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Decoded: RBI committee report on working of Asset Reconstruction Companies

Let bad assets move to ARCs, to enable banks to focus on credit growth and core banking

Hari Hara Mishra | November 8, 2021

An RBI appointed committee to review the working of Asset Reconstruction Companies (ARCs) recently submitted a report containing a set of 42 recommendations. The recommendations have been made to ensure the flow of NPAs to ARCs gather speed and momentum, so that bankers can focus on core banking activities like lending, leaving stressed asset management to specialised regulated institutional framework like ARCs. A few of these are discussed below, which have potential to deepen and broad-base the distressed loan sales market substantially. The enabling suggestions can be clubbed in three categories: 1.    Introduction of new players into distressed debt space 2.    Factors facilitating / forcing banks  to sell NPAs 3.    Factors facilitating ARCs with  greater capacity to acquire ARCs raise funds from investors for investment through Security Receipts (SRs), a typical promissory note type instrument issued by ARCs in lieu of cash and accepted by seller banks of the Non-Performing Assets (NPAs). The investors eligible to invest in these instruments are banks, Financial institutions, Foreign Portfolio Investors (FPIs), and some other specified entities like NBFCs, HFCs with a threshold level of asset size. Now the report recommends inclusion of several entities like High Net-worth Individuals (HNIs) (investment> ₹1 crore), corporates (Net worth>₹10 crore), all NBFCs, HFCs, Trusts, Family office, Distressed asset fund, pension funds etc. This change will greatly facilitate ARCs raise resources, while making a separate asset class, viz. Security Receipts, being made available in the market for investment and trading. Apart from banks extending credit facilities, there are many other players in the broader financial system like Mutual Funds and AIFs who have exposure to various debts. But so far only banks, FIs, NBFCs could sell their loans to ARCs. For a comprehensive solution of distressed debt, the report suggests inclusion of AMCs, AIFs, FPIs as eligible entities to sale credit facilities to ARC. So far, generally ARC sale used to be the last resort by banks after exploring all other means of resolution. In the process, the demographic composition of NPAs sold was ageing with minimal chance of a turnaround and ARCs did not have much choice other than asset sale, settlement etc, and there was not much of turnaround and reconstruction. The committee acknowledges the systemic importance NPA sale to ARC, and that too at an early date, so that lenders can focus on their core business. The committee has made recommendations as below which will have significant impact: •    For all NPAs above ₹100 crore, the resolution must include evaluation of sale to ARC •    For all NPAs  above 2 years, with no active resolution, reason for not selling to ARC to be recorded •    Allowing early sale of NPAs, even less than 60 days. It can be sold on date of default itself •    Amortisation of loss on sale of NPAs over a period of 2 years •    If 66% lenders agree to ARC sale, offer will be binding on all others, else they have to make 100% provision on total loan •    Relaxation in provisioning norms for banks  for loans sold by banks, if 51% of SRs held by non-lenders •    All financial entities (not only banks) to prepare a list of NPAs to be sold at beginning of year and circulate it to all ARCs. •    Fraud accounts (now estimated around ₹4 trillion ) permitted to be sold The acquisition capabilities of ARCs will go up, as its margin/ contribution to acquire is now proposed at only 2.5% against 15% now, if they are able to co-opt a SR investor and give cash exit to seller banks. For other cases, it will be only 15% of lenders’ investment or 2.5%, whichever is higher. ARCs’ scope of functioning and empowerment also are proposed to be enhanced as follows: •    Permitted to float AIF as supporting platform for resolution •    SARFAESI right available for debts acquired from even those which were not having the power as assignor •    If ARC acquires 66% debt, 2-year moratorium on even Govt dues •    ARCs can become resolution applicant under IBC, subject to  capping it at the level of SRs acquired in its usual Non-IBC acquisitions •    Can buy equity from banks •    Can acquire loans to domestic borrowers by overseas regulated entities The Committee has made a host of other recommendations including standardisation of process and documents, online trading platform etc. One Important recommendation is fixation of reserve price, which will be done at a higher level, that has the power to write off the amount. So far, one of the bottlenecks was valuation expectation mismatch between banks and ARCs. Hopefully, with application of mind at higher management, price fixation will be more realistic. Incidentally, all assets above ₹500 crore will now have two valuers. The focus of ARCs now will be market making an investor class of HNIs, Corporates etc with risk capital and appetite to invest in distressed papers. The challenge lies in convincing the attractiveness of business proposition from a risk-reward perspective. Incidentally, very rightly, the RBI Committee recommends for disclosure of 10 years performance track record of ARCs in the offer document to be issued to the investors. Mishra is a policy analyst and columnist.  

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Assignment of Debts under the Insolvency and Bankruptcy Code

[ Aayush Mitruka  is a lawyer based in Delhi]

Synergies Dooray Automotive, the first corporate entity to be resolved under the new Insolvency and Bankruptcy Code ( Code ) posed a few very interesting questions and highlighted some grey areas in Code. In the present post I intend to discuss one important issue that came up in the context of assignment of debts.

To put things in perspective, the Code stipulates that after the National Company Law Tribunal ( NCLT ) admits an insolvency application, the Insolvency Resolution Professional ( IRP ), among other things, constitutes a committee of creditors ( CoC ) on the basis of claims received against the corporate debtor. The committee comprises all the financial creditors of the corporate debtor, and they are assigned voting shares based on the size of their debt. However, a related party to whom a corporate debtor owes a financial debt does not have any right of representation, participation or voting in the meetings of the CoC.

Before discussing the issue, it will be beneficial to allude to the brief facts of the Synergies Dooray case. In November 2016, just a week before the Code became operational, Synergies Castings, a sister concern of Synergies Dooray, assigned a major portion of its debt to third-party Millennium Finance by way of three assignment deeds. Note that Synergies Castings had acquired the debt from a consortium of banks by way of a one-time settlement in 2011. In the usual course, Synergies Castings, being a related party would not have been permitted to participate/vote in the meetings of the CoC. Therefore, the maneuvering had secured Millennium Finance ( Millennium ) a place in the CoC.

Understandably, there is no reason to complain when a creditor (related party or otherwise) assigns its loan to somebody, as that is well within their rights. However the important question is whether the assignee should get a seat in the CoC by virtue of the assignment? The Code does not seem to directly provide any answer in this regard. [1]

This particular question came up for consideration in an application filed by Edelweiss Asset Restructuring Company Limited ( Edelweiss ) against Synergies Dooray. Edelweiss challenged the assignment and the constitution of the CoC (which included Millennium), alleging that the assignment of debt by Synergies Casting to Millennium was carried out with the ulterior motive of reducing its (i.e. Edelweiss’) voting rights. It was also argued that the assignment deeds were inadequately stamped and unregistered. However, Edelweiss’ argument did not find favour with the NCLT, Hyderabad and while rejecting the application, the NCLT remarked :

“29. Therefore, the assignment deeds between the two entities also legal and permissible. At most it can be said to be similar to “tax planning” rather tax avoiding. Because of this assignment deed, not only the applicant’s share in total debt is reduced, but other financial creditors/Assignees share also proportionately reduced and they did not object to the same but only the applicant agitates with oblique motive/reasons best known to it. Therefore, a fraudulent attempt made to reduce the Applicant’s share in the total voting rights is not a plausible plea by the Applicant. In the absence of any documentary proof/evidence to the claim of the Applicant, the same is liable to be rejected. Accordingly, the bench rejects the above allegations/claim of the applicant.”

[Emphasis supplied]

Although the NCLT held that such an assignment was legal and permissible, it did not delve into the critical aspect of whether such an assignment would secure the assignee a seat in the CoC. The reasoning provided does not appear very convincing. This question ought to have been discussed at length. A reading of the above quoted paragraph also brings to fore that the decision lends it approval to an assignment undertaken even with the sole objective of securing a seat in the CoC because it is akin to “tax planning”. Edelweiss has preferred an appeal before the NCLAT and the matter is currently pending for its decision.

This issue was once again considered by the NCLT, Mumbai in the case of Fortune Pharma Private Limited . Interestingly, in this case, after filing applications initiating the corporate insolvency resolution process ( CIRP ) but before its admission, two related party creditors assigned their debts to an unrelated third party. Naturally, this diminished the voting share of the applicant creditor, who then filed an application contending that the assignments were executed with an ulterior motive. The NCLT held that disqualification that existed at the time of initiating the CIRP cannot be removed by a mere assignment. It noted that assignment is transfer of one’s right to recover debt to another person and that the rights of the ‘assignee’ are no better than those of an ‘assignor’. Accordingly, the assignee does not get the right to change its status from ‘related’ to ‘unrelated.’

In other words, the NCLT, Mumbai reasoned that since at the inception of the debt it belonged to a related party (who is barred to participate in the proceedings of CoC), the assignment of such a debt will not remove the bar. In my view, though the NCLT was correct in debarring the assignee from participating in the proceedings of the CoC, however the reasoning provided does not appear to inspire much confidence because of the following reasons.

First, it is important to understand that the bar is on the person who is holding the debt and not the nature of the debt per se. It will not be entirely correct to bar somebody (who is otherwise eligible) from voting just because it bought the debt from a related party. Imagine a situation where an original creditor (unrelated) assigns a debt to a related party. Now when this related party creditor assigns a debt to an unrelated X in the usual course of business, will X in this case be barred since at some point in time the debt was held by a related party?  The answer to this has to be in the negative.

Second, this will prove to be counter-productive and have unintended repercussions. It will strongly discourage genuine asset reconstruction companies or other interested parties from buying the debt from any related party creditor. Surely, the Code could not have intended to hinder assignments which are undertaken in the usual course of the business.

Third, how do we exactly deal with situations when a CIRP application is being made by an operational creditor under section 9 of the Code? An operational creditor needs to deliver to the corporate debtor a demand notice as per section 8 before invoking section 9. Do we, in these cases, also allow an assignment before filing of an application? It would be impractical to have a one-size-fits-all approach.

The two views and the approaches adopted by two benches of the NCLT on this critical question throws open a can of worms. Let us try to closely examine this issue.

Assignment is essentially a contractual concept and refers to an agreement by which the rights and obligations of one party can be transferred to another. By virtue of assignment, the assignee steps into the shoes of her assignor and agrees to be both bound by it and is entitled to enforce it. Further, to be valid, an assignment agreement must satisfy the requirements under the Indian Contract Act, 1872 ( Act ). Accordingly, an assignment agreement can be declared void under section 23 of the Act if the object of the assignment agreement is (a) of such a nature that, if permitted, it would defeat the provisions of any law; or (b) fraudulent; or (c) involves or implies injury to the person or property of another; or (d) the court regards it as immoral, or opposed to public policy.

At this juncture, it is significant to examine if the NCLT (which exercises summary jurisdiction) would have the power to undertake such an investigation or would it be the prerogative of a civil court? The language of section 60(5)(c) of the Code seem to suggest that the NCLT will have the authority since this will be a “ question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code .”

It cannot be the intention of the Code to allow the promoters to appoint a proxy on the CoC by means of an assignment. It is a well settled principle of law that what may not be done directly cannot be permitted to be done indirectly. However, at the same time it must also be borne in mind that the Code does not aim to discourage any bona fide assignments. In the absence of any guidance in the Code, in order to determine the validity of such assignments, the NCLT ought to investigate the objective behind the assignment. In this regard, the time and the circumstances under which the assignment is made would be one relevant factor. Among other factors, the NCLT may also consider if the assignment is executed in the usual and ordinary course of the business.

This issue undermines the efficiency of the Code and therefore warrants serious consideration. The Code envisages provisions for scrutinizing certain transactions which may compromise the CIRP. One way to address this issue could be by amending the law to include such assignments also within its ambit. Pertinently, under section 240 of the Code, the Insolvency and Bankruptcy Board of India has the power to make regulations. However, since Parliament has been quite proactive in the past in preventing the promoters trying to game the system, it would not be surprising if an amendment is brought in to bring some clarity. It remains to be seen how and when this issue does gets finally elucidated.

– Aayush Mitruka 

[1] Regulation 28 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 does not address this issue.

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Thanks for the above post. Its very helpful. Can you share a draft Assignment Agreement as per IBC?

Ad Mr Ayush. Sir.we have settlements our loans with J.M Arc on 12.8.15 in rs 7 Cr.J.M ARC not given permission to sell extra open land to deposit upfront 25% payments. Hence company not sine agreement. B.J.M ARC revoked on 11.12.15.J.M ARC file petition with NCLt for rs 14.5 cr in application. Pls advice your view.

With respect to Mr Mitruka’s views on the issue of assignment, I humbly submit that no amendment in the Code is called for. The Code, in several places, has expressly equated a creditor (by virtue of a business deal) with a creditor who has simply acquired a debt from another, say through assignment. Once the assignment agreement comes out unscathed, the assignee (of any debt) is as much a creditor as any other creditor. So, post the assignment, Millenium is a creditor in his own right. This way there is no question of any ‘related party’. A financial creditor gets a seat in the CoC, irrespective of his lineage. This should be looked at in this simple manner. In the proceedings before NCLT, Hyderabad, all that was said was that these 3 Agreements smacked of malafide because their date of signing was so close to the date of SICA Repeal . To be sure, I fail to see the connection between the two. It was known to all and sundry that SICA Repeal will be brought into force as soon as NCLTs got ready to be constituted.What was the fault of the Assignor or Assignee , even if agreements were signed on the very day on which SICA Repeal was made effective. Edelweiss does not appear to have led any evidence to show that the parties were planning to get around the section 21(2) by signing those assignment agreements. In fact, if the objective was just to get around this section, the date of signing did not need to be close to the date of SICA Repeal coming into effect. Neither NCLT nor the RP could afford to waste time on mere allegations unsupported by any evidence.

Please sir help…. Bank insolvency pr assignment ready krna h… So plz explain I am so very confused..

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Asset Reconstruction Companies (ARCs) – Business Model

Updated on : Dec 7th, 2021

Banks are financial institutions that are engaged principally in the business of money lending and money borrowing. The customer base of the banking sector is very large and there is also a substantial risk involved in lending money.

While the bank always has the option of taking legal action on the defaulting borrowers, it is not always economically feasible to do so. The bank sometimes decides to just cut its losses, clean up its balance sheet and keep the business moving towards better avenues. This is where an Asset Reconstruction Company (ABC) comes in.

Asset Reconstruction Company

An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.

The asset reconstruction companies or ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).

The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets. Thus ARCs are engaged in the business of asset reconstruction or securitisation or both.

All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The required funds to purchase such such debts can be raised from Qualified Buyers.

Asset Reconstruction

It is the acquisition of any right or interest of any bank or financial institution in loans, advances granted, debentures, bonds, guarantees or any other credit facility extended by banks for the purpose of its realisation. Such loans, advances, bonds, guarantees and other credit facilities are together known by a term – ‘financial assistance’.

Securitisation

It is the acquisition of financial assets either by way of issuing security receipts to Qualified Buyers or any other means. Such security receipts would represent an undivided interest in the financial assets.

Qualified Buyers

Qualified Buyers include Financial Institutions, Insurance companies, Banks, State Financial Corporations, State Industrial Development Corporations, trustee or ARCs registered under SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of mutual funds, pension funds, FIIs, etc. The Qualified Buyers (QBs) are the only persons from whom the ARC can raise funds.

Working of the ARC

The working of the ARC can be summarized by the following diagram:

assignment of debt to arc

The business of asset reconstruction or securitisation may be commenced only after obtaining a registration certificate under Section 3 of the SARFAESI Act, 2002. The main requirement in this regard is that the ‘net owned funds’ as prescribed in the RBI Act should be Rs. 100 crore or more.

Process of Asset Reconstruction by ABC

The main intention of acquiring debts / NPAs is to ultimately realise the debts owed by them. However, the process is not a simple one. The ARCs have the following options in this regard:

  • Change or takeover of the management of the business of the borrower.
  • Sale or lease of such business.
  • Rescheduling the payment of debts – offering alternative schemes, arrangements for the payment of the same.
  • Enforcing the security interest offered in accordance with the law.
  • Taking possession of the assets offered as security.
  • Converting a portion of the debt into shares.

Type of Debts ARC can Take Over

The ARC can take over only secured debts which have been classified as a non-performing asset (NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give a notice of 90 days before it qualifies to be taken over.

Non-performing Assets

Banks and other financial institutions are required to classify the debts owned by them into the following four categories:

  • Sub-standard

The criteria for the classification into such categories depends upon the type of financial institution and the regulatory authority governing such bank or financial institution. Out of the above 4 categories, a non-performing asset would be either a sub-standard, doubtful or a loss asset.

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Asset Reconstruction Companies (ARCs)

Asset Reconstruction Companies (ARCs)

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. So, ARCs are in the business of buying bad loans from banks. ARC is a company registered under the companies Act and registered with Reserve Bank of India under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

SARFAESI Act provides the legal basis of setting up an Asset Reconstruction Company (ARC) in India. ARCs are regulated by RBI as a Non-Banking Financial Company (NBFC) under RBI Act, 1934. They function under the supervision and control of the Reserve Bank of India (RBI). 100% Foreign Direct Investment (FDI) in Asset Restructuring Companies under the Automatic route.

The Asset Reconstruction Companies (ARCs) through SARFAESI Act, “enables the secured creditors to realise the long-term assets, manage problems of liquidity, asset liability mismatch and recovery of their dues stuck in the non-performing assets, by exercising the powers under section 13(4), without the intervention of the Court or Tribunal, to take possession of the securities and sell them by adopting the measures for recovery or reconstruction as per the provisions of the act.” As per RBI, ARC performs the functions namely Acquisition of financial assets, Change or takeover of Management or Sale or Lease of Business of the Borrower, Rescheduling of Debts, Enforcement of Security Interest and Settlement of dues payable by the borrower.

For legal purposes, these entities are considered to be banking entities. Therefore the laws that apply to banking companies also apply to Asset Reconstruction Companies. Also, they are subject to the same regulation as banks are. Therefore they are also governed by the same regulators as banks are i.e. banking ombudsmen.

From the above paragraph, we can understand the functions of ARC as follows:

Acquisition of financial assets

Change or takeover of Management / Sale or Lease of Business of the Borrower

Rescheduling of Debts

Enforcement of Security Interest

Settlement of dues payable by the borrower

The origin of ARCs is normally credited to a 1991 report on financial sector reforms by a panel chaired by former RBI Governor M.Narasimham. Accounting policies of the banking system until the 1990s didn’t include any norms for setting aside funds against bad loans. RBI released its first set of norms to classify bad loans or non-performing assets in October 1990. It led to a pile of bad loans in most public sector banks and development financial institutions was unearthed. The Narasimhan Panel recommended the establishment of an asset reconstruction fund or asset reconstruction company to flush bad loans out of the system.

The Board for Industrial and financial Reconstruction, set up as a part of the Department of Financial Services of the Ministry of Finance, in January 1987. Its objective was to determine the sickness of industrial companies and to assist in reviving them. BIFR showed little success in tackling industrial sickness. That and delays in winding-up procedures led to the establishment of debt recovery tribunals (DRTs). The objective was a speedy recovery of money from defaulters who had borrowed from banks and financial institutions. But DRTs, too, could not speed up the recovery procedures in most cases as they lacked sufficient judicial experience. This resulted in a lot of pending cases. Hence, ARCs were set up to enable faster recovery without the intervention of the court.

As of May 31, 2021, there are 28 Asset Reconstruction Companies that have been registered under the Reserve Bank of India. The first off the block, Asset Reconstruction Company (India) Ltd. or Arcil was set up in 2002 by four banks: SBI, ICICI Bank, Punjab National Bank and IDBI Bank. While Arcil has worked on Rs.78, 000 crore of debt over the years, the action now has shifted to the promoter-led ARCs that mushroomed later. Lenders have decided to initially transfer 22 bad loan accounts of ₹89,000 crore to the proposed National Asset Reconstruction Company Limited (NARCL), aiding the cleanup of their balance sheets. The aggregate amount of bad loans likely to be transferred in trenches will be ₹2 trillion.

In the Budget 2021-2022, Asset Reconstruction Company has been proposed to be set up by State owned and Private Sector banks, and there will be no equity contribution from the government. While the Central government will not provide any direct equity support to the ARC, it may provide the sovereign guarantee that could be needed to meet regulatory requirements.

The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs.2-5 lakh crores that remain unresolved in around 70 large accounts. This is being considered as the government’s version of a Bad bank. This function of ARC helps banks to concentrate in normal banking activities rather than going after the defaulters by wasting their time and effort.

As per amendment made in SARFAESI Act in 2016, an ARC should have a minimum net owned fun Rs.2 crore. The RBI raised this amount to Rs.100 crore in 2017. The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets. These assets are used to determine the minimum amount of capital that must be held by banks and other financial institutions in order to reduce the risk of insolvency.

Of the existing ARCs, only 3 to 4 are adequately capitalized, while the more than dozen remaining are thinly capitalized- necessitating the need to set up a new structure to resolve stressed assets urgently. In a report released by RBI it was said that banks gross non-performing assets my raise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario.

The transfer of stressed assets to ARC will happen at net book value, which is the value of assets minus the provisioning done by banks against these assets. This could enable the banks to alleviate its losses from NPAs. The bank will get 15% cash and 85% security receipts against bad debt that will be sold to ARC.

RECOVERY MECHANISM OF NPA BY ARCs

The loan amount taken by a client by providing mortgaged asset will be converted into NPA if the borrower fails to repay it and it is due for 90 days or more. Now the bank has the option either to recover the loan itself or sale that NPA to an ARC. ARC will raise the necessary funds through a subscription instrument floated by the trust. This instrument is known as Security Receipt (SR) and this will be issued to qualified institutional buyers. The banks or financial institutions (FIs), who desire to transfer their bad assets to ARCs, invite intending ARCs to express their interest which will show their willingness to acquire the financial assets of the Banks/FIs. The seller Banks/FIs detail out their terms and conditions of sale of financial assets which are to be accepted by intending ARCs. Before giving the price bid by the intending ARCs, due diligence is to be taken. The ARCs would give indicative offer to seller bank or FI. On receipt of acceptance from seller, they execute assignment of debt with seller bank/FI so that SC/RC may take further steps for resolution of acquired NPAs. The non-fund based facilities are generally not taken over since these are obligations. Until and unless these are crystallized as liabilities, these are not taken over. In case these facilities are crystallized as liability ARCs also take over them. The assets will be taken over either on sale basis or agency basis after applying certain discount. The discount will be worked out in consultation with banks/FIs and it is based on various factors like security value, promoters profile, the current status of the assets (whether running or idle), age, product market, etc. The whole process is to be done in a transparent manner and on mutually agreed terms. In case of consortium or multiple banking, if 75 per cent of the lenders by value agree then the remaining banks/FIs will be obliged to accept the offer by the ARC. The borrower does not have the right to oppose the transfer of assets to ARCs, if the board of the respective banks/FI has agreed for such transfer. Any dispute between the ARCs and Banks/FIs shall be resolved only through arbitrator and no one can approach the courts. Almost all the State Governments have rationalized the rates of stamp duty for assignment of debts and registration charges to smoothen the process for acquisition of financial assets by the ARCs.

The RBI has set up the Sudarshan Sen Committee to review the working of Asset Restructuring Companies comprehensively. It will recommend suitable measures for enabling them to meet the growing requirements. The committee shall submit its report in 3 months’ time.

ARCs have more than 2 decades of experience in the resolution of stressed assets in India. We should leverage this capacity to the fullest. By tweaking some regulations, ARCs can become a potent solution to the growing crisis of the NPAs.

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India: Assignment Of Claim To Non-Related Party: A Case For Non-Statutory Insider?

View Arka  Majumdar Biography on their website

The National Company Law Appellate Tribunal (" NCLAT "), vide its order dated December 14, 2018 in the case of Company Appeal (AT) (Insolvency) No. 169 of 2017 (" Synergies Dooray order "), has rejected the appeal filed by Edelweiss Asset Reconstruction Company Limited (" EARC "), one of the financial creditors of Synergies Dooray Automotive Limited (" Synergies Dooray") , challenging the order dated August 2, 2017 of the Hyderabad bench of National Company Law Tribunal (" NCLT "), approving the resolution plan pertaining to Synergies Dooray. Whilst rejecting the challenge, which was based on the fundamental premise that a 'non-related party' assignee of a related party financial creditors cannot be inducted in the committee of creditors (" CoC ") of a corporate debtor undergoing corporate insolvency resolution process (" CIRP ") under the provisions of Insolvency and Bankruptcy Code, 2016 (" IBC "), NCLAT seemed to have taken view different from its own earlier decision rendered in the case of Pankaj Yadav v. State Bank of India [Company Appeal (AT) (Insolvency) No. 28 of 2018], on August 7, 2018 (" Fortune Pharma order "). The different views taken by NCLAT, which may be justified basis the specific facts of the cases, points to a more fundamental question- can there be a straight-jacket formula which can be applied to ascertain whether an assignee of a debt owed to a related party financial creditor of the corporate debtor be subject to same disqualifications that the related party assignor would be subject to, or would it require a more case-by-case basis analysis, based more on the factual aspect.

It is in light of the above background that, we wish to analyse in this thought paper, whether a non-related assignee of a debt owed to a 'related party' would retain its 'related party' character and the yardsticks that may be applied to ascertain the same.

Legislative Framework

The CoC occupies an important and probably the most critical position during the CIRP of a corporate debtor. Be it the decision to allow withdrawal of CIRP once the same has been admitted 1 , or extending the period of the CIRP beyond the initial period of one hundred eighty days 2 , or appointment 3 or replacement of the resolution professional 4 , all of the aforesaid is dependent upon the relevant majority of members constituting the CoC approving such decision. Approval of a resolution plan is also such an item, which is dependent upon the CoC approving the same with at least sixty six percent of the voting shares of the financial creditors 5 . Accordingly, in the context of approval of the resolution plan at least, the constituents and voting powers of the creditors forming the CoC assumes huge significance.

The constitution of a CoC is governed under sub-section (2) of Section 21 of IBC, which reads as follows:

"21. (2) The committee of creditors shall comprise all financial creditors of the corporate debtor:

Provided that a related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors. (emphasis supplied)

Thus, whilst section 21(2) postulates that the CoC will be formed by all the financial creditors of the corporate debtor, if a related party (as defined under section 5(24) of the IBC 6 ) is also a financial creditor of the corporate debtor (" Related Party Creditor "), such related party does not have any right of representation, participation or voting in a meeting of the CoC 7 .

As we have also noted earlier, approval of a resolution plan is dependent upon the approval of requisite majority of members of the CoC. It is in this context of having the right to approve (or reject) a resolution plan, the issue of assignability of debts due to Related Party Creditors, assumes significance, as, in terms of Rule 28 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 , a creditor is allowed to assign or transfers the debt due to such creditor to any person even during the CIRP period and thus, opening up the possibility of potential avoidance of the restriction in influencing the decision making powers of the CoC by assigning/ transferring the debt to associate but 'non-related parties'. To understand how such assignment can potentially affect the decision-making powers of CoC, let us turn our interest to two of the cases referred to in the background to understand the role that related parties played in influencing the resolution plan.

NCLT Decision in the CIRP Involving Synergies Dooray

The Hyderabad Bench of NCLT, vide its order dated January 23, 2017 had admitted the petition filed by the corporate debtor i.e. Synergies Dooray, a sick company under the aegis of erstwhile Sick Industrial Companies (Special Provisions) Act, 1985, seeking initiation of the CIRP under section 10 of the IBC.

The financial creditors of Synergies Dooray were (i) Alchemist Asset Reconstruction Company Limited, with amount of claim admitted amounting to INR 122,06,00,000 (Indian Rupees one hundred and twenty two crores six lakhs) and percentage share in voting in the CoC being 13.83% (thirteen decimal eight three percent); (ii) EARC, with amount of claim admitted amounting to INR 86,92,00,000 (Indian Rupees eighty six crores ninety two lakhs) and percentage share in voting in the CoC being 9.84% (nine decimal eight four percent); (iii) Millenium Finance Limited (" MFL ") with amount of claim admitted amounting to INR 673,91,00,000 (Indian Rupees six hundred seventy three crores ninety one lakhs) and percentage share in voting in the CoC being 76.33% (seventy six decimal three three percent) and (iv) Synergies Castings Limited (" SCL ") with amount of claim admitted amounting to INR 89,26,00,000 (Indian Rupees eighty nine crores twenty six lakhs) and percentage share in voting in the CoC being 0% (zero percent), because SCL was a related party and hence not a part of the CoC as per section 21(2) of the IBC.

Resolution plans were submitted by three entities i.e. SCL, SMB Ashes Industries, Suiyas Industries Private Limited out of which the resolution plan submitted by SCL was approved by a majority vote of 90.16% (ninety decimal one six percent) with certain modifications. It is pertinent to note that EARC had abstained from voting.

An application bearing C.A. No 123/2017 in CP(IB)No.01/HDB/2017 was moved before the NCLT, Hyderabad for submission of the resolution plan under section 30(6) 8 of the IBC and for approval under section 31(1) 9 of the IBC, against which, objections were raised by EARC alleging that MFL was a related party under section 5(24) of the IBC and hence should not have been allowed to be a part of the CoC and vote on the resolution plan.

EARC filed C.A. Nos 43, 56, 57 and 124 of 2017 by questioning the constitution of the CoC and the related party issues. EARC's main contention was that vide an assignment agreement dated November 24, 2016 which was executed between MFL and SCL, SCL had assigned a significant portion of its debts to MFL which gave MFL more than 75% (seventy five percent) voting power in the CoC and thus MFL could approve any resolution plan all by itself. Since SCL was a related party of Synergies Dooray within section 5(24) of the IBC, by the said assignment agreement, MFL would also become a related party and hence should not have been allowed to be a part of the CoC.

Regarding the issue of the status of MFL as a "related party" as defined, under section 5(24) of the IBC, in CA No. 43 of 2017 in CP No. 01/IBC/HDB/2017, the resolution professional had submitted the following:

" 14) With regard to issue of related party, it is stated that related party has been defined under section 5(24) of the IBC by a plain reading of the provisions of section 5(24), it is evident that MFL does not fall into any one of the conditions that may trigger the applicability of section 5(24) so as to establish a related party relationship between SCL and MFL. SCL (Respondent No.4) in the instant case, had assigned its debts to MFL on 24.11.2016, which is even prior to coming into force of the SICA Repeal Act, which came in force on 01.12.2016. In the said background, it is evident that SCL as a part of its commercial decision assigned its dues to MFL and MFL also as a part of its business decision as a Non-Banking Financing Company (NBFC) acquired the debts from SCL. Pursuant to the assignment of the dues of SCL in favour of MFL, the charge of MFL on the assets of the Corporate Debtor has been duly registered and the same forms a part of the application as filed with Tribunal. So the contention of applicant that MFL can fall within the definition of related party qua the Corporate Debtor is not at all tenable and liable to be rejected . Both EARC and MFL are Financial Creditors of the Corporate Debtor who have taken over the loans of the Corporate Debtor from the original lenders." (emphasis supplied)

Accepting the argument of the resolution professional, the NCLT Hyderabad, observed the following:

" 8. So far as the issue relating to allegation of related party, it is to be mentioned here that the applicant like that of MFL got subsequently assigned debt of original lenders. The litigation started by the applicant right from initiation of case before BIFR and EXIM Bank, its original assignee, which is one of seven creditors of corporate debtor. As rightly pointed out by the Learned Resolution professional, MFL cannot be termed as related party and the applicant has no locus standi to question various rights obtained by MFL from SCL by Assignment Agreement Deeds in question. The applicant is making everything a serious issue right from stage of BIFR till date. We have examined the legality of Assignment deeds in question in detail in subsequent CA No. 57 of 2017, wherein we have passed a detailed order by rejecting all the contentions of the applicant. Since initiation of CIRP proceedings only the applicant amongst various financial creditors raised various issues, viz, incorrect admission of claims, constitution of invalid CoC, initial IM, malafide ulterior motive of reducing the voting right of the applicant which is questionable and suspicious, apprehensions, etc. All the other concerns of the Applicant are dealt with above suitably. Therefore, we are of the prima facie opinion that the applicant's action throughout the entire CIRP proceedings which is not acceptable considering the preamble of the Code. After perusing various records, the Bench is of the opinion that there is no relationship between SCL and MFL. The Applicant's submission that the agenda of the meeting of CoC would have far reaching effect which is prejudicial to the interest of the Financial Creditors including the Applicant is factually not correct, since none of the other financial creditors objected to it. With regard to the intentions of the Corporate Debtor as well as its related party SCL, we would like to add that the proceedings before the Adjudicating Authority under the IBC is summary proceedings. Therefore, mensrea cannot be raised before the Adjudicating Authority under the IBC proceedings. " (emphasis supplied)

NCLT Decision in the CIRP Involving Fortune Pharma

CIRP was initiated against Fortune Pharma Private Limited on August 28, 2017 by the Mumbai bench of the NCLT, pursuant to a Section 10 application moved by the corporate debtor on June 29, 2017.

An application was filed by State Bank of India (" SBI ") alleging that, during the period between the date of filing the Section 10 application (being June 29, 2017) and the date of admission (being August 28, 2017), the related parties of the corporate debtor had executed several assignment deeds, whereby the voting power of SBI in the CoC came down from 100% to 55%. SBI contended that the act of assignment of the debt owed by the related parties to a 'non-related' party financial creditor, post filing of the Section 10 application was a malicious act, with the ulterior motive of reducing the voting power of SBI.

The arguments advanced by SBI found favour with NCLT, with both the judicial members penning their concurrent, but separate decisions. Relevant paragraphs in this regard are as follows:

Per Mr. B P Mohan (Member Judicial):

" 9. As regards the disqualification, it is clear that the Mr. Sudhakar H Mulay and Mulay Constructions Private Limited are not entitled to vote in the Committee of Creditors as they are "related parties". In view of the aforementioned peculiar circumstances of this case, and the meticulous planning on the part of the promoter/directors of the Corporate Debtor to execute Assignment Deeds with the sole intention of bringing down the voting power of the Applicant cannot be regarded as a natural business decision. Hence, a related party cannot suddenly become a non-related party just because he washes off his hands and hands over the papers to other party who have no valid reason for taking up assignment of a debt which may not be recoverable . We don't see any business prudence on the part of Brainer Impex Limited and Mr. Pankaj Radhakrishna Yadav in stepping into the shoes of the Assignors. Since the whole transaction is controversial, the disqualification cannot be removed and it follows till the end . The point (b) and (c) are decided in favour of the Applicants and accordingly the voting power of the Applicant is restored back to 100%. " (emphasis supplied)

Per Mr. M K Shrawat (Member Judicial):

" 13. The summum bonum of the above decision is that by an assignment the assignee does not get the right to change its status. If the Assignor is a 'related party' then the assignee shall also be treated in the same status as 'related party' vis-à-vis to the impugned debt . Yet another example is that if the assignor is an 'operational creditor' then as a result of assignment the assignees shall be treated as 'operational creditor' and its status must not for a moment be considered as 'financial creditor'. " (emphasis supplied)

NCLAT's Decisions upon Appeal

As would be apparent from the aforesaid discussion, the Mumbai and Hyderabad benches of the NCLT had taken diametrically opposite views in the context of whether a non-related party assignee of debts of a related party would be treated differently for the purpose of participation in the CoC. When appealed against the respective orders, NCLAT rejected both the appeals preferred against the decisions, albeit on different grounds.

The reason given by NCLAT in the Fortune Pharma order ( supra) to reject the appeal was as under:

" 7. It is not in dispute that the assignor Mr. Sudhakar Mulay was the Director/promoter of the 'Corporate Debtor'. Therefore, he is 'related party' within the meaning of Section 5(24). A legal transfer of 'debt' account from a 'creditor' (assignor) to a third party (assignee) provides the rightful ownership to the assignee. The 'debt assignment' is a transfer of debt with all the rights and obligations associated with it from a creditor to a third party, who is' assignee' . The 'debt' is in the form of loan from a 'financial institution', the debtor is referred as a 'borrower' and if the debt is in the form of securities, such as bonds, the debtor is referred to as an 'issuer'. Undisputedly, the assignment is the transfer of one's right to recover the debt of another person as a contractual right. Rights of an 'assignee' are no better than those of the 'assignor'. It can be, therefore, held that 'assignor' assigns its debt in favour of the 'assignee' and 'assignee' steps in the shoes of the 'assignor'. The 'assignee' thereby takes over the right as it actually did and also takes over all the disadvantages by virtue of such assignment ." (emphasis supplied).

The same may be contrasted with the following observation of NCLAT rendered in the Synergies Dooray order ( supra ):

" In the result, we hereby declare that both 'Synergies Castings Limited' and 'Millennium Finance Limited' were eligible to execute the assignment agreements in question and all rights flow those agreements to 'Millennium Finance Limited'. After getting assignment of rights, the 'Millennium Finance Limited' is fully competent to participate in 'Committee of Creditors' in question and it cannot be called a related party as explained ." (emphasis supplied)

As is apparent from the aforesaid, whilst in the Fortune Pharma order , NCLAT held that the assignee would be subject to the same rights and disadvantages , the issue of disadvantage attaching to the assignee was did not get any mention in the Synergies Dooray order .

Whilst in the ultimate analysis, it could be well argued that the difference in the outcome from the NCLAT decisions was based on the specific factual circumstances 10 , the decisions probably highlight the importance of undertaking a deeper scrutiny of factual elements for determination of restrictions on participation by an assignee of Related Party Creditors in the CoC. In the subsequent paragraphs, it would be our endeavor to ascertain the relevant principles through judicial precedents developed in other bankruptcy-mature jurisdictions and examine whether the same principles would hold good under the IBC or not. In the absence of direct judicial precedents in India, we will also refer to certain foreign judicial developments on the evolution of the jurisprudence on this issue and examine whether the same principles would hold good under the IBC or not.

The rationale behind a creditor assigning its claims against a corporate debtor undergoing insolvency resolution process was discussed by United States Court of Appeals, Third Circuit (" Third Circuit ") in the case of In re KB Toys 11 , in the following terms:

" Creditors holding claims against an entity who has filed a Chapter 11 petition sometimes face a risky and lengthy bankruptcy process. To avoid this risk and expense, a creditor may look to sell its claim , a practice permitted under the bankruptcy rules. In re Kreisler, 546 F.3d 863, 864 (7th Cir.2008) (citing Fed. R. Bankr. P. 3001(e)). By selling its claim, a risk averse creditor can opt out of the bankruptcy process and obtain an immediate, albeit discounted, payment on the debt it is owed. See id. Claim purchasers buy these claims and hope to receive a distribution from the debtor's estate in excess of the price paid. See Tally M. Wiener & Nicholas B. Malito, On the Nature of the Transferred Bankruptcy Claim, 12 U. Pa. J. Bus. L. 35, 36 (2009) ("Some purchasers are simply ... investing with an eye towards receiving a distribution on claims in cash or readily liquidated property in excess of the purchase price .")" (emphasis supplied)

Where the purpose behind acquisition of the claim is to derive distribution on claims from the liquidated property of the corporate debtor, it can be prima facie assumed that, the creditor would be governed by the intention to derive the best possible distribution and not by any other extraneous considerations. It is only where, the decision-making power is influenced by other extraneous considerations, the question of bias and impropriety may arise.

If one wishes to analyse IBC to ascertain whether under IBC, such assignment of claims on preferential terms (or on a non-arm's length basis) can be avoided, he may be directed to Section 43, which deals with preferential transactions and avoidance of such preferential transactions. The relevant part of the section has been reproduced below:

"43. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

(2) A corporate debtor shall be deemed to have given a preference, if—

(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor and

(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53." (emphasis applied)

As Section 43(2) of the IBC deals with avoidance of preference given in the context of transfer of property or an interest thereof, reference may also be made to section 3(27) of the IBC, which defines the expression ' property ' as follows:

"(27) "property" includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property". (emphasis supplied)

The question, however, would be, whether assignment of a claim, owed by the corporate debtor to its creditor, can be challenged under Section 43 of IBC. This in turn begs the question, as to whether, such a claim can at all be classified as property of the corporate debtor. In the context of US Bankruptcy code, the answer would be no, especially in view of the following observation of the Third Circuit in the KB Toys case:

" ASM did not purchase property of the estate. ASM purchased claims against the Debtors' estates. A claim against an estate is not property of that estate . Enron I, 340 B.R. at 206 ("[A] claim as defined under [§] 101(5),is not ,and has never been, considered property of the estate (it is being asserted against ) under [§ ] 541 of the Bankruptcy Code."). Thus, on its face, § 550(b) is inapplicable to ASM ." (emphasis supplied)

Closer home, our own Supreme Court has also, in the case of ICICI Bank Limited v. APS Star Industries Limited 12 , acknowledged the aforesaid principle by noting as follows:

" 46. As stated above, an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank. Secondly, the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecate . The bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer)..... At this stage, we wish to once again emphasize that debts are assets of the assignor bank . The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner affecting the rights of the borrower(s)/mortgagor(s) in the contract or in the assets . " (emphasis added)

In substance, if the claim owed by corporate debtor to its creditors cannot be considered as a property of the corporate debtor, assignment or transfer of such claim even at non-arm's length basis, would not be subject to anti avoidance rule specified under Section 43 of the IBC. This may pose a critical threat for the success of a genuine attempt being made to revive or liquidate the corporate debtor in a manner which addresses the concerns of all stakeholders, and not only of a few.

The broader question, however, would be, whether the judiciary would be permitted to disregard the voting by an assignee of Related Party Creditor, by virtue of the claim being assigned by the Related Party Creditor.

In this context, it would be interesting to trace the development of the concept of 'insider' under the US Bankruptcy Code, which is analogous to the ' related party ' concept under IBC. The expression 'insider' finds enumeration under section 101(31) 13 of the US Bankruptcy Code and people or entities that fall strictly within the definition of 'insider' are called 'statutory insiders'. However, the US bankruptcy courts have also recognised a class of insiders who are called 'non-statutory insiders' and refers to a person, who is not explicitly listed in section 101(31) of the US Bankruptcy Code, but who has a sufficiently close relationship with the debtor to fall within the definition 14 . It is important to make this distinction because it is on the basis of this that the US Bankruptcy courts have proceeded to decide on the nature of a transferred claim in a bankruptcy case from a statutory insider to a non-insider.

Prior to 2016, there are a plethora of judicial precedents on the moot point as to who is to be considered a non-statutory insider. There are certain judgments which have taken a limited approach 15 in defining non-statutory insiders and there are certain judgments which have taken an expansive approach 16 towards defining non-statutory insiders.

However, an important case on this moot point is US Bank N.A., Trustee, et al., by an through CW Capital Asset Management LLC, solely in its capacity as Special Servicer, Appellant v. The Village at Lakeridge, LLC, Appelee, Rovert Alan Rabkin, Real Party in Interest ( " In Re The Village at Lakeridge, LLC " ) 17 decided by the United States Court of Appeals, Ninth Circuit (" Ninth Circuit ") in February 2016, which addressed the issue that whether a transferred claim retained its insider status for the purpose of voting on the resolution plan. The debtor, Village at Lakeridge, LLC had filed for a Chapter 11 18 bankruptcy. There were two creditors holding claims against the debtor's assets. One was MBP Equity Partners 1, LLC (" MBP ") who held an unsecured claim in the amount of $2.76 million (US Dollars two million seven hundred and sixty thousand) and the other was U.S. Bank National Association (" USBNA ") which held a secured claim in the amount of $10 million (US Dollars ten million). MBP, sold its claim against the debtor to Dr. Robert Rabkin (" Rabkin "), who had a business and personal relationship with one of MBP's board members, but otherwise, had no connection to MBP or the debtor prior to purchasing the claim. The debtor's plan for reorganization could only be confirmed under section 1129(a)(10) of the US Bankruptcy Code if at least one class of impaired claims had voted to accept the plan. Section 1129(a)(10) of the US Bankruptcy Code reads as follows:

"(10) If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider. " (emphasis supplied)

USBNA had opposed the plan however, Rabkin had approved the plan. Since, the claims of both the creditors were impaired, the plan had to be approved.

USBNA argued that Rabkin had become a non-statutory insider because of his close relationship with one of the board members of MBPA and hence was not entitled to vote on the plan. The bankruptcy court had granted USBNA's motion and disallowed Rabkin from voting on the reorganization plan as he had become a non-statutory insider. The bankruptcy court's order was reversed by the United States Bankruptcy Appellate Panel for the Ninth Circuit (" BAP ") and it held that:

"insider status cannot be assigned and must be determined for each individual ''on a case-by-case" basis, after the consideration of various factors."

Thus, Rabkin was not a non-statutory insider and was allowed to vote on the reorganization plan.

The Ninth Circuit, in a split verdict, affirmed the BAP's ruling and held the following:

"[11 – 13] ... A person does not become a statutory insider solely by acquiring a claim from a statutory insider for two reasons. First, bankruptcy law distinguishes between the status of a claim and that of a claimant. Insider status pertains only to the claimant; it is not a property of a claim. Because insider status is not a property of a claim, general assignment law - in which an assignee takes a claim subject to any benefits and defects of the claim does not apply . Second, a person's insider status is a question of fact that must be determined after the claim transfer occurs ."

"[14] ... Further, if a third party could become an insider as a matter of law by acquiring a claim from an insider, bankruptcy law would contain a procedural inconsistency wherein a claim would retain its insider status when assigned from an insider to a non-insider, but would drop its non-insider status when assigned from a non-insider to an insider. " (emphasis supplied)

However, in the decision rendered in In re The Village at Lakeridge, LLC , there was an interesting precedent which was cited by USBNA, but the Ninth Circuit had conveniently rejected it on technical grounds. USBNA had made reference to a judgment delivered by the Ninth Circuit itself in Wake Fores, Inc. v Transamerica Title Ins. 19 which held that insider status does transfer with a claim under the general law of assignment . However, the Ninth Circuit rejected USBNA's contention by referring to a Ninth Circuit procedural rule stating that unpublished cases issued prior to 2007 could not be cited to courts in the Ninth Circuit.

The ruling by the Ninth Circuit was referred to by the Court of Appeal of the Republic of Singapore in the matter of SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another 20 while determining who is to be treated as a related creditor for the purposes of confirming a scheme of arrangement. It held the following:

"52 The reasoning in this case is persuasive even though it relates to the interpretation of the United States Bankruptcy Code. It would be absurd if a creditor which acquires its claim against a scheme company from a related creditor were to find that the votes attached to the claim are automatically discounted because of the status of the assignor-creditor, regardless of the present assignee-creditor's status and relationship with the scheme company . The purpose of discounting related creditors' votes is to remove or negate the influence of any bias which such creditors might have towards a certain voting outcome. That concern is not attached to the claim, but rather, is attached to the individual creditor in question. Such concerns would not be present if a creditor which acquires its claim against a scheme company from a related creditor has no demonstrable reason for bias towards any particular voting outcome beyond its own interests as a creditor " (emphasis supplied)

The aforesaid approach, in our view, reflects the correct approach in determining whether the assignee of a Related Party Creditor would be subject to the same disqualifications. In fact, it appears to us that, the rationale provided by Mr. B P Mohan (NCLT Member Judicial) in the Fortune Pharma matter followed the same approach in the sense, the decision was not based on whether the assignee is a non-Related Party Creditor (the approach followed by Hyderabad Bench of NCLT in Synergies Dooray case and upheld by NCLAT), or that an assignee automatically becomes disqualified on the basis that the disadvantages applicable to a Related Party ) are also transferred to the assignee (an approach followed by the other judicial member of the Mumbai bench in Fortune Pharma case and which found favour with NCLAT), but on whether the circumstances promoting such assignment was based on non-commercial ulterior motives.

Final Thoughts

It would be interesting to follow the development of jurisprudence in this regard and to examine, if the NCLTs choose to look beyond the apparent status of the assignee, and rather place emphasis on the identification of the assignee-creditor's status vis-à-vis the corporate debtor/ Related Party Creditor to ascertain the intent behind the assignment. Consequently, it would be interesting to consider whether the concept of ' non-statutory insider ' can be introduced even in the Indian context, to mitigate the potential abuse of the spirit behind debarment of Related Party Creditors.

1. See, Section 12A of IBC.

2. See, Section 12(2) of IBC.

3. See, Section 22(2) of IBC.

4. See, Section 27(1) of IBC.

5. See, Section 30(4) of IBC.

6. Section 5(24): "related party", in relation to a corporate debtor, means—

(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;

(b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent. of its share capital;

(e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid-up share capital;

(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;

(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent. of voting rights in the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty per cent. of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;

(m) any person who is associated with the corporate debtor on account of—

(i) participation in policy making processes of the corporate debtor; or

(ii) having more than two directors in common between the corporate debtor and such person; or

(iii) interchange of managerial personnel between the corporate debtor and such person; or

(iv) provision of essential technical information to, or from, the corporate debtor;

7. The composition of CoC, where the corporate debtor has no financial creditor or if all the financial creditors of the corporate debtor are related parties, has been stipulated under Rule 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which allows the CoC to be constituted of only operational creditors.

8. Section 30(6): The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.

9. Section 31(1): If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

10. In so far as Synergies Dooray case, whilst, without having all the relevant facts, it would be unfair for us to impute any allegation of ulterior motive behind such assignment of debt by SCL to MFL, a few facts which were of particular interest are (a) the date of assignment of debt being November 26, 2016, by which period, a few of the sections of the IBC were already notified and implying the impending notification of the rest of the provisions; and (b) initiation of resolution process by the corporate debtor itself on January 23, 2017, implying a certain amount of preparedness on part of the promoters of Synergies Dooray.

11. In re KB Toys 736F.3d 247 (3d Cir. 2013).

12. ICICI Bank Limited v. APS Star Industries Limited Civil Appeal No.8393 OF 2010, decided on September 30, 2010.

13. Section 101(31) : The term "insider" includes—

(A) if the debtor is an individual—

(i) relative of the debtor or of a general partner of the debtor;

(ii) partnership in which the debtor is a general partner;

(iii) general partner of the debtor; or

(iv) corporation of which the debtor is a director, officer, or person in control;

(B) if the debtor is a corporation—

(i) director of the debtor;

(ii) officer of the debtor;

(iii) person in control of the debtor;

(iv) partnership in which the debtor is a general partner;

(v) general partner of the debtor; or

(vi) relative of a general partner, director, officer, or person in control of the debtor;

(C) if the debtor is a partnership—

(i) general partner in the debtor;

(ii) relative of a general partner in, general partner of, or person in control of the debtor;

(iii) partnership in which the debtor is a general partner;

(iv) general partner of the debtor; or

(v) person in control of the debtor;

(D) if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor;

(E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and

(F) managing agent of the debtor.

14. See Schubert v. Lucent Techs. Inc. (In re Winstar Commc'ns, Inc.) , 554F.3d 382, 395 (3d Cir.2009).

15. Butler v. David Shaw, Inc , 72 F.3d 437 (4th Cir. 1996) decided on January 3, 1996; In Re Boston Pub. Co., Inc., 209 B.R. 157 (Bankr.d.Mass. 1997) , decided on May 2, 1997; In Re Gilbert, 104 B.R. 206 (Bankr. W.D. Mo. 1989) decided on August 3, 1989.

16. Three Flint Hill Ltd. P'ship v. Prudential Ins. Co. (In re Three Flint Hill Ltd P'ship) , 213 B.R. 292, 299 (D. Md. 1997);

In re Applegate Property, Ltd ., 133 B.R. 827, 833 (Bankr. W.D.Tex.1991); In re Holly Knoll P'ship , 167 B.R. 381, 385 (Bankr. E.D. Pa.1994).

17. US Bank N.A., Trustee, et al., by an through CW Capital Asset Management LLC, solely in its capacity as Special Servicer, Appellant v. The Village at Lakeridge, LLC, Appelee, Rovert Alan Rabkin, Real Party in Interest 814 F.3d 993 (9th Cir. 2016).

18. Chapter 11 under the United States Bankruptcy Code permits reorganization under bankruptcy laws of the United States.

19. See, In re Greer West Inv. Ltd. P'ship), No. 94–15670, 1996 WL 134293 (9th Cir. Mar. 25, 1996) (unpublished) cited in In re The Village at Lakeridge, LLC at page number 1001 at footnote 10.

20. Wake Fores, Inc. v Transamerica Title Ins. [2017 SGCA 51 (Singapore)].

Originally published January 23, 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Notifications

Master Circular - Asset Reconstruction Companies

1. Applicability of the Guidelines/ Instructions

(1) The provisions of these guidelines/ instructions shall apply to ARCs registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, in respect of the trust/s mentioned in paragraph 7 herein, the provisions of paragraphs 3, 4, 5,8, 9(i), 9(iii) 11,12,13 and 14 shall not be applicable.

1 (2) ARCs covered by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their financial statements. In order to promote a high quality and consistent implementation as well as facilitate comparison and better supervision, the Reserve Bank has issued regulatory guidance on Ind AS vide circular DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated March 13, 2020 which alongwith subsequent instructions on the subject is applicable on such ARCs for preparation of their financial statements from financial year 2019-20 onwards.

2. Definitions

(1) (i) "Act" means the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(ii) "Bank" means the Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act (RBI Act), 1934;

(iii) “Break up Value” means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company;

2 (iv) "Change in Management" means effecting change by the borrower at the instance of ARC in the person who has responsibility for the whole or substantially whole of the management of the business of the borrower and/ or other relevant personnel;

3 (v) "Date of acquisition" means the date on which the ownership of financial assets is acquired by ARC either on its own books or directly in the books of the trust;

(vi) "Deposit" means deposit as defined in the Companies (Acceptance of Deposits) Rules 2014 framed under Section 73 of the Companies Act, 2013;

(vii) “Earning value” means the value of an equity share computed by taking the average of profits after tax as reduced by the preference dividend and adjusted for extra-ordinary and non-recurring items, for the immediately preceding three years and further divided by the number of equity shares of the investee company and capitalised at the following rate:

(a) in case of predominantly manufacturing company, eight per cent;

(b) in case of predominantly trading company, ten per cent; and

(c) in case of any other company, including non-banking financial company, twelve per cent;

Note: If, an investee company is a loss-making company, the earning value will be taken at zero;

(viii) “Fair value” means the mean of the earning value and the break up value;

(ix) "Non-performing Asset" (NPA) means an asset in respect of which:

a) Interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date of acquisition or the due date as per contract between the borrower and the originator, whichever is later;

b) interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date fixed for receipt thereof in the plan formulated for realisation of the assets referred to in paragraph 6(C) herein;

c) interest or principal (or instalment thereof) is overdue on expiry of the planning period, where no plan is formulated for realisation of the assets referred to in paragraph 6(C) herein; or

d) any other receivable, if it is overdue for a period of 180 days or more in the books of the ARC;

Provided that the Board of Directors of an ARC may, on default by the borrower, classify an asset as NPA even earlier than the period mentioned above (for facilitating enforcement as provided for in Section 13 of the Act).

(x) "Overdue" means an amount which remains unpaid beyond the due date;

(xi) “Owned Fund" means the aggregate of

(a) paid up equity capital;

(b) paid up preference capital, to the extent it is compulsorily convertible into equity capital;

(c) free reserves (excluding revaluation reserve);

(d) credit balance in Profit and Loss Account

as reduced by:

(e) the debit balance on the profit and loss account

(f) Miscellaneous Expenditure (to the extent not written off or adjusted);

(g) book value of intangible assets;

(h) under/ short provision against NPA/ diminution in value of investments;

(i) over recognition of income, if any;

(j) other deductions required on account of the items qualified by the auditors in their report on the financial statements;

(xii) "Planning period" means a period not exceeding 4 six months allowed for formulating a plan for realization of financial assets acquired for the purpose of reconstruction;

(xiii) "Standard asset" means an asset, which is not an NPA;

5 (xiv) "Takeover of Management" means taking over of the responsibility for the management of the business of the borrower with or without effecting change in management personnel of the borrower by the ARC;

(xv) "Trust" means trust as defined in Section 3 of the Indian Trusts Act, 1882.

(2) Words or expressions used but not defined herein and defined in the Act, shall have the same meaning as assigned to them in that Act. Any other words or expressions not defined in that Act shall have the same meaning as assigned to them in the Companies Act, 2013.

3. Registration and matters incidental thereto

(i) Every ARC shall apply for registration in the form of application 6 hosted on the Bank’s website and obtain a certificate of registration from the Bank as provided under Section 3 of the Act;

(ii) The ARC seeking registration from the Bank shall submit their application in the format specified at the clause (i) above, duly filled in with all the relevant annexures/ supporting documents to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai - 400 001;

(iii) An ARC, which has obtained a Certificate of Registration issued by the Bank under Section 3 of the Act, can undertake both securitisation and asset reconstruction activities;

7 (iii) (a) An ARC shall commence business within six months from the date of grant of Certificate of Registration by the Bank;

Provided that on the application by the ARC, the Bank may grant extension for such further period, not exceeding 12 months from the date of grant of Certificate of Registration.

8 (iii) (b) Provisions of Section 45 -IA , 45-IB and 45-IC of RBI Act,1934 shall not apply to non-banking financial company, which is an ARC registered with the Bank under Section 3 of the Act;

(iv) Any entity not registered with the Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act subject to requisite authorisation/ approval .

9 4. Net Owned Fund

(1) Net Owned Fund (NOF) for ARCs shall be minimum Rs.100 crore on an ongoing basis with effect from April 28, 2017. Accordingly, no ARC shall commence or carry on the business of securitization or asset reconstruction without having NOF of not less than Rs.100 crore.

10 (1) Net Owned Fund (NOF) for ARCs shall be minimum Rs. 300 crore on an ongoing basis with effect from October 11, 2022. Consequently, any ARC obtaining the certificate of registration on or after October 11, 2022 shall not commence the business of securitisation or asset reconstruction without having minimum NOF of Rs. 300 crore. The following glide path is provided for the ARCs existing as on October 11, 2022 to achieve the minimum required NOF of Rs. 300 crore:

In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time.

(2) NOF shall be arrived at by reducing from Owned Fund (OF), the amounts representing

(i) investments of the ARC in shares of –

a. its subsidiaries;

b. companies in the same group;

c. all other ARCs; and

(ii) the book value of debentures, bonds, outstanding loans and advances made to, and deposits with, -

a. subsidiaries of the ARC; and

b. companies in the same group,

to the extent such amount exceeds 10% of the Owned Fund.

5. Permissible Business

(i) An ARC shall commence / undertake only the securitisation and asset reconstruction activities and the functions provided for in Section 10 of the Act.

(ii) An ARC shall not raise monies by way of deposit.

6. Asset Reconstruction

A. (1) Acquisition of Financial Assets

(i) Every ARC shall frame with the approval of its Board of Directors, a 'Financial Asset Acquisition Policy', within 90 days of grant of Certificate of Registration, which shall clearly lay down the policies and guidelines covering, inter alia,

11 (a) norms and procedure for acquisition either on its own books or directly in the books of the trust;

(b) types and the desirable profile of the assets;

(c) valuation procedure ensuring that the assets acquired have realisable value which is capable of being reasonably estimated and independently valued;

(d) in the case of financial assets acquired for asset reconstruction, the broad parameters for formulation of plans for their realisation.

(ii) The Board of Directors may delegate powers to a committee comprising any director and/ or any functionaries of the ARC for taking decisions on proposals for acquisition of financial assets;

(iii) Deviation from the policy should be made only with the approval of the Board of Directors.

12 (iv) Before bidding for the stressed assets, ARCs may seek from the auctioning banks adequate time, not less than two weeks, to conduct a meaningful due diligence of the account by verifying the underlying assets.

13 (2) Permission to acquire financial asset from other ARCs

ARCs will acquire financial asset from other ARCs on the following conditions:

a. The transaction is settled on cash basis;

b. Price discovery for such transaction shall not be prejudicial to the interest of Security Receipt (SR) holders;

c. The selling ARC will utilize the proceeds so received for the redemption of underlying SRs;

d. The date of redemption of underlying SRs and total period of realisation shall not extend beyond eight years from the date of acquisition of the financial asset by the first ARC.

14 (3) Acquisition of financial assets by ARCs from sponsors and lenders

ARCs shall not acquire financial assets from the following on a bilateral basis, whatever may be the consideration:

(i) a bank/ financial institution (FI) which is the sponsor of the ARC;

(ii) a bank/ FI which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its operations;

(iii) an entity in the group to which the ARC belongs.

However, they may participate in auctions of the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and the prices are determined by market forces.

15 (4) Expenses incurred at pre-acquisition stage for performing due diligence etc. for acquiring financial assets from banks/ FIs should be expensed immediately by recognizing the same in the statement of profit and loss for the period in which such costs are incurred. Expenses incurred after acquisition of assets on the formation of the trusts, stamp duty, registration, etc. which are recoverable from the trusts, should be reversed, if these expenses are not realised within 180 days from the planning period or downgrading of SRs [i.e. Net Asset Value (NAV) is less than 50% of the face value of SRs] whichever is earlier.

B. Measures of Asset Reconstruction

16 (1) Change in or Takeover of the Management of the Business of the Borrower

(i) The objective of these guidelines is to ensure fairness, transparency, non-discrimination and non- arbitrariness in the action of ARCs and to build in a system of checks and balances while effecting change in or takeover of the management of the business of the borrower by the ARCs under Section 9(1)(a) of the Act. The ARCs shall follow these instructions while exercising the powers conferred on them under Section 9(1)(a) of the Act.

(ii) An ARC may resort to change in or takeover of the management of the business of the borrower for the purpose of realisation of its dues from the borrower subject to the provisions of these guidelines. The ARCs resorting to takeover of management of the business of the borrower shall do so after complying with the manner of takeover of the management in accordance with the provisions of Section 15 of the Act. On realisation of its dues in full, the ARC shall restore the management of the business to the borrower as provided in Section 15(4) of the Act;

provided that if any ARC has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such ARC shall not be liable to restore the management of the business to such borrower.

(iii) Eligibility conditions to exercise power for change in or takeover of management

In the circumstances set forth in paragraph (iv) below

(a) An ARC may effect change in or takeover of the management of the business of the borrower, where the amount due to it from the borrower is not less than 25% of the total assets owned by the borrower; and

(b) Where the borrower is financed by more than one secured creditor (including ARC), secured creditors (including ARC) holding not less than 60% of the outstanding SRs agree to such action.

Explanation: 'Total Assets' means total assets as disclosed in its latest audited Balance Sheet immediately preceding the date of taking action.

(iv) Grounds for effecting Change in or Takeover of Management

Subject to the eligibility conditions set forth in paragraph (iii) above, ARC shall be entitled to effect change in management or takeover of the management of business of the borrower on any of the following grounds:

(a) the borrower makes a wilful default in repayment of the amount due under the relevant loan agreement/s;

(b) the ARC is satisfied that the management of the business of the borrower is acting in a manner adversely affecting the interest of the creditors (including ARC) or is failing to take necessary action to avoid any event which would adversely affect the interest of the creditors;

(c) ARC is satisfied that the management of the business of the borrower is not competent to run the business resulting in losses/ non-repayment of dues to the ARC or there is a lack of professional management of the business of the borrower or the key managerial personnel of the business of the borrower have not been appointed for more than one year from the date of such vacancy which would adversely affect the financial health of the business of the borrower or the interests of the ARC as a secured creditor;

(d) the borrower has without the prior approval of the secured creditors (including ARC), sold, disposed of, charged, encumbered or alienated 10% or more (in aggregate) of its assets secured to the ARC;

(e) there are reasonable grounds to believe that the borrower would be unable to pay its debts as per terms of repayment accepted by the borrower;

(f) the borrower has entered into any arrangement or compromise with creditors without the consent of the ARC which adversely affects the interest of the ARC or the borrower has committed any act of insolvency;

(g) the borrower discontinues or threatens to discontinue any of its businesses constituting 10% or more of its turnover;

(h) all or a significant part of the assets of the borrower required for or essential for its business or operations are damaged due to the actions of the borrower;

(i) the general nature or scope of the business, operations, management, control or ownership of the business of the borrower are altered to an extent, which in the opinion of the ARC, materially affects the ability of the borrower to repay the loan;

(j) the ARC is satisfied that serious dispute/s have arisen among the promoters or directors or partners of the business of the borrower, which could materially affect the ability of the borrower to repay the loan;

(k) failure of the borrower to acquire the assets for which the loan has been availed and utilization of the funds borrowed for other than stated purposes or disposal of the financed assets and misuse or misappropriation of the proceeds;

(l) fraudulent transactions by the borrower in respect of the assets secured to the creditor/s.

Explanation A : For the purpose of this paragraph, wilful default in repayment of amount due, includes

(a) non-payment of dues despite adequate cash flow and availability of other resources, or

(b) 'routing of transactions through banks which are not lenders/ consortium members' so as to avoid payment of dues, or

(c) siphoning off funds to the detriment of the defaulting unit, or misrepresentation/ falsification of records pertaining to the transactions with the ARC.

Explanation B : The decision as to whether the borrower is a wilful defaulter or not, shall be made by the ARC keeping in view the track record of the borrower and not on the basis of an isolated transaction/ incident which is not material. The default to be categorized as wilful must be intentional, deliberate and calculated.

(v) Policy regarding Change in or Takeover of Management

(a) Every ARC shall frame policy guidelines regarding change in or takeover of the management of the business of the borrower, with the approval of its Board of Directors and the borrowers shall be made aware of such policy of the ARC.

(b) Such policy shall generally provide for the following :

(i) The change in or takeover of the management of the business of the borrower should be done only after the proposal is examined by an Independent Advisory Committee to be appointed by the ARC consisting of professionals having technical/ finance/ legal background who after assessment of the financial position of the borrower, time frame available for recovery of the debt from the borrower, future prospects of the business of the borrower and other relevant aspects shall recommend to the ARC that it may resort to change in or takeover of the management of the business of the borrower and that such action would be necessary for effective running of the business leading to recovery of its dues;

(ii) The Board of Directors including at least two independent directors of the ARC should deliberate on the recommendations of the Independent Advisory Committee and consider the various options available for the recovery of dues before deciding whether under the existing circumstances the change in or takeover of the management of the business of the borrower is necessary and the decision shall be specifically included in the minutes.

(iii) The ARC shall carry out due diligence exercise and record the details of the exercise, including the findings on the circumstances which had led to default in repayment of the dues by the borrower and why the decision to change in or takeover of the management of the business of the borrower has become necessary.

(iv) The ARC shall identify suitable personnel/ agencies, who can takeover the management of the business of the borrower by formulating a plan for operating and managing the business of the borrower effectively, so that the dues of the ARC may be realized from the borrower within the time frame.

(v) Such plan will also include procedure to be adopted by the ARC at the time of restoration of the management of the business to the borrower in accordance with paragraph 6(B)(1)(ii) above, borrower's rights and liabilities at the time of change in or takeover of management by the ARC and at the time of restoration of management back to the borrower, rights and liabilities of the new management taking over management of the business of the borrower at the behest of ARC. It should be clarified to the new management by the ARC that the scope of their role is limited to recovery of dues of the ARC by managing the affairs of the business of the borrower in a prudent manner.

Explanation: To ensure independence of members of Independent Advisory Committee (IAC), such members should not be connected with the affairs of the ARC in any manner and should not receive any pecuniary benefit from the ARC except for services rendered for acting as member of IAC.

(vi) Procedure for Change in or Takeover of Management

(a) The ARC shall give a notice of 60 days to the borrower indicating its intention to effect change in or takeover of the management of the business of the borrower and calling for objections, if any.

(b) The objections, if any, submitted by the borrower shall be initially considered by the IAC and thereafter the objections along with the recommendations of the IAC shall be submitted to the Board of Directors of the ARC. The Board of Directors of ARC shall pass a reasoned order within a period of 30 days from the date of expiry of the notice period, indicating the decision of the ARC regarding the change in or takeover of the management of the business of the borrower, which shall be communicated to the borrower.

(vii) Reporting

ARCs shall report to the Bank all cases where they have taken action to cause change in or takeover of the management of the business of the borrower for realization of its dues from the borrower in terms of Circular DNBS(PD)CC.No.12/SCRC/10.30.000/2008-2009 dated September 26, 2008 as amended from time to time .

(2) Sale or Lease of a part or whole of the business of the borrower

No ARC shall take the measures specified in Section 9(1)(b) of the Act, until the Bank issues necessary guidelines in this behalf.

(3) Rescheduling of Debts

(i) Every ARC shall frame a policy, duly approved by the Board of Directors, laying down the broad parameters for rescheduling of debts due from borrowers;

(ii) All proposals should be in line with and supported by an acceptable business plan, projected earnings and cash flows of the borrower;

(iii) The proposals should not materially affect the asset liability management of the ARC or the commitments given to investors;

(iv) The Board of Directors may delegate powers to a committee comprising any director and / or any functionaries of the company for taking decisions on proposals for reschedulement of debts;

(v) Deviation from the policy should be made only with the approval of the Board of Directors.

17 (vi) In cases where ARCs have exposure to a borrower in respect of which a resolution plan is under implementation in terms of the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 , as amended from time to time, ARCs shall also sign the inter-creditor agreement (ICA) and adhere to all its provisions .

(4) Enforcement of Security Interest

18 (i) ARCs are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors holding not less than 60% of the amount outstanding to a borrower as against 75% hitherto.

(ii) While taking recourse to the sale of secured assets in terms of Section 13(4) of the Act, a ARC may itself acquire the secured assets, either for its own use or for resale, only if the sale is conducted through a public auction.

(5) 19 Settlement of dues payable by the borrower

(i) Settlement of dues with the borrower shall be done only after the proposal is examined by the IAC mentioned at Para 6 (B)(1)(v)(b)(i) above. The IAC, after assessing the financial position of the borrower, the time frame available for recovery of the dues from the borrower, projected earnings & cash flows of the borrower and other relevant aspects, shall give its recommendations to the ARC regarding settlement of dues with the borrower.

(ii) The Board of Directors including at least two independent directors shall deliberate on the recommendations of IAC and consider the various options available for recovery of dues before deciding whether the option of settlement of dues with the borrower is the best option available under the existing circumstances and the decision, along with detailed rationale, shall be specifically recorded in the minutes of the Board meeting.

(iii) Settlement with the borrower should be done only after all possible steps to recover the dues have been taken and there are no further prospects of recovering the debt.

(iv) The Net Present Value (NPV) of the settlement amount should generally be not less than the realizable value of securities. If there is a significant variation between the valuation of securities recorded at the time of acquisition of financial assets and the realisable value assessed at the time of entering into a settlement, reasons thereof shall be duly recorded.

(v) The settlement amount should preferably be paid in lump sum. In cases where the borrower is unable to pay the entire amount in lump sum, IAC shall make specific recommendations about minimum upfront lump-sum payment and maximum repayment period.

(vi) ARCs shall frame a Board-approved policy based on the above-mentioned framework.

20 (6) Conversion of any portion of debt into equity of a borrower company

(i) Every ARC shall frame a policy, duly approved by the Board of Directors, laying down the broad parameters for conversion of debt into shares of the borrower company;

In cases of the Financial Assets which have turn around potential after restructuring but normally with huge default and unsustainable level of debt, it will be necessary to arrive at sustainable level of debt, on the basis of evaluation of detailed business plan with projected level of operations, which can be serviced by the company. A part of residual unsustainable debt may have to be converted to equity for an optimal debt equity structure. While ARCs are permitted to have significant influence or have a say in decisions surrounding the borrower company’s turn around through conversion of debt into shares, they should not be seen to be running the companies. The shareholding of the ARC shall not exceed 26% of the post converted equity of the company under reconstruction.

21 Provided that ARCs meeting the criteria set out in sub-paragraph (a) below shall be exmepted from the cap of 26% subject to compliance with the provisions of the Act, Guidelines/ Instructions issued by the Bank from time to time as applicable to ARCs as well as Foreign Exchange Management Act, 1999, Reserve Bank of India Act, 1934, Companies Act, 2013, SEBI Regulations and other relevant Statutes. The extent of shareholding post conversion of debt into equity shall be in accordance with permissible Foreign Direct Investment (FDI) limit for that specific sector.

(a) ARCs that meet the conditions mentioned below are exempted from the limit of shareholding at 26% of post converted equity of the borrower company:

(i) The ARC shall be in compliance with NOF requirement of Rs.100 crore on an ongoing basis;

(ii) At least half of the Board of Directors of the ARC comprises of independent directors;

(iii) The ARC shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion;

(iv) The equity shares acquired under the scheme shall be periodically valued and marked to market. The frequency of valuation shall be at least once in a month.

(b) The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which could be considered for managing the companies.

C. Plan for realisation of financial assets

(i) Every ARC may, within the planning period, formulate a plan for realisation of assets, which may provide for one or more of the following measures :

(a) Rescheduling of payment of debts payable by the borrower;

(b) Enforcement of security interest in accordance with the provisions of the Act;

(c) Settlement of dues payable by the borrower;

(d) Change in or take over of the management, or sale or lease of the whole or part of business of borrower as stated in paragraphs 6(B)(1) and 6(B)(2) herein above;

22 (e) conversion of any portion of debt into shares of a borrower company.

23 (ii) ARC shall formulate the policy for realisation of financial assets under which the period for realisation shall not exceed five years from the date of acquisition of the financial asset concerned.

(iii) The Board of Directors of the ARC may increase the period for realisation of financial assets so that the total period for realisation shall not exceed eight years from the date of acquisition of financial assets concerned.

(iv) In case the ARC is one of the lenders in an account where a resolution plan has been finalised and the same extends beyond the maximum resolution period allowed for ARCs as per clause (iii) above, the ARC may accept a resolution period co-terminus with other secured lenders.

(v) The Board of Directors of the ARC shall specify the steps that will be taken by the ARC to realise the financial assets within the time frame referred to in clause (ii) or (iii) above as the case may be.

(vi) The Qualified Buyers (QBs) shall be entitled to invoke the provisions of Section 7(3) of the Act only at the end of such extended period, if the period for realisation is extended under clause (iii) above.

7. Securitisation

24 (1) Issue of SRs - An ARC shall give effect to the provisions of Sections 7(1) and 7(2) of the Act through one or more trusts set up exclusively for the purpose. The ARC shall transfer the assets to the said trusts at the price at which those assets were acquired from the originator if the assets are not acquired directly on the books of the trust:

(i) The trusts shall issue SRs only to QBs; and hold and administer the financial assets for the benefit of the QBs;

(ii) The trusteeship of such trusts shall vest with the ARC;

(iii) The ARC proposing to issue SRs, shall, prior to such an issue, formulate a policy, duly approved by the Board of Directors, providing for issue of SRs under each scheme formulated by the trust;

(iv) The policy referred to in clause (iii) above shall provide that the SRs issued would be transferable / assignable only in favour of other QBs.

25 (2) Investment in SRs issued by the trusts floated by ARC

26 ARCs shall, by transferring funds, invest in the SRs at a minimum of either 15% of the transferors’ investment in the SRs or 2.5% of the total SRs issued, whichever is higher, of each class of SRs issued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme.

27 (3) Restructuring Support Finance

An ARC can utilize a part of funds raised under a scheme from the QBs for restructuring of financial assets acquired under the relative scheme subject to following conditions:

(i) ARCs with acquired assets in excess of Rs.500 crore can float the fund under a scheme which envisages the utilization of part of funds raised from QBs in terms of Section 7(2) of the Act, for restructuring of financial assets acquired out of such funds.

(ii) The extent of funds that shall be utilized for reconstruction purpose should not be more than 25% of the funds raised under the scheme in terms of Section 7(2) of the Act. The funds raised to be utilized for reconstruction (within the ceiling of 25%) should be disclosed upfront in the scheme. Further, the funds utilized for reconstruction purposes should be separately accounted for.

(iii) Every ARC shall frame a policy, duly approved by the Board of Directors, laying down the broad parameters for utilization of funds raised from QBs under such a scheme.

(4) Disclosures

Every ARC intending to issue SRs shall make disclosures as mentioned in the Annex .

28 (5) In order to enable the QBs to know the value of their investments in the SRs issued by the ARC, the ARCs registered with the Bank under the Act, were advised to declare NAV of the SRs issued by them at periodical intervals.

8. Requirement as to capital adequacy

(1) Every ARC shall maintain, on an ongoing basis, a capital adequacy ratio, which shall not be less than fifteen percent of its total risk weighted assets. The risk-weighted assets shall be calculated as the weighted aggregate of On-Balance Sheet and Off-Balance Sheet items as detailed hereunder:

Weighted risk assets

9. Deployment of Funds

(i) The ARC, may as a sponsor and for the purpose of establishing a joint venture, invest in the equity share capital of a ARC formed for the purpose of asset reconstruction;

29 (ii) The ARC may deploy any surplus funds available with it, in terms of a policy framed in this regard by its Board of Directors, in Government securities and deposits with scheduled commercial banks, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development or such other entity as may be specified by the Bank from time to time;

30 In addition, ARCs can deploy the available surplus funds in short-term instruments viz., money market mutual funds, certificates of deposit and corporate bonds/ commercial papers which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible CRA, subject to the following conditions:

a) Maximum investment in such instruments is capped at 10% of the NOF of the ARC.

b) The ARC shall have a Board-approved policy in this regard.

31 (iii) No ARC shall, invest in land or building,

Provided that the restriction shall not apply to investment by ARC in land and buildings for its own use up to 10% of its owned fund;

Provided further that the restriction shall not apply to land and building acquired by the ARC in satisfaction of claims in ordinary course of its business of reconstruction of assets in accordance with the provisions of Act;

Provided further that any land and / or building acquired by ARC in the ordinary course of its business of reconstruction of assets while enforcing its security interest, shall be disposed of within a period of five years from the date of such acquisition or such extended period as may be permitted by the Bank in the interest of realization of the dues of the ARC.

32 (iv) ARCs may deploy their funds for undertaking restructuring of acquired loan account with the sole purpose of realizing their dues.

10. Accounting Year

Every ARC shall prepare its balance sheet and profit and loss account as on March 31 every year. ARCs are advised in their balance sheet to classify all the liabilities due within one year as "current liabilities" and assets maturing within one year along with cash and bank balances as "current assets". Capital and Reserves will be treated as liabilities on liability side while investment in SRs and long-term deposits with banks will be treated as fixed assets on the assets side.

11. Asset Classification

(1) Classification

(i) Every ARC shall, after taking into account the degree of well-defined credit weaknesses and extent of dependence on collateral security for realisation, classify the assets 33 [held in its own books] into the following categories, namely :

(a) Standard assets

(ii) The NPAs shall be classified further as

(a) 'Sub-standard asset' for a period not exceeding twelve months from the date it was classified as NPA;

b) 'Doubtful asset' if the asset remains a sub-standard asset for a period exceeding twelve months;

34 (c) 'Loss asset' if (A) the asset is non-performing for a period exceeding 36 months; (B) the asset is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non-availability of security; (C) the asset has been identified as loss asset by the ARC or its internal or external auditor; or (D) the financial asset including SRs is not realized within the total time frame specified in the plan for realization formulated by the ARC under paragraph 6(C)(ii) or 6(C)(iii) and the ARC or the trust concerned continues to hold those assets.

(iii) Assets acquired by the ARC for the purpose of asset reconstruction may be treated as standard assets during the planning period, if any.

(2) Asset Reconstruction: Renegotiated / Rescheduled assets

(i) Where the terms of agreement regarding interest and/ or principal relating to standard asset have been renegotiated or rescheduled by an ARC (other wise than during planning period) the asset concerned shall be classified as sub-standard asset with effect from the date of renegotiation/ reschedulement or continue to remain as a sub-standard or doubtful asset as the case be.

(ii) The asset may be upgraded as a standard asset only after satisfactory performance for a period of twelve months as per the renegotiated / rescheduled terms.

(3) Provisioning requirements

Every ARC shall make provision against NPAs, as under: -

12. Investments

35 (i) Considering nature of investment in SRs where underlying cash flows are dependent on realization from non-performing assets, it can be classified as available for sale. Hence investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category. Net depreciation, if any shall be provided for. Net Appreciation, if any should be ignored.

(ii) All other investments should be valued at lower of cost or realisable value. Where market rates are available, the market value would be presumed to be the realisable value and in cases where market rates are not available, the realisable value should be the fair value. However, investments in other registered ARC shall be treated as long term investments and valued in accordance with the Accounting Standards and Guidance notes issued by the Institute of Chartered Accountants of India (ICAI).

13. Income recognition

36 (i) Yield on SRs should be recognised only after the full redemption of the entire principal amount of SRs. This will be effective from the accounting year 2014-15.

(ii) Upside income should be recognized only after full redemption of SRs. This will be effective from the accounting year 2014-15.

37 (iii) Management fees should be calculated and charged as a percentage of the NAV calculated at the lower end of the range of the Recovery Rating specified by the Credit Rating Agency (CRA) provided that the same is not more than the acquisition value of the underlying asset. However, management fees are to be reckoned as a percentage of the actual outstanding value of SRs, before the availability of NAV of SRs.

Management fees may be recognized on accrual basis. Management fees recognized during the planning period must be realized within 180 days from the date of expiry of the planning period. Management fees recognized after the planning period should be realized within 180 days from the date of recognition. Unrealised Management fees should be reversed thereafter. Further any unrealized Management fees will be reversed if before the prescribed time for realisation, NAV of the SRs fall below 50% of face value. However, ARCs are allowed to write off the accrued unrealised Management Fee receivables prior to March 31, 2014 in a staggered manner in four half-yearly instalments over a period of two years, 2014-15 and 2015-16 subject to the disclosure of age wise such receivables in the Balance Sheet of the company.

(iv) The income recognition on all other items shall be based on recognised accounting principles;

(v) All the Accounting Standards and Guidance Notes issued by the ICAI shall be followed in so far as they are not inconsistent with the guidelines contained herein;

(vi) Interest and any other charges in respect of all the NPAs shall be recognised only when they are actually realised. Any such unrealised income recognised by an ARC before the asset became non-performing and remaining unrealised shall be derecognised.

14. Disclosures in the balance sheet

(1) Every ARC shall, in addition to the requirements of Schedule III of the Companies Act, 2013 , prepare the following schedules and annex them to its balance sheet :

Continuing Disclosures

(i) The names and addresses of the banks/ FIs from whom financial assets were acquired and the value at which such assets were acquired from each such bank/ FIs;

(ii) Dispersion of various financial assets industry-wise and sponsor-wise. (dispersion is to be indicated as a percentage to the total assets);

(iii) Details of related parties as per Accounting Standard and Guidance notes issued by the ICAI and the amounts due to and from them;

(iv) A statement clearly charting therein the migration of financial assets from standard to non-performing;

38 [(v) Value of financial assets acquired during the financial year either on its own books or in the books of the trust;

(vi) Value of financial assets realized during the financial year;

(vii) Value of financial assets outstanding for realization as at the end of the financial year;

(viii) Value of SRs redeemed partially, and the SRs redeemed fully during the financial year;

(ix) Value of SRs pending for redemption as at the end of the financial year;

(x) Value of SRs which could not be redeemed as a result of non-realization of the financial asset as per the policy formulated by the ARC under Paragraph 6(C)(ii) or 6(C)(iii);

(xi) Value of land and/ or building acquired in ordinary course of business of reconstruction of assets (year wise);]

39 (xii) The basis of valuation of assets if the acquisition value of the assets is more than the Book Value;

(xiii) The details of the assets disposed of (either by write off or by realization) during the year at a discount of more than 20% of valuation as on the previous year end and the reasons therefor;

(xiv) The details of the assets where the value of the SRs has declined more than 20% below the acquisition value.

(2) (i) The accounting policies adopted in preparation and presentation of the financial statements shall be in conformity with the applicable prudential norms prescribed by the Bank;

(ii) Where any of the accounting policies is not in conformity with these guidelines/ instructions, the particulars of departures shall be disclosed together with the reasons therefor and the financial impact on account thereof. Where such an effect is not ascertainable, the fact shall be so disclosed citing the reasons therefor;

(iii) An inappropriate treatment of an item in Balance Sheet or Profit and Loss Account cannot be deemed to have been rectified either by disclosure of accounting policies used or by disclosure in notes to balance sheet and profit and loss account.

15. Internal Audit

Every ARC shall put in place an effective Internal Control System providing for periodical checks and review of the asset acquisition procedures and asset reconstruction measures followed by the company and matters related thereto.

16. Exemptions

The Bank may, if it considers necessary for avoiding any hardship to ARC, or for any other just and sufficient reason exempt all ARCs or a particular ARC or class of ARCs, from all or any of the provisions of these guidelines/ instructions either generally or for any specified period, subject to such conditions as the Bank may impose.

17. Submission of Quarterly Statement

40 ARCs are advised to follow the instructions contained in Master Direction-Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016 as amended from time to time.

18. Submission of Audited Balance Sheet

41 All the ARCs were advised to furnish a copy of audited balance sheet along with the Directors' Report / Auditors' Report every year within one month from the date of Annual General Body Meeting, in which the audited accounts are adopted, to the Regional Office of the Department of Supervision of the Bank under whose jurisdiction it is registered .

42 19. Submission of data to Credit Information Companies

(1) Every ARC shall become a member of at least one credit information company (CIC) which has obtained certificate of registration from the Bank in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005.

(2) ARC shall provide periodically to the CIC of which it is a member, accurate data / history of the borrowers.

(3) ARCs should submit the list of wilful defaulters as at end of March, June, September and December every year to the CIC of which it is a member.

(4) Every ARC shall place on its website the list of suit-filed accounts of wilful defaulters.

For the purpose of this paragraph, the expression “wilful defaulter” shall have the same meaning as is assigned to that expression in the circulars issued to banks by Department of Regulation.

20. Filing of transactions with Central Registry set up under the Act

ARCs shall file and register the records of all transactions related to securitisation, reconstruction of financial assets and creation of security interest, if any, with Central Registry.

43 21. Submission of Financial Information to Information Utilities

Instructions contained in Circular DBR.No.Leg.BC.98/09.08.019/2017-18 dated December 19, 2017 on the captioned subject are applicable to all registered ARCs.

44 22. Reporting to Indian Banks’ Association (IBA) – The ARCs shall report to IBA the details of Chartered Accountants, Advocates and Valuers (who have committed serious irregularities in the course of rendering their professional services) for including in the IBA database of Third Party Entities involved in fraud. However, the ARCs will have to ensure that they follow meticulously the procedural guidelines issued by IBA (Circular No.RB-II/Fr./Gen/3/1331 dated August 27, 2009) and also give the parties a fair opportunity to explain their position and justify their action before reporting to IBA. If no reply/ satisfactory clarification is received from them within one month, the ARCs shall report their details to IBA. ARCs should consider this aspect before assigning any work to such parties in future.

45 23. Bank’s prior approval for any substantial change in management by way of transfer of shares

Notwithstanding anything to the contrary contained in the terms and conditions stipulated in the certificate of registration issued under Section 3 of the Act, ARCs shall obtain prior approval of Reserve Bank only for transfers that result in substantial change in management namely –

46 any transfer or fresh issuance of shares resulting in a new sponsor

any transfer or fresh issuance of shares resulting in cessation of an existing sponsor

an aggregate transfer of ten percent or more of the total paid up share capital of the ARC by a sponsor during the period of five years commencing from the date of certificate of registration

Explanation : For the purposes of this clause, a transfer shall be deemed to be a transfer of more than ten percent of the total paid up share capital of the ARC if the aggregate of all the transfer of shares made by the sponsor prior to that transfer, and including that transfer, is 10% or more of the total paid up share capital of the ARC.

24. Fit and Proper Criteria for Sponsors/ Investors

47 (1) The provisions of the Master Direction - Fit and Proper Criteria for Sponsors - Asset Reconstruction Companies (Reserve Bank) Directions, 2018 as amended from time to time, shall apply to the existing and proposed sponsors of the ARCs.

48 (2) All ARCs shall comply with the instructions contained in the Bank’s circular DOR.CO.LIC.CC No.119/03.10.001/2020-21 February 12, 2021 as amended from time to time.

49 25. Fair Practices Code

In order to achieve the highest standards of transparency and fairness in dealing with stakeholders, ARCs are advised to put in place Fair Practices Code (FPC) duly approved by their Board. The following paragraphs provide the minimum regulatory expectation while each ARC’s Board is free to enhance its scope and coverage. The FPC must be followed in right earnest and the Board must involve itself in its evolution and proper implementation at all times. The FPC shall be placed in public domain for information of all stakeholders.

(1) ARC shall follow transparent and non-discriminatory practices in acquisition of assets. It shall maintain arm’s length distance in the pursuit of transparency.

(2) In order to enhance transparency in the process of sale of secured assets,

(i) invitation for participation in auction shall be publicly solicited; the process should enable participation of as many prospective buyers as possible;

(ii) terms and conditions of such sale may be decided in wider consultation with investors in the SRs as per the Act;

(iii) 50 the ARCs shall ensure compliance with Section 29A of Insolvency and Bankruptcy Code, 2016 in dealing with prospective buyers.

(3) ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan, subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled/ paid.

(4) ARCs shall put in place Board approved policy on the management fee, expenses and incentives, if any, claimed from trusts under their management. The Board approved policy should be transparent and ensure that management fee is reasonable and proportionate to financial transactions. 51 Any management fee/ incentives charged towards the asset reconstruction or securitisation activity shall come only from the recovery effected from the underlying financial assets. The Board-approved policy shall indicate the quantitative cap/ limit on the management fee/ incentives under various scenarios, any deviation from which shall require approval of the Board.

(5) ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy, approved by the Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARC shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the Bank nor impede effective supervision by the Bank. The outsourced agency, if owned/controlled by a director of the ARC, the same may be made part of the disclosures specified in the Master Circular.

(6) In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. ARCs shall ensure that the staff are adequately trained to deal with customers in an appropriate manner.

(i) ARCs shall put in place a Board approved Code of Conduct for Recovery Agents and obtain their undertaking to abide by that Code. ARCs, as principals, are responsible for the actions of their Recovery Agents.

(ii) It is essential that the Recovery Agents observe strict customer confidentiality.

(iii) ARCs shall ensure that Recovery Agents are properly trained to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling, privacy of customer information, etc. They should ensure that Recovery Agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process.

52 (iv) ARCs shall ensure that they or their agents do not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude upon the privacy of the debtors' family members, referees and friends, sending inappropriate messages either on mobile or through social media, making threatening and/ or anonymous calls, persistently 53 calling the borrower and/ or calling the borrower before 8:00 a.m. and after 7:00 p.m. for recovery of overdue loans, making false and misleading representations, etc.

(7) ARCs should constitute Grievance Redressal machinery within the organisation. The name and contact number of designated grievance redressal officer of the ARC should be mentioned in the communication with the borrowers. The designated officer should ensure that genuine grievances are redressed promptly. ARCs' Grievance Redressal machinery will also deal with the issue relating to services provided by the outsourced agency and recovery agents, if any.

(8) ARCs shall keep the information, they come to acquire in course of their business, strictly confidential and shall not disclose the same to anyone including other companies in the group except when (i) required by law; (ii) there is duty towards public to reveal information; or (iii) there is borrower’s permission.

(9) Compliance with FPC shall be subject to periodic review by the Board.

54 26. Corporate Governance Framework

(1) Measures to Enhance Governance of ARCs

(i) Chair and Meetings of the Board of Directors: The Chair of the Board shall be an independent director. In the absence of the Chair of the Board, meetings of the Board shall be chaired by an independent director. The quorum for the Board meetings shall be one-third of the total strength of the Board or three directors, whichever is higher. Further, at least half of the directors attending the meetings of the Board shall be independent directors.

(ii) Tenure of Managing Director (MD)/ Chief Executive Officer (CEO) and Whole -time Directors (WTDs): Tenure of MD/ CEO or WTD shall not be for a period of more than five years at a time and the individual shall be eligible for re-appointment. However, the post of the MD/ CEO or WTD shall not be held by the same incumbent for more than fifteen years continuously. Thereafter, the individual shall be eligible for re-appointment as MD/ CEO or WTD in the same ARC, if considered necessary and desirable by the Board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling period, the individual shall not be appointed or associated with the ARC in any capacity, either directly or indirectly. The ARCs shall put in place appropriate measures to ensure succession planning.

(iii) Age of the MD/ CEO and WTDs: No person shall continue as MD/ CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, ARCs’ Boards are free to prescribe a lower retirement age.

(iv) Performance Review: The performance of MD/ CEO and WTD shall be reviewed by the Board annually.

(2) Committees of the Board

In order to strengthen the oversight by the Board, all ARCs shall constitute the following committees of the Board:

(i) Audit Committee: ARCs shall constitute an Audit Committee of the Board, which shall comprise of non-executive directors only. The Chair of the Board shall not be a member of the Audit Committee. The Audit Committee shall meet at least once in a quarter with a quorum of three members. The meetings of the Audit Committee shall be chaired by an independent director who shall not chair any other committee of the Board. Each of the members of the Audit Committee should have the ability to understand the financial statements as well as the notes/ reports attached thereto and at least one member should have requisite professional expertise/ qualification in financial accounting or financial management. The Audit Committee shall have the same powers, functions and duties as laid down in Section 177 of the Companies Act, 2013. In addition, the Audit Committee shall periodically review and assess the effectiveness of internal control systems, especially with respect to the asset acquisition procedures and asset reconstruction measures followed by the ARC and matters related thereto. The Audit Committee shall also ensure that accounting of management fee/ incentives/ expenses is in compliance with the applicable regulations.

(ii) Nomination and Remuneration Committee: ARCs shall constitute a Nomination and Remuneration Committee of the Board, which shall have the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013. In addition, the Committee shall ensure 'fit and proper' status of proposed/ existing directors and sponsors.

(3) Transition Period

ARCs that were not in compliance with the guidelines prescribed at paragraphs 26 (1) and (2) above as on October 11, 2022, are required to comply with these guidelines latest by April 10, 2023.

(4) Fit and Proper Criteria for Directors and CEO

(i) In terms of the provisions of the SARFAESI Act, prior approval of the Reserve Bank of India is required for appointment/ re-appointment of a director or MD/ CEO. ARCs shall undertake due diligence to determine the suitability of the person for the post, based upon track record, integrity and other ‘fit and proper’ criteria. For this purpose, ARCs shall obtain necessary information and declaration from the appointed/ existing directors and MD/ CEO in the format enclosed in Appendix I . The Nomination and Remuneration Committee shall scrutinise the declarations for this purpose.

(ii) The declaration in Appendix I with updated information shall be obtained from the directors/ MD/ CEO on an annual basis, as on March 31 of each year. Any change in position with reference to items in paragraphs 3 and 4 of Appendix I shall be communicated to the Department of Regulation of the Reserve Bank of India for its consideration.

(iii) The ARC shall require the directors to execute a covenant in the format enclosed at Appendix II , at the time of their joining the ARC, binding them to discharge their responsibilities to the best of their abilities, individually and collectively. This deed shall be preserved by the ARC and should be made available to the Reserve Bank of India as and when called for.

27. ARCs as Resolution Applicant under Insolvency and Bankruptcy Code, 2016 (IBC)

In terms of the provision of Section 10(2) of the SARFAESI Act, ARCs have been permitted to undertake those activities as a Resolution Applicant (RA) under IBC which are not specifically allowed under the SARFAESI Act. This permission shall be subject to the following conditions:

(i) The ARC has a minimum NOF of ₹1,000 crore.

(ii) The ARC shall have a Board-approved policy regarding taking up the role of RA which may inter alia include the scope of activities, internal limit for sectoral exposures, etc.

(iii) A committee comprising of a majority of independent directors shall be constituted to take decisions on the proposals of submission of resolution plan under IBC.

(iv) The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which may be considered for managing the firms/ companies, if needed.

(v) In respect of a specific corporate insolvency resolution process (CIRP), the ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the Adjudicating Authority under IBC. In case of non-compliance with this condition, the ARCs shall not be allowed to submit any fresh resolution plans under IBC either as a resolution applicant or a resolution co-applicant.

(vi) The ARC shall make additional disclosures in the financial statements with respect to assets acquired under IBC in addition to the existing disclosure requirements. These would include the type and value of assets acquired under IBC, the sector-wise distribution based on business of the corporate debtor, etc.

(vii) The ARC shall disclose the implementation status of the resolution plans approved by the Adjudicating Authority on a quarterly basis in their financial statements.

(1) Disclosure in Offer Document

55 A. Relating to the Issuer of SRs

i. Name, place of Registered Office, date of incorporation, date of commencement of business of the ARC;

ii. Particulars of sponsors, shareholders, and a brief profile of the Directors on the Board of the ARC with their qualifications and experience;

iii. Summary of financial information of the company for the last five years or since commencement of business of the company, whichever is shorter;

iv. Details of Securitisation / Asset Reconstruction activities handled, if any, in the last eight years or since commencement of business, whichever is shorter. This shall inter alia include track record of returns generated for all SR investors on the schemes floated in the last eight years.

v. Track record of recovery rating migration and engagement with credit rating agencies of schemes floated in the last eight years

vi. Whether the scheme envisages the utilization of part of funds raised for restructuring of financial assets acquired out of such funds? If so, the percentage of funds raised which will be utilized for restructuring purposes.

B. Terms of Offer

i. Objects of offer;

ii. Description of the instrument giving particulars relating to its form, denomination, issue price, etc together with an averment that the transferability of SRs is restricted to the QBs;

iii. Arrangements made for management of assets and extent of management fee charged by ARC;

iv. Interest rate/ probable yield;

v. Terms of payment of principal/ interest, date of maturity/ redemption;

vi. Servicing and administration arrangement;

vii. Details of credit rating, if any, and a summary of the rationale for the rating;

viii. Description of assets being securitized including date of acquisition, valuation, and the interest of the ARC in the assets at the time of issue of SR;

ix. Geographical distribution of asset pool;

x. Residual maturity, interest rates, outstanding principal of the asset pool;

xi. Nature and value of underlying security, expected cash flows, their quantum and timing, credit enhancement measures;

xii. Policy for acquisition of assets and valuation methodology adopted;

xiii. Terms of acquisition of assets from banks/ FIs;

xiv. Details of performance record with the Originators;

xv. Terms of replacement of assets, if any, to the asset pool;

xvi. Statement of risk factors, particularly relating to future cash flows and steps taken to mitigate the same;

xvii. Arrangements, if any, for implementing asset reconstruction measures in case of default;

xviii. Duties of the Trustee;

xix. Specific asset reconstruction measures, if any, on which approvals will be sought from investors;

xx. Dispute Redressal Mechanism.

(2) Disclosure on quarterly basis

i. Defaults, prepayments, losses, if any, during the quarter;

ii. Change in credit rating, if any;

iii. Change in profile of the assets by way of accretion to or realisation of assets from the existing pool;

iv. Collection summary for the current and previous quarter;

v. Any other material information, which has a bearing on the earning prospects affecting the QBs.

Guidance Notes for Asset Reconstruction Companies

The Bank has evolved Guidance Note, gist of which is given below. The words and expressions used in these notes shall have the same meaning as in the Act.

(1) Acquisition of Financial Assets

i) Every ARC is required to evolve Asset Acquisition Policy within 90 days of getting the certificate of registration which shall, inter alia, provide that the transactions will take place in a transparent manner and at a fair price in a well-informed market, and the transactions are executed on arm's length basis by exercise of due diligence.

ii) The share of financial assets to be acquired from the bank / FI should be appropriately and objectively worked out keeping in view the provision in the Act requiring consent of secured creditors holding not less than 60% of the amount outstanding to a borrower for the purpose of enforcement of security interest;

iii) For easy and faster realisability, all the financial assets due from a single debtor to various banks/ FIs may be considered for acquisition. Similarly, financial assets having linkages to the same collateral may be considered for acquisition to ensure relatively faster and easy realisation.

iv) Both fund and non-fund based financial assets may be included in the list of assets for acquisition. Assets classified as 56 Special Mentioned Account (SMA) in the books of the originator may also be acquired.

v) Acquisition of funded assets should not include takeover of outstanding commitments, if any, of any bank/ FI to lend further. Terms of acquisition of security interest in non-fund transactions, should provide for the relative commitments to continue with bank/ FI, till demand for funding arises.

vi) Loans not backed by proper documentation should be avoided.

vii) As far as possible, the valuation process should be uniform for assets of same profile and should ensure that the valuation of the financial assets is done in scientific and objective manner. Valuation may be done internally or by engaging an independent agency, depending upon the value of the assets. Ideally, valuation may be entrusted to the committee authorised to approve acquisition of assets, which may carry out the task in line with an Asset Acquisition Policy laid down by the board of directors in this regard.

viii) The assets acquired by ARC should be transferred to the trusts set up by the ARC at the price at which these were acquired from the originator of the asset. However, there is no restriction on acquisition of assets from banks/ FIs directly in the books of trusts set up by ARC.

(2) Issuance of SRs

i) Every ARC shall issue the SRs through the trust set up exclusively for the purpose. The trusteeship of such trust shall vest with the ARC.

ii) The trust shall issue SRs only to QBs and such SRs shall be transferable/ assignable only in favour of other QBs.

iii) Every ARC intending to issue SRs shall make disclosures in the offer document as prescribed by the Bank from time to time.

57 [(iv) Commonality and conflict of interest, if any, between the ARC and Rating Agency should be disclosed.

(v) Special features of SRs

(a) SRs cannot be strictly characterized as debt instruments since they combine the features of both equity and debt. However, these are recognized as securities under Securities Contracts (Regulation) Act, 1956.

(b) The cash flows from the underlying assets cannot be predicted in terms of value and intervals.

(c) These instruments when rated would generally be below investment grade. These instruments are privately placed.

(vi) Rating/ Grading of SRs

58 (a) Every ARC shall mandatorily obtain initial rating/ grading of SRs from a 59 [SEBI registered] CRA within a period of six months from the date of acquisition of assets and declare forthwith, the NAV of the SRs issued by it. Thereafter, ARCs will get the rating/ grading of SRs reviewed from a registered CRA as on June 30, and December 31 every year and declare the NAV of SRs forthwith, to enable the QBs to value their investment in SRs. 60 ARCs shall retain a CRA for at least 6 rating cycles (of half year each). If a CRA is changed mid-way through these 6 rating cycles, the ARC shall disclose the reason for such change. For arriving at NAV, ARC shall get the SRs rated on ‘recovery rating scale’ and require the rating agencies to disclose the assumptions and rationale for rating. 61 ARCs shall mandatorily obtain the recovery rating from the CRAs and disclose the assumptions and rationale behind the rating to SR holders.

(b) The rating/ grading should be based on 'recovery risk’ as against 'default’ which is the basis for rating assignments in normal assets, i.e. how much more can be recovered instead of timely payment. Rating should reflect present value of the anticipated recoverability of future cash flows.

(c) The ratings will be assigned on a specifically developed rating scale called “Recovery Rating (RR) scale”. Each rating category in the recovery scale will have an associate range of recovery, expressed in percentage terms, which can be used for arriving at NAV of SRs. Symbols should be assigned by rating agencies to the associated range of recovery, which would inter-se not deviate by a specified percentage points, say (+/ -) 10%. The rating would be indicative.

(d) The Recovery Rating should be assessed after factoring in any other relevant obligation and not on the original debt obligation.

(e) The other key factors that should be factored in while assigning Recovery Rating are extent of debt acquired, composition of lenders, collaterals available, security and seniority of debt, individual lender vis-à-vis institutional lender, estimated cash flows, uncertainty in realising expected cash flows in initial period, management, business risk, financial risk, etc.

(f) The Recovery Rating should reflect changes like change in resolution strategy of the ARC that take place from time to time.

(g) The Recovery Rating will factor in likely cash flows from the underlying impaired assets till the maturity of the SRs.

(h) The Recovery Rating should comprise of rating of not only the SRs of the scheme as a whole but wherever feasible a desegregation of each component in the scheme, which means the underlying assets of each entity in the scheme forming the basket should also be rated.

(i) The Rating Agency should disclose the rationale for rating on request.

(vii) Methodology for valuation of SRs for declaration of NAV

Each rating category in the recovery scale will have an associate range of recovery, expressed in percentage terms, which can be used for computing NAV of SRs. The NAV should be restricted within the recovery range associated with the rating assigned to the SRs. The ARC based on its recovery experience should choose a particular percentage within the recovery range indicated by the Rating Agency. The Recovery Rating percentage so picked by the ARC multiplied by the face value of the SR will give the NAV. The ARC should provide the rationale for selection of the particular percentage of Recovery Rating. For example, if range is between 81% - 90%, ARC may pick up 87% based on its judgement. The face value of say Rs 10 multiplied by the recovery percentage i.e. 87% would give the NAV as Rs 8.70].

List of Notifications Issued

Notification No.DNBS.1/CGM(CSM)/2003 dated March 7, 2003

Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003

Notification No.DNBS.3/CGM(OPA)/2003 dated August 28, 2003

Notification No.DNBS.4/ED(SG)/-2004 dated March 29, 2004

Notification No.DNBS.5/CGM(PK)/-2006 dated September 20, 2006

Notification No.DNBS.6/CGM(PK)/-2006 dated October 19, 2006

Notification DNBS(PD-SC/RC)No.7/CGM(ASR)/-2010 dated April 21, 2010

Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010 .

Notification No.DNBS.PD(SC/RC).9/CGM(ASR)-2010 dated April 21, 2010

Notification No.DNBS.PD(SC/RC)10/PCGM(NSV)-2014 dated January 23, 2014

Notification No.DNBS.PD(SC/RC)11/PCGM(KKV)-2014 dated August 05, 2014

Notification No.DNBS.PD(SC/RC)12/PCGM(KKV)-2014 dated August 07, 2014

Notification No.DNBR.PD(SC/RC)01/CGM(CDS)-2014-15 dated February 24, 2015

Notification No.DNBR.PD(SC/RC)02/CGM(CDS)-2014-15 dated May 07, 2015

Notification DNBR (PD-ARC) No.05/ED(SS)-2017 dated April 28, 2017

List of Circulars Issued

DNBS.PD.CC.1/SCRC/10.30/2002-03 dated April 23, 2003

DNBS.PD.CC.2/SCRC/10.30/2003-04 dated March 29, 2004

DNBS.PD.CC.3/SCRC/10.30.000/2006-07 dated September 20, 2006

DNBS.PD.CC.4/SCRC/10.30.000/2006-07 dated October 19, 2006

DNBS.(PD)CC.No.5/SCRC/10.30.000/2006-07 dated April 25, 2007

DNBS.(PD)CC.No.6/SCRC/10.30.049/2006-07 dated May 28, 2007

DNBS.(PD)CC.No.8/SCRC/10.30.000/2007-08 dated March 5, 2008

DNBS.(PD)CC.No.9/SCRC/10.30.000/2007-08 dated April 22, 2008

DNBS.(PD)CC.No.12/SCRC/10.30.000/2008-09 September 26, 2008

DNBS/PD(SC/RC)CC.No.13/26.03.001/2008-09 April 22, 2009

DNBS(PD)CC.No.14/SCRC/26.01.001/2008-09 April 24, 2009

DNBS.(PD).CC.No.17/SCRC/26.03.001/2009-2010 dated April 21, 2010

DNBS.(PD).CC.No.18/SCRC/26.03.001/2009-2010 dated April 21, 2010

DNBS.(PD).CC.No.19/SCRC/26.03.001/2009-2010 dated April 21, 2010

DNBS.(PD).CC.No.23/SCRC/26.03.001/2010-2011 dated November 25, 2010

DNBS.(PD).CC.No.24/SCRC/26.03.001/2010-2011 dated May 25, 2011

DNBS(PD)CC.No.34/SCRC/26.03.001/2013-14 dated December 31, 2013

DNBS(PD)CC.No.35/SCRC/26.03.001/2013-14 dated January 23, 2014

DNBS(PD)CC.No.36/SCRC/26.03.001/2013-14 dated March 19, 2014

DNBS(PD)CC.No.37/SCRC/26.03.001/2013-14 dated March 19, 2014

DNBS(PD)CC.No.38/SCRC/26.03.001/2013-14 dated April 23, 2014

DNBS(PD)CC.No.41/SCRC/26.03.001/2014-15 dated August 05, 2014

DNBS(PD)CC.No.42/SCRC/26.03.001/2014-15 dated August 07, 2014

DNBR(PD)CC.No.01/SCRC/26.03.001/2014-15 dated February 24, 2015

DNBR(PD)CC.No.02/SCRC/26.03.001/2014-15 dated May 07, 2015

DNBR.(PD).CC.No.03/SCRC/26.03.001/2015-16 dated July 01, 2015

DNBR(PD)CC.No.04./SCRC/26.03.001/2015-16 dated July 01, 2015

DNBR.PD(ARC)CC.No.03/26.03.001/2016-17 dated April 28, 2017

DNBR.PD(ARC)CC.No.04/26.03.001/2017-18 dated November 23, 2017

DNBR.PD(ARC)CC.No.05/26.03.001/2017-18 dated January 04, 2018

DNBR.PD(ARC)CC.No.06/26.03.001/2018-19 dated October 25, 2018

DNBR.PD(ARC)CC.No.07/26.03.001/2018-19 dated June 28, 2019

DOR.NBFC(ARC)CC.No.8/26.03.001/2019-20 dated December 6, 2019

DOR.NBFC(ARC)CC.No.9/26.03.001/2020-21 dated July 16, 2020

  • DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

1 Inserted vide Circular No.DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated March 13, 2020

2 Inserted vide Circular No.DNBS/PD (SC/RC) No.17/26.03.001/2009-10 dated April 21, 2010

3 Substituted vide Circular No.DNBS (PD) CC.No.18/SCRC/26.03.001/2009-2010 dated April 21, 2010

4 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

5 Inserted vide Circular No.DNBS/PD (SC/RC) No.17/26.03.001/2009-10 dated April 21, 2010

6 https://rbi.org.in/scripts/FS_Forms.aspx?fn=14

7 Inserted vide Notification No.DNBS.6/CGM(PK)-2006 dated October 19, 2006

8 Inserted vide Notification No.DNBS.3/CGM(OPA)-2003 dated August 28, 2003

9 Inserted vide Circular No.DNBR.PD (ARC) CC.No.03/26.03.001/2016-17 dated April 28, 2017

10 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

11 Substituted vide Notification No.DNBS.PD(SC/RC).8/CGM (ASR)-2010 dated April 21, 2010

12 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

13 Inserted vide Circular No.DNBR.PD (ARC) CC.No.07/26.03.001/2018-19 dated June 28, 2019

14 Inserted vide Circular No.DOR.NBFC(ARC) CC.No.8/26.03.001/2019-20 dated December 6, 2019

15 Inserted vide Circular No.DNBS (PD)CC.No.38/SCRC/26.03.001/2013-14 dated April 23, 2014

16 Inserted vide Circlar No.DNBS/PD (SC/RC) No.17/26.03.001/2009-10 dated April 21, 2010

17 Inserted vide footnote 5 of the circular No.DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019

18 Inserted vide Circular No.DNBS (PD) CC No.35/SCRC/26.03.001/2013-14 dated January 23, 2014

19 Modified vide Circular No DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

20 Inserted vide Circular No.DNBS (PD)CC No.35/SCRC/26.03.001/2013-14 dated January 23, 2014

21 Inserted vide Circular No.DNBR.PD(ARC)CC.No.04/26.03.001/2017-18 dated November 23, 2017

22 Inserted vide Circular No.DNBS (PD) CC.No.35/SCRC/26.03.001/2013-14 dated January 23, 2014

23 Substituted vide Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010

24 Substituted vide Notification No.DNBS.PD(SC/RC).8/CGM (ASR)-2010 dated April 21, 2010

25 Inserted vide Circular No.DNBS(PD) CC.No.41/SCRC/26.03.001/2014-15 dated August 05, 2014

26 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

27 Inserted vide Circular No.DNBS (PD) CC.No.37/SCRC/26.03.001/2013-14 dated March 19, 2014

28 Inserted vide Notification No.DNBS.PD(SC/RC).9/CGM (ASR)-2010 dated April 21, 2010

29 Substituted vide Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010

30 Inserted vide circular no. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

31 Substituted vide Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010

32 Inserted vide Circular No.DNBS/PD (SC/RC)CC.No.13/26.03.001/2008-09 dated April 22, 2009

33 Modified vide Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010

34 Modified vide Notification No.DNBS.PD(SC/RC).8/CGM(ASR)-2010 dated April 21, 2010

35 Inserted vide Circular No.DNBS (PD) CC No.38/SCRC/26.03.001/2013-14 dated April 23, 2014

36 Inserted vide Circular No.DNBS (PD) CC No.38/SCRC/26.03.001/2013-14 dated April 23, 2014

37 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

38 Inserted vide Circular No.DNBS (PD)CC.No.18/SCRC/26.03.001/2009-2010 dated April 21, 2010

39 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

40 Substituted vide Master Direction DNBS.PPD.02/66.15.001/2016-17 dated September 29, 2016

41 Inserted vide Notification No.DNBS.4/ED.(SG)/-2004 dated March 29, 2004

42 Inserted vide Notification No.DNBS (PD-SC/RC) No.12/PCGM (KKV)-2014 dated August 07, 2014

43 Inserted vide Circular No.DNBR.PD(ARC)CC.No.05/26.03.001/2017-18 dated January 04, 2018

44 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

45 Inserted vide Notification No.DNBR(PD-SC/RC) No.01/CGM (CDS)/2014-2015 dated February 24, 2015

46 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

47 Inserted vide Master Direction DNBR.PD (ARC) CC.No.06/26.03.001/2018-19 dated October 25, 2018

48 Inserted vide Circular No.DOR.CO.LIC.CC No.119/03.10.001/2020-21 dated February 12, 2021

49 Inserted vide Circular No.DOR.NBFC(ARC) CC.No.9/26.03.001/2020-21 dated July 16, 2020

50 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

51 Inserted vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

52 Inserted vide Circular No. DOR.ORG.REC.65/21.04.158/2022-23 dated August 12, 2022

53 For example- calling repeatedly

54 Inserted vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

55 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

56 Modified vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

57 Inserted vide Guidelines DNBS (PD) CC.No.6/SCRC/10.30.049/2006-2007 dated May 28, 2007

58 Inserted vide Notification No.DNBS(PD-SC/RC) No.11/PCGM (KKV)/-2014 dated August 05, 2014

59 Inserted vide Guidelines DNBS (PD) CC.No.6/SCRC/10.30.049/2006-2007 dated May 28, 2007

60 Inserted vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

61 Inserted vide Circular No. DoR.SIG.FIN.REC.75 /26.03.001/2022-23 dated October 11, 2022

IBC Laws

All about Indian Insolvency Laws

Emerging Landscape for Asset Reconstruction Companies – By Satish Kumar Gupta, Insolvency Professional

Emerging landscape for asset reconstruction companies, opportunities and challenges.

“With increasing stressed assets in the financial eco-system, ARCs strive to face greater challenges to capture these opportunities”

[ Satish Kumar Gupta is as a stressed asset specialist with more than 25 years of experience. He was the Resolution Professional for Essar Steel India Ltd, the largest account under IBC, which got successfully resolved recently. He can be reached on [email protected] .]

ARCs have been playing an important role in the resolution of stressed assets by adapting their business model and aligning with ongoing ever evolving regulatory changes. ARCs are enhancing their role in stressed assets space by co-investing with various investors by leveraging on the unique advantages available with ARC structure and becoming a source of alternative capital for banks. ARCs are playing critical role as more and more ARCs are bidding for large IBC accounts and distressed NBFCs portfolios. Multiple ARCs are present in IBC bidding or purchase of NPAs which demonstrates active participation on its own and/or on behalf of investors to tap large pool of capital available. However, ARCs face multiple challenges also before it takes quantum jump to tap these opportunities.

Current Scenario

As per recent Financial Stability Report of RBI, the gross and net non-performing asset (GNPA and NNPA) ratios of all SCBs were at levels of 8.5 per cent and 3.0 per cent in March 2020. As per aforesaid report, given the fact that impact of moratorium is still uncertain and evolving, the exact nature of how the same will play out on the quality of banking assets is difficult to ascertain accurately. The stress tests indicate that the GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under the very severely stressed scenario. Similarly, NBFCs’ Gross NPAs which were at 6.3% of advances as of September 2019 are expected to reach above 9 per cent level as per various reports. NPAs of NBFCs comprising real estate loans, structured loans, etc. are additional pool of assets which are now available to distressed debt investors. The Government and RBI have announced various schemes and measures to reduce stress and NPAs which may not allow NPAs rising to such high levels. Still on account of large number of earlier NPAs, failure or non-fructification of earlier restructuring schemes, contraction in economy, fresh slippages etc., pool of NPAs and stressed assets is expected to increase significantly.

With banks currently sitting on large NPAs and stressed assets against which significant provisions have been made, banks would be able to undertake sale of these assets comfortably. In large assets, banks can undertake consortium sale of stressed assets to ARCs and distressed debt investors for its expeditious resolution. While opportunities are large from banks and NBFCs, ARCs face challenges in raising capital, by way of increased regulatory oversight, transparency and increased participation of SR holders in decision making.

Details of financial assets securitized by ARCs in last four years till June 2019 as per RBI report are as given below:

Source: Quarterly statements submitted by ARCs

Difference of SRs of Rs 18,888 crore, though not explained in aforesaid RBI report, may be attributed to SRs written-off or loss assets/ zeroizing them after completion maximum resolution period of 5/8 years. Data regarding break-up of outstanding SRs held by banks, SCs/RCs, FIIs, NBFCs and QIB is not available.

As may be observed, 70% of SRs have been subscribed to by banks and accordingly 70% of outstanding SRs may have public money at risk. Latest figures of total financial assets securitized, break-up of SRs outstanding held by ARCs, Banks, FIIs, other QIB as on March 31, 2020 are not available in public domain though as per reports during year 2019-20 significant amounts of SRs have been redeemed.

Regulatory and Operational Issues

ARCs are under administrative control of RBI, are regulated by it and are subject to its audit and inspection. Further, ARCs are required to meet compliance requirements such as submission of quarterly statement on its operations to RBI. Higher regulatory and compliance requirements keep ARCs operational costs high.

In December 2019, RBI issued circular that ARCs shall not acquire financial assets on a bilateral basis from (i) a bank/ financial institution which is the sponsor of the ARC; (ii) a bank/ financial institution which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its operations; (iii) an entity in the group to which the ARC belongs. However, such ARCs may participate in auctions of the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and the prices are determined by market forces. Above shall provide level playing field and will discourage asset acquisition by ARCs on bilateral basis and sale by sellers to captive entities. 

In view of above restriction, in future many of captive/in-house ARCs may find it challenging to continue business on account of sub-optimal operations and may therefore yield space to large ARCs.

Financial Performance and Funding of ARCs

As per regulations, there is 15% ‘invest and hold’ requirement on the part of the ARCs in relation to each class of SR. ARCs cannot transfer this holding, which was Introduced as ‘skin in the game’ as long as class of SR is in existence. ARCs have to raise funds and maintain leverage keeping in account the risks associated with the distressed asset sector and the volatility of their earnings profile. ARCs mainly rely on the following sources of funds:

  • Equity capital – 100% FDI is permitted in ARC sector;
  • Bank borrowings or Non-Convertible Debentures;
  • Principal protected market linked debentures; and
  • Raising of funds against Fixed Deposits

Above borrowings by ARCs are normally secured by:

  • charge on receivables;
  • secured by exclusive pledge of ARCs own SRs held with cover from 1.5-2.0 times; and
  • backed by an unconditional and irrevocable corporate guarantee issued by holding/parent company

ARCs raise funds by pledging its own invested SRs with its lenders, however, same can lead to breach of RBI regulations in certain situation. If lenders invoke pledge of 15% mandatorily held SRs on ARC defaulting to its lender, ARC may find itself not in compliance with RBI regulations. However, ARCs have been borrowing conservatively and no such situation has arisen so far.

ARCs have been strengthening their balance sheets with infusion of equity and long term borrowings and have reduced reliance on short term commercial papers significantly in last year. Edelweiss ARC with total borrowing of Rs 4375 crore has diversified sources of funding including asset specific borrowing wherein repayments are linked to recoveries of Rs 1,539 crore as on March 31, 2020. To raise capital, one of entities of CDPQ, one of Canada’s fund, has invested funds by convertible instruments in the Edelweiss group and is expected to hold 20% stake in Edelweiss ARC. Additionally, CDPQ has also committed to invest Rs 4,500 crore in distressed assets through SRs and other instruments.

JM Financial Ltd had also infused Rs 183 crore in H1FY2020 by subscribing to the rights offer made by JMF ARC for the issue of Compulsorily Convertible Debentures. ACRE ARC raised capital of Rs 70.77 crore during FY2019 which was largely subscribed to by its existing shareholders. It will be interesting to see resource raising by UVARC for its acquisition of Aircel and Reliance Communications. At present, UVARC, as per details from MCA, has borrowings from banks and one of funds of UTI.

Various funding routes by different ARCs are being used and explored, however, these should stand tests of regulatorily, trust and the Companies Act. ARCs are able to attract lot of funds as is evident from their interest in large IBC accounts and NBFCs bidding of portfolios.

The financial results of ARCs for year 2020 have been mixed. Whereas on one hand Edelweiss ARC, the largest ARC in the country, has reported net profit of Rs 301 crore, Phoenix ARC has reported net loss of Rs 5.5 crore (after expensing/providing net loss on account of fair value changes and impairment of financial instruments of Rs 114 crore). Edelweiss ARC’s improved performance was as a result of significant recoveries made from some of large IBC accounts as well as recoveries from a large number of NPA accounts acquired. Results of most of other ARCs are not available as these companies are unlisted.

Financial performance of some of the ARCs which are available in public domain are as follows:                                                                                                                   (Rs in crore)

$ Covid related impairment on asset quality of ~ Rs 200 crore taken in Q4 2020. As per para 8 of financial results, Impairment Reserve has been created out of Reserves. # Year 2019 Audited. Year 2020 – N.A. % Audited Year 2019- From Brickwork Rating Rationale dated November 4, 2019 @ provisional Year 2020– From Brickwork Rating Rationale dated July 13, 2020 *provisional – Year 2020 -From Brickwork Rating Rationale dated April 30, 2020

Parameters of leverage for some of the ARCs, based on publicly available information and rating reports, are as follows:

In order to promote quality and consistent implementation of Ind AS, as well as facilitate comparison and better supervision, RBI has framed regulatory guidance on Ind AS which will apply to ARCs for preparation of their financial statements from the financial year 2019-20 onwards. The guidelines mandate ARCs to put in place board-approved policies that clearly articulate and document their business models and portfolios which will require detailed analysis, application of judgment and detailed documentation to support judgments. These guidelines focus on the need to ensure consistency in the application of the accounting standards in specific areas, including asset classification and provisioning, and provide clarifications on regulatory capital in the light of Ind AS implementation. Above guidance will have significant changes and will require board, audit committees, auditors of ARCs to be well versed with the business policies. One of the provision is that impairment reserve shall not be counted for regulatory capital and will be prohibited to be withdrawn without RBI permission. 

ARCs as Resolution Applicant

As per Section 29A of IBC, an ARC can act as a resolution applicant and can submit resolution plan itself or with other investors jointly as a consortium or partnership. Further, as per Section 29A, expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is 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.  ARC as partner of bidder or Resolution Applicant provides flexibility to investors as:

  • No further fresh security to be created with assignment of existing debt to ARC;
  • Restructuring of existing debt into various instruments such as non-convertible debentures, OCDs, equity, etc.;
  • Low stamp duty on assignment of debt;
  • Enhanced enforcement rights of ARCs compared to other legal entities;
  • ARCs can pursue piece-meal sale/monetization of assets of the Corporate Debtor on approval of resolution plan over a period of time and pay lenders from sale proceeds; and
  • In the event of sale under SARFAESI Act, priority of dues of Secured Creditors over government dues

On ARC taking over controlling interest independently and wherein there is no operating partner, in future ARC as holding platform may be  controlling many businesses through its subsidiaries or through any other structure. As per section 10 of the SARFEASI Act, ARCs business activities are restricted and therefore will have to ensure that business proposed complies with activities permitted under the Act and does not require any prior approval of RBI under section 10(2) of the Act.

In a number of accounts, as per the resolution plans proposed, ARCs are holding majority of equity and will manage day-to-day affairs of the acquired company. ARC will also commit to infusion of capital and funds for revival of stressed company. For example, based on available details, UVARC will initially hold 76% in the reconstructed company of Aircel as per approved resolution plan. As an entity running management of the reconstructed company, question is will ARC be treated as promoter as per the Companies Act, 2013 which defines promoters as the persons who controls the affairs of the company? Additionally, will ARC be subject to regular compliances as per the Companies Act?

RBI’s Fair Practices Code

By its circular dated July 16, 2020, RBI has advised ARCs to adopt ‘Fair Practices Code’ (FPC) so as to ensure transparency and fairness in their operation. Some of the features of FPC are as follows:

  • Transparency in the process of sale of assets

As per FPC, in order to enhance transparency in the process of sale of secured assets, (i) invitation for participation in auction shall be publicly solicited; the process should enable participation of as many prospective buyers as possible; (ii) terms and conditions of such sale may be decided in wider consultation with investors in the security receipts as per SARFAESI Act 2002; (iii) spirit of Section 29A of Insolvency and Bankruptcy Code, 2016 may be followed in dealing with prospective buyers.

RBI has emphasized on ARC to carry out sale through public auctions, have wider consultation with SR holders for sale rather than sharing of information only. As currently majority of the SRs are subscribed to by banks (70% as per RBI report), RBI considered it imperative to consult majority SR holders prior to finalization of sale. It is understood that sale here will also include any measure on asset reconstruction adopted by ARC under Section 9(1) of the Act.

It may be noted here that as per Section 7(3) of the Act, in the event of non-realization under sub-section (2) of financial assets, the qualified buyers of an ARC, holding SRs of not less than seventy five percent of the total value of the SRs issued under a scheme by such company, shall be entitled to call a meeting of all the qualified buyers and every resolution passed in such in meeting shall be binding on the company.  The qualified buyers shall, at a meeting called under sub-section(3), follow the same procedure, as  nearly as possible as is followed at meetings of the board of directors of the ARCs, as the case maybe.

Thus, SR holders with 75% value have right to call the meeting of all SR holders and pass resolution for taking further action by ARC which shall be binding on ARC but above right at present is only in the event of non-realization of financial assets. As per current practice, ARCs periodically submit status reports to SR holders, have periodic review meetings and share audited financial statements of trusts with SR holders, NAV reports from rating agencies etc. on regular basis.

FPC prescribes wider consultation with SR holders which has very expanse meaning and may delay sometimes actions to be taken.  SR holders objective is maximization of their recovery in minimum period. As per discussion with certain large seller banks, they feel that consultation under FPC will further improve co-ordination amongst seller banks and ARCs and accelerate recoveries. It was also felt that sometimes long time is taken to decide on recovery plan in view of perceived sub-optimal recoveries and assets were held for  a long period in trusts. One of the issue of some of SR holders is that in some cases, recovery gets delayed as ARCs are not able to aggregate debt which is beyond control of ARCs. SR holders feel that they can assist ARC in debt aggregation or ask ARC to proceed with resolution as it is. Thus, by consultation with SR holders and with their involvement, optimal decision can be taken expeditiously which won’t be questioned later by SR holders.

An ARC may have multiple trusts which have acquired financial asset of the same company funded by different investors. A scenario may be imagined wherein ARC has acquired NPA asset for external investor as well as has itself subscribed to 100% SRs. Different investors may have different action plans based on their outstanding, securities, charges, acquisition pricing etc. ARC will have to co-ordinate amongst these investors and manage conflicts to reach consensus on asset reconstruction measure to be taken forward. In IBC situation, therefore, various ARC trusts may vote differently resolutions proposed in Committee of Creditors.

Further, as ARCs have multiple assets from small to large assets to work-on, regular monitoring and consultation by SR holders will ensure all assets acquired irrespective of size will get attention for recovery/resolution.

Compliance with Section 29A of IBC is an effort to harmonize the provisions on sale of assets across various statutes.  IBC in both CIRP and liquidation does not allow persons connected to defaulting borrowers not to bid for assets. In the event promoters or connected persons wants to resolve, they should approach ARCs and take asset reconstruction through other measures available to ARC under Section 9(1) of the Act such as settlement, rescheduling, etc.

  • Outsourcing of activities by ARCs

As per FPC, ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy, approved by the Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARC shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the RBI nor impede effective supervision by RBI. The outsourced agency, if owned/controlled by a director of the ARC, the same may be made part of the disclosures specified in the Master Circular of ARCs.

Above provision is in line with earlier direction issued to NBFCs in 2017 on outsourcing activities which required a board approved code of conduct for recovery agents, clear demarcation of resources like premises and personnel in case of sharing of back-office.

Outsourcing may include activities such as running process of sale of assets, raising funds, monitoring, etc. which are carried out by group/associate companies to achieve management, operational and financial synergies. Importantly, it has been clarified further that if any outsourcing agency is owned/controlled by a director of the ARC, suitable disclosures have to be made for greater transparency. ARCs therefore have to carry out dealings with group companies on arms’ length basis on these outsourcing activities.

  • Confidentiality of Information

As per FPC, ARCs shall keep the information, they come to acquire in course of their business, strictly confidential and shall not disclose the same to anyone including other companies in the group except when (i) required by law; (ii) there is duty towards public to reveal information; or (iii) there is borrower’s permission.

In the context of some of the ARCs being part of larger group and as ARCs move towards acquisition of bigger ticket, it is important and imperative that confidentiality of information relating to assets acquired, their businesses, customers, assets, resolution status, etc. is maintained. Some of the information could be price sensitive also. As per provision, information may be shared only if required by law or with borrowers’ permission and may be shared through information memorandum only at the time of sale or bidding.

Above provision is important from the standpoint of many ARCs bidding for retail assets aggressively and information of defaulting borrowers is required to be kept confidential.

Way Forward

In the backdrop of rising stress in the financial sector including NBFCs, increasing participation of distressed debt players in stressed asset market, the landscape of ARC industry is changing. ARCs in partnership with investors and as Resolution Applicant are bidding for bigger and large distressed companies and financial assets, which shows the tremendous potential for growth.

The Central Government’s support to SARFAESI Act is clear from the amendment in December 2019, as per which, after the registration of security interest with CERSAI, the debts of the secured creditor i.e. banks, FIs, NBFCs, ARCs, etc. shall be paid in priority over all other debts and all revenue, taxes, etc. payable to the Central Government or State Government or Local Authority, exception being IBC proceedings.  Therefore, the Central Government and RBI have harmonized the provisions of IBC on priority of dues of secured creditors and Section 29A of IBC with that of SARFAESI Act and applicable to ARCs to enable ARCs to play and enable ARCs to play larger role in the resolution of stressed assets.

The challenge before ARCs will be to maintain transparency in its operations, manage increased participation of SR holders, demonstrate superior resolution skills to capture opportunities available and attract more investment in this sector.

Please note above article has been written for understanding of the topic and for discussion purpose only and is not a professional advice. No responsibility is assumed by author with regard to use of such article and readers are expected to refer to the relevant existing provisions of the relevant laws and take their own independent advice. Article is largely based on information publicly available.

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What is an Assignment of Debt?

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By Vanessa Swain Senior Lawyer

Updated on February 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Perfecting Assignment

  • Enforcing an Assigned Debt 

Recovery of an Assigned Debt

  • Other Considerations 

Key Takeaways

Frequently asked questions.

I t is common for creditors, such as banks and other financiers, to assign their debt to a third party. Usually, an assig nment of debt is done in an effort to minimise the costs of recovery where a debtor has been delinquent for some time. This article looks at:

  • what it means to ‘assign a debt’;
  • the legal requirements to perfecting an assignment; and
  • common problems with enforcing an assigned debt. 

Front page of publication

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor ) transfer to the new owner (the assignee ). Once an assignment of debt has been perfected, the assignee can collect the full amount of the debt owed . This includes interest recoverable under the original contract, as if they were the original creditor. A debtor is still responsible for paying the outstanding debt after an assignment. However, now, the debt or must pay the debt to the assignee rather than the original creditor.

Purchasing debt can be a lucrative business. Creditors will generally sell debt at a loss, for example, 20c for each dollar owed. Although, the amount paid will vary depending on factors such as the age of the debt and the likelihood of recovery. This can be a tax write off for the assignor, while the assignee can take steps to recover 100% of the debt owed. 

In New South Wales, the requirements for a legally binding assignment of debt are set out in the Conveyancing Act :

  • the assignment must be in writing. You do this in the form of a deed (deed of assignment) and both the assignor and assignee sign it; and
  • the assignor must provide notice to the debtor. The requirement for notice must be express and must be in writing. The assignor must notify the debtor advising them of the debt’ s assign ment and to who it has been assigned. The assignee will send a separate notice to the debtor, putting them on notice that the debt is due and payable. They will also provide them with the necessary information to make payment. 

The assignor must send the notices to the debtor’s last known address.  

Debtor as a Joined Party

In some circumstances, a debtor will be joined as a party to the deed of assignment . There can be a great benefit in this approach . This is because the debtor can provide warranties that the debt is owed and has clear notice of the assignment. However, it is not always practical to do so for a few reasons:

  • a debtor may not be on speaking terms with the assignor; 
  • a debtor may not be prepared to co-operate or provide appropriate warranties; and
  • the assignor or the assignee may not want the debtor to be made aware of the sale price . This occurs particularly where the sale price is at a significant discount.

If the debtor is not a party to the deed of assignment, proper notice of the assignment must be provided.  

An assignment of debt that has not been properly perfected will not constitute a legal debt owing to the assignee. Rather, the legal right to recover the debt will remain with the assignor. Only an equitable interest in the debt will transfer to the assignee.  

Enforcing an Assigned Debt 

After validly assigning a debt (in writing and notice has been provided to the debtor’s last known place of residence), the assignee is entitled to take any legal steps available to them to recover the outstanding debt. These recovery options include:

  • commencing court proceedings;
  • obtaining a judgment; and 
  • enforcement of that judgment.

Suppose court proceedings have been commenced or judgment already entered in favour of the assignor. In that case, the assignee must take steps to have the proceedings or judgment formally changed into the assignee’s name.  

In our experience, recovery of an assigned debt can be problematic because:  

  • debtors often do not understand the concept of debt assignment and may not be aware that their credit contract contains an assignment of debt clause;
  • disputes can arise as to whether a lawful assignment of debt has arisen. A debtor may claim that the assignor did not provide them with the requisite notice of the assignment, or in some cases, a contract will specifically exclude the creditor from legally assigning a debt;
  • proper records of the notice of assignment provided to the debtor must be maintained. If proper records have not been kept, it may be difficult to prove that notice has been properly given, which may invalidate the legal assignment; and
  • the debtor has the right to make an offsetting claim in defence to any recovery action taken by the assignee. A debtor may raise an offsetting claim which has arisen out of a previous arrangement with the assignor (which the assignee may not be aware of). For example, the debtor may have entered into an agreement with the assignor whereby the assignor agreed to accept a lesser amount of the debt owed by way of settlement. Because the assignee acquires the same rights and obligations of the assignor, the terms of that previous settlement agreement will bind the assignee. The court may find that there is no debt owing by the debtor. In this case, the assignee will have been assigned nothing of value. 

Other Considerations 

When assigning a debt, it is essential that the assignee, in particular, considers relevant statutory limitation periods for commencing proceedings or enforcing a judgment debt . In New South Wales, the time limit:

  • to file legal proceedings to recover debts is six years from the date of last payment or when the debtor admitted in writing that they owed the debt; and
  • for enforcing a judgment debt is 12 years from the date of judgment.

An assignment of a debt does not extend these limitation periods.  

While there can be benefits to both the assignor and the assignee, an assignment of debt will be unenforceable if done incorrectly. Therefore, if you are considering assigning or being assigned a debt, it is important to seek legal advice. If you need help with drafting or reviewing a deed of assignment or wish to recover a debt that has been assigned to you, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.  

An assignment of debt is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once the assignee has validly assigned a debt, they are entitled to take any legal steps available to them to recover the outstanding debt. This includes commencing court proceedings, obtaining a judgment and enforcement of that judgment.

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COMMENTS

  1. ARC rights to use SARFAESI for debts assigned by non-SARFAESI entities

    The secured creditor often undertakes to assign its defaulted debts to an ARC. The SARFAESI Act provides the formation of ARCs to acquire loans from secured lenders and take actions extended to it. Section 9 of the Act lists down the measure exclusive extended to the ARCs for the purposes of asset reconstruction and reads as- "9.

  2. The stamp duty payable during assignation of debt by Asset

    Phoenix ARC breaks new ground in holding that the assignment of a debt to an Asset Reconstruction Company is liable to be stamped as per the concerned state stamping legislation. In Essar Steel India Ltd. Committee of Creditors v.

  3. Reserve Bank of India

    (1) Every ARC shall become a member of at least one credit information company (CIC) which has obtained certificate of registration from the Bank in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005. (2) ARC shall provide periodically to the CIC of which it is a member, accurate data / history of the borrowers.

  4. Reserve Bank of India

    13 Subject to the provisions of the circulars DNBR.PD (ARC) CC.No.07/26.03.001/2018-19 dated June 28, 2019 and DOR.NBFC(ARC) CC. No. 8/26.03.001/2019-20 dated December 6, 2019, all stressed loans which are in default in the books of the transferors are permitted to be transferred to ARCs. This shall include loan exposures classified as fraud as ...

  5. Reserve Bank of India

    To enable early assignment of debt and better reconstruction of stressed assets, lenders may be permitted to sell accounts reported as SMAs to ARCs. ... Therefore, in the interest of efficient recovery of debt by ARCs, the Act should be amended to clarify that an ARC to whom a secured debt is assigned shall be a "secured creditor" under the ...

  6. India: RBI'S Framework For Transfer Of Loan Assets

    As an anticipated measure for the banking and financial sector, the Reserve Bank of India (RBI) has, towards the close of past week, issued the comprehensive framework for the sale or transfer of loan assets. Taking immediate effect from the date of its issuance, the framework titled ' Master Directions - Reserve Bank of India (Transfer of Loan ...

  7. PDF NPAs and their assignment to Assets Reconstruction Companies (ARCs)

    gets the benefit of assignment of debt in the form of reduction in its NPAs. Despite no real recovery for the bank, this transaction reduces the gross and net NPAs of the respective bank and ... So, the ARC makes a down payment and when the amount is finally recovered, the balance is paid to the bank against the SRs. While two-thirds of the ...

  8. ARCs and Insolvency Resolution Plans: The Enigma of Equity vs Debt

    A connected provision is section 15 (4) which states that the secured creditor (in this case, an ARC) shall, on realisation of debt in full, " restore the management of the business of the borrower to him ".

  9. Decoded: RBI committee report on working of Asset Reconstruction

    An RBI appointed committee to review the working of Asset Reconstruction Companies (ARCs) recently submitted a report containing a set of 42 recommendations. The recommendations have been made to ensure the flow of NPAs to ARCs gather speed and momentum, so that bankers can focus on core banking activities like lending, leaving stressed asset ...

  10. Applicability of SARFAESI to Assignment of Loan by an NBFC

    The law of assignment is based on the principle of "nemo dat quad non habet", meaning that 'the assignee cannot have better rights than that of the assignor'. This maxim forms the basis of the issue that if an NBFC itself does not have the right to make use of provisions of recovery of loan arrears of SARFAESI Act, how the assignee ...

  11. Assignment of Debts under the Insolvency and Bankruptcy Code

    Edelweiss challenged the assignment and the constitution of the CoC (which included Millennium), alleging that the assignment of debt by Synergies Casting to Millennium was carried out with the ulterior motive of reducing its (i.e. Edelweiss') voting rights. It was also argued that the assignment deeds were inadequately stamped and unregistered.

  12. PDF NPA Management Sale of Stressed Assets to Asset Reconstruction

    assignment agreement under SARFAESI Act,2002 Sale of NPAs to ARCs A R C The bankruptcy code is a one stop solution for resolving ... in respect of the debt would be transferred to the ARC. The required funds to purchase such debts can be raised from Qualified Buyers. There are 28 ARCs presently operating in India. The first ARC registered under ...

  13. PDF Asset Reconstruction Companies (ARCs): Tax and regulatory framework

    (ARCs): Questions and answers • Conclud ing rem arks Reso lution p lan - regu latory, accounting and tax considerations Deconstructing a reso lution p lan Asset Reconstruction Com pan ies (ARCs) Introduction In trodu c t ion (RDBFI) Institutes Act F inancia l Bank and debt dues to Recovery of 1993 (ARCs) Act SARFAES I 2002

  14. Can Asset Reconstruction Company to which debt is assigned make

    NCLT held that debt was assigned with knowledge of Debtor (Assignment Deed), Certificate Under Banker's Book Evidence Act show default, Balance Confirmation falls within Limitation Period. As per original Loan agreement the CD had agreed to pay to the Bank or assignee (In this case ARC).

  15. Asset Reconstruction Companies (ARCs)

    An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.

  16. IBC Laws

    Assignment of loan to an ARC after approval of Resolution Plan by NCLT - Electrosteel Castings Ltd. Vs. UV Asset Reconstruction Company Ltd. & Ors. - Supreme Court November 27, 2021 IBC Laws Editor I. Case Reference II. Brief about the decision Facts of the case

  17. Assignment Agreement Of Asset Reconstruction Companies: To Be ...

    The Respondent reciprocated by submitting that Assignment of the financial debt by Bank or Financial Institution in favour of the ARC can be effected in accordance with the statutory scheme provided in Section 5 of the SARFAESI Act and it does not contemplate Assignment of financial debt by registered document.

  18. Asset Reconstruction Companies (ARCs)

    The bank will get 15% cash and 85% security receipts against bad debt that will be sold to ARC. ... On receipt of acceptance from seller, they execute assignment of debt with seller bank/FI so that SC/RC may take further steps for resolution of acquired NPAs. The non-fund based facilities are generally not taken over since these are obligations.

  19. Banks, ARCs spar over key document, indemnity clause

    An assignment agreement is the key document that a bank selling loans and an ARC buying the assets sign for every transaction. It 'assigns' all the rights which are with the banks to the ARC. "One can understand that a bank would not want an ARC holding the loans to act as a front and help a promoter make a backdoor entry into the company.

  20. Assignment Of Claim To Non-Related Party: A Case For Non ...

    The 'debt assignment' is a transfer of debt with all the rights and obligations associated with it from a creditor to a third party, who is' assignee'. The 'debt' is in the form of loan from a 'financial institution', the debtor is referred as a 'borrower' and if the debt is in the form of securities, such as bonds, the debtor is referred to as ...

  21. Reserve Bank of India

    (v) Such plan will also include procedure to be adopted by the ARC at the time of restoration of the management of the business to the borrower in accordance with paragraph 6(B)(1)(ii) above, borrower's rights and liabilities at the time of change in or takeover of management by the ARC and at the time of restoration of management back to the ...

  22. Emerging Landscape for Asset Reconstruction Companies

    ARC as partner of bidder or Resolution Applicant provides flexibility to investors as: No further fresh security to be created with assignment of existing debt to ARC; Restructuring of existing debt into various instruments such as non-convertible debentures, OCDs, equity, etc.; Low stamp duty on assignment of debt;

  23. What is an Assignment of Debt?

    An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt. Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor) transfer to the new owner (the assignee).