ARTICLE
21 August 2023

Do Asset Reconstruction Companies Require Prior Approval Of The RBI To Become Resolution Applicants Under The Insolvency Code?

AL
AB Legal

Contributor

The debt-ridden economy of India found a worthy messiah, when upon the recommendation of the 2nd Report of the Committee on Banking Sector Reforms circa 1998 (Narasimham Committee II), Asset
India Corporate/Commercial Law

The debt-ridden economy of India found a worthy messiah, when upon the recommendation of the 2nd Report of the Committee on Banking Sector Reforms circa 1998 (Narasimham Committee II), Asset Reconstruction Companies (ARCs) were set up1. In a nutshell, these ARCs take over Non-Performing Assets (NPAs). That is to say, NPAs and bad debts, in general, are alleviated from the balance sheets of Banks and Financial Institutions at a discount and then it is upon the ARCs to bind themselves to the arduous task of recovering them.

However, as times have progressed, so has the landscape of debt and recovery. With the inception of the Insolvency and Bankruptcy Code, 2016 (IBC/Code), recovery has been ditched for resolution2. Naturally, ARCs would also wish to partake in the same. Under the working mechanism of the IBC, ARCs have been given an inherent green light to enlist themselves as Resolution Applicants and Co-Resolution Applicants under Section 29A3. That being said, herein lies a major conflict.

Reserve Bank of India v. IBC

Finding their existence in Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act/Act), ARCs have to be registered with the Reserve Bank of India (RBI)4, who shall also stand as their regulator. Now, the conflict arises out of Section 10(2) of the Act. It reads as follows,

"(2) Save as otherwise provided in sub-section (1), no [asset reconstruction company] which has been granted a certificate of registration under sub-section (4) of section 3, shall commence or carry on, without prior approval of the Reserve Bank, any business other than that of securitisation or asset reconstruction."

If seen from the point of view of the SARFAESI Act, if the RBI's approval is not sought or not obtained, Section 29A becomes inoperable. Similarly, on the other hand, if Section 29A of the Code is to be implemented, it renders Section 10(2) of the Act as moot inasmuch as the IBC is concerned. From a perusal of the above, it is clear to see that Section 29A of the Code and Section 10(2) of the Act are both at loggerheads with each other. The question that beckons is; which prevails?

NCLAT settles the law

In a landmark judgment delivered by the Hon'ble National Company Law Appellate Tribunal's Chennai Bench in Puissant Towers India Pvt. Ltd v. Neueon Towers Limited & Ors.,5 vide order dated 12.06.2023, the Hon'ble Appellate Authority attempted to bury this proposition once and for all.

The brief facts of the matter are as follows:

The CoC-approved Resolution Plan was put before the Hon'ble National Company Law Tribunal, Hyderabad Bench. In furtherance of the plan, M/s. Invent Assets Securitization and Reconstruction Private Limited was to be a non-equity holding Resolution Co-Applicant. However, the Resolution Plan was rejected by the Hon'ble Tribunal by holding that,

"10. In the instant case before us, M/s Invent Assets Securitisation & Reconstruction Private Limited cannot submit resolution plan as co-Applicant along with M/s Longview Resources (HK) Limited Hong Kong, without the prior approval of RBI under Section 10 (2) of SARFAESI Act. Therefore, we are of the view that prima facie even though the entry point under Section 29A is satisfied, the Successful Resolution Applicant has to satisfy that they are capable of submitting the resolution plan, without the prior permission of the RBI as contemplated under the law. We hold that the Resolution Plan is in contravention of Section 30 (2)(e) of I&B Code, 2016.

***

  1. We also feel the resolution plan submitted by the CoC before the Adjudicating Authority has become a conditional resolution plan subject to the approval of RBI as Regulator of ARCs. As such, we are not inclined to consider such conditional resolution plan for resolution of the Corporate Debtor."

The matter was then preferred in an appeal before the Hon'ble Appellate Tribunal. In its infinite wisdom, the Hon'ble Appellate Tribunal opined that Section 238 of the Code shall have an overriding effect on any law in force for the time being which is inconsistent with the Code. Section 238 reads,

"238. Provisions of this Code to override other laws. -

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

And hence, the Hon'ble Appellate Tribunal directed the Adjudicating Authority to approve the Resolution Plan. Another fact that nudged the Hon'ble Appellate Tribunal towards this decision were the submissions of the Counsel for RBI. As per the RBI, an ARC does not require the prior approval of the RBI to participate as a 'Resolution Co-Applicant'. The submissions on behalf of RBI in this instant matter are of huge importance.

RBI's Review of Regulatory Framework for Asset Reconstruction Companies

On 11.10.2022, RBI released their Review of Regulatory Framework for Asset Reconstruction Companies (ARCs)6. Through this notification, inter alia it was promulgated that ARCs are henceforth allowed to "undertake those activities as a Resolution Applicant (RA) under IBC which are not specifically allowed under the SARFAESI Act." However, such allowance is conditional, that is to say, seven conditions must be fulfilled so as to come within the ambit of the notification. These are, inter alia a minimum net owned fund (NOF) of Rs. 1000 Crores, Board-approved policies for taking up such a role, and a promise to relinquish control over the Corporate Debtor after five years from the approval of the Resolution Plan. Hence, giving ARCs a conditional suo moto approval as opposed to blanket permission given under the Code.

The pertinent question this puts forth is whether the decision in Puissant Towers (Supra) renders RBI's notification as struck out to the extent it talks about ARCs as Resolution Applicants.

RBI muddies the legislative waters even further

The ratio employed by the Hon'ble Appellate Tribunal while allowing the Resolution Plan in this matter is two-fold. Firstly, the RBI has come on record to suggest that ARCs need not approach the Central Bank for prior approval. Secondly, it was adjudged that Section 238 of the Code would override Section 10(2) of the Act insofar as it was inconsistent with the Code apropos the requirement of approval. The latter of the two is what becomes the focal point of this discussion. It is a settled position of law as expounded in various matters such as Pr. Commissioner of Income Tax vs Monnet Ispat and Energy Ltd.7 and Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Anr.8 that Section 238 of the Code shall have an overriding effect on any other law that is inconsistent and/or contrary to the Code. At this juncture, therefore, we must evaluate the relevant paras of RBI's notification against the test laid down in the aforesaid orders.

On the one hand, it can be argued that while Section 29A of the Code allows ARCs to become Resolution Applicants, RBI's notification helps facilitate it while performing its duties and functions are a regulator. That is to say, the notification isn't contrary as much as it is supplemental to Section 29A of the Code. On the other hand, however, the Rs. 1000 Crores NOF entry barrier may seem conflicting with the Code given that no such restriction has been placed in the Code itself. While under Section 29A any ARC can apply to become a Resolution Applicant, the pecuniary restriction imposed under the RBI notification can be found to be in contrast and conflict with the Code. Thus, liable to be overridden. That being said, applying this ratio, it cannot be said that the post-acceptance compliances as envisaged in the notification deserves the same fate.

Conclusion

ARCs form a very integral part of the debt-recovery ecosystem in India. However, with the genesis and prevalence of the latest Insolvency regime, it became pertinent for these entities to delve into the realms of the CIRP. The Code in itself provides for such an outlet, however, with the RBI being the primary regulator of these ARCs, legislative conflicts have arisen. The order of the Hon'ble NCLAT to an extent has clarified the law and the RBI notification should have substantiated such clarity. But in reality, it has posed more questions than it has answered. Thereby, the current requirement is to have a further clarity, in light of the aforesaid notification, to pave a stronger way for letting the ARCs into the process of IBC as Resolution Applicants, which we might observe with upcoming judicial pronouncements.

Footnotes

1. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf

2.https://cdn.ibclaw.online/insolvency/nclat/2023/Yash+Nachrani+Director+of+suspended+Board+of+Directors+Coppertun+Brewing+Pvt.+Ltd.+Vs.+Pardesi+Construction+Pvt.+Ltd.+-+13.03.2023+NCLAT+New+Delhi.pdf

3. https://ibclaw.in/section-29a-persons-not-eligible-to-be-resolution-applicant/

4. https://ibclaw.in/section-3-registration-of-securitisation-companies-or-reconstruction-companies/

5. [Company Appeal (AT) (CH) (Ins) No. 181/2022].

6. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/ARCS3AD8FB7FBDE1424EB0962073C2A2912C.PDF

7. [SLA (C) No. 6483 of 2018]

8. [C.A. (AT) (Ins) No. 428 of 2018]

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