assignment of debt by arc

ARCs and Insolvency Resolution Plans – The Enigma of Equity vs Debt

– By Sikha Bansal ( [email protected] )

This article has also been published in IndiaCorpLaw Blog, the same can be viewed here

A regulatory framework for asset reconstruction companies (ARCs) was introduced in India through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This intended to put in place a system for clearing up non-performing assets (NPAs) from the books of banks and financial institutions. Over a decade later, the Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the objective of reorganisation and resolution of insolvent entities.

Although the common goal of both these legislation seems to be the cleaning or reconstruction of bad loan portfolios, it is important to understand the difference between the basic premises of these two laws: while the SARFAESI Act deals with ‘recovery’ and is more of a ‘class’ remedy, the IBC is about ‘resolution’ and intended to constitute a collective process. Given a common set of stakeholders involved under both these laws, there remains an obvious possibility of overlaps or inconsistencies.

Recently, the rejection of a resolution plan pertaining to a telecom-sector entity by the Reserve Bank of India (RBI) highlighted an important regulatory or interpretative gap. According to publicly available information, the issue essentially revolves around investment by an ARC in the equity of an insolvent entity. While the IBC has imbibed provisions for submission of ‘resolution plans’ by financial entities (including an ARC), the SARFAESI Act does not explicitly permit ARCs to ‘invest’ in or acquire equity in firms. Further, the SARFAESI Act imposes a ban on ARCs from carrying on any business other than that of asset reconstruction and/or securitisation. This has led to a conundrum as to the periphery within which ARCs can operate.

This post intends to analyse the provisions of the SARFAESI Act and the IBC and consider if there is in fact any gap as such, and whether there is any prejudice to the basic framework of any of the laws applicable to the ARCs, if the ARCs become equityholders under resolution plans.

Whether the SARFAESI Act bars equity infusion by ARCs

Going by the definition of “asset reconstruction company” under section 2(1)(ba) of the SARFAESI Act, an ARC is formed for the purpose of “asset reconstruction” or “reconstruction” or “both”. Here, “asset reconstruction” is the acquisition by an ARC of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance, while ‘securitisation’ is the acquisition of financial assets by an ARC from any originator, whether by the ARC raising funds from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.

Barring these two “businesses”, an ARC would have to obtain RBI approval to commence or carry on any other “business”. However, there are exceptions under clauses (a), (b), and (c) of section 10(1), that is, where the ARC acts as a recovery agent, manager or receiver. Hence, the law is clear that the ARCs are specialised business undertakings, expected to concentrate on acquisition of financial assets, rights, or interests for the purpose of their realisation or reconstruction.

Notably, with the inherent right to carry out the business of asset reconstruction, the ARCs will have to be equipped with incidental rights that would facilitate the business. As such, section 9 of the SARFAESI Act lists out the measures that the ARC can take “ for the purpose of asset reconstruction ”, which includes the “ proper management of the business of the borrower, by change in, or takeover of , the management of the business of the borrower” as well as “ conversion of any portion of debt into shares of a borrower company”.

A connected provision is section 15(4) which states that the secured creditor (in this case, an ARC) shall, on realisation of debt in full, “ restore the management of the business of the borrower to him ” . This aspect was also pointed out by Bankruptcy Law Reform Committee (BLRC) while assessing ARCs as possible tools for insolvency resolution [see, page 10 of the Interim Report of the BLRC (2015) ]:

“ . . . But given their powers to resort to several measures (which includes taking over the management and conversion of debt into equity among others) for recovering the value underlying those loans, ARCs can (at least in theory) also help in insolvency resolution of a company . . . It may be noted that an ARC can takeover the management of the borrower only for the purpose of ‘realization of dues’ . The management of the company has to be restored back to the borrower after realisation of the dues. Therefore, this mechanism is largely seen as a debt recovery tool and not an insolvency resolution tool (i.e., it does not facilitate rescue in practice) .” [emphasis added]

Therefore, the BLRC drew a thin line between ‘realisation’ and ‘rescue’. As the intent and objective of an ARC is to ‘realise the dues’ and reposition the borrower, it would not amount to ‘rescue’ in its truest sense.

However, an important amendment was inserted in the SARFAESI Act by way of the Amendment Act of 2016. A proviso to section 15(4) now provides that “ if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower . ” [emphasis added} Therefore, there would be no obligation on the ARC to return the business to the borrower where the ARC has already acquired a controlling interest in the entity.

Therefore, it might appear that ARCs can undertake a permanent equity position in the borrower entity. This however, in view of the author, comes with a rider, as imbibed in the law itself. An ARC is only formed for the purpose of asset reconstruction and securitisation and no other purpose. Any other business can only be undertaken with the prior approval of the RBI. Hence, the author opines that the very act of being in the management of a borrower cannot be in perpetuity: ultimately, the ARC will have to obtain an exit. At the same time, it cannot be said that ARCs are completely debarred from infusing equity in the borrower.

On the question as to how the exit can occur, it is always possible for the ARCs to sell the asset, which again, should be subject to overall provisions of the IBC, the SARFAESI Act as well as directions issued by the RBI. For instance, the ARC will not be able to sell the asset to a person ineligible under section 29A of the IBC: this has become all the more clear from the Fair Practice Code for ARCs issued by RBI (see discussion here ). As to the appropriate time or stage for the exit, the ARC may have to take a commercial call on the same: the objective, as is obvious, would be to recoup the investments made by the ARC in acquiring the asset.

Besides the above, note that have explicit provisions for conversion of debt into equity. Earlier, there was a cap of 26% of the total post-converted equity shareholding of an entity upon conversion of debt into equity. However, the RBI removed the same through a notification dated November 23, 2017. The 2017 notification also stated that ARCs shall explore the possibility of preparing a panel of sector-specific management firms or individuals having expertise in running firms or companies which could be considered for managing the companies.

Although the notification deals with conversion of debt to equity, it gives the right to ARCs to acquire equity of companies. Essentially, it should not matter whether the equity is acquired against conversion of debt into equity or directly by infusion of equity into the borrower.

Hence, in the view of the author, there is nothing in the SARFAESI Act that bars an ARC from becoming an equity shareholder of the borrower company, subject to the rider that this cannot be a permanent equity investment, as discussed above.

ARCs as resolution applicant under the IBC

Resolution applicants under the IBC can be any person who individually or jointly with any other person submits a resolution plan. The person, however, should not be a person ineligible under section 29A. The list is, therefore, a negative list: anyone who falls under that list is not entitled to be a resolution applicant.

Here, one should refer to the first proviso to explanation I of section 29A. The same is worded as: “ Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor ” [emphasis added]. According to explanation II, “financial entity” includes an ARC registered under the SARFAESI Act.

The wordings of the law, as above, are amply clear that an ARC can be a resolution applicant under the IBC. While the opening words of explanation II require such entities to meet such criteria or conditions as the Central Government may notify, so far, however, no such notification or criteria have been issued.

Now, the very task of a resolution applicant is to come up with a resolution plan. The resolution plan, seeking the insolvency resolution of the corporate debtor as a going concern, can contain a variety of measures, including varying kinds of restructuring options and acquisition of shares. Therefore, whether the resolution happens by way of debt or by way of equity should not be a matter of concern. As already established by way of landmark court rulings [1] , the IBC is a complete code in itself, having resolution and revival of insolvent entities as a key objective. However, the resolution plan must not contravene provision of any other law: see section 30(2)(e).

The author has noted above that there is nothing under the SARFAESI which prohibits infusion of equity by an ARC in an entity. Therefore, there is arguably no inconsistency between the provisions of the SARFAESI Act and the IBC and, as such, a plan that provides for equity participation of an ARC cannot be said to be ultra vires the provisions of the SARFAESI Act. This again is subject to the condition of impermanency of such relationship between the ARC and the corporate debtor.

Global perspectives

Globally, the framework for asset management companies (AMCs) may follow either a centralised approach or a decentralised approach, and may be either perennial or may be with a sunset clause. See for instance, Danaharta (Malaysia), IBRA (Indonesia) and Thai Asset Management Company (TAMC) were formed with specific sunset dates. However, no sunset dates were specified while formation of AMCs in Japan, Korea and Taiwan.

In the Indian context, the activity of asset reconstruction has been encouraged as a ‘business’ activity, and ARCs have been promoted as a specialised business model, although of course, with required regulatory overview. Therefore, it might be difficult to say that the ARCs should be in the business of asset reconstruction, but with the prohibition that they should not be allowed to acquire equity in the entity. This contention would be more irrational where there already exists right with the ARC to take over the management of the borrower.

From the above discussion, there does not seem to be any bar on ARCs in being equity-participants under resolution plans.  The only aspect that needs to be taken care of is that, while ARCs take over the management of a company or the company itself, they shall run the business only until the business is revived which, in turn, is a commercial decision . Thereafter, the ARC must exit. In so far as any requirement for any amendment to the law is concerned, given the perplexity surrounding the issue, it would be better if there is a clarification under the SARFAESI Act or one issued by RBI on the same.

[1] Swiss Ribbons Pvt. Ltd. v. Union of India (2019); Chitra Sharma v. Union of India (2018).

Our presentation can be viewed here –  https://vinodkothari.com/2021/09/attributes-of-a-resolution-plan/

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Master Directions

The transferor(s) should also make appropriate disclosures with regard to the quantum of excess provisions reversed to the profit and loss account on account of sale of stressed loans. Also, the lenders should disclose the distribution of the SRs held by them across the various categories of Recovery Ratings assigned to such SRs by the credit rating agencies.

87. Transferors shall report each loan transfer transaction undertaken under these directions to a trade reporting platform as notified by the Reserve Bank. The detailed instructions in this regard will be issued separately. In anticipation of the same, lenders shall maintain a database of loan transfer transactions with adequate MIS concerning each transaction till the reporting platform is notified and the related instructions are issued.

Chapter VI: Repeal of circulars

88. The list of circulars / directions / guidelines / parts of Master Directions that stand repealed with immediate effect is given below:

Entities to which lenders are permitted to transfer stressed loan exposures under Clause 58 of these directions

1. Scheduled Commercial Banks;

2. All India Financial Institutions (NABARD, NHB, EXIM Bank, SIDBI and 17 NaBFID );

3. Small Finance Banks;

4. All Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs);

5. Asset Reconstruction Companies registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

6. A company, as defined in sub-section (20) of Section 2 of the Companies Act, 2013 other than a financial service provider as defined in sub-section (17) of Section 3 of the Insolvency and Bankruptcy Code, 2016. Acquisition of loan exposures by such companies shall be subject to the relevant provisions of the Companies Act, 2013.

1 Amended vide amendment dated December 05, 2022

2 Amended vide amendment dated December 05, 2022

3 Inserted vide amendment dated December 28, 2023

4 Inserted vide amendment dated December 05, 2022

5 Amended vide amendment dated December 05, 2022

6 Inserted vide amendment dated December 05, 2022

7 Amended vide amendment dated December 05, 2022

8 Inserted vide amendment dated December 28, 2023

9 Amended vide amendment dated December 05, 2022

10 Amended vide amendment dated December 05, 2022

11 Inserted vide amendment dated December 05, 2022

12 Amended vide amendment dated December 05, 2022

13 Amended vide amendment dated December 05, 2022

14 Deleted vide amendment dated December 05, 2022

15 Inserted vide amendment dated December 05, 2022

16 Amended vide amendment dated December 05, 2022

17 Inserted vide amendment dated December 28, 2023

Important Supreme Court and High Court Judgments of 2022 on SARAFESI Act, 2002/ Recovery of Debts and Bankruptcy Act, 1993

Supreme Court

1. landmark judgment on a civil suit filed by a borrower against a bank/financial institution in relation to the proceedings for recovery of debt by a bank or financial institution under rdb act 1993, transfer of a suit from civil court to a drt and parallel proceedings in drt and civil court.

Case Name: Bank of Rajasthan Ltd. Vs. VCK Shares & Stock Broking Services Ltd.

Case Citation: (2022) ibclaw.in 126 SC

Landmark judgment on Provision of RDB Act and Civil Procedure Code, 1908, Jurisdiction of the Civil Court to entrain a suit filed by Borrower against Bank/Financial Institutes, Transfer a suit from Civil Court to a DRT, consent is required for the transfer of a suit and Parallel Proceedings-No question of stay of DRT proceedings by way of a civil proceeding instituted before the Civil Court.

2. Section 14 of the SARFAESI Act does not involve any adjudicatory process qua points raised by Borrowers against Secured Creditor taking possession of the Secured Assets and CMM/DM is not required to adjudicate disputes between Borrower and Secured Creditor and/or between any other third party and Secured Creditor

Case Name: Balkrishna Rama Tarle Dead thr LRS & Anr Vs. Phoenix ARC Pvt. Ltd. & Ors.

Case Citation: (2022) ibclaw.in 116 SC

Hon’ble Supreme Court upheld decision of Division Bench of Bombay High Court in which the Bench listed Do’s and Don’ts for action under Section 14 of SARFAESI. Hon’ble Supreme Court held that the powers exercisable by CMM/DM under Section 14 of the SARFAESI Act are ministerial step and Section 14 does not involve any adjudicatory process qua points raised by the borrowers against the secured creditor taking possession of the secured assets. In that view of the matter once all the requirements under Section 14 of the SARFAESI Act are complied with/satisfied by the secured creditor, it is the duty cast upon the CMM/DM to assist the secured creditor in obtaining the possession as well as the documents related to the secured assets even with the help of any officer subordinate to him and/or with the help of an advocate appointed as Advocate Commissioner. At that stage, the CMM/DM is not required to adjudicate the dispute between the borrower and the secured creditor and/or between any other third party and the secured creditor with respect to the secured assets and the aggrieved party to be relegated to raise objections in the proceedings under Section 17 of the SARFAESI Act, before Debts Recovery Tribunal.

3. The expression District Magistrate/Chief Metropolitan Magistrate as appearing in Section 14 of the SARFAESI Act shall deem to mean and include Additional District Magistrate/Additional Chief Metropolitan Magistrate for the purposes of Section 14 of the SARFAESI Act

Case Name: M/s R.D. Jain and Co. Vs. Capital First Ltd. & Ors. 

Case Citation: (2022) ibclaw.in 93 SC

Hon’ble Supreme Court has upheld decision of Bombay High Court and held that Section 14(2) is an enabling provision and permits the CMM/DM to take such steps and use force, as may, in his opinion, be necessary. Sub¬-Section (1A) is in the nature of an explanatory provision and it merely restates the implicit power of the CMM/DM in taking services of any officer subordinate to him. The powers exercised by the CMM/DM is a ministerial act. He cannot brook delay. Time is of the essence. This is the spirit of the special enactment. While disposing of the application under Section 14 of the SARFAESI Act, no element of quasi-judicial function or application of mind would require. The Magistrate has to adjudicate and decide the correctness of the information given in the application and nothing more. Therefore, Section 14 does not involve an adjudicatory process qua points raised by the borrower against the secured creditor taking possession of secured assets. The steps to be taken by the Chief Metropolitan Magistrate under Section 14 of the SARFAESI Act as observed hereinabove are ministerial in nature and does not involve any adjudicatory process and there is no element of any quasi¬-judicial function. The expression “Chief Metropolitan Magistrate” as appearing in Section 14 of the SARFAESI Act shall deem to mean and include Additional Chief Metropolitan Magistrate for the purposes of Section 14 of the SARFAESI Act. Similarly, when the Additional District Magistrates are conferred with the powers to be exercised by the District Magistrates either by delegation and/or by special orders and the Additional District Magistrates are exercising the same powers which are being exercised by the District Magistrates, the same analogy can be applied, more particularly, when the powers exercisable under Section 14 of the SARFAESI Act, are ministerial steps. The Court also held that the contrary view taken by the other High Courts, namely, Gujarat High Court in the case of Pushpa Devi B Jain W/o Bhawarlal M Jain Vs. Indian Overseas Bank in Special Civil Application No. 19102/2015; Calcutta High Court in the case of Shri Chellaperumal & Anr. Vs. The Authorised Officer & Ors. in M.A. No. 26/2014 and Kerala High Court in the case of Aseena Vs. Sub¬-Divisional Magistrate and Ors. in W.P. (C) No. 3331/2007, is not a good law and are specifically overruled.

4. Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered

Case Name: Indian Overseas Bank Vs. M/s RCM Infrastructure Ltd. and another

Case Citation: (2022) ibclaw.in 39 SC

Hon’ble Supreme Court held that in the present case, the balance amount has been accepted by the appellant Bank on 08.03.2019. The sale under the statutory scheme as contemplated under Rules 8 and 9 of the said Rules would stand completed only on 08.03.2019. This date falls much after 03.01.2019, i.e., on which date CIRP commenced and moratorium was ordered. In view of the provisions of Section 14(1)(c) of the IBC, which have overriding effect over any other law, any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act is prohibited. We are of the view that the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered.

5. Unless a Company or Firm has committed the offence as a principal accused, the persons mentioned in Section 141(1) or (2) of the Negotiable Instruments Act, 1881 would not be liable and convicted as vicariously liable

Case Name: Dilip Hariramani Vs. Bank of Baroda

Case Citation: (2022) ibclaw.in 37 SC

The Hon’ble Supreme Court held that the appellant/partner cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan. The Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Indian Contract Act, 1872 is a civil liability. The appellant/partner may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the SARFAESI Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability. Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm.

6. Whether NBFCs regulated by the RBI could also be regulated by State enactments

Case Name: Nedumpilli Finance Company Ltd. Vs. State of Kerala & Ors.

Case Citation: (2022) ibclaw.in 36 SC

The Hon’ble Supreme Court held that the competence of the legislatures of the States of Kerala and Gujarat to enact a law for the regulation of the business of money lending cannot be questioned, as their power is traceable to Entry 30 of List¬-II of the Seventh Schedule. The Hon’ble Court concluded that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI. Therefore, all the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court are dismissed.

7. Landmark judgment – Whether the CMM/DM can appoint an advocate in exercise of powers under Section 14(1A) of the SARFAESI Act, 2002?

Case Name: NKGSB Cooperative Bank Ltd. Vs. Subir Chakravarty & Ors. 

Case Citation: (2022) ibclaw.in 13 SC

Hon’ble Supreme Court holds that once the order is passed, the statutory obligation cast upon the CMM/DM stands discharged to that extent. The next follow-up step is of taking possession of the secured assets and documents relating thereto. The same is ministerial step. It could be taken by the CMM/DM himself/herself or through any officer subordinate to him/her, including the Advocate Commissioner who is considered as an officer of his/her court. It is well established that an advocate is a guardian of constitutional morality and justice equally with the Judge. Sub-Section (1A) of Section 14 of the 2002 Act is no impediment for the CMM/DM to engage services of an advocate (an officer of the court)- only for taking possession of secured assets and documents relating thereto and to forward the same to the secured creditor in furtherance of the orders passed by the CMM/DM under Section 14(1) of the 2002 Act in that regard. If an advocate is appointed as commissioner for execution of the orders passed by the CMM/DM under Section 14(1) of the 2002 Act, that responsibility and duty will be discharged honestly and in accordance with rules of law. In our view, in law, an advocate is an officer of the court and, thus, subordinate to the CMM/DM.

8. Dues of the secured creditor will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944

Case Name: Punjab National Bank Vs. Union of India & Ors.

Case Citation: (2022) ibclaw.in 12 SC

Hon’ble Supreme Court held that the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173Q(2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000. Secondly, the dues of the secured creditor, i.e. the Appellant-bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.

9. By selling the mortgaged property/secured property it cannot be said that the borrower is discharged from the entire liability outstanding against him

Case Name: Bank of Baroda  Vs. M/s Karwa Trading Company & Anr.

Case Citation: (2022) ibclaw.in 10 SC

Hon’ble Supreme Court holds that even otherwise on making the payment i.e. Rs.65.65 lakhs against the total dues Rs.1,85,37,218.80/¬ as on 07.01.2013 the entire liability outstanding against the borrower cannot be said to have been discharged. Even if the mortgaged property would have been sold in a public auction say for an amount of Rs.71 lakhs and the bank has realized Rs.71 lakhs by selling the mortgaged property, in that case also the liability of the borrower to pay the balance amount would still continue. By selling the mortgaged property/secured property it cannot be said that the borrower is discharged from the entire liability outstanding against him. The liability of the borrower with respect to the balance outstanding dues would still be continued. Unless and until the borrower was ready to deposit/pay the entire amount payable together with all costs and expenses with the secured creditor, the borrower cannot be discharged from the entire liability outstanding. Therefore, as such no order could have been passed either by the DRT and/or by the Division Bench of the High Court to discharge the borrower from the entire liability outstanding and to discharge the mortgaged property and handover the possession along with original title deeds to the borrower. Even if the interim relief order is set aside by this Court the appeal/application will have to be decided and disposed of on merits and on whatever grounds which may be available to the borrower.

10. If proceedings are initiated under the SARFAESI Act and the borrower is aggrieved by any of the actions of the private Bank/Bank/ARC, borrower has to avail the remedy under the SARFAESI Act and no writ petition is maintainable/entertainable

Case Name: Phoenix ARC Pvt. Ltd. Vs. Vishwa Bharati Vidya Mandir & Ors. 

Case Citation: (2022) ibclaw.in 03 SC

Hon’ble Supreme Court holds that in view of the statutory remedy available under Section 17 of the SARFAESI Act, the writ petitions against the notice under Section 13(4) of the SARFAESI Act was not required to be entertained by the High Court. Even otherwise, it is required to be noted that a writ petition against the private financial institution – ARC – appellant herein under Article 226 of the Constitution of India against the proposed action/actions under Section 13(4) of the SARFAESI Act can be said to be not maintainable. In the present case, the ARC proposed to take action/actions under the SARFAESI Act to recover the borrowed amount as a secured creditor. The ARC as such cannot be said to be performing public functions which are normally expected to be performed by the State authorities. During the course of a commercial transaction and under the contract, the bank/ARC lent the money to the borrowers herein and therefore the said activity of the bank/ARC cannot be said to be as performing a public function which is normally expected to be performed by the State authorities. If proceedings are initiated under the SARFAESI Act and/or any proposed action is to be taken and the borrower is aggrieved by any of the actions of the private bank/bank/ARC, borrower has to avail the remedy under the SARFAESI Act and no writ petition would lie and/or is maintainable and/or entertainable.

1. By including a clause of ‘as is where is’ it would not be sufficient for a Bank from disclosing encumbrances or handing over the property to Auction Purchaser

Case Name: S. K. Bakshi Vs. Punjab National Bank and others

Case Citation: (2022) ibclaw.in 390 HC

Hon’ble High Court held that in terms of SARFASI Act, an application under Section 17 can be made to DRT by “any person” including borrower to challenge any of the measures referred to in Section 13(4) once taken by the secured creditor. But, in present case, the petitioner who is the auction purchaser of the property and has been promised by the Bank that the delivery of the property is free from all encumbrances cannot proceed under Section 17 as it does not envisages any of the grounds enumerated in Section 13(4). Thus, the judgment relied (Agarwal Tracom Pvt. Ltd. vs. Punjab National Bank and others [2017] ibclaw.in 15 SC arguing that petition is not maintainable as the only remedy is available to the petitioner is under Section 17 of the SARFAESI Act) upon is not applicable to the facts of this case.

2. Bank having accepted the offer of the petitioner at every step, could not have wriggled out by cancelling OTS at the climax and further could not have retained the entire amount

Case Name: M/s. Rima Transformers and Conductors Pvt. Ltd. Vs. Canara Bank

Case Citation: (2022) ibclaw.in 391 HC

In State Bank of India Vs. Arvindra Electronics Pvt. Ltd. (2022) ibclaw.in 125 SC, the Apex Court holds that Courts exercising jurisdiction under Article 226 of the Constitution cannot direct extension of OTS. Hon’ble High Court held that but, the facts obtaining in the case at hand are entirely different. The petitioner’s offer of OTS was accepted by the Bank with certain conditions. The petitioner accepts the terms and conditions. Before the deadline fixed by the Bank as 28-02-2021 for compliance of OTS conditions, the petitioner had deposited Rs.18.90 crores. and the Bank later unilaterally withdraws OTS. It is in these facts the judgment of the Apex Court would not become applicable.

3. Once an ARC has become the new pledgee of shares, having acquired by way of a Debt Assignment Deed, its right to deal with these pledged shares is absolute, and is required to be recognised by all third parties, including statutory authorities like the National Depository

Case Name: UV Assest Reconstruction Company Ltd. Vs. Union of India & Ors. 

Case Citation: (2022) ibclaw.in 306 HC

In the present case, UVARCL has, in accordance with Section 5 of the SARFAESI Act, purchased the NPA account of BCL from SBI, alongwith all assets, including the pledged shares. However, National Depository denied to substitute its name in the record maintained by National Depository in respect of the pledged shares of the BCL Hon’ble High Court held that once the original pledgee, with whom the shares were pledged by the BCL for availing certain loans, has issued specific instructions to the National Depository to substitute the name of the petitioner in its place, there is no justification for the National Depository to deny the petitioner’s request. Merely because the Depositories Act, 1996 or the SEBI (Depositories and Participant) Regulations, 2018 do not lay down any procedure for making such a substitution, does not imply that the National Depository can refuse to incorporate changes in the ownership of the pledged shares, which already stand vested with the petitioners by way of Section 5(2) and (3) of the SARFAESI Act.

4. OTS entered between Banks and parties is purely a contract and a borrower cannot ask for alterations of the same by filing petitions under Article 226 of the Constitution of India

Case Name: Supertech Realtors Pvt. Ltd. Vs. Bank of Maharashtra

Case Citation: (2022) ibclaw.in 285 HC

Hon’ble High Court held that as rightly observed by the learned Single Judge, that the writ petition was an attempt for renovation of contract which cannot be permitted in a writ petition. It is settled law that High Courts while exercising jurisdiction under Article 226 of the Constitution of India cannot rewrite the contract entered into between the parties. The One-Time Settlement which has been entered into between the consortium of Banks and the parties is purely a contract and a borrower cannot ask for alterations of the same by filing petitions under Article 226 of the Constitution of India. The terms can be altered only through mutual consent between the parties.

5. Recovery of debt advanced by bank under the UP State sponsored scheme is not covered as ‘debt’ u/s 2(g) of RDB Act, 1993, for the recovery of such debt, the specific mode is provided under the U.P. Agricultural Credit Act, 1973

Case Name: Agriserve Producer Company Ltd. and Another Vs. Union of India and 4 Others

Case Citation: (2022) ibclaw.in 274 HC

The Division bench of the Court held that the fact that the bank has initially proceeded to seek recovery by taking recourse of Section 19 of the RDB Act, 1993, will not have any bearing on the proceedings initiated by the bank for recovery under the U.P Agricultural Credit Act, 1973. To clarify, the recovery of debt advanced by the bank under the State sponsored scheme is not covered as ‘debt’ under Section 2(g) of the RDB Act, 1993 being not a transaction during the ordinary course of any business activity undertaken by the bank or the financial institution, for the recovery of such debt, the specific mode provided under the U.P. Act of 1973, has rightly been availed by the bank. The plea of the learned counsel for the petitioners to challenge the recovery citation on the ground that the bank has already approached the Debt Recovery Tribunal for recovery of the ‘debt’, in question, and as such it cannot proceed under the Act of 1973 to recover it as arrears of land revenue, therefore, is liable to be turned down. There is, thus, no merit in the challenge to the recovery citation issued by the Tehsildar.

6. A certificate of sale issued by a Civil or a Revenue Officer in evidence of a sale conducted by way of public auction is not compulsorily registrable under Registration Act, 1908

Case Name: L. Sangeetha Vs. The Sub Registrar, Pollachi

Case Citation: (2022) ibclaw.in 268 HC

Hon’ble High Court held that a certificate of sale issued by a Civil or a Revenue Officer in evidence of a sale conducted by way of public auction is not compulsorily registrable and Section 89(4) imposes an obligation on the Revenue Officer, who conducts an auction sale to forward the certificate to the Registering Authority to enable him to file the same in Book-I maintained by him. Under Section 17(2)(xii) would show that a certificate of sale issued by a Civil or a Revenue Officer in evidence of a sale conducted by way of public auction is not compulsorily registrable and Section 89(4) imposes an obligation on the Revenue Officer, who conducts an auction sale to forward the certificate to the Registering Authority to enable him to file the same in Book-I maintained by him.

7. Section 34 of SARFAESI Act is applicable to only such cases which are governed by and are within the purview of the SARFAESI Act or the RDDBFI Act and Section 34 of the SARFAESI Act is not a stand-alone provision, it must be read along with the provisions contained in the Limitation Act, 1963

Case Name: Punjab National Bank Vs. Subhash Aggarwal & Ors

Case Citation: (2022) ibclaw.in 260 HC

The Hon’ble High Court held that the words “to be taken” forming a part of Section 34 of SARFAESI Act cannot have an ethereal meaning giving infeasible rights to a party de hors the law of the land. Section 34 of the SARFAESI Act is not a stand-alone provision and as stipulated in Section 36 therein, it must be read along with the provisions contained in the Limitation Act, 1963. Legal plea of limitation is fundamental to all proceedings before a Court of law. This Court at the appellate stage is free to take up any legal issue which has a material bearing and which is germane to the issue, and forms the very essence thereof. In any event, the same is instrumental for the purposes of adjudication of the present dispute as the suit of the respondents was not arising out of the either SARFAESI Act or the RDDBFI Act. Section 34 of SARFAESI Act that the same is applicable to only such cases which are governed by and thus are within the purview of the SARFAESI Act or the RDDBFI Act. A perusal of the whole SARFAESI Act reveals that there is no bar of any kind for a Civil Court to proceed with such actions which are beyond the domain of the SARFAESI Act of the RDDBFI Act. The jurisdiction of a Civil Court has not been ousted and has only been restricted by introduction of the SARFAESI Act.

8. Intimation of invocation pledge of shares received by way of a text message from NSDL and notice giving 7 days to the plaintiff to clear the outstanding dues would constitute reasonable notice under Section 176 of the Indian Contracts Act, 1872

Case Name: Amit Jain Vs. Canara Bank & Ors.

Case Citation: (2022) ibclaw.in 259 HC

In this case, it has been contended on behalf of the plaintiff that the defendant bank has failed to give reasonable notice to the plaintiff for the sale of the pledged shares, as required under Section 176 of the Indian Contracts Act, 1872. There is no denying the fact that in terms of Section 176 of the Indian Contracts Act, 1872, a pawnee is required to give reasonable notice of sale to the pawnor before selling the pledged goods. Hon’ble High Court held that the intimation of invocation was duly received by the plaintiff by way of a text message on 6th September, 2022 and this was, in fact challenged by the plaintiff by way of a writ petition. It was only thereafter that the notice dated 15th September, 2022 was issued by the defendant bank giving seven days to the plaintiff to clear the outstanding dues, failing which the defendant bank would sell the pledged shares. Therefore, the notice dated 15th September, 2022 would have to be read along with the intimation of invocation sent on 6th September, 2022 and in my view, this would constitute reasonable notice under Section 176 of the Indian Contracts Act, 1872.

9. Merely because proceedings under SARFAESI Act, 2002 has been initiated, Arbitration of disputes does not get per se barred. The provisions of the SARFAESI Act, 2002 are a remedy in addition to the adjudication under the Arbitration and Conciliation Act, 1996

Case Name: Diamond Entertainment Technologies Pvt. Ltd. Vs. Religare Finvest Ltd. Through Its Authorised Officer

Case Citation: (2022) ibclaw.in 230 HC

Hon’ble High Court held that the SARFAESI Act and RDDB Act are complementary to each other and merely because proceedings in the SARFAESI Act have been initiated would not be a ground to oust the jurisdiction of the RDDB Act. The provisions of the SARFAESI Act, 2002 are a remedy in addition to the adjudication under the Arbitration and Conciliation Act, 1996 as an alternate forum to Civil Court/DRT. Once the remedy of recovery remains the parties still have the freedom to choose the forum alternate to and the regular Court or DRT as the case may be for adjudicating their inter se disputes. All disputes relating to the “Right in Personam” are arbitrable and therefore, the choice is given to the parties to choose the alternative forum. A claim of money by a Bank or financial institution cannot be treated as a right in rem and thus, taking it out of the realm of arbitrability.

10. The aspect of classifying an account as NPA is not justiciable in exercise of power of judicial review under Article 226 and upto Section 13(4) of SARFAESI Act, 2002 no remedy is provided to the Borrower

Case Name: Gaurav Lubricants Pvt. Ltd. Vs. Tamilnadu Mercantile Bank Ltd. 

Case Citation: (2022) ibclaw.in 234 HC

Hon’ble High Court held that the Debts Recovery Tribunal can go into the aspect of classifying the accounts as NPAs and also whether RBI guidelines are violated on any aspect leading to declaring the accounts as NPAs and taking recourse under the Act. On the contrary, as consistently opined by Constitutional courts, the aspect of classifying an account as NPA is not justiable in exercise of power of judicial review under Article 226 of the Constitution. We are therefore of the opinion that these writ petitions are not maintainable. Further, classifying loan account as NPA can be challenged before RBI alleging that its guidelines are violated. A complaint can be filed before the Ombudsman.

11. A borrower cannot approach the RBI, in its capacity as a regulatory body to adjudicate whether the actions of an ARC are in compliance with the SARFAESI Act

Case Name: M/s M. Sons Gems N Jjewellery Pvt. Ltd. & Ors Vs. Reserve Bank of India & Ors 

Case Citation: (2022) ibclaw.in 235 HC

The contention of the Petitioners that that the scope of the remedy available under Section 17 of the SARFAESI Act is restricted only to disputes pertaining to Chapter III of the SARFAESI Act and it does not cover Chapter II of the SARFAESI Act cannot be accepted. The borrower is entitled to file an application under Section 17 of the SARFAESI Act challenging the actions of the Asset Reconstruction Company/Bank on the ground that it is not in accordance with the SARFAESI Act. Hon’ble High Court held that a borrower cannot claim that his grievance with the actions of a secured creditor be adjudicated by the RBI under Chapter II of the SARFAESI Act. The borrower cannot approach the RBI, in its capacity as a regulatory body to adjudicate whether the actions of an ARC are in compliance with the SARFAESI Act. As stated above, the SARFAESI Act under Section 17 provides for an efficacious and efficient remedy to adjudicate the grievances of a borrower and the DRT has the power to determine whether the actions of an ARC are in compliance with the SARFAESI Act. Permitting a borrower to approach the RBI to adjudicate such claims under Chapter II would be against the scheme of the SARFAESI Act.

12. EPFO has a priority over the Secured Debts of Bank in view of the provisions of Section 11(2) of the EPF Act, 1952 vis-a-vis Section 26E read with Section 35 of the SARFAESI Act, 2002

Case Name: UCO Bank Vs. Employees Provident Fund Organization & 1 Other(s)

Case Citation: (2022) ibclaw.in 222 HC

The Hon’ble High Court held that in the facts of the case, Section 11(2) of the EPF Act provides that if any amount is due from an employer in respect of the PF dues, the due shall be deemed to be the first charge on the assets of the establishment and notwithstanding anything contained in any other law, for the time being in force, be paid in priority to all other debts meaning thereby that the dues of the PF shall have the first charge on the property and therefore, as observed by the Apex Court in case of Centra Bank of India (2017) ibclaw.in 73 SC, the purpose and intend of the legislature is required to be looked into. The first charge on the property vis-a-vis the PF dues would be created moment there would be a failure on the part of the employer to deposit the PF dues. The Court concluded that in view of above dictum of law and considering the language of Section 11(2) of the EPF Act and the object behind the same for the benefit of the workers and considering the intention of the legislature, the provisions of Section 11(2) shall prevail over Section 26E of the SARFAESI Act.

13. Steps are required to be adopted for writ of Summons issued under Recovery of Debts and Bankruptcy Act 1993, Important decision of Division Bench of Bombay High Court on procedure for issuance of Summons by DRT

Case Name: Sunil Gupta Vs. Asset Reconstruction Company (India) Ltd.

Case Citation: (2022) ibclaw.in 210 HC

Hon’ble High Court listed the steps that from DRT Rules and DRT Regulations, it is clear that the following steps are required to be adopted for the writ of summons to be issued under the Seal of the Registrar and served on the Defendants to the O.A. (including petitioners herein):

14. Whether Executive Magistrate can be delegated the powers of the District Magistrate under section 14 of the SERFAESI Act, 2002 to take possession of secured assets

Case Name: Joy Kali Oil Industries Pvt. Ltd. Vs. Union of India & Ors.

Case Citation: (2022) ibclaw.in 200 HC

Division Bench of High Court of Calcutta referring judgments M/s R. D. Jain and Co. v. Capital First Ltd. & Ors. (2022) ibclaw.in 93 SC and Indian Bank v. D. Visalakshi (2019) ibclaw.in 130 SC held that the statutory obligation enjoined upon the CMM/DM is to immediately move into action after receipt of a written application under Section 14(1) of the SARFAESI Act from the secured creditor. As soon as such an application is received, the CMM/DM is expected to pass an order after verification of compliance of all formalities by the secured creditor referred to in the proviso in Section 14(1) of the SARFAESI Act and after being satisfied in that regard, to take possession of the secured assets and documents relating thereto and to forward the same to the secured creditor at the earliest opportunity. This is the spirit of the special enactment. The step taken by the CMM/DM while taking possession of the secured assets and documents relating thereto is a ministerial step. It could be taken by the CMM/DM himself or through any officer subordinate to him. Section 14 does not oblige the CMM/DM to go personally and take possession of the secured assets which can be discharged even by the Executive Magistrate as is done in this case.

15. Bombay High Court Larger Bench decision on priority in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act and Section 26E in the SARFAESI Act or section 31B of the RDDB Act

Case Name: Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai, & Anr.

Case Citation: (2022) ibclaw.in 192 HC

Following substantial questions of law for answers:

a. Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/MVAT Act/MGST Act] to appropriate the amount realized by the sale of a secured asset? b. Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of ‘first charge’ created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor? c. Are the provisions, inter alia, according ‘priority’ in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act prospective? d. Whether section 31B of the RDDB Act can be pressed into service for overcoming the disability that visits a secured creditor in enforcing its security interest under the SARFAESI Act upon such creditor’s failure to register the security interest in terms of the amendments introduced in the SARFAESI Act? e. Whether the priority of interest contemplated by section 26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? Depending on the answer to this question, whether correct proposition of law has been laid down (extracted infra) in paragraph 21 of the Division Bench decision reported in ASREC (India) Limited vs. State of Maharashtra and Ors. (2021) ibclaw.in 117 HC and in paragraph 35 of the Division Bench decision, reported in 2021 (2) Mh. LJ 721 (State Bank of India vs. the State of Maharashtra and Ors.)? f. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A in the SARFAESI Act from 24th January 2020? and g. Whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on “as is where is and whatever there is basis”?

16. Division Bench of Bombay High Court listed Do’s and Don’ts for action under Section 14 of SARFAESI

Case Name: Phoenix ARC Pvt. Ltd. Vs. The State of Maharashtra 

Case Citation: (2022) ibclaw.in 193 HC

Division Bench held that the proceedings adopted by Petitioner to secure possession of its security interest has been effectively scuttled and resulted in relief being granted to defaulting and non-co-operative Borrowers. Such patently illegal orders, apart from defeating the very purpose of Chapter III of the SARFAESI Act, also burden this Hon’ble Court with needless litigation. It is for these reasons that we find it necessary to once again reiterate the extent and scope of the jurisdiction of the DA under Section 14. The Designated Authorities (DA) while considering an Application filed by a secured creditor under Section 14 is only required to ascertain as follows and Section 14 does not contemplate the following.

17. Whether the proceedings already initiated under Section 14 of the SARFAESI Act prior to a Guarantor’s/Borrower’s death automatically abate and they cannot be continued against his legal heirs on the basis of the notice under Section 13(2) of the SARFAESI Act issued to the deceased Guarantor/Borrower during his life time?

Case Name: Kotak Mahindra Bank Ltd. Vs. The District Magistrate and another 

Case Citation: (2022) ibclaw.in 173 HC

Hon’ble High Court held that a District Magistrate/Chief Judicial magistrate while exercising jurisdiction under Sec.14 of the SARFAESI Act has a very limited jurisdiction and has no adjudicatory powers. In our view, even the question of ‘abatement’ of proceedings initiated by the Bank under Sec.14 of the SARFAESI Act against the deceased guarantor/ mortgagor fall in the arena of ‘adjudication’, which the respondent No.1 had no power or jurisdiction to go into.

18. High Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, would have the jurisdiction to extend the period of settlement as originally provided for in the OTS letter

Case Name: Hardyal Singh Cheema Vs. State Bank of India and another

Case Citation: (2022) ibclaw.in 159 HC

The following points arise for consideration: –

(a) Whether the petitioner, in his capacity as a director/guarantor, can maintain this Writ Petition? (b)Whether the Writ Petition under Article 226 of the Constitution of India is maintainable in contractual matters? (c) Whether this Court, in exercise of its power under Article 226 of the Constitution of India, can extend the time granted for payment of amount under the OTS by a Bank/secured creditor and if so in what circumstances? (d) Whether in the facts and circumstances of the case, the petitioner is entitled to relief in the instant case?

19. Whether the District Magistrate is required to grant an opportunity of hearing to the petitioners while examining application filed by the secured creditor under Section 14 of the Act, 2002

Case Name: M/s. Maa Kalika Bhandar and Others Vs. The Collector and District Magistrate, Khordha and Others 

Case Citation: (2022) ibclaw.in 152 HC

Hon’ble High Court held that if any person is aggrieved of any action taken by the secured creditor under Section 13(4), the remedy available to such person is to file an application before the DRT under Section 17. Still further, as per Section 34 of SARFAESI Act, 2002 the jurisdiction of the civil court is barred which clearly indicates the intention of the legislature is to avoid conferring of parallel jurisdiction to other courts/authorities. Reading of Section 14 nowhere permits conferring of any power of adjudication or entitlement to determine inter-se rights upon the District Magistrate while examining application under Section 14. Therefore, as far as statutory provisions are concerned, they clearly do not support the contention of the petitioner that the District Magistrate should have afforded an opportunity of hearing especially when neither any adjudicatory functions are to be performed nor any right inter-se the parties are to be determined by the District Magistrate. The only remedy available with the petitioners is to challenge the action of the bank by filing of an application before the DRT under section 17 of the Act, 2002.

20. Constitutional validity of amended Rule 8(8) of the Security Interest (Enforcement) Rules, 2002 – Sale of secured asset by private treaty can be conducted only after the sale by inviting tenders from the public or by holding public auction fails

Case Name: Mr Prateek Pradeep Agarwal Vs. Union of India

Case Citation: (2022) ibclaw.in 140 HC

The Petitioner is challenging constitutional validity of amended Rule 8(8) as it removes the requirement of consent of borrower for the purpose of settlement of terms of sale for conducting the same by obtaining quotations or by private treaty of secured assets by secured creditor/authorized officer. Hon’ble High Court held that it is possible that as a result of the amended Rule 8(8), the sale of secured asset by private treaty can be conducted, even at the first instance, without making attempts to sell the same by public auction or by inviting public tender. Thus allowing sale by private treaty without failure of sale by method of public auction or by inviting public tender will be violative of the object of the said Act and said Rules of ensuring receipt of maximum possible price by sale of the secured asset. In that case, the said amended Rule 8(8) will become unconstitutional as unfettered and arbitrary powers are conferred on the secured creditor/authorised officer to that extent. Said amended Rule 8(8) is not per se unconstitutional. However the stage when said amended Rule 8(8) is invoked is very crucial and important. If the said Rule is invoked at the first instance, then in view of absence of public notice as public participation is denied, the same will amount to conferring unfettered, arbitrary and excessive powers on the secured creditor/ authorised officer resulting into destroying the object of the said Act and said Rules. Thus to save the said amended Rule 8(8) from unconstitutionality on the ground that unfettered and arbitrary powers are given to secured creditors/authorised officer it is necessary to read into said Rule 8(8) that sale by private treaty can be conducted only after the sale by inviting tenders from the public or by holding public auction fails.

21. At the stage of issuance of notice under Section 13(2) of the SARFAESI Act, no interference is called for. The adjudication would have to wait till the stage of Section 13(4) is reached

Case Name: M/s. S.V. Developers Vs. State Bank of India

Case Citation: (2022) ibclaw.in 132 HC

The Divisional Bench of Telangana High Court has considered following questions in this petition:

(i) Whether the notice issued by the SBI under Section 13(2) of the SARFAESI Act is legal and valid? Corollary to the above is the question as to whether the High Court should interfere in such a notice under Article 226 of the Constitution of India?

(ii) Whether the petitioner is entitled to the benefit of the OTS scheme under SBIOTS 2019 and whether the High Court under Article 226 of the Constitution of India can issue a direction to the respondent/SBI to accept the OTS proposal of the petitioner?

(iii) Whether respondent/SBI would be precluded from taking steps under the 1993 Act after having invoked provisions of the SARFAESI Act?

(iv) Is there any suppression of material facts by the petitioner? And if so, whether the same would disentitle the petitioner to any relief from the Writ Court?

22. Whether a Bank has right to withhold the documents of security in view of Section 171 of the Indian Contract Act, 1872 under the right of general lien especially when Borrower has fully repaid the amount of loan

Case Name: Mr. Sunil s/o Ratnakar Gutte Vs. Union Bank of India

Case Citation: (2022) ibclaw.in 135 HC

In the present case the petitioner has repaid the entire amount of loan regarding the loan obtained to purchase the flat. The petitioner has produced on record the account extract which shows that no balance amount remains to be paid in respect of loan account of the petitioner. It is also admitted by the respondent-Bank that the petitioner has paid the entire amount against the loan which was obtained to purchase the flat. Only contention of the respondent-Bank is that the petitioner is also borrower of Sunil Hitech Company. The petitioner as well as other Directors have obtained the loan but the said Company went in liquidation and Liquidator is appointed. The amount is due from the Company. The petitioner being the Director of the said Company is liable to pay the loan amount and, therefore, the documents regarding the title of the property is not remitted by the Company. It is further submitted by the Bank that Bank has already moved an application before the Debt Recovery Tribunal, New Delhi against the petitioner and others for recovery of loan amount which is due against the Company and said application is pending for the hearing. It is further submitted by the respondent-Bank that till the out come of the order of the Debt Recovery Tribunal the respondent is unable to release the said documents.

23. When District Magistrate has already passed an order under section 14 of the SARFAESI Act, he could not have sit in appeal or review his own order by recalling or cancelling the same

Case Name: Canara Bank Ltd. (Erstwhile Syndicate Bank) Vs. State of Gujarat

Case Citation: (2022) ibclaw.in 136 HC

Hon’ble Gujarat High Court quashed and set aside the order of recalling/cancelling the earlier order passed by District Magistrate under section 14 of the SARFAESI Act and held that the District Magistrate has to discharge the ministerial act of providing assistance to the secured creditor to take physical possession of the secured assets when the secured creditor has initiated the proceedings under section 13 of the SARFAESI Act. As per the provisions of section 26E of the SARFAESI Act, the secured creditor has first claim/charge over the sale proceeds of the secured assets towards the recovery of the outstanding dues. Therefore, it is the mandatory for the District Magistrate to pass an order to provide police assistance to the secured creditors to take the possession of the secured assets as per provision of section 14 of the SARFAESI Act. Merely because there was an attachment of the property by the State Government under the provisions of Act of 1978, the possession of the property cannot be continued with the borrower and as such physical possession of the property ought to have been taken over by the secured creditor as per the provisions of the SARFAESI Act.

24. Merely because the petitioner is a bonafide auction purchaser who had purchased assets of Corporate Debtor through auction/bidding so conducted by orders of NCLT, will not absolve it from paying arrears of lease rental and interest thereon

Case Name: Palika Towns LLP Vs. State of UP and 2 others 

Case Citation: (2022) ibclaw.in 131 HC

Hon’ble High Court of Allahabad held that

(i) Merely because the petitioner is a bonafide auction purchaser who had purchased assets Corporate Debtor through auction/bidding so conducted by orders of NCLT, will not absolve it from paying arrears of lease rental and interest thereon.

(ii) The Insolvency Bankruptcy Code, 2016 grants limited protection to the petitioner (auction purchaser) while allowing it to step into the shoes of the Corporate Debtor but in order to the lessee of the principle lessor (GNIDA) the petitioner has to honor the commitments and discharge its contractual obligation as embodied in the lease deeds, Transfer Memorandum and Sale Certificate.

(iii) The words so employed in the Certificate of Sale Deed being “AS IS WHERE IS”, ”AS IS WHAT IS”, “WHATEVER THERE IS” AND “NO RECOURSE” itself creates contractual obligation upon the petitioner to honor the commitments and to discharge the obligations so embodied in the lease and the subsequent lease deeds for the payment of past lease rentals and interest thereon.

(iv) The principal lessor has paramount interest over the demised land put to auction and it has legal as well as contractual right to raise demand of out standing arrears of lease rentals and interest thereon.

(v) High Court under Article 226 of the Constitution of India cannot by a judicial fiat creates a podium to facilitate avoidance of agreements while wriggling out from contractual obligations so embodied therein. A writ petition containing solitary relief of refund of the amount deposited for fulfilling contractual obligation, is not maintainable.

25. A commercial court or commercial division under the Commercial Courts Act is prohibited from entertaining a suit or proceeding in respect of matters which the jurisdictional DRT or DRAT, as the case may be, is empowered by the SARFAESI Act to determine

Case Name: M/s. Reactive Chemicals and Solvents Vs. Authorized Officer, Indian Overseas Bank

Case Citation: (2022) ibclaw.in 134 HC

On reading Section 34 of the SARFAESI Act and Section 11 of the Commercial Courts Act conjointly, the position that emerges is that a commercial court or commercial division is prohibited from entertaining a suit or proceeding in respect of matters which the jurisdictional DRT or DRAT, as the case may be, is empowered by the SARFAESI Act to determine. The second limb of Section 34 deals with the grant of injunctions and is, therefore, not relevant in relation to the present suit. Section 11 of the Commercial Courts Act prohibits a commercial court or a commercial division from entertaining or deciding any suit, application or proceeding relating to any commercial dispute if the jurisdiction of a civil court is expressly or impliedly barred in respect thereof. Therefore, what remains to be considered is whether the jurisdictional DRT or DRAT is vested with jurisdiction under the SARFAESI Act to determine the matters in respect of which the suit was filed. If so, this Court is prohibited from exercising jurisdiction. If not, this Court is entitled to exercise jurisdiction.

26. Debt Recovery Tribunal (DRT) has no power to restrain a person from travelling abroad in the absence of specific powers to that effect

Case Name: Anurag S/o. Padmesh Gupta Vs. Bank of India

Case Citation: (2022) ibclaw.in 126 HC

A division bench of the Hon’ble of Bombay High Court held that on careful consideration of the language of Sub Section 12, 13(A), 17 and 18 of Section 19, we are of the considered view that the Tribunal is not conferred with specific power to restrain a person from leaving the country. In the absence of a specific provision conferred on the Debt Recovery Tribunal by statute, the Debt Recovery Tribunal has no power to restrain a citizen from travelling abroad, particularly when the said right has been recognised as a facet of Article 21 of the Constitution of India. In our view, the provisions under RDDBFI Act, 1993, as they stand, do not even impliedly confer such powers on the Debt Recovery Tribunal to restrain a person from travelling abroad. The order refusing permission to travel abroad has been made in contravention of the provisions of Article 21 of the Constitution and is violative of the right guaranteed to the petitioner under Article 21. The State has not made any law or provision in the said Act seeking to deprive or regulate the right of a person to travel abroad. The order is, therefore, liable to be set aside.

27. Rule 9(3) and 9(4) of the Security Interest (Enforcement) Rules, 2002 make it evident that there is no bar on the mode of payment through which a payment has to be tendered by the auction purchaser

Case Name: Pahwa Buildtech Pvt. Ltd. Vs. Mr. Jagmohan Singh Arora & Ors. 

Case Citation: (2022) ibclaw.in 123 HC

Hon’ble High Court set aside decision of the DRAT and held that while dealing with a challenge to the auction of the secured asset, the question that needs to be asked and answered is whether there is any real prejudice suffered by the borrower due to adoption of the method complained of, as not being in conformity with the Rules. If there is any confusion amongst the two documents regarding the modalities for sale of the secured asset, the terms of sale of the secured assets that are in consonance with the relevant Rules, and which further the objective of the SARFAESI Act (i.e., to recover the dues of the secured creditor), must be preferred. If the auction purchaser tenders the cheque on the same day, or even the following day, it is to be presumed that he has the financial capacity to ensure that the cheque would be honoured upon presentation. Rule 9(3) and 9(4) of the Security Interest (Enforcement) Rules, 2002 make it evident that there is no bar on the mode of payment through which a payment has to be tendered by the auction purchaser. Hence, the acceptance of cheque dated 01.09.2018 of the 15% amount, and encashment thereof by the respondent no.4 is in compliance with Rule 9(3) and Rule 9(4) of the Security Interest (Enforcement) Rules, 2002. Even if it were to be accepted that the respondent Nos.4 & 5 delayed the encashment of the said cheque, that delay, if any, cannot be to the prejudice of the petitioner, who had tendered the same in time. There was no mandatory requirement for the Petitioner to make payment of the 15% amount by way of DD/RTGS/NEFT only.

28. The conjunction ‘and’ employed in the proviso to Rule 9(1) of Security Interest (Enforcement) Rules 2002 indicate the mandatory nature of all three methods as serve, affix and publish of sale notice

Case Name: E.K. Rajan Vs. The Authorized Officer, Canara Bank 

Case Citation: (2022) ibclaw.in 118 HC

The Hon’ble High Court held that a reading of the proviso to Rule 9(1) of the Security Interest (Enforcement) Rules 2002 makes it explicit that the authorised officer must serve, affix and publish the notice of sale of not less than 15 days to the borrower, for any subsequent sale. The word ‘serve’ relates to personal service of notice, affixture relates to the notice being affixed on the property and the publication relates to the publication of notice in the newspaper dailies. The conjunction ‘and’ employed in the proviso also indicate the mandatory nature of all three methods of notice. Further, in spite of the amendment to section 13(8) of the Act, the proviso to Rule 9(1) mandates the three methods of serve, affix and publish the notice to be carried out, with 15 days clear notice. In the instant case, there is a failure on the part of the respondent to serve notice of not less than 15 days upon the petitioner.

29. Whether a Secured Creditor/Bank can file an application under section 14 of the SARFAESI Act 2002 without issuing notice under section 13(4) thereof or not?

Case Name: HDFC Bank Ltd. Vs. Parwati Cotton 

Case Citation: (2022) ibclaw.in 105 HC

In this case, District Magistrate rejected the section 14 application filed by the Bank on the ground that without issuing notice under section 13(4) of the SARFAESI Act, application under section 14 cannot be filed by the secured creditor. Hon’ble High Court held that learned advocate for the petitioner has correctly placed reliance on the decision of Apex Court in case of Standard Chartered Bank v. V. Noble Kumar and others (2017) ibclaw.in 40 SC. Similarly, the Apex Court in case of Jagdish Singh v. Heeralal and others (2017) ibclaw.in 38 SC. In view of above conspectus of law, the impugned order passed by the District Magistrate is not tenable in law and accordingly, the same is quashed and set aside.

30. Whether a sale conducted by an authorized officer under SARFAESI Act, 2002 is an open market sale and is, thus, excluded from the scrutiny contemplated under Section 47A of the Indian Stamp Act, 1899

Case Name: Ballyfabs International Ltd. Vs. The State of West Bengal & Ors. 

Case Citation: (2022) ibclaw.in 97 HC

The Single Bench referred an issue “whether the sale conducted by an authorized officer under SARFAESI Act, 2002 is an open market sale and is, thus, excluded from the scrutiny contemplated under Section 47A of the Indian Stamp Act, 1899 (as amended in West Bengal)” to a bench through Chief Justice. Upon referring various judgments, the Bench found that the sale conducted by the authorized officer in exercise of the powers conferred under Rule 8 of the Security Interest (Enforcement) Rule, 2002 by public auction or by inviting tenders from the public would be regarded as the sale in the open market and the price so accepted shall be the price which it would fetch if sold in the open market under Section 47A of the Stamp Act. The sale must be conducted by making a wide publication at least in one newspaper widely circulated in the particular city/town/district where the property is situated. The authorized officer shall not have any relation or connection with the intending purchaser.

31. Whether Recovery Officer has power to extend time for payment of auction amount?

Case Name: M/s. Kirlampudi Sugar Mills Ltd. Vs. Recovery Officer-II, DRT

Case Citation: (2022) ibclaw.in 77 HC

The Court observes that whether the Recovery Officer was right in issuing notices to the auction purchaser for payment of balance 75%, after expiry of 15 days time from the date of auction? Instant case is not one where there was any condition in the Sale Notice giving power to the Recovery Officer for extension of time. But, here is a case where the amount could not be paid by the auction purchaser due to an interim order passed by the High Court at the instance of the borrower and the subsequent order passed by the High Court at the instance of the borrower, who ultimately failed to succeed in the Writ Petitions filed by him. Some leverage of time should be given to the Recovery Officer to verify the fact situation and then proceed further, as directed by the High Court, more so, when no time-limit was fixed by the Court in its interim order. Further, the issuance of notice to auction purchaser by the Recovery officer cannot be found fault, for the reason, that the Hon’ble Court in its interim order, gave such power to him, namely, issuance of sale certificate, which can be only after payment of balance 75% of sale consideration, for which a notice is required to be given.

32. If a Bank has acted contrary to the terms of its own OTS policy, framed as per the RBI directives, a right is created in the petitioner which is certainly enforceable by way of a Writ Petition under Article 226 of the Constitution of India

Case Name: Amrik Singh Vs. DCB Bank Ltd. and another

Case Citation: (2022) ibclaw.in 74 HC

High Court held that having regard to the terms of the above Clause in the OTS Policy, it is not open to the respondents-Bank to take a stand as it did in its reply at Para 11 that once the petitioner was not able to fulfill his obligation as per the OTS, the OTS lapses and would no longer be valid. Since the respondents-Bank has acted contrary to the terms of its own OTS policy, framed as per the RBI directives, a right is created in the petitioner which is certainly enforceable by way of a Writ Petition under Article 226 of the Constitution of India.

33. Where the highest bid received during the public auction/tender is equal to the Reserve Price, no consent from the borrower is required under Rule 9 of the Security Interest (Enforcement) Rules, 2002

Case Name: Mahipal Singh Yadav Vs. Union Bank of India & Anr. 

Case Citation: (2022) ibclaw.in 20 HC

In this case, the highest bid amount received by the respondent Bank was the reserve price, the auction purchase was confirmed at the reserve price. The petitioner contended that the said auction at the reserve price, and confirmation thereof, are violative of Rule 9(2) of the Security Interest (Enforcement) Rules, 2002. Hon’ble High Court holds that the whole purpose of undertaking the sale of the immovable property through a public auction/ tender would be defeated, if the authorised officer is obliged to first obtain the consent of the borrower – where the highest bid/ offer received during the public auction/ tender is equal to the reserve price, and not higher. The second proviso to Rule 9(2) would become relevant and be attracted, only if the case is not covered by the first proviso, namely, where the amount offered towards sale price is equal to, or more than the reserve price specified under sub-Rule (5) of Rule 8. It is only when the offered sale price is lower than the reserve price, that the second proviso comes into play, and in such a situation, without the consent of the borrower and the secured creditor, the authorised officer cannot confirm the sale. The second proviso to Rule 9(2) provides flexibility to the concerned parties, namely, the borrower and the secured creditor, to sell the secured asset, with their consent, at a price which is even below the reserve price.

34. No duty is cast upon the District Magistrate to put the defaulter borrower on notice before passing any order under the section 14 of the SARFAESI Act, 2002

Case Name: Adams Marketing Pvt. Ltd. & Ors. Vs. State Bank of India & Anr.

Case Citation: (2022) ibclaw.in 19 HC

Section 14(3) of the Act, clearly provides that no Act of the District Magistrate or any officer authorized by the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority. From the discussion made above it is clear that no duty is cast upon the District Magistrate to put the defaulter borrower on notice before passing any order under the section 14 of the Act. Therefore, question of violation of Principle of Natural Justice by the District Magistrate in a proceeding under Section 14 of the Act or the order is bad being passed behind the borrower does not arise. This court does not find any illegality in the order passed by the District Magistrate on 02.08.18 and in view of Section 14(3) the same is barred from being challenged in any Court of law. Therefore, the question of the petitions of the petitioners being bared by limitation as held by DRT, Kolkata also does not arise.

35. Scope of exercise of jurisdiction by the authorities concerned, while examining an application under Section 14 of the SARFAESI Act, 2002

Case Name: Bajaj Finance Ltd. Vs. M/s. Ali Agency and Others

Case Citation: (2022) ibclaw.in 12 HC

The following issues would arise for consideration in this case:-

i. Whether the present writ petition is maintainable in view of the remedy provided under Section 17 of the SARFAESI Act, 2002?

ii. Whether Chief Judicial Magistrate would have the jurisdiction to entertain an application under Section 14 of the SARFAESI Act, 2002?

iii. Scope of exercise of jurisdiction by the authorities concerned, while examining an application under Section 14 of the Securitisation Act, 2002.

iv. Relief to which the petitioner would be entitled to in the instant petition

36. If after issuance of section 13(2) notice, the bank itself initiates proceedings under the RDB Act for recovery of any debt and invites an adjudication on the quantum of debt due to it, they cannot thereafter turn around and proceed to demand or enforce security interest for any amount, more than what is quantified by the Tribunal

Case Name: M/s Annam Steels (P) Ltd. Vs. M/s Canara Bank Ltd.

Case Citation: (2022) ibclaw.in 11 HC

Hon’ble High Court holds that if after issuance of section 13(2) notice, the bank itself initiates proceedings under the RDB Act for recovery of any debt and invites an adjudication on the quantum of debt due to it, they cannot thereafter turn around and proceed to demand or enforce security interest for any amount, more than what is quantified by the Tribunal. Fairness of the lender demands that the bank ought not to be permitted to recover anything more than what has already been quantified by the Tribunal. Therefore, on an appreciation of the various statutory provisions, this Court is of the view that once the DRT quantifies the debt due from the borrower, on the basis of an application under section 19 of the RDB Act, the bank is not entitled to seek enforcement of the security interest for any amount more than what is quantified.

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RBI Circular | Acquisition of financial assets by an ARC from another ARC

03rd Jul, 2019

On June 28, 2019, the Reserve Bank of India (“ RBI ”) issued a circular on ‘Permission to acquire financial asset from other Asset Reconstruction Companies (ARCs)’ (“ Circular ”). 

Vide  the Circular, the RBI has set out the following conditions for an asset reconstruction company (“ ARC ”) to acquire financial asset(s) from another ARC:

1. The transaction is settled on cash basis.

2. Price discovery for such transaction is not prejudicial to the interest of security receipt holders. 

3. The selling ARC will utilize the proceeds so received for the redemption of underlying security receipts. 

4. The date of redemption of underlying security receipts and total period of realisation shall not extend beyond 8 (eight) years from the date of acquisition of the financial asset by the first ARC.

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Asset Reconstruction Companies (ARCs)

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. So, ARCs are in the business of buying bad loans from banks. ARC is a company registered under the companies Act and registered with Reserve Bank of India under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

SARFAESI Act provides the legal basis of setting up an Asset Reconstruction Company (ARC) in India. ARCs are regulated by RBI as a Non-Banking Financial Company (NBFC) under RBI Act, 1934. They function under the supervision and control of the Reserve Bank of India (RBI). 100% Foreign Direct Investment (FDI) in Asset Restructuring Companies under the Automatic route.

The Asset Reconstruction Companies (ARCs) through SARFAESI Act, “enables the secured creditors to realise the long-term assets, manage problems of liquidity, asset liability mismatch and recovery of their dues stuck in the non-performing assets, by exercising the powers under section 13(4), without the intervention of the Court or Tribunal, to take possession of the securities and sell them by adopting the measures for recovery or reconstruction as per the provisions of the act.” As per RBI, ARC performs the functions namely Acquisition of financial assets, Change or takeover of Management or Sale or Lease of Business of the Borrower, Rescheduling of Debts, Enforcement of Security Interest and Settlement of dues payable by the borrower.

For legal purposes, these entities are considered to be banking entities. Therefore the laws that apply to banking companies also apply to Asset Reconstruction Companies. Also, they are subject to the same regulation as banks are. Therefore they are also governed by the same regulators as banks are i.e. banking ombudsmen.

From the above paragraph, we can understand the functions of ARC as follows:

Acquisition of financial assets

Change or takeover of Management / Sale or Lease of Business of the Borrower

Rescheduling of Debts

Enforcement of Security Interest

Settlement of dues payable by the borrower

The origin of ARCs is normally credited to a 1991 report on financial sector reforms by a panel chaired by former RBI Governor M.Narasimham. Accounting policies of the banking system until the 1990s didn’t include any norms for setting aside funds against bad loans. RBI released its first set of norms to classify bad loans or non-performing assets in October 1990. It led to a pile of bad loans in most public sector banks and development financial institutions was unearthed. The Narasimhan Panel recommended the establishment of an asset reconstruction fund or asset reconstruction company to flush bad loans out of the system.

The Board for Industrial and financial Reconstruction, set up as a part of the Department of Financial Services of the Ministry of Finance, in January 1987. Its objective was to determine the sickness of industrial companies and to assist in reviving them. BIFR showed little success in tackling industrial sickness. That and delays in winding-up procedures led to the establishment of debt recovery tribunals (DRTs). The objective was a speedy recovery of money from defaulters who had borrowed from banks and financial institutions. But DRTs, too, could not speed up the recovery procedures in most cases as they lacked sufficient judicial experience. This resulted in a lot of pending cases. Hence, ARCs were set up to enable faster recovery without the intervention of the court.

As of May 31, 2021, there are 28 Asset Reconstruction Companies that have been registered under the Reserve Bank of India. The first off the block, Asset Reconstruction Company (India) Ltd. or Arcil was set up in 2002 by four banks: SBI, ICICI Bank, Punjab National Bank and IDBI Bank. While Arcil has worked on Rs.78, 000 crore of debt over the years, the action now has shifted to the promoter-led ARCs that mushroomed later. Lenders have decided to initially transfer 22 bad loan accounts of ₹89,000 crore to the proposed National Asset Reconstruction Company Limited (NARCL), aiding the cleanup of their balance sheets. The aggregate amount of bad loans likely to be transferred in trenches will be ₹2 trillion.

In the Budget 2021-2022, Asset Reconstruction Company has been proposed to be set up by State owned and Private Sector banks, and there will be no equity contribution from the government. While the Central government will not provide any direct equity support to the ARC, it may provide the sovereign guarantee that could be needed to meet regulatory requirements.

The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs.2-5 lakh crores that remain unresolved in around 70 large accounts. This is being considered as the government’s version of a Bad bank. This function of ARC helps banks to concentrate in normal banking activities rather than going after the defaulters by wasting their time and effort.

As per amendment made in SARFAESI Act in 2016, an ARC should have a minimum net owned fun Rs.2 crore. The RBI raised this amount to Rs.100 crore in 2017. The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets. These assets are used to determine the minimum amount of capital that must be held by banks and other financial institutions in order to reduce the risk of insolvency.

Of the existing ARCs, only 3 to 4 are adequately capitalized, while the more than dozen remaining are thinly capitalized- necessitating the need to set up a new structure to resolve stressed assets urgently. In a report released by RBI it was said that banks gross non-performing assets my raise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario.

The transfer of stressed assets to ARC will happen at net book value, which is the value of assets minus the provisioning done by banks against these assets. This could enable the banks to alleviate its losses from NPAs. The bank will get 15% cash and 85% security receipts against bad debt that will be sold to ARC.

RECOVERY MECHANISM OF NPA BY ARCs

The loan amount taken by a client by providing mortgaged asset will be converted into NPA if the borrower fails to repay it and it is due for 90 days or more. Now the bank has the option either to recover the loan itself or sale that NPA to an ARC. ARC will raise the necessary funds through a subscription instrument floated by the trust. This instrument is known as Security Receipt (SR) and this will be issued to qualified institutional buyers. The banks or financial institutions (FIs), who desire to transfer their bad assets to ARCs, invite intending ARCs to express their interest which will show their willingness to acquire the financial assets of the Banks/FIs. The seller Banks/FIs detail out their terms and conditions of sale of financial assets which are to be accepted by intending ARCs. Before giving the price bid by the intending ARCs, due diligence is to be taken. The ARCs would give indicative offer to seller bank or FI. On receipt of acceptance from seller, they execute assignment of debt with seller bank/FI so that SC/RC may take further steps for resolution of acquired NPAs. The non-fund based facilities are generally not taken over since these are obligations. Until and unless these are crystallized as liabilities, these are not taken over. In case these facilities are crystallized as liability ARCs also take over them. The assets will be taken over either on sale basis or agency basis after applying certain discount. The discount will be worked out in consultation with banks/FIs and it is based on various factors like security value, promoters profile, the current status of the assets (whether running or idle), age, product market, etc. The whole process is to be done in a transparent manner and on mutually agreed terms. In case of consortium or multiple banking, if 75 per cent of the lenders by value agree then the remaining banks/FIs will be obliged to accept the offer by the ARC. The borrower does not have the right to oppose the transfer of assets to ARCs, if the board of the respective banks/FI has agreed for such transfer. Any dispute between the ARCs and Banks/FIs shall be resolved only through arbitrator and no one can approach the courts. Almost all the State Governments have rationalized the rates of stamp duty for assignment of debts and registration charges to smoothen the process for acquisition of financial assets by the ARCs.

The RBI has set up the Sudarshan Sen Committee to review the working of Asset Restructuring Companies comprehensively. It will recommend suitable measures for enabling them to meet the growing requirements. The committee shall submit its report in 3 months’ time.

ARCs have more than 2 decades of experience in the resolution of stressed assets in India. We should leverage this capacity to the fullest. By tweaking some regulations, ARCs can become a potent solution to the growing crisis of the NPAs.

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Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

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Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt , and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt. In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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Asset Reconstruction Companies (ARCs) – Business Model

Updated on : Dec 7th, 2021

Banks are financial institutions that are engaged principally in the business of money lending and money borrowing. The customer base of the banking sector is very large and there is also a substantial risk involved in lending money.

While the bank always has the option of taking legal action on the defaulting borrowers, it is not always economically feasible to do so. The bank sometimes decides to just cut its losses, clean up its balance sheet and keep the business moving towards better avenues. This is where an Asset Reconstruction Company (ABC) comes in.

Asset Reconstruction Company

An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.

The asset reconstruction companies or ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).

The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets. Thus ARCs are engaged in the business of asset reconstruction or securitisation or both.

All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The required funds to purchase such such debts can be raised from Qualified Buyers.

Asset Reconstruction

It is the acquisition of any right or interest of any bank or financial institution in loans, advances granted, debentures, bonds, guarantees or any other credit facility extended by banks for the purpose of its realisation. Such loans, advances, bonds, guarantees and other credit facilities are together known by a term – ‘financial assistance’.

Securitisation

It is the acquisition of financial assets either by way of issuing security receipts to Qualified Buyers or any other means. Such security receipts would represent an undivided interest in the financial assets.

Qualified Buyers

Qualified Buyers include Financial Institutions, Insurance companies, Banks, State Financial Corporations, State Industrial Development Corporations, trustee or ARCs registered under SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of mutual funds, pension funds, FIIs, etc. The Qualified Buyers (QBs) are the only persons from whom the ARC can raise funds.

Working of the ARC

The working of the ARC can be summarized by the following diagram:

The business of asset reconstruction or securitisation may be commenced only after obtaining a registration certificate under Section 3 of the SARFAESI Act, 2002. The main requirement in this regard is that the ‘net owned funds’ as prescribed in the RBI Act should be Rs. 100 crore or more.

Process of Asset Reconstruction by ABC

The main intention of acquiring debts / NPAs is to ultimately realise the debts owed by them. However, the process is not a simple one. The ARCs have the following options in this regard:

• Change or takeover of the management of the business of the borrower.
• Sale or lease of such business.
• Rescheduling the payment of debts – offering alternative schemes, arrangements for the payment of the same.
• Enforcing the security interest offered in accordance with the law.
• Taking possession of the assets offered as security.
• Converting a portion of the debt into shares.

Type of Debts ARC can Take Over

The ARC can take over only secured debts which have been classified as a non-performing asset (NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give a notice of 90 days before it qualifies to be taken over.

Non-performing Assets

Banks and other financial institutions are required to classify the debts owned by them into the following four categories:

• Sub-standard

The criteria for the classification into such categories depends upon the type of financial institution and the regulatory authority governing such bank or financial institution. Out of the above 4 categories, a non-performing asset would be either a sub-standard, doubtful or a loss asset.

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I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more

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Assignment Of Debt Agreement

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What is an assignment of debt agreement.

An assignment of debt agreement is a legal document between a debtor and creditor that outlines the repayment terms. An assignment of debt agreement can be used as an alternative to bankruptcy, but several requirements must be met for it to work.

In addition, if obligations are not met under a debt agreement, it might still be necessary to file for bankruptcy later on. Therefore, consulting with an attorney specializing in debt agreements is always recommended before entering into one of these contracts.

Assignment Of Debt Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10 5 exhibit1024f10qsbmay04.htm EXHIBIT 10.24 , Viewed December 20, 2021, View Source on SEC .

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2008 - Present: Sole Practitioner – Dennis W. Winkler, P.C. Practice primarily in finance and business transactions, as well as commercial real estate transactions. Represent developers, investors, lenders, and businesses, in such matters as: corporate entity selection, drafting and negotiating complex asset purchase agreements, corporate mergers and sales, stock purchase agreements, and various other business contracts for closely related businesses. Involved in a variety of real estate developments, multi-family apartment buildings, construction and acquisition financing, commercial leasing, sophisticated workout transactions, joint ventures, and tax-deferred exchanges. Advise on tax and other savings incentives available to business owners and real estate owners in Illinois. Advise companies involved in related real estate activities such as sales, leasing, property management, brokerage, and construction. Tax experience that includes the representation of taxpayers in State and Federal controversies including: sales/excess tax disputes and responsible parties’ tax assessment protest. Additionally, Dennis has experience in the protest of real estate taxes of commercial and multi-family real estate. As a legal and business advisor, Dennis is committed to helping clients find, develop, and close deals that further their business objectives. Dennis regularly advises entrepreneurs and closely held businesses on matters incidental to their day-to-day business operations as well as their capital raising and start-up needs, corporate structure, private equity raises, and operating agreements. Much like general counsel, Dennis’s breadth of experience allows him to not only provide strategic planning and routine business transactional support to companies, but he also regularly advises on a number of unique issues facing companies by spotting issues and engaging specialists when needed, such as intellectual property, environmental, and bankruptcy counsel. As such, Dennis has been actively involved in sales and acquisitions of manufacturing companies, trucking companies, and logistics companies.

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...has stepped in to shoes of the Dena Bank under Assignment deed dated 18-12-2018. It is submitted that the petitioner being Financial Institution, the provision of SARFAESI Act will be applicable and...that under due process of law, the petitioner has stepped into the shoes of the said Dena Bank under the Assignment deed , the petitioner is justified in making an application for substituting itself in place of Dena Bank for any fur...therefore, in view of the Assignment deed , the petitioner is required to be substituted in place of the then Dena Bank. 3. Learned AGP opposes to the application and submits that...

...stepped in to shoes of the Indian Bank under Assignment deed dated 16-04-2018. It is submitted that the petitioner being Financial Institution, the provision of SARFAESI Act will be applicable and...on 08-12-2017 and that under due process of law, the petitioner has stepped into the shoes of the said Indian Bank under the Assignment deed , the petitioner is justified in making an application for substituting itself in place of I...therefore, in view of the Assignment deed , the petitioner is required to be substituted in place of the then Indian Bank. 3. Learned AGP opposes to the application and submits that...

...( SARFAESI ). The petitioner entered into an Assignment Deed dated 28.03.2013 at Chennai with City Union Bank Ltd., under which the City Union Bank has assigned loans together with rights, title...Manufacturing India Pvt. Ltd., which is a borrower and the Assignment Deed was entered into under Section 5(1)(b) of the SARFAESI Act.3. When the petitioner presented the document for..., directing the third respondent to register the Assignment Deed dated 28.03.2013, which was presented for registration on 17.04.2013 in accordance with G.O.Ms No. 21.CT dated 04.03.2005, Notification-1...

....3. This writ petition is filed with the following relief:-“to issue a writ of certiorarified mandamus calling for the records of the second respondent in Assignment Deed dated 31.12.2008 under ...in S.F No. 378 of Muthannampalayam Village Chettipalayam, Dharapuram Road, Tirupur Taluk Coimbatore District among others based on the registration of the said Assignment Deed and quash the said...registration holding the debt had been fully discharged”.4. In this writ petition, the petitioner seeks to challenge the Assignment Deed dated 31.12.2008, by raising very many grounds...

...Original Registered Assignment Deed dated 29.03.2022 to the petitioner. 2.The learned counsel for the petitioner vehemently contended that petitioner company assigned the secured asset viz., account of the borrower to the second res...of India praying to issue a Writ of Mandamus, directing the 1strespondent to release the Original Registered Assignment Deed dated 29.03.2022 to the petitioner. For Petitioner : Mr.Srinath...registration of the subject Assignment Deed and the matter was posted for hearing today. Today, the learned Additional Government Pleader placed a status report filed by the first respondent, wherein, it is...

...circumstances, this Court is of the view that as a tentative measures, the petitioner's assignment deed for the transaction relating to the assignment of assets under the SARFAESI Act executed by the...there is no stamp duty separately fixed for an assignment in favour of the reconstruction company in terms of SARFAESI Act. It is for that reason, the Government has also decided to constitute a High...A. Muhamed Mustaque, J.:— The petitioner is an Asset Reconstruction Company referable under the SARFAESI Act.2. The issue pertains to the stamp duty payable by the company...

.... Pursuant to the said Assignment Deed dated 25.5.2011, IFCI caused a Possession Notice dated 23.6.2012 and then publication was effected in Tamil and English dailies under Section 13(4) of the SARFAESI A...14(3) of the SARFAESI Act.15. It is further to be noted that after knowing fully well that the Deed of Assignment executed on 25.5.2011 is not valid in the eye of law, the...Petitioner-Company and the Tribunal rejected the Petition filed by the IIBI.(ii) IIBI Bank has executed a Deed of Assignment on 25.5.2011, at Calcutta, whereby various financial...

...permitted under section 5 of the sarfaesi act. The registration of the deed of assignment is a mandatory requirement of law and unless the deed is registered, the assignment of title and interest of the..., 2002 (for short, the SARFAESI Act). Appellant No. 1, thereafter, wrote a letter to the defendants, who were the guarantors/mortgagors, informing them about the assignment of the debt. Appellant No. 2...after the registration of the assignment deed , which could not be done due to strike in the Registration Department in Ludhiana. The learned Tribunal has allowed that LA. and dismissed the O.A by the...

...the assignment deed cannot be said to be ‘fraudulent’.23. It is further submitted that the word ‘fraud’/‘fraudulent’ are used in the plaint only with a view to bring the suit maintainable before the civil...- appellant herein as a guarantor and therefore Assignment deed is fraudulent. Therefore, it is the case on behalf of the plaintiff - appellant herein that the suit in which there are allegations of ‘fraud’ with respect to the ...Applicant herein under the Assignment Deed dated 30.06.2018, arid consequently, declare that the 1 Defendant is not a secured creditor vis-a-vis, the Applicant herein; and...

...willing to regularise his loan account by making payments and reconciling his statement of account with the respondent financial institution. Ld.Counsel for applicant submits that, Assignment Deed in favour of 1stresponde...while issuing the impugned possession notice, and that the Assignment Deed is duly empowering 1strespondent to exercise their SARFAESI rights against the mortgage executed by applicant as...1strespondent financial institution has filed its counter and typed set of documents evidencing its actions. It is submitted that pursuant to the Assignment Deed dated 27.09.2017, 1strespondent has...

...the petitioner has executed the Deed of Assignment with the original lender in the year 2019 after passing of the order under Section 14 of the SARFAESI Act. 3.1...Admittedly in the facts of the case, the order under Section 14 of SARFAESI Act is passed on 10.9.2018 prior to the date of Deed of Assignment on 5.11.2019. Therefore, it cannot be said that the... 2. It is the case of the petitioner that the petitioner has executed a Deed of Assignment on 5.11.2019 and acquired the debt of the original lender - Religare Finve...

...Karumariamman Educational Trust has been assigned to the petitioner, which is an Asset Reconstruction Company as per the provisions of Section 3 of the SARFAESI Act, under an assignment deed dated 24.11.2020.... Sri Devi Karumariamman Educational Trust was operating two bank accounts with the respondent which are mentioned in Schedule-A to the writ petition. The assignment deed dated 24.11.2020 has been filed...along with this writ petition. 4. The learned counsel appearing for the respondent /bank on instructions would submit that they are not disputing the said assignment ...

.... The rights and claims of the appellant under the latter was the only issue, and has not been considered at all. The deed of assignment dated 28-7-2010 was subsisting and was challenged by none. The...creditor holding first charge consequent to the deed of assignment in its favour dated 28-7-2010 from IFCI. In support of the relief sought, reliance was also placed on the pursis dated 21-11-2011 filed by...of the Transfer of Property Act are not applicable to the facts of the present case as IFCI has transferred the debts of the company in liquidation in favour of the applicant by deed of assignment and...

...as per the agreed terms and conditions of the loan agreement and also as per RBI guidelines. Hence the claim amount is proper. Further the Assignment Deed was executed by the Assignor in favour of the applicant is as per section 3 o.... Therefore, the Assignment Deed is valid. 12. The main objections of the defendant is that the OA is barred by limitation. The.... Brief averment of Application :- 2. The Applicant had been assigned the debts of Barclays Bank PLC under Assignment dated 06.11.2012. The defendant in this OA is one of the...

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...from further pursuing its Petition under the provisions of the Insolvency and Bakruptcy Code, 2016 (Annexure P-2) before NCLT, Chandigarh in the absence of a valid assignment deed in its favour. ...has not challenged any proceedings pending under SARFAESI Act or IBC, 2016 in the present writ petition and it is only the deed of assignment by original lender i.e., respondent no.2-IndusInd Bank in...various prayers in this writ petition which are reproduced as hereunder:- "i. Issue a writ in the nature of Certiorari for quashing the impugned assignment deed ...

...Stand By Letter of Credit (SBLC) in favour of the petitioner through an assignment deed . It is submitted that since on account of the continuous default of the respondent, and HSBC having already classified the account of the respon... assignment deed before any authority, it is submitted that various clarifications on the assignment deed were sought from HSBC; the assignment deed was challenged in the reply to the ...09.05.2012. It is explained in the letter dated 09.05.2012 that due to some clerical mistake, the particulars of loan as mentioned in Clause 1 Details of Loans of Schedule 1 of the deed of assignment deed dated 21.03.2012 r...

... assignment deed , dated 04.10.2012, based on which, the 1st respondent claims right, is invalid and not in accordance with law. After hearing the petitioners, the DRT, Madurai, has granted a conditional order of stay, in respect of p...to the banks to assign the debt in favor of the asset reconstruction company. The present petitioners is an Asset Reconstruction Company. On perusal of assignment deed , the applicant bank has assigned debt to petitioners under secti...arguments. The SARFAESI Act gives right to the banks to assign the debt in favour of the asset reconstruction company. The present petitioner is an Asset Reconstruction Company. On perusal of assignment deed , the applicant ...

...instant writ petition for a Mandamus, directing the respondents herein, to treat the certified copy of the registered Assignment Deed dated 23.03.1978 and the Certified copy of the Sale Deed bearing Document No.4532/P41/200..., the petitioner has chosen to file the present writ petition. 8. Learned Additional Advocate General further submitted that, if the Registered Assignment Deed dated 23.03.1978 and certified copy of the Sale .... Assignment Deed was with SIDCO from 1.8.1976, on the day, when charge was taken by SIDCO, as an Agent of the Government. In the year 1988, the company sought permission from SIDCO, for mortgage of...

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Assignment of Debts under the Insolvency and Bankruptcy Code

[ Aayush Mitruka  is a lawyer based in Delhi]

Synergies Dooray Automotive, the first corporate entity to be resolved under the new Insolvency and Bankruptcy Code ( Code ) posed a few very interesting questions and highlighted some grey areas in Code. In the present post I intend to discuss one important issue that came up in the context of assignment of debts.

To put things in perspective, the Code stipulates that after the National Company Law Tribunal ( NCLT ) admits an insolvency application, the Insolvency Resolution Professional ( IRP ), among other things, constitutes a committee of creditors ( CoC ) on the basis of claims received against the corporate debtor. The committee comprises all the financial creditors of the corporate debtor, and they are assigned voting shares based on the size of their debt. However, a related party to whom a corporate debtor owes a financial debt does not have any right of representation, participation or voting in the meetings of the CoC.

Before discussing the issue, it will be beneficial to allude to the brief facts of the Synergies Dooray case. In November 2016, just a week before the Code became operational, Synergies Castings, a sister concern of Synergies Dooray, assigned a major portion of its debt to third-party Millennium Finance by way of three assignment deeds. Note that Synergies Castings had acquired the debt from a consortium of banks by way of a one-time settlement in 2011. In the usual course, Synergies Castings, being a related party would not have been permitted to participate/vote in the meetings of the CoC. Therefore, the maneuvering had secured Millennium Finance ( Millennium ) a place in the CoC.

Understandably, there is no reason to complain when a creditor (related party or otherwise) assigns its loan to somebody, as that is well within their rights. However the important question is whether the assignee should get a seat in the CoC by virtue of the assignment? The Code does not seem to directly provide any answer in this regard. [1]

This particular question came up for consideration in an application filed by Edelweiss Asset Restructuring Company Limited ( Edelweiss ) against Synergies Dooray. Edelweiss challenged the assignment and the constitution of the CoC (which included Millennium), alleging that the assignment of debt by Synergies Casting to Millennium was carried out with the ulterior motive of reducing its (i.e. Edelweiss’) voting rights. It was also argued that the assignment deeds were inadequately stamped and unregistered. However, Edelweiss’ argument did not find favour with the NCLT, Hyderabad and while rejecting the application, the NCLT remarked :

“29. Therefore, the assignment deeds between the two entities also legal and permissible. At most it can be said to be similar to “tax planning” rather tax avoiding. Because of this assignment deed, not only the applicant’s share in total debt is reduced, but other financial creditors/Assignees share also proportionately reduced and they did not object to the same but only the applicant agitates with oblique motive/reasons best known to it. Therefore, a fraudulent attempt made to reduce the Applicant’s share in the total voting rights is not a plausible plea by the Applicant. In the absence of any documentary proof/evidence to the claim of the Applicant, the same is liable to be rejected. Accordingly, the bench rejects the above allegations/claim of the applicant.”

[Emphasis supplied]

Although the NCLT held that such an assignment was legal and permissible, it did not delve into the critical aspect of whether such an assignment would secure the assignee a seat in the CoC. The reasoning provided does not appear very convincing. This question ought to have been discussed at length. A reading of the above quoted paragraph also brings to fore that the decision lends it approval to an assignment undertaken even with the sole objective of securing a seat in the CoC because it is akin to “tax planning”. Edelweiss has preferred an appeal before the NCLAT and the matter is currently pending for its decision.

This issue was once again considered by the NCLT, Mumbai in the case of Fortune Pharma Private Limited . Interestingly, in this case, after filing applications initiating the corporate insolvency resolution process ( CIRP ) but before its admission, two related party creditors assigned their debts to an unrelated third party. Naturally, this diminished the voting share of the applicant creditor, who then filed an application contending that the assignments were executed with an ulterior motive. The NCLT held that disqualification that existed at the time of initiating the CIRP cannot be removed by a mere assignment. It noted that assignment is transfer of one’s right to recover debt to another person and that the rights of the ‘assignee’ are no better than those of an ‘assignor’. Accordingly, the assignee does not get the right to change its status from ‘related’ to ‘unrelated.’

In other words, the NCLT, Mumbai reasoned that since at the inception of the debt it belonged to a related party (who is barred to participate in the proceedings of CoC), the assignment of such a debt will not remove the bar. In my view, though the NCLT was correct in debarring the assignee from participating in the proceedings of the CoC, however the reasoning provided does not appear to inspire much confidence because of the following reasons.

First, it is important to understand that the bar is on the person who is holding the debt and not the nature of the debt per se. It will not be entirely correct to bar somebody (who is otherwise eligible) from voting just because it bought the debt from a related party. Imagine a situation where an original creditor (unrelated) assigns a debt to a related party. Now when this related party creditor assigns a debt to an unrelated X in the usual course of business, will X in this case be barred since at some point in time the debt was held by a related party?  The answer to this has to be in the negative.

Second, this will prove to be counter-productive and have unintended repercussions. It will strongly discourage genuine asset reconstruction companies or other interested parties from buying the debt from any related party creditor. Surely, the Code could not have intended to hinder assignments which are undertaken in the usual course of the business.

Third, how do we exactly deal with situations when a CIRP application is being made by an operational creditor under section 9 of the Code? An operational creditor needs to deliver to the corporate debtor a demand notice as per section 8 before invoking section 9. Do we, in these cases, also allow an assignment before filing of an application? It would be impractical to have a one-size-fits-all approach.

The two views and the approaches adopted by two benches of the NCLT on this critical question throws open a can of worms. Let us try to closely examine this issue.

Assignment is essentially a contractual concept and refers to an agreement by which the rights and obligations of one party can be transferred to another. By virtue of assignment, the assignee steps into the shoes of her assignor and agrees to be both bound by it and is entitled to enforce it. Further, to be valid, an assignment agreement must satisfy the requirements under the Indian Contract Act, 1872 ( Act ). Accordingly, an assignment agreement can be declared void under section 23 of the Act if the object of the assignment agreement is (a) of such a nature that, if permitted, it would defeat the provisions of any law; or (b) fraudulent; or (c) involves or implies injury to the person or property of another; or (d) the court regards it as immoral, or opposed to public policy.

At this juncture, it is significant to examine if the NCLT (which exercises summary jurisdiction) would have the power to undertake such an investigation or would it be the prerogative of a civil court? The language of section 60(5)(c) of the Code seem to suggest that the NCLT will have the authority since this will be a “ question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code .”

It cannot be the intention of the Code to allow the promoters to appoint a proxy on the CoC by means of an assignment. It is a well settled principle of law that what may not be done directly cannot be permitted to be done indirectly. However, at the same time it must also be borne in mind that the Code does not aim to discourage any bona fide assignments. In the absence of any guidance in the Code, in order to determine the validity of such assignments, the NCLT ought to investigate the objective behind the assignment. In this regard, the time and the circumstances under which the assignment is made would be one relevant factor. Among other factors, the NCLT may also consider if the assignment is executed in the usual and ordinary course of the business.

This issue undermines the efficiency of the Code and therefore warrants serious consideration. The Code envisages provisions for scrutinizing certain transactions which may compromise the CIRP. One way to address this issue could be by amending the law to include such assignments also within its ambit. Pertinently, under section 240 of the Code, the Insolvency and Bankruptcy Board of India has the power to make regulations. However, since Parliament has been quite proactive in the past in preventing the promoters trying to game the system, it would not be surprising if an amendment is brought in to bring some clarity. It remains to be seen how and when this issue does gets finally elucidated.

– Aayush Mitruka 

[1] Regulation 28 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 does not address this issue.

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Thanks for the above post. Its very helpful. Can you share a draft Assignment Agreement as per IBC?

Ad Mr Ayush. Sir.we have settlements our loans with J.M Arc on 12.8.15 in rs 7 Cr.J.M ARC not given permission to sell extra open land to deposit upfront 25% payments. Hence company not sine agreement. B.J.M ARC revoked on 11.12.15.J.M ARC file petition with NCLt for rs 14.5 cr in application. Pls advice your view.

With respect to Mr Mitruka’s views on the issue of assignment, I humbly submit that no amendment in the Code is called for. The Code, in several places, has expressly equated a creditor (by virtue of a business deal) with a creditor who has simply acquired a debt from another, say through assignment. Once the assignment agreement comes out unscathed, the assignee (of any debt) is as much a creditor as any other creditor. So, post the assignment, Millenium is a creditor in his own right. This way there is no question of any ‘related party’. A financial creditor gets a seat in the CoC, irrespective of his lineage. This should be looked at in this simple manner. In the proceedings before NCLT, Hyderabad, all that was said was that these 3 Agreements smacked of malafide because their date of signing was so close to the date of SICA Repeal . To be sure, I fail to see the connection between the two. It was known to all and sundry that SICA Repeal will be brought into force as soon as NCLTs got ready to be constituted.What was the fault of the Assignor or Assignee , even if agreements were signed on the very day on which SICA Repeal was made effective. Edelweiss does not appear to have led any evidence to show that the parties were planning to get around the section 21(2) by signing those assignment agreements. In fact, if the objective was just to get around this section, the date of signing did not need to be close to the date of SICA Repeal coming into effect. Neither NCLT nor the RP could afford to waste time on mere allegations unsupported by any evidence.

Please sir help…. Bank insolvency pr assignment ready krna h… So plz explain I am so very confused..

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NCLAT | Assignment of debt cannot be challenged in petition under Section 7 of I&B Code

National Company Law Appellate Tribunal (NCLAT): A Bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an

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National Company Law Appellate Tribunal (NCLAT):  A Bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed by the Executive Director and shareholder of GPI Textiles Ltd. (Corporate Debtor) against the order of National Company Law Tribunal, Chandigarh whereby it had admitted an application under Section 7 of the Insolvency Resolution Process against GPI filed by Phoenix ARC (P) Ltd. (Financial Creditor).

The loan was originally granted to GPI by HSBC Bank. Subsequently, GPI became an NPA (non-performing asset). HSBC assigned the debt to Phoenix for recovery thereof. Thereafter, Phoenix filed the application under Section 7 as mentioned above. Pooja Mahajan, Mahima Singh and Gaurav Arora, Advocates appeared for the appellant who disputed the proper assignment of debt to Phoenix by HSBC and according to them Phoenix was not the Financial Creditor under the Code.

On perusal of the record, the Appellate Tribunal found that the GPI had full knowledge of the assignment which was done an Assignment Deed on record. It relied on  Innoventive Industries Ltd. v. Union of India,  (2018) 1 SCC 407 wherein it was held that the Adjudicating Authority (NCLT in this case) has merely to see the records the information or the evidence produced by the Financial creditor to satisfy itself that default has occurred. In the present case, the appellant sought a declaration that assignment made by HSBC to Phoenix was illegal. This, according to the Court, could be raised only in a civil suit. Reiterating objectives of the Code, the Court observed that  “the assignment cannot be challenged in the petition under Section 7 and that too by a party who had the knowledge of Assignment Deed”.  In such a view of the matter, it was held that the appellant was not entitled to either raise allegation of malafide against HSBC or allege that assignment was illegal. [Lalan Kumar Singh v. Phoenix ARC (P) Ltd.,  2018 SCC OnLine NCLAT 835 , dated 20-12-2018]

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Hello, This is the blog assignment of debt that cannot be challenged in petition under section is helping. thank you for share this blog

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India: Allahabad High Court On Stamp Duty On Debt Assignment

Introduction

Assignment of debt is one of the most common forms of transactions in financial markets. It essentially entails transfer of a debt from a creditor (assignor) to a third-party (assignee).

One of the biggest challenges faced in debt assignment transactions in India is the significant stamp duty implication on the deed of assignment. Considering the volume of assignment transactions undertaken generally by banks and financial institutions or by asset reconstruction companies (" ARCs "), the stamp duty levied becomes a significant cost in such transactions.

The Constitution of India (" Constitution ") confers upon the Parliament and each State Legislature the power to levy taxes and other duties. The subjects on which the Parliament or a State Legislature or both can legislate are specified in the Seventh Schedule of the Constitution. The Seventh Schedule is divided into 3 (three) lists:

• Union List;
• State List; and
• Concurrent List.

The Parliament has the exclusive power to legislate on the subjects enumerated in the Union List. The State List enumerates the subjects on which each State Legislature can legislate and such laws operate within the territory of each State. The Parliament, as well as the State Legislatures, have the power to legislate over the subjects listed in the Concurrent List.

The entry pertaining to levy of stamp duty in the Union List is as follows: -

" 91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts."

The entry pertaining to levy of stamp duty in the State List is as follows: -

" 63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty. "

The entry pertaining to levy of stamp duty in the Concurrent List is as follows: -

" 44. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty . " [emphasis supplied]

From the aforementioned entries, it is clear that the power to legislate on the rate of stamp duty chargeable on instruments of debt assignment (since it is not covered under Entry 91 of the Union List) is with the State Legislature. However, the power to determine whether stamp duty can be charged or not on a specific instrument is in the Concurrent List.

In this regard, it may be noted that pursuant to the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (" Amendment Act "), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (" SARFAESI ") and the Indian Stamp Act were amended to provide for an exemption from stamp duty on a deed of assignment in favour of an ARC.

As mentioned above, the power to legislate on whether stamp duty is payable or not on an instrument is in the Concurrent List. Therefore, the Parliament has the power to legislate on the aforesaid subject.

Pursuant to the Amendment Act, section 5(1A) was inserted in SARFAESI which provides that any agreement or document for transfer or assignment of rights or interest in financial assets under section 5(1) of SARFAESI in favour of an ARC is not liable to payment of stamp duty.

In several States, notifications have been issued for remission and/ or reduction of stamp duties on debt assignment transactions. For instance, in Rajasthan, the stamp duty chargeable on any agreement or other document executed for transfer or assignment of rights or interests in financial assets of banks or financial institutions under section 5 of SARFAESI in favour of ARCs 1 has been remitted. Further, in Maharashtra, the stamp duty on instrument of securitization of loans or assignment of debt with underlying security has been reduced to 0.1% (zero point one percent) of the loan securitized or the debt assigned subject to a maximum of Rs. 1,00,000 (Rupees one lac) 2 .

Certain State Governments, such as those of Rajasthan and Tamil Nadu have reduced the stamp duty based on the nature of the financial asset being assigned. In Rajasthan, the stamp duty has been reduced for assignment of standard assets whilst in Tamil Nadu, the stamp duty has been reduced for assignment of non-performing assets and assignment in favour of ARCs.

This paper discusses a decision passed by the Allahabad High Court in the case of Kotak Mahindra Bank Limited v. State of UP & Ors. 3 (" Kotak case "), where it was held that an instrument of assignment is chargeable with stamp duty under Article 62(c) (Transfer) of Schedule 1B of the Indian Stamp Act, as applicable in Uttar Pradesh (" UP Stamp Act "), as opposed to Article 23 (Conveyance) of Schedule 1B of the UP Stamp Act.

The stamp duty payable in various States under Article 23 or the relevant provision for conveyance is on an ad valorem basis whereas the stamp payable under Article 62(c) or relevant provision for transfer of interest secured, inter alia , by bond or mortgage deed, is a nominal amount. For instance, in Uttar Pradesh, the stamp duty payable under Article 62(c) is Rs. 100 (Rupees one hundred).

Decision in the Kotak case

In the Kotak case, Kotak Mahindra Bank Limited (" Kotak ") had purchased and acquired certain loans from State Bank of India (" Assignor ") along with the underlying securities.

The question for consideration before the full bench of the Allahabad High Court was whether the deed executed by the applicant with the underlying securities would be chargeable with duty under Article 62(c) or Article 23 of Schedule 1B of the UP Stamp Act.

The court observed that in order to determine whether an instrument is sufficiently stamped, one must look at the instrument in its entirety to find out the true character and the dominant purpose of the instrument. In this case it was observed that the dominant purpose of the deed of assignment entered into between Kotak and the Assignor (" Instrument "), was to transfer/ assign the debts along with the underlying securities, thereby, entitling Kotak to demand, receive and recover the debts in its own name and right.

Article 11 of Schedule 1B of the UP Stamp Act provides that an instrument of assignment can be charged to stamp duty either as a conveyance, a transfer or a transfer of lease. The court observed that since the Instrument was not a transfer of lease, it would either be a conveyance or a transfer.

The court referred to the definition of conveyance in the UP Stamp Act, which reads as follows:

" Conveyance" . — "Conveyance" includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for [by Schedule I, Schedule IA or Schedule IB] [as the case may be];" [emphasis supplied]

The court held that the term conveyance denotes an instrument in writing by which some title or interest is transferred from one person to other and that the use of the words "on sale" and "is transferred" denote that the document itself should create or vest a complete title in the subject matter of the transfer, in the vendee. In this case since under the Instrument, the rights of the Assignor to recover the debts secured by the underlying securities had been transferred to Kotak, it was held that the requirement of conveyance or sale cannot be said to be satisfied.

The court further observed that debt is purely an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property. Where a transaction does not affect the transfer of any immovable or movable property, Article 23 of Schedule 1B cannot have any applicability.

The court's view was that since debt along with underlying securities is an interest secured by bonds and/ or mortgages, transfer of such debt would be chargeable under Article 62(c).

The court further clarified that under the Instrument, merely the right under the contract to recover the debts had been transferred. Since the borrower(s) had never transferred the title in the immovable property given in security to the Assignor, the Assignor could merely transfer its rights i.e. mortgagee's rights in the property to recover the debts. It was further observed that the Assignor never had any title to the underlying securities and that it merely had the right to enforce the security interest upon default of the borrower(s) in repayment. The right transferred to Kotak was primarily the right to recover the debts, in accordance with law, by proceeding against the underlying security furnished by the bonds/ mortgage deed(s).

Therefore, the court held that the Instrument was chargeable with stamp duty under Article 62(c) of Schedule 1B of the UP Stamp Act.

Whilst coming to the conclusion that assignment of debt would not constitute a conveyance, the court referred to the definition of conveyance to state that debt is an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property.

In this regard, it may be noted that there are various judicial precedents 4 , where it has been held that an interest (including mortgage interest) in immovable property is itself immovable property.

However, even assuming assignment of debt with underlying securities over immovable property amounts to a conveyance, it may be pertinent to refer to the definition of conveyance in the UP Stamp Act which specifically excludes a conveyance which is otherwise provided for by the Schedule to the UP Stamp Act.

Article 62(c) of the UP Stamp Act reads as follows:

" 62. Transfer (whether with or without consideration) –

(c) of any interest secured by a bond, mortgage- deed or policy of insurance-- "

In view of the above, transfer of any interest secured by a mortgage deed, which is covered under Article 62(c), would be excluded from the meaning of conveyance and would be chargeable to stamp duty under Article 62.

In this regard it may be pertinent to refer to the definitions of 'bond' and 'mortgage deed' under the UP Stamp Act, which is as follows:

" " Bond " includes-

• any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;
• any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and
• any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another "

" " Mortgage-deed ". — "mortgage-deed" includes every instrument whereby, for the purpose of securing money advanced, or to be advanced, by way of loan, or an existing or future debt, or the performance of an engagement, one person transfers, or creates, to, or in favour of another, a right over or in respect of specified property; "

In view of the above, where a debt secured by a bond or a mortgage deed is assigned under a deed of assignment, the stamp duty payable on such deed of assignment will be under Article 62(c) of the UP Stamp Act or corresponding provisions of the Stamp Act of other States.

However, in cases of unsecured loans or loans secured by an equitable mortgage (where there is no mortgage deed), the deed of assignment would attract ad valorem stamp duty chargeable on conveyance, since the same will not get covered under Article 62(c) or similar provisions in other states.

The market practice until now has been to stamp the deed of assignment of debt under the relevant article for Conveyance in the applicable Stamp Act. In fact, in States such as Maharashtra, the State Government has issued notifications for reduction of stamp duty on a deed of assignment under the article for Conveyance.

The judgment passed by the Allahabad High Court in the Kotak case may prove to be a welcome step in reducing the incidence of stamp duty on debt assignment transactions. However, it would need to be seen whether in other States a similar view is taken by stamp duty authorities.

1. Notification No. F4(3)FD/Tax/2017-110 dated March 8, 2017 issued by Finance Department (Tax Division) Government Of Rajasthan.

2. Notification No.Mudrank-2002/875/C.R.173-M-1 dated May 6, 2002 issued by Revenue & Forests Department, Government of Maharashtra.

3. Reference Against MISC. Acts. No. 1 of 2016, order dated February 9, 2018.

4. Bank of Upper India Ltd. (in liquidation) v. Fanny Skinner and Ors. , AIR 1929 All 161. See also Prahlad Dalsukhrai and Ors. v. Maganlal Muljibhai Tewar , AIR 1952 Bom 454 and Harihar Pandey v. Vindhayachal Rai and Ors. , AIR 1949 Pat 170.

Originally published February 13, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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What is an Assignment of Debt?

By Vanessa Swain Senior Lawyer

Updated on February 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Perfecting Assignment

• Enforcing an Assigned Debt 

Recovery of an Assigned Debt

• Other Considerations 

Key Takeaways

Frequently asked questions.

I t is common for creditors, such as banks and other financiers, to assign their debt to a third party. Usually, an assig nment of debt is done in an effort to minimise the costs of recovery where a debtor has been delinquent for some time. This article looks at:

• what it means to ‘assign a debt’;
• the legal requirements to perfecting an assignment; and
• common problems with enforcing an assigned debt. 

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor ) transfer to the new owner (the assignee ). Once an assignment of debt has been perfected, the assignee can collect the full amount of the debt owed . This includes interest recoverable under the original contract, as if they were the original creditor. A debtor is still responsible for paying the outstanding debt after an assignment. However, now, the debt or must pay the debt to the assignee rather than the original creditor.

Purchasing debt can be a lucrative business. Creditors will generally sell debt at a loss, for example, 20c for each dollar owed. Although, the amount paid will vary depending on factors such as the age of the debt and the likelihood of recovery. This can be a tax write off for the assignor, while the assignee can take steps to recover 100% of the debt owed. 

In New South Wales, the requirements for a legally binding assignment of debt are set out in the Conveyancing Act :

• the assignment must be in writing. You do this in the form of a deed (deed of assignment) and both the assignor and assignee sign it; and
• the assignor must provide notice to the debtor. The requirement for notice must be express and must be in writing. The assignor must notify the debtor advising them of the debt’ s assign ment and to who it has been assigned. The assignee will send a separate notice to the debtor, putting them on notice that the debt is due and payable. They will also provide them with the necessary information to make payment. 

The assignor must send the notices to the debtor’s last known address.  

Debtor as a Joined Party

In some circumstances, a debtor will be joined as a party to the deed of assignment . There can be a great benefit in this approach . This is because the debtor can provide warranties that the debt is owed and has clear notice of the assignment. However, it is not always practical to do so for a few reasons:

• a debtor may not be on speaking terms with the assignor; 
• a debtor may not be prepared to co-operate or provide appropriate warranties; and
• the assignor or the assignee may not want the debtor to be made aware of the sale price . This occurs particularly where the sale price is at a significant discount.

If the debtor is not a party to the deed of assignment, proper notice of the assignment must be provided.  

An assignment of debt that has not been properly perfected will not constitute a legal debt owing to the assignee. Rather, the legal right to recover the debt will remain with the assignor. Only an equitable interest in the debt will transfer to the assignee.  

Enforcing an Assigned Debt 

After validly assigning a debt (in writing and notice has been provided to the debtor’s last known place of residence), the assignee is entitled to take any legal steps available to them to recover the outstanding debt. These recovery options include:

• commencing court proceedings;
• obtaining a judgment; and 
• enforcement of that judgment.

Suppose court proceedings have been commenced or judgment already entered in favour of the assignor. In that case, the assignee must take steps to have the proceedings or judgment formally changed into the assignee’s name.  

In our experience, recovery of an assigned debt can be problematic because:  

• debtors often do not understand the concept of debt assignment and may not be aware that their credit contract contains an assignment of debt clause;
• disputes can arise as to whether a lawful assignment of debt has arisen. A debtor may claim that the assignor did not provide them with the requisite notice of the assignment, or in some cases, a contract will specifically exclude the creditor from legally assigning a debt;
• proper records of the notice of assignment provided to the debtor must be maintained. If proper records have not been kept, it may be difficult to prove that notice has been properly given, which may invalidate the legal assignment; and
• the debtor has the right to make an offsetting claim in defence to any recovery action taken by the assignee. A debtor may raise an offsetting claim which has arisen out of a previous arrangement with the assignor (which the assignee may not be aware of). For example, the debtor may have entered into an agreement with the assignor whereby the assignor agreed to accept a lesser amount of the debt owed by way of settlement. Because the assignee acquires the same rights and obligations of the assignor, the terms of that previous settlement agreement will bind the assignee. The court may find that there is no debt owing by the debtor. In this case, the assignee will have been assigned nothing of value. 

Other Considerations 

When assigning a debt, it is essential that the assignee, in particular, considers relevant statutory limitation periods for commencing proceedings or enforcing a judgment debt . In New South Wales, the time limit:

• to file legal proceedings to recover debts is six years from the date of last payment or when the debtor admitted in writing that they owed the debt; and
• for enforcing a judgment debt is 12 years from the date of judgment.

An assignment of a debt does not extend these limitation periods.  

While there can be benefits to both the assignor and the assignee, an assignment of debt will be unenforceable if done incorrectly. Therefore, if you are considering assigning or being assigned a debt, it is important to seek legal advice. If you need help with drafting or reviewing a deed of assignment or wish to recover a debt that has been assigned to you, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.  

An assignment of debt is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once the assignee has validly assigned a debt, they are entitled to take any legal steps available to them to recover the outstanding debt. This includes commencing court proceedings, obtaining a judgment and enforcement of that judgment.

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Crying Myself to Sleep on the Biggest Cruise Ship Ever

Seven agonizing nights aboard the Icon of the Seas

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Updated at 2:44 p.m. ET on April 6, 2024.

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MY FIRST GLIMPSE of Royal Caribbean’s Icon of the Seas, from the window of an approaching Miami cab, brings on a feeling of vertigo, nausea, amazement, and distress. I shut my eyes in defense, as my brain tells my optic nerve to try again.

The ship makes no sense, vertically or horizontally. It makes no sense on sea, or on land, or in outer space. It looks like a hodgepodge of domes and minarets, tubes and canopies, like Istanbul had it been designed by idiots. Vibrant, oversignifying colors are stacked upon other such colors, decks perched over still more decks; the only comfort is a row of lifeboats ringing its perimeter. There is no imposed order, no cogent thought, and, for those who do not harbor a totalitarian sense of gigantomania, no visual mercy. This is the biggest cruise ship ever built, and I have been tasked with witnessing its inaugural voyage.

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“Author embarks on their first cruise-ship voyage” has been a staple of American essay writing for almost three decades, beginning with David Foster Wallace’s “A Supposedly Fun Thing I’ll Never Do Again,” which was first published in 1996 under the title “Shipping Out.” Since then, many admirable writers have widened and diversified the genre. Usually the essayist commissioned to take to the sea is in their first or second flush of youth and is ready to sharpen their wit against the hull of the offending vessel. I am 51, old and tired, having seen much of the world as a former travel journalist, and mostly what I do in both life and prose is shrug while muttering to my imaginary dachshund, “This too shall pass.” But the Icon of the Seas will not countenance a shrug. The Icon of the Seas is the Linda Loman of cruise ships, exclaiming that attention must be paid. And here I am in late January with my one piece of luggage and useless gray winter jacket and passport, zipping through the Port of Miami en route to the gangway that will separate me from the bulk of North America for more than seven days, ready to pay it in full.

The aforementioned gangway opens up directly onto a thriving mall (I will soon learn it is imperiously called the “Royal Promenade”), presently filled with yapping passengers beneath a ceiling studded with balloons ready to drop. Crew members from every part of the global South, as well as a few Balkans, are shepherding us along while pressing flutes of champagne into our hands. By a humming Starbucks, I drink as many of these as I can and prepare to find my cabin. I show my blue Suite Sky SeaPass Card (more on this later, much more) to a smiling woman from the Philippines, and she tells me to go “aft.” Which is where, now? As someone who has rarely sailed on a vessel grander than the Staten Island Ferry, I am confused. It turns out that the aft is the stern of the ship, or, for those of us who don’t know what a stern or an aft are, its ass. The nose of the ship, responsible for separating the waves before it, is also called a bow, and is marked for passengers as the FWD , or forward. The part of the contemporary sailing vessel where the malls are clustered is called the midship. I trust that you have enjoyed this nautical lesson.

I ascend via elevator to my suite on Deck 11. This is where I encounter my first terrible surprise. My suite windows and balcony do not face the ocean. Instead, they look out onto another shopping mall. This mall is the one that’s called Central Park, perhaps in homage to the Olmsted-designed bit of greenery in the middle of my hometown. Although on land I would be delighted to own a suite with Central Park views, here I am deeply depressed. To sail on a ship and not wake up to a vast blue carpet of ocean? Unthinkable.

Allow me a brief preamble here. The story you are reading was commissioned at a moment when most staterooms on the Icon were sold out. In fact, so enthralled by the prospect of this voyage were hard-core mariners that the ship’s entire inventory of guest rooms (the Icon can accommodate up to 7,600 passengers, but its inaugural journey was reduced to 5,000 or so for a less crowded experience) was almost immediately sold out. Hence, this publication was faced with the shocking prospect of paying nearly $19,000 to procure for this solitary passenger an entire suite—not including drinking expenses—all for the privilege of bringing you this article. But the suite in question doesn’t even have a view of the ocean! I sit down hard on my soft bed. Nineteen thousand dollars for this .

The viewless suite does have its pluses. In addition to all the Malin+Goetz products in my dual bathrooms, I am granted use of a dedicated Suite Deck lounge; access to Coastal Kitchen, a superior restaurant for Suites passengers; complimentary VOOM SM Surf & Stream (“the fastest Internet at Sea”) “for one device per person for the whole cruise duration”; a pair of bathrobes (one of which comes prestained with what looks like a large expectoration by the greenest lizard on Earth); and use of the Grove Suite Sun, an area on Decks 18 and 19 with food and deck chairs reserved exclusively for Suite passengers. I also get reserved seating for a performance of The Wizard of Oz , an ice-skating tribute to the periodic table, and similar provocations. The very color of my Suite Sky SeaPass Card, an oceanic blue as opposed to the cloying royal purple of the standard non-Suite passenger, will soon provoke envy and admiration. But as high as my status may be, there are those on board who have much higher status still, and I will soon learn to bow before them.

In preparation for sailing, I have “priced in,” as they say on Wall Street, the possibility that I may come from a somewhat different monde than many of the other cruisers. Without falling into stereotypes or preconceptions, I prepare myself for a friendly outspokenness on the part of my fellow seafarers that may not comply with modern DEI standards. I believe in meeting people halfway, and so the day before flying down to Miami, I visited what remains of Little Italy to purchase a popular T-shirt that reads DADDY’S LITTLE MEATBALL across the breast in the colors of the Italian flag. My wife recommended that I bring one of my many T-shirts featuring Snoopy and the Peanuts gang, as all Americans love the beagle and his friends. But I naively thought that my meatball T-shirt would be more suitable for conversation-starting. “Oh, and who is your ‘daddy’?” some might ask upon seeing it. “And how long have you been his ‘little meatball’?” And so on.

I put on my meatball T-shirt and head for one of the dining rooms to get a late lunch. In the elevator, I stick out my chest for all to read the funny legend upon it, but soon I realize that despite its burnished tricolor letters, no one takes note. More to the point, no one takes note of me. Despite my attempts at bridge building, the very sight of me (small, ethnic, without a cap bearing the name of a football team) elicits no reaction from other passengers. Most often, they will small-talk over me as if I don’t exist. This brings to mind the travails of David Foster Wallace , who felt so ostracized by his fellow passengers that he retreated to his cabin for much of his voyage. And Wallace was raised primarily in the Midwest and was a much larger, more American-looking meatball than I am. If he couldn’t talk to these people, how will I? What if I leave this ship without making any friends at all, despite my T-shirt? I am a social creature, and the prospect of seven days alone and apart is saddening. Wallace’s stateroom, at least, had a view of the ocean, a kind of cheap eternity.

Worse awaits me in the dining room. This is a large, multichandeliered room where I attended my safety training (I was shown how to put on a flotation vest; it is a very simple procedure). But the maître d’ politely refuses me entry in an English that seems to verge on another language. “I’m sorry, this is only for pendejos ,” he seems to be saying. I push back politely and he repeats himself. Pendejos ? Piranhas? There’s some kind of P-word to which I am not attuned. Meanwhile elderly passengers stream right past, powered by their limbs, walkers, and electric wheelchairs. “It is only pendejo dining today, sir.” “But I have a suite!” I say, already starting to catch on to the ship’s class system. He examines my card again. “But you are not a pendejo ,” he confirms. I am wearing a DADDY’S LITTLE MEATBALL T-shirt, I want to say to him. I am the essence of pendejo .

Eventually, I give up and head to the plebeian buffet on Deck 15, which has an aquatic-styled name I have now forgotten. Before gaining entry to this endless cornucopia of reheated food, one passes a washing station of many sinks and soap dispensers, and perhaps the most intriguing character on the entire ship. He is Mr. Washy Washy—or, according to his name tag, Nielbert of the Philippines—and he is dressed as a taco (on other occasions, I’ll see him dressed as a burger). Mr. Washy Washy performs an eponymous song in spirited, indeed flamboyant English: “Washy, washy, wash your hands, WASHY WASHY!” The dangers of norovirus and COVID on a cruise ship this size (a giant fellow ship was stricken with the former right after my voyage) makes Mr. Washy Washy an essential member of the crew. The problem lies with the food at the end of Washy’s rainbow. The buffet is groaning with what sounds like sophisticated dishes—marinated octopus, boiled egg with anchovy, chorizo, lobster claws—but every animal tastes tragically the same, as if there was only one creature available at the market, a “cruisipus” bred specifically for Royal Caribbean dining. The “vegetables” are no better. I pick up a tomato slice and look right through it. It tastes like cellophane. I sit alone, apart from the couples and parents with gaggles of children, as “We Are Family” echoes across the buffet space.

I may have failed to mention that all this time, the Icon of the Seas has not left port. As the fiery mango of the subtropical setting sun makes Miami’s condo skyline even more apocalyptic, the ship shoves off beneath a perfunctory display of fireworks. After the sun sets, in the far, dark distance, another circus-lit cruise ship ruptures the waves before us. We glance at it with pity, because it is by definition a smaller ship than our own. I am on Deck 15, outside the buffet and overlooking a bunch of pools (the Icon has seven of them), drinking a frilly drink that I got from one of the bars (the Icon has 15 of them), still too shy to speak to anyone, despite Sister Sledge’s assertion that all on the ship are somehow related.

Kim Brooks: On failing the family vacation

The ship’s passage away from Ron DeSantis’s Florida provides no frisson, no sense of developing “sea legs,” as the ship is too large to register the presence of waves unless a mighty wind adds significant chop. It is time for me to register the presence of the 5,000 passengers around me, even if they refuse to register mine. My fellow travelers have prepared for this trip with personally decorated T-shirts celebrating the importance of this voyage. The simplest ones say ICON INAUGURAL ’24 on the back and the family name on the front. Others attest to an over-the-top love of cruise ships: WARNING! MAY START TALKING ABOUT CRUISING . Still others are artisanally designed and celebrate lifetimes spent married while cruising (on ships, of course). A couple possibly in their 90s are wearing shirts whose backs feature a drawing of a cruise liner, two flamingos with ostensibly male and female characteristics, and the legend “ HUSBAND AND WIFE Cruising Partners FOR LIFE WE MAY NOT HAVE IT All Together BUT TOGETHER WE HAVE IT ALL .” (The words not in all caps have been written in cursive.) A real journalist or a more intrepid conversationalist would have gone up to the couple and asked them to explain the longevity of their marriage vis-à-vis their love of cruising. But instead I head to my mall suite, take off my meatball T-shirt, and allow the first tears of the cruise to roll down my cheeks slowly enough that I briefly fall asleep amid the moisture and salt.

I WAKE UP with a hangover. Oh God. Right. I cannot believe all of that happened last night. A name floats into my cobwebbed, nauseated brain: “Ayn Rand.” Jesus Christ.

I breakfast alone at the Coastal Kitchen. The coffee tastes fine and the eggs came out of a bird. The ship rolls slightly this morning; I can feel it in my thighs and my schlong, the parts of me that are most receptive to danger.

I had a dangerous conversation last night. After the sun set and we were at least 50 miles from shore (most modern cruise ships sail at about 23 miles an hour), I lay in bed softly hiccupping, my arms stretched out exactly like Jesus on the cross, the sound of the distant waves missing from my mall-facing suite, replaced by the hum of air-conditioning and children shouting in Spanish through the vents of my two bathrooms. I decided this passivity was unacceptable. As an immigrant, I feel duty-bound to complete the tasks I am paid for, which means reaching out and trying to understand my fellow cruisers. So I put on a normal James Perse T-shirt and headed for one of the bars on the Royal Promenade—the Schooner Bar, it was called, if memory serves correctly.

I sat at the bar for a martini and two Negronis. An old man with thick, hairy forearms drank next to me, very silent and Hemingwaylike, while a dreadlocked piano player tinkled out a series of excellent Elton John covers. To my right, a young white couple—he in floral shorts, she in a light, summery miniskirt with a fearsome diamond ring, neither of them in football regalia—chatted with an elderly couple. Do it , I commanded myself. Open your mouth. Speak! Speak without being spoken to. Initiate. A sentence fragment caught my ear from the young woman, “Cherry Hill.” This is a suburb of Philadelphia in New Jersey, and I had once been there for a reading at a synagogue. “Excuse me,” I said gently to her. “Did you just mention Cherry Hill? It’s a lovely place.”

As it turned out, the couple now lived in Fort Lauderdale (the number of Floridians on the cruise surprised me, given that Southern Florida is itself a kind of cruise ship, albeit one slowly sinking), but soon they were talking with me exclusively—the man potbellied, with a chin like a hard-boiled egg; the woman as svelte as if she were one of the many Ukrainian members of the crew—the elderly couple next to them forgotten. This felt as groundbreaking as the first time I dared to address an American in his native tongue, as a child on a bus in Queens (“On my foot you are standing, Mister”).

“I don’t want to talk politics,” the man said. “But they’re going to eighty-six Biden and put Michelle in.”

I considered the contradictions of his opening conversational gambit, but decided to play along. “People like Michelle,” I said, testing the waters. The husband sneered, but the wife charitably put forward that the former first lady was “more personable” than Joe Biden. “They’re gonna eighty-six Biden,” the husband repeated. “He can’t put a sentence together.”

After I mentioned that I was a writer—though I presented myself as a writer of teleplays instead of novels and articles such as this one—the husband told me his favorite writer was Ayn Rand. “Ayn Rand, she came here with nothing,” the husband said. “I work with a lot of Cubans, so …” I wondered if I should mention what I usually do to ingratiate myself with Republicans or libertarians: the fact that my finances improved after pass-through corporations were taxed differently under Donald Trump. Instead, I ordered another drink and the couple did the same, and I told him that Rand and I were born in the same city, St. Petersburg/Leningrad, and that my family also came here with nothing. Now the bonding and drinking began in earnest, and several more rounds appeared. Until it all fell apart.

Read: Gary Shteyngart on watching Russian television for five days straight

My new friend, whom I will refer to as Ayn, called out to a buddy of his across the bar, and suddenly a young couple, both covered in tattoos, appeared next to us. “He fucking punked me,” Ayn’s frat-boy-like friend called out as he put his arm around Ayn, while his sizable partner sizzled up to Mrs. Rand. Both of them had a look I have never seen on land—their eyes projecting absence and enmity in equal measure. In the ’90s, I drank with Russian soldiers fresh from Chechnya and wandered the streets of wartime Zagreb, but I have never seen such undisguised hostility toward both me and perhaps the universe at large. I was briefly introduced to this psychopathic pair, but neither of them wanted to have anything to do with me, and the tattooed woman would not even reveal her Christian name to me (she pretended to have the same first name as Mrs. Rand). To impress his tattooed friends, Ayn made fun of the fact that as a television writer, I’d worked on the series Succession (which, it would turn out, practically nobody on the ship had watched), instead of the far more palatable, in his eyes, zombie drama of last year. And then my new friends drifted away from me into an angry private conversation—“He punked me!”—as I ordered another drink for myself, scared of the dead-eyed arrivals whose gaze never registered in the dim wattage of the Schooner Bar, whose terrifying voices and hollow laughs grated like unoiled gears against the crooning of “Goodbye Yellow Brick Road.”

But today is a new day for me and my hangover. After breakfast, I explore the ship’s so-called neighborhoods . There’s the AquaDome, where one can find a food hall and an acrobatic sound-and-light aquatic show. Central Park has a premium steak house, a sushi joint, and a used Rolex that can be bought for $8,000 on land here proudly offered at $17,000. There’s the aforementioned Royal Promenade, where I had drunk with the Rands, and where a pair of dueling pianos duel well into the night. There’s Surfside, a kids’ neighborhood full of sugary garbage, which looks out onto the frothy trail that the behemoth leaves behind itself. Thrill Island refers to the collection of tubes that clutter the ass of the ship and offer passengers six waterslides and a surfing simulation. There’s the Hideaway, an adult zone that plays music from a vomit-slathered, Brit-filled Alicante nightclub circa 1996 and proves a big favorite with groups of young Latin American customers. And, most hurtfully, there’s the Suite Neighborhood.

I say hurtfully because as a Suite passenger I should be here, though my particular suite is far from the others. Whereas I am stuck amid the riffraff of Deck 11, this section is on the highborn Decks 16 and 17, and in passing, I peek into the spacious, tall-ceilinged staterooms from the hallway, dazzled by the glint of the waves and sun. For $75,000, one multifloor suite even comes with its own slide between floors, so that a family may enjoy this particular terror in private. There is a quiet splendor to the Suite Neighborhood. I see fewer stickers and signs and drawings than in my own neighborhood—for example, MIKE AND DIANA PROUDLY SERVED U.S. MARINE CORPS RETIRED . No one here needs to announce their branch of service or rank; they are simply Suites, and this is where they belong. Once again, despite my hard work and perseverance, I have been disallowed from the true American elite. Once again, I am “Not our class, dear.” I am reminded of watching The Love Boat on my grandmother’s Zenith, which either was given to her or we found in the trash (I get our many malfunctioning Zeniths confused) and whose tube got so hot, I would put little chunks of government cheese on a thin tissue atop it to give our welfare treat a pleasant, Reagan-era gooeyness. I could not understand English well enough then to catch the nuances of that seafaring program, but I knew that there were differences in the status of the passengers, and that sometimes those differences made them sad. Still, this ship, this plenty—every few steps, there are complimentary nachos or milkshakes or gyros on offer—was the fatty fuel of my childhood dreams. If only I had remained a child.

I walk around the outdoor decks looking for company. There is a middle-aged African American couple who always seem to be asleep in each other’s arms, probably exhausted from the late capitalism they regularly encounter on land. There is far more diversity on this ship than I expected. Many couples are a testament to Loving v. Virginia , and there is a large group of folks whose T-shirts read MELANIN AT SEA / IT’S THE MELANIN FOR ME . I smile when I see them, but then some young kids from the group makes Mr. Washy Washy do a cruel, caricatured “Burger Dance” (today he is in his burger getup), and I think, Well, so much for intersectionality .

At the infinity pool on Deck 17, I spot some elderly women who could be ethnic and from my part of the world, and so I jump in. I am proved correct! Many of them seem to be originally from Queens (“Corona was still great when it was all Italian”), though they are now spread across the tristate area. We bond over the way “Ron-kon-koma” sounds when announced in Penn Station.

“Everyone is here for a different reason,” one of them tells me. She and her ex-husband last sailed together four years ago to prove to themselves that their marriage was truly over. Her 15-year-old son lost his virginity to “an Irish young lady” while their ship was moored in Ravenna, Italy. The gaggle of old-timers competes to tell me their favorite cruising stories and tips. “A guy proposed in Central Park a couple of years ago”—many Royal Caribbean ships apparently have this ridiculous communal area—“and she ran away screaming!” “If you’re diamond-class, you get four drinks for free.” “A different kind of passenger sails out of Bayonne.” (This, perhaps, is racially coded.) “Sometimes, if you tip the bartender $5, your next drink will be free.”

“Everyone’s here for a different reason,” the woman whose marriage ended on a cruise tells me again. “Some people are here for bad reasons—the drinkers and the gamblers. Some people are here for medical reasons.” I have seen more than a few oxygen tanks and at least one woman clearly undergoing very serious chemo. Some T-shirts celebrate good news about a cancer diagnosis. This might be someone’s last cruise or week on Earth. For these women, who have spent months, if not years, at sea, cruising is a ritual as well as a life cycle: first love, last love, marriage, divorce, death.

Read: The last place on Earth any tourist should go

I have talked with these women for so long, tonight I promise myself that after a sad solitary dinner I will not try to seek out company at the bars in the mall or the adult-themed Hideaway. I have enough material to fulfill my duties to this publication. As I approach my orphaned suite, I run into the aggro young people who stole Mr. and Mrs. Rand away from me the night before. The tattooed apparitions pass me without a glance. She is singing something violent about “Stuttering Stanley” (a character in a popular horror movie, as I discover with my complimentary VOOM SM Surf & Stream Internet at Sea) and he’s loudly shouting about “all the money I’ve lost,” presumably at the casino in the bowels of the ship.

So these bent psychos out of a Cormac McCarthy novel are angrily inhabiting my deck. As I mewl myself to sleep, I envision a limited series for HBO or some other streamer, a kind of low-rent White Lotus , where several aggressive couples conspire to throw a shy intellectual interloper overboard. I type the scenario into my phone. As I fall asleep, I think of what the woman who recently divorced her husband and whose son became a man through the good offices of the Irish Republic told me while I was hoisting myself out of the infinity pool. “I’m here because I’m an explorer. I’m here because I’m trying something new.” What if I allowed myself to believe in her fantasy?

“YOU REALLY STARTED AT THE TOP,” they tell me. I’m at the Coastal Kitchen for my eggs and corned-beef hash, and the maître d’ has slotted me in between two couples. Fueled by coffee or perhaps intrigued by my relative youth, they strike up a conversation with me. As always, people are shocked that this is my first cruise. They contrast the Icon favorably with all the preceding liners in the Royal Caribbean fleet, usually commenting on the efficiency of the elevators that hurl us from deck to deck (as in many large corporate buildings, the elevators ask you to choose a floor and then direct you to one of many lifts). The couple to my right, from Palo Alto—he refers to his “porn mustache” and calls his wife “my cougar” because she is two years older—tell me they are “Pandemic Pinnacles.”

This is the day that my eyes will be opened. Pinnacles , it is explained to me over translucent cantaloupe, have sailed with Royal Caribbean for 700 ungodly nights. Pandemic Pinnacles took advantage of the two-for-one accrual rate of Pinnacle points during the pandemic, when sailing on a cruise ship was even more ill-advised, to catapult themselves into Pinnacle status.

Because of the importance of the inaugural voyage of the world’s largest cruise liner, more than 200 Pinnacles are on this ship, a startling number, it seems. Mrs. Palo Alto takes out a golden badge that I have seen affixed over many a breast, which reads CROWN AND ANCHOR SOCIETY along with her name. This is the coveted badge of the Pinnacle. “You should hear all the whining in Guest Services,” her husband tells me. Apparently, the Pinnacles who are not also Suites like us are all trying to use their status to get into Coastal Kitchen, our elite restaurant. Even a Pinnacle needs to be a Suite to access this level of corned-beef hash.

“We’re just baby Pinnacles,” Mrs. Palo Alto tells me, describing a kind of internal class struggle among the Pinnacle elite for ever higher status.

And now I understand what the maître d’ was saying to me on the first day of my cruise. He wasn’t saying “ pendejo .” He was saying “Pinnacle.” The dining room was for Pinnacles only, all those older people rolling in like the tide on their motorized scooters.

And now I understand something else: This whole thing is a cult. And like most cults, it can’t help but mirror the endless American fight for status. Like Keith Raniere’s NXIVM, where different-colored sashes were given out to connote rank among Raniere’s branded acolytes, this is an endless competition among Pinnacles, Suites, Diamond-Plusers, and facing-the-mall, no-balcony purple SeaPass Card peasants, not to mention the many distinctions within each category. The more you cruise, the higher your status. No wonder a section of the Royal Promenade is devoted to getting passengers to book their next cruise during the one they should be enjoying now. No wonder desperate Royal Caribbean offers (“FINAL HOURS”) crowded my email account weeks before I set sail. No wonder the ship’s jewelry store, the Royal Bling, is selling a $100,000 golden chalice that will entitle its owner to drink free on Royal Caribbean cruises for life. (One passenger was already gaming out whether her 28-year-old son was young enough to “just about earn out” on the chalice or if that ship had sailed.) No wonder this ship was sold out months before departure , and we had to pay $19,000 for a horrid suite away from the Suite Neighborhood. No wonder the most mythical hero of Royal Caribbean lore is someone named Super Mario, who has cruised so often, he now has his own working desk on many ships. This whole experience is part cult, part nautical pyramid scheme.

From the June 2014 issue: Ship of wonks

“The toilets are amazing,” the Palo Altos are telling me. “One flush and you’re done.” “They don’t understand how energy-efficient these ships are,” the husband of the other couple is telling me. “They got the LNG”—liquefied natural gas, which is supposed to make the Icon a boon to the environment (a concept widely disputed and sometimes ridiculed by environmentalists).

But I’m thinking along a different line of attack as I spear my last pallid slice of melon. For my streaming limited series, a Pinnacle would have to get killed by either an outright peasant or a Suite without an ocean view. I tell my breakfast companions my idea.

“Oh, for sure a Pinnacle would have to be killed,” Mr. Palo Alto, the Pandemic Pinnacle, says, touching his porn mustache thoughtfully as his wife nods.

“THAT’S RIGHT, IT’S your time, buddy!” Hubert, my fun-loving Panamanian cabin attendant, shouts as I step out of my suite in a robe. “Take it easy, buddy!”

I have come up with a new dressing strategy. Instead of trying to impress with my choice of T-shirts, I have decided to start wearing a robe, as one does at a resort property on land, with a proper spa and hammam. The response among my fellow cruisers has been ecstatic. “Look at you in the robe!” Mr. Rand cries out as we pass each other by the Thrill Island aqua park. “You’re living the cruise life! You know, you really drank me under the table that night.” I laugh as we part ways, but my soul cries out, Please spend more time with me, Mr. and Mrs. Rand; I so need the company .

In my white robe, I am a stately presence, a refugee from a better limited series, a one-man crossover episode. (Only Suites are granted these robes to begin with.) Today, I will try many of the activities these ships have on offer to provide their clientele with a sense of never-ceasing motion. Because I am already at Thrill Island, I decide to climb the staircase to what looks like a mast on an old-fashioned ship (terrified, because I am afraid of heights) to try a ride called “Storm Chasers,” which is part of the “Category 6” water park, named in honor of one of the storms that may someday do away with the Port of Miami entirely. Storm Chasers consists of falling from the “mast” down a long, twisting neon tube filled with water, like being the camera inside your own colonoscopy, as you hold on to the handles of a mat, hoping not to die. The tube then flops you down headfirst into a trough of water, a Royal Caribbean baptism. It both knocks my breath out and makes me sad.

In keeping with the aquatic theme, I attend a show at the AquaDome. To the sound of “Live and Let Die,” a man in a harness gyrates to and fro in the sultry air. I saw something very similar in the back rooms of the famed Berghain club in early-aughts Berlin. Soon another harnessed man is gyrating next to the first. Ja , I think to myself, I know how this ends. Now will come the fisting , natürlich . But the show soon devolves into the usual Marvel-film-grade nonsense, with too much light and sound signifying nichts . If any fisting is happening, it is probably in the Suite Neighborhood, inside a cabin marked with an upside-down pineapple, which I understand means a couple are ready to swing, and I will see none of it.

I go to the ice show, which is a kind of homage—if that’s possible—to the periodic table, done with the style and pomp and masterful precision that would please the likes of Kim Jong Un, if only he could afford Royal Caribbean talent. At one point, the dancers skate to the theme song of Succession . “See that!” I want to say to my fellow Suites—at “cultural” events, we have a special section reserved for us away from the commoners—“ Succession ! It’s even better than the zombie show! Open your minds!”

Finally, I visit a comedy revue in an enormous and too brightly lit version of an “intimate,” per Royal Caribbean literature, “Manhattan comedy club.” Many of the jokes are about the cruising life. “I’ve lived on ships for 20 years,” one of the middle-aged comedians says. “I can only see so many Filipino homosexuals dressed as a taco.” He pauses while the audience laughs. “I am so fired tonight,” he says. He segues into a Trump impression and then Biden falling asleep at the microphone, which gets the most laughs. “Anyone here from Fort Leonard Wood?” another comedian asks. Half the crowd seems to cheer. As I fall asleep that night, I realize another connection I have failed to make, and one that may explain some of the diversity on this vessel—many of its passengers have served in the military.

As a coddled passenger with a suite, I feel like I am starting to understand what it means to have a rank and be constantly reminded of it. There are many espresso makers , I think as I look across the expanse of my officer-grade quarters before closing my eyes, but this one is mine .

A shocking sight greets me beyond the pools of Deck 17 as I saunter over to the Coastal Kitchen for my morning intake of slightly sour Americanos. A tiny city beneath a series of perfectly pressed green mountains. Land! We have docked for a brief respite in Basseterre, the capital of St. Kitts and Nevis. I wolf down my egg scramble to be one of the first passengers off the ship. Once past the gangway, I barely refrain from kissing the ground. I rush into the sights and sounds of this scruffy island city, sampling incredible conch curry and buckets of non-Starbucks coffee. How wonderful it is to be where God intended humans to be: on land. After all, I am neither a fish nor a mall rat. This is my natural environment. Basseterre may not be Havana, but there are signs of human ingenuity and desire everywhere you look. The Black Table Grill Has been Relocated to Soho Village, Market Street, Directly Behind of, Gary’s Fruits and Flower Shop. Signed. THE PORK MAN reads a sign stuck to a wall. Now, that is how you write a sign. A real sign, not the come-ons for overpriced Rolexes that blink across the screens of the Royal Promenade.

“Hey, tie your shoestring!” a pair of laughing ladies shout to me across the street.

“Thank you!” I shout back. Shoestring! “Thank you very much.”

A man in Independence Square Park comes by and asks if I want to play with his monkey. I haven’t heard that pickup line since the Penn Station of the 1980s. But then he pulls a real monkey out of a bag. The monkey is wearing a diaper and looks insane. Wonderful , I think, just wonderful! There is so much life here. I email my editor asking if I can remain on St. Kitts and allow the Icon to sail off into the horizon without me. I have even priced a flight home at less than $300, and I have enough material from the first four days on the cruise to write the entire story. “It would be funny …” my editor replies. “Now get on the boat.”

As I slink back to the ship after my brief jailbreak, the locals stand under umbrellas to gaze at and photograph the boat that towers over their small capital city. The limousines of the prime minister and his lackeys are parked beside the gangway. St. Kitts, I’ve been told, is one of the few islands that would allow a ship of this size to dock.

“We hear about all the waterslides,” a sweet young server in one of the cafés told me. “We wish we could go on the ship, but we have to work.”

“I want to stay on your island,” I replied. “I love it here.”

But she didn’t understand how I could possibly mean that.

“WASHY, WASHY, so you don’t get stinky, stinky!” kids are singing outside the AquaDome, while their adult minders look on in disapproval, perhaps worried that Mr. Washy Washy is grooming them into a life of gayness. I heard a southern couple skip the buffet entirely out of fear of Mr. Washy Washy.

Meanwhile, I have found a new watering hole for myself, the Swim & Tonic, the biggest swim-up bar on any cruise ship in the world. Drinking next to full-size, nearly naked Americans takes away one’s own self-consciousness. The men have curvaceous mom bodies. The women are equally un-shy about their sprawling physiques.

Today I’ve befriended a bald man with many children who tells me that all of the little trinkets that Royal Caribbean has left us in our staterooms and suites are worth a fortune on eBay. “Eighty dollars for the water bottle, 60 for the lanyard,” the man says. “This is a cult.”

“Tell me about it,” I say. There is, however, a clientele for whom this cruise makes perfect sense. For a large middle-class family (he works in “supply chains”), seven days in a lower-tier cabin—which starts at $1,800 a person—allow the parents to drop off their children in Surfside, where I imagine many young Filipina crew members will take care of them, while the parents are free to get drunk at a swim-up bar and maybe even get intimate in their cabin. Cruise ships have become, for a certain kind of hardworking family, a form of subsidized child care.

There is another man I would like to befriend at the Swim & Tonic, a tall, bald fellow who is perpetually inebriated and who wears a necklace studded with little rubber duckies in sunglasses, which, I am told, is a sort of secret handshake for cruise aficionados. Tomorrow, I will spend more time with him, but first the ship docks at St. Thomas, in the U.S. Virgin Islands. Charlotte Amalie, the capital, is more charming in name than in presence, but I still all but jump off the ship to score a juicy oxtail and plantains at the well-known Petite Pump Room, overlooking the harbor. From one of the highest points in the small city, the Icon of the Seas appears bigger than the surrounding hills.

I usually tan very evenly, but something about the discombobulation of life at sea makes me forget the regular application of sunscreen. As I walk down the streets of Charlotte Amalie in my fluorescent Icon of the Seas cap, an old Rastafarian stares me down. “Redneck,” he hisses.

“No,” I want to tell him, as I bring a hand up to my red neck, “that’s not who I am at all. On my island, Mannahatta, as Whitman would have it, I am an interesting person living within an engaging artistic milieu. I do not wish to use the Caribbean as a dumping ground for the cruise-ship industry. I love the work of Derek Walcott. You don’t understand. I am not a redneck. And if I am, they did this to me.” They meaning Royal Caribbean? Its passengers? The Rands?

“They did this to me!”

Back on the Icon, some older matrons are muttering about a run-in with passengers from the Celebrity cruise ship docked next to us, the Celebrity Apex. Although Celebrity Cruises is also owned by Royal Caribbean, I am made to understand that there is a deep fratricidal beef between passengers of the two lines. “We met a woman from the Apex,” one matron says, “and she says it was a small ship and there was nothing to do. Her face was as tight as a 19-year-old’s, she had so much surgery.” With those words, and beneath a cloudy sky, humidity shrouding our weathered faces and red necks, we set sail once again, hopefully in the direction of home.

THERE ARE BARELY 48 HOURS LEFT to the cruise, and the Icon of the Seas’ passengers are salty. They know how to work the elevators. They know the Washy Washy song by heart. They understand that the chicken gyro at “Feta Mediterranean,” in the AquaDome Market, is the least problematic form of chicken on the ship.

The passengers have shed their INAUGURAL CRUISE T-shirts and are now starting to evince political opinions. There are caps pledging to make America great again and T-shirts that celebrate words sometimes attributed to Patrick Henry: “The Constitution is not an instrument for the government to restrain the people; it is an instrument for the people to restrain the government.” With their preponderance of FAMILY FLAG FAITH FRIENDS FIREARMS T-shirts, the tables by the crepe station sometimes resemble the Capitol Rotunda on January 6. The Real Anthony Fauci , by Robert F. Kennedy Jr., appears to be a popular form of literature, especially among young men with very complicated versions of the American flag on their T-shirts. Other opinions blend the personal and the political. “Someone needs to kill Washy guy, right?” a well-dressed man in the elevator tells me, his gray eyes radiating nothing. “Just beat him to death. Am I right?” I overhear the male member of a young couple whisper, “There goes that freak” as I saunter by in my white spa robe, and I decide to retire it for the rest of the cruise.

I visit the Royal Bling to see up close the $100,000 golden chalice that entitles you to free drinks on Royal Caribbean forever. The pleasant Serbian saleslady explains that the chalice is actually gold-plated and covered in white zirconia instead of diamonds, as it would otherwise cost $1 million. “If you already have everything,” she explains, “this is one more thing you can get.”

I believe that anyone who works for Royal Caribbean should be entitled to immediate American citizenship. They already speak English better than most of the passengers and, per the Serbian lady’s sales pitch above, better understand what America is as well. Crew members like my Panamanian cabin attendant seem to work 24 hours a day. A waiter from New Delhi tells me that his contract is six months and three weeks long. After a cruise ends, he says, “in a few hours, we start again for the next cruise.” At the end of the half a year at sea, he is allowed a two-to-three-month stay at home with his family. As of 2019, the median income for crew members was somewhere in the vicinity of $20,000, according to a major business publication. Royal Caribbean would not share the current median salary for its crew members, but I am certain that it amounts to a fraction of the cost of a Royal Bling gold-plated, zirconia-studded chalice.

And because most of the Icon’s hyper-sanitized spaces are just a frittata away from being a Delta lounge, one forgets that there are actual sailors on this ship, charged with the herculean task of docking it in port. “Having driven 100,000-ton aircraft carriers throughout my career,” retired Admiral James G. Stavridis, the former NATO Supreme Allied Commander Europe, writes to me, “I’m not sure I would even know where to begin with trying to control a sea monster like this one nearly three times the size.” (I first met Stavridis while touring Army bases in Germany more than a decade ago.)

Today, I decide to head to the hot tub near Swim & Tonic, where some of the ship’s drunkest reprobates seem to gather (the other tubs are filled with families and couples). The talk here, like everywhere else on the ship, concerns football, a sport about which I know nothing. It is apparent that four teams have recently competed in some kind of finals for the year, and that two of them will now face off in the championship. Often when people on the Icon speak, I will try to repeat the last thing they said with a laugh or a nod of disbelief. “Yes, 20-yard line! Ha!” “Oh my God, of course, scrimmage.”

Soon we are joined in the hot tub by the late-middle-age drunk guy with the duck necklace. He is wearing a bucket hat with the legend HAWKEYES , which, I soon gather, is yet another football team. “All right, who turned me in?” Duck Necklace says as he plops into the tub beside us. “I get a call in the morning,” he says. “It’s security. Can you come down to the dining room by 10 a.m.? You need to stay away from the members of this religious family.” Apparently, the gregarious Duck Necklace had photobombed the wrong people. There are several families who present as evangelical Christians or practicing Muslims on the ship. One man, evidently, was not happy that Duck Necklace had made contact with his relatives. “It’s because of religious stuff; he was offended. I put my arm around 20 people a day.”

Everyone laughs. “They asked me three times if I needed medication,” he says of the security people who apparently interrogated him in full view of others having breakfast.

Another hot-tub denizen suggests that he should have asked for fentanyl. After a few more drinks, Duck Necklace begins to muse about what it would be like to fall off the ship. “I’m 62 and I’m ready to go,” he says. “I just don’t want a shark to eat me. I’m a huge God guy. I’m a Bible guy. There’s some Mayan theory squaring science stuff with religion. There is so much more to life on Earth.” We all nod into our Red Stripes.

“I never get off the ship when we dock,” he says. He tells us he lost $6,000 in the casino the other day. Later, I look him up, and it appears that on land, he’s a financial adviser in a crisp gray suit, probably a pillar of his North Chicago community.

THE OCEAN IS TEEMING with fascinating life, but on the surface it has little to teach us. The waves come and go. The horizon remains ever far away.

I am constantly told by my fellow passengers that “everybody here has a story.” Yes, I want to reply, but everybody everywhere has a story. You, the reader of this essay, have a story, and yet you’re not inclined to jump on a cruise ship and, like Duck Necklace, tell your story to others at great pitch and volume. Maybe what they’re saying is that everybody on this ship wants to have a bigger, more coherent, more interesting story than the one they’ve been given. Maybe that’s why there’s so much signage on the doors around me attesting to marriages spent on the sea. Maybe that’s why the Royal Caribbean newsletter slipped under my door tells me that “this isn’t a vacation day spent—it’s bragging rights earned.” Maybe that’s why I’m so lonely.

Today is a big day for Icon passengers. Today the ship docks at Royal Caribbean’s own Bahamian island, the Perfect Day at CocoCay. (This appears to be the actual name of the island.) A comedian at the nightclub opined on what his perfect day at CocoCay would look like—receiving oral sex while learning that his ex-wife had been killed in a car crash (big laughter). But the reality of the island is far less humorous than that.

One of the ethnic tristate ladies in the infinity pool told me that she loved CocoCay because it had exactly the same things that could be found on the ship itself. This proves to be correct. It is like the Icon, but with sand. The same tired burgers, the same colorful tubes conveying children and water from Point A to B. The same swim-up bar at its Hideaway ($140 for admittance, no children allowed; Royal Caribbean must be printing money off its clientele). “There was almost a fight at The Wizard of Oz ,” I overhear an elderly woman tell her companion on a chaise lounge. Apparently one of the passengers began recording Royal Caribbean’s intellectual property and “three guys came after him.”

I walk down a pathway to the center of the island, where a sign reads DO NOT ENTER: YOU HAVE REACHED THE BOUNDARY OF ADVENTURE . I hear an animal scampering in the bushes. A Royal Caribbean worker in an enormous golf cart soon chases me down and takes me back to the Hideaway, where I run into Mrs. Rand in a bikini. She becomes livid telling me about an altercation she had the other day with a woman over a towel and a deck chair. We Suites have special towel privileges; we do not have to hand over our SeaPass Card to score a towel. But the Rands are not Suites. “People are so entitled here,” Mrs. Rand says. “It’s like the airport with all its classes.” “You see,” I want to say, “this is where your husband’s love of Ayn Rand runs into the cruelties and arbitrary indignities of unbridled capitalism.” Instead we make plans to meet for a final drink in the Schooner Bar tonight (the Rands will stand me up).

Back on the ship, I try to do laps, but the pool (the largest on any cruise ship, naturally) is fully trashed with the detritus of American life: candy wrappers, a slowly dissolving tortilla chip, napkins. I take an extra-long shower in my suite, then walk around the perimeter of the ship on a kind of exercise track, past all the alluring lifeboats in their yellow-and-white livery. Maybe there is a dystopian angle to the HBO series that I will surely end up pitching, one with shades of WALL-E or Snowpiercer . In a collapsed world, a Royal Caribbean–like cruise liner sails from port to port, collecting new shipmates and supplies in exchange for the precious energy it has on board. (The actual Icon features a new technology that converts passengers’ poop into enough energy to power the waterslides . In the series, this shitty technology would be greatly expanded.) A very young woman (18? 19?), smart and lonely, who has only known life on the ship, walks along the same track as I do now, contemplating jumping off into the surf left by its wake. I picture reusing Duck Necklace’s words in the opening shot of the pilot. The girl is walking around the track, her eyes on the horizon; maybe she’s highborn—a Suite—and we hear the voice-over: “I’m 19 and I’m ready to go. I just don’t want a shark to eat me.”

Before the cruise is finished, I talk to Mr. Washy Washy, or Nielbert of the Philippines. He is a sweet, gentle man, and I thank him for the earworm of a song he has given me and for keeping us safe from the dreaded norovirus. “This is very important to me, getting people to wash their hands,” he tells me in his burger getup. He has dreams, as an artist and a performer, but they are limited in scope. One day he wants to dress up as a piece of bacon for the morning shift.

THE MAIDEN VOYAGE OF THE TITANIC (the Icon of the Seas is five times as large as that doomed vessel) at least offered its passengers an exciting ending to their cruise, but when I wake up on the eighth day, all I see are the gray ghosts that populate Miami’s condo skyline. Throughout my voyage, my writer friends wrote in to commiserate with me. Sloane Crosley, who once covered a three-day spa mini-cruise for Vogue , tells me she felt “so very alone … I found it very untethering.” Gideon Lewis-Kraus writes in an Instagram comment: “When Gary is done I think it’s time this genre was taken out back and shot.” And he is right. To badly paraphrase Adorno: After this, no more cruise stories. It is unfair to put a thinking person on a cruise ship. Writers typically have difficult childhoods, and it is cruel to remind them of the inherent loneliness that drove them to writing in the first place. It is also unseemly to write about the kind of people who go on cruises. Our country does not provide the education and upbringing that allow its citizens an interior life. For the creative class to point fingers at the large, breasty gentlemen adrift in tortilla-chip-laden pools of water is to gather a sour harvest of low-hanging fruit.

A day or two before I got off the ship, I decided to make use of my balcony, which I had avoided because I thought the view would only depress me further. What I found shocked me. My suite did not look out on Central Park after all. This entire time, I had been living in the ship’s Disneyland, Surfside, the neighborhood full of screaming toddlers consuming milkshakes and candy. And as I leaned out over my balcony, I beheld a slight vista of the sea and surf that I thought I had been missing. It had been there all along. The sea was frothy and infinite and blue-green beneath the span of a seagull’s wing. And though it had been trod hard by the world’s largest cruise ship, it remained.

This article appears in the May 2024 print edition with the headline “A Meatball at Sea.” When you buy a book using a link on this page, we receive a commission. Thank you for supporting The Atlantic.