“Excluded Asset”: Paradox under IBC Vs SARFAESI – By Adv. (CA.) Nipun Singhvi and Adv. Mayur Jugtawat

The RP is required to understand various aspects of civil and criminal laws to delve into the definition of ‘excluded debt’ and ‘excluded asset’. Along with RP, personal guarantors are also required to disclose everything even if that disclosure is unrelated to default for which he is admitted into insolvency. Since the law of excluded assets under personal insolvency is yet to develop, Personal Guarantor’s are required to carefully include/exclude excluded asset while submitting application before Adjudicating Authority and further making RP’s duty and responsibility to carefully examine such disclosures for smooth functioning of the process.

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“Excluded Asset”: Paradox under IBC Vs SARFAESI       

Adv. (CA.) Nipun Singhvi and Adv. Mayur Jugtawat
Practicing Advocates

After the recent Supreme Court verdict in Dilip B Jiwrajka v. Union of India and Ors. (2023) ibclaw.in 147 SC, paving the way for Personal Guarantor’s insolvency, now the Resolution Professionals (RP) are more occupied in collating unorganized claims and way forward for insolvent guarantors. Though many issues are arising in the process, one such issue is of Excluded Asset which needs to be kept out of the assets under the Insolvency process of a personal guarantor.

Application to initiate PG insolvency

In an application made by the Guarantor u/s 94 or Creditor u/s 95 the form requires disclosure of Excluded Asset. Hence, at the time of filing as well as giving report, RP is required to consider the excluded asset of the Personal Guarantor (PG).

Definitions under IBC

Section 79 (14) of the IBC Rule 5 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

(14) “excluded assets” for the purposes of this part includes –

(a) unencumbered tools, books, vehicles and other equipment as are necessary to the debtor or bankrupt for his personal use or for the purpose of his employment, business or vocation,

 

(b) unencumbered furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his immediate family;

 

(c) any unencumbered personal ornaments of such value, as may be prescribed, of the debtor or his immediate family which cannot be parted with, in accordance with religious usage;

(a) the value of unencumbered personal ornaments under clause (c) of the said sub-section shall not exceed one lakh rupees;
(d) any unencumbered life insurance policy or pension plan taken in the name of debtor or his immediate family; and  
(e) an unencumbered single dwelling unit owned by the debtor of such value as may be prescribed;

(b) the value of unencumbered single dwelling unit owned by the debtor under clause (e) of the said sub-section shall not exceed,-

(i) in the case of dwelling unit in an urban area, twenty lakh rupees;

(ii) in the case of dwelling unit in rural area, ten lakh rupees.

Explanation.— For the purposes of this rule,-

(a) “rural area” shall have the same meaning as assigned to it in clause (o) of section 2 of the National Rural Employment Guarantee Act, 2005 (42 of 2005);

(b) “urban area” means any area other than rural  area.

A combined reading of the Section 79 (14) of IBC with Rule 5 of Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 makes it clear that the monetary limits for the excluded asset has been specified.

Comparison with SARFAESI Act, 2002 on Excluded Assets

Section 31 of the Securitisation And Reconstruction of Financial Assets And Enforcement Of Security Interest Act, 2002 (SARFAESI) provides that some of the assets cannot be attached wherein various list of items is specified which cannot be attached. This list has an interesting reference to Section 60 of The Code of Civil Procedure, 1908 wherein such assets which cannot be attached under CPC is referred. Hence, it becomes important to refer to both of them.

SARFAESI Act, 2002 The Code of Civil Procedure, 1908

31. Provisions of this Act not to apply in certain cases.—The provisions of this Act shall not apply to

(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time being in force;

(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 (9 of 1872);

(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934 (24 of 1934);

(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958);

1* * * * *

(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930);

(g) [any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act)] or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5 of 1908);

(h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;

60. Property liable to attachment and sale in execution of decree.—

(1) The following property is liable to attachment and sale in execution of a decree, namely, lands, houses or other buildings, goods, money, bank-notes, cheques, bills of exchange, hundis, promissory notes, Government securities, bonds or other securities for money, debts, shares in a corporation and, save as hereinafter mentioned, all other saleable property, movable or immovable, belonging to the judgment-debtor, or over which, or the profits of which, he has a disposing power which he may exercise for his own benefit, whether the same be held in the name of the judgment debtor or by another person in trust for him or on his behalf:

Provided that the following particulars shall not be liable to such attachment or sale, namely:—

(a) the necessary wearing-apparel, cooking vessels, beds and bedding of the judgment-debtor, his wife and children, and such personal ornaments as, in accordance with religious usage, cannot be parted with by any woman;

(b) tools of artisans, and, where the judgment-debtor is an agriculturist, his implements of husbandry and such cattle and seed-grain as may, in the opinion of the Court, be necessary to enable him to earn his livelihood as such, and such portion of agricultural produce or of any class of agricultural produce as may have been declared to be free from liability under the provisions of the next following section;

(c) houses and other buildings (with the materials and the sites thereof and the land immediately appurtenant thereto and necessary for their enjoyment) belonging to [an agriculturist or a labourer of a domestic servant] and occupied by him ;

(d) books of account ;

(e) a mere right to sue for damages ;

(f) any right of personal service ;

(g) stipends and gratuities allowed to pensioners of the Government  [or of a local authority or of any other employer], or payable out of any service family pension fund notified in the Official Gazette by [the Central Government or the State Government] in this behalf, and political pensions; 

(h) the wages of labourers and domestic servants, whether payable in money or in kind;

(i) salary to the extent of the first one thousand rupees and two third of the remainder in execution of any decree other than a decree for maintenance

Provided that where any part of such portion of the salary as is liable to attachment has been under attachment, whether continuously or intermittently, for a total period of twenty-four months, such portion shall be exempt from attachment until the expiry of a further period of twelve months, and, where such attachment has been made in execution of one and the same decree, shall, after the attachment has continued for a total period of twenty-four months, be finally exempt from attachment in execution of that decree.

(ia) one-third of the salary in execution of any decree for maintenance;

(k) all compulsory deposits and other sums in or derived from any fund to which the Provident Funds Act, 1925, for the time being applies in so far as they are declared by the said Act not to be liable to attachment;

(ka) all deposits and other sums in or derived from any fund to which the Public Provident Fund Act, 1968 (23 of 1968), for the time being applies, in so far as they are declared by the said Act as not to be liable to attachment;

(kb) all moneys payable under a policy of insurance on the life of the judgment-debtor;

(kc) the interest of a lessee of a residential of building to which the provisions of law for the time being in force relating to control of rents and accommodation apply;

Though the list under The Civil Procedure Code, 1908 is quite exhaustive the similar list under IBC is not given. Some of the issues which will be quite intriguing for the guarantors and the resolution professional shall have to take call on issues such as:

a. Maintenance awarded by competent court of law: Though the excluded asset doesn’t include the same but the same is under “Excluded debt” [Section 79 (15) of IBC].

There are various laws for Maintenance such as:

i. The Hindu Adoption and Maintenance Act, 1956.

ii. The Hindu Marriage Act, 1955.

iii. The Protection of Woman From Domestic Violence Act, 2005:

iv. The Code of Criminal Procedure, 1973:

v. The Maintenance and Welfare of Parents and Senior citizens Act, 2007.

b. Life and other Insurance policies: IBC only prescribes exclusion of life insurance policies but there are various other policies which are required for the person to indemnify from contingencies.

c. Retirement Benefits: Further only the pension plan is excluded but other retirement benefits (Eg. Gratuity, Provident Fund) have not been excluded by IBC which is not so the case under CPC.

d. Residential house: It is important to note that IBC only excludes the dwelling unit and that too valuation is fixed (Rs.20/10 lakhs), however the same is excluded under CPC and there are state amendments made for protection of one’s residential house.

e. Avoidance transactions : The excluded debt of the IBC states that the debt arising out of breach of contractual/statutory obligations are excluded from the debt definition. For instance, what shall be the fate of the avoidance transaction application pending before the NCLT, is still unclear.

f. Custody and control of assets of the PG: Whether the assets which are to be controlled by RP, will extend to the underlying assets of PG for instance, the PG who is member of HUF , can the control of the HUF be taken. PG could also be Karta of HUF and have obligations towards the family members in HUF.

g. Legal expenses of the PG: Whether any expenses can be done by the PG without approval of RP/COC, has the right to defend in court of law available to the PG after initiation of insolvency.

 The RP is required to understand various aspects of civil and criminal laws to delve into the definition of ‘excluded debt’ and ‘excluded asset’. Along with RP, personal guarantors are also required to disclose everything even if that disclosure is unrelated to default for which he is admitted into insolvency. Since the law of excluded assets under personal insolvency is yet to develop, Personal Guarantor’s are required to carefully include/exclude excluded asset while submitting application before Adjudicating Authority and further making RP’s duty and responsibility to carefully examine such disclosures for smooth functioning of the process.


The Authors are practicing advocates before Supreme Court, High Court and various Tribunals. Can be reached at nipunsinghvi@yahoo.com, mayur.jugtwat@gmail.com.


 

 


Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.


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