Research methodology

The research paper has been written by adopting a purely doctrinal method of research. The
researcher has accessed library and other online resources extensively for preparing the
research paper.

Objectives

The research paper focuses on the Problem and solution to the case of increasing non-
performing Assets in India.

Sources of data

The researchers have accessed primary, secondary & tertiary sources of data to prepare the
research paper.

Method of writing

The method of writing the paper is primarily based on analytical and critical approach.

Mode of Citation

The researcher has used Bluebook citation edition 20th through the course of the research
paper.

1.)
 INTRODUCTION

The banking system is the genesis of the financial system. The most crucial function of the
financial system is the mobilization of the public savings and its allocation in different
sectors of the economy as an investment. The conversion of financial savings in to
investment is known as the process of capital formation in the economy. How the process
of financial intermediation (i.e. collecting scattered savings and using it in to productive
purposive) is carried out shall reflect the efficiency of the financial institutions and their role
in socio-economic transformation of the country.

Asset quality was not the only concern in Indian banking sector till 1991, but it was mainly
focused on performance objectives such as opening wide network/branches, development
of rural areas, priority sector lending, higher employment generation, etc. whereas the
primary function of banks is to lend funds as loans to various sectors such as agriculture,
industry, personal loans, housing loans etc., but in the recent past the banks have become
very cautious in extending loans. The reason being mounting NPA. Bankers are the
custodian and disburser of the liquid capital of the country. Therefore, it is considered to be
the most important function of the banking system is to mobilize the savings of the person
by accepting deposits from the public. The banker becomes the trustee of the surplus
balances of the public. The Non-Performing Asset (NPA) concept is restricted to loans,
advances & investment. As long as an asset generates the income expected from it and does
not disclose any unusual risk other than normal commercial risk, it is treated as performing
asset, and when it fails to generate the expected income it becomes a “Non-performing
Asset”. In the subsequent manner, a long asset becomes a Non- Performing Asset (NPA)
when it ceases to generate income, i.e., interest, fees, commissions or any other dues for the
bank for than 90 days. An NPA is an advance where payment of interest or repayment of
installment on principal or both remains unpaid any of the credit facilities is to treat as past
due when it remains unpaid for 30 days beyond due date.

2.)
Recommendation and Early Scenario of NPAs

Narasimham Committee that mandated identification & reduction of NPAs to be treated as

a national priority because NPA direct toward credit risk that faces and its efficiency in
allocating resources. Profitability and earnings of banks are affected due to NPA numbers. A
quick glance on the numbers of non-performing assets in the year 1995 it was Rs. 33885
crores.

One of the major concerns is that the challenges in the performance of commercial banks in
the late 90s adversely affecting was the accumulations of the huge non-performing assets.
The growth of Indian Bank’s lending to priority sector is more than that of the Public Sector
Banks as a whole Indian Bank has slippages in controlling of NPAs in the early years of the
decade. The origin of the problem of burgeoning NPA’s lies in the system of credit risk
management by the banks. Banks are initiated to have adequate preventive measures in
fixing pre-sanctioning appraisal responsibility and an effective post-disbursement
supervision. Banks must keep a continuous surveillance and monitor loans to recognize
accounts that have potential to become non-performing. Also, each bank should have its
own independence credit rating agencies, they must evaluate the financial condition of the
client on a regular basis. There were instances where corporate borrowers even after
defaulting on a regular basis were given credit. This is because there was no legal framework
to safeguard the real actual interest of the banks. One current scenario has given a gist that
the banks should find out the original reasons/purposes of the loan required by the
concerned borrower. The proper identification and full concealment of the guarantor must
be checked by the banks including scrutiny of his/her actual wealth. It is pertinent to
mention that NPA’s are considered to be as the most significant parameter to judge the
performance and financial health of the banks.

Establishments of the Adjudicating Bodies to Curb the Problem of NPAs

In the year 1992, the Government of India introduced a number of reforms to deal with the
incumbent problem of growing NPAs in banking sector. The major crucial steps include,
introduction of Debt Recovery Tribunal, Securitization Act 2002, Lok Adalats, Compromise

3.)
Settlement Scheme and introduction of Credit Information Bureau. In the year 2016-17,
10.3% of the total amount referred to for recovery is recovered through all the recovery
channel. Whereas 9.2% through DRT’s as compared to 16.5% alone from SARFAESI Act.
This gives to a direct conclusion that strong banking sector is crucial for a flourishing
economy.1

In the case of Common Cause v. Union of India2, The petitioner has stated that the aggregate
figure of NPAs worked out on the basis of data compiled by the Banking Division of the
Ministry of Finance is Rs. 43,577 crores. Non-recovery of such huge amount of NPAs has
resulted in substantial funds of banks not being available for development of the country's
economy and this, in turn, has affected the citizens.

Mostly the bad debts are on account of defaults3 made by men of substantial means and
influence and if proper checks are introduced to ensure that loans and advances are not
given to fraudulent borrowers, NPAs will get substantially reduced. 4

The court emphasized that the loans and advances must not be given without fully checking
the creditworthiness and past record of the borrowers and that companies, which have been
“willful defaulters” in the past or whose subsidiary companies and promoters have willfully
defaulted in the past in repaying the loans and advances, should not be given fresh loans and
advances.

1 Legal Aspect of NPAs, G J BULSARA, Submission date, May 2017.

2 (2010) 11 SCC 528: (2010) 4 SCC (Civ) 514 at page 529.
3 Section 2(1)(j) of NPA Act, 2002 “default” means non-payment of any principal debt or interest thereon or any other

amount payable by a borrower to any secured creditor consequently upon which the account of such borrower is
classified as NPA in the books of account of the secured creditors.
4 Id. 2.

4.)
JM Financial Asset Reconstruction Company v. State of Maharashtra, 20165

In this case, the petitioner submitted that the banks and financial institutions were suffering
considerable difficulties in recovering their loans and advances due to the fact that the
procedure existing then for recovery were extremely time consuming and burdensome, and
the debts due to banks and financial institutions blocked a significant portion of their funds
in unproductive assets, The Recovery of Debts Due to banks and financial Institutions Act,
19936 was enacted.

Legal aspects of Non-Performing Assets

1. SARFAESI ACT, 2002

The concept of securitization has been adopted more recently from the American financial
system and has been described as processing of acquiring financial asset and packaging the
same for investments by several other investors. The actual term ‘Securitization’ has not
been defined as such, but has been used in certain rules, regulations & notifications. In the
recent past the parliament has enacted the Securitization and Reconstruction of financial
Assets and Enforcement of Security Interest Act, 2002. The term securitization has been
defined as “acquisition of financial assets by any securitization company or reconstruction
company from qualified institutional buyers by issue of security receipts representing
undivided interests in such financial assets or otherwise”.
The Securitization Act has been enacted mainly for tackling the growing menace non-
performing assets by securitization of assets by sale to ARC, which is to issue of security
receipts to the investor and for enforcement of security interest by banks and financial
institutions: Initially, many were delighted to find that the securitization process as a class
has come to stay in the Indian legal system, and the problem of the non-performing assets of
banks and financial institution would stand resolved since the banks and financial
institutions would be able to enforce its security interest without intervention of the courts.

5JM Financial Asset Reconstruction Company v. State of Maharashtra 2016 SCC OnLine Bom 9099.
6An Act to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks
and financial institutions and for matters connected therewith or incidental thereto. be called the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993.

5.)
The quantum of non-performing assets has been growing rapidly by leaps and bounds and it
has been playing as a havoc on the Indian finance system since as at the end of the year
2001, the sum total amount of outstanding NPAs stood up to Rs. 83,500/- crores. After the
enactment of the Securitization Act, 2002 the willful defaulters cannot now hide behind
long-winded judicial process but at the same instance the bank also cannot recover dues
arising out of underwritten commitments obligations and equity finance by way of share
subscriptions, also the shares acquired by exercising the option for conversion of loan into
equity.

The IT tribunal in the case of Vishwapriya Financial Service and Securities Ltd v. Commissioner of
Income Tax7. The Hon’ble court held that jolt development of asset securitization in auto
finance and housing finance sector. The company was utilizing funds obtained from the
investors for deployment in fixed income security and had guaranteed fixed rate of return.
The contention of the company is that it was only agent for the investors and has evolved
only a paythrough structure which was not accepted by the tribunal and held that the
company was liable for the withholding taxes on the payments made to the investors.

2. Measures under SARFAESI Act to determine the securitization

Section 13 of SARFAESI Act, 2002 specifically gives right to the secured creditor with the
legal authority/power of great import, without creating sufficient accountability mechanism.
The measures that can be taken the recourse by the secured creditor under Section 13(4)
which includes the power to take over the management of the business of the borrower and
to appoint any person to manage the secured assets. There is a total absence of any check
against the abuse of any opportunity to control the property and business of the borrower in
the hand of the creditor. The creditor and the manager would undoubtedly be in the
position of “trustees” while in control and they should be subject to all civil and criminal
consequences for the breach of trust.

Indian Parliament has amended the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interests Act, 2002 (SARFAESI Act) and the Recovery of

7 (2003) 179 CTR Mad 334, 2002 258 ITR 496 Mad.

6.)
Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) in 2016. These
amendments aim to create an enabling infrastructure to affectively deal with stressed assets.
It also confers more powers to the Reserve Bank of India (RBI) to regulate asset
reconstruction companies (ARCs). An ARC’s primary goal is to manage and to make
profitable those assets which have been underperforming, or which have been formally
classified as NPA’s. Selling stressed and NPA accounts to ARCs has been increasing since
March 2014, because of the regulatory support extended to banks under the Framework to
Revitalize the Distressed Assets in the Economy. It is proposed to give RBI powers to audit
and inspect ARCs and freedom to remove the chairman or any director and appoint central
bank officials to the board. RBI will be empowered to impose a penalty for noncompliance
with its directives, besides regulating the fees charged by these companies to banks at the
time of acquiring such assets.8

3. Amendment strengthening the position of borrower whose account is declared as

NPA

Section 13 gives the secured creditor to unilaterally “determine” the amount dues. On the
basis of this ex parte determination, secured creditor is entitled to issue and serve a demand
notice at the end of the 60 days period. It adopts the measures for recovery which includes
taking over the business of the borrower. In the case of Mardia Chemicals Ltd. v Union of India
& Ors.9, the court lucidly mentioned that the parliament through amendment in Section
13(3)A10 that to provide for an obligation on the part of the secured creditor to consider the
representation/objection of the borrower to the demand notice served.
The SARFAESI Act, 2002 is a mighty tool of the secured creditor for the recovery of the
outstanding debt. The genesis of this act is to take recourse to the provision of the act as a

8
Insolvency & Bankruptcy Code: Debt Restructuring & Managing NPA In India, Sameera Saurabh, July 6, 2017
http://www.businessworld.in/article/Insolvency-Bankruptcy-Code-Debt-Restructuring-Managing-NPA-InIndia
9 Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311.
10If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the
secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that
such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such
representation or objection the reasons for non-acceptance of the representation or objection to the borrower:
Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of
reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under
section 17 or the Court of District Judge under section 17A.

7.)
first resort for recovering loans. However, the banks have also been prevalently misusing the
provision of the Act, by using the unfair means of coercion and throwing overboard the due
process as prescribed under the Act.

In the case of ITC Limited v. Blue Coast Hotel Ltd.11 the question which was required to be
decided by the Hon’ble Supreme Court was that whether the parliament intended for a total
invalidity to result from the failure to reply and give reasons for the non-acceptance of the
borrower’s representation. The Hon’ble Supreme Court held that once the proceeding has
been initiated by the secured creditor to consider the representation made by the debtor
under section 13(3)A of the NPA Act.

Growth of Banking Practice in India

In the semi-permanent scenario from the concept of ancient money lenders, India march
forward to the realm of the banking, which has ever since branched out in the concept of
the development banking, the narrow banking and the universal banking. Also from simple
current and savings bank accounts, the bank finance has extended to structured finance,
trade finance and export finance & finance for infrastructure, also the last few years have
seen an emergence of the fee based services in the form of merchant bankers, financial
advisors and managers to the public issue and private placement of shares debentures and
bonds, syndication of loan facilities, external borrowings, forex services, services in takeover,
mergers, acquisitions & amalgamations, mostly through the bank subsidiaries or associates
arms.

Reasons for the growth of NPAs

The development and the proliferation in the activities of the bank has led to ever increasing
non-performing assets that has surmounted to an enormous amount in the last few decades.
The quantum of NPAs has been calculated and put at different figures mainly due to the
absence of proper statistical knowledge and the method on which the basis adopted for
calculating the percentage of NPAs in relation to either the total assets of the bank or the

11 CIVIL APPEAL Nos. 2928-2930 OF 2018 [Arising out of SLP (C) Nos. 1021510217/2016].

8.)
amount of loan portfolio or on the basis of the accounts or the size of the outstanding
advances. But the pragmatic question lies under this is the real reasons as to why and how
NPA appears in the books of the banks & financial institutions. For a large number of years,
the banks have been taking credit in its books, on the basis of accrued income, even for the
amount of the amount of periodic interest that was not actually paid by the borrower. Our
existing legal framework relating to commercial transactions has not kept pace with the
changing commercial practices & financial sector reforms. This has resulted in slow pace of
recovery of defaulting loans and mounting levels of NPA of banks & financial institutions.12

Reason for the Low recovery growth of NPAs

It is very pertinent to mention that the public banks record around Rs.1,50,960 Crores
reduction in the NPA levels from the beginning of the financial year 2017-18. However, the
data also showed that the same period has seen Rs.2,37,475 Crores of the loans being added
to the NPA list, thereby leading to an overall worsening of the NPA situation. Further,
within the Rs. 1,50,960 Crores ‘reduction in NPAs’, at about 55% or Rs.84,272 Crores as
due to write-offs. Only about 27% of the reduction in NPA levels was due to actual
recoveries. Private sector bank on the other hand saw a significant reduction of Rs.46,091
Crores in the NPA levels as according to December 2017. For the private sector banks, at
about 40.2% of the reduction in the NPA levels was due to write-offs. Actual recoveries for
34.2% of the reduction. Hence the data showed that the bank frauds were increased in both
numbers & value over the last three years.13
Also, in one of the cases named as Central Bank of India v. State of Kerala & Ors.14,The
company borrowed a certain sum from the appellant Bank by creating equitable mortgage of
its properties in favor of the bank. The company failed to repay the amount, its account was
classified as NPA & the bank had initiated the proceeding under the Securitization Act
under Section 13(2). The bank held the possession of the properties and sold the same. The
ACST informed the Bank that sales dues constituted a first charge against the company &,
12
Keshavlal Khemchand & Sons Pvt. Ltd & Ors. v. Union of India LAWS (SC)-2015-1-68.
13 The Hindu, Low Recoveries of NPAs: RBI Data, T.C.A Sharad Raghavan, June 12, 2018.
https://www.thehindu.com/business/Economy/rbi-data-show-low-nparecovery/article24146708.ece
14 (2009) 4 SCC 12.

9.)
therefore, the ban could not have taken possession of the mortgaged properties and sold
them. The High court held that since there was no provision in the securitization act
providing for the first charge in favor of the banks, Section 35 of the securitization act could
not be held to override Section 38-C of the Bombay Sales Tax Act.

It has been prevalently stated in the case of Shyam Ice & Cold Storage Pvt. Ltd. v. Syndicate
Bank15 that even a defaulter has his rights and can be proceeded against him only in
accordance with law. The division bench further held that merely because a defaulter had
made some willful default in payment of the instalments and EMIs it would not mean that
he should be dealt with double & multiple blows and that he had a right for consideration of
a One Time Settlement under the RBI guidelines.

Subsequently, in the case of M.N Shanmugasundaram v. The Authorized Officer Bank of Baroda
Nambiyur Branch Coimbatore & K.C Sivakumar16 states to struck down the SARFAESI Act, the
concept of judicial review has developed so far, even the validity of the statutes mentioned
in Schedule IX to the Constitution of India can be tested by the Courts with the power of
judicial review to decide as to whether such statues satisfy the rule of law, As it was held in
I.R Coelho v. State of Tamil Nadu,17. Therefore, the impugned Section 14 of the SARFAESI
Act does not satisfy the principle of the rule of law and hence, it is subject to be struck
down.

CHALLENGES AND RECOMMENDATION FOR THE REFORM

In recent years, several committees have given recommendations on NPAs. We discuss

these below.

Action against defaulters: Willful default refers to a situation where a borrower defaults on
the repayment of a loan, despite having adequate resources. As of December 2015, the

15 2012 (92) ALR 139.

16 2012 SCC OnLine Mad 1569.
17 (2007) 2 SCC 1.

10.)
public sector banks had 7,686 willful defaulters, which accounted for Rs 66,000 crores of
outstanding loans. The Standing Committee of Finance, in February 2016, observed that
21% of the total NPAs of banks were from willful defaulters. It recommended that the
names of top 30 willful defaulters of every bank be made public. It noted that making such
information publicly available would act as a deterrent for others.

Asset Reconstruction Companies (ARCs): ARCs purchase stressed assets from banks
and try to recover them. The ARCs buy NPAs from banks at a discount and try to recover
the money. The Standing Committee observed that the prolonged slowdown in the
economy had made it difficult for ARCs to absorb NPAs. Therefore, it recommended that
the RBI should allow banks to absorb their written-off assets in a staggered manner. This
would help them in gradually restoring their balance sheets to normal health.

Improved recovery: The process of recovering outstanding loans is time consuming. This
includes time taken to resolve insolvency, which is a situation where a borrower is unable to
repay his outstanding debt. The inability to resolve insolvency is one of the factors that
impacts NPAS, the credit market, and affects the flow of money in the country. As of 2015,
it took over four years to resolve insolvency in India. This was higher than other countries
such as the UK (1 year) and USA (1.5 years).18

INSOLVENCY AND BANKRUPTCY CODE, 2016

The Insolvency and Bankruptcy Code, 2016 notified by the Government of India reflects a
clear intent to resolve and restructure bad debts in a time bound manner and plug loopholes
available to borrowers who have defaulted on their payments. The Code is being understood
as the new Bankruptcy Law of India which seeks to combine the existing framework by
creating a single law for insolvency and bankruptcy. Two separate tribunals are
recommended - the National Company Law Tribunal (NCLT) for companies and limited
liability partnership for firms, and the Debt Recovery Tribunal for individuals and

18
The PRS Blog, The Official Blog site of PRS Legislative Research, http://www.prsindia.org/theprsblog/?p=3652.

11.)
partnership. The code enlisted the proper procedure and mechanism of dealing with stressed
assets in a more promising way. Until the Insolvency & Bankruptcy Code came into force in
India, lenders were exercising recovery proceedings through special laws such as the
‘Recovery of Debts Due to Banks and Financial Institutions Act 1993’, or the ‘Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act
(“SARFESI”) 2002’, and restructuring options as per RBI guidelines such as Corporate Debt
Restructuring (“CDR”), Strategic Debt Restructuring, Scheme for Sustainable Structuring of
Stressed Assets (“S4A”) etc. However, legal remedies did not empower the creditors to
control the company in the event of default.19

The Code intends to initiate an Insolvency Resolution Process (IRP) for a period of 180 days
when a default takes place. The Insolvency Resolution Process (IRP) is over seen by an
Insolvency Professional who has to ensure that no asset removal has taken place from the
company by checking transactions for last two years.

The NCLT in the case of IDBI Bank Ltd. V. Lanco Infratech Ltd.22 was criticized that the
insolvency professional should be very judicious and careful in accepting too many
assignments. If they do so, they may make some money in the short term but are running a
huge risk of losing their reputation, respect and credibility in the long run, if they are not
able to handle such assignment effectively and to the satisfaction of the stakeholders.

One of the issues before the Hon’ble NCLAT in the case of J.K Jute Mills Company Ltd. V.
M/s. Surendra Trading Co.20 was that the time limit prescribed in IBC, 2016 for admitting or
rejecting a petition or initiation of insolvency resolution process is mandatory. The court
magnificently pointed out the objective behind the time period prescribed under Section 7(5)
& Section 9 (5) also Section 10(4), like Order VII Rule 1 of CPC is to prevent the delay in
hearing the disposal of the cases. The Hon’ble court held that “the time is the essence of the
code and all the stakeholders, including the Adjudicating Authority are require to perform its

Paradigm Shift in Banking Future Strategies Confederation of Indian Industry

19
September 2017
https://www2.deloitte.com/content/dam/Deloitte/lk/Documents/financial-services/ik-fs-
paradigmshiftbankingfuture-strategies-noexp.pdf.
20 2018 SCC OnLine NCLAT 219.

12.)
jobs within the time prescribed under the code except in exceptional circumstances if the
adjudicating authority for one or other good reason fails to do so.

The law also enshrines a period where in the Committee of Creditor is expected to analyses
the records of the company, hear rival proposals and make up its mind on the issue. A
Revival Plan is binding on all creditors and stake holders if 75% of Creditors Committee
agrees to it. On the other hand, if 75% of the Creditors Committee decide that the
complexity of the case requires more time for resolution, a onetime extension of 90 days is
possible with the approval of the Adjudicating Authority. Whereas, if in 180 days no Revival
Plan achieves support of 75% of creditors, the firm goes into liquidation. Most importantly,
it provides for resolution of insolvency in a speedier and time-bound manner, and also
specifies prioritization of settlements of debts owed by a corporate debtor.

In the case of Sandeep Reddy & Anr. V. Jaycon Infrastructure Ltd.21the question before the court
was that whether NCLT has power to appoint an IRP, without obtaining suggestions from
IBBI on its own, and where the name of an IRP has also not been suggested by Operational
Creditor in the application for CIRP. It was held that since the parties had settled the
disputes and initiation of resolution process under section 9 of the code was not
maintainable, in view of existence of disputes, NCLAT left the question open as to whether
the NCLT had power to appoint any person of its own choice or not.

1. ROLE OF RBI IN ASCERTAINING THE RECOVERY OF NPA

The Reserve Bank of India has issued various instructions aimed at resolution of stressed
assets in the economy, including introduction of certain specific schemes at different points
of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it
has been decided to substitute the existing guidelines with a harmonized and simplified
generic framework for resolution of stressed assets. The details of the revised framework are
elaborated in the following paragraphs. Lenders shall identify incipient stress in loan

21 2017 SCC OnLine NCLAT 303.

13.)
accounts, immediately on default, by classifying stressed assets as special mention accounts
(SMA) as per the following categories:22

SMA Sub- Basis for classification – Principal or

categories interest payment or any other amount
wholly or partly overdue between

SMA-0 1-30 days

SMA-1 31-60 days

SMA-2 61-90 days

The list clearly mandates that after the period of 90 days the account wholly turned to be as
nonperforming Account. The reserve bank of India replacing the regime of voluntary
restructuring for Indian Banks by introducing the Revised Framework on ‘Resolution of
Stressed Assets’. Under this new framework, the RBI has primarily focused on NPAs of the
borrowers where the banking financial assets exceeds Rs 2000 crores and to effectuate the
same within the period of six months, failing which the creditor have to mandatorily refer
the borrower to the National Company Law Tribunal (NCLT) for corporate insolvency
under the Insolvency and Bankruptcy Code, 2016. The new restructuring norms are in many
ways a condensed version of the SDR, outside SDR and S4A schemes of the past, with more
relaxed parameters as to the extent of equity conversion.

The policy brings a great success in the short tenure of the Code with a commendable work
on resolving the stressed account that any of the withdrawn restructuring schemes. The

22 Resolution of Stressed Assets – Revised Framework Reserve Bank of India February 12, 2018
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218.

14.)
RBI's policy is a nod to the efficacy of the statutory process and its own preference to have
that followed instead of a bank-led restructuring.23

The RBI also reinforced its supervisory and enforcement frameworks by revising the prompt
corrective action (PCA) framework and establishing an Enforcement Department. Once
PCA is vitiated by the regulator, the bank faces restrictions on spending money on opening
branches, recruiting staff and giving increments to employees. Further, the bank can
disburse loans only to those companies whose borrowing is above investment grades. With
the new framework in place, the RBI aims at a harmonized and simplified mechanism for
the resolution of stressed assets. This framework has been introduced keeping in mind the
regulator’s stance on ensuring speedy resolution of bad loans in the future. A predominant
theme of the new framework is reliance on the IBC to resolve stressed assets while doing
away with a number of interim schemes introduced before India adopted as bankruptcy code
in 2016.24

2. PROCEDURAL HURDLES ON THE FACE OF OPERATIONAL

CREDITOR UNDER SECTION 8 & 9 OF THE CODE

Under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as, the "Code"),
for operational creditors to initiate a corporate insolvency resolution process (hereinafter
referred to as "CIRP"), two steps are required to be followed. The first step is that the
creditor has to deliver a demand notice under Section 8 25 of the Code to the Corporate

23 Resolution of Stressed Assets – Revised Framework, Kumar Saurabh Singh & Rajeev Vidhani April 4, 2018

http://www.businessworld.in/article/Resolution-Of-Stressed-Assets-Revised-Framework.
24 RBI’s revised framework for resolving stressed assets: Building transparency and accuracy PwC Feb. 2018

https://www.pwc.in/assets/pdfs/services/ras/financial-services/rbi-s-revised-framework-for-resolving stressed assets-

building-transparency-and-accuracy.pdf.
25 Insolvency resolution by operational creditor. — (1) An operational creditor may, on the occurrence of a default,

deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in
the default to the corporate debtor in such form and manner as may be prescribed. (2) The corporate debtor shall,
within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring
to the notice of the operational creditor— (a) existence of a dispute, if any, and record of the pendency of the suit or
arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; (b) the repayment of
unpaid operational debt— (i) by sending an attested copy of the record of electronic transfer of the unpaid amount from
the bank account of the corporate debtor; or (ii) by sending an attested copy of record that the operational creditor has
encashed a cheque issued by the corporate debtor. Explanation. —For the purposes of this section, a “demand notice”
means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt
in respect of which the default has occurred.

15.)
Debtor regarding the non-payment of dues and then subsequently if there is no dispute
raised by the Corporate Debtor or there is the absence of payment, the CIRP can be
initiated under the provisions of Section 9 of the Code. In a recent judgment, the Hon'ble
Supreme Court had the opportunity to settle the law on two issues that were impeding the
right of the Operational Creditors in initiating the CIRP against the Corporate Debtors.

In the case of Macquarie Bank v. Shilpi Cables26, wherein the Hon'ble Supreme Court settled
the law on two important issues under the Code. The first issue was whether the provision
under Section 9 (3) (c)27 of the Code which mandates that in order to trigger CIRP against
the Corporate Debtor, ""a copy of the certificate from the financial institutions maintaining accounts of
the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate
debtor." is mandatory or not? This issue is specifically connected to the foreign operational
creditors who could not maintain accounts with the recognized financial institutions and
thus were prevented from initiating the CIRP since such institutions were unable to produce
the requisite certificate. The second issue for consideration before the Hon'ble apex court
was that whether a demand notice of an unpaid Operational Debt under Section 8 can be
issued by a lawyer or an authorized representative on behalf of the Operational Creditor.

Hon’ble Supreme Court took a very pragmatic approach and differed with the narrow view
taken by the NCLT/NCLAT and concluded that the requirement under section 9(3) (c) is
not a "condition precedent to triggering the insolvency process under the Code". The certificate is only a
piece of evidence to confirm the existence of the debt rather than being a precondition. The
Hon'ble Court held that the provision in question is merely directory in nature, and not
mandatory. In this way court took a forward step in incentivizing the role of creditors to
ponder upon the debt in a smoother manner and also dealt with the problem of non-
performing assets in a legal effect.

26Macquarie Bank Limited v/s Shilpi Cable Technologies Limited (2018) 2 SCC 674 Civil Appeal 15135/2017.
27Application for initiation of corporate insolvency resolution process by operational creditor
a copy of the certificate from the financial institutions maintaining accounts of the operational
creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.

16.)
The NCLAT has overruled the decision of the adjudicating authority in the case of M/s.
Annapurna Infrastructure Pvt. Ltd. & Anr. v. Soril Infra Resources Ltd.28 on the very ground that
the Adjudicating Authority had arrived at an erroneous conclusion regarding “existence of
dispute”. NCLAT observed that an order of an arbitral panel adjudicating on the default
under the heading ‘Particulars of Operational Debt (Documents, Records & Evidence of
Default)’. It must be specified as a document which can be an evidence debt & non-payment
of which amounts to ’default’ of the debt. Also, NCLAT states that CIRP under IBC is not a
suit for recovery or a suit for execution of any decree or award, and therefore, the finding of
the Adjudicating Authority on the question of alternate remedy was not based on any sound
principle of law. Therefore, as per NCLAT, pendency of proceedings by Operational
Creditor for execution of the arbitral award would not bar its application under Section 9 of
the IBC.

It has been lucidly mentioned in the case of Kirusa Software Pvt. Ltd. V. Mobilox innovations Pvt.
Ltd.29 the definition and interpretation of “disputes” and ‘existence of disputes” in favor of
corporate debtors, the definition of ‘dispute’ under the IBC is an inclusive definition and not
exhaustive; the expression ‘includes’ used in the definition of ‘dispute’ should be read as
‘means and includes’; dispute will embrace not only the suits or arbitrations but its ambit will
extend to proceedings initiated or pending before consumer courts, tribunals, labour court
or mediation, conciliation etc. Such actions, suits, arbitrations, proceeding before any court,
tribunal, or mediations etc. must be in the context of a debt, or quality of goods or services
or breach of representation or warranty. It must be raised prior to the notice for insolvency
resolution by an operational creditor under section 8 30 of the IBC. Raising of a pending
‘dispute’ cannot be a malafide dispute to stall the insolvency resolution process.

In the instant case the adjudicating authority has acted mechanically and rejected the
application under sub-section (5) (ii) (d) of section 931 without examining & discussing the

28 M/s. Annapurna Infrastructure Pvt. Ltd. & Anr. v. Soril Infra Resources Ltd 2017 SCC OnLine NCLAT 380.
29 M/s. Kirusa Software Pvt. Ltd v. M/s. Mobilox Innovations Pvt. Ltd. 2017 SCC OnLine NCLT 314.
30Supra 25.
31Section 9 (5)(ii)(d) states that the notice of dispute has been received by the operational creditor or there is a record of
dispute in the information utility.

17.)
issue. If the adjudicating authority would have noticed the provisions as to what constitute
“dispute” in relation to services provided by operational creditor then it would have
concluded that condition of demand notice has not been fulfilled by the corporate debtor
and the defense claiming dispute was not only vague but got up and motivated to evade the
liability.

3. INSOLVENCY AND BANKRUPTCY (AMENDMENT) ACT, 2017

The significance of the code and the horizon to which it expands in almost two years since
the enactment of the code has resulted in the full-fledged recovery of stressed financial
assets. The amendment act has a retrospective effect as to the past proceedings under IBC
and purpose being to strengthen the Corporate Insolvency Resolution Process (CIRP).

• The amendment act has amended Section 2 of the code, which extends the
application of the code to personal guarantors of the corporate debtor and
proprietorship firms who were earlier immune from any liability under the code.
Hence the inclusion of these firms will reduce the scope of default by such firms
which resulted in the compliance of NPA to them in case of default.

• Further, the amendment amends the liberty provided to the resolution professional
to invite any resolution applicant as prospective lender, investors and any other
person to put forward a resolution plan. This resulted in the addition of Section 29A
to curb the unscrupulous promoters of corporate debtors to themselves submit a
resolution plan in a CIRP for their own distressed company and thereby be the
biased resolution applicant.

The objective of Amendment act prima facie is to prevent unscrupulous person from
vitiating the provision of the code. It ensures the transparency in the CIRP by imposing the
eligibility criteria for being a resolution applicant with multiple layers of safeguards. This step
provides the viability in the procedure laid down under Insolvency and Bankruptcy Code.

18.)
CONCLUSION

It must be concluded that the incidence of non-performing assets is affecting the

performance of credit institutions both financially & psychologically. Imbibing the credit
management skills has become significant for the improvement from the bottom-line of the
banking sector. Skills of NPA management, include working out negotiated settlements,
compromises constituting active settlement, advisory committees, restructuring and
rehabilitation, effective recourse to suitable legal remedies are to be supplemented with most
suitably legal reforms by banks to recover dues well in an appropriate framework so that the
financial soundness of the banking sector will not be undermined.

The legal reforms to curb the NPAs (viz., BIFR/SICA, lok adalats, DRTs, OTS, SARFAESI
etc) but nothing has hit the mark in tackling NPAs. The effectiveness of both DRT/
Securitization act was challenged and still hangs in dilemma, in many Indian cases the actual
position of the defaulter was not determined. There should be a real crackdown on willful
defaulters and their assets whether or not charged too banks should be declared as national
assets and be disposed in a transparent manner, without major legal hurdles. Hence,
therefore there was a need for more stringent law in order to curb the higher growing NPAs
in the nation which is directly hampering the growth of the economy.

The Insolvency and Bankruptcy Code, 2016, is a progressive legislation that is intended to
improve the efficiency of insolvency and bankruptcy proceedings in India. The new
legislation provides for the early detection of financial distress and a time bound process for
resolution. However, many facets on the IBC's implementation need to be worked out in the
regulations, and its success will depend to a large extent on recruitment of insolvency
resolution professionals will emerge with the time bound process for insolvency resolution
will be adhered to in practice. The code substantially brought to a course the much-awaited
reforms that needs to be looked upon in resorting solutions to the non-performing assets.
The amendments are perhaps the most significant set of changes to the SARFAESI Act
since its enactment in 2002. The Bankruptcy Code and the amendments to the SARFAESI

19.)
Act together reflect a clear legislative intent to shift the needle in a distressed situation
towards the creditors by plugging various loopholes available to borrowers.

20.)
 Bibliography

1. Dr. Ambuj Gupta - Non-Performing Assets (NPAs) in Indian Banks: Issues, Perspective
& Future Directions
2. Bidani S.N. – Managing NPA- in Banks 2002, Vision Books Pvt Ltd. New Delhi
3. Kothari, V.- Securitization, 2005, Nadhwa & Company, New Delhi
4. Mukherjee, Paramita, (2003), - “Dealing with NPAs: Lessons From International
Experience” Money & Finance, Vol.12, No.12, March 2017
5. M.R. Umarji, - 7th Edition 2017- Law & Practice Relating to Securitization &
Reconstruction of Financial Assets & Enforcement of Security Interest
6. Vinod Kothari- Edition 2016 - Laws Relating to insolvency & Bankruptcy Code 2016
(revised 2017)
7. The Bare Act, SARFAESI ACT, 2002
8. The Bare Act, Insolvency & Bankruptcy Code, 2016

Dailies

1. The Hindu
2. The Indian Express
3. Business World

Journals

1. Narasimham Committee Report-I (1991)

2. Narasimham, M., 1998. Report of the committee on Banking Sector Reforms.
3. RBI Bulletins, RBI Reports on trend & Progress of Banking in India. (Various Years)
4. Trend & Progress in Banking, 1998-2017, RBI.
5. Verma Committee Report- (1999)

WEBOGRAPHY

21.)
 www.Bankersindia.com.
 www.IndiaInforline.com.
 www.RBI.Org.in.
 www.PRS.Org.in.

22.)