Asset Reconstruction Companies require prior approval from the Reserve Bank of India before submitting resolution plans under the IBC, necessitating inter-ministerial cooperation for regulatory clarity.

JUDGMENT

Prathiba M. Singh, J. (ORAL)--The present petition raises an important issue as to the role of an Asset Reconstruction Company under the Insolvency and Bankruptcy Code (hereinafter, "IBC"), in the context of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter `SARFAESI Act').

2. Under the IBC, sub clause (d) of Explanation II r/w the Provisos to Explanation 1, under section 29A(j), in effect, does not prohibit an Asset Reconstruction Company from submitting a resolution plan. On the other hand, under Section 10 of the SARFAESI Act, for an Asset Reconstruction Company to conduct any business apart from securitization or assets reconstruction, prior approval of the Reserve Bank of India is required. The said two provisions are set out below:

"Insolvency and Bankruptcy Code

"29A. A person not be eligible to be resolution applicant - A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person -

....

(j) has a connected person not eligible under clauses (a) to (i).

[Explanation I] - For the purposes of this clause, the expression "connected person" means -

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

[Provided that nothing in clause (iii) of this Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:

Provided further that the expression "related party" shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt equity shares or instruments convertible into equity shares [or completion of such transactions as may be prescribed,] prior to the insolvency commencement date;]

[Explanation II - For the purposes of this section, "financial entity" shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely:-

... (d) an asset reconstruction company registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of security Interest Act, 2002 (54 of 2002)";

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

"10. Other functions of [asset reconstruction company]. - (1) Any [asset reconstruction company] registered under section 3 may -

(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties;

(b) act as a manager referred to in clause (c) of sub- section (4) of section 13 on such fee as may be mutually agreed upon between the parties;

(c) act as receiver if appointed by any court or tribunal;

Provided that no [asset reconstruction company] shall act as a manager if acting as such gives rise to any pecuniary liability.

(2) Save as otherwise provided in sub-section (1), no [asset reconstruction company] which has been granted a certificate a registration under sub-section (4)