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Role of NCLT in Promoting Interest of Banks and Financial Institution

Banks and Financial Institution

In order to decide upon all the matters related to companies, banks, and financial institutions, the Central Government constituted a quasi-judicial adjudicating authority. The authority is National Company Law Tribunal (NCLT), under Section 408 of the Indian Companies Act, 2013.  The composition of NCLT not only dispense with the issues related to the corporate sector. But it also encouraged to promote the interests of Banks, the financial sector institutions and stakeholders. Hence dealing with the crisis related to the Non-performing asset. In this blog, we would be discussing how NCLT helps in promoting the interests of banks and financial institution.

How Banks and Financial Institutions can file a Petition in NCLT?

If Financial Debtor makes any default in making a payment or fails to repay financial debt, Financial Creditor i.e. Banks and Financial Institutions have the option to approach the National Company Law Tribunal. It will initiate the Corporate Insolvency Resolution Process under Section 7 of Insolvency and Bankruptcy Code, 2016.

Is there any other Authority that is Authorized with Powers equal to NCLT?

Besides NCLT, Debt Recovery Tribunal (DRT)  under Section 3(1) of Recovery of Debt due to Banks and Financial Institution Act, 1993, has also been assigned with some powers. It has to act as adjudicating authority for the purpose of resolving matters related to banks and financial institutions.

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Jurisdiction of NCLT:

Corporate Insolvency[1] Resolution Process or liquidation of a corporate debtor can be initiated before NCLT having jurisdiction where the registered office of the corporate entity is presently situated.

Although adjudicating authority to settle matters pertaining to partnership firms and individuals is Debt Recovery Tribunal. NCLT is empowered to adjudicate matters related to the corporate entity. But in case of individuals who act as a personal guarantor of the corporate debtor, Insolvency Resolution Process need to be filed before NCLT. In such cases, NCLT shall be vested with powers of DRT to settle matters related to personal guarantors.

What is ‘Default’ under IBC?

Under IBC ‘Default’ means failure to fulfill an obligation.  Especially to repay the whole or part debt due to not only to applicant financial creditor but to others also.

What is Financial debt and what does it Include?

Financial Debt is defined under Section 5(7) of the IBC which means Loan amount borrowed against interest to be paid by the borrower. It also includes loan sanctioned under credit facility and bonds, debentures, loan stock or other similar Instruments issued. Certain instances of financial debt are:

  • Any amount or liability admitted under an agreement
  • Amount acknowledged under money receipt
  • Amount admitted under the bill of exchange, promissory notes, inter-corporate deposits
  • Failure to pay the redemption amount

Who can initiate the Insolvency Resolution Process?

When default has been made an Application to initiate Resolution Process under Section 7 of IBC can be filed either alone or jointly by:

  • Financial creditor
  • Operational Creditor
  • Corporate entity

What are preconditions of filing an Insolvency Resolution Process under Section 7 of Insolvency and Bankruptcy Code, 2016?

There are certain conditions that the petitioner has to fulfill before filing a petition under Section 7 and 8 of IBC. They are not specifically defined under IBC but as per guidelines laid down by Hon’ble Tribunal certain procedure has to follow to avoid any slightest dispute between the parties.

  • There should be the existence of the disputed amount.
  • The claim amount must not be in dispute which means that there should not be any counterclaim from another party.
  • The claim amount should not be time-barred.
  • Breach of any representation or warranty
  • Quality of goods and services provided
  • The pendency of any other matter for the same cause of action and between the same parties.
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Is it mandatory to send legal notice before initiating Insolvency Resolution Process under IBC?

Financial Creditor needs to dispatch the Demand Notice to Corporate Debtor. He needs to mention amount due and ask him to repay the amount within the prescribed limit of time. If Financial Creditor doesn’t receive a claim amount within 10 days, then he can initiate the insolvency process by filing an application under Section 7 of IBC. The NCLT within 14 days of application either accepts the application or reject the same. If the tribunal is satisfied with the facts of the case, notices will be sent to opposite parties. Further, an IRP will be appointed.

Commencement of the resolution Process as per  earlier laws v/s IBC Code:

Earlier the obligation to initiate a resolution process lies with the Corporate Debtor, as Financial Creditor had the option to pursue difference recourse for redressal of its grievances such as Suit for recovery, security enforcement, Criminal Complaint, Complaint under NIA and debt restructuring. But now Code has made a significant departure from the existing resolution regimen. It is by shifting the responsibility on the financial creditor to initiate the insolvency resolution process against the corporate debtor.

How IBC Brings more Benefits for Banks and Financial Institution than Previous Laws?

IBC Code brings many benefits for the banks and financial institutions. Some of the benefits are as follows:

  1. Less time consuming: The Insolvency resolution process needs to be completed within a period of 180 days from the date of admission of application. It may be extended by a further period of 90 days. It will be by an order of the tribunal on an application made by the Committee of Creditors by resolution.
  2. Better efficacy of NCLT in dealing with banking matters: As per reports of IBC it has been revealed that in 2018 the average recovery in terms of percentage of total claims filed by financial creditors was as high as 70%.
  3. Consolidation of the existing framework: Earlier there were four different legal forums having jurisdiction to deal with matters related to banking and financial institutions. They were High Courts, Company Law Board, Debt Recovery Tribunal and Board for Industrial and Financial Reconstruction which overlapped with each other resulted in delay and complexity to recover bad debts. But bankruptcy law not only consolidated the existing framework but also ensure time-bound resolution of the dispute.
  4. Priority-wise distribution of assets during liquidation: Code provided relief to lenders by distributing assets in Secured Creditors, Unsecured Creditors, and Government dues under which Secured creditors will be given priority over unsecured creditors and government dues. A secured creditor will be able to receive the entire outstanding amount rather than the limit provided as collateral.
  5. Penalties: Code also incorporates the provision of the penalty imposed in case any person contravenes with any provision of IBC, which may lead to a fine ranging from Rupees 1 lakh to 2 crores.
  6. Banks can take benefit of IBC to clean up their balance sheets: Banks have been instructed by RBI to use resolution process more frequently with waiting for instructions to improve performance on a sustainable basis to remain competitive and for resolution of stressed assets.
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IBC by empowering NCLT to resolve matters related to banking and financial institution not only helped to resolve the NPA issue. Further, it helps to improve their performance and stability by realizing their assets. Unlike earlier proceedings which take a long time to recover the loan amount, IBC gave alternative and speedy recourse to resolve the dispute.

For more information, you can contact the team of experts at Enterslice.

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