Legal Ease

• Innoventive Industries Ltd. v. ICICI Bank & Anr. (Supreme Court), Civil Appeal Nos. 8337-8338 of 2017 decided on August 31, 2017

The contrast between Segment 7 and Area 9 of the Code: The plot of Segment 7 stands in differentiate with the conspire beneath Area 8 where an operational leaser is, on the event of a default, to begin with, provide a request take note of the unpaid obligation to the operational indebted person within the way given in Area 8(1) of the Code. Beneath Area 8(2), the indebted corporate person can, inside a period of 10 days of receipt of the request take note or duplicate of the receipt specified in subsection (1), bring to the take note of the operational bank the presence of a debate or the record of the pendency of a suit or assertion procedures, which is pre-existing – i.e. sometime recently the corporate debtor got such take note or receipt. The minute there’s the presence of such a debate, the operational lender gets out of the clutches of the Code.

On the other hand, as we have seen, within the case of an indebted corporate person who commits a default of a money related obligation, the arbitrating specialist has to see the records of the data utility or other prove delivered by the monetary leaser to fulfil itself that a default has happened. It is of no matter that the obligation is debated so long as the obligation is “due,” i.e. payable unless interdisciplinary by a few laws or has not yet ended up due within the sense that it is payable at some future date. It is as it were when usually demonstrated to the fulfilment of the settling specialist that the arbitrating specialist may dismiss an application and not otherwise.”

• Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited & Ors. (Supreme Court), Civil Appeal No. 16929 of 2017, decided on October 23, 2017

A discretion continuing cannot be begun after the burden of a ban which that the impact of Area 14(1)(a) is that the intervention that has been organizations after the previously mentioned ban is non-Est in law.

• Black Pearl Hotels Pvt. Ltd. v. Planet M. Retail Ltd. (Supreme Court), Civil Appeal 2973-2974 of 2017, decided on February 17, 2017

The obligation of assurance of an instrument or, to elucidate, to determine when there’s a challenge a specific record of being precise, the arbitration should be done by the judge after hearing the advice for the parties. It may be a portion of legal work, and consequently, the same cannot be assigned.

• Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private Limited (NCLAT Delhi), Company Appeal (AT) (Insolvency) No. 335 of 2017, decided on 04.01.2018

The Hyderabad seat of the NCLT, in an indebtedness request against Kamineni Steel & Power India, permitted a determination to arrange endorsed by 66.67% of its committee of creditors (CoC). The Hyderabad NCLT said in it arrange that Area 30 (4) does not say whether such rate is out of the whole voting share of the money related lenders or those display during meetings of the CoC. “Since IBC may be a modern code and still advancing, the over rate has got to be studied with different circulars issued by the Save Bank of India. The National Company Law Appellate Tribunal (NCLAT) has struck down an arrange passed by the insolvency court that affirmed a determination arrange for Kamineni Steel & Control despite the truth that it failed to get the required 75 per cent vote share, a pre-requite agreeing to the Indebtedness and Insolvency Code (IBC) to urge the arrange embraced by the court.

• K.S. Rangasamy v. State Bank of India & Anr. (NCLAT Chennai), Company Appeal (AT) (Insolvency), No. 83 of 2017, Dated: 06/03/2018

For the reasons aforementioned, we are not slanted to meddle with the condemned arrange dated June 13, 2017. In any case, as we discover that the Appealing party has taken supplication that the ‘Corporate Debtor’ is prepared to pay the overall amount with 9% intrigued p.a. in 12 rise to a month to month portions, it’ll be open to the ‘Financial Creditor’ to settle the debate, on the off chance that the ‘Resolution Applicant’ proposes ‘lesser amount’ and ‘more time’ than the ‘amount and time’ proposed by the Appealing party. In such a case, it’ll be too open to the concerned individual to move some time recently a suitable gathering to create the settlement absolute.” If the offer of the promoters is superior to the determination arrange, slack has been given to approach the suitable gathering to induce the settlement recorded.

A Division Bench of the Bombay High Court comprising Justices Sunil B. Shukre and Avinash G. Gharote in the matter of Medineutrina Pvt. Ltd. v. District Industries Centre and Others, REED 2021 Bom 02243, held that in receipt of sale proceeds, as per Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 the dues of the secured creditor will have priority over dues owed to the government, but the obligation to discharge dues under any Central/State/Local Act survives and therefore, the auction purchaser is liable to discharge the outstanding government dues. This post elucidates the factual background of the case, the issues involved and the ruling pronounced by the Bombay High Court.

BACKGROUND

M/s. Wood Stock Holdings (Wood Stock), the owner of a property, had availed loan from Punjab National Bank/ Respondent No. 3 (PNB), on account of non-payment of which action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was initiated by PNB, resulting in attachment of the above immovable property, which was put to auction. In the auction, the Medineutrina Pvt. Ltd (Petitioner) made the highest bid and accordingly, PNB issued a sale certificate in favour of the Petitioner. Thereafter, the Petitioner applied to the District Industries Center/Respondent No.1 (DIC) for issuance of a No Objection Certificate (NOC) to get the said property transferred in its name. The Petitioner was informed it will have to take NOC from the Sales Tax Department/Respondent No.2 as there were arrears of sales tax dues upon Wood Stock and also certain other documents were also directed to be submitted.

Resultantly, the Petitioner filed a writ petition before the Bombay High Court challenging the action on part of DIC, in refusing to transfer the immovable property in its favour, unless the liability of the Sales Tax Department was discharged. Further, the Petitioner sought PNB to issue a NOC and also a fresh sale certificate, free from all encumbrances in its favour.

ANALYSIS

Placing reliance on a catena of rulings, including Cosmos Co-operative Bank v. State of Maharashtra and Ors 2019 SCC OnLine Bom 9527 and State Bank of India v The State of Maharashtra and others W.P. (ST.) No.92816/2020, the Bombay High Court noted that on a combined reading of Section 26-E of the SARFAESI Act and Section 37 of the Maharashtra Value Added Tax Act, 2002 it is clear that the rights of the secured creditor, to realize secured debts, due and payable to them by sale of assets in which security interest is created is given priority over all other debts and Government dues. However, the priority given in Section 26-E of the SARFAESI Act, to a secured creditor, only means that it is first in queue for recovery of its debts by sale of the property, the other creditors being relegated to second place and so on in the order of their preferences. Further, according to Bom HC, this does not have the effect of wiping out the dues payable under any Central/State/Local Act, where, for the recovery of such dues, a first charge has been created. Hence, when a statutory charge is created on the property, the same goes with the property and follows the property, in whosoever hands the property goes.

The Bombay High Court also rejected the Petitioner’s argument that since no notice of any charge was given to it by the Sales Tax Department and PNB, it was not liable for payment of any dues to them. The Bombay High Court observed that the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. Further, it is the duty of the auction purchaser, before bidding for the property, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. Thus, after acquiring title to the property, the auction purchaser cannot claim that it will have the rights associated with the property and not the liabilities. Consequently, the Bombay High Court concluded that the Petitioner, who was the successful auction purchaser, was liable to pay the outstanding dues to the Sales Tax Department.

In view of the foregoing reasons, Bombay High Court found that the Petitioner was not entitled to the reliefs as claimed in the petition and accordingly, the writ petition was dismissed.

“Bad asset and disposal of bad asset is not something which banks are equipped for at the moment, they have never been equipped and you can’t blame them for it”

~Nirmala Sitharaman, Finance Minister of India, Annual Budget Speech’21

The rampant presence of NPA in the Indian Banking sector is no hidden affair. Despite its limited potential, Bad Banks can be seen as the most viable way forward. This essay explores the history of bad loans, and the consequent need of Bad Banks arising due to the same. Furthermore, alongside presenting arguments for and against the creation of Bad Banks, the future of Bad Banks in the place of proper channels of management and guidelines is also explored. The concept of Bad Banks could be a step towards improvement of the NPAs since it would give the PSBs a tabula rasa to move forward with their day-to-day operations. This would also free the percentage of capital reserves against the lent money, thereby, giving banks the confidence to lend more money and keep the COVID-19 ridden economy afloat. But this should not be misconstrued as a free pass to keep lending increasing amounts of money to the defaulters. This essay has attempted to present a solution-oriented approach based on the perspectives of various financial experts over the years. These include improvement in the PSBs, consideration of privatisation in PSBs and placing financial experts in the valuation of a borrower’s asset rather than allowing bureaucratic controls over loan grants.

Non-performing assets (NPAs) or Bad loans as they are commonly called, have always been a threat to the banking system across the world.  The Indian banking system is no exception. NPAs become a detrimental factor for the growth of the banking system, thereby having an indirect effect on the overall economy. In order to build a stable and strong financial system, minimizing NPAs becomes a key priority. The Indian banking system is more often than not found to be understating their gross non-performing assets in order to boost their earnings and capital adequacy ratios.^[1] Therefore, the true picture of India’s bad loan problem may be far more serious than it’s alluded in recent times. This problem of bad loans came to the forefront for the first time in the Bancon-13 conference held in Mumbai in 2013, wherein the then Deputy Governor of Reserve Bank of India (RBI) chose to talk about ‘future of banks’ instead of the theme ‘banks of future’. He expressed his rhetorical concerns about the rising NPAs, the problem with debt recasting, poor credit appraisal and monitoring systems adopted by bankers while granting loans.^[2] This is when the discourse around the incapability of public sector banks (PSBs) in evaluating the asset quality of a borrower and creating a separate entity, an asset reconstruction company (ARC), to do so began.

Cut to 2020, the Indian Banks Association proposed to the government to set up an asset reconstruction company, commonly known as a Bad Bank, to initially buy the non-performing loans from them (since the banks are unable to realise it’s value and in order to save NPA, ends up grating more loan to the borrower), so that the bank’s balance sheets get settled. In this scenario, the Bad Bank, (whose sole purpose would be re-evaluating the borrower’s assets and recovering the loan back), would be responsible for the appropriation of the bad loans.^[3]

Every bank has some customers who are unable to repay their loans which are termed as non-performing assets and presence of some amount of NPA is naturally expected by the banks as not every loan gets repaid. In India, the problem arose when the levels of ‘hidden’ NPA kept on increasing and the situation got out of hand of the bankers. ‘Hidden’ NPA implies that the banks extend loans over loans to the borrowers before the due date of the premium, so that it does not converts into a NPA. They do so to save their profitability and ultimately leads to camouflaging the real position of the bad loans.^[4] Essentially, the Indian bankers ‘extend and pretend’ which is commonly called ‘ever-greening’ abroad.^[5] They do so because i) they are poor at evaluating project finance, ii) Most of the mega-projects are financed by state-owned banks, so banks take private-equity levels of risk, for interest-rate levels of reward^[6] and iii) if they end up acknowledging NPA (as losses), it will give invitation to internal enquiry, no promotion, and maybe CBI’s involvement too, like it happened in the case of Yogesh Agarwal (former IDBI bank’s chairman).^[7] Additionally, banks end up lending huge amounts of loans to completely new, capital-intensive sectors, such as aviation and telecommunication, in which they have no prior experience to analyse the predicted growths and thus, do not realise the risks associated with the same.