Recovery of Non-performing Assets (Hereinafter referred to as 'NPA') is one
of the most critical components of development in a burgeoning economy,
especially one recuperating from the effects of a pandemic. Mounting bad debts
discourage a steady flow of credit in the economy and as more and more financial
institutions crumble under the load of failed recoveries, India's legal
framework tries its best to keep up. Introduction of the Insolvency and
Bankruptcy Code, 2016 (Hereinafter referred to as IBC or the Code) propelled
India from a rank of 142 in 2014 to a 63 in 2019 in World Bank's Doing Business
reports. Since its inception in 2016, it saw a steadfast recovery of 44% of bad
debts as compared to the combined recovery of 24% from Debt Recovery Tribunals,
SARFAESI Act, 2002, and Lok Adalats, in the financial years, 2018-2020.
IBC was introduced as a means of amalgamation of all the legislations scattered
across different statues and in an attempt to introduce speedy recovery of NPAs
and despondent financial institutions. Even though the Code faced an impediment
in the form of COVID-19, when fillings were deferred from 25th March 2020, it
managed to bounce back in no time.
Reserve Bank of India Governor Shaktikanta Das has also been noted praising the
Code, saying that recoveries under the IBC had been far greater than those via
other debt recovery mechanisms. It can be said with no doubt that IBC has
launched India to the forefront for potential financial investments. However,
what has the IBC done differently that its predecessors failed to do?
Failures of the SARFAESI over the IBC
Before the IBC came into force the SARFAESI Act was one of the major instruments
of financial asset reconstruction. While both the IBC and the SARFAESI are
geared towards recovering bad debts by analyzing the assets of a debtor, IBC
deals with companies as a going concern as opposed to the SARFAESI which is more
concerned with liquidating the assets of the debtor to recover debts.
Even though the RBI has tried to formulate schemes to revive defaulting
companies, most of them were unsuccessful and financial distress due to
increasing non-performing assets was a common scenario before the advent of the
code. There was a lack of proper insolvency law and the process of winding up of
companies was tedious.
Due to such insufficiency, most of the defaulting companies would end up filing
winding-up petitions. After which there were two solutions left to the secured
creditors; to either enforce their securities under the SARFAESI Act after a
long winding-up process or relinquish their securities and anticipate payment
after the liquidation of the company's assets, alongside a long list of
Even though it was in the best interests of the banks and other financial
institutions to revive or restructure a distressed debtor as opposed to winding
up, there was very limited scope to do the same.
After its introduction in 2016, creditors have time and again preferred IBC over
the SARFAESI Act. Even after the amendments to the SARFAESI Act, several
shortcomings persist. Furthermore, the Act has failed to exhibit its viability
in numbers. In the fiscal year 2018-19, recoveries made under the SARFAESI Act
were just 14.5 percent, while it was a whopping 42.4 percent under the IBC,
which is considerably higher than the former. Moreover, the SARFAESI Act
continues to have a problem of pending proceedings. Even though IBC faced a
sudden backlog of cases when filings were suspended last year due to the ongoing
pandemic, there is an expected rise in its operation since proceedings were
resumed in March 2021.
It is very evident that the legislators also bestow a great deal of importance
to the code, apart from the lenders. This can be concluded from the existence of
a non-obstante clause. The application of the clause gives preference to the IBC
over the SARFAESI, or as a matter of fact any other law, in cases where
proceedings under both have been instituted simultaneously.
This inclination of adjudicating authorities towards the code can be observed in
numerous cases. It was held in Rakesh Kumar Gupta v. Mahesh Bansal, that pending
proceedings under the SARFAESI cannot impede proceedings initiated by financial
creditors under the IBC. The non-obstante clause allows for the initiation of
fresh proceedings under the code even when proceedings are ongoing under the
SARFAESI. Thus, there is a clear prevalence of the IBC over any other laws of
the same essence.
Reference can be drawn from the landmark case of Encore Asset Reconstruction
Company Pvt. Ltd v. Ms. Charu Sandeep Desai
to prove this preference of IBC
over other debt recovery laws. The corporate debtor had secured a loan from Dena
Bank, in 2011, by mortgaging property and when proceedings were instituted under
the SARFAESI Act on subsequent default, the property was seized by the bank.
Fresh proceedings were instituted under IBC after the enactment of the act and
consequently, a moratorium was declared under the code.
Dena Bank approached the NCLT to prevent the resolution professional from taking
control of the property which was already under their possession owing to
previously instituted proceedings under SARFAESI. Learned counsel for the bank
argued that in light of the judgment in Transcore v. Union of India, all rights
in the property stay vested with them as they were already in possession of the
same. It was held, an Interim Resolution Professional is bound to take custody
of the property in dispute, under section 18 of the code.
The appellants further appealed to NCLAT which upheld the judgment of the
NCLT:Decision in M/s. Transcore v. Union of India & Anr.
was rendered in the
year 2008 when the 'I&B Code' was not in existence. The 'I&B Code' came into
force w.e.f. 1st December, 2016… 'SARFAESI Act, 2002' being an existing law,
Section 238 of the 'I&B Code' will prevail over any of the provisions of the 'SARFAESI
Act, 2002' if it is inconsistent with any of the provisions of the 'I&B Code'.
Recovery of non-performing assets is at the forefront of both the legislations
due to which they have often come into conflict. Even though the existence of a
non-obstante clause indicates a clear-cut preference of IBC, at times the two
laws are in dispute due to regulatory gaps and overlaps. A lack of proper
consonance between the two often leads to such problems. One such scenario is UV
Asset Reconstruction's acquirement of Aircel's assets.
RBI has recently rejected a resolution plan submitted by the Asset
reconstruction company (ARC) under the acumen of not adhering to SARFAESI
guidelines, although the same was approved by the NCLT. While the SARFAESI
discourages ARCs to submit resolution plans, section 29A of the IBC permits the
same and. The enactment of the section succeeds SARFAESI guidelines and as such
should prevail. Thus, RBI's disregard for the non-obstante clause causes
confusion and disrupts precedence.
But, regardless of minor uncertainties, IBC has always emerged victorious. Even
though the IBC is fairly new and possesses challenges faced by any new
legislation, it is still quite fast in its workings. Therefore, the IBC is
preferred over the SARFAESI Act, basically on the grounds that it offers a
speedy recovery and is additionally compelling in managing debt and defending
the interests of all creditors.
Recent developments in IBC promise efficiency and a boom in the recovery of
non-performing assets. With the introduction of the Pre-packaged Insolvency
Resolution Process (PIRP) in the Insolvency and Bankruptcy Code (Amendment)
Bill, 2021, legislators plan to combat one of the biggest challenges posed by
the Corporate Insolvency Resolution Process. The prolonged resolution process
and drawn-out litigation by promoters and bidders had made around 79 percent of
the ongoing 1723 insolvency resolution proceedings cross the 270-day mark.
The pre-pack resolutions will limit itself to 120 days only, with strictly 90
days for bringing a resolution plan for approval to the NCLT. Apart from this,
another factor that contributes to the efficiency of the PIRP is that it permits
existing management to maintain control instead of appointing resolution
professionals, as in the case of CIRP. PIRP aims to provide quick resolution for
distressed debtors and reduce the burden of NPAs on the economy.
One of the primary objectives of an effective debt recovery law is to provide a
range of tools to help enterprises address different stages of financial
distress. In particular, a debt recovery law should allow plenty of room for the
restructuring of viable businesses and exit of non-viable businesses. The IBC
provides such a framework with a time-bound mechanism for restructuring
companies through a CIRP or exiting the market through a liquidation process. It
has been an important legislative reform that has reduced India's financial
distress by reducing NPAs, helped strengthen its' insolvency regime, and
increased overall recovery for creditors.
The COVID-19 pandemic is expected to have far-reaching and destabilizing effects
on businesses. Forecasts predict large numbers of business failures globally,
particularly small businesses, and insolvency regimes need to be equipped to
rapidly restructure viable businesses and liquidate non-viable ones.
In a very short time, the IBC has made great strides in providing a predictable
framework that aims to provide timely, efficient, and impartial resolution of
viable businesses and a transparent liquidation process, which recognizes
existing creditor rights and respects the priority of claims.