Alternative remedies available to creditors for recovery of their debts post Insolvency And Bankruptcy Code (Amendment) Ordinance, 2020

Since the corporate insolvency resolution process has been suspended for a period of 6 months for any default arising on or after 25.03.2020 in terms of the said Ordinance, the creditors may take recourse to the following remedies as alternatively available for recovering their outstanding debts:

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act, 2002”):

The secured creditor as defined under Section 2 (zd) of the SARFAESI Act, 2002 in whose favour security interest is created as defined under Section 2 (zf) of the SARFAESI Act, 2002 may initiate enforcement measures for recovery of its outstanding dues in accordance with the provisions of the SARFAESI Act, 2002 and the Security Interest (Enforcement) Rules, 2002.

• Arbitration:

The creditors may also initiate arbitration proceedings in accordance with the arbitration agreement entered into between the parties for recovery of their outstanding dues. Before initiating arbitration proceedings, the Creditors may file an appropriate application under Section 9 of the Arbitration and Conciliation Act, 1996 inter-alia seeking interim measures for securing the amount in dispute and/or protection of the subject matter in dispute and/or interim injunction. Thereafter creditors may proceed for execution of the arbitration award, in case the award has been passed in favour of the creditors.  

• RBI Prudential Framework for Resolution of Stressed Assets:

RBI issued circular no. DBR.No.BP.BC.45/21.04.048/2018-19 dated 07.06.2019 titled as “Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019” for resolution of stressed assets by banks (“Framework”).

The said Framework applies to the lenders namely Scheduled commercial banks; All India Term Financial Institutions; Small Finance Banks; and Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D) (hereinafter collectively referred to as the “Lenders”).

The said Framework prescribes that all lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. It is expected that the Lenders initiate the process of implementing a Resolution Plan even before a default. In any case, once a borrower is reported to be in default by any of the Lenders, Lenders shall undertake a prima facie review of the borrower account within 30 days from such default (“Review Period”). During this Review Period of 30, the Lenders may decide on the resolution strategy, including the nature of the Resolution Plan, the approach for implementation of the Resolution Plan, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.

The Resolution Plan may involve any action / plan / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership and restructuring be clearly documented by the lenders concerned (even if there is no change in any terms and conditions).

• Power to make Compromise or Arrangements under Section 230 of the Companies Act, 2013:

In terms of Section 230 of the Companies Act, 2013 a scheme of compromise or arrangement maybe proposed between the company and its creditors or any class of them. If the scheme envisages “corporate debt restructuring” i.e. seeks to restructure or vary the debt obligations of a company towards its creditors, it would be subject to certain requirements inter-alia consent of not less than 75% of secured creditors. The restructuring scheme is subject to approval of the Hon’ble NCLT and if such compromise or arrangement is sanctioned by the NCLT, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

• Summary Suits under Order 37 of the CPC or commercial suits under the Commercial Courts Act, 2015:

The creditors may consider filing a summary suit under Order 37 of the CPC or a commercial suit under the Commercial Courts Act, 2015 (“said Act”) as an alternate remedy to initiating proceedings under the IBC. The said Act attempts to dispose of the matters as expeditiously as possible. The said Act sets an outer limit of 120 days for filing written statement by the defendants beyond which the right to file the same is forfeited and the Court would be bound to not take such a delayed submission on record. To curb frivolous claims or defences being raised and to cut short litigation, provisions have been made for a party to apply for a summary judgment without trial, either for dismissal or decreeing of a suit or for acceptance or rejection of any particular claim or defence.

• Corporate insolvency resolution proceedings against personal guarantors under IBC:

Since the said Ordinance does not suspend initiation of corporate insolvency resolution proceedings against the personal guarantors to the corporate debtors, therefore the same may be initiated by the creditors against such personal guarantors in accordance with the provisions of the IBC. However, since there seems to be no rational in not protecting the personal guarantors to a corporate debtor, the same may not be the intent of the Government, thus it may be subject to interpretation in the absence of any clarification in this regard.