The Insolvency and Bankruptcy Code (IBC), introduced in 2016, aimed to revamp the insolvency and bankruptcy process in India. The IBC provides for an efficient and time-bound insolvency resolution process while protecting the interests of all stakeholders, including secured creditors. Under the IBC, secured assets hold significant importance in insolvency resolution proceedings. In this article, we will discuss the significance of secured assets under the IBC.
Understanding Secured Assets
A secured asset is an asset that is backed by collateral or security, which gives the creditor the right to sell or recover the asset in case of default by the borrower. In the context of the IBC, a secured creditor is a creditor who has a security interest in the debtor’s assets. These assets may include land, buildings, machinery, equipment, and other tangible or intangible assets.
Rights and Duties of Secured Creditors
Secured creditors have several rights and duties under the IBC. Here are some of them:
- Right to Initiate Insolvency Proceedings: Secured creditors have the right to initiate insolvency proceedings against the debtor in case of default. They can file an application before the NCLT and start the resolution process.
- Duty to Submit Claims: Secured creditors must submit their claims to the resolution professional within the specified time frame. Failure to do so can result in the rejection of their claim.
- Right to Attend Meetings: Secured creditors have the right to attend CoC meetings and participate in the decision-making process. They can also vote on the resolution plan submitted by the resolution applicant.
- Duty to Cooperate with the Resolution Professional: Secured creditors must cooperate with the resolution professional and provide all necessary information to facilitate the resolution process.
- Right to Enforcement of Security Interest: Secured creditors have the right to enforce their security interest over the secured assets and recover their dues. They can take control of the assets and manage them to recover their dues.
Significance of Secured Assets
Secured assets play a crucial role in insolvency resolution proceedings under the IBC. Here are some reasons why:
- Priority in Repayment
Secured creditors have a higher priority in repayment compared to unsecured creditors. They are entitled to receive the proceeds from the sale of the secured assets in case of default by the borrower.
- Protection of Interests
The IBC provides for the protection of the interests of secured creditors. The insolvency resolution process must be completed within a specified time frame, and secured creditors have the right to initiate the process in case of default by the borrower.
- Control over Assets
Secured creditors have the right to enforce their security interest and recover their dues. They can take control of the secured assets and manage them to recover their dues.
Role of Secured Creditors in Insolvency Resolution
Secured creditors play a crucial role in insolvency resolution proceedings. Here are some ways in which they are involved:
- Initiating Insolvency Proceedings: Secured creditors have the right to initiate insolvency proceedings against the debtor in case of default. They can file an application for the same before the National Company Law Tribunal (NCLT).
- Formation of Committee of Creditors (CoC): The CoC is formed by the NCLT and comprises all financial creditors, including secured creditors. The CoC has the power to approve or reject the resolution plan submitted by the resolution applicant.
- Recovery of Dues: Secured creditors can recover their dues by enforcing their security interest over the secured assets. They can take control of the assets and manage them to recover their dues.
Conclusion
Secured assets hold significant importance in insolvency resolution proceedings under the IBC. Secured creditors have a higher priority in repayment compared to unsecured creditors and can initiate insolvency proceedings, form the CoC, and recover their dues by enforcing their security interest over the secured assets. It is crucial for secured creditors to take necessary measures to safeguard their interests, especially in the current economic climate, where businesses are struggling to stay afloat due to the impact of the pandemic.
Secured creditors must conduct proper due diligence before entering into a lending agreement and ensure that the borrower has adequate assets to secure the loan. They must also monitor the borrower’s financial health regularly and take necessary actions in case of default.
In case of default, secured creditors must act swiftly and initiate the insolvency resolution process to recover their dues. They must work closely with insolvency professionals and lawyers to ensure that their interests are protected and that the resolution process is completed efficiently and within the specified time frame.
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