Status of Asset Reconstruction Companies(ARCs) under IBC – By Divyanshu Kumar

Status of Asset Reconstruction Companies(ARCs) under IBC

Divyanshu Kumar
(Third year, B.A., LL.B. (Hons.), Chanakya National Law University, Patna)


Asset Reconstruction, as defined under Section 2(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002), means “acquisition by any Asset Reconstruction Company (ARC) of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance”[1].

Asset Reconstruction Companies[2] are specialized financial institutions that purchase Non-Performing Assets (“NPAs”) or bad loans from banks and financial institutions. Their main goal is to resolve the underlying issues of these NPAs and maximize their recovery through various means such as debt restructuring, asset management, and legal recovery. ARCs play an important role in reducing the stress on the banking sector and promoting financial stability by resolving NPAs and reducing the risk of loan defaults.

Under the Insolvency and Bankruptcy Code, 2016 (IBC), the Asset Reconstruction Companies have been given the status of financial creditors.

While the SARFAESI Act focuses on ‘recovery’ and is more of a ‘class’ remedy, the IBC focuses on ‘resolution’ and seeks to establish a procedure based on cooperation of the stakeholders. Since a similarity exists in the participants in both of these regulations, the possibility of overlap persists. In this article, we shall assess the various judicial and legislative developments that confirm the status that ARCs have under IBC.

The RBI Impediment

Recently, in the Aircel Insolvency, Reserve Bank of India (RBI) discarded the resolution plan that was submitted by UV Asset Reconstruction Co. Ltd. (UVARCL).[3] The reason for rejection was stated that under the SARFAESI Act, ARCs are only permitted to undertake the business of asset reconstruction/securitisation. If an ARC intends to undertake any business other than these two, an RBI approval is needed.  An ARC, therefore was only eligible to purchase assets out of defaulted loans from banks or NBFCs (the procedure to realise it is only through restructuring and recovery).

It is worth noting that before this bar to be resolution applicants by RBI on ARCs, many judicial pronouncements did allow ARCs to act as resolution applicants, the likes of which include Maxim Infrastructure & Real Estate Pvt. Ltd.[4], Aparant Iron and Steel Pvt. Ltd.[5] and Palm Lagoon Backwater Resorts Pvt. Ltd.[6].

The issue has now been settled by the RBI itself through a revised regulatory framework dt. 11th October 2022[7] wherein the central bank has given the much-awaited green signal to the ARCs to undertake activities as Resolution Applicants in a CIRP. However, only the ARCs with a minimum of Rs. 1,000 Crores as Net Owned Funds (NOF) are eligible to act as Resolution Applicants. However, the requirement of an ARC to have a minimum of Rs. 1000 Crores as NOF eliminates any possibility of ARCs with minimum required NOF to act as resolution applicants under IBC. This doesn’t seem to be well within the interest of the Indian banking sector which is in desperate need of large-scale efforts to minimize their Non-Performing Asset (“NPA”) problem. The RBI, instead of placing this minimum NOF requirement could have introduced caps for ARCs limiting the size of distressed assets for they could act as resolution applicants. This move would have benefitted one of the cardinal purposes of the enactment of IBC i.e., maximization of value by providing the Committee of Creditors with a longer list of options of resolution applicants.   

ARCs as Resolution Applicants under IBC

Resolution applicants are defined under the IBC as anyone who submits a resolution proposal either separately or jointly with another person.[8] Section 29A of IBC, which provides for the eligibility criteria for becoming a resolution applicant under the code, enables an ARC to apply as a resolution applicant.

Section 29A(j)(iii) provides that a financial entity acting as a resolution applicant under the code can’t be a related party and Explanation-II of the section recognises an ARC as a “financial entity” for the section.

From a reading of the abovementioned provisions, it can be inferred that IBC does recognize and authorize the act of ARCs to act as resolution applicants. However, for an ARC, based on Explanation II, compliance with requirements or conditions set forth by the Central Government must be met. Though, no such requirement or compliance has been notified till date.

Moreover, the proceedings of IBC hold a supremacy over any other proceeding under any other law, this overriding effect of IBC over any other law[9] makes it certainly clear that the recognition of an ARC under IBC is not to be taken casually and this, arguably amounts to the qualification of ARCs as resolution applicants which should be interpreted over any law depriving them of such status.   

Even though the October 2022 notification by RBI is generally perceived as a welcome move, there are still some caveats to the recognition of ARCs as resolution applicants. This was acknowledged in the NCLAT ruling of Superna Dhawan v. Bharti Defence and Infrastructure Ltd,[10] wherein the appellate tribunal affirmed that the resolution applicant should not decrease the activities of the corporate debtor, but revitalise it. The tribunal further stated that the instead of adding value with the purpose of selling it, the resolution applicant should seek for ‘insolvency resolution’. Such intentions were judged to be incompatible with the IBC’s fundamental goals.


The enablement of ARCs as resolution applicant has by far and large been perceived a positive move which would strengthen the goal set forth by IBC i.e., maximization of value of assets. This maximization, from the enablement given to ARCs under the October 2022 notification, can be better achieved by increasing the multiplicity of resolution applicants.

Currently, as a result of the October 2022 notification, there are no legal prohibitions on ARCs to act as resolution applicants. Therefore, the resolution applications in a CIRP submitted by ARCs seem to be immune from legal challenges on grounds of the eligibility of ARCs to act as such and make such applications.  

However, the NCLAT in Superna Dhawan posed some thought-provoking objections to this enablement. The objections are directly associated with impact that this notification would have on the corporate rescue paradigm of India. The parliament as well the concerned regulators must acknowledge the objections by NCLAT, only then can the goal of IBC can be achieved the best.



[1] Section 2(b), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

[2] Section 2(ba) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 defines “asset reconstruction company” as a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both”.

[3] Hindustan Times, Insolvency resolution plans by ARCs won’t get RBI’s approval,

[4] Yavar Dhala v. JM Financial Asset Reconstruction Company Ltd., (2019) 481 NCLAT.

[5] Bank of India v. Aparant Iron & Steel (P) Ltd., (2019) 174 NCLT.

[6] R. Velu v. Palm Lagoon Backwater Resorts (P) Ltd., 2020 SCC OnLine NCLT 19263.

[7] Reserve Bank of India, Review of Regulatory Framework for Asset Reconstruction Companies (ARCs),

[8] Section 5(25), Insolvency and Bankruptcy Code, 2016.

[9] Section 238, Insolvency and Bankruptcy Code, 2016.

[10] Superna Dhawan v. Bharti Defence and Infrastructure Ltd., (2019) 56 NCLAT.



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