ENFORCMENT OF SECURITY INTEREST¹

MEANING OF SECURITISATION:

In the process of loans, receivable and other financial assets are pooled together, with their cash flow or economic values redirected to support payment on related securities. These are assets backed securities' are issued and sold to investor principally, institutions in the public and private markets by or on behalf of issuers' and the use it for finance their business activities. It also includes residential and commercial mortgager loans, as well as a wide Varity on non mortgages assets such as trade receivable credit card balance, consumer and business receivables or says that securitisation covers those assets having a certain value or creates a future stream of revenue.

In simple Securitisation is a process of converting something, which is not a security into a security. In an Asset Securitisation, a Financial claims or a claim against a third party are assigned or sold to a special entity called the Special Purpose Vehicle (SPV) separate asset from the issuer. The SPV in turn issues one or more debt instruments, whose interest and principal payments are serviced from the cash flows arising out of the underlying Assets.

ENFORCEMENT OF SECURITY INTEREST:-

Under the Act security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provision of this Act. ( Notwithstanding anything contained in section 69 or section 69(A) of the Transfer of Property Act, 1882)

Section 13(2)

Where any borrower, who is under a liability to a secured creditor under a security under a security agreement, makes any default in repayment of secured debt or any installment thereof , and his account in respect of such debt is classified by the secured creditor as non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor with in sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4)

(4). In case the borrower fails to discharge his liability in full within the period

Specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-

(a) Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset.

(b).take over the management of the assets of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset.

(c). Appoint any person to manager the secured assets the possession of which has been taken over by the secured creditor.

(d). require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money any money is due or may become due to the borrower, to pay the secured creditor o much of the money as is sufficient to pay the secured debt.

Under section 69 of Transfer of Property Act, mortgagee can take possession of Mortgaged property and sale the same without intervention of Court only in case of English mortgage² . In addition mortgagee can take possession of mortgaged property where there is a specific provision in mortgage deed and the mortgaged property is situated in towns of Kolkata, Chennai or Mumbai. In other cases possession can be taken only with the intervention of court. Therefore till now Banks/Financial Institutions had to enforce their security through court. This was a very slow and time-consuming process³ .

CONSTITUTIONALITY OF SECTION 13:-

In accordance with the observation of the Supreme Court section 13(3A) of the Act was inserted by the 2004 Ordinance.

Transcore vs. Union of India . Another controversy arose soon after over the interpretation of some provisions of this law, with some high courts ruling in favour of the debtors. The Supreme Court came to the rescue of the banks and the financial institutions and interpreted the law in their favour in a batch of appeals,

The Supreme Court pointed out in its judgement that the existing laws providing for recovery of debts have proved to be time-consuming. Therefore, the Securitisation Act provided for non-adjudicatory procedures without the intervention of the courts. The Act proceeded on the basis that security interest in the banks needed to be enforced speedily without the intervention of courts and tribunals.

In MARDIA CHEMICALS V. UNION ON INDIA⁴ court proceeded to consider the ‘ pivotal of the whole controversy' namely section 13 of the Act. The petitioner contended that the sale of a secured asset for enforcement of secured interest is an exception to the common law principle. It was strongly argued by the petitioner that section 13 empowers the borrower with unchecked arbitrary power since “before any action is taken under section 13, there is no forum or adjudication mechanism to resolve any dispute which may arise in respect of the alleged dues or the NPA”

At the very outset the court observed that there is a need for modern enforcement laws and speedy enforcement laws and there has been shift in paradigm on the issue of enforcement laws which have increasingly becoming lender friendly. The court held “in such a situation, there is a need for change in approach towards enforcement of the security interest law and the act cannot be held to be ultra vires merely because it allows the secured creditors to enforce their rights without the intervention of a judicial authority”.

In the same breath however the Court pointed out that any law which does not give the other party to represent his case would be struck down of Art.14 of the Constitution. Particularly there must be some internal mechanism which provides safeguards for a borrower, before a secured asset is classified as NPA. The Supreme Court observed that such an internal mechanism must be included in the Act by mandating that the creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objection rose in the reply to the notice.

WAYS TALKING POSSESSION OF THE SECURED ASSETS

Under section 14(1) provides for taking assistance of the chief metropolitan or the district magistrate in the process of taking possession of the secured assets of the borrower by the secured creditor under sub sec of 4 under 13 sec.

Aid of magistrate in taking possession the secured assets implies aid of police since force necessary for that purpose can only be the police force. It may happen in a given case that there is resistance to the taking possession. Then it is no doubt open to bank to seek assistance as provided in section fourteen of this act. It can not be accepted as an inexorable rule that in all cases the bank shall he compelled to take recourse to section 14 of the act. No doubt it enables a bank to seek assistance as provided in ection14 of the act if the fact of the given case so warrant⁵.

Under section 14(1) Request by secured creditors to seek help of magistracy

It provides that for purpose of taking possession or control of or in sale on transfer of secured assets of the borrower, the secured creditor can make a request in writing to the chief metropolitan magistrate or the district magistrate within whose jurisdiction any such secured assets or other documents relating to those assets may be situated or found, to take possession thereof and such magistrate, shall there upon take possession of the same and, then, forward the same to the secured creditor

Under section14 (2) provide use of force for effective, compliance of sub section one of the above sections. The chief metropolitan magistrate or the district magistrate may either himself take or cause to the taken such steps or cause to be used such force as may in his opinion be necessary for the purpose of securing compliance of section 13(4) for taking possession of the secured assets.

Section 14 (3) talks about the action of magistrate not to be called in question in court: in case the action of the magistrate in mala fide as there no occasions or material or record for the concern a magistrate to form n opinion whether use of force was really necessary the blanket immunity given to such magistrate sounds like negation of the rule of law. More so when public servant disobeying law with intend to case injury to any person or public servant framing an incorrect document with intend to cause injury, our specious of culpable offence contemplated respectively under section 166 and 167 of penal code.

Action of magistrate having No territorial void: the property in question that is, the secured assets sought to be taken possession was an immovable property situated in plot no 69, block A, sector 56, Noida, U.P Which is out side the territorial jurisdiction of the chef metropolitan magistrate, Delhi Ex facie the chief metropolitan, Delhi If he delivered the order could not have done so in terms of express provision 13 of the securitization act. In view of that the notice was quashed⁶.

Under section (16). No compensation to directors for loss of office : (1) not withstanding any thing to the contrary contained in any contract or in any other law for the time being in force, no managing director or by other director or the manager or any person in charge of management of the business of the borrower shall be in title to any compensation for the loss of office or for the premature termination of any contract of management entered into by him with the borrower.

Nothing contained in sub section one shall affect the right of any such managing director or any other director or manager of any such person in charge of management recover from the business of the borrower monetary recoverable otherwise then by way of such compensation.

Who has right to appeal: the notice under section 13(4) of the act in the absence of the challenge bye the borrowers attains finality and section 17(1) of the 2002 act gives right to any person aggrieved by this determination including the borrower to have adjudication by the tribunal regarding the correctness of the conclusion arrived at by the secured creditors if there after even either the secured creditors or any one aggrieved bye the notice is not satisfied bye the adjudication, he is given another opportunity of assailing the conclusion by filing an appeal under section 18(1) of the 2002 act⁷.

It provides for an application for assailing any of the measure referred in subsection four of section 13 taken bye the secured creditor or his authorized officials. The right of making such application is available not only to the borrower but also any person aggrieved by any measure resorted to bye the secured creditor under section 13(4). The expression (person aggrieved) may include a surety or guarantor, or even a bank or financial institution, if aggrieved by action taken under.

Such application has to be filed before the DRT established under sub section 1 of the section 3 of the recovery of debts due to Banks and Financial Institutions Act 1993, and having jurisdiction in the matter.

Any aggrieved person- includes tenant of borrower any person aggrieved by any of the measures referred to in 13(4) can prefer an appeal 17(3) was inserted by the amendment in 2005 expressly authorizes the tribunal to pass orders including restoration of possession of the secured assets and/or pass such orders as it may be consider appropriate add necessary in relation to any of the action taken bye the secured creditors. In case where the tenants of borrower or any other person relying upon some other right, may be aggrieved by the measure or action taken by the secured creditor section 17 efforts adequate remedy. The petitioner tenant was given liberty to approach DRT under section 17 of the act with in a period of two weeks⁸.

Remedy before DRT borrowers and guarantor or any person aggrieved : basically confer rights to approach the tribunal only on the banks and financial institutions; this section has bestowed the remedy of approaching the tribunal. Also on the borrower or any other person aggrieved from such action in the situation only where the secured creditor has resorted to any of the measures contemplated in section 13(4) of the act.

The right to approach to the tribunal to assail the action of the secured creditor is made available not only to the borrower, which expression includes the guarantor, but also to any other person aggrieved from such action.

Subsection (2),(3)and(4) of section 17 talks about power of DRT to pass order in regard to measures under section 13(4) on application bye the borrower. 17 (5), (6) and (7) provides expeditious disposal of application and procedure

Section 18 provides for an appeal against any order of DRT to the Debts Recovery Appellate Tribunal (DRAT) established under section 8(1) of the recovery of the debts due to banks and financial institutions act, 1993. Any person aggrieved by an order made by the debt recovery tribunal under section 17, may prefer an appeal along with the prescribed fee to the appellate tribunal with in 30 day from the date of receipt of the order of the debt recovery tribunal. Section 18(4) provides if order is illegal or recovery is illegal than appellant can pray for waiver of condition of the deposit; contention that the order of tribunal being nullity in recovery of amount awarded being illegal, appellant id exempted complying with the condition of statutory deposit of 50% of debt since recovery of amount being illegal, same cannot be held as “debt” can be raise before appellate tribunal, and a writ petition on that point held as barred by alternative remedy⁹

Right of borrower to receive compensation and costs in certain cases: it provides for return of assets, along with compensation and costs to the borrower where the debts recovery tribunals or the appellate tribunal finds the possession of the secured assets taken over by the secured creditor from the borrower under section 13(4) to be not in accordance with the provision of the act. The quantum compensation and costs would be such as tribunal or appellate tribunal may determine.

SALE OF FINANCIAL ASSETS:

The sale of financial assets from a bank/FI¹⁰ 's may be of “without recourse” basis, i.e., with the entire credit risk associated with the financial asset being transferred to the Securitisation (or Reconstruction) Company, as well as on a “with recourse” basis, i.e., subject to the unrealized part of the asset reverting to the seller bank/FI's.

Banks/FIs are however, required to ensure that the effect of the sale of the financial assets should be such that the asset is taken off the books of the bank/FI and after the sale there should not be any known liability devolving on the bank/FI.

It has also been clarified that under no circumstances can a transfer to the Securitisation (or Reconstruction) Company be made at a contingent price whereby in the event of shortfall in the realization by the Securitisation (or Reconstruction) Company, the banks/FIs would have to bear a part of the shortfall.

Specific financial assets , where it is considered necessary, banks/FIs may enter into agreements with the Securitisation (or Reconstruction) Company share, in agreed proportion, any surplus realized by the Securitisation (or Reconstruction) Company on the eventual realization of the concerned asset. In the case of financial assets that cannot be revived, the Sale Guidelines recognize that a Securitisation (or Reconstruction) Company may not take over these assets but act as an agent for recovery for which it will charge a fee. In such a case, the assets will not be removed from the books of the bank/FI but realizations as and when received will be credited to the asset account.

Securities offered by the Securitisation (or Reconstruction) Company to the banks/FIs the securities offered by the Securitisation (or Reconstruction) Company to the banks/FIs is required to satisfy the following conditions:

1. The securities must not have a term in excess of six years.

2. The securities must carry a rate of interest which is not lower than 1.5% above the Bank Rate in force at the time of issue.

3. The securities must be secured by an appropriate charge on the assets transferred.

4. The securities must provide for part or full prepayment in the event that the Securitisation (or Reconstruction) Company sells the asset securing the security before the maturity date of the security.

5. The commitment of the Securitisation (or Reconstruction) Company to redeem the securities must be unconditional and not linked to the realization of the assets.

6. Wherever the security is transferred to any other party, notice of transfer should be issued to the Securitisation (or Reconstruction) Company.

RBI'S GUIDELINES FOR SECURITISATION AND RECONSTRUCTION OF COMPANY¹¹ :

Securitisation and Reconstruction Company may, for purpose of assets reconstruction, adopt one or more of the measures enumerated and clauses (a) to (f) of the section and these measures are:

1) Proper management of the business of the borrower by change in or take over of the management of the business of the borrower. The sale or lease of a part or whole of the business of the borrower

2) Rescheduling the payment of debts payable by the borrower. And also settlement of dues payable by the borrower

The purpose of assets reconstruction for securitisation of company and Reconstruction Company will have proper management of the business of the borrower. Also, whole of the business of the borrower will lease a sale or a part. Rescheduling of payment of debts payable by the borrower the settlement of dues are also payable by the borrower, and take over the possession of secured assets in accordance with the “section 9” of this act.

DISPUTE SETTLEMENT SYSTEM¹²

If the securitisation or the reconstruction company has not issued a debenture or bond or any other security in the nature of debenture. Or if the bank or the financial institute has failed to transfer the assets acquired b the securitisation or the reconstruction company or has transferred the assets other than those agreed to have been transferred.

If there has been some difference between the parties as to the existence or the validity of the terms and conditions of the agreement entered into, between the bank or the financial institute and the securitisation or reconstruction company or if measures or assets reconstruction have been taken without regard to the guideline by the Reserve bank.

Any dispute relating to securitization or reconstruction or non payment of any amount due including interest arises, amongst any of the party or parties [bank, financial institute, Securitization Company and Reconstruction Company or qualified institution] buyer then will be settled under conciliation and arbitration as provided in the arbitration and conciliation act 1996.

Enforcement of security interest:

I) Security interest may be enforced without intervention of the court or tribunal by secured creditor.

II) Any kind of default arises in repayment of secured debt or instatement or any account in respect debt has been classified as NPA¹³ then secured creditor may require the borrower, by notice in writing to discharge in full his liabilities to secured creditor with in sixty days of failing notice.

 

CONCLUSION:

The securitisation is, hence, a process through which another agency, namely the securitisation or the reconstruction company comes in between the secured creditors and the borrower, and pays the secured creditors the value of his loan at the some discounting and thereafter deals with the borrower directly on the basis of securitised recovered from the secured creditor, relieving the secured creditor from resorting to any recovery process against its borrowers, since, as a result of securitisation

In India , the structure of securitisation transactions is quite innovative and varied. However there is no legal regulatory accounting and taxation framework for debts securitisation. There are no proper and consistent definitions of true sale of assets of the SPV to ascertain whether moving assets off balance sheet is proper or not. There is no disclosure guideline for the originators of various securitisation transactions in terms of assets securitised and the deal structure, including credit enhancement and recourse obligation. There are no prescribed norms on capital requirements to support the risk exposure based on the substance rather than the form of arrangements¹⁴.

Bibliography

References  

•  Dr R.G. chaturvedi, “Law and Practice of Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest” Bharat Law Publications, Second Edition

•  Ramaiya A , ‘Guide To The Companies Act', Wadhwa Nagpur, Sixteenth Edition

•  Kothari Vinod, ‘ Securitisation Asset Reconstruction and Enforcement of

•  Security Interest' , Wadhwa Nagpur, First Edition Reprint 2005

•  Gupta S.N. ‘ Recovery of Debts Due to Banks & Financial Institution Act, 1993'

•  H.P.S. Pahwa , “Sick Industries and BIFR”, Bharat Law House, seventh Edition

Web sites  

•  www.find law india.com

•  www. legalserviceindia.com

•  www. findarticles.com

•  www.rbi.org.in

•  www.bankdrt.com

•  www.indlaw.com/publicdata/article

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1. Vipin Singh Rainiwal, IV year, NLIU &

Nidhi verma , II year , NLIU

2.English Mortgage is where mortgagor binds himself to repay the mortgaged money on a certain date, and

transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will retransfer

The property to the mortgagor upon payment of the mortgage money as agreed.

3. There was also no provision in any of the present law in respect of hypothecation, though hypothecation

is one of the major security interest taken by the Bank/Financial Institution.

4. AIR 2004 SC 2371.

5. Aboobacker Vs Punjab national bank 2005(64) SCL 42

6. Santosh raghav Smt V.Orental bank of commerce. Manu/DE/0821/2003

7. Atma jain hosiery emporium v. Union of India, 2005(60) SCL 38.

8. Sanjay Bansal V. Rakesh K. Ahlawat, 2006(130) Comp. cas. 634

9. Oswal Agency, Tourist Lodge V. Recovery officer, Debt Recovery Tribunal, 2004(3) BC 78 (All.).

10. Financial institution

11. Section 9 of The securitisation and reconstruction of Financial assets and Enforcement of Security Interest act

12. Section 11 of The securitisation and reconstruction of Financial assets and Enforcement of Security Interest act

13. A Non-Performing Asset means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classifications issued by the Reserve Bank.” However, according to the Reserve Bank of India asset is considered as non-performing in case the interest or installments of principal or both remain unpaid for more than 180days.

14. Ibid