PROCEDURE TO CHANGE OR TAKEOVER THE MANAGEMENT BY ARC

Section 15 of SARFAESI describes the manner in which an ARC can change or takeover the management of a Borrower Company. However, if we look closely at the provision, the said provision initially states that through a newspaper publication, Directors (in case of Company) or Administrators (in any other case) are appointed to carry out necessary actions as may be necessary to take into custody all the property, effects or actionable claims to which the Borrower is entitled. With the new management on board, it is eventually deemed that erstwhile Directors have vacated their offices and terminated the contracts between the Borrower and managerial personnel. This empowers the Directors or Administrators appointed by ARC or secured creditor to exercise the power of superintendence, direction and control of the assets and business of the Borrower. Further, the Section states that where the management of the company is taken over by secured creditors, then, it shall not be lawful for the shareholders of such Borrower Company or any other person to nominate or appoint any person to be a Director of the company; no resolution passed at any meeting of the shareholders of such company shall be given effect, unless approved by the secured creditor and no proceedings for the winding up of such company or for the appointment of a receiver, in respect thereof, shall lie in any court, except with the consent of the secured creditor. The said provision clarifies that on realization of the debt in full, the management of the business taken over from the Borrower, shall be reverted to the erstwhile management of the Borrower Company. If the debt is converted into equity then no such reversion can take place.

It is imperative to note that Section 15 focuses more on the consequences of takeover and how the same is to be dealt with. Further, the words ‘ARCs’ or ‘Secured Creditors’ are often used in conjunction or individually, thereby causing confusion as to whether the same provision applies to ARC and secured creditors together or separately.

Evaluating the procedure set out under the RBI notification dated 21.04.2010 bearing DNBS/ PD (SC/RC) No. 17/26.03.001/2009-10 with respect to change or takeover of the Borrower’ Company’s management, it is essential to understand that even though the notification lays down its objectives of fairness, transparency, non-discrimination, non-arbitrariness and building a system of checks and balances, the process built on these objectives has become complicated and cumbersome for ARCs. Through such notifications, the Borrower Company is provided with multiple opportunities to challenge every action of the ARC before the Debts Recovery Tribunal (DRT), thereby making the whole process nugatory and a landmine for the ARC.

Clause 5 of the RBI notification lays down twelve grounds for change or takeover of management along with explanations. Still the major issue arising out of the same is with regards to the fact that enlisting the grounds provides an ingenious method for the Borrower to challenge the action of ARC, thereby making the entire process time consuming and interdicted with roadblocks. However, these grounds can be removed for the ARCs to decide as per its own discretion.

Further, Clause 6 of the notification provides that ARC should have a policy duly approved by its Board of Directors and the Borrowers should be made aware of this policy. It is essential to notice herein that there is no reason for such a requirement as Borrowers would challenge the policy itself in the Hon’ble Courts. Therefore, either RBI can provide a standard policy for all ARCs to follow or direct that the policy be uploaded on its website, thereby relieving itself of the tedious task of informing or making each Borrower aware of the said policy. Additionally, Clause 6(B) provides for setting up of an Independent Advisory Committee (IAC) to consider and give a report recommending or approving the proposal for change or takeover of management by the ARC. Thereafter, the Board (with at least two Independent Directors) is required to consider the recommendations or the report of the IAC and contemplate various options for recovery before deciding to change or takeover the Borrower’s management and such decisions shall be specifically included in the minutes. The ARC is also required to conduct due diligence, record details of due diligence including findings on circumstances which led to default and why change or takeover of management is necessary. Thereupon, ARC has to identify suitable personnel or agencies, who can take over the management of the Borrower’s business by formulating a plan for operating and managing the business of the Borrower effectively, so that the ARC may realize the dues within the time frame. The said plan aims to provide a procedure for restoring the business of the Borrower after recovery of the dues and the ARC is also required to inform the new management that its role is limited to recovery of dues by prudently managing the business. Thus, this whole provision is extremely cumbersome, subject to challenge and makes the process complicated to execute.

The 7th Clause of the notification pertains to procedure for change or takeover of management, which specifically provides that ARC should give 60 days’ notice to the Borrower of its intention to change or takeover management and call for objections, if any. If the Borrower raises objections then consideration is done by IAC, wherein a report is prepared and submitted to the Board. After considering the IAC report, the Board is required to pass a reasoned order within 30 days of the notice period’s expiry indicating their decision in this regard, which is then further communicated to the Borrower, which is challengeable. Hence, it is evident that even after going through several communication channels, the final decision can be challenged, thereby resulting in making the whole process tiresome and futile. It is imperative to note that the procedure to be followed by an ARC before takeover of possession of assets of a Borrower is inbuilt under Sections 13(2), 13(3A) and 13(4)(b) of the Act and the same procedure can be made applicable to change in or transfer of Borrower’s management to dilute the whole procedure under clause 7.

Under IBC, when a Borrower Company or the Corporate Debtor makes a default in paying the outstanding dues of creditors, the creditors have been empowered to initiate Corporate Insolvency Resolution Process (CIRP) against such Corporate Debtor. CIRP is a revival mechanism of the Corporate Debtor, wherein at the final stage of the proceedings a Resolution Applicant must submit a Resolution Plan to resolve the financial distress of the Corporate Debtor and take over the Corporate Debtor. Incidentally, Section 29A of IBC enlists persons who are not eligible to be a Resolution Applicant but there are no restrictive provisions under the Code which prohibits an ARC from being a Resolution Applicant. On the contrary, the proviso to Explanation under Section 29A specifically exempts an ARC from the disqualification provided under Section 29A(c), which disqualifies related parties in management and control of Companies having an NPA to act as Resolution Applicant. This evidently showcases that the legislature has clarity regarding ARCs being financial entities which can clearly act as Resolution Applicants under IBC and have, thus explicitly been exempted from the disqualification, if any, under Section 29A(c ).

Accordingly, to grant adequate certainty and to avoid any ambiguity pertaining to locus of ARCs to act as Resolution Applicant under the Code, RBI may issue notification under the SARFAESI Act permitting ARCs to act as Resolution Applicants in line with clear statutory framework as laid down under IBC.