Asset Reconstruction Companies as Resolution Applicants
By EDITORIAL TEAM INSOL India Posted On : March 24, 2021
The inconsistency between the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 and those of the IBC regarding asset reconstruction companies (“ARCs”) had come up recently when the resolution plan submitted by an ARC was rejected by the RBI for non-compliance with the provisions applicable to ARCs under the SARFAESI Act 2002.
Since the inception of the IBC, over 250 companies have seen resolutions and out of which, some have been successfully acquired by ARCs. The SARFAESI Act stipulates that ARCs cannot carry on any business other than that of asset reconstruction and/or securitization. Any other business proposed to be conducted by an ARC would require the permission of the RBI.
Notwithstanding the provisions of the SARFAESI Act, the IBC contains provisions for submission of a resolution plan by financial entities (the definition of which includes an ARC). Therefore, if the IBC allows financial creditors to submit a resolution plan, why does the RBI reject the understanding that an ARC, who is also categorized as a financial creditor, can submit a resolution plan?
Since the inception of the IBC, over 250 companies have seen resolutions and out of which, some have been successfully acquired by ARCs. The SARFAESI Act stipulates that ARCs cannot carry on any business other than that of asset reconstruction and/or securitization. Any other business proposed to be conducted by an ARC would require the permission of the RBI.
Notwithstanding the provisions of the SARFAESI Act, the IBC contains provisions for submission of a resolution plan by financial entities (the definition of which includes an ARC). Therefore, if the IBC allows financial creditors to submit a resolution plan, why does the RBI reject the understanding that an ARC, who is also categorized as a financial creditor, can submit a resolution plan?
%u200BCreation and purpose of ARCs under SARFAESI Act
In accordance with the definition of “Asset Reconstruction Company” under Section 2(1)(ba) of the SARFAESI Act, an ARC is created for the purposes of “asset reconstruction” or “reconstruction” or both.”
A connected provision, section 15(4) of the SARFAESI Act, states that the secured creditor (in this case, an ARC) shall, on full realisation of debt, “restore the management of the business of the borrower to him”. In the report, a thin line between ‘realisation’ and ‘rescue’ was therefore drawn. Because the purpose and the aim of ARCs is to ‘realize the dues’ and reposition the creditor, in its truest sense, it does not amount to ‘rescue’.
However, by way of the Amendment Act, 2016, in SARFAESI Act a major change was introduced. Section 15(4) now provides that if any secured creditor has converted part of its debt into shares of a borrower company, together with other secured creditors or any asset rehabilitation company or financial institution or any other assignee and thus, has gained a controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the borrower company’s debt.
A connected provision, section 15(4) of the SARFAESI Act, states that the secured creditor (in this case, an ARC) shall, on full realisation of debt, “restore the management of the business of the borrower to him”. In the report, a thin line between ‘realisation’ and ‘rescue’ was therefore drawn. Because the purpose and the aim of ARCs is to ‘realize the dues’ and reposition the creditor, in its truest sense, it does not amount to ‘rescue’.
However, by way of the Amendment Act, 2016, in SARFAESI Act a major change was introduced. Section 15(4) now provides that if any secured creditor has converted part of its debt into shares of a borrower company, together with other secured creditors or any asset rehabilitation company or financial institution or any other assignee and thus, has gained a controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the borrower company’s debt.
ARCs as Resolution Applicants under IBC Code
Under the IBC, resolution applicants may be any person who submits a resolution proposal individually or jointly with any other individual. The person should not, however, be ineligible under Section 29A of the IBC. The second proviso to clause (c) of Section 29A mentions that nothing in clause (c) applies to a resolution applicant where such applicant is a financial person and is not a related party to the corporate debtor. However, such relation does not extend to any person related to the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions.
The language of the statute, as set out above, makes it very clear that an ARC may be an applicant for a resolution under the IBC. In any case, ARCs may also consider partnering with resolution applicants as participants in the structure proposed under a resolution plan without actually being classified as a resolution applicant. Until further clarifications from the RBI, this would enable ARCs to continue being a part of the resolution process under the IBC without violating the current norms/order of the RBI.