The Judiciary and the Stressed Assets Resolution

When defaulting borrowers are unable to pay their overdue amounts, the matter invariably lands up with the courts for settlement through a court-regulated process of lenders taking possession of assets and their sale. However, recently some borrowers have challenged the resolution scheme designed by the Reserve Bank of India. The outcome of the judiciary-led resolution processes in the past and the recent judicial intervention are examined.

It is a generally accepted view that the time-consuming processes and inevitable inordinate delays in disposal of cases have impaired lenders’ ability to collect their dues by taking over and sale of such assets owned by defaulting borrowers through court-administered mechanisms. Over the years, new laws were enacted and mechanisms introduced to remove this lacuna. Debt Resolution Tribunals (DRTs) were set up in 1993 for speedier disposal of disputes with a view to accelerate asset sale through courts for the collection of lenders’ dues. In 2002, the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act was passed to enable banks to take possession of assets owned by a defaulting borrower. This was hailed then as a revolutionary step necessary to restore balance between debtor–lender relationships. Simultaneously, the Reserve Bank of India (RBI) in 2001 introduced Corporate Debt Resolution (CDR) mechanism for voluntary restructuring of the dues by viable corporate entities outside the legal system through negotiation between the troubled borrower and all lenders.

Introduction of Bankruptcy Code