assignment of debt by nbfc

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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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Court denies assignee bank benefit of SARFAESI Act

The assignment of debt by banks and other financial institutions has become quite common. Bombay High Court recently adjudicated upon an interesting aspect of law in relation to one such assignment in the case of Kotak Mahindra Bank Ltd v Trupti Sanjay Mehta and Others .

Facts of the case

In this case, a non-banking financial company (NBFC) had sanctioned a loan to an entity that defaulted in meeting its payment obligations in relation to the loan. Upon the default, the NBFC invoked the arbitration clause in the financing document and the arbitral tribunal ordered the borrower to repay the loan to the NBFC in accordance with the terms stipulated. The NBFC subsequently assigned the debt to a bank via a deed of assignment. The assignee invoked the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), to recover the outstanding amount and took possession of the flat which was provided as security for the loan.

The borrower filed an application before the Debt Recovery Tribunal, claiming that since the original lender (i.e. the NBFC) was not entitled to invoke the provisions of the SARFAESI Act, the assignee bank was also not entitled to take action under the act. The tribunal allowed the application and directed the bank to hand over possession of the flat. The bank filed an application before the Debt Recovery Appellate Tribunal, which was dismissed. Accordingly, the bank filed a writ petition before Bombay High Court.

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Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice . This article is intended for informational purposes and does not constitute a legal opinion or advice.

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Co-lending by NBFCs

• What is Co-origination/ Co-lending

Simply put, co-lending/ co-origination is the joint contribution of a loan by two or more lenders.  To that end, the Reserve Bank of India ( “ RBI ”), vide its earlier notification dated September 21, 2018 titled ‘ Co-origination of loans by Banks and NBFCs for lending to priority sector ’ provided for co-origination by scheduled commercial banks with systemically important non-deposit taking non-banking finance companies (NBFC-ND-SI). This has been revised and rechristened as ‘Co-Lending Model’  by the RBI vide its notification dated November 05, 2020 (“ Notification ”).

• Non-applicability of the Notification in case of co-lending by NBFCs

Currently the Notification does not apply to co-lending by two NBFCs, and only governs co-lending arrangements between banks and NBFCs (including housing finance companies) to the priority sector. Evidently, there are no specific guidelines which regulate co-lending by NBFCs. In the past year especially, we have witnessed NBFCs, influenced by commercial requirements, entering into co-lending arrangements not only with banks but also with other NBFCs, enabling wider access to the credit market. As per the Notification, NBFCs (originating the loan) are required to retain 20% share of the individual loan on their books. In the absence of any guidelines governing the co-lending arrangements between NBFCs (not involving banks), while one may argue that 20% retention requirement may not apply, we do note that some of the co-lending structures available in the public domain have clearly adopted the 20% retention rule even for co-lending amongst NBFCs.

• Forms of Co-Lending

Taking guidance from the Notification, co-lending can take one of two forms:

• Non-discretionary – where the co-lending arrangement contemplates prior and irrevocable commitment of the other co-lender to take its portion of the loan on its books; or
• Discretionary – where the other co-lender will have the discretion to take the loan on its books after the loan has been originated by the NBFC, based on its due diligence.

Evaluating the Notification, it would appear that for the purposes of co-lending arrangements between two designated NBFCs, non-discretionary lending would require compliance with the extant guidelines dated November 09, 2017 on ‘ Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs ’ issued by the RBI, as applicable to NBFCs. On the other hand, discretionary co-lending which is deemed akin to direct assignment would appear to require compliance with the direct assignment guidelines issued by the RBI dated September 24, 2021 titled ‘ Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 ’.

• Compliance with KYC Directions

It is pertinent to note that as per the Master Direction – Know Your Customer (KYC) Direction, 2016 (“ KYC Direction ”), a co-lending NBFC may also rely on the KYC undertaken by the originating NBFC. Under the KYC Direction, the RBI allows regulated entities to rely on customer due diligence undertaken by a third party (including originating NBFC), subject to compliance with certain conditions, including:

• the co-lender satisfying itself that relevant identification data/ documents shall be made available by the third party (i.e. originating NBFC) upon request without delay; and
• that the third party is regulated, supervised or monitored, and has measures in place to comply with customer due diligence and record keeping as per the Prevention of Money Laundering Act, 2002.

Any bank/NBFC participating in co-lending must recognise that the ultimate responsibility for customer due diligence and enhanced due diligence measures shall remain with each respective co-lender and cannot be outsourced.

While the Notification only addresses co-lending between banks and NBFCs for priority sector, there does not appear to be any bar on co-lending arrangements that otherwise meet the applicable structured lending norms. In practice, several NBFCs enter into co-lending structures. In such cases, entities may adopt prudent regulatory and compliance practices to ensure that the outsourcing and customer due diligence provisions, which emulate the core values of customer protection and responsibilities of regulated entities (i.e. each co-lending NBFC), are followed.

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• Bank Entitled To Proceed U/S 13...

Bank Entitled To Proceed U/S 13 SARFAESI Act Notwithstanding That Debt Portfolio Was Assigned To It By NBFC: Bombay High Court

Fatima ansari.

22 March 2022 12:21 PM GMT

The Bombay High Court has held that a Bank, being a "secured creditor" within the meaning of section 2(zd) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is entitled to initiate proceedings against a debtor under Section 13 thereof, notwithstanding the fact that the assignor of debt portfolio was not a...

The Bombay High Court has held that a Bank, being a "secured creditor" within the meaning of section 2(zd) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is entitled to initiate proceedings against a debtor under Section 13 thereof, notwithstanding the fact that the assignor of debt portfolio was not a "financial institution" at the material time.

 A bench of Chief Justice Dipankar Datta and Justice MS Karnik concluded 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. "

Respondent no. 1 was the Kotak Mahindra Bank which was assigned debt portfolio by Respondent no. 2, a non-banking financial company. Petitioner was a partnership firm which had obtained financial assistance from the respondent no. 2 upon creation of mortgage in respect of a flat, which was later classified as a non-performing asset by the Respondent no. 1, Bank.

The Bank had then proceeded to  issued demand notice to the Petitioner under Section 13(2) of SARFAESI Act.

The notice was opposed by the petitioner primarily on the ground that the original lender was not a "financial institution" within the meaning of section 2(m) of the SARFAESI Act and, therefore, not a "secured creditor" within the meaning of section 2(zd) thereof. Hence, it was the petitioners' contention that since the respondent no.1 had stepped into the shoes of the respondent no. 2, the respondent no. 1 had no authority to proceed under section 13 of the SARFAESI Act.

Reliance was placed on  Kotak Mahindra Bank Ltd. V/s. Trupti Sanjay Mehta & Ors., where it was held that a Bank to whom a debt has been assigned by a NBFC is not entitled to adopt proceedings under SARFAESI Act.

Nevertheless, the respondent no. 1 Bank proceeded to  the Magistrate's Court and  filed an application under section 14 of the SARFAESI Act. The application was allowed and an order was passed permitting Respondent no. 1 to take possession of the secured asset with the assistance of a public official.

Aggrieved, the Petitioner approached the High Court.

The High Court has held: 

"the action taken by the respondent no.1 to issue demand notice under section 13 (2) of the SARFAESI Act as well as to approach the magistrate under section 14 is legal and valid and it cannot be invalidated based on the decision of this Court in Kotak Mahindra Bank Ltd. (supra)."

The bench said that as the owner of the debt, the lender can always transfer its asset unless a law or the loan agreement prohibits the same. Such transfer in no manner affects any right or interest of the borrower.

In the instant case, the respondent no. 2 assigned its rights under a contract and its own asset, namely, the debt, to the respondent no.1. It is not the case of the petitioners that in so assigning, their rights as borrowers flowing from the loan agreement has in any manner been affected or even the asset affected, the Court noted. It further stated that the petitioner has not shown that the rights that the respondent no.2 assigned to the respondent no.1 were incapable of assignment, either under any law or under an agreement between the petitioners and the respondent no.2.

Next, it referred to the decision in  M. D. Frozen Foods Exports Pvt. Ltd. and others Vs. Hero Fincorp Ltd., where by the Supreme Court held that Section 13 of the SARFAESI Act could be resorted to in respect of a debt which had arisen out of the loan agreement/mortgage created prior to enactment of the SARFAESI Act, give that the debt was alive at the time when the Act was brought into force.

Further, it referred to Indiabulls Housing Finance Limited Vs. M/s. Deccan Chronicle Holdings Limited and others. In this case,  Indiabulls Financial Services Limited ('IBFSL') was the original lender which later on merged with the appellant (IHFL). The contention before the Court was that IBFSL not being a "financial institution" within the definition of the term in the SARFAESI Act on the date money was lent, it had no right to initiate action under the SARFAESI Act. However, t he Supreme Court concluded that the arrangement would be classified as 'security arrangement' under Section 2(1)(zb); the agreements created 'security interest' under Section 2(1)(zf); and the appellant became 'secured creditor' within the meaning of Section 2(1)(zd) of SARFAESI Act."

After perusing both the judgments, the High Court remarked that the decision in Kotak Mahindra Bank Ltd. (supra) has been "impliedly overruled" by the Supreme Court.

The bench observed that the petitioner had sought to distinguish the decisions in M. D. Frozen Foods Exports Pvt. Ltd. (supra) and Indiabulls Housing Finance Limited (supra) by submitting that the facts were different.

However, the bench was of the view that even though the facts in this case are a little different from the facts in M. D. Frozen Foods Exports Pvt. Ltd. (supra) and Indiabulls Housing Finance Limited (supra), the same pales into insignificance for the reason that:

" If indeed the provisions of the SARFAESI Act can be applied even in respect of loan agreements entered into before such enactment was brought into force, we see nothing in any law to hold that the provisions thereof can never be resorted to by a bank like the respondent no.1 in circumstances such as the present. Upon noticing default being committed, the account of the petitioners was classified as a nonperforming asset by the respondent no.1. The rights of the respondent no.2 enforceable against the petitioners for default in payment of debt having passed on to it, the respondent no.1 did have the authority or sanction in law to resort to the provisions of the SARFAESI Act. Applying the parameters as laid down in paragraph 18 of the decision in M. D. Frozen Foods Exports Pvt. Ltd. (supra), since accepted in Indiabulls Housing Finance Limited (supra), we find that all such parameters in the present case are fulfilled. "

The bench noted that it need not keep this writ petition pending awaiting a decision of the Supreme Court in the pending appeal arising out of the decision in Kotak Mahindra Bank Ltd. (supra).

Incidentally, at one point of time, the appeal arising from Kotak Mahindra Bank Ltd. (supra) and the appeal in Indiabulls Housing Finance Limited (supra) were tagged together by the Supreme Court for hearing. However, the same got segregated and the decision in Indiabulls Housing Finance Limited (supra) came to be pronounced, which in the High Court's opinion, brings about a quietus to the issue.

The writ petition was consequently dismissed.

Case Title :  Poorti Rent a Car and Logistics Pvt. Ltd. & ors. vs. Kotak Mahindra Bank Ltd. & ors.

Citation : 2022 LiveLaw (Bom) 95

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Debt assigned by NBFC can't be enforced by assignee-bank under SARFAESI Act

In case of mortgage loan, mortgagee took action under provisions of SARFAESI Act which was denied by DRT & DRAT. On writ petition HC upheld decision of courts below stating that as per Objects & Reasons & various provisions of SARFAESI Act, debt which is assigned to Bank or Financial Institution by Non-banking Financial Institution is not covered within definition of term "borrower" & therefore can't be enforced under Sec.13 of said Act.-000219

1. By this Petition which is filed under Article 226 of the Constitution of India, Petitioner is seeking the following substantive reliefs:

"a. to hold and declare 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 bank of Financial Institution to adopt steps under the RDDB Act/or SARFAESI Act and/or Civil Law."

"b. to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction calling for the records of the case in Appeal No.235 of 2014 and in Securitization Application No. 39 of 2014, from the Debts Recovery Appellate Tribunal, Mumbai and after considering the legality veracity and correctness of the impugned order dated 20th January, 2015 read with the Trial Courts order dated 28th November, 2014, this Hon'ble Court be pleased to quash and set aside the same or such part thereof as this Hon'ble Court deems fit and proper."

2. Petitioner No.1 is a Banking Company incorporated and registered under the Companies Act. Respondent No.1 and 2 claim to be the owners of Flat No.55, 5th Floor, "B" Wing, Gita Smruti Premises CHS Ltd., Pandita Ramabai Road, Gamdevi, Mumbai - 400 007. This Flat was given and accepted as security by Respondent No.4 with Respondent No.3 for advances made to Respondent No.4. It is an admitted position that Respondent No.3 is a Non-Banking Financial Institution, which was pleased to assign this debt to the Petitioner by virtue of a Deed of Assignment dated 18/07/2012 alongwith underlying security.

3. Since Respondent No.4 had committed defaults in repayment of his debts, Respondent No.3 invoked the Arbitration Clause in the agreement and finally an award was passed in favour of Respondent No.3 on 31/07/2010, directing Respondent No.4 to pay sum of Rs 75,30,872/- with interest @ 13.24 % per annum with effect from 25/02/2010 to 31/07/2010 and thereafter @ 14% per annum till the actual payment and/or realization. Thereafter, Respondent No.3, by a Deed of Assignment dated 18/07/2012, transferred, assigned and released in favour of the Petitioner - Kotak Mahindra Bank Ltd. the entire amount payable by Respondent No.4 to Respondent No.3.

4. In view of Deed of Assignment, Petitioner started taking steps for realization of the outstanding amount and invoked the provisions of SARFAESI Act. Initially, notice dated 03/07/2013 under section 13(2) of the SARFAESI Act was issued to Respondent No.4, calling upon him to pay an amount of Rs 1,10,39,111/- due and payable as on 02/07/2013 with interest @ 14% per annum. No reply was given to the said notice by Respondent No.4. Petitioner, thereafter, filed an application under section 14 of the SARFAESI Act in the Court of Chief Metropolitan Magistrate, Esplanade, Mumbai. At the time of taking possession, Respondent No.1 was found in the premises, though Respondent No.4 had mortgaged the premises to Respondent No.3, which mortgage was assigned to the Petitioner.

5. Respondent Nos. 1 and 2 thereafter claiming to be the owners of the said Flat, challenged the action of the Petitioner by filing Securitization Application being Securitization Application No.39 of 2014 before the DRT, Mumbai on various grounds and more particularly on the ground that they have been dispossessed by the Petitioner without following due process of law. The principal contention, inter alia, which was raised by Respondent Nos. 1 and 2 was that Respondent No.3 - Citi Financial Consumer Finance Ltd., being a Non-Banking Financial Corporation, was not entitled to invoke the provisions of SARFAESI Act and, secondly, its Assignee i.e. the Petitioner was also not entitled to invoke the provisions of the SARFAESI Act.

6. The Presiding Officer of Debt Recovery Tribunal-II, by his judgment and order dated 28/11/2014, held that since Respondent No.3 - Citi Financial Consumer Finance Ltd. was not a Financial Institution within the definition of "financial institution" under the SARFAESI Act, Petitioner, despite being a Bank, was not entitled to exercise any powers or authority as a Bank under the provisions of the said Act against Respondent No.4. The Securitization Application filed by Respondent Nos. 1 and 2 was allowed and the Petitioner was directed to handover possession of the secured assets to Respondent Nos. 1 and 2. The operation of the order was, however, stayed for a period of one month.

7. Petitioner, being aggrieved by the judgment and order passed by the Presiding Officer, DRT-II, filed an appeal being Appeal No.235 of 2014 on various grounds. It was inter alia contended that even though the Petitioner - Bank was an Assignee of the debt from NBFC, it was entitled to take action under the provisions of the SARFAESI Act. It was contended that the "debt" as defined under section 2(g) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 ("RDDBFI Act") and 2(ha) of SARFAESI Act, included assignment regardless of the fact as to who the primary holder is. The DRAT by its judgment and order dated 20/01/2015 dismissed the appeal filed by the Petitioner and directed the Petitioner to restore the possession of Respondent Nos. 1 and 2.

8. Being aggrieved by both these orders, Petitioner has filed this Petition under Article 226 of the Constitution of India.

HC held as under:

9. Upon a conjoint reading of the definitions reproduced hereinabove alongwith Section 13 of the said Act read with Sections 17 and 18, it can be seen that though the word "debt" under section 2(ha) of the SARFAESI Act and section 2(g) of the RDDBFI Act is identical bringing within its fold any debt whether secured or unsecured or assigned, by virtue of the definitions quoted hereinabove under the SARFAESI Act and Sections 13, 17, 18 and 31 only the Bank who has assigned the debt to a Financial Institution and vice versa can take recourse to Section 13 sub-clause (2) and (4) of the said Act for the following reasons.

10. Definition of "borrower" is defined under section 2(f) to mean a person who fulfills two criteria viz (1) who has been granted financial assistance by any Bank or Financial Institution, (2) who has given any guarantee or created any mortgage or pledge as a security for financial assistance granted by any Bank or Financial Institution and (3) it includes a person who becomes a borrower of Securitisation Company or Reconstruction Company upon acquisition by it of any rights or interest of any Bank or Financial Institution in relation to such assistance. The third part, therefore, clearly restricts definition of the term "borrower" of a Bank or Financial Institution who acquires any right or interest and specifically excludes any other type of Institution such as Non-banking Financial Institution or a private person.

11. As a corollary therefore it is clear that by virtue of the restrictive definition, only debts which are assigned to a Bank from another Financial Institution or to the Financial Institution from a Bank, 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. The term "borrower" is one of the crucial terms which is to be considered because security interest of borrower within the definition of section 2(f) alone can be enforced under Chapter-III, Section 13 sub-clause (2) and (4) of the said Act.

12. In our view, therefore, though the term "debt" as defined under the RDDBFI Act and SARFAESI Act includes the words "or assigned" such assignment therefore in view of the definition of the term "borrower" in section 2(f) would have to be restricted to a debt of borrower which is assigned to a Bank by a Financial Institution or vice versa.

13. The Objects and Reasons of the SARFAESI Act and various provisions of the said Act as well as the mechanism which has been provided under the said Act clearly disclose that this mechanism which is non-adjudicatory in nature has been designed only for the benefit of Banks and Financial Institutions and not for other categories such as Non-banking Financial Institutions etc. This is fortified from the other terms which are defined under the SARFAESI Act. The term "financial assistance" which is defined in section 2(k), again, is restricted to any Bank or Financial Institution.

14. At the same time, definition of "financial institution" under section 2(m) reveals that it does not include a Non-banking Financial Institution nor the term "bank" defined in section 2(c) includes such NBFC. The term "secured creditor" under section 2(zd) is restricted to any Bank or Financial Institution or any consortium or group of Banks or Financial Institutions but does not include a Non-banking Financial Institution. The word "secured creditor", again, is used in the definition of the word "security interest" under section 2(zf) which restricts the meaning of "security interest" which is created in favour of any secured creditor which again means a Bank or a Financial Institution. The word appearing in section 2(zf) viz "assignment" other than those words specifically mentioned in Section 31 therefore will have to be given a restrictive meaning as an assignment by a Bank or Financial Institution and not the assignment made by NBFC.

15. Lastly, Section 5 of the said Act deals with acquisition of rights and interest in financial assets. Sub-clause (5) of Section 5 was inserted by Amendment Act No.1 of 2013 with effect from 15/01/2013 and it permits the Securitisation Company or Reconstruction Company an acquisition of financial assets under sub-section (1) which deals with acquisition of financial assets and any Bank or Financial Institution can substitute its name in any pending suit, appeal or other proceedings before the DRT or Appellate Tribunal etc. Chapter-III deals with enforcement of security interest and section 13(2) and (4) makes it clear that a borrower who fails to discharge his liability in full within a period prescribed in sub-section (2), again, against such a borrower, a secured creditor can take recourse to recover his secured debt. Consequently, therefore, only against such a borrower the debt which is defined under section 2(f) can be enforced under Section 13.

16. Taking into consideration the scheme of the Act, Objects and Reasons and various provisions of the SARFAESI Act, we have no hesitation in holding that the debt which is assigned to a Bank or Financial Institution by Non-banking Financial Institution is not covered within the definition of the term "borrower" and therefore cannot be enforced under Section 13 of the said Act. The submission made by Ms. Rajani Iyer, the learned Senior Counsel appearing on behalf of the Petitioner, therefore, cannot be accepted and we concur with the view taken by the DRT and DRAT.

17. Ms Rajani Iyer, the learned Senior Counsel appearing on behalf of the Petitioner has relied on the judgment of the Apex Court in ICICI Bank v. APS Star Industries Ltd. (2010) 10 SCC 1 Relying on the said judgment, she submitted that the Apex Court has considered, whether assignments were permissible banking activity and whether assignments from a Bank, Financial Institution or NBFC to a Bank, Financial Institution and NBFC is legal and valid. She submitted that the Apex Court, while relying on the guidelines issued by the Reserve Bank of India, upheld the guidelines and further held that assignment from/to NBFC and Financial Institution was valid and legal. She further submitted that City Financial Consumer Finance Ltd. is NBFC and the assignment from NBFC to present Petitioner is permitted under the RBI guidelines. She further submitted that the debt therefore in the hands of the Bank is a "secured debt" within the meaning of section 2(ze) and 2(zf) of the SARFAESI Act and the Petitioner was entitled to enforce the secured asset under the provisions of the SARFAESI Act.

18.In our view, the said submission is without any substance. Perusal of the said judgment and order in ICICI Bank v.APS Star Industries Ltd. (2010) 10 SCC 1 reveals that the Apex Court was called upon to consider a question as to whether assignment of debts between Non-banking Financial Institutions and Banks was a permissible banking business. While deciding the said issue, the Apex Court, relying on RBI policy, held that it was a permissible banking business. In the said case, the question which fell for consideration and which had been reproduced in para 2 of the said judgment was as under:—

"Whether inter se transfer of non-performing assets ("NPA", for short) by the banks is illegal under the Banking Regulation Act, 1949 ("the BR Act, 1949", for short) as held by the Gujarat High Court in the impugned judgment?"

Answering the said question, after relying on RBI directives, the Apex Court held that guidelines issued by RBI dated 13/07/2005 have statutory force and are not ultra vires the BR Act, 1949 and it therefore held that assignment of debts of NBFC by one Bank to another Bank is permissible under 1949 Act and not violative of section 130 of the Transfer of Property Act, 1882. In our view, taking into consideration the facts of the said case, the issue which fell for consideration before the Apex Court therefore was entirely different. The issue which falls for consideration before this Court in this case is : whether the Bank to whom a debt has been assigned by the Non-Banking Financial Corporation ("NBFC") is entitled to adopt proceedings under the the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act, 2002? This issue being completely distinct and different from the issue decided by the Apex Court in ICICI Bank v. APS Star Industries Ltd., (2010) 10 SCC 1 in our view, ratio of the said judgment will certainly not apply to the facts of the present case. For the same reasons, guidelines issued by RBI dated 13/07/2005 also cannot be relied upon for answering the question raised in this Petition.

19. Reliance was also placed by the learned Senior Counsel appearing on behalf of the Petitioner on the judgment of the Delhi High Court in Kotak Mahindra Bank Ltd. v. Stiefel Und Schuh India Ltd. & Ors. ILR (2009) V Delhi 12 In the said case, original lender was NBFC viz. SBI Home Finance which filed proceedings in the Civil Court for recovery of a mortgaged debt. However, during the pendency of the suit, the debt was assigned to a Bank viz. the State Bank of India, which, in turn, assigned it to Kotak Mahindra Bank Ltd. After assignment, Kotak Mahindra Bank Ltd. applied for transfer of proceedings from Civil Court to DRT on the ground that subsequent assignee - Kotak Mahindra Bank Ltd. was a Bank under RDDB & FI Act, 1993. The learned Single Judge dismissed the application for transferring it to DRT. Appeal Court, however, reversed the decision and held that remedies available in the DRT were permitted to Kotak Mahindra Bank and therefore proceedings in the Civil Court were expressly barred.

20. In our view, it is not possible to accept the view taken by the Delhi High Court. Secondly, Delhi High Court was not required to consider the issue as to whether a debt which is assigned by a Non-banking Financial Institution to a Bank or Reconstruction Company could be enforced under the SARFAESI Act and, therefore, ratio of the said judgment, in any case, will not apply to the facts of the present case.

CONCLUSION:

21. For the aforesaid reasons the question framed in para 3 of this judgment is answered in the negative. We therefore decline to interfere with the order passed by DRT and confirmed by DRAT. Writ Petition is dismissed.

22. At this stage the learned Counsel for the Petitioner seeks extension of stay for a period of eight weeks in view of the statement made by the Counsel for the Respondents. The request is declined since no stay was granted by DRT, DRAT or by this Court.

Case Reference-Kotak Mahindra Bank Ltd. v. Trupti Sanjay Mehta

HIGH COURT OF BOMBAY

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Initiation of Insolvency Proceeding & Persons not entitled to make application to initiate CIRP

Decoding the CodeChapter-II: Corporate Insolvency (CIRP)Topic-1 : CIRP Initiation and withdrawal Initiation of Insolvency Proceeding “A claim gives rise to […]

Decoding the Code Chapter-II: Corporate Insolvency (CIRP) Topic-1 : CIRP Initiation and withdrawal

Initiation of Insolvency Proceeding

“A claim gives rise to a debt only when it becomes due, a default occurs only when a debt becomes due and payable and is not paid by the debtor” 1

1. Applicability of the Code [Sec. 2]

Section 2 of the Insolvency and Bankruptcy Code, 2016 (the Code) provides for application of provisions of the Code. This Section indicates how the provisions of the Code would operate in respect of the several classes of persons to which the Code applies.

Legal contents:

“2. The provisions of this Code shall apply to—

(a) any company incorporated under the Companies Act, 2013 or under any previous company law; (b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; (c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008; (d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; (e) personal guarantors to corporate debtors; (f) partnership firms and proprietorship firms; and (g) individuals, other than persons referred to in clause (e).

in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.”

Section 2 of the Code was notified with effect from November 1, 2016 and Clause (e) has been enforced w.e.f. December 1, 2019  insofar as it relates to personal guarantors to corporate debtors vide  S.O. 4126(E) dated November 15, 2019 .

The Notification S.O. 4126(E) dated 15.11.2019 was challenged in Lalit Kumar Jain Vs. Union of India & Ors. (2021) ibclaw.in 61 SC where Hon’ble Supreme Court held that this notification was issued within the power granted by Parliament, and in valid exercise of it. The exercise of power in issuing this notification under Section 1(3) is therefore, not ultra vires;  the notification is valid.

Judicial Pronouncements:

Section 2(a) of the Code, 2016 provides that the provisions of the Code, 2016 shall apply to, “ any company incorporated under the Companies Act 2013 (18 of 2013) or under any previous company law for the applicability of the Code, 2016 ”. Accordingly, the Insolvency and Bankruptcy Code, 2016 does not create a difference based on the objectives or nature of the company. Thus, clearly, Section 8 Companies of the Companies Act, 2013 are also covered under the Code, 2016 as a “Corporate Person‟ and therefore, CIRP can be initiated against the Corporate Debtor therein. 2

The Monitoring Committee of a Corporate Debtor is covered under the provisions of the Code, by virtue of Section 2(d) of the code. The Monitoring Committee is formed under the provisions of the Code and the Chairman therein, is also appointed in accordance with the provisions of the Code. Hence, he has proper authority to proceed to take any steps as necessary to protect the interest of the Corporate Debtor. 3

B y the virtue of Section 2(e) of the code is fully applicable to Personal Guarantors to Corporate Debtors. The Code specifically has been made applicable on the Personal Guarantors of the Corporate Debtors. Whosoever may be the Personal Guarantors of the Corporate Debtor is covered by Section 2(e) of the Code. 4

NCLAT in Asset Reconstruction Company (India) Ltd. Vs. Mohammadiya Educational Society (2021) ibclaw.in 361 NCLAT held that a Society registered under the Societies Registration Act, 1860 does not fall under the purview of Section 2 of the Code.

2. Minimum amount of default [Sec. 4]

Click here for minimum amount of default.

3. Who can initiate insolvency proceeding [Sec. 6]

Chapter-II of the Insolvency and Bankruptcy Code, 2016 covers Corporate Insolvency Resolution Process(CIRP). As per Section 6 of the Code, following persons may initiate CIRP against corporate debtor on commits a default in debt:

• a financial creditor or
• an operational creditor or
• a corporate applicant

Legal content of the Section 6 is reproduced here:

“ 6. Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.”

The Code of 2016 segregates creditors of a company into two broad categories of financial and operational creditor. The classification of a creditor of a company as secured, unsecured and statutory creditor stands to be replaced by financial or operational creditor of a company in the initiation of an insolvency proceeding of a Company under the Code of 2016. A creditor of a Company when involved in an insolvency proceeding of a company under the Code of 2016 does not lose the character of being either a secured or unsecured or statutory creditor, of such company as the case may be. However, in the insolvency proceedings, under the Code of 2016, a creditor is also classified as a financial or an operational creditor to deal with the insolvency proceeding of a company.

Hon’ble Supreme Court in Sesh Nath Singh & Anr Vs. Baidyabati Sheoraphuli Co-Operative Bank Ltd And Anr. (2021) ibclaw.in 49 SC held that the sine qua non for initiation of the CIRP is the occurrence of default. NCLAT in Nirej Vadakkedathu Paul Vs. Sunstar Hotels and Estates Pvt. Ltd. (2023) ibclaw.in 152 NCLAT held that Section 6 of the IBC, 2016 prescribes as to who may initiate CIRP. It includes a Financial Creditor or an Operational Creditor or the Corporate Debtor itself. This definition is restrictive and includes only Creditors both Financial Creditors & Operational Creditors and the Corporate Debtor who may wilful.

4. Assignment/Transfer of debt

Where an assignment agreement legally assigns the impugned debt to a person, such a person becomes a financial creditor within a meaning of Section 5(7) of the IBC, 2016. In such case, the assignee steps into the shoes of the Financial Creditor and as such he is entitled to the reliefs as available in the IBC, 2016.

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.  Assignor assigns its debt in favour of the assignee and assignee steps in the shoes of the assignor.

Can Asset Reconstruction Company to which debt is assigned make Application as a financial creditor under section 7

In Edelweiss Asset Reconstruction Co. Ltd Vs. Kalptaru Alloys Pvt. Ltd. [2017] ibclaw.in 16 NCLT , question before NCLT that can Asset Reconstruction Company to which debt is assigned make Application as a financial creditor under section 7 of the Code. 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). Initiation of proceedings under SARFAESI Act by the Bank is no bar for initiation of insolvency proceedings under the Code in view of overriding effect given to Section 238. Form 2 was signed by proposed Interim Resolution Professional.  Hence the Application accepted.

Requirement of registration of Assignment Agreement

• Palm Products Pvt. Ltd. vs. T.V.L. Narsimha Rao and Anr.  (2021) ibclaw.in 115 NCLAT , in this case, when the NBFC made an application before the Resolution Professional on the basis of Assignment Deed, the said deed was unregistered and that is the reason given by the Resolution Professional for not accepting the claim. This Tribunal held that there being NBFC certificate, the applicant was NBFC and the said observation have to be ignored. A perusal of the above observation indicate that although the application was held to be NBFC, however, there was no case that applicant was Asset Reconstruction Company.  Assignment in the above case was not in favour of any Asset Reconstruction Company.
• Citi Securities & Financial Services Pvt. Ltd. vs. Sudip Bhatacharya  (2022) ibclaw.in 747 NCLAT , in this case, the Appellant – the Financial Creditor had obtained an assignment of debt of Reliance Infrastructure Limited by documents dated 01.03.2019, who filed claim before the IRP, which was rejected. The Adjudicating Authority in the impugned order has also observed that the Assignment Deed dated 01.03.2019 was required to be registered under Section 17 of the Registration Act. NCLAT upheld the view of the Adjudicating Authority that Assignment Deed dated 01.03.2019 was required to be registered. 
• However, NCLAT in Naresh Kumar Aggarwal Vs. CFM Asset Reconstruction Pvt. Ltd. (2023) ibclaw.in 322 NCLAT held that the present is a case of an Asset Reconstruction Company where for acquisition of asset by an Asset Reconstruction Company an particular manner and procedure is prescribed and when asset is acquired as per provisions of Section 5 of SARFAESI Act, deeming section will come into play. Hence, the Assignment Agreement being in accordance with Section 5 of the SARFAESI Act, 2002, the Assignee has to be deemed to be lender and is thus entitle to exercise all rights which were vested in the lender.

Assignment of debt during CIRP application pending before NCLT

NCLAT in Siti Networks Ltd. Vs. Assets Care and Reconstruction Enterprises Ltd. & Anr. (2022) ibclaw.in 1034 NCLAT held that there is no prohibition in the IBC or any of the Regulations from continuing the proceeding by an assignee. Section 5(7) of the IBC which defines Financial Creditor also includes a person to whom such debt has been legally assigned or transferred to. 

NCLAT in Surender Singh Vs. Yes Bank Ltd. & Anr. (2023) ibclaw.in 131 NCLAT held that on account of failure of assignee to file application to continue the proceeding, the application could not have been dismissed, the original Financial Creditor could have continued the proceeding for the benefit of assignee.

Legality of Assignment Agreement whether is genuine or not

NCLAT in Ranjit Kapoor Member of Suspended Board of Directors of White Metals Limited Vs. Asset Reconstruction Company (India) Limited (2018) ibclaw.in 170 NCLAT held the question whether the Assignment Agreement dated 17th April, 2015 is genuine or not cannot be looked into by the Adjudicating Authority while deciding the application under Section 7 or by this Appellate Tribunal, till the Corporate Debtor alleges the same and raise the objection under Section 65 of the Code. No such plea has been taken by the Corporate Debtor before the Adjudicating Authority alleging fraud on the part of the Financial Creditor for initiation of proceedings under Section 65 of the Code. Therefore, this Appellate Tribunal cannot look into such question of fraud.  Further, NCLAT, reported at (2019) ibclaw.in 317 NCLAT , held that the validity of the Assignment Agreement cannot be decided by the Adjudicating Authority.

Assignee shall be related party under IBC, if Assignor was related party at the time of assignment

NCLAT in Pankaj Yadav Vs. State Bank of India Ltd. [2018] ibclaw.in 49 NCLAT held that the debtis 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.

A creditor is entitled to assign its debt to another person but a debtor cannot assign a debt payable by it to a third party in absence of any provision to assign debt of a debtor

NCLAT in M/s. Khanna Lubricants Vs. M/s. Gulf Petronergy Pvt. Ltd. & Anr. (2019) ibclaw.in 296 NCLAT observed that a creditor is entitled to assign its debt to another person but a debtor cannot assign a debt payable by it to a third party in absence of any provision to assign debt of a debtor.

NCLAT in TVS Interconnect Systems Pvt. Ltd. Vs. ORG Informatics Ltd. (2018) ibclaw.in 141 NCLAT , held that we do not intend to go into the definition of the ‘Operational Creditor’, as it is admitted that MOKA was the ‘Operational Creditor’ of the respondent corporate debtor. We are of the view that the appellant being assignee of the ‘Operational Creditor’ pursuant to the valid agreement dated 14th November 2013 and as the ‘debt’ comes within the meaning of ‘operational debt’, the goods having been supplied to the Corporate Debtor and awarded amount having not been paid, thereby there being a default, it was incumbent on the part of the Adjudicating Authority to admit the application preferred by the appellant under Section 9.

In Edelweiss Asset Reconstruction Company Limited Vs. M/s Winsome Yarns Ltd. (2020) ibclaw.in 147 NCLT , it was held that Debt Assignment Agreement is inadequately stamped, CIRP application under Sec. 7 of IBC is liable to reject.

5. Persons not entitled to make application to initiate CIRP [Sec. 11]

Applications under Section 7; Section 9 and Section 10, are the only applications, which are filed for initiation of CIRP under Chapter II of Part II, cannot be filed, if prohibited in terms of Section 11. 

“ 11. The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely:

(a) a corporate debtor undergoing a corporate insolvency resolution process or a pre-packaged insolvency resolution process; or

(aa) a financial creditor or an operational creditor of a corporate debtor undergoing a pre-packaged insolvency resolution process; or

(b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or

(ba) a corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A, twelve months preceding the date of making of the application; or

(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or

(d) a corporate debtor in respect of whom a liquidation order has been made.

Explanation I.—For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.

Explanation II.- For the purposes of this section, it is hereby clarified that nothing in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another corporate debtor.”

Judicial Pronouncements

5.1 for initiation of fast tract cirp under section 55 (chapter-iv), prohibition under section 11 is not applicable.

Apart from the Section 7; Section 9 and Section 10 of Chapter II of Part II, the CIRP can also be initiated under Section 55 (Fast Track CIRP) as provided under Chapter IV of Part II. For initiation of ‘Fast Tract Corporate Insolvency Resolution Process’ under Section 55 (Chapter-IV), prohibition under Section 11 is not applicable.

5.2 Ongoing Liquidation Process and Winding Proceeding

In Forech India Ltd. Vs. Edelweiss Assets Reconstruction Co. Ltd. [2019] ibclaw.in 20 SC, in the said case, the Hon’ble Supreme Court noticed the pendency of the Application under Section 433 and 434 of the Companies Act, 1956 and winding up petition, being 42 of 2014 was filed by Forech India Ltd. before the Hon’ble High Court of Delhi. In the said case, the notice was issued. The Forech India Ltd. took plea that the Application under Section 7 of the I&B Code was not maintainable, which was the reason that Section 7 Application was rejected by the NCLT. Against the said order, an Appeal was filed before this Appellate Tribunal, which was also disposed of, in which Section 11 of the I&B Code was referred to, and it was held by this Appellate Tribunal that since there was no winding up order by the Hon’ble High Court, the Financial Creditor’s petition would be maintainable. As a result of this the Appellant’s Appeal was dismissed.

When the matter was challenged before the Hon’ble Supreme Court by Forech India Ltd., the Hon’ble Supreme Court referring to different provisions observed and held that Section 11(d) is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the Code in respect of whom a liquidation order has been made. From a reading of this Section, it does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9 as the case may be, as has been held by the Appellate Tribunal. Hence, any reference to Section 11 in the context of the problem before us is wholly irrelevant. However, we decline to interfere with the ultimate order passed by the Appellate Tribunal because it is clear that the financial creditor’s application which has been admitted by the Tribunal is clearly an independent proceeding which must be decided in accordance with the provisions of the Code. Though, we are not interfering with the Appellate Tribunal’s order dismissing the appeal, we grant liberty to the appellant before us to apply under the proviso to Section 434 of the Companies Act (added in 2018), to transfer the winding up proceeding pending before the High Court of Delhi to the NCLT, which can then be treated as a proceeding under Section 9 of the Code.

Mere pendency of a petition for winding up, where no order of winding up or order of liquidation has been passed, cannot be ground to reject the application*:

• In a case where a winding up proceedings has already been initiated against a Corporate Debtor by the Hon’ble High Court or Tribunal or liquidation order has been passed in respect of Corporate Debtor, no application under Section 10 can be filed by the Corporate Applicant in view of ineligibility under Section 11(d) of Code.
• Clause (d) of Section 11 refers to “liquidation order”, against a Corporate Debtor. The word ‘winding up’ has not been mentioned therein. For the said reason by Section 255 read with Schedule 11 of the Code, in Section 2 of the Companies Act, 2013 for clause (23), the clause has been substituted. So, the legislatures have made it clear that the word “winding up” mentioned in the Companies Act, 2013 is synonymous to the word “liquidation” as mentioned in the Code.
• If any winding up proceeding has been initiated against the Corporate Debtor by the Hon’ble High Court or Tribunal or liquidation order has been passed, in such case the application under Section 10 is not maintainable. However, mere pendency of a petition for winding up, where no order of winding up or order of liquidation has been passed, cannot be ground to reject the application under Section 10.

*NCLAT in M/S. Unigreen Global Private Limited Vs. Punjab National Bank, Corporation Bank, Vijaya Bank, Oriental Bank Of Commerce, [2017] ibclaw.in 05 NCLAT.

In Ameya Laboratories Ltd(All) Vs. Kotak Mahindra Bank, IDBI Bank Ltd, Asstt Reconstruction Company (India) Ltd [2018] ibclaw.in 02 NCLAT, it is held that if a winding up proceeding has been passed & is pending against the Corporate Debtor, application u/s 10 of code at the instance of the corporate applicant is not maintainable in view of the bar imposed u/s 11(d) of Code.

In Innoventive Industries Limited Vs. Kumar Motors Private Limited [2018] ibclaw.in 128 NCLAT , NCLAT held that the Appellant is not covered by Section 11 of the Code, we are of the view that the ratio laid down in “ M/s. Unigreen Global Private Limited Vs. Punjab National Bank & Ors.[2017] ibclaw.in 05 NCLAT ” is also applicable to the Financial Creditor/Operational Creditor for the reasons recorded below. The clause (d) of Section 11 is also applicable in respect to Corporate Debtor in respect of whom a liquidation order has been made. The question as raised in this appeal fell for consideration before this Appellate Tribunal in “Forech India Pvt. Ltd. Vs. Edelweiss Assets Reconstruction Company Ltd. & Anr. [2017] ibclaw.in 29 NCLAT ” , and held that in the present case, as admittedly the High Court has already admitted the winding up proceedings and ordered for winding-up of the Respondent-Corporate Debtor, we hold that the question of initiation of CIRP against same Corporate Debtor does not arise.

In Abhay N. Manudhane Vs.Gupta Coal India Pvt. Ltd [2019] ibclaw.in 159 NCLAT , the Liquidator intends to file application u/s 9 against different companies, there being a debt payable to the present Corporate Debtor(Gupta Coal India Pvt. Ltd.) against other companies or against other Corporate Debtors. NCLAT held that as clause (d) of Section 11, a Corporate Debtor in respect of whom a liquidation order has been made is not entitled to make application to initiate CIRP under Chapter II. That means, it cannot file any application under Sections 7 or 9 of the Code. Therefore, no application under Chapter II can be filed by the Corporate Debtor, which is under Liquidation of which the Appellant is Liquidator. In so far as, sub-section (5) of Section 33 is concerned, it is subject to Section 52. Section 52 relates to right of secured creditor in liquidation proceedings. However, in case where matter does not relate to any secured asset and recovery of any money by the Corporate Debtor, which is not under Liquidation, a suit or other legal proceedings may be instituted by the Liquidator on behalf of the Corporate Debtor, but not an application under Section 9 of the Code.

However, a explanation is added by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 clarifying that that section 11 does not prevent a Corporate Debtor from initiating CIRP against another Corporate Debtor.

5.3 A separate CIRP can be initiated against Subsidiary Company of the Corporate Debtor which is separate from the CIRP initiated against Holding Company

In Ashok B. Jiwrajka, Director of Alok Infrastructure Ltd. Vs. Axis Bank Ltd. (2019) ibclaw.in 275 NCLAT , a separate CIRP has been initiated against Alok Industries Ltd. (Holding Company). Subsequently, another CIRP has been initiated pursuant to application filed by another financial creditor against Alok Infrastructure Ltd. (Subsidiary of Alok Industries Ltd.). This appeal has been preferred by  Director of Alok Infrastructure Ltd. against order dated 24th October, 2018 whereby and whereunder CIRP has been initiated against Alok Infrastructure Ltd. (Subsidiary Company). Learned senior counsel appearing on behalf of the Appellant submits that the insolvency resolution process should not continue till the CIRP is decided under Section 31 in the case of Alok Industries Ltd. (Holding Company).

NCLAT held that such submission cannot be accepted as a separate CIRP has been initiated against another Corporate Debtor which is separate from the CIRP initiated against Alok Infrastructure Ltd., of which the Appellant is the Director. Also, NCLAT cleared that that we have not stayed the CIRP initiated against Alok Infrastructure Ltd. and the Resolution Professional, the Committee of Creditors and the Adjudicating Authority will continue with the same in accordance with law within the time specified in the law.

NCLAT in Union Bank of India (erstwhile Andhra Bank) Vs. Siripuram Developers Pvt. Ltd. (2021) ibclaw.in 90 NCLAT held that proceedings under SARFAESI Act can be initiate against Subsidiaries Companies of a Corporate Debtor under Liquidation.

5.4 Whether the application preferred by the Company in terms of Section 4(b) of the SIC Repeal Act, 2003 is barred under Section 11(d) of the Code?

NCLAT in Pratima P. Shah (Ex-Director Amar Remedies Limited) Vs. IDBI Bank Limited [2019] ibclaw.in 160 NCLAT , held that in view of Section 252 of the Code read with Schedule Eighth annexed thereto; and substituted sub-section (b) of Section 4, particularly proviso thereto of Repeal Act, 2003 is a part of the Code. In terms of the proviso to Section 4(b) of SIC Repeal Act, 2003, as the Appeal before the AAIFR stood abated, the Company had a right to file reference for initiation of CIRP against it under the Code. Section 11 of the Code deals with persons, who are ineligible to make application with the I&B Code. Clause (d) of Section 11 of the Code prohibits the corporate debtor to prefer any application under Chapter II of Part II to initiate CIRP against itself in case liquidation order has been made.

It is held that for initiation of CIRP by reference under sub-section (b) of Section 4 of SIC Repeal Act, 2003, the prohibition under Section 11 is not applicable.

5.5 Non-disclosure of any fact of Section 11 in CIRP Application

Non-disclosure of any fact, unrelated to Section 10 and Form 6 cannot be termed to be suppression of facts or to hold that the Corporate Applicant has not come with clean hand except the application where the ‘Corporate Applicant’ has not disclosed disqualification, if any, under Section 11. Non-disclosure of facts, such as that the Corporate Debtor is undergoing a corporate insolvency resolution process; or that the ‘Corporate Debtor’ has completed corporate insolvency resolution process twelve months preceding the date of making of the application; or that the corporate debtor has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under the said Chapter; or that the corporate debtor is one in respect of whom a liquidation order has already been made can be a ground to reject the application under Section 10 on the ground of suppression of fact/not come with clean hand.

The outstanding dues were prior to the period of initiation of CIRP & the creditor having not filed the claim at that stage: In Sanjay Chemicals (India) Private Limited Vs. Sharon Bio-Medicine Limited (2019) ibclaw.in 404 NCLAT , it is held that the outstanding dues were prior to the period of initiation of CIRP and the Appellant having not filed the claim at that stage, now application under Section 9 of the Code after completion of the CIRP against Corporate Debtor was not maintainable.

In Electrosteel Steels Ltd. Vs. Imperia Structures Ltd. [2018] ibclaw.in 127 NCLAT , it was held that Corporate Debtor undergoing CIRP through Resolution Professional as Financial Creditor can file file fresh application under Section 9 of the Code against other Corporate Debtor.

Last updated on 25.07.2023.

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Stamp Duty on Assignment of Receivables

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Updated as on 07.05.2024

The table below provides the rate of stamp duty applicable on assignment of receivables in major states across India:

[1] Notification G.O.Ms. No.305 dated 29.03.2004 issued by Registration and stamps Department, Government of Andhra Pradesh. This shall apply to ARC’s.

[2] Notification S.O.No.-1/M1-126-2004/2904 dated 29.12.2004 issued by Department of Registration, Government of Bihar. This shall apply to ARC’s.

[3] Notification No./F10-9-2004-C.T.-(R) –V-(32) dated 28.02.2004 issued by Financial and Planning Department {Commercial Tax (Registration) Department}, Government of Chhattisgarh.

[4] http://delhi.gov.in/wps/wcm/connect/DoIT_Revenue/revenue/home/registration+acts+and+rules/manuals%2Cnotifications%2Corders/reg260209

[5] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[6] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[7] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[8] 1.  Notification No. Stamp-6/05/35723/R. dated 31.08.2005 issued by Revenue Department, Government of Orrisa. 2. Notification No. Stamp-6/05/35723/R. dated 31.08.2005 issued by Revenue Department, Government of Orrisa.

[9] http://igrs.rajasthan.gov.in/writereaddata/Portal/Images/pdf/notification-dated-26062015.pdf

[10] Notification No.K.N.5-1023/11-2005-500(137)-2003 dated 15.03.2005 as amended by No.K.N.5-1389/11-2005-500(137)/2003 dated 29.03.2005 issued by Kar Evam Nibandhan Anubhag-5, Government of Uttar Pradesh.

[11] Notification No.2307-F.T. dated 02.07.2004 issued by Finance (Revenue) Department, Government of West Bengal.

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can you please provide copy of the Notification No.2307-F.T. dated 02.07.2004 issued by Finance (Revenue) Department, Government of West Bengal.

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