Can ARCs Be Held Accountable If A Defaulter Dies By Suicide? Experts Decode

The death of national award-winning art director Nitin Desai on August 2 sparked outrage among his fans after it was revealed that he died by suicide following disputes with his financial creditor. Desai was found dead in the early morning of August 2 at his ND Studio in Khalapur Raigarh near Karjat. A day before, his appeal against the National Company Law Tribunal (NCLT) order allowing the initiation of corporate insolvency and resolution process against his firm, ND’s Art World Private Ltd, was dismissed by the National Company Law Appellate Tribunal (NCLAT). The NCLT order came on July 25, 2023, while the NCLAT dismissed Desai’s appeal on August 1. 

Desai had defaulted on the payments of a loan amount of Rs 252 crore. The well known art director, through his company, had borrowed Rs 185 crore in the form of two loans from ECL Finance in 2016 and 2018, the financial arm of Edelweiss ARC, PTI reported. 

Following his death, Maharashtra’s Deputy Chief Minister Devendra Fadnavis and other BJP MLAs demanded criminal proceedings against Edelweiss ARC (Asset Reconstruction Company) and directed the police to initiate abetment cases against Edelweiss' chairman, Rashesh Shah, and other company officials, citing their alleged involvement in Desai's suicide.

The group Chairman of Edelweiss Financial Services, Rashesh Shah and  Raj Kumar Bansal, CEO of Edelweiss Asset Reconstruction Company Limited have approached the Bombay High Court to quash the FIR against them for allegedly abetting art director Nitin Desai’s suicide.

However, in an earlier verdict that came out in January 2021, the Nagpur bench of the Bombay High Court clarified that demanding an outstanding loan amount from a defaulter cannot be construed as abetment to suicide and the recovery agency can’t be held responsible. As per the data of the National Crime Record Bureau (NCRB), in 2021, suicides due to loan default and indebtedness accounted for nearly 4% of total suicides in India. Between 2016 and 2021, the number of suicides due to bankruptcy and indebtedness has gone up by more than 40%, shows the NCRB data. 

Despite this verdict of the Bombay High Court, officials of banks, ARCs, and other financial bodies continue to face the heat, in case of suicide of the defaulters. The situation gets particularly challenging when the defaulter is a public figure or it is a high-profile case, said lawyers associated with the ARCs. 

The Core reached out to various lawyers, officials from ARCs, and involved in NCLAT to get a better understanding of what the ARC needs to do in such a situation and the kind of legal protection they have from the Reserve Bank of India (RBI) to safeguard themselves. 

 

ARCs And Their Responsibility

Setting up of Asset Reconstruction Companies in India was proposed by Finance Minister Nirmala Sitharaman in the Budget 2021-22, to deal with the rising cases of non-performing Assets (NPAs) of stressed banks. Sitharaman also clarified that ARCs in India shall be set up by state-owned and private-sector banks and there will be no equity contribution from the government. 

As of March 2022, ARCs have purchased NPA loans of approximately Rs 6.13 trillion in book value, investing their own funds to the tune of Rs 0.43 trillion to purchase them, shows the data compiled by credit rating agency Crisil and ASSOCHAM in February 2023. 
To clear their books, banks transfer the stressed assets to ARCs at the net book value in lieu of 15% cash and 85% security receipts against the amount of bad loans from the Asset Management Company. Once the ARC took over the stressed assets, their responsibility lies in recovering the loans from the defaulters. 

ARCs are registered under the RBI and they need to follow the regulations under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002). “Under the SARFAESI act , action against borrowers/mortgagors can be taken by banks/ARC only if the loan taken is more than 20 lakhs or more,” said Payoja Gandhi, advocate dealing with cases related to ARCs and loan defaults at Bombay High Court. 

 

Challenges Faced By ARCs

The banks and ARCs start facing hurdles if the defaulter is extremely influential. Lawyers and other industry experts claim defaulters often use their influence to delay the process of recovery or even follow the path of emotional blackmail when the officials reach out to them for the recovery process. 

“Another major challenge of ARC is their inability to issue shares to recover the money. The security receipts they hand over to banks are not tradeable and thus it becomes even more challenging to recover the money,” said a former Chairperson of a government-backed ARC, requesting anonymity.

 

The Legal Support 

Experts pointed out that both ARCs and borrowers have to abide by the regulations under SARFAESI and NCLT Act during the process of recovery. The Reserve Bank of India (RBI) has strict guidelines for the recovery process that both the banks and ARCs need to follow. 

"As per RBI guidelines, every ARC needs to have a policy of recovery. RBI has formulated very clear guidelines regarding the steps that ARC could take for such defaulters. The process followed by the ARC has to be in line with the guidelines of the RBI. ARC has clear guidelines on when the ARC can get in touch with the defaulter, at what time they can call and ARCs follow that. ARCs need to follow the guidelines and SOP for the recovery and they can’t go out of their way. So, blaming or shaming ARCs for the loan recovery process is thus not accepted,” said Siby Antony, former MD & CEO of Edelweiss Asset Reconstruction Company Ltd., who later became the Executive Chairman and Director of the company. 

Lawyers dealing with such cases told The Core that the banks and ARCs have to follow the legal framework while they have to take possession of the mortgaged assets and in case they face challenges from the borrowers, they need to approach the District Magistrate to avoid any further complications. 

“Officials from banks and ARCs can go to take possessions of the assets of the defaulters as per the provisions of law under the SARFAESI act. If the officials face challenges in taking possession of the mortgaged assets of defaulted loans, then they can get an order from the District Magistrate or Chief Judicial Magistrate to take possession. DM may also appoint an advocate commissioner who will be accompanied by the police officials also during the possession,” added Gandhi. 

SARFAESI Act gives a blanket pass to the bank, that if the account is an NPA and the demand notice is served, and within 60 days the debt has not been cleared, then the company can proceed to take symbolic possession and auction the property. Though most of the laws are in favour of banks and ARCs, still the bankers face challenges, said lawyers and experts. 

“But even if the banks and ARCs are doing their jobs, they still face criminal proceedings in case of suicide of the defaulters. Then, they may approach HC for quashing the FIR,” said Gandhi. 

Antony highlighted that SARFAESI Act has very clearly specified the procedures as to how the recovery process needs to be done. So, if any ARC takes one small wrong step, then they will have to face the consequences. 

“The crime and allegations against the ARC need to be proven. The officials are doing their duties and should be protected as they have not physically assaulted or threatened the defaulter. Just asking for the defaulted money is not a crime,” said Satpal Kumar Arora, MD & CEO, of Alchemist ARC. 

If the ARC has not threatened or abused him or physically harmed the defaulter, then there should not  be any liability of the ARC, so even if the criminal complaints  are lodged against the ARC, Arora beleives that the court will do justice.

Even if there is a criminal proceeding against ARCs, the officers can get anticipatory bail until it could be proven that they had applied any unlawful methods. “ If any officer from the lender community has done something like this, then he/she has to pay for the same. But ARCs usually handle the cases very prudently and gently,” said Antony. 
 

Provisions For The Borrowers 

Experts also pointed out that not only the ARCs but the borrowers are also safeguarded by the legal framework. So, in case, a borrower or defaulter feels that ARC has been harassing them, they can file complaints and lodge grievances. 

"Borrowers can file securitization applications, but there are very few grounds on which the borrowers can challenge the actions of the banks, especially the actions that have been taken under the SARFAESI Act,” added Gandhi. 

Once an auction notice is put up, borrowers can file an application at DRT on every auction notice and try to get a stay. Alongside, RBI also has a section on their ombudsman website, where defaulters and borrowers can lodge complaints against ARCs. 

“If a borrower/defaulter feels that he/she has been harassed by the ARCs, he or she can always file complaints through the grievance redressal systems of RBI against the ARC and they can also approach the NCLAT/court under NCLT law,” said Antony. 

 

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