Category Archives: Governance and Responsibility

Governance and Responsibility – In life of Nation, State, Government, Corporate, Society and Individual

THE ECOSYSTEM OF LAW


How to read the ecosystem of law is the basic question all practitioners of procedural laws raise time to time. This is not the same question students of law raise in schools or lawyers in courts. This is not all about interpretation and cracking of a law code hidden behind words. Here, I am trying to reply with reference to my bread and butter – the Companies Act, 2013 and The Insolvency and Bankruptcy Code, 2016.

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Legal Claims on Work-related Injuries


Guest Post by: Eric Tress Eric@TheRosenfeldFoundation.com

Getting injured at work is never a welcome occurrence. It may cause you to miss work for days or even weeks as you recuperate. If the injury is severe, it could put you out of work altogether. 

As if the hospital bills and possible loss of wages are not enough, work-related injuries can also trigger a lot of emotional and mental distress. There is a small consolation in knowing that workers compensation exists to alleviate such stress.

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Further Discussion on Manufacturing Activities in LLP


I recently published here a post analysing the law relating to manufacturing activities in a limited liability partnership. I, presently, have a strong view that manufacturing is not permitted under the present framework of the law. The parliament in its wisdom included trading as a permitted business for LLPs but not manufacturing under Section 2(e). According to my views, the Parliament may bring an amendment to include manufacturing as a permitted business for LLP. Any Office Memorandum issued by the Ministry or its withdrawal may not give LLPs permission to do the business of manufacturing without an amendment to the Act.

This blog post generated a debate. In this post, I reproduced a consolidation of all these discussions I was part:

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MANUFACTURING ACTIVITIES IN LLPs


Presently on the website of Ministry of Corporate Affairs, in news and update section following update is displaying prominently –

Manufacturing & allied activities were restricted in LLPs vide OM No. CRC/LLP/e-Forms dated 06.03.2019. This OM invoking the restriction regarding manufacturing & allied activities has been withdrawn with immediate effect.

As this office memorandum is now withdrawn officially we will not refer the same in this post but we will surely discuss the law.

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Corporate Law – Post Election


Unless a general election is crucial there is no purpose to conduct such a huge exercise. The best part of democracy is to give the opportunity for new ideas. Without going to any political prediction we will discuss possible post-election scenario after 23rd May 2019. This may help us to be prepared for the volatility of corporate law in India.

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PROCEDURE UNDER THE SARFAESI ACT, 2002


Shreesh Chadha
4th Year BALLB Student,
Jindal Global Law School
Sonipat

In the Statement of Object and Reasons of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002(hereinafter SARFAESI,2002 or Act,2002), it is stated that the recovery of loans was a slow process which consequently resulted in the “mounting levels of Non-Performing Assets”. This act provides for the realization of any security interest in the favour of any secured creditor “without the intervention of the court or tribunal”[1]. This has resulted in a speedy recovery of Non- Performing Assets.

Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under S. 13 of SARFAESI Act, 2002. If the borrower of financial assistance makes any default in repayment of the loan or any instalment and his account is classified as Non-Performing Asset by a secured creditor, then secured creditor may require before the expiry of the period of limitation[2]by written notice. The Impugned Act, does not cover a certain class of assets, for example, any asset other than a non-performing asset, or unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principals stated in S. 31 of the SARFAESI Act,2002.

WHAT IS THE PROCEDURE FOR SALE/AUCTION THAT THE SECURED CREDITOR NEEDS TO FOLLOW?

The procedures laid down in the SARFAESI Act,2002, as well as the Security Enforcement (Rules), 2002, are mandatory, and no divulgence from the same is permitted, as held by the Hon’ble Supreme Court of India.[3] The procedures to be followed under the Act,2002 are stated hereinbelow.

Procedure of Physical Possession of the secured asset:

  • If the borrower defaults in repayment, under S. 13(2) a demand notice is to be sent by Secured Creditor to the borrower to discharge his liabilities. Such notice persists for 60 days. The demand notice shall contain details and amounts of the amount payable by the borrower.[4] This demand notice can also be objected to by the borrower, which should be replied by the secured creditor within 15 days, and the reply should enumerate the reasons for non-acceptance of such objection. This position was clarified by the Hon’ble Supreme Court of India[5]and later amended into the SARFAESI Act, as S. 13 (3A).
  • When the 60 day period concludes, without any discharge by the Borrower, actions can be taken by the Secured Creditor as enumerated under S. 13 (4)- wherein they can take possession of the secured assets, take over the management of the asset, appoint any person to manage the secured asset, require any person who has acquired any of the assets from the borrower to pay the secured creditor.
  • The actions under S. 13 (4) are appealable as enumerated in S. 17- 18. Therefore, the borrower can appeal the actions of the secured creditor in Debt Recovery Tribunal, DRAT, writ in High Court and SLP in Supreme Court.

Procedure of Sale and Auction under the SARFAESI Act,2002:

  • A Sale Notice is required in the case of auctioning off of the secured asset if inviting tenders from the public, or by way of public auction. This sale notice shall be published in 2 leading newspapers, on the website of the secured creditor, and as per the Directions of the Ministry of Finance directions, upload the tender notice on tender.gov.in.
  • The sale notice or possession notice should be effectively served, I.e. in 2 newspapers in circulation in the area as provided for in the SECURITY INTEREST (ENFORCEMENT) RULES,2002.
  • More particularly, the procedure for an auction of immovable assets is given in Rule 8, Security Interest (Enforcement) Rules,2002. the methods of sale of the immovable secured assets include:

(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or

(b) by inviting tenders from the public;

(c) by holding public auction; or

(d) by private treaty.[6] (after the possession of the asset by a Bank or Financial Institution, they might be willing to sell it to an appropriate buyer through a private deal with a third party)

Procedure regarding payment by purchaser:

The first step is determining the Reserve Price which is the minimum fair market value of the immovable asset as stipulated by the authorized officer, followed by the relevant notice according to the obligations enumerated in Rule 8 (6). The bidding process for public auction shall be done in accordance with Rule 9, Security Interest Rules, 2002 wherein the bidder shall deposit:

(1) Earnest money deposit (at the time of bidding)

(2) 25 per cent of the accepted sales price (including EMD) after successful bidding

(3) 75 per cent of the balance amount within 15 days of the auction.

Upon completion of the above, the sale certificate shall be issued to him. Otherwise, any sale by any other method other than public auction shall be on terms and conditions as decided by the parties.[7]It is also mandated under the Security Interest Rules,2002 that the amount of sale shall not be less than the reserved price.

 àWHAT ARE THE OTHER REMEDIES AVAILABLE TO SECURED CREDITORS?

Section 14 of the Act, 2002 provides a provision for the assistance of the Chief Metropolitan Magistrate andDistrict Magistrate in taking possession of the property. According to the Hon’ble High Court of Madras has held that this provision should be given a purposive interpretation in consonance with the Statement of Objects and Reasons of the SARFAESI Act,2002. It was held that the purpose of this provision is to aid the secured creditor of obtaining possession of the asset as soon as possible, and convert a Non-Performing Asset into a source of recovery for the amount due, and transfer the secured asset to a willing third party.[8]

However, it is pertinent to mention that all the rights and interests of symbolic and/or physical possession guaranteed to the secured creditor under the Act,2002 extinguish after the sale to the third party is complete. From the date of the registration of the sale deed, the secured creditor does not have any remedy or course of action under S. 13 or S. 14 of the SARFAESI Act,2002.

In instances where the secured creditor is unable to claim possession over the secured asset after the expiry of the period of the demand notice under S. 13(2) of the Act,2002 specifically due to tenancy rights that might exist over the said asset, the rent or any other amount which might become due on the said secured asset from the lessee to the borrower (if any) becomes due to the secured creditor. This position was enumerated in S. 13 (4) of the Act,2002, and was solidified by the Hon’ble Supreme Court [9].

Therefore, within the 4 walls of the Act,2002 the secured creditor is well protected if the correct procedure is followed. The SARFAESI Act,2002 is one such legislation that genuinely removes unnecessary and frivolous litigation from the courts, and provides safeguard against the initiation of such litigation at the option of both, the defaulting borrower as well as the secured creditor.

(Views express in this post are of the author, this blog do not take any responsibility.)

E-mail of auther- shreeshchadha @ gmail.com

[1] S. 13 (1), SARFAESI Act, 2002.

[2] S. 36,SARFAESI Act,2002.

[3]ITC Limited v. Blue Coast Hotels Ltd. &OrsCIVIL APPEAL Nos. 2928-2930 OF 2018.

[4] S 13 (3), SARFAESI Act,2002.

[5]Mardia Chemicals Ltd. v. Union of IndiaTransfer Case (civil)  92-95 of 2002.

[6] Rule 8 (6), Security Interest Rules,2002.

[7] Rule 8(8), Security Interest Rules,2002.

[8]Kathikkal Tea Plantations v. State Bank of IndiaMANU/TN/1926/2009.

[9]Harshad Govardhan Sondgar v. International Asset Reconstruction((2014) 6 SCC 1).

AishMGhrana – Law Governance Responsibility


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Happy New Year 2019!

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