The Indian banking and insolvency framework has undergone significant reforms over the past two decades to address the challenges of non-performing assets (NPAs) and corporate distress. As of May 22, 2025, with gross NPAs in Indian banks at approximately 3.5% of total advances (down from 5% in 2020, per Reserve Bank of India data), mechanisms like the SARFAESI Act, corporate restructuring, the National Company Law Tribunal (NCLT), and the Insolvency and Bankruptcy Code (IBC) have become critical tools for banks and businesses. These frameworks not only facilitate debt recovery but also ensure the revival of viable businesses while balancing the interests of creditors and debtors. This article provides an educational overview of these mechanisms and the role of legal representation in navigating them, drawing on the expertise of Belverdia Legal LLP.
SARFAESI Act: Empowering Banks for Debt Recovery
What is the SARFAESI Act?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a landmark legislation that enables banks and financial institutions to recover dues from defaulting borrowers without court intervention. It applies to secured loans where the borrower has defaulted on repayment, allowing creditors to enforce their security interest (e.g., mortgages, pledges).
Key Provisions
- Notice and Possession: Under Section 13, banks can issue a 60-day notice to the borrower upon default. If the borrower fails to repay, the bank can take possession of the secured asset.
- Asset Sale: Banks can sell the secured asset to recover dues, often through auctions.
- Debt Recovery: The Act also allows the formation of Asset Reconstruction Companies (ARCs) to manage and recover NPAs.
Significance
The SARFAESI Act has significantly expedited debt recovery for banks. For instance, in Mardia Chemicals Ltd. v. Union of India (2004), the Supreme Court upheld the Act’s validity while ensuring procedural fairness, such as the borrower’s right to appeal under Section 17 to the Debt Recovery Tribunal (DRT). As of 2025, the Act remains a cornerstone of banking law, enabling banks to manage NPAs efficiently while reducing the burden on courts.
Corporate Restructuring: A Path to Revival
What is Corporate Restructuring?
Corporate restructuring involves reorganizing a company’s financial or operational structure to address distress, improve viability, and avoid liquidation. In the context of insolvency, restructuring often aims to balance the interests of creditors and the debtor while ensuring the business continues as a going concern.
Mechanisms in India
- Pre-IBC Restructuring: Before the IBC, schemes like the Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR) were used, allowing banks to convert debt into equity or extend repayment timelines.
- IBC-Driven Restructuring: Under the IBC, restructuring occurs through the Corporate Insolvency Resolution Process (CIRP), where a resolution plan is formulated to revive the company.
- RBI Frameworks: The Reserve Bank of India (RBI) has introduced frameworks like the Prudential Framework for Resolution of Stressed Assets (2019), which encourages out-of-court restructuring for large accounts.
Significance
Restructuring is crucial for preserving economic value and jobs. For example, the resolution of Essar Steel under the IBC in 2019, which involved a ₹42,000 crore debt settlement, showcased how restructuring can save a major company from liquidation. Legal experts play a vital role in negotiating terms, ensuring compliance, and drafting resolution plans that satisfy all stakeholders.
NCLT: The Adjudicating Authority for Insolvency
What is the NCLT?
The National Company Law Tribunal (NCLT) is a quasi-judicial body established under the Companies Act, 2013, to adjudicate corporate disputes, including insolvency proceedings under the IBC. It replaced the Company Law Board and has benches across India, with over 15 operational as of May 2025.
Role in Insolvency
- Initiation of CIRP: Under Section 7 (for financial creditors) or Section 9 (for operational creditors) of the IBC, the NCLT admits insolvency petitions if a default is proven.
- Appointment of Resolution Professionals (RPs): The NCLT appoints an RP to manage the debtor’s operations during the CIRP.
- Approval of Resolution Plans: The NCLT approves or rejects resolution plans submitted by the Committee of Creditors (CoC), ensuring they comply with IBC provisions.
Significance
The NCLT has streamlined corporate insolvency by providing a single forum for adjudication. In Innoventive Industries Ltd. v. ICICI Bank (2017), the Supreme Court clarified the NCLT’s role, emphasizing its authority to prioritize insolvency proceedings over other laws. However, the NCLT faces challenges, with over 20,000 pending cases as of 2025, necessitating faster disposal mechanisms.
IBC-Related Representation: Navigating the Insolvency Ecosystem
What is the IBC?
The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive law that consolidates insolvency and bankruptcy processes for companies, partnerships, and individuals. Its primary objective is to maximize the value of assets, promote entrepreneurship, and balance stakeholder interests within a time-bound framework.
Key Features
- Time-Bound Resolution: The CIRP must be completed within 330 days, including litigation (Section 12).
- Committee of Creditors (CoC): Financial creditors form a CoC to approve resolution plans with a 66% majority (Section 22).
- Liquidation as a Last Resort: If no resolution plan is approved, the company is liquidated under Section 33.
Role of Legal Representation
Legal representation in IBC matters involves:
- Advising Creditors and Debtors: Assisting in filing petitions, preparing resolution plans, and negotiating with stakeholders.
- Representation Before NCLT: Advocating for clients during CIRP hearings, whether for creditors seeking recovery or debtors aiming for revival.
- Appeals to NCLAT and Beyond: Challenging NCLT orders before the National Company Law Appellate Tribunal (NCLAT) or the Supreme Court via Special Leave Petitions (SLPs).
At Belverdia Legal LLP, Advocate Rashmi Varma’s 27 years of expertise in banking and insolvency laws ensures effective representation in IBC proceedings. Her experience includes representing prominent banks and institutions before the NCLT, securing recoveries under the SARFAESI Act, and navigating complex restructurings.
Challenges and the Way Forward
Despite their effectiveness, these mechanisms face challenges. The SARFAESI Act often encounters borrower resistance, leading to prolonged DRT appeals. Restructuring under the IBC can be complex for large conglomerates, as seen in the prolonged resolution of Jet Airways (2019–2023). The NCLT’s backlog delays justice, while IBC implementation requires better coordination between stakeholders.
To address these issues:
- Capacity Building: Increasing NCLT benches and judges to handle caseloads.
- Technology Integration: Expanding e-courts and digital filings for faster proceedings.
- Stakeholder Education: Raising awareness among creditors and debtors about restructuring benefits.
A pivotal role
The SARFAESI Act, corporate restructuring, NCLT, and IBC form the backbone of India’s banking and insolvency framework, offering structured solutions to manage NPAs and corporate distress. These mechanisms empower banks to recover dues, provide businesses a chance at revival, and ensure efficient adjudication through specialized tribunals. Legal representation, as exemplified by Belverdia Legal LLP, is crucial in navigating this complex ecosystem, ensuring that creditors and debtors achieve fair outcomes. As India continues to strengthen its financial systems, these tools will play a pivotal role in fostering economic stability and growth.
