Category Archives: Insolvency and Bankruptcy Code 2016

Provision under the (Indian) Insolvency and Bankruptcy Code 2016

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).

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Ease of Doing Business Report 2019 – Corporate Law Perspective


Once upon a time falling in the line of World Bank was not fine for at least half of the world. The scenario is changing. There is a rumour that economies not only reforms but also window dress it.

India placed this year at the 77th place with 67.23 EODB scores. Unlike a layman, this EODB score concerns the exports. When we talk about this ranking is a rating of Delhi and Mumbai, not any other place. It might possible other states/cities doing better and not reflected in the report.

“India also focused on streamlining business processes. Under its National Trade Facilitation Action Plan 2017-2020, India implemented several initiatives that improved the efficiency of cross-border trade, reducing border and documentary compliance time for both exports and imports (figure 1.9). Enhanced risk-based management now allows exporters to seal their containers electronically at their own facilities; as little as 5% of shipments must undergo physical inspections. India also invested in port equipment, strengthened management and improved electronic document flow. By implementing the Single Window Clearance System in Delhi and the Online Building Permit Approval System in Mumbai during the second half of 2017, India also continued to streamline and centralize its construction permitting process. Regarding getting electricity, newly-adopted regulations from the Delhi Electricity Regulatory Commission require that electrical connections be completed within 15 days of the application’s acceptance. To comply with this regulation, Tata Power Delhi Distribution deployed more personnel as well as tracking tools and key performance indicators to monitor each commercial connection.” {Page 12}

A print version of the report may be downloaded from here.

SPICe added to the report

The report mentioned that India is among nation who improved by making it easier to start a business. India made starting a business easier by fully integrating multiple application forms into a general incorporation form.

Starting a Business

The starting a business ranking is fairly poor despite mentioning of SPICe in the report. The starting a Business rank among 190 economies is 137. On the scale of 100, the score for incorporation is 80.96. Starting a business in India involves 10 procedures involving 16.5 days. It cost 14.4% of per capita income of Indians. It means it is still not easy to start a formal business for an average Indian. This fact cause concern as there is no legal requirement of minimum capital for a business.

Minority Protection

This is good news. Our ranking is fairly good at 7th place with a score of 80. It can be understood that most economies are not doing fair on minority protection. So, it may not be our best efforts but the poor performance of most economies.

The extent of disclosure index (0–10) 8

The extent of director liability index (0–10) 7

Ease of shareholder suits index (0–10) 7

The extent of shareholder rights index (0–10) 10

The extent of ownership and control index (0–10) 8

The extent of corporate transparency index (0–10) 8

Resolving Insolvency

Insolvency is a very interesting phenomenon presently in India. Our improved rank is 108, a number which Indians love. Insolvency Resolution Score is 81.85. An average time for insolvency resolution is one year presently. This is quite embracing as against the promised 180 days. However, we are facing many practical issues and teething troubles.

Cost of Insolvency resolution is 3.5% of the estate evolved. Recovery rate is 85.3 cent in the Dollar.

In India the establishment of debt recovery tribunals reduced nonperforming loans by 28% and lowered interest rates on larger loans, suggesting that faster processing of debt recovery cases cut the cost of credit.

A recent study using Doing Business data showed that insolvency resolution is one of the main drivers behind “missing” corporate bond markets in many economies. More borrowers gain access to credit in economies with a robust legal system that supports the use of movable assets as collateral and a well-developed credit information sharing system.

Other major reform related to business

India (Delhi) issued a regulation prescribing new electricity charges.

India introduced the Maharashtra Goods and Services Tax Act 2017 and the Delhi Goods and Services Tax Act 2017, which unified all sales taxes into one new tax called the Goods and Services Tax (GST).

Performance on corporate law front

Overall performance on corporate law front is not satisfactory. We can notice that last year insolvency related score and rating were improved due to the introduction of the law. Practical implementation of the same was not so satisfactory. Same is also true for incorporation of a company or starting a business.

Targeted reforms

This is unfortunate that government across economies trying to improve their ease of doing business ranking and not taking a holistic approach on reforms. Various segments which might need attention but not directly related to the ranking are not taken care of.

Anyway it is good to see reforms.

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Managing a Going Concern


[A version of this article was published in July – August 2017 issue of Newsletter of The ICSI – WIRC Pune Chapter.]

These days, media hype talk about a new magical law to reduce nonperforming assets from the books of lender banks and financial institutions. There is no such new law. There is a law for insolvency resolution. This law also deals with the possibility of liquidation which may trigger after the failure of resolution of insolvency.

Continue reading

Amendment in Corporate Insolvency Regulations


Recent case of Jaypee Infratech, question arises where should home-buyers be classified? Are home-buyers financial creditors or operational creditors? In case, home-buyers they classify themselves as operational creditors, will they forego their claim on interest or assured return on their advances? In case, home-buyers they classify themselves as financial creditors, will they forego their claim over homes? This was a game of dice, will company be able to resolve insolvency or face liquidation?

These amendments try to solve these issues.

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Managing Corporate Debtor under Resolution


My well criticized last post “Insolvency Professional ‘Non’ Entities” mentioned, “The Term “Insolvency Professional Entity” has no mention in the Insolvency and Bankruptcy Code, 2016. This is sole creation of anxieties of newly enrolled registered Insolvency Professionals reflected in Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.” Most insolvency professionals, except few like me, are anxious about managing corporate debtor as a going concern. Every worry has its solution.

Continue reading

Insolvency Professional “Non” Entity


The Term “Insolvency Professional Entity” has no mention in the Insolvency and Bankruptcy Code, 2016. This is sole creation of anxieties of newly enrolled registered Insolvency Professionals reflected in Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. This magic creation has no purpose except one apart from its legal existence.

[This post already published in NIRC – NIRC Newsletter June 2017] Continue reading

Cracking Limited Insolvency Examination


This was first attempt. I studied about 120 hours. But after lot of discussion with many who attempted it with or without success, in first attempt. I made strategy and changed it slightly just 20 study hours before examination on advice.

Last advice I received was not to try too much question. Due to negative marking you should touch your most positive questions. We should care positivity more, if negativity surround.

In first round of 70 minutes, I read all questions and answered most sure one. I marked all other questions for review. In second round of 20 minutes, I reviewed all marked questions and decided not to attempted most of them. Now, out of my target of 70 out of 90, I did only 69 questions.  Now, in final round of 30 minutes, I reviewed all questions once. This did the trick.

But, passing this examination or any examination is not about tricks only. In an examination with multiple choice questions coupled with negative marking need concentration of minor details. Section numbers, penalties, imprisonment, rules, regulations, timelines, definitions and case laws are just a few critical points. No model paper can cover all these in a comprehensive manner. You have to study from original sources. I read law directly from bare published by ICSI – Insolvency Professional Agency.

With age, we may loss our memory and become adamant. Experience usually comes with overconfidence. When new law come into statute books, it changes rule of game more dramatically than we understand.

I was well advised to focus 90% on 60% of syllabus to be covered. I revised all old laws in syllabus in first day of my preparation not to touch again. I cannot memorise all these minor details missed earlier. This was time to focus on new law – the king of the examination concerned. I noted down all possible minor details and left confusing details for practical life outside this examination.

In professional life and examination you cannot take risk with your time. I enrolled for back to back three attempts spread over two weeks. There was another risk for me, the syllabus is about to be revised from fourth week. My failure may require me to cover more diversification and enrichment in new syllabus.

I am indebted to all my family, seniors, critics, friends, relatives and well wishers.

I am thankful to following person more directly for this success, in alphabetical order –

Hari Babu Thota
ICSI
ICSI IPA
Jinesh Kulshreshtha
Lakshmi Arun
Prabhjit Singh Soni
RajKumar S Adukia

Rakesh Kumar Jain