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ASSET RECONSTRUCTION COMPANIESAS A RESOLUTION APPLICANT

Author: Somasundararajan B, IV year of BBA LLB ( Corporate Hons) from University of Petroleum and Energy Studies - School of Law


Abstract

Asset Reconstruction companies (Also Known as ARCs) stepped its feet in the banking system in 2002. The main activities of these companies are to dispose bad debts from the bank. The conditions of registration, cancellation, functions of the ARCs are enumerated under the SARFAESI Act 2002. These companies are regulated by the Reserve Bank of India and RBI has the power to issue directions, policy etc from time to time based on the needs of the financial system. ARCs shall not carry any business other than the business of securitisation or asset reconstruction or business referred to in sub-section (1) under Section 10 of Act 2002. If they want to carry any other business then prior approval from RBI is necessary. The article tries to explain, on one hand, the definition of “Resolution applicant” under Section 5(25) and section 25(2) of IBC 2016 before and after the amendment of 2018 and how the amendment though restricted the “connected person” (under 29A(j)) to act as resolution applicant but specifically excluded Scheduled Bank and ARCs registered under RBI. On the other hand, the lack of provision under SARFAESI Act which restrict ARCs to Act as Resolution Applicant. If ARCs want to undertake the activities of Resolution Applicant, then they need to get an approval of RBI under section 10 of the Act 2002. Nevertheless, the article also explains how this approval process had been burden to the ARCs and how the recent notification by RBI on October 11 2022 gave a big relief to this problem, caused due to two contradicting provisions under SARFAESI Act 2002, the requirement of approval from RBI to act as Resolution applicant, and under IBC 2016, where it categorically allowed ARCs to participate as Resolution applicant.


Introduction

Banks play a vital role in maintaining the financial economy of the country. Toprevent the banks from get affected during unforeseeable market conditions, and as a safety back up, RBI had imposed a certain rider upon the banks which they should maintain in the name of the CSR and SLR. This is also one of the primary tools to regulate the flow of money in the market. Through its lending purpose, it benefits the number of the individuals and other corporate applicants in their hard financial crises. [1]When these banks and financial institutions are burden with the non-performing asset which bane to the development of Indian economy, ARCs known as Asset Reconstruction companies stepped its feet in the banking system in 2002. The main activities of these companies are to dispose the bad debts from the bank. The conditions of registration, cancellation, functions of the ARCs are enumerated under the SARFAESI Act 2002. These companies are regulated by the Reserve Bank of India, which has the power to issue directions, policy etc from time to time based on the needs of the financial system. The discussion tries to accumulate how the dichotomous definition of “Resolution applicant” under IBC 2016 got amended to include the ARCs as Resolution applicant and how lack of provision under SARFAISE Act 2002 for the same, left the decision-making power withRBI. Nevertheless, the discussion also portrays the recent RBI guidelines which struct down the rider that ARCsneed approval from RBI to undertake activities of Resolution Applicant.


Resolution applicant Under IBC

1.Dichotomous definition

The term Resolution Applicant is defined under [2]section 5(25) of the code 2016. The definition for Resolution applicant provided under this code before the amendment act 2018 read as – “Any person who submits a resolution plan to the resolution professional.” As per the above definition, any person willing to submit a resolution plan has the freedom to do so. On the other side of coin, under [3]section 25(2)(h), the resolution professional has the duty to invite prospective lenders, investors an any other persons to put forward resolution plans. The above two different interpretation was totally controversial and raises the question as to who can be a resolution applicant.

2. Reshaped Definition

The solution with respect to the above confusion found its way from the amendment act 2018 of the Code 2016. After this amendment a clear definition with respect to the Resolution applicant under Section 5(25) and section 25(2)(h) was incorporated.Nevertheless, the amendment act 2018 also inserted [4]section 29A which categorically provides the ground to accept the eligible resolution applicant to avoid the unnecessary bidders and time -consuming process. [5]This also helps to filter only the eligible and genuine bidders fromsubmittinga resolution plan. Another pragmatic benefit of this amendment is that, it excluded a Scheduled bank, Asset Reconstruction Company (ARC) registered under RBI from the prohibition against the connected person to function as Resolution applicant under IBC. This paved the way for the ARCs to function as the Resolution Applicant and tosubmit the Resolution Plan without bar under IBC.


Working Review and Suggestion of ARCs

The Reserve of Bank of India constituted a committee on April 19, 2021, of five members under the chairperson of Sir. Sudarshan Sen to undertake the comprehensive review of the working of ARCs and to recommend suitable measures for enabling them to function in a more transparent and efficient manner. [6]The Aforesaid committee submitted its report on September 2021.

The committee’s report evaluated the entire working nature of the ARCs and some of the notable suggestion with respect to the ARCs as resolution applicant are as follows:

a) The definition of security creditor which allows only such creditors under section 2(1) (zd) in whose favour the security interest is created by the borrower to “in whose favour security interest is created by any borrower for due repayment of any financial assistance or transferred pursuant to assignment, transfer, transmission, etc. of any financial assistance.” This entitled the right to Asset Reconstruction company to enforce the security interest to whom the security debt is assigned, under section 13 of the Act 2002.


b) To allow ARCs to act as Resolution Applicant either through the Security Receipt (SR) Trust or Alternative Investment Fund (AIF) sponsored by ARCs with the rider that Asset under management(AUM) acquired by ARCs through the AIF and IBC shall not exceed any time by the AUM acquired through the SR issuance.


ARCs as Resolution applicant

1. RBI ruled ARCs

The Reserve Bank of India under [7]Section 10 of SARFAESI Act 2002 describe the function of ARCs which it can undertake. ARCs need the approval of the RBI if it wants to undertake any other function not specified under the said section.[8]Section 9 of the above said act 2002 also talks about the measure that the ARCS can adopt for the purpose of the Asset reconstruction company. The lay-behind under SARFAESI Act 2002 was that, both these sections neither specify nor grant any power for ARCs to perform as Resolution Applicant. So, if ARCs want to participate as Resolution Applicant, then they need to get an approval from RBI. Most of the times, RBI rejected the Application made by ARCs for the approval to act as Resolution Applicant on various Reasons.


2. Amendment By RBI

The only reason RBI disapproved the request from ARCs to act as Resolution Applicant was to prevent deviation ofthe companies from their primary activities. The purpose for which the ARCs are created is to clear the stressed Debt from Bank and for the Purpose of Recovery and not for the purpose for resolving insolvency. The committee reviewed the working of ARCs also pointed out that performance of ARCs during the FY 2004- FY 2013 has been lacklustre both in the terms of recovery and revival of business. So, the committee recommended ARCs to act as resolution applicant through the Security Receipt Trust or Alternative Investment Fund.


But Based on the Recommendation received from the committee and problems faced by the ARCs because of not allowing them to participate as the Resolution applicant, [9]RBI vide its Notification on 11th October 2022 allowed the ARCs to undertake the activities of Resolution Applicant directly,without the approval of RBI, if certain prerequisites are fulfilled as per the notification. The following are the conditions notified by RBI.

i) The ARC shall have the minimum Net owned fund of Rs 1 crore.

ii) For taking the role of Resolution applicant, ARC needs to get the approval of the Board of Directors and the chair of the Board will be the Independent Director.

iii) For the submission of resolution plan under IBC, the approval of committee constituted with Majority of independent Directors will be followed.

iv) Once the Resolution plan submitted by ARC is approved by the Adjudicating authority then the company shall not have any control or influence over the corporate debtor from the date of approval. If the company does so, it will lose its right to participate as resolution applicant or co- applicant under IBC.

v) Implementation of the status of approved Resolution plan needs to be recorded on Quarterly Basis in their Financial statements.


Conclusion

The subsisted [10]conflict between the SARFAISE Act 2002i.e.Where it categorically allowed ARCs to participate as Resolution applicant and IBC 2016 i.e.,where it required prior approval from RBI to act as Resolution applicant came an end, with this much awaited notification from the RBI. Though Supreme court cited IBC will prevail over the SARFAISE Act due to its overriding provision under section 238, the absence of provision under Act 2002 made RBI to reject the proposal of the ARC to undertake the activities of Resolution Applicant. The disapproval of UV Asset Reconstruction Company to acquire the shares of the corporate applicant and notice by RBI for the violation of section 10 under Act 2002 paved way to review the system. After releasing the notification, [11]RBI also pointed out that majority of the ARCs doesn’t fulfil the criteria mentioned in the notification to act as Resolution applicant so, it will not be an additional burden to the bidders for the resolution plan and the only motive is to allow the genuine bidders for better resolution plan. Though the recent notification will reduce the burden of courts and tribunals dealing with this issue, absence of clear indication when this notification will come into force either retrospectively or prospectively does not make change.The RBI while enforcing this notification shall take into consideration of the number of cases pending in the judiciary and how the ARCs right will be affected if it enforced suddenly without proper time gap to adapt them with this condition. Because, many of the ARCs conducting business in India doesn’t fulfil the primary criteria of Rs 1 crore Net owned Fund to act as Resolution Applicant but, whose Resolution Plans are already approved under IBC and cases are pending in the courts and Tribunals due to the disapproval from RBI. To protect the interest of these ARCs, the RBI should come up with the proper guidelines.

[1]Financial Institutions, ‘ARCs in India : A Study of Their Business Operations and Role in NPA Resolution *’ 157. [2]‘IBC Laws - Section 5 of IBC – Insolvency and Bankruptcy Code, 2016 : Definitions under Part-II’ <https://ibclaw.in/section-5-definitions-under-part-ii-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sections/> accessed 20 October 2022. [3]‘IBC Laws - Section 25 of IBC – Insolvency and Bankruptcy Code, 2016 : Duties of Resolution Professional’ <https://ibclaw.in/section-25-duties-of-resolution-professional/> accessed 20 October 2022. [4]‘IBC Laws - Section 29A of IBC – Insolvency and Bankruptcy Code, 2016 : Persons Not Eligible to Be Resolution Applicant’ <https://ibclaw.in/section-29a-persons-not-eligible-to-be-resolution-applicant/> accessed 20 October 2022. [5]‘SUPREMO AMICUS VOLUME 9 SUBMISSION OF RESOLUTION PLAN UNDER THE CURRENT INSOLVENCY REGIME OF INDIA : AN ANALYSIS OF SECTION 29 OF THE INSOLVENCY AND BANKRUPTCY CODE ( AMENDMENT ) ACT , 2018 By Shambhavi Shekhar & Prateek Kumar ISSN : 2456-9704 Critically ’. [6]‘Report of the Committee to Review the Working of Asset Reconstruction Companies Reserve Bank of India’. [7]‘IBC Laws - Section 10 of SARFAESI Act, 2002: Other Functions of Asset Reconstruction Company’ <https://ibclaw.in/section-10-other-functions-of-1asset-reconstruction-company/> accessed 20 October 2022. [8]‘IBC Laws - Section 9 of SARFAESI Act, 2002: Measures for Assets Reconstruction’ <https://ibclaw.in/section-9-measures-for-assets-reconstruction/> accessed 20 October 2022. [9]Raj Bhala, ‘Reserve Bank of India’ [2018] Research Handbook on Central Banking 68. [10]ibid. [11]ibid.

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