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Evolution of Law for Protecting the Rights of the Secured Lenders – Journey from Suit Proceedings to Corporate Insolvency Resolution Process



Any creditor or lender involved in the issue of a secured credit instrument is referred to as a secured creditor. Any credit product that is backed by collateral is referred to as a secured credit product. Secured creditors can be any type of entity; however, they are most often financial institutions. Thus, protecting their rights is necessary, the law for the same has been evolving to render their best.

Evolution of Law

Prior to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, (RDDB & FI) that is Recovery of Debts and Bankruptcy Act (‘RDB Act’), a creditor’s only option for recovering debts and enforcing security was to visit to a civil court. Such legal actions took the appearance of an ordinary suit, a summary suit, or a mortgage suit, depending on the circumstances. With the ever-increasing figure of issues before civil courts, it was considered that a statute would be needed to assist banks and financial institutions by ensuring that their cases were dealt with quickly by a tribunal that dealt only with such concerns. The Narasimham and Tiwari Committee alleged that specialized tribunals for recovering debts owed to banks and financial institutions were necessary. The RDDB & FI Act was passed in 1993 in response to the aforementioned reports.

The RDDB & FI Act was enacted to speed up the adjudication and collection of debts owed to banks and financial institutions. With the passage of the aforementioned Act, it was hoped that the massive backlog of claims filed on behalf of banks and financial institutions would be properly addressed. Secured creditors were also expected to be able to recover their obligations through the sale of assets charged by the Borrowers to the Banks and Financial Institutions. Secured creditors, on the other hand, were not particularly mentioned in the RDDB & FI Act when it came to taking physical control of a mortgaged asset and selling it. The procedure for taking control and selling a secured asset was based on the terms of the Transfer of Property Act, 18821 (‘TPA’), which did not help secured creditors.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (‘SARFAESI Act’) was enacted as a result. The SARFAESI Act was enacted to permit banks and financial institutions to obtain possession and management of a secured asset devoid of the court’s involvement. By exercising powers to take control of securities, sell them, and reduce non-performing assets by adopting recovery or reconstruction procedures, the SARFAESI Act aims to realize long-term assets, managing liquidity problems, asset liability mismatches, along with improving recovery. Because the SARFAESI Act was enacted to benefit secured creditors directly, its constitutionality was challenged on the grounds that it empowers banks and financial institutions to act arbitrarily and unfairly. The Hon’ble Supreme Court of India, on the other hand, upheld the validity of the SARFAESI Act, explaining that the Act provides for the issuance of a statutory notice, which gives the borrower/guarantor a time frame to respond and raise objections to the Bank/ Financial Institution’s proposed measures. The Supreme Court further stated that a bank or financial institution must deal with the borrowers or guarantor’s replies or concerns before proceeding. As a result, the borrower/guarantor has a reasonable opportunity to oppose. Furthermore, Section 17 of the SARFAESI Act allows a borrower, guarantor, or any other aggrieved party to file a complaint with the pertinent DRT, disputing the Bank/ Financial Institution’s action. As a result, there is no room for arbitrary decisions. The Supreme Court further concluded that the categorization of an account as a non-performing asset is not based on the Financial Institution’s whims and fancies, but rather on a suitable methodology. In light of the foregoing scenario and law, it became evident that a Bank/ Financial Institution has two options: first, to initiate actions for debt adjudication and recovery under the RDDB & FI Act, and second, to enforce the security interest under the SARFAESI Act. 

Moreover, there was again the need for a law to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner to maximize asset values and promote entrepreneurship due to changing circumstances and escalating debts by assorted companies as well as individuals, As a result, the Insolvency and Bankruptcy Code (IBC) of 2016 was enacted. The IBC is predicated on the idea that any creditor who owes a debt to a corporate person can file an appropriate Application/ Petition to start a Corporate Insolvency Resolution Process (‘CIRP’) against that Debtor. We will only discuss the provisions of the IBC that pertain to the Corporate Debtor in this article because certain rules relating to personal insolvency have yet to be announced. A secured creditor has been defined as a creditor who has a security interest developed in their favor. A query that may crop up is what a secured creditor’s rights are in the event of a CIRP being initiated.

To begin, it is critical to note that when CIRP is initiated, an Interim Resolution Professional (‘IRP’) assumes management and control of the Corporate Debtor’s assets. IRP may then be appointed as a Resolution Professional (‘RP’) with the approval of the Committee of Creditors (‘CoC’). It is now the responsibility of RP to manage a Corporate Debtor’s affairs as a running concern. The RP is required to call for Resolution Plans, which must be approved by at least 66% of the CoC members. The terms of a Resolution Plan will be implemented if it is approved first by the CoC, then by the Adjudicating Authority. Only the authorized conditions of the Resolution Plan, by the virtue of Section 53 of the IBC, will be paid to the secured creditor or any other creditor. If no Resolution Plan is adopted, however, the end result is liquidation. 

A tenable creditor has the choice of relinquishing its rights to the security interest or realizing the security interest in the mode authorized during the liquidation of a Corporate Debtor.  If a secured creditor relinquishes its security interest, the asset becomes part of the Liquidation Estate, and the revenues are disseminated according to the law. If a secured creditor preserves the right to realize its security interest, it will be the secured creditor’s responsibility to prove its security interest to the satisfaction of the liquidator, and only that portion of the property will be permitted to be sold on which the secured creditor establishes its claim. If a secured creditor fails to notify the liquidator of its desire to realize a security interest within 30 days of the liquidation’s start date, the assets covered by the security interest are deemed to be part of the liquidation estate. Furthermore, the secured creditor would be compelled to pay the liquidator its portion of the Insolvency Resolution Process Cost and liquidation Cost within 90 days.

It is also the secured creditor’s accountability to reimburse the liquidator any finances received in surplus of its accepted claim within 180 days of the liquidation’s start date. It’s also worth noting that the IBC only permits for the enforcement of a security interest in an asset by one secured creditor. Following the enforcement of one secured creditor’s claim, no other secured creditor can enforce its rights for the same secured assets in the future, for the reason that the excess amount is placed with the liquidator. 

After describing a secured creditor’s rights under the IBC, it’s worth noting that the process outlined in the IBC is for the resolution of insolvency, not for the recovery of debt or the enforcement of a security interest. 


In a nutshell it can be stated that the journey for protecting the rights of the secured lenders have been through a roller coaster ride. From RDB Act to SARFAESI and IBC the law tries its best to guard the secured lenders and aims to improve the law from the prior ones.

Written By: Mansi Rathi     




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