Amendments brought by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012
Posted Date : 23-Jan-2013 , 01:47:55 pm | Posted By Sameer Kakar Your Rating: NoneAverage : 0.00
Amendments brought by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012
A commentary by CA Sameer Kakar, B.Com (Hons.), LLB, FCA
The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2012 was passed by the Legislature in December, 2012 has been assented by the President recently in January, 2013.
The enactment has modified the SARFEASI Act and the RDB Act. The salient features of the Act impacting the SARFEASI Act are as under :-
1. Amendment to S. 2 (c):- A new sub clause (iva) added to S. 2 (c).
“(iva) a multi-State co-operative bank; or”. This section defines what is a “Bank” under the Act. As per the earlier Act Bank means
(i) a banking company; or
(ii) a corresponding new bank; or
(iii) the State Bank of India; or
(iv) a subsidiary bank; or
(v) such other bank which the Central Government may, by notification, specify for the purposes of this Act;
Cooperative banks were covered earlier by way of notification, a multi - State cooperative Bank has been specifically included under the definition of the bank.
The provisions of the Act were earlier extended by way of notification to most of the existing multi-State Cooperative Banks, with a specific provision now in the Act, the need for separate notification is done away with.
1. New Sub-Section 5 (5):- A new sub section 5 (5) has been introduced which is as under :-
“On acquisition of financial assets under sub-section (1), the securitisation company or reconstruction company, may with the consent of the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or any court or other Authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or court or Authority shall pass orders for the substitution of the securitisation company or reconstruction company in such pending suit, appeal or other proceedings.”
The amendment seeks to reduce procedural delays in substitution of an ARC in any existing suit before DRT, DRAT or any other court or authority pursuant to assignment of debt by existing lender to any ARC. One of the essentials is consent of the originator. What is originator has not been dealt in but in line with the common meaning, the same to be taken as the original lender. The section makes it mandatory for the Tribunal/authority/court to pass order for substitution of the lender with ARC. This will save precious time for the ARC’s in reducing the litigation wherein they were facing lots of problems as borrowers kept on dragging the matter by way of various objections to such substitution.
1. Amendment to S. 9:- A new sub-section 9 (g) has been introduced. The new sub-section is reproduced below :-
“to convert any portion of debt into shares of a borrower company:
Provided that conversion of any part of debt into shares of a borrower company shall be deemed always to have been valid, as if the provisions of this clause were in force at all material times.”.
This amendment will enable an ARC to take up equity exposure on the borrower company by part conversion of their debt into shares of Borrower Company. The earlier Act has no such specific provision. ARC’s were facing difficulties in absence of such specific provision in the Act. The amendment is retrospective and enables any past conversions to equity made by ARC’s.
1. Amendment to S. 13
Some far reaching amendments have been done to S. 13 of the Act which mainly deals with the enforcement of security interest making the Act more stringent and providing more teeth to the lenders.
1. Amendment to S. 13 (3A):- S. 13 (3A) enabled a borrower to make representation or raise objections, if any, on receipt of notice u/s 13 (2) before the Secured Creditor. Such representation/objections were to be replied by the Secured Creditor within a period of one week of the receipt of such representation or objection. The said time limit of one week has now been enhanced to ‘fifteen days’.
The implementation of the SARFEASI Act is based upon principle of natural justice without the intervention of the Courts. The reply within “one week” was perhaps little to short a time period and many lenders were not able to meet the deadline permitting borrowers to raise objections to the further action under the Act. Fifteen days is more convenient option for the lenders.
1. Insertion of new Sub Section 5 (A, B & C ) to S. 13 :- Three new subsections have been added to S. 13 (5) having far reaching consequences. They are as under :-
“(5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorised by the secured creditor in this behalf, to bid for the immovable property on behalf of the secured creditor at any subsequent sale.
(5B) Where the secured creditor, referred to in sub-section (5A), is declared to be the purchaser of the immovable property at any subsequent sale, the amount of the purchase price shall be adjusted towards the amount of the claim of the secured creditor for which the auction of enforcement of security interest is taken by the secured creditor, under sub-section (4) of section 13.
(5C) The provisions of section 9 of the Banking Regulation Act, 1949 shall, as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5A).”
As per the provisions of the SARFEASI Act, the action u/s 13 is :-
1. For the purpose enforcing the security interest and not to allow a lender the interest as an asset owner.
2. Taking of possession does not amount to transfer of title.
3. Taking of possession is only for the purpose of realisation of security.
4. Sec 13 (4) is to be read with sec 13 (7) - attempts of sale of the asset should follow forthwith upon possession.
5. In respect of sale proceeds, the lender is accountable to borrower.
6. The lender is not allowed to use the asset, all usufructs belong to the borrower.
7. Foreclosure i.e. lender keeping the property in lieu of the mortgage money is not the concept under the Act.
In view of the foregoing, foreclosure of the property, hitherto, was strictly a no-no under the SARFEASI Act. The present amendment has somewhat relaxed the law in this respect.
Now the secured creditors can acquire the asset under mortgage with them. The law has laid down procedure to be followed in such cases. The steps as laid down are very important. They are:-
1. Applicable only to immovable property. Hence movables are excluded.
2. Specification of reserve price for immovable property by the Secured Creditor.
3. Fixation of sale (by auction/tender-implied)
4. Postponement of Sale for want of bid of an amount not less than such reserve price.
5. Authority in favour of any officer of the secured creditor to bid for the immovable property on behalf of the creditor at any subsequent sale.
As such even with new amendment secured creditors are not allowed foreclosure, but are now allowed to bid and subsequently sale the immovable property to themselves. Such provisions are only applicable when efforts to sale have not fructified because of want of a bid at the reserve price declared by the secured creditors.
In many cases lenders were not able to sell the property due to several reasons associated with auction sale eg. formation of a cartel, coterie by the auction bidders, unscrupulous borrowers in collusion with auction bidders, fronting of auction bidders for a certain group/borrowers etc. As a result secured creditors were being saddled with so many immovable properties which they could not sell and at times forcing the secured creditors to lower the price, the bottleneck being the secured creditors were not allowed to bid themselves. With the introduction of S. 13 (5) (A), legislature has removed such bottleneck.
S. 13 (5) (B) provides that the amount of purchase price shall be adjusted towards the amount of claim of the secured creditor for which the enforcement is taken. Though the act does not specifies the sharing pattern amongst multiple secured creditors, it emerges from the scheme of law that such sale will be considered as sale at an auction, the secured creditor who is purchasing the asset will have to pay the share to other secured creditors in case of multiple secured creditors.
S. 13 (5) (C) states that section 9 of the Banking Regulation Act, 1949 shall, as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5A). Under S. 9 of the Banking Regulation Act, 1949, restrictions are placed on a banking company as regards to immovable property howsoever acquired (except own use). A banking company cannot hold such immovable property for any period exceeding 7 years, RBI can extent the period on application by the banking company for a period of further 5 years, on being satisfied that such extension will be in interest of the depositors of the banking company. At the expiry of the period of 7 or 12 years, the banking company must dispose of such immovable property.
Thus efforts will have to be made by the banking company to liquidate the acquired asset over extended period of time.
This is a measure of building checks and balances in the process of SARFEASI.
Iii. Changes in S. 13 (9).
S. 13 (9) is applicable in case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset in common parlance Consortium or Multiple Banking. The section states that no secured creditors, shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) (steps relating to possession and enforcement of security interest) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors. With the amendment three-fourth has been replaced by “sixty percent”.
This change will have far reaching consequences for the borrower and secured creditors. Hitherto borrowers were able to stonewall the actions of secured creditors by managing the minority (one fourth) and in many cases the majority was oppressed by the minority. The threshold of what constitutes the majority has been since reduced to “sixty percent”.
Defaulting borrowers will now have to more cautious and ultimately the majority will have its views.
1. Amendment to S. 14
Amendments have been made to S. 14 of the Act which mainly deals with secured creditor obtaining assistance from the CMM or DM for taking possession of the secured asset. S. 14 (1) (a) has been introduced which is as under :-
“Provided that any application by the secured creditor shall be accompanied by an affidavit duly affirmed by the authorised officer of the secured creditor, declaring that—
(i) the aggregate amount of financial assistance granted and the total claim of the Bank as on the date of filing the application;
(ii) the borrower has created security interest over various properties and that the Bank or Financial Institution is holding a valid and subsisting security interest over such properties and the claim of the Bank or Financial Institution is within the limitation period;
(iii) the borrower has created security interest over various properties giving the details of properties referred to in sub-clause (ii) above;
(iv) the borrower has committed default in repayment of the financial assistance granted aggregating the specified amount;
(v) consequent upon such default in repayment of the financial assistance the account of the borrower has been classified as a nonperforming asset;
(vi) affirming that the period of sixty days notice as required by the provisions of sub-section (2) of section 13, demanding payment of the defaulted financial assistance has been served on the borrower;
(vii) the objection or representation in reply to the notice received from the borrower has been considered by the secured creditor and reasons for non-acceptance of such objection or representation had been communicated to the borrower;
(viii) the borrower has not made any repayment of the financial assistance in spite of the above notice and the Authorised Officer is, therefore, entitled to take possession of the secured assets under the provisions of sub-section (4) of section 13 read with section 14 of the principal Act;
(ix) that the provisions of this Act and the rules made there under had been complied with:
Provided further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of the secured assets:
Provided also that the requirement of filing affidavit stated in the first proviso shall not apply to proceeding pending before any District Magistrate or the Chief Metropolitan Magistrate, as the case may be, on the date of commencement of this Act.”;
The object of the section seems to built a sense of responsibility on the part of secured creditor and make him responsible to the process of law. Hitherto the secured creditors were making application before the CMM or DM for obtaining assistance, now the Act specifies the same by way of affidavit. The affidavit must state that all provisions have been complied with and after such compliance assistance is sought from the CMM or DM as the case may be. Introduction of these provisions to an extent puts a check on the unfettered powers of the secured creditors and builds’ in some checks and balances.
The author expects delays to happen now at the level of CMM or DM where they start verifying the correctness or otherwise of the affidavit.
The other amendment to the S. 14 are procedural and authorize the CMM/DM to authorize any officer subordinate to him to take possession/collect documents etc.
1. Amendment to S. 18
Amendment to S. 18 have introduced process of “Caveat” to the process of SARFEASI. The secured creditor or borrower can now file “Caveat” before DRT/DRAT or any Court. This is a new provision and will enable more responsibility on the part of both the parties and will install confidence and safety to the aggrieved.
1. New S. 31A
Powers have been given under the Act to the Central Government to withdraw the powers given under to the Act to the Secured Creditors.
The Central Government may, by notification in the public interest, direct that any of the provisions of this Act,—
(a) shall not apply to such class or classes of banks or financial institutions;
(b) shall apply to the class or classes of banks or financial institutions with such exceptions, modifications and adaptations, as may be specified in the notification.
All such notifications shall be laid before the before each House of Parliament.
The Act as amended give more powers to the secured creditors and at the same time imposed certain checks in the system. The provisions regarding bid by the secured creditor in case of failed auction and reduction of the majority to 60% are some measures which will have far reaching implications and are good for the secured creditors, ultimately strengthening the scheme under the Act.