JLF guidelines which require the participation of all creditors. Further, in the event IDFC did not desire to participate in the restructuring of the loan accounts, the IDFC had the option to exit by selling their exposure to a new lender within the time limit for implementation of the corrective action plans.

In relation to the second issue, the Court held that there are three corrective action plans that are specifically provided, namely, rectification, restructuring and recovery. The action of recovery can be initiated by the lender, only if the first two options i.e. rectification and restructuring of the borrower' assets are not feasible. Thus, IDFC had an option to exercise its rights against the borrower by taking appropriate legal steps of rectification and restructuring the assets of the defaulter company. Also, the Court held that the mode of recovery should be ideally resorted to by the lender only when the first two modes are proved to be not viable. In other words, one cannot proceed for availing the recovery process simultaneously when the process of rectification and restructuring has already been initiated.

On the third issue, the Court held that "even if the debt is proved and even if the inability to pay the debt is also shown, it is not a launching pad, in all cases, for a successful winding up order." In other words, the Court held that before deciding on winding up of a company, the economic condition of the company along with the interest of all stakeholders must be taken into consideration.

The Court relied on a plethora of judgements including the ruling of the Supreme Court in the case of M/s. Madhusudan Gordhandas & Co.13 in which it has held that if there is opposition to the making of the winding up order by the creditors, the Court will consider the interests of all creditors and may decline to make the winding up order.Further, reference was made to Tata Capital Financial Services Ltd. v. Unity Infra projects Ltd. & Ors.14 in which it was held that even though there was a clear case of deemed inability of the borrower company to make payments but that does not necessarily imply that the Court is in anyway obligated to admit a winding up petition. Thus, the Court concluded the judgement in the following words:

"If 98% of the creditors in value have decided to oppose a winding up petition and have agreed to take steps to revive the respondent-company by taking corrective action plan, the petitioner who is one of the miniscule creditor of the respondent cannot be allowed to coerce the respondent for its winding up."


This article has elucidated the formal as well the informal regulatory framework in the country by means of which the creditor can realise and recover all moneys due and payable by its debtors. However, the law does not permit the creditors or lenders to spin the sword and the stick at the same time. It must be understood that mere default in the payment by the borrower would not mean that the defaulter be dealt a double or multiple blows by the lender. The position of law is that the scheme for OTS or restructuring is provided in the RBI guidelines and therefore, keeping in mind the statutory force of such guidelines, it is the statutory right of the borrower to file a proposal of OTS or restructuring, as the case may be. Also, it is only after the rejection of the OTS or restructuring proposal or non-compliance by the borrower with the terms of OTS that the bank has the right to recover its dues by enforcing the security interests, created in its favour, under the provisions of the SAFAESI Act.

Also, recently the President gave its assent to the Banking Regulation (Amendment) Ordinance, 2017 which empowers the Central Government to direct the RBI to issue directions to the banking companies to initiate insolvency resolution process under the provisions of the Code, 201615. Further, notwithstanding the power of this power of the Central Government, the RBI is vested with the power to issue all such directions, as may be required, for resolution of stressed assets16. Furthermore, the RBI has been granted the power to constitute such committees and authorities, as may be required, for the purpose of speedy and effective resolution of stressed assets.

In this context, a pertinent question arises in relation to the possibility of conflict or overlap between the formal and informal regulatory framework in the country, that is to say, which procedure will be considered superior when during the existence of a JLF and formulation of corrective action plans, an application for initiation of an insolvency resolution process is admitted by the adjudicating authority under the Code, 2016. In the view of this article, in such a situation it is highly unlikely that the creditors, who have willingly participated in the JLF for restructuring the stressed assets of the borrower company, will waste their time and economic resources in drafting and implementing a fresh resolution plan for revival of the company. It must be noted that the foundational principle of the Code, 2016 is "creditors in control" and therefore if the object is to restructure the assets of the company then the majority of the creditors will not take any decision which will lead to delayed revival of the company.

Also, in the event the remedies under the Code, 2016 is pursued by the creditors after the formation of JLF has been completed then whether the restructuring process under the Code, 2016 will be nothing more than a repetition of the process undertaken by the creditors of the JLF. At the first glance, this question seems to indicate that any repetition in the restructuring process will defeat the entire objective of the Code, 2016. However, this article is of the opinion that the legislative mandate behind the formulation of the Code, 2016 is the revival or reorganisation or liquidation, as the case may be, in a time bound manner. As already mentioned above, after the initiation of the insolvency resolution process the creditors control the fate of the company and they have to take decisions in the interest of all stakeholders within a period of one hundred and eighty days or two hundred and seventy days, as the case may. It will be in the absolute interest of the creditors to not take and decision which will delay the recovery of their dues from the corporate debtor. Above all, it is extremely counter intuitive to imagine a situation in which the creditors will take any steps and measures which may go against their interests.

Another pertinent concern is that whether the provisions of the Banking Regulation (Amendment) Ordinance, 2017 does more harm than good keeping in mind extensive powers granted to the Central Government and the RBI to deal with the specific cases of default and arm twist the defaulters. Further, it appears that the problem of stressed assets and debt ridden companies will not be solved unless the remedies and the measures of the Code, 2016 are implemented in an effective and time bound manner. Also, it must be remembered that the Code, 2016 is a nascent stage and there is a dire need for more dedicated tribunals to fast-track the insolvency matters. Thus, what remains to be seen is how will the different wings of the Government, namely, the legislature, executive and judiciary bring much clarity with regards to the different regulatory frameworks existing in the country to avoid any kind of possible conflict or overlap. 


1. Company Petition No. 570 of 2016, Company Application No. 455 of 2016 in Company Petition No. 570 of 2016 and Company Application No. 470 of 2016 in Company Petition No. 570 of 2016, decided on 14th February, 2017





6. Company Petition No. 570 of 2016, Company Application No. 455 of 2016 in Company Petition No. 570 of 2016 and Company Application No. 470 of 2016 in Company Petition No. 570 of 2016, decided on 14th February, 2017

7. Sudhir Shantilal Mehta v. Central Bureau of Investigation (2009) 8 SCC 1

8. (2002) 1 SCC 367

9. AIR 2010 SC 218

10. Sardar Associates v. Punjab and Sind Bank   AIR 2010 SC 218

11. III (2012) BC 573 (DB) (Andhra)

12. Civil Misc Writ Petition No. 65260 of 2014 decided on 8-12-2014

13. 1971 (3) SCC 632

14. (2015) SCC 3597

15. Section 35AA of the Banking Regulation (Amendment) Ordinance, 2017

16. Section 35AB (1) of the Banking Regulation (Amendment) Ordinance, 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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