assignment of loan by arc

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

– Archana Kejriwal

Asset reconstruction companies, formed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’/‘the Act’) are an important part of the country’s ecosystem to tackle non-performing loans. ARCs buy and resolve non-performing loans by acquiring them from the financial system.

ARCs were traditionally focusing on acquiring large corporate loan exposures. However, recently, there is increasing participation of the ARCs in retail loans. When ARCs buy retail loans, it is quite likely that the lender or the loan does not qualify for SARFAESI right when the loan was with the lender. This may be either because of the nature of the lender (NBFCs having assets of less than Rs 100 crores) or the size of outstanding (less than Rs 20 lakhs). In such cases, once the ARC acquires the loans, will it have the rights under the SARFAESI Act?

The question becomes important, because in case of corporate loans, the advantage that ARCs had over the original lender was one of aggregation, that is, ARCs acquiring loans given to the same borrower by various lenders, and thus getting significant strength in relation to the borrower. This cannot be the case, obviously, with retail loans. Hence, if the acquiring ARC is no better than the outgoing NBFC, in what way does the transfer of the loans help to accelerate the recovery?

In this article, we discuss this important question.

Explicit rights extended to ARCs under the SARFAESI Act

As per the definition of “asset reconstruction company” under section 2(1)(ba) of the SARFAESI Act, an ARC is formed for the purpose of “asset reconstruction” or “reconstruction” or “both”. 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. Measures for assets reconstruction.—(1)Without prejudice to the provisions contained in any other law for the time being in force, an asset reconstruction company may, for the purposes of asset reconstruction, provide for any one or more of the following measures, namely:—

(a) the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower;

(b) the sale or lease of a part or whole of the business of the borrower;

(c) rescheduling of payment of debts payable by the borrower;

(d) enforcement of security interest in accordance with the provisions of this Act;

(e) settlement of dues payable by the borrower;

(f) taking possession of secured assets in accordance with the provisions of this Act;

(g) conversion of any portion of debt into shares of a borrower company ….”

RBI’s stand on ARC rights

Controversies have arisen for quite a long period of time. The RBI, in its Report of the Committee to Review the Working of Asset Reconstruction Companies ,, [para-F.4.1 of pg. 66-67] raised the concern with respect to right of ARC to enforce security interest irrespective of availability of enforcement rights with the assignor and proposed the following:

Recommendation : ‘In the interest of efficient recovery of debt by creditors, the Act may be amended to ensure that enforcement rights under Section 13 of the Act would be available to an ARC to which a secured financial asset is assigned, irrespective of the availability of enforcement rights with the assignor under Section 13 of the Act. For this purpose, the definition of “secured creditor” under Act may be modified by amending the closing clause in Section 2(1)(zd)(vi) as follows : “in whose favour security interest is created by any borrower for due repayment of any financial assistance or transferred pursuant to assignment, transfer, transmission, etc. of any financial assistance.’ Although no such clarification has been brought to deal with this question, the issue continues to grow and entangle with the other circumstantial aspects.

Being a crucial mechanism for securitisation and asset reconstruction, the ARCs have been contending the right to take over the assets of the borrower even if assigned to it by an entity ineligible under SARFAESI Act. However over the years, this issue has been a matter of concern  which is yet to receive an appropriate elucidation.

Judicial Pronouncements

In the case of Poorti Rent a Car and Logistics Pvt. Ltd. & ors. v Kotak Mahindra Bank Ltd. & ors ., the petitioner (‘borrower’) obtained financial assistance from a Non-Banking Financial Company (‘lender’). The lender assigned the debt to a bank (‘respondent’) who, on default in repayment, issued a notice to the borrower under section 13(2) of the SARFAESI Act. The borrower argued against such notice contending that the lender was not being a “financial institution” within the meaning of section 2(m) of the Act is not a “secured creditor” within the meaning of section 2(zd)thus is ineligible to take actions under the Act. As a result, the respondent bank will also not have authority to take action against the borrower under the Act. Aggrieved by the action, the borrower filed the writ petition before this court.

The Bombay High Court, held the action taken by the assignor(respondent) is legal and valid. It further upheld the decision laid in the case of M. D. Frozen Foods Exports Pvt. Ltd v. Hero Fincorp Ltd. , holding the application of SARFAESI on the point of retrospectivity and retroactivity and was firmly of the view that the SARFAESI Act being brought into force to solve the problem of recovery of large debts, would apply to all claims which are alive at the time when it was brought into force.

In Indiabulls Housing Finance Limited v Deccan Chronicle Holdings Limited and others , the original lender, being a ‘financial institution’/ ‘secured creditor’ ineligible to take actions under SARFAESI, merged with the appellant, eligible under SARFAESI, was granted the right to take actions against the borrower under the SARFAESI Act. Here the court held-

“We find that all such parameters in the present case are fulfilled with the result that initiation of action under Chapter III of the SARFAESI Act by the respondent no.1, being a “secured creditor” within the meaning of section 2(zd) thereof for the purpose of enforcing the security interest that was created earlier, is legally permissible. That the respondent no. 1 is the successor-in-interest of the respondent no.2, which was not a “financial institution” at the material time would make no difference insofar as consequence in law is concerned.”

An opposite view altogether was held in Kotak Mahindra Bank Ltd. v Trupti Sanjay Mehta and others , dealing with a similar issue wherein the petitioner (assignor) contended that regardless of the status of the assignor, if the assignee of a debt along with its underlying security is a bank or financial institution, it is open to such assignor to adopt steps under the SARFAESI Act. However, the court held that the term ‘secured creditor’ being restricted to any bank or financial institution or any consortium or group of banks or financial institutions but does not include a NBFC, thus no rights under SARFAESI gets transferred. The same was however overruled by the Bombay High Court in the Poorti Rent a Car and Logistics Pvt. Ltd .

ARCs as assignors under IBC

In a recent case of Naresh Kumar Aggarwal v Cfm Asset Reconstruction Pvt Ltd , a question relating to validity of assignment of debt was acknowledged by the NCLAT. It was further held that the action taken under section 7 of Insolvency and Bankruptcy Coded(‘IBC’) is valid and legal. It held-

“When acquisition of assets by Asset Reconstruction Company is made as per Section 5(1), deeming provision contained in Sub-section (2) of Section 5 shall come into play and the Asset Reconstruction Company shall be deemed to be Lender for all purposes.”

On a conjoint reading of IBC and SARFAESI, the common goal of both these legislation is to clean and resolve  bad loan portfolios. A common set of stakeholders involved under both these laws, sets out a well established connection between them. It is often seen how the provisions of these legislations are dealt harmonically giving way to both to the extent possible. Taking the basis of the judgment in Naresh Kumar Aggarwal, it can be contended that the assignment of debt being valid under IBC may be held to be at par with SARFAESI Act.

The opposing viewpoints and methods on this vital subject opened up a bag of worms. Some judgments are indicative of conferring the right on ARCs whereas others are not.

From the cited judgments, it seems like the view has been kept limited to the provisions of section 13 of the Act without considering the provisions of section 9 of the Act. This point is pertinent to be highlighted because even if we keep aside the actions under section 13 for once, section 9(f) of the Act clearly holds the validity of taking possession of secured assets in accordance with the provisions of this Act. ” Therefore, ignoring the specific provision under section 9, while paving way for the general provisions leads to questioning the purpose of the ARCs in relation to transfer of retail loans as a whole.

From the above discussions and provisions of section 9 of the Act, there seems no point to bar the ARCs from taking possession of the secured asset even if its rights come from an ineligible assignor. Concerning the given perplexity surrounding the issue, it would be better if there is a clarification in this context.

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Without considering the facts of the case, in our view, the same should not be allowed.

Sir can nbfc assign to ARC company when stay of alienation is there against nbfc by court

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Applicability of SARFAESI to Assignment of Loan by an NBFC

[ Siddharth Tandon is a BB.A. LL.B student at National Law University, Jodhpur]

The primary objective of enacting the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (or the SARFAESI Act) was to empower the financial institutions by identifying and remedying the problem of non-performing assets (NPA) by providing efficient solutions such as recovery of NPA without intervention of courts. Although from the time of its enactment the Act did recognise non-banking financial companies (NBFCs) as coming under the ambit of ‘ financial institutions ’, it required the Central Government to pass a notification stating the same. The need for such a notification was felt by the Central Government almost thirteen years after the Act came into force, when it was stated by the then Finance Minister of India, Mr. Arun Jaitley, in his 2015 budget speech.

After almost eighteen months, the Central Government passed a notification recognizing and listing a total of 196 substantially important NBFCs, which were allowed to take benefit of the provisions of the SARFAESI Act. The notification also listed certain conditions to be fulfilled by the NBFCs to come under the purview of the Act. The NBFCs should be:

• Covered under clause (f) of section 45-I of the Reserve Bank of India Act ( or the RBI Act), 1934, which defines ‘NBFCs’
• Registered with RBI;
• Having assets worth rupees five hundred crore and above as per their last audited balance sheet.

In addition to this, the notification also highlighted that only those NBFCs with “such security interest which is obtained for securing repayment of secured debt with principal amount of rupees one crore and above” will be allowed to make use of sections 13 to 19 of the SARFAESI Act, which are of utmost importance when it comes to recovery of loan arrears.

This is where the notification leads to a problem. Only NBFCs which have given secured loans having a principal amount of rupees one crore or more are allowed to make use of sections 13 to 19 of the Act for recovery of the loan, while the other financial institutions have a reduced threshold of rupees one lakh. Hence, an issue arises during the assignment of loan by an NBFC to any other financial institution, where the principal amount is less than rupees one crore. Will such financial institution, which otherwise would have been allowed to use the provisions of the Act, be allowed in this situation where it is an assignee of a loan from an NBFC not coming under the purview of the Act.

The word “assignment” can be defined as “a transfer or setting over of property, or of some right or interest therein, from one person to another; the term denoting not only the act of transfer, but also the instrument by which it is effected”. [i] As has previously been held in multiple cases , ‘assignment of loan or debt’ is permissible under the provisions of the Transfer of Property Act.

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 financial institution can do the same.

This question was dealt by the Bombay High Court in 2015 in Kotak Mahindra Bank Ltd v Trupti Sanjay Mehta and Others . In this case, an NBFC had sanctioned a loan to an institution which had defaulted in paying back the loan. The debt was subsequently assigned to a bank, which invoked the SARFAESI Act for recovery of the amount. The borrower filed an application with the Debt Recovery Tribunal (DRT) stating that as the original lender did not possess the right to enforce the Act, the assignee should not be allowed to do the same. Aggrieved by the judgment of the DRT which was pronounced against the bank, it filed a petition in the Bombay High Court.

The High Court delved into the definition of ‘borrower’ as defined in the SARFAESI Act to hold: “The third part [of the definition of ‘borrower’] … clearly restricts the definition to a ‘borrower’ of a Bank or Financial Institution who acquires any right or interest and specifically excludes any other type of Institution”. It went on to state that “by virtue of the restrictive definition, only debts which are assigned to a Bank from another Financial Institution (or vice versa), such debts alone are covered under the term “borrower”. If the legislature intended to expand the scope of “borrower” to mean any debt assigned to a Bank or Financial Institution by a Non-Banking Financial Institution or any other private person, it would not have excluded a Non- Banking Financial Institution or any other person in the last part of the definition.” It finally held: “The Objects and Reasons of the SARFAESI Act … clearly disclose that this mechanism has … been designed only for the benefit of Banks and Financial Institutions and not for other categories such as Non-banking Financial Institutions etc.”

The Court read the Act restrictively by not allowing ‘NBFCs’ to be interpreted into the provisions. But to place reliance on this case for answering the issue in contention would not be correct. This is because the Bombay High Court gave this judgment during the time when the Central Government had not come up with the notification identifying various NBFCs coming under the purview of the Act. Though it cannot be said that the notification overruled the judgment, it can definitely be stated that it changed the legal environment in which this issue exists. After the notification, the reasoning of the Bombay High Court holds little water.

Another case, which indirectly deals with this issue, is Indiabulls Housing Finance Limited v. Deccan Chronicles Holdings Limited . The Supreme Court in this case held: “No doubt, till the respondent (an NBFC) was not a ‘financial institution’ within the meaning of Section 2(1)(m)(iv) of the Act, it was not a ‘secured creditor’ as defined under Section 2(1)(zd) of the Act and, thus, could not invoke the provisions of the Act. However, the right to proceed under the Act accrued once the Notification was issued.” It further held: “… the definition clauses dealing with ‘debt securities’, ‘financial assistance’, ‘financial assets’, etc., clearly convey the legislative intent that the Act applies to all existing agreements irrespective of the fact whether the lender was a notified ‘financial institution’ on the date of the execution of the agreement with the borrower or not.”

This case, though relevant in the sense that it portrays the inclusive nature of the statute, does not directly give us the answer to the present issue.

An analysis of the present legal regime, including the cases of various courts as well as statutes have not been able to correctly provide us with a clear answer. The case of Trupti Sanjay Mehta , though directly dealing with the question, cannot be relied upon as the judgment came before the notification was passed. Similarly, the IBFSL judgment cannot be relied upon, as it is less about assignment of loan and more about whether an NBFC is allowed to make use of provisions of the Act even if the loan was given out before the notification was passed.

Therefore, according to the author, in order to arrive at an answer, a different and a more inclusive viewpoint needs to be taken. The right to make use of the provisions of SARFAESI Act cannot be considered as a contractual right, which can be transferred or taken away by way of contract. Thus, the fact that an assignee cannot have better rights than that of assignor is not applicable as the rule is in relation to contractual rights, and not in respect to legal rights. At this point, reliance can be placed on the case of ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd. , where it was held: “In assigning the debts with underlying security, the bank [a financial institution] is only transferring its asset and is not acquiring any rights of its client(s)…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 … without in any manner affecting the rights of the borrower(s) in the assets.”

Thus, as long as there is no interference with the right of the borrower, the assignment of loan should be held to be rightful, along with the assignee having full discretion to make use of the Act for recovery of loan.

– Siddharth Tandon

[i] Alexander M. Burrill, A Treatise on the Law and Practice of Voluntary Assignments for the Benefit of Creditors §1, at 1 (James Avery Webb ed., 6 th ed. 1894).

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The stamp duty payable during assignation of debt by Asset Reconstruction Companies – By Adv. Haaris Moosa

In Phoenix Arc Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT (hereafter Phoenix ARC) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959

The stamp duty payable during assignation of debt by Asset Reconstruction Companies

Adv. Haaris Moosa

Stamping has been used by litigators as a deus ex machina for long. Insufficient stamping determines the fate of a case quite independent of its facts or merits. The interplay of the stamping legislations with the Insolvency and Bankruptcy Code, 2016 (IB Code, 2016), has not been adequately analysed by either courts or tribunals.  Stamping in India is regulated by both Union and State legislations since it is covered by Entry 91 of the Union List and Entry 63 of the State List. The Union legislation is the Indian Stamp Act, 1899 (ISA, 1899) 1 and almost all the States have their own stamping statutes. The stamping legislations of old vintage have stood their ground even with the coming of avant garde legislations meant to streamline commercial transactions like the Arbitration and Conciliation Act, 1996, SARFAESI Act, 2002, Companies Act, 2013 and now the IB Code,2016.

In Phoenix ARC Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT  (hereafter Phoenix ARC ) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959) 2 .  The Hon’ble NCLT held that the applicability of KSA 1959 2 is not ruled out by the prescription under Section 8F of the Indian Stamp Act, 1899 (ISA, 1899) which exempts ARCs from paying any stamp duty on “ any agreement or other document for transfer or assignment of rights or interest in financial assets of banks or financial institution s” covered under section 5 of the SARFAESI Act, 2002.

KSA, 1959 in section 25, declares the assignment of a debt to be a conveyance, and the duty payable has been pegged at 8%. In the instant case, the Tribunal found that the assignment deed was to be stamped at 8% as per Section 25 of KSA, 1959 since the agreement was made in Kerala. Interestingly in the instant case, the stamp duty as per KSA, 1959 comes to Rs. 6,33,99,500/- while the assignment deed was found to be made on a non-judicial stamp paper of Rs. 500/-. Consequently, the Tribunal found the assignment deed to be unenforceable for insufficient stamping. 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. Satish Kumar Gupta [2019] ibclaw.in 07 SC  (hereafter Essar Steel ) the supreme court confirmed the decision of the NCLAT, [2019] ibclaw.in 109 NCLAT in affirming the decision of the NCLT in rejecting an application that suffered from insufficient stamping. And held that “Further, the submission of the Appellants that they have now paid the requisite stamp duty, after the impugned NCLAT judgment, would not assist the case of the Appellants at this belated stage. These appeals are therefore dismissed.” 3 Quite to the contrary, in Praful Nanji Satra v. Vistra ITCL (India) Ltd. (2022) ibclaw.in 550 NCLAT , the NCLAT went on to reject an argument for dismissal of an application for insufficient stamping, holding that the only issue that the NCLT in IBC proceedings can look at is whether there has been a default, and nothing further. It was also held that insufficient stamping is a curable defect. The effect of insufficient stamping has attracted contradictory judgments from the NCLAT and the Supreme Court. However, Phoenix ARC follows the correct law laid down by the Supreme Court in Essar Steel .

It is to be noted that proceedings under Code are non-adversarial. Any applicant seeking to initiate corporate insolvency proceedings is required to produce documents that satisfy the Adjudicating Authority (the NCLT) proving the default committed by the corporate debtor. Such an applicant is also required to ensure that the financial contracts on which they rely are legally sound and are not truncated. While structuring true sale transactions for assignment of debt (standard assets or NPA), compliance under the applicable stamping legislations must be ensured to avoid legal complications.

Disclaimer:  The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws ( http://www.ibclaw.in ). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws ( http://www.ibclaw.in ) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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• [2019] ibclaw.in 07 SC , para 99 [ ↩ ]

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RBI Notifications

Rbi’s new guidelines for asset reconstruction companies (arcs).

From UPSC perspective, the following things are important :

Prelims level: Asset Reconstruction Companies, SARFAESI Act, 2002;

Mains level: NA

Why in the news?

The RBI has introduced updated guidelines for Asset Reconstruction Companies (ARCs) through a master direction, effective from April 24, 2024.

What is an Asset Reconstruction Company (ARC)?

What are the new guidelines laid out by the RBI?

• Enhanced Capital Requirements:
• Minimum Capital Requirement Increase: ARCs are now mandated to maintain a minimum capital requirement of Rs 300 crore, a significant increase from the previous Rs 100 crore stipulation established on October 11, 2022.
• Transition Period for Compliance: Existing ARCs are granted a transition period to reach the revised Net Owned Fund (NOF) threshold of Rs 300 crore by March 31, 2026.
• Interim Requirement: However, by March 31, 2024, ARCs must possess a minimum capital of Rs 200 crore to comply with the new directives.
• Supervisory Actions for Non-Compliance:
• ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.
• Expanded Role for Well-Capitalized ARCs:
• Empowerment of Well-Capitalized ARCs: ARCs with a minimum NOF of Rs 1000 crore are empowered to act as resolution applicants in distressed asset scenarios.
• Investment Opportunities: These ARCs are permitted to deploy funds in government securities, scheduled commercial bank deposits, and institutions like SIDBI and NABARD, subject to RBI specifications. Additionally, they can invest in short-term instruments such as money market mutual funds, certificates of deposit, and corporate bonds commercial papers.
• Investment Cap: Investments in short-term instruments are capped at 10% of the NOF to mitigate risk exposure.

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