Prior to the advent of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB&FI Act), now known as Recovery of Debts and Bankruptcy Act (‘RDB Act'), the only remedy available to a creditor was to approach a civil court for recovery of its dues and for enforcement of security. Such civil proceedings were either in the nature of an ordinary suit or a summary suit or a mortgage suit, as the case maybe. With an ever increasing burden of cases before the civil courts, a need was felt to introduce a law that would come to the rescue of Banks and Financial Institutions to ensure disposal of lenders' cases expeditiously by a Tribunal exclusively dealing with such matters. The Narasimham Committee deemed it essential to introduce and formulate specialized Tribunals for recoveries of debts due to Banks and Financial Institutions. The Committee recommended that establishment of specialized Tribunals is vital to the successful implementation of the financial sector reforms. The Narasimham Committee Report was further strengthened by the recommendations made by the Tiwari Committee Report, which also recommended the establishment of specialized Tribunals. In view of the aforementioned reports, the RDDB&FI Act was promulgated in the year 1993.
The RDDB&FI Act was introduced as a measure for expeditious adjudication and recovery of debts due to Banks and Financial Institutions. With the introduction of the said Act, it was believed that the huge pendency of the cases filed on behalf of Banks and Financial Institutions will be tackled effectively. It was also assumed that secured creditors will be able to realize their debts by sale of assets charged by the Borrowers to the Banks and Financial Institutions. However, soon it was realized by the law-makers that the RDDB&FI Act did not prove to be very useful for the secured creditors in so far as taking over physical possession of a mortgaged asset and its sale, were not specifically provided for in the RDDB&FI Act. The procedure to be adopted for possession and sale of a secured asset related back to the provisions of the Transfer of Property Act, 18821 (‘TPA') and thus, did not aid the cause of the secured creditors.
Accordingly, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act') came to be introduced. The SARFAESI Act aimed at providing measures to Banks and Financial Institutions to take over the possession and management of a secured asset without intervention of a court of law. The provisions of the SARFAESI Act aimed at realizing long-term assets, manage problem of liquidity, asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell the same and to reduce non-performing assets by adopting measures for recovery or reconstruction.
As the SARFAESI Act came for the direct benefit of the secured creditor, the vires of the Act came to be challenged2 on the grounds that the Act allows the Banks/ Financial Institutions to act in an arbitrary and unfair manner. However, the Hon'ble Supreme Court of India upheld the validity of the SARFAESI Act and explained that the Act provides for issuance of a statutory notice3 which provides for a time frame to the borrower/ guarantor to respond and raise objections to the measures proposed by the Bank/ Financial Institution. The Supreme Court also observed that it is mandatory for a Bank/ Financial Institution to deal4 with the response/ objections of the borrower/ guarantor before proceeding ahead. Thus, a borrower/ guarantor gets reasonable opportunity to raise objections. Further, Section 17 of the SARFAESI Act also empowers a borrower/ guarantor/ any other aggrieved person to approach the concerned DRT challenging the action of the Bank/ Financial Institution. Thus, there is no scope of arbitrariness. The Supreme Court also held that classification of an account as a non-performing asset is not on the whims and fancies of the Bank/ Financial Institution and that there is a proper mechanism in place for the same.
In view of the aforementioned scenario and law, it became abundantly clear that for a Bank/ Financial Institution there are two mechanisms - Firstly, by way of initiating proceedings for adjudication of debt and recovery of debt under the provisions of the RDDB&FI Act and secondly, by way of enforcing the security interest under the provisions of the SARFAESI Act. With the availability of these two measures came another question, i.e., whether a Bank/Financial Institution could take measures under the provision of both the Acts simultaneously. The issue was answered by the Hon'ble Supreme Court in the affirmative5. Thus, it can be easily stated that a secured creditor could initiate action under both the Acts simultaneously if it deemed necessary.
With a change in circumstances and with surmounting debts by various companies and individuals, the need was again felt for a law that could 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 asset values of such persons and to promote entrepreneurship. Accordingly, the Insolvency and Bankruptcy Code, 2016 (IBC) was introduced.
The IBC is based on the premise that any creditor6 to whom a debt is due by a Corporate Person can initiate a Corporate Insolvency Resolution Process (‘CIRP') against such Debtor by filing an appropriate Application/ Petition. In the present article we will be dealing with the provisions of IBC that relate to the Corporate Debtor alone as certain provisions relating to personal insolvency are yet to be notified. A secured creditor has been defined7 to include a creditor in favour of whom a security interest is created. A question that may come to one's mind is that what would be a right of a secured creditor in case of initiation of a CIRP.
Firstly, it is imperative to point out that on initiation of CIRP, an Interim Resolution Professional (‘IRP') takes over the management and control over the assets of the Corporate Debtor. Subsequently, with the consent of the Committee of Creditors (‘CoC'), IRP may be appointed as a Resolution Professional (‘RP'). Now it becomes the duty of RP to manage the affairs of a Corporate Debtor as a going concern. The RP is duty bound to call for Resolution Plans which get approved after a consensus of not less than 66 percent of the CoC members. If a Resolution Plan gets approved (firstly by CoC and thereafter by the Adjudicating Authority), the terms of the said Plan will be implemented. The secured creditor or any other creditor will be paid only as per the approved terms of the Resolution Plan as provided under Section 53 of IBC. However, in case no Resolution Plan gets approved, the ultimate result is liquidation.
During the process of liquidation of a Corporate Debtor, it is the right of a secured creditor to either relinquish its rights towards the security interest or to realise its security interest in a manner prescribed.8 In the event, a secured creditor relinquishes its security interest, the said asset would form part of the Liquidation Estate and the proceeds thereof will be distributed as per law. However, if a secured creditor retains its right to realize its security interest, it will be incumbent on the secured creditor to prove to the satisfaction of the liquidator its security interest and only that portion will be allowed to be sold on which the secured creditor proves its claim.9 In case, a secured creditor does not inform the liquidator about its intention to realize the security interest within a period of 30 days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate10. Further, the secured creditor would also be required to pay to the liquidator within 90 days the amount of its share for the Insolvency Resolution Process Cost and liquidation cost11
It is also the duty of the secured creditor who has proceeded to enforce its security interest to pay to the liquidator the amounts received in excess of its admitted claim12 within 180 days from the liquidation commencement date.13 It is also pertinent to point out here that IBC provides for enforcement of security interest by only one secured creditor over the asset. After enforcement of right by one secured creditor, no other secured creditor can enforce its rights subsequently for realization of the amount for the same secured assets, as the excess amount is deposited with the liquidator14. Thus, from the aforementioned, it is amply clear that a special recognition is accorded to a secured creditor under the provisions of IBC and opportunity (in case of liquidation) is afforded to the secured creditor to enforce its security interest. However, the same is not without fetters.
Having explained the rights of a secured creditor under the provisions of IBC, it would also not be impertinent to mention that the process provided under IBC is not for recovery of debt or for enforcement of security interest but for resolution of insolvency. However, it would also not be out of place to mention that laws including IBC recognize the importance of a security interest and thus, efforts have been made by the legislature to give recognition to the rights of a secured creditor to enforce a security interest, whether the same is done under the provisions of the SARFAESI Act or under IBC.
1. Chapter IV, Transfer of Property Act, 1882
2.Mardia Chemicals Ltd v. Union of India, AIR 2004 SC2371
3. Section 13(2) of the SARFAESI Act.
4. Section 13(3-A) of the SARFAESI Act.
6. Section 3(10) of IBC defines creditors to include both secured creditors and unsecured creditors.
7. Section 3(30) of IBC
8. Section 52 of IBC
10. Regulation 21 A (1) of Insolvency and Bankruptcy Board Of India (Liquidation Process) Regulations, 20161 Amended Upto 24-04-2020.
11. Section 21A(2) (a) of Insolvency and Bankruptcy Board Of India (Liquidation Process) Regulations, 20161 Amended Upto 24-04-2020.
12. JM Financial Asset Reconstruction Company Ltd v. Finquest Financial Solutions Pvt. Ltd & Ors Company Appeal (AT) (Insolvency) No.593 of 2019 decided on 11.12.2019
13. Section 21A(2) (b) of Insolvency and Bankruptcy Board Of India (Liquidation Process) Regulations, 20161 Amended Upto 24-04-2020.
14. Supra Note 12
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