CHECKLIST FOR ACTION UNDER SARFAESI ACT

CHECKLIST FOR ACTION UNDER SARFAESI ACT

 

Authorized Officer who is given the statutory power has to exercise higher degree of caution and care in following the prescription law while taking action under the Act. Taking action in any other manner than the prescription is not permissible in law. This cardinal principle is covered by Latin Maxim “expressio unius est exclusio alterius”. This is followed by Supreme Court and High Courts as can be seen from catena of judgments. The Authorised Officer may follow the check list for initiating the action. That any error or omission on the part of the authorized officer, makes the action of the bank liable to be striked down by DRT under Section 17 of the The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

 

Sl.N.STAGE WISE ACTIONSUGGESTION/ADVISE
1Sarfaesi Act  poroceeds on the basis that borrower created security interest in favour of bank and his liability stood crystalised on account of his default and his account is classified as NPASec.13(2): Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under subsection(4)
1Initiation of action begins on service of demand noticeThe opinion Supreme Courtin Mardia Chemicals Ltd. &Anr. Vs. Union of India &Ors.:AIR 2004 (4) SCC 311)that the demand notice is show cause is clarified by Supreme Court in (Transcore Vs. Union of India &Anr. AIR 2007 SC 712) as initiation of action
2How to calculate the quantum of claim amount in the demand noticePlease ensure that, the balance outstanding in the bank’s book and the un-debited portion of interest accrued but not reflected in the bank’s book (on account of status of the loan account as NPA) are added and incorporated in the demand notice. The Authorised Officer (for short “A.O.”) need not approach any Court or Tribunal for determination of the quantum of amount of claim.

 

3Demand notice and its contents:i). Please ensure that the demand notice covers all the details of the facilities granted to the borrower(s), dues and securities and measures to be taken in the event of default as stated in the guide and all the borrowers are addressed correctly as per the records.

ii). The Act or the Rules have not prescribed any format of demand notice.

4Whether action under RDDB & Fi Act 1993 or a suit/ claim already filed in civil court/drt/transferred from civil court, saves limitation for initiating action under SARFAESI ActAction under RDDB & FI Act 1993 or a suit/claim already filed in civil court/DRT/transferred from civil court, does not save limitation for taking action under SARFAESI Act.
9Whether action initiated under SARFAESI Act 2002 saves limitation for filing claim for recovery of the unrealised portion of debt.No.
10How many demand notices a secured creditor can issueThere is no bar. Any number of notices can be issued provided the security interest sought to be enforced is not barred by limitation.

 

11Res JudicataNo application. Action under the Act can be taken any number of times if the secured debt or security interest is not barred by limitation.
12Service of demand notice: Please note changes in the addresses of the borrowers if any before addressing the demand notice. Change of address of borrower(s) must be obtained in writing. Oral information is not reliable as it is construed as not born out of record. Servedemand notice as contemplated in Rule 3 of Security Interest (enforcement) Rules 2002.3(1) The service of demand notice shall be made by delivering or transmitting at the place where the borrower or his agent, empowered to accept the notice or documents on behalf of the borrower, actually and voluntarily resides or carries on business or personally works for gain, by registered post with acknowledgement due, addressed to the borrower (or his agent empowered to accept the service) or by Speed Post or by courier or by any other means of transmission of documents like fax message or electronic mail service.

 

 ii). Procedure where borrower avoids service of demand notice or for any reason notice could not be served.Proviso to Rule 3(1):Where authorised officer has reason to believe that the borrower or his agent is avoiding the service of the notice or that for any other reason, the service cannot be made as aforesaid, the service shall be effected by affixing a copy of the demand notice on the outer door or some other conspicuous part of the house or building in which the borrower or his agent ordinarily resides or carries on business or personally works for gain and also by publishing the contents of the demand notice in two leading newspapers, one in vernacular language, having sufficient circulation in that locality.

Evidence of this exercise is to be reduced to writing (record panchanama).

Preserve full page of the relevant Newspapers as the same are required in evidence.

 iii) Service of notice to wife of borrower is sufficient serviceIf borrower’s marital relationship is not judicially separated or dissolved by order of competent court
 iv). If borrower is abody corporateRule 3(2): Where the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate as specified under sub-rule (1).
 v). The manner of service of any notice Rule 3(3) of S.I.(E) RulesRule 3(3): Any other notice [i.e. Possession notice under 13(4) of SARFAESI Act or Rule 8(6) of S.I.(E) Rules] in writing to be served on the borrower or his agent by authorised officer, shall be served in the same manner as provided in Rule 3.
 See Sec.2 (2) of SARFAESI Act.According to Section 2(1)(f) of SARFAESI Act “borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by

any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance

 

According to Sec.2(2) of the Act the Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.

3Inspection of secured assetsIt is advisable to inspect the secured asset(s) and find out its/their status / situation.
4Computation of 60 daysThe date of service of the demand notice or publication of the demand notice after affixing it (as stated in the proviso to Rule 3(1) of S.I.(E) Rules) and the 60th day to be expired are to be excluded for computing the 60 days.

 

 

5Representation/Objection: against the demand notice Sec13 (3A).

 

Communication of reply is mandatory in both the events.

After service of the notice if the borrower makes any representation or objection against the demand notice the A.O. should immediately send it to the secured creditor who in turn should send a reply or advise the A.O. to communicate reply to the borrower within “fifteen days” (recent amendment substituted for one week) of receipt of such representation or objection by registered post with AD or Courier. Evidence of communication is to be preserved for evidence.

 

Representation: seeking for extension of time for payment or OTS.

Objection: Challenging the validity of the demand notice on various grounds.

6PROCEDURE FOR TAKING POSSESSION OF MOVABLE SECURED ASSETSTaking symbolic possession of movable secured assets is not permissible in law. Procedure for taking possession of movable secured assets is different from the procedure relating to the immovable secured assets.
  i). In case the secured assets are movable, the A.O. has to take possession of them in the presence of two witnesses and draw a  panchanama, as nearly as possible as given in Appendix-I [ See Rule 4(2) of S.I.(E) Rules]

(Evidence to be preserved).

 INVENTORY REPORTii). After taking possession of the movable secured assets, the A.O. has to record ‘Inventory Report’ as per Appendix–II [See Rule 4(1) of S.I.(E) Rules] and deliver it or caused to be delivered it to the borrower any person entitled to receive on behalf of borrower. In the inventory report the A.O. has to mention the name of the person appointed by him in whose custody the secured assets are preserved.
 PRESERVATIONTo take care to preserve movable secured assets which owner of ordinary prudence would take. In case of factories or stores the secured creditor has to entrust the same for custody of an authorised person or approved re-possessors / security persons.
 INSURANCE COVERA.O. has to take insurance cover if necessary until sale is completed. Comprehensive policy with a clause to pay the sum assured to the company which would discharge the insurance company against adverse claim of borrower if any.
7CIRCUMSTANCES FOR IMMEDIATE SALEThere are two circumstances for immediate sale of movable secured assets.

1.   If movable secured assets are subject to speedy or natural decay

2.   or the expense of keeping such property in custody is likely to exceed its value, the authorised officer may sell them at once.

 

(Issue sale notice but need not wait for expiry of 30 days of the sale notice).

 

AO has to record reasons if necessary by drawing a panchanama in this regard.

 

8

 

PLANT AND MACHINERY ATTACHED TO EARTHPlant and machinery should be treated as part of the immovable secured asset if they are fastened to the earth with cement and concrete as on the date of taking possession. In the possession notice (Appendix-IV) the same must be mentioned specifically giving brief description of the particulars of the machinery vide separate annexure attached to it.
 PLANT AND MACHINERY IF DETACHED FROM EARTHIf Plant and machinery are detachable from earth as on the date of taking possession then A.O. has to record ‘Inventory Report’ as per Appendix–II [See Rule 4(1) of S.I.(E) Rules] and deliver it or caused to be delivered it to the borrower any person entitled to receive on behalf of borrower. In the inventory report the A.O. has to mention the name of the person appointed by him in whose custody the secured assets are preserved.
 VALUATION OF MOVABLE SECURED ASSETSAfter taking possession under sub-rule (1) of rule 4 and in any case before sale, the authorised officer shall obtain the estimated value of the movable secured assets and thereafter, if considered necessary, fix in consultation with the secured creditor, the reserve price of the assets to he sold in realisation of the dues of the secured creditor.
8REQUIREMENTS TO MOVE CMM/DMFOR ASSISTANCE1.   Application making a request to render assistance.

2.   List with copies of documents.

3.   Affidavit disclosing all the particulars.

9PROCEDURE IN CASE OF IMMOVABLE SECURED ASSETSTake possession of immovable secured asses (whether symbolic or physical), serve possession notice (Appendix-IV) under Sec.13(4) read with Rule 8(1) and(2), obtain acknowledgment of service, affix it to secured asset and publish it in two leading newspapers(one in vernacular) having sufficient circulation in the locality.

 

  If borrower refuses to acknowledge service of the possession notice, then the AO may send it by registered post /courier and preserve evidence and the same may be recorded at the foot of the possession notice and obtain signature of two witnesses.
10VALUATION OF IMMOVABLE SECURED ASSETS BY APPROVED VALUER

 

 

 

 

Rule 8(5) of S.I.(E) Rules contemplates valuation of immovable secured assets by approved valuer before effecting sale.
11APPROVED VALUER:1.Registered under Sec.34AB

of Wealth Tax Act 1957

2.Approved by the Board of the

company.

12RESERVE PRICEValuation minus 15% or 20%

See Swastic Agency Vs. State Bank of India

 

13SALE NOTICE-PERSONAL Rule 8(6)The Authorised Officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5)

 

14SERVICE OF SALE NOTICESale notice must be served in the same manner as the demand notice and possession notice are served in the same manner as contemplated in the sub rule(1) of Rule 3 of S.I.(E) Rules 2002. See Rule 3(3) demanding the borrowers to pay the debt as demanded in the demand notice and possession notice together with interest
15PUBLICATION OF SALE NOTICEIf the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall include, –

(a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor

(a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor;

(b) the secured debt for recovery of which the property is to be sold;

(c) reserve price, below which the property may not be sold;

(d) time and place of public auction or the time after which sale by any other mode shall be completed;

(e) depositing earnest money as may be stipulated by the secured creditor;

(f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value

of the property.

16AFFIXTURE OF SALE NOTICEEvery notice of sale shall be affixed on a conspicuous part of the immovable property and may, if the authorised officer deems it fit, put on the website of the secured creditor on the Internet.

 

17SALE  BY OTHER METHODSSale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.
18SALE CANNOT BE EFFECTED BEFORE EXPIRY OF THIRTY DAYSNo sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower.

 

19IDENTIFICATION OF SUCCESSFUL BIDDERA bidder who has offered highest prize shall be identified as successful bidder and he has to deposit 25% of the bid amount immediately
20CONFIRMATION OF SALE BY SECURED CREDITORThe sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor
21SALE BELOW RESERVE PRIZENo sale shall be confirmed, if the amount offered is less than the reserve price
22PAYMENT BY BIDDER IN WHOSE FAVOUR THE BID IS CONFIRMEDThe balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the parties.
23BIDDER’S NOMINEEBidder cannot appoint nominee for obtaining sale certificate
24FORFEITURE AND RESALE OF SECURED ASSETIn default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.
25CONSENT OF BORROWERIf the authorised officer fails to obtain a price higher than the reserve price, he may, with the consent of the borrower and the secured creditor effect the sale at such price.

 

26PARTIPATION OF THE BORROWER IN THE PROCESS OF SALE AS TENDERER/BIDDERBorrower can participate as tenderer / bidder to purchase the secured asset in the process of sale
 PARTIPATION OF THE BORROWER IN THE PROCESS OF SALE AS SPECTATOR OR WITNESSBorrower cannot participate as spectator or witness in the process of sale
27SALE CRTIFICATEOn confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the Form given in Appendix V to these rules.

(Note: The sale is caused under the Act in “as it is what it is and where it is basis. Hence the S.I.(E) Rules devised the sale certificate. Sale Certificate does not contain any indemnity clause as in case of sale deed and the rule “sans recourse” is not applicable to the sale i.e. the secured creditor is not answerable for any defects in the title to the secured asset sold). The sale certificate shall be the prima facie evidence of title of the purchaser

28ENCUMBERANCESThe purchaser has to deposit the encumbrances if any in respect of the secured asset sold. Where the immovable property sold is subject to any encumbrances, the authorised officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him.
29NOTICE TO PERSONS INTERESTED IN THE AMOUNT OF (CROWN DEBTS) ENCUMBRANCESOn such deposit of money for discharge of the encumbrances, the authorised officer shall issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly
30NON PRIORITY DUESThe following are not crown debts:

1.Electricity dues

2.Custom & Excise Duty

3.Income Tax dues prior to creation of mortgage

 

31PAMENT OF SURPLUS TO THE PURCHASERProvided that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen day, from date of finalisation of the sale.

 

What went wrong with Yes Bank?

In this article we will discuss wrong with Yes Bank? We know the ongoing troubles with Yes Bank but in this article we aim to discuss the reasons behind what went wrong with Yes Bank. Yes Bank’s problems started two years ago, when the regulator forced it to disclose that nonperforming loans were $630 million more than the $113 million reported in the company’s audited accounts for the year ended in March 2016. The divergence widened to almost $1 billion a year later.

Account holders queue up outside Yes Bank to withdraw money, in Mumbai, Saturday, March 7, 2020. (Credit: PTI)

Account holders queue up outside Yes Bank to withdraw money, in Mumbai, Saturday, March 7, 2020.

The Reserve Bank of India (RBI) on March 5 placed Yes Bank under moratorium and restricted withdrawals to a maximum of Rs 50,000, sending its customers into a wave of confusion and panic.

Shares of the lender fell to its lowest on Friday, at Rs 5.65 a share, down by over 84% in intraday trading before paring losses and closing at Rs 16.15 on the NSE. Depositers queued up to withdraw their money and fintech platforms partnered with the bank suffered outages and suspended their services.

Here are some reasons behind the crisis:

1. Bad loans – wrong with Yes Bank

Yes Bank, a medium-sized private sector bank, first ran into trouble following the central’s bank’s asset quality reviews in 2017 and 2018, which led to sharp increases in its impaired loans ratio and uncovered significant governance lapses that resulted in a complete change of management.

Yes Bank, yet to report its third-quarter financials, has struggled to raise the capital that it needs to stay above regulatory requirements as it battles high levels of bad loans. It has been trying to raise more than $1 billion in fresh capital since late last year.

2. Sluggish economic sector

Indian authorities have been struggling to contain a crisis among shadow lenders, less tightly regulated lending and lending for riskier businesses, which has choked credit to consumers and small businesses, slowing economic growth to a 11-year low, according to Fitch Ratings.

“In the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors, it had no alternative” but to seize Yes Bank, the RBI said in the statement.

In its 2020 Outlook for ‘Asia-Pacific Emerging Market Banks’, Fitch maintained a negative outlook on Indian banks, based on its expectations of continued weak performance despite trends showing the trough might have passed, and ongoing capital requirements.

3. Governance issues – wrong with Yes Bank

The bank has experienced serious governance issues and practices in recent years that led to its downfall. According to a Business Today report, the bank under-reported Non-Performing Assets to the tune of Rs 3,277 crore in 2018-19.

4. Deferring regulatory restructuring -wrong with Yes Bank

Two years ago, co-promoter Rana Kapoor was asked to step down by the RBI. Despite continued poor performance, the RBI did not place the bank under the Prompt Corrective Action framework and chose to move directly to a moratorium. According to a report in The Hindu, the central bank had flagged several concerns in recent years, including a distinct divergence between the bank’s reported financials and the RBI’s findings.

5. High withdrawals

Yes Bank’s financial condition dissuaded many depositors from keeping funds in the bank over a longer term. The bank showed a steady withdrawal of deposits, burdening its balance sheet and adding to its woes. The bank had a deposit book of Rs 2.09 lakh crore at the end of September 2019.

Here are some important things to know about the Yes Bank crisis:

  1. Depositors rushed to ATMs for withdrawing funds from their accounts following the RBI’s move last Thursday to cap the withdrawals at Rs 50,000. While many customers claimed that the bank had not given any prior information about the move, some complained that the ATMs were out of cash.
  2. Currently, the RBI has capped Yes Bank withdrawals at Rs 50,000 till April 3 and imposed limits on withdrawals to protect the depositors.
  3. During this period, RBI has not allowed Yes Bank without prior permission of the RBI to make payments in excess of Rs. 50,000 to its savings, current or other account holders.
  4. The government has prodded State Bank of India – the country’s largest bank by assets – to step into the breach and lead the planned rescue of Yes Bank.
  5. SBI chairman Rajnish Kumar told NDTV on Monday that the current cap on withdrawals from Yes Bank accounts could be lifted “within a week”.
  6. “I want to assure Yes Bank customers that once we (SBI) step in, they shouldn’t worry about money… The financial system is sound,” he said.
  7. SBI has agreed to immediately invest Rs 2,450 crore to buy a 49 per cent stake in Yes Bank as part of the RBI-backed rescue deal for the troubled private sector lender.
  8. Yes Bank’s founder and former managing director, Rana Kapoor, is in police custody until March 11 after he was arrested on money-laundering charges.
  9. Yes Bank, weighed down by an increasing pile of bad debt, had struggled for months to raise the capital it needs to stay above regulatory requirements, without any success.
  10. Initially, Yes Bank wanted to raise $2 billion, which was later brought down to $1.2 billion as it could not rope in any investor. In February, the bank delayed the release of its financial results for the October-December period.

Journey of the definition of NPA – Non Performing Assets

Non Performing Assets

Definition and Journey-of-NPA

Definition and Journey-of-NPA

The definition of NPA has seen a journey in the form of amendments to its originally conceived definition and various constitutional challenges. RBI issued notification, DBOD No. BP.BC/ 20 /21.04.048 /2001-2002 defined NPA – Non Performing Assets, namely, Prudential Norms on Income Recognition, Asset Classification and Provisioning – Pertaining to Advances, which summarily defines the NPA as below:

Definition: 

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Description: 

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
  1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Historical Journey of the definition of NPA

That the Concept of NPA has seen a journey from its original definition to what it stands today.After a decade of working of the “The Recovery of Debts due to Banks and Financial Institutions Act, 1993” (“RDDBI Act”), it was felt that RDDBI Act was unable to achieve the desired result of efficiently recovering monies from the borrowers. This led to the enactment of “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” (“SARFAESI Act”) in the year 2002, with an attempt to revamp the slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. The SARFAESI Act provides the “Secured Creditor”, the right to enforce the security without the intervention of either the court or tribunal by following the procedure prescribed under Section 13 of the SARFAESI Act. Thereafter, the constitutional validity of SARFAESI Act was challenged in Mardia Chemicals Ltd. & Others v. Union of India & Others1 and the Supreme Court of India (“Supreme Court”) upheld the constitutional validity of SARFAESI Act save that of sub-section (2) of Section 17.2

Amendment to Section 2(1) (o) of the SARFAESI Act

Section 2(1) (o) of the SARFAESI Act defines “non-performing assets” (“NPA”) and the said definition came to be amended in 2004.3 The amended definition has been the bone of contention in various high courts across the country. While Gujarat High Court by a common judgment dated April 24, 2014 held that the amended Section 2 (1) (o) of the SARFAESI Act is unconstitutional, on the other hand, in another common judgment dated May 18, 2014, the Madras High Court rejected the challenge. Hence, aggrieved parties (i.e. borrowers or the secured creditors) filed various writ petitions invoking Article 32 of the Constitution before Supreme Court.

Constitutionality Of The Amended Definition Of NPA Upheld

  • Supreme Court upholds the constitutional validity of amended definition of “non-performing assets” under SARFAESI Act;
  • Supreme Court holds that the function of prescribing the norms for classifying a NPA is not an essential legislative function and since all creditors do not form a uniform/homogeneous class, therefore by prescribing different norms for the identification of a NPA with reference to different creditors, does not amount to unreasonable classification;
  • Supreme Court provides much required clarification as there existed conflicting decisions by two different High Courts on the constitutional validity of the amended definition of NPA.
  • Recently, by a common judgment in Keshavlal Khemchand and Sons Pvt Ltd & Ors v. Union of India & Ors, the Supreme Court decided on the writ petitions and has upheld the constitutionality of the amended definition of NPA under the SARFAESI Act.

Definition of NPA

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
2. Definitions

(1) In this Act, unless the context otherwise requires:

(o) “Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss assets, in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank.

2. Definitions

(1) In this Act, unless the context othe rwise requires:

(o) “Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution, as sub-standard, doubtful or loss asset.-

(a) In case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;

(b) In any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.

Brief proceedings before Madras High Court

Madras High Court rejected the submission that the amended definition suffers from the vires of excessive delegation on the following premises:

  1. In the year 1992, Reserve Bank of India (“RBI”) introduced the prudential norms of “income recognition, asset classification, provisioning and other related matters” and such norms were revised periodically keeping in mind various developments in the banking system, both nationally and internationally.
  2. RBI in exercise of the statutory authority under Sections 21 and 35A of the Banking Regulation Act, 1949 prescribes norms for the various aspects of banking specified under the SARFAESI Act.
  3. Parliament while defining a non-performing asset under Section 2 (1) (o) of the SARFAESI Act only adopted the norms prescribed from time to time by the RBI for the purpose of identifying the NPA.

Brief proceedings before Gujarat High Court

Gujarat High Court (“Gujarat HC“) opined that the amended definition of the expression “NPA” creates two classes of borrowers and in this context, while one class of borrowers are governed by the guidelines issues by the RBI, the other class of borrowers are governed by the guidelines issued by different authorities4. Gujarat HC relying on the statement of objects and reasons of the SARFAESI Act, held that the Parliament deviated from the original aims and objects propounded by it. It also took note of the fact that Supreme Court in Mardia Chemicals repelled the attack on the original definition of a NPA on the ground that the creditors are bound by the policy guidelines issued by the RBI, and therefore, there is no possibility of the creditors arbitrarily or whimsically classifying the account of any borrower as a NPA. Accordingly, it was concluded that the deviation from the original objects and reasons would be violative of Article 14 of the Constitution of India.

Issues

The issue before Supreme Court was to test the constitutional validity of the definition of NPA. In particular, the Supreme Court examined the following aspects:

  1. Whether by delegating the responsibility to an authority or body to frame the guidelines for asset classification under the amended definition of NPA amounts to delegation of essential legislative function?
  2. Whether the different standards for arriving at the definition of NPA (in effect the differentiation between two classes of borrowers) amounts to a violation of Article 14 of the Constitution?

Contentions

Petitioner:

The Petitioner submitted that:

  1. by authorizing various bodies to frame guidelines for classifying borrower’s account as “NPA“, the same abdicated Parliament’s essential legislative function by making an excessive delegation;
  2. the un-amended Section 2(1)(o) of the SARFAESI Act provided an uniform standard for classification of “NPA” by applying the guidelines issued by the RBI, while the amended provision enables different Creditors to adopt different guidelines prescribing different standards for NPA classification. Such an amendment is violative of Article 14 of the Constitution of India as it amounts to a class legislation forbidden by Article 14 of the Constitution;
  3. The SARFAESI Act recognizes the possibility of acquisition of a “financial asset” of a Creditor by either a “securitization company” or a “reconstruction company” creating uncertainty in the application of the guidelines appropriate for classification of an account of a borrower as a NPA and purely depending on who the current holder of such financial asset is when the proceedings under Section 13 are sought to be invoked.
  4. The SARFAESI Act does not provide for a reasonable opportunity to demonstrate that the classification of the borrower’s account as a NPA is untenable, the power to make such a classification itself becomes arbitrary and violative of Article 14 of the Constitution.

Respondent:

The Respondent submitted that:

  1. the assessment of an account of borrower as NPA depends upon innumerable factors which constantly keep changing, as a result it was deemed fit that such assessment should be made in light of the guidelines made by either the RBI or various other regulators regulating the activities of various creditors. There is no delegation of any essential legislative functions.
  2. the classification of NPA to be made on the basis of the guidelines framed by different bodies regulating different creditors is not constitutionally permissible having regard to the nature of the different credit facilities extended by various creditors to different categories of borrowers and on different terms and conditions.
  3. even assuming that assets are acquired either by a secularization company or a reconstruction company and therefore governed by guidelines other than those promulgated by the RBI, it has not been demonstrated that such guidelines are less favourable to the borrowers than the guidelines prescribed by RBI.

Judgment

Supreme Court upheld the amended definition of NPA considering the below mentioned aspects and analyzing them at length.

  1. First, Supreme Court observed that if NPA is sought to be defined and holistically made applicable to millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of Creditors for all times to come, it would not only be an impracticable task but could also simply paralyse the entire banking system thereby producing results which are counter productive to the object and the purpose sought to be achieved by the SARFAESI Act. Realizing the same, the Parliament left it to the RBI and other regulators to prescribe guidelines from time to time in this regard.
  2. Second, the Supreme Court held that the function of prescribing norms for classifying a borrower’s account as a NPA is not an essential legislative function. According to Supreme Court, Parliament is only stipulating that the expression “NPA” must be understood by all the Creditors in the same sense in which such expression is understood by the expert body i.e., the RBI or other Regulators which are in turn is subject to the supervision of the RBI. Supreme Court held that the amended definition of NPA is not bad on account of excessive delegation of essential legislative function.
  3. Third, Supreme Court held that it is not necessary that legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. Supreme Court observed that if a statute does not contain the definition of a particular expression employed in it, it becomes the duty of the courts to expound the meaning of the undefined expressions in accordance with the well-established rules of statutory interpretation.
  4. Finally, Supreme Court held that as all the creditors do not form a uniform/homogeneous class, and therefore by prescribing different norms for the identification of a NPA with reference to different creditors does not amount to unreasonable classification. According to Supreme Court, there are innumerable differences among the creditors based on the legal structure of the creditors’ organization, differences based upon the nature of the loan advanced by them, and differences based on the terms and conditions subject to which such loans or advances are made by each of those creditors, etc.

Analysis

This is a landmark decision by the Supreme Court so far as it provides clarification on the conflicting approaches taken by various High Courts while deciding on the constitutional validity of the amended definition of NPA under the SARFAESI Act. The decision of the Supreme Court is well reasoned and based on the premise that there is a need for some amount of delegated legislation in the modern world considering the banking norms and guidelines laid down by various regulatory bodies for different class of creditors. Supreme Court`s analysis towards upholding the constitutional validity of the amended definition of NPA, while relying on the classification protected under Article 14 of the Constitution and principles of administrative law is appealing to say the least. More importantly, the Supreme Court has once again opined that the powers delegated to RBI for rule making are consistent with Section 21 and 35-A of the Banking Regulation Act, 1949.

Footnotes

  1. 2004 4 SCC 311
  2. Subsequently, Section 17 (2) was amended by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
  3. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
  4. Extract from Gujarat High Court Judgment: “23. Thus, borrowers are divided into two different classes; First, the borrowers in respect of the Banks and Financial Institutions which are administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force, and in those cases, it will be for that authority or body to frame the guidelines for asset classification and, secondly, the borrowers in respect of all other cases not covered by clause (a), and in respect of those cases, it will be in accordance with the directions or guidelines issued by the Reserve Bank for asset classification.

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 3

As we discussed in the conclusion part of our 2nd Article on the subject matter, We concluded that the Amendment would cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

Image result for ibc amendment 2019However, there was one part which largely became the bone of contention amongst the property buyers. The amended Amended Subsection (1) of Section 7of the Insolvency and Bankruptcy Code (IBC) 2016 set the threshold of minimum 100 or 10% of allottees in a project or class of investors, for them to approach the NCLT in order to initiate the Insolvency Process against the defaulting developer.

The provision as amended read as follows:

Provided

that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first or second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission..

The Property buyers aggrieved by the aforesaid amendment approached the Supreme Court and Hon’ble the Supreme Court provided partial relief to home buyers:

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers as the constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers.

 

The Supreme Court has issued a notice to the Government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. 

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. 

The Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a home buyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

The Supreme Court has granted a partial stay on the 3rd provision of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.

There are further changes to the IBC, which are enumerated below:

Amended Provisions of the CodeLegal position prevailing before OrdinanceNew legal position
1.Section 5 -DefinitionsSection 5(12) defines “insolvency commencement date” as the date of admission of application for initiating the Corporate Insolvency Resolution Process (“CIRP”) by the National Company Law Tribunal (“Adjudicating Authority”) under Sections 7, 9 or 10, as the case may be.

The proviso thereafter to Section 5(12) (which was inserted in the Code with effect from June 6, 2018) states that where the interim resolution professional (“IRP”) is not appointed in the admission order, the insolvency commencement date shall be the date on which such IRP is appointed by the Adjudicating Authority.

The proviso to Section 5(12) has been omitted.
Section 5(15) defines “interim finance” to mean any financial debt raised by the Resolution Professional (“RP”) during the CIRP period.The words “and such other debt as may be notified” has been inserted within the definition of “interim finance”
2.Section 7 – Initiation of CIRP by financial creditor.Section 7(1) states that a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor (as may be notified by the Central Government) may file an application before the Adjudicating Authority for initiating CIRP against a corporate debtor when a default has occurred.

An Explanation is also given to the said section to clarify the meaning of default.

After Section 7(1), the provisos being inserted before the Explanation through the Ordinance provide for: –

Proviso 1– For financial creditors referred to in Section 21(6A) (a) and (b), the Section 7 application is required to be filed jointly by at least 100 creditors in the same class or 10% of the total number of such creditors in the same class, whichever is less;

Proviso 2– For homebuyers, the Section 7 application is required to be filed jointly by at least 100 allottees under the same real estate project or 10% of the total number of such allottees, whichever is less.

Proviso 3– The Section 7 applications filed by the financial creditors mentioned in the aforesaid provisos, which are presently pending before the Adjudicating Authorities, have to be modified within 30 days of the date of ordinance, failing which the application will be deemed to be withdrawn.

3.Section 11 – Persons not entitled to make applicationSection 11 states that certain persons, such as a corporate debtor undergoing CIRP, cannot file an application to initiate CIRP. An Explanation to the Section provides that ‘corporate debtor’ includes a corporate applicant in respect of such corporate debtor, for the purposes of this Section.Explanation-II has been inserted to provide an important clarification that the corporate debtor mentioned in the Section is not barred from initiating CIRP against another corporate debtor.
4.Section 14 – MoratoriumSection 14(1) provides that the Adjudicating Authority, on the insolvency commencement date, shall declare moratorium prohibiting certain actions.An Explanation has now been inserted after Section 14(1), clarifying that a license, permit, registration, quota, concession, clearances, or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other existing legal authority shall not be suspended or terminated on the grounds of insolvency. However, there should be no default in payment of dues arising during the moratorium period.
Section 14(2) states that the supply of essential goods or services to the corporate debtor shall not be terminated or interrupted during moratorium period.Sub-section (2A) has been inserted which states that where the IRP/RP considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated or interrupted during the moratorium period, except where such corporate debtor has not paid dues arising from supply during the moratorium period or in such circumstances as may be specified.
Section 14(3)(a) states that the provisions of moratorium will not apply to such transactions as may be notified by the Central Government in consultation with any financial regulator.Section 14(3)(a) has now been substituted to provide that the provisions of moratorium will not apply to such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
5.Section 16 – Appointment and tenure of IRPSection 16(1) states that the Adjudicating Authority will appoint the IRP within 14 days from insolvency commencement date.The amended Section 16(1) provides for the appointment of IRP on the insolvency commencement date itself.
6.Section 21 – Committee of Creditors (“CoC”)Section 21(2) states that the CoC will comprise all financial creditors of the corporate debtor. The second proviso to Section 21(2) states that that the first proviso (related party of the corporate debtor not to be a part of CoC) will not apply to a financial creditor, regulated by a financial sector regulator, if it becomes a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.The second proviso to Section 21(2) has been further amended to include “or completion of such transactions as may be prescribed” before the words “prior to the insolvency commencement date”.
7.Section 23 – RP to conduct CIRPSection 23(1) states that the RP shall conduct the entire CIRP and manage the operations of the corporate debtor during the CIRP period. The proviso to Section 23(1) (which was inserted in the Code with effect from June 6, 2018states that where the resolution plan has been submitted to the Adjudicating Authority for approval, the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period until an order of approval of resolution plan is passed by Adjudicating Authority.The existing proviso to Section 23(1) now stands substituted with a new proviso which states that the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period, until an order of approval of resolution plan (u/s 31(1) of the Code) or appointment of liquidator (u/s 34) is passed by the Adjudicating Authority.
8.Section 29A – Persons not eligible to be resolution applicantSection 29A provides a list of persons who are not eligible to submit a resolution plan.The Ordinance seeks to amend the meaning of “related party” provided in Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j). This amendment, which is on the lines of amendment to second proviso to Section 21(2) (as aforesaid), states that the expression “related party” shall not include a financial entity which has become a related party, inter alia, “on completion of such transactions as may be prescribed“.
9.Section 32A- Liability for prior offences, etc.

(NEW PROVISION)

Section 32A has been inserted after Section 32 in the Code to clarify the legal position on the liability for offences of the corporate debtor committed prior to commencement of CIRP.

  • Section 32A(1), incorporating the notwithstanding provision, states that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence from the date of approval of resolution plan by the Adjudicating Authority, if the said resolution plan results in a change in the management or control of the corporate debtor to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence committed by the corporate debtor.
  • The first proviso to Section 32A(1) provides that any prosecution instituted against the corporate debtor during the CIRP will stand discharged from the date of approval of the resolution plan, subject to the fulfilment of requirement of this sub-section.
  • However, every person who was an “officer who is in default” (as defined in Section 2(60) of Companies Act, 2013) or a “designated partner” (as defined in Section 2(j) of LLP Act, 2008) or in any manner responsible for the conduct of the business of the corporate debtor, being directly or indirectly involved in the commission of the offence, shall continue to be prosecuted and punished for such offence committed by the corporate debtor (2nd proviso to Section 32A(1)).
  • Section 32A(2) states that no action shall be taken against the property of the corporate debtor in relation to the offence committed prior to the commencement of its CIRP, where such property is covered under the resolution plan approved by the Adjudicating Authority. However, the approved resolution plan should result in a change in the management or control of the corporate debtor or sale of liquidation assets under Chapter III of the Code to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence so committed by the corporate debtor.
  • The Explanation to Section 32A(2) clarifies the meaning of “an action against the property of the corporate debtor” to include attachment, seizure, retention or confiscation of such property. The Explanation further provides that Section 32A(2) will not bar any action against the property of any person, other than the corporate debtor or a person who has acquired such property through CIRP or liquidation process under the Code and fulfils the requirements specified in this section.
  • Section 32A(3) states that notwithstanding the immunity provided in this section, the corporate debtor and any other person (as may be required) shall extend all assistance and cooperation to any authority investigating an offence committed prior to the commencement of the CIRP.
10Section 227 – Power of Central Government to notify financial sector providers etc.Section 227 gives power to the Central Government to notify financial service providers or categories of financial service providers, in consultation with the appropriate financial sector regulators, for the purpose of their insolvency and liquidation proceedings, notwithstanding anything to the contrary examined in this Code or any other law for the time being in force.The Ordinance substitutes the words “examined in this Code” contained in Section 227 with “contained in this Code“. Further, an Explanation has been inserted to clarify that the insolvency resolution and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.
11Section 239 – Power to make rulesSection 239 empowers the Central Government to make rules for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 239(2), from (a) to (zn).The Ordinance inserts clauses (fa) to (fc) after Section 239(2)(f) to empower the Central Government to make rules on transactions inserted vide this Ordinance in second proviso to Section 21(2), Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j) (such transactions which would not make the financial creditor a related party of the corporate debtor).
12Section 240 – Power to make regulationsSection 240 empowers IBBI to make regulations consistent with the Code and the rules thereunder, for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 240(2), from (a) to (zzzc).The Ordinance inserts clause (ia) after Section 240(2)(i) to empower the IBBI to make regulations on circumstances in which supply of critical goods or services may be terminated or interrupted during moratorium under Section 14(2A)

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 2

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court. Therefore, it becomes interesting to watch how does CIRP would be like after the amendment. Read Part 1

home buyers nclt ibc ordinance

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Important amendments to the code:

The most pivoting amendment is the amendment to Section 25A of the Code. One of the drawbacks of the earlier scheme of the Code was the requirement of the vote of each home buyer being calculated individually in proportion to the individual debt owed to him and not as a class of financial creditors. This used to lead situations where none of the agendas put forth before the Committee of Creditors (“CoC”) could be approved, mainly due to many home buyers failing to exercise their votes and thus, the remaining financial creditors (including home buyers who did cast their vote) were not able to form the requisite majority (calculated on total debt share).

In such a scenario, if no Resolution Plan is approved, the corporate debtor was necessarily required to be liquidated. And on liquidation, home buyers being unsecured creditors would stand to lose priority to secured financial creditors such as financial institutions.

  • That the amendment sought to be moved through Ordinance, is set to benefit classes of creditors such as home buyers, the Amendment now rectifies this issue by empowering the authorized representative to cast the vote of the entire class of creditors represented by him in accordance with the decision approved by more than 50% of such class of creditors on a present and voting basis.

The Scenario of Typical CIRP before the Amendment for the Home Buyers would be like this:

  • if there are 1000 property buyers, in a real estate company undergoing CIRP, where the collective debt of the 1000 home buyers forms 70% of the total debt of all financial creditors. 
  • Out of these, 300 home buyers attend a meeting of the CoC and 270 of such home buyers, vote in favor of a particular agenda.
  • That before Amendment, the vote of the 270 home buyers who voted in favor of the agenda would only count to the extent of their respective individual debt share. 
  • Thus, although in the present example, almost all home buyers who were present had voted in favor of a particular agenda, the fact that a large number of home buyers abstained from voting would lead to failure to garner the minimum required percentage for approving that particular agenda. 

This might not present itself as an issue when minor decisions of the CoC are affected; however in a vote for the approval of a Resolution Plan, such a mechanism for calculating the vote would undoubtedly hinder the effectual resolution of any company undergoing CIRP.

The Scenario of CIRP after the Amendment would be like this:

  • Because the majority of the home buyers, i.e., 270 home buyers out of the 300 present and voting have voted in favor of the agenda, the vote of the entire class of financial creditors i.e. of 1000 home buyers forming 70% of total debt share would be cast by the authorized representative in favor of the agenda. 
  • Thus, now the authorized representative is required to extrapolate the vote of the 270 home buyers, to all the 1000 home buyers being a class of creditors, and backed by the entire voting share of this class, the vote of the collective class of creditors being home buyers would undoubtedly carry more weight and actually lend meaning to home buyers becoming part of the CoC.

Therefore, this Amendment would undoubtedly cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

IBC amendment: Supreme Court provides partial relief to home buyers

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers, said Aditya Parolia
  • The constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers

Providing partial relief to home buyers, the Supreme Court has issued a notice to the government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. “This basically means that the NCLT will have to maintain status quo with respect to the applications already filed by home buyers and investors against defaulting developers,” said Aditya Parolia of PSP Legal, Advocates & Solicitors.

However, the legality and constitutional validity of the amendment will be tested by the Supreme Court after hearing the government and the home buyers, he added. The government recently amended the Insolvency and Bankruptcy Code (IBC) 2016 through an ordinance introducing a threshold of minimum 100 or 10%of allottees in a project or class of investors required that can approach the NCLT in order to start the liquidation process against the defaulting developer.

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. “This is certainly good news for home buyers as under the ordinance there was a clause which says all matter will be dismissed automatically within 30 days if they don’t meet the criteria. So, that has also been put on hold ,” said Aditya Parolia of PSP Legal, Advocates and Solicitors. The Home buyers were represented by the Advocate Piyush Singh and Advocate Aditya Parolia of PSP Legal, Advocates and Solicitors before the Supreme Court.

“However, there is no clarity on the threshold limit as of now as the bench didn’t comment on the same,” said Parolia. Challenging the ordinance, group of home buyers and investors had filed multiple writ petition with the Supreme Court challenging the amendment. Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a homebuyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

Clients of Karvy Private Wealth who saw defaults on their loans to builders introduced by Karvy have also challenged recent amendments to the Insolvency and Bankruptcy Code (IBC). “The Supreme Court has granted a partial stay on the 3rd provison of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.,” said Advocate Srijan Sinha, a lawyer practicing in the Supreme Court.

 

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 1

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court.

  

Home Buyers NCLT IBC Oridnance

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Background:

The Ordinance amends the Insolvency and Bankruptcy Code, 2016. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.  The Code provides a time-bound process for resolving insolvency.

“This is against the interest of home buyers as it puts unreasonable conditions on them, destroys level playing field which currently exists and makes the law lopsided in favour of real estate developers. The amendment being brought under influence of builders is not only illogical, illegal but also regressive to say the least,” said FPCE (The Forum for People’s Collective Efforts)’s letter to the standing committee chairman.

Minimum threshold for initiating the resolution process:

  • Under the Code, a financial creditor (either by itself or jointly with other financial creditors) may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process.  The Ordinance amends this to provide minimum thresholds for certain classes of financial creditors for initiating the insolvency resolution process. In case of real estate projects, if an allottee (person to whom a plot, apartment, or builder has allotted or sold the building) wants to initiate the resolution process, the home buyers should file an application jointly by at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less.
     

For other financial creditors, where the debt owed is either:

  1. in the form of securities or deposits, or
  2. to a class of creditors, the application should be filed jointly by at least 100 creditors in the same class, or 10% of the total number of such creditors in the same class, whichever is less.
     

Restriction on persons allowed to make applications:

The Code restricts certain corporate debtors from making an application to initiate the insolvency resolution process. These include, corporate debtors :

  1. undergoing an insolvency resolution process,
  2. who have completed the resolution process 12 months before making the application,
  3. or financial creditors who have violated terms of the resolution plan, or
  4. in respect of whom a liquidation order has been passed. 

The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, clarifies that such corporate debtors will be allowed to initiate the resolution process against other corporate debtors.
 

Permits, licenses and registrations not to be terminated on the ground of insolvency:

The Ordinance states that any existing license, permit, registration, quota, concession, or clearance, given by the government or local authority, will not be suspended or terminated on the grounds of insolvency.  However, there should be no default in payment of current dues for the use or continuation of such grants.
 

Supply of critical goods and services not to be discontinued:

  • The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 states that the resolution professional may order that the supply of certain goods and services which are critical for the corporate debtor’s operations cannot be discontinued during the moratorium period.  The moratorium period refers to the time period during which the NCLT may prohibit persons from taking certain actions against the corporate debtors, such as filing of recovery suits. This provision will not apply if the debtor has unpaid dues to the suppliers or in certain other specified circumstances.
     

Liability for prior offences: 

  • The resolution plan under the Code may result in change in the management or control of a corporate debtor to other persons.   The Ordinance states that in such cases, the corporate debtor will not be liable for any offences committed prior to the commencement of the insolvency resolution process.  The liability will cease from the date the plan is approved by the NCLT. The Ordinance also provides immunity to the corporate debtor from actions against their property, such as attachment, confiscation or liquidation of property, in such cases.
     

Immunity to apply in certain cases: 

The immunity against prior offences will be available if such other person

  1. was not a promoter or in the management or control of the corporate debtor, or a related party of such a person,
  2. was not a person against whom investigating authorities have submitted or filed a complaint, or have reasons to believe that the person abetted or conspired to commit the offence.

To read part 2 click here.

Original Text :

Source Credit: Prs Legislative Research 

126TH CONSTITUTIONAL AMENDMENT BILL

126TH CONSTITUTIONAL AMENDMENT BILL

Recently, 126th Constitutional Amendment Bill was passed by Parliament.

126TH CONSTITUTIONAL AMENDMENT BILL

126TH CONSTITUTIONAL AMENDMENT BILL

MORE ABOUT 126TH CONSTITUTIONAL AMENDMENT BILL EXTENDING RESERVATION TILL 25TH JANUARY 2030

  • This bill was brought for two objectives:
    • Extend reservation for Scheduled castes (SC) and Scheduled Tribes (ST) to Lok Sabha and legislative bodies.
    • Remove provision of nominating Anglo Indians to Lok Sabha and legislative bodies.
  • The bill has provisions for amending Article 334 and extending reservation only for Scheduled castes (SC) and Scheduled Tribes (ST) to Lok Sabha and legislative bodies till 25th January, 2030 (which was expiring in 2020).
  • Article 334 originally provided that reservation of seats and special representation would cease 10 years after the commencement of Constitution. But this was extended every 10 years (8th,23rd,45th,62nd,79th and 95th amendments).
  • Currently, only some state Assemblies like Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand etc. have one Anglo-Indian member each. The Amendment does away with this as well.
  • No member from the Anglo-Indian community has been nominated to the current Lok Sabha.
  • Earlier a panel, comprising Union Defence Minister, Home Minister, Social Justice Minister etc. had observed that the community was doing well and did not need reservation.
  • Since, the amendment falls within the purview of Article 368 (2) (d) dealing with “the representation of States in Parliament”, it is required to be ratified by the Legislature of not less than half of the States by simple majority.
    • Article 368 deals with power of Parliament to amend the Constitution and procedure therefor.
      Constitutional Provisions for reservation of seats For SC/STs
    • Article 330 and 332 provides for the reservation of seats for SC/STs in Lok Sabha and State Legislative Assemblies respectively, on the basis of their population ratio.
    • Also, there is no bar on SC/STs candidates contesting from general seats.
  • For Anglo-Indians:
    • The reservation for Anglo Indians was provided as they were in very small numbers and were diffused over different parts of the country. o The idea of such nominations is traced to Frank Anthony, who headed the All India Anglo-Indian Association. Article 331 was added in the Constitution following his suggestion to Jawaharlal Nehru.

Provisions

  • Under Article 331 President can nominate two members of Anglo-Indian community in Lok Sabha, if not adequately represented.
  • Article 333 provides same powers to Governor of a state to nominate one Anglo-Indian member.
  • According to the 10th Schedule of the Constitution, Anglo-Indian members of Lok Sabha and state Assemblies can take the membership of any party within six months of their nomination. But, once they do so, they are bound by their party whip.
  • The Anglo-Indian members enjoy the same powers as other MPs, but they cannot vote in the Presidential election.