Updated: Sunday August 25, 2013/AlAhad Shawwal 19, 1434/Ravivara Bhadra 03, 1935, at 06:52:40 PM

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (India)

An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.

Be it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:---

CHAPTER I

Preliminary

1. Short title, extent and commencement.---

(1) This Act may be called the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

(2) It extends to the whole of India.

(3) It shall be deemed to have come into force on the 21st day of June, 2002.

2. Definitions.-

(1) In this Act, unless the context otherwise requires,-

(a) Appellate Tribunal means a Debts Recovery Appellate Tribunal established under sub-section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)

(b) asset reconstruction means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance;

(c) 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;

(d) banking company shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)

(e) Board means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992)

(f) borrower means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;

(g) Central Registry means the registry set up or cause to be set up under sub-section (1) of section 20;

(h) corresponding new bank shall have the meaning assigned to it in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949)

(i) Debts Recovery Tribunal means the Tribunal established under sub-section (1) of section 3 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993)

(j) default means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor in accordance with the directions or guidelines issued by the Reserve Bank;

(k) financial assistance means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution;

(l) financial asset means debt or receivables and includes-

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or

(ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or

(iii) a mortgage, charge, hypothecation or pledge of movable property; or

(iv) any right or interest in the security, whether full or part underlying such debt or receivables; or

(v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or

(vi) any financial assistance;

(m) financial institution means-

(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956)

(ii) any institution specified by the Central Government under sub-
clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)

(iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges ) Act, 1958 (42 of 1958)

(iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act;

(n) hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property;

(o) 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 under guidelines relating to assets classifications issued by the Reserve Bank;

(p) notification means a notification published in the Official Gazette;

(q) obligor means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower;

(r) originator means the owner of a financial asset which is acquired by a securitisation company or reconstruction company for the purpose of securitisation or asset reconstruction;

(s) prescribed means prescribed by rules made under this Act;

(t) property means,---

(i) immovable property;

(ii) movable property;

(iii) any debt or any right to receive payment of money, whether secured or unsecured;

(iv) receivables, whether existing or future;

(v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature;

(u) qualified institutional buyer means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or any asset management company making investment on behalf of mutual fund or provident fund or gratuity fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder, or any other body corporate as may be specified by the Board;

(v) reconstruction company means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;

(w) Registrar of Companies means the Registrar defined in clause (40) of section 2 of the Companies Act, 1956 (1 of 1956)

(x) Reserve Bank means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934)

(y) scheme means a scheme inviting subscription to security receipts proposed to be issued by a securitisation company or reconstruction company under that scheme;

(z) securitisation means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;

(za) securitisation company means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation;

(zb) security agreement means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

(zc) secured asset means the property on which security interest is created;

(zd) secured creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes-

(i) debenture trustee appointed by any bank or financial institution; or

(ii) securitisation company or reconstruction company; or

(iii) any other trustee holding securities on behalf of a bank or financial institution;

in whose favour security interest is created for due repayment by any borrower of any financial assistance;

(ze) secured debt means a debt which is secured by any security interest;

(zf) security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;

(zg) security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation;

(zh) sponsor means any person holding not less than ten per cent. of the paid-up equity capital of a securitisation company or reconstruction company;

(zi) State Bank of India means the State Bank of India constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955)

(zj) subsidiary bank shall have the meaning assigned to it in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959).

(2) Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.

CHAPTER IIRegulation of securitisation and reconstruction of financial assets of banks and financial institutions 

3. Registration of securitisation companies or reconstruction compnaies.-

(1) No securitisation company or reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without-

(a) obtaining a certificate of registration granted under this section; and

(b) having the owned fund of not less than two crore rupees or such other amount not exceeding fifteen per cent. of total financial assets acquired or to be acquired by the securitisation company or reconstruction company, as the Reserve Bank may, by notification, specify:

Provided that the Reserve Bank may, by notification, specify different amounts of owned fund for different class or classes of securitisation companies or reconstruction companies:

Provided further that a securitisation company or reconstruction company, existing on the commencement of this Act, shall make an application for registration to the Reserve Bank before the expiry of six months from such commencement and notwithstanding anything contained in this sub-section may continue to carry on the business of securitisation or asset reconstruction until a certificate of registration is granted to it or, as the case may be, rejection of application for registration is communicated to it.

(2) Every securitisation company or reconstruction company shall make an application for registration to the Reserve Bank in such form and manner as it may specify.

(3) The Reserve Bank may, for the purpose of considering the application for registration of a securitisation company or reconstruction company to commence or carry on the business of securitisation or asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such securitisation company or reconstruction company, or otherwise, that the following conditions are fulfilled, namely:-

(a) that the securitisation company or reconstruction company has not incurred losses in any of the three preceding financial years;

(b) that such securitisation company or reconstruction company has made adequate arrangements for realisation of the financial assets acquired for the purpose of securitisation or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on the investments made in the company by the qualified institutional buyers or other persons;

(c) that the directors of securitisation company or reconstruction company have adequate professional experience in matters related to finance, securitisation and reconstruction;

(d) that the board of directors of such securitisation company or reconstruction company does not consist of more than half of its total number of directors who are either nominees of any sponsor or associated in any manner with the sponsor or any of its subsidiaries;

(e) that any of its directors has not been convicted of any offence involving moral turpitude;

(f) that a sponsor, is not a holding company of the securitisation company or reconstruction company, as the case may be, or, does not otherwise hold any controlling interest in such securitisation company or reconstruction company;

(g) that securitisation company or reconstruction company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank.

(4) The Reserve Bank may, after being satisfied that the conditions specified in sub-section (3) are fulfilled, grant a certificate of registration to the securitisation company or the reconstruction company to commence or carry on business of securitisation or asset reconstruction, subject to such conditions, which it may consider, fit to impose.

(5) The Reserve Bank may reject the application made under sub-section (2) if it is satisfied that the conditions specified in sub-section (3) are not fulfilled:

Provided that before rejecting the application, the applicant shall be given a reasonable opportunity of being heard.

(6) Every securitisation company or reconstruction company, shall obtain prior approval of the Reserve Bank for any substantial change in its management or change of location of its registered office or change in its name:

Provided that the decision of the Reserve Bank, whether the change in management of a securitisation company or a reconstruction company is a substantial change in its management or not, shall be final.

Explanation.-For the purposes of this section, the expression substantial change in management means the change in the management by way of transfer of shares or amalgamation or transfer of the business of the company.

4. Cancellation of certificate of registration.---

(1) The Reserve Bank may cancel a certificate of registration granted to a securitisation company or a reconstruction company, if such company-

(a) ceases to carry on the business of securitisation or asset reconstruction; or

(b) ceases to receive or hold any investment from a qualified institutional buyer; or

(c) has failed to comply with any conditions subject to which the certificate of registration has been granted to it; or

(d) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section (3) of section 3; or

(e) fails to-

(i) comply with any direction issued by the Reserve Bank under the provisions of this Act; or

(ii) maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve Bank under the provisions of this Act; or

(iii) submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or

(iv) obtain prior approval of the Reserve Bank required under sub-section (6) of section 3:---

Provided that before cancelling a certificate of registration on the ground that the securitisation company or reconstruction company has failed to comply with the provisions of clause (c) or has failed to fulfil any of the conditions referred to in clause (d) or sub-clause (iv) of clause (e), the Reserve Bank, unless it is of the opinion that the delay in cancelling the certificate of registration granted under sub-section (4) of section 3 shall be prejudicial to the public interest or the interests of the investors or the securitisation company or the reconstruction company, shall give an opportunity to such company on such terms as the Reserve Bank may specify for taking necessary steps to comply with such provisions or fulfillment of such conditions.

(2) A securitisation company or reconstruction company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government:

Provided that before rejecting an appeal such company shall be given a reasonable opportunity of being heard.

(3) A securitisation company or reconstruction company, which is holding investments of qualified institutional buyers and whose application for grant of certificate of registration has been rejected or certificate of registration has been cancelled shall, notwithstanding such rejection or cancellation, be deemed to be a securitisation company or reconstruction company until it repays the entire investments held by it (together with interest, if any) within such period as the Reserve Bank may direct.

5. Acquisition of rights or interest in financial assets.-

(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution,-

(a) by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or

(b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.

(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.

(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of securitisation company or reconstruction company, as the case may be.

(4) If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be.

6. Notice to obligor and discharge of obligation of such obligor.---

(1) The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by any securitisation company or reconstruction company, to the concerned obligor and any other concerned person and to the concerned registering authority (including Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment or other interest created on the financial assets had been registered.

(2) Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or financial institution, the obligor, on receipt of such notice, shall make payment to the concerned securitisation company or reconstruction company, as the case may be, and payment made to such company in discharge of any of the obligations in relation to the financial asset specified in the notice shall be a full discharge to the obligor making the payment from all liability in respect of such payment.

(3) Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or financial institution, any money or other properties subsequently received by the bank or financial institution, shall constitute monies or properties held in trust for the benefit of and on behalf of the securitisation company or reconstruction company, as the case may be, and such bank or financial institution shall hold such payment or property which shall forthwith be made over or delivered to such securitisation company or reconstruction company, as the case may be, or its agent duly authorised in this behalf.

7. Issue of security by raising of receipts or funds by securitisation company or reconstruction company.---

(1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any securitisation company or reconstruction company, may, after acquisition of any financial asset under sub-section (1) of section 5, offer security receipts to qualified institutional buyers (other than by offer to public) for subscription in accordance with the provisions of those Acts.

(2) A securitisation company or reconstruction company may raise funds from the qualified institutional buyers by formulating schemes for acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired out of investments made by a qualified institutional buyer and ensure that realisations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme.

(3) In the event of non-realisation under sub-section (2) of financial assets, the qualified institutional buyers of a securitisation company or reconstruction company, holding security receipts of not less than seventy-five per cent. of the total value of the security receipts issued by such company, shall be entitled to call a meeting of all the qualified institutional buyers and every resolution passed in such meeting shall be binding on the company.

(4) The qualified institutional buyers shall, at a meeting called under sub-section (3), follow the same procedure, as nearly as possible as is followed at meetings of the board of directors of the securitisation company or reconstruction company, as the case may be.

8. Exemption from registration of security receipt.-Notwithstanding anything contained in sub-section (1) of section 17 of the Registration Act, 1908 (16 of 1908),-

(a) any security receipt issued by the securitisation company or reconstruction company, as the case may be, under sub-section (1) of section 7, and not creating, declaring, assigning, limiting or extinguishing any right, title or interest, to or in immovable property except in so far as it entitles the holder of the security receipt to an undivided interest afforded by a registered instrument; or

(b) any transfer of security receipts,

shall not require compulsory registration.

9. Measures for assets reconstruction.---

Without prejudice to the provisions contained in any other law for the time being in force, a securitisation company or reconstruction company may, for the purposes of asset reconstruction, having regard to the guidelines framed by the Reserve Bank in this behalf, provide for any one or more of the following measures, namely:-

(a) the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower;

(b) the sale or lease of a part or whole of the business of the borrower;

(c) rescheduling of payment of debts payable by the borrower;

(d) enforcement of security interest in accordance with the provisions of this Act;

(e) settlement of dues payable by the borrower;

(f) taking possession of secured assets in accordance with the provisions of this Act.

10. Other functions of securitisation company or reconstruction company.----

(1) Any securitisation company or reconstruction company registered under section 3 may,---

(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties;

(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be mutually agreed upon between the parties;

(c) act as receiver if appointed by any court or tribunal:---

Provided that no securitisation company or reconstruction company shall act as a manager if acting as such gives rise to any pecuniary liability.

(2) Save as otherwise provided in sub-section (1), no securitisation company or reconstruction company which has been granted a certificate of registration under sub-section (4) of section 3, shall commence or carry on, without prior approval of the Reserve Bank, any business other than that of securitisation or asset reconstruction:

Provided that a securitisation company or reconstruction company which is carrying on, on or before the commencement of this Act, any business other than the business of securitisation or asset reconstruction or business referred to in sub-section (1), shall cease to carry on any such business within one year from the date of commencement of this Act.

Explanation-For the purposes of this section, securitisation company or reconstruction company does not include its subsidiary.

11. Resolution of disputes.---

Where any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest arises amongst any of the parties, namely, the bank or financial institution or securitisation company or reconstruction company or qualified institutional buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996 (26 of 1996), as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly.

12. Power of Reserve Bank to determine policy and issue directions.-

(1) If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any securitisation company or reconstruction company from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such securitisation company or reconstruction companay, it is necessary or expedient so to do, it may determine the policy and give directions to all or any securitisation company or reconstruction company in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment of funds by the securitisation company or reconstruction company, as the case may be, and such company shall be bound to follow the policy so determined and the directions so issued.

(2) Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give directions to any securitisation company or reconstruction company generally or to a class of securitisation companies or reconstruction companies or to any securitisation company or reconstruction company in particular as to-

(a) the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof;

(b) the aggregate value of financial assets which may be acquired by any securitisation company or reconstruction company.

CHAPTER IIIEnforcement of security interest 

13. Enforcement of security interest.-

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment 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 within 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).

(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.

(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 realising the secured asset;

(b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

(c) appoint any person (hereafter referred to as the manager), to manage 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 is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

(6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.

(7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) 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:

Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956):

Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen’s dues with the liquidator in accordance with the provisions of section 529A of that Act:---

Provided also that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen’s dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen’s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen’s dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:---

Provided also that in case the secured creditor deposits the estimated amount of workmen’s dues, such creditor shall be liable to pay the balance of the workmen’s dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:---

Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen’s dues, if any.

Explanation.-For the purposes of this sub-section,---

(a) record date means the date agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding on such date;

(b) amount outstanding shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

(11) Without prejudice to the rights conferred on the secured creditor under or by this section the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act.

(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.

14. Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset.---

(1) Where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him,---

(a) take possession of such asset and documents relating thereto; and

(b) forward such asset and documents to the secured creditor.

(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.

(3) No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.

15. Manner and effect of takeover of management.---

(1) When the management of business of a borrower is taken over by a secured creditor, the secured creditor may, by publishing a notice in a newspaper published in English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated, appoint as many persons as it thinks fit-

(a) in a case in which the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), to be the directors of that borrower in accordance with the provisions of that Act; or

(b) in any other case, to be the administrator of the business of the borrower.

(2) On publication of a notice under sub-section (1),-

(a) in any case where the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), all persons holding office as directors of the company and in any other case, all persons holding any office having power of superintendence, direction and control of the business of the borrower immediately before the publication of the notice under sub-section (1), shall be deemed to have vacated their offices as such;

(b) any contract of management between the borrower and any director or manager thereof holding office as such immediately before publication of the notice under sub-section (1), shall be deemed to be terminated;

(c) the directors or the administrators appointed under this section shall take such steps as may be necessary to take into their custody or under their control all the property, effects and actionable claims to which the business of the borrower is, or appears to be, entitled and all the property and effects of the business of the borrower shall be deemed to be in the custody of the directors or administrators, as the case may be, as from the date of the publication of the notice;

(d) the directors appointed under this section shall, for all purposes, be the directors of the company of the borrower and such directors or as the case may be, the administrators appointed under this section, shall alone be entitled to exercise all the powers of the directors or as the case may be, of the persons exercising powers of superintendence, direction and control, of the business of the borrower whether such powers are derived from the memorandum or articles of association of the company of the borrower or from any other source whatsoever.

(3) Where the management of the business of a borrower, being a company as defined in the Companies Act, 1956 (1 of 1956), is taken over by the secured creditor, then, notwithstanding anything contained in the said Act or in the memorandum or articles of association of such borrower,-

(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;

(b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the secured creditor;

(c) no proceeding for the winding up of such company or for the appointment of a receiver in respect thereof shall lie in any court, except with the consent of the secured creditor.

(4) Where the management of the business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him.

16. No compensation to directors for loss of office.-

(1) Notwithstanding anything to the contrary contained in any contract or in any other law for the time being in force, no managing director or any other director or a manager or any person in charge of management of the business of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act of any contract of management entered into by him with the borrower.

(2) Nothing contained in sub-section (1) shall affect the right of any such managing director or any other director or manager of any such person in charge of management to recover from the business of the borrower, moneys recoverable otherwise than by way of such compensation.

17. Right to appeal.-

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may prefer an appeal to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken.

(2) Where an appeal is preferred by a borrower, such appeal shall not be entertained by the Debts Recovery Tribunal unless the borrower has deposited with the Debts Recovery Tribunal seventy-five per cent. of the amount claimed in the notice referred to in sub-section (2) of section 13:

Provided that the Debts Recovery Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

(3) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and rules made thereunder.

18. Appeal to Appellate Tribunal.-

(1) Any person aggrieved, by any order made by the Debts Recovery Tribunal under section 17, may prefer an appeal to an Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.

(2) Save as otherwise provided in this Act, the Appellate Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and rules made thereunder.

19. Right of borrower to receive compensation and costs in certain cases.-

If the Debts Recovery Tribunal or the Appellate Tribunal, as the case may be, on an appeal filed under section 17 or section 18, holds the possession of secured assets by the secured creditor as wrongful and directs the secured creditor to return such secured assets to the concerned borrower, such borrower shall be entitled to payment of such compensation and costs as may be determined by such Tribunal or Appellate Tribunal.

CHAPTER IVCentral Registry

20. Central Registry.-

(1) The Central Government may, by notification, set up or cause to be set up from such date as it may specify in such notification, a registry to be known as the Central Registry with its own seal for the purposes of registration of transaction of securitisation and reconstruction of financial assets and creation of security interest under this Act.

(2) The head office of the Central Registry shall be at such place as the Central Government may specify and for the purpose of facilitating registration of transactions referred to in sub-section (1), there may be established at such other places as the Central Government may think fit, branch offices of the Central Registry.

(3) The Central Government may, by notification, define the territorial limits within which an office of the Central Registry may exercise its functions.

(4) The provisions of this Act pertaining to the Central Registry shall be in addition to and not in derogation of any of the provisions contained in the Registration Act, 1908 (16 of 1908), the Companies Act, 1956 (1 of 1956), the Merchant Shipping Act, 1958 (44 of 1958), the Patents Act, 1970 (39 of 1970), the Motor Vehicles Act, 1988 (59 of 1988) and the Designs Act, 2000 (16 of 2000) or any other law requiring registration of charges and shall not affect the priority of charges or validity thereof under those Acts or laws.

21. Central Registrar.-

(1) The Central Government may, by notification, appoint a person for the purpose of registration of transactions relating to securitisation, reconstruction of financial assets and security interest created over properties, to be known as the Central Registrar.

(2) The Central Government may appoint such other officers with such designations as it thinks fit for the purpose of discharging under the superintendence and direction of the Central Registrar, such functions of the Central Registrar under this Act as he may, from time to time, authorise them to discharge.

22. Register of securitisation, reconstruction and security interest transactions.-

(1) For the purposes of this Act, a record called the Central Register shall be kept at the head office of the Central Registry for entering the particulars of the transactions relating to-

(a) securitisation of financial assets;

(b) reconstruction of financial assets; and

(c) creation of security interest.

(2) Notwithstanding anything contained in sub-section (1), it shall be lawful for the Central Registrar to keep the records wholly or partly in computer, floppies, diskettes or in any other electronic form subject to such safeguards as may be prescribed.

(3) Where such register is maintained wholly or partly in computer, floppies, diskettes or in any other electronic form, under sub-section (2), any reference in this Act to entry in the Central Register shall be construed as a reference to any entry as maintained in computer or in any other electronic form.

(4) The register shall be kept under the control and management of the Central Registrar.

23. Filing of transactions of securitisation, reconstruction and creation of security interest.-

The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed, within thirty days after the date of such transaction or creation of security, by the securitisation company or reconstruction company or the secured creditor, as the case may be:

Provided that the Central Registrar may allow the filing of the particulars of such transaction or creation of security interest within thirty days next following the expiry of the said period of thirty days on payment of such additional fee not exceeding ten times the amount of such fee.

24. Modification of security interest registered under this Act.-

Whenever the terms or conditions, or the extent or operation, of any security interest registered under this Chapter, are, or is, modified, it shall be the duty of the securitisation company or the reconstruction company or the secured creditor, as the case may be, to send to the Central Registrar, the particulars of such modification, and the provisions of this Chapter as to registration of a security interest shall apply to such modification of such security interest.

25. Securitisation company or reconstruction company or secured creditors to report satisfaction of security interest.-

(1) The securitisation company or reconstruction company or the secured creditor as the case may be, shall give intimation to the Central Registrar of the payment or satisfaction in full, of any security interest relating to the securitisation company or the reconstruction company or the secured creditor and requiring registration under this Chapter, within thirty days from the date of such payment or satisfaction.

(2) The Central Registrar shall, on receipt of such intimation, cause a notice to be sent to the securitisation company or reconstruction company or the secured creditor calling upon it to show cause within a time not exceeding fourteen days specified in such notice, as to why payment or satisfaction should not be recorded as intimated to the Central Registrar.

(3) If no cause is shown, the Central Registrar shall order that a memorandum of satisfaction shall be entered in the Central Register.

(4) If cause is shown, the Central Registrar shall record a note to that effect in the Central Register, and shall inform the borrower that he has done so.

26. Right to inspect particulars of securitisation, reconstruction and security interest transactions.-

(1) The particulars of securitisation or reconstruction or security interest entered in the Central register of such transactions kept under section 22 shall be open during the business hours for inspection by any person on payment of such fee as may be prescribed.

(2) The Central Register referred to in sub-section (1) maintained in electronic form, shall also be open during the business hours for the inspection by any person through electronic media on payment of such fee as may be prescribed.

CHAPTER VOffences and penalties

27. Penalties.-

If a default is made-

(a) in filing under section 23, the particulars of every transaction of any securitisation or asset reconstruction or security interest created by a securitisation company or reconstruction company or secured creditor; or

(b) in sending under section 24, the particulars of the modification referred to in that section; or

(c) in giving intimation under section 25,

every company and every officer of the company or the secured creditor and every officer of the secured creditor who is in default shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.

28. Penalties for non-compliance of direction of Reserve Bank.-

If any securitisation company or reconstruction company fails to comply with any direction issued by the Reserve Bank under section 12, such company and every officer of the company who is in default, shall be punishable with fine which may extend to five lakh rupees and in the case of a continuing offence, with an additional fine which may extend to ten thousand rupees for every day during which the default continues.

29. Offences.-

If any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules made thereunder, he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both.

30. Cognizance of offence.-

No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try any offence punishable under this Act.

CHAPTER VIMiscellaneous

31. Provisions of this Act not to apply in certain cases.-

The provisions of this Act shall not apply to-

(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time being in force;

(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 (9 of 1872)

(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934 (24 of 1934)

(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958)

(e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;

(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930)

(g) any properties not liable to attachment or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5 of 1908)

(h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;

(i) any security interest created in agricultural land;

(j) any case in which the amount due is less than twenty per cent. of the principal amount and interest thereon.

32. Protection of action taken in good faith.-

No suit, prosecution or other legal proceedings shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditor or borrower for anything done or omitted to be done in good faith under this Act.

33. Offences by companies.-

(1) Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company, for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation.-For the purposes of this section,-

(a) company means any body corporate and includes a firm or other association of individuals; and

(b) director, in relation to a firm, means a partner in the firm.

34. Civil court not to have jurisdiction.-

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).

35. The provisions of this Act to override other laws.-

The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

36. Limitation.-

No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963).

37. Application of other laws not barred.-

The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.

38. Power of Central Government to make rules.-

(1) The Central Government may, by notification and in the Electronic Gazette as defined in clause (s) of section 2 of the Information Technology Act, 2000 (21 of 2000), make rules for carrying out the provisions of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:-

(a) the form and manner in which an application may be filed under sub-section (10) of section 13;

(b) the manner in which the rights of a secured creditor may be exercised by one or more of his officers under sub-section (12) of section 13;

(c) the safeguards subject to which the records may be kept under sub-section (2) of section 22;

(d) the manner in which the particulars of every transaction of securitisation shall be filed under section 23 and fee for filing such transaction;

(e) the fee for inspecting the particulars of transactions kept under section 22 and entered in the Central Register under sub-section (1) of section 26;

(f) the fees for inspecting the Central Register maintained in electronic form under sub-section (2) of section 26;

(g) any other matter which is required to be, or may be, prescribed, in respect of which provision is to be, or may be, made by rules.

(3) Every rule made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.

39. Certain provisions of this Act to apply after Central Registry is set-up or cause to be set-up.-

The provisions of sub-sections (2), (3) and (4) of section 20 and sections 21, 22, 23, 24, 25, 26 and 27 shall apply after the Central Registry is set up or cause to be set up under sub-section (1) of section 20.

40. Power to remove difficulties.-

(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to be necessary for removing the difficulty:

Provided that no order shall be made under this section after the expiry of a period of two years from the commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be after it is made, before each House of Parliament.

41. Amendments of certain enactments.-

The enactments specified in the Schedule shall be amended in the manner specified therein.

42. Repeal and saving.-

(1) The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 (2 of 2002) is hereby repealed.

(2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under the corresponding provisions of this Act.

THE SCHEDULE

(See section 41)

Year Act No. Short title Amendment

1956 42 The Securities

Contracts

(Regulation)

Act, 1956.
In section 4A, in sub-section (1), after clause (vi), insert the following:-

(vii) the securitisation company or reconstruc-tion company which has obtained a certificate of registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002.

1986 1 The Sick Industrial

Companies (Special

Provisions) Act,

1985.
In section 2, in clause (h), after sub-clause (ib), insert the following:-

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

1956 1 The Companies Act, 1956.

In section 15, in sub-section (1), after the proviso, insert the following:-

Provided further that no reference shall be made to the Board for Industrial and Financial Reconstruction after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where financial assets have been acquired by any securitisation company or reconstruction company under sub-section (1) of section 5 of that Act:

Provided also that on or after the commencement of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, where a reference is pending before the Board for Industrial and Financial Reconstruction, such reference shall abate if the secured creditors, representing not less than three-fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of that Act.

 

------------

 

SARFAESI Act, 2002, Section 13(2) 13(4) ----------- Bank Loan Recovery, Bank Engaging enforcement agency and claiming amount paid to such agency--------------------- held------------------------- Unjustified and untenable.

IN THE HIGH COURT OF PUNJAB AND HARAYANA AT CHANDIGARH

Date of Decision:  20.10.2011

(i) Civil Writ Petition No. 11662 of 2010

Mohinder Pal Singh and another       …..Petitioners 

Versus 

State Bank of India and another        …..Respondents

Present: Shri Anand Chhibbar, Shri Ranjit Chawla and Shri I.P. Singh, Advocates, for the petitioners. 

Shri S.C. Pathela, Advocate, for the respondents.

(ii) Civil Writ Petition No. 299 of 2011

Rajeev Gulati  and another       …..Petitioners 

Versus 

State Bank of India       …..Respondent

Present: Shri Karan Bhardwaj, Advocate, for the petitioners. 

Shri S.C. Pathela, Advocate, for the respondent. 

CORAM: HON’BLE MR. JUSTICE HEMANT GUPTA

HON’BLE MR. JUSTICE G.S. SANDHAWALIA

1. Whether Reporters of local papers may be allowed to see the judgment?

2. To be referred to the Reporters or not?

3. Whether the judgment should be reported in the Digest?

HEMANT GUPTA, J. 

This order shall dispose of Civil Writ Petition No. 11662 of 2010 and Civil Writ Petition No. 299 of 2011, challenging the action of the Bank in taking possession of the secured assets, even though the amount of the financial assistance stands substantially paid.  Civil Writ Petition No. 11662 of 2010

For the facility of reference, the facts are taken from Civil Writ Petition No. 11662 of 2010. The petitioner herein availed loan of Rs.10 lacs on 23.8.2006 and mortgaged the property, a piece of land, as collateral security. The petitioner defaulted in payment of the loan which led to the issuance of a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short `the Act’). A copy of the said notice, produced by the respondent-Bank in Court, shows the outstanding amount as Rs.12,15,630/- as on 15.5.2008 along with further interest and incidental expenses. The Bank vide letter dated 12.9.2008 sought the assistance of an Enforcement Agency, namely, M/s Vrinda Corporate Services Ltd., to take possession of the immovable and movable property as an agent of the Bank.

Subsequently, a notice for taking possession under Section 13(4) of the Act was issued on 4.2.2009 by the Authorized Officer of the Bank.

Such notice was published in the newspaper “The Hindustan Times” on 9.2.2009. The petitioner failed to make payment of the amount, which led to the issuance of another notice dated 27.5.2009 under Section 13(4) of the Act. Such notice under Section 13(4) of the Act, was published in the newspaper `The Tribune’ (English Edition) and vernacular newspaper `Punjabi Tribune’ dated 13.6.2009 proposing the date of auction as 17.7.2009. The amount mentioned in the sale notice was Rs.12,15,630/- along with interest. The petitioner deposited a sum of Rs.2.00 lacs on 13.7.2009 and sought six months’ time to deposit the balance amount.

Another public notice was published in the newspapers `The Tribune’ (English Edition) and vernacular newspaper `Punjabi Tribune’ dated 5.6.2010 proposing the date of sale as 7.7.2010. The petitioner deposited the balance amount in parts with last deposit of Rs.2,17,444/- on 25.6.2010. As per the petitioner, with the said (Civil Writ Petition No. 11662 of 2010 deposit, there was only one rupee in the debit account, as per the statement of account Annexure P.4 appended with the writ petition.

In view of the statement of account (Annexure P.4), it is argued that the entire amount, as mentioned in the notice under Sections 13(2) and 13(4) of the Act, stands paid, therefore, for the non deposit of the interest amount, the property cannot be sold.   

This Court on 6.7.2010 permitted the Banks to receive bids, but it was ordered that it will not finalise the auction of the property. The respondent-Bank initially filed written statement on 25.9.2011 raising a plea that the jurisdiction of the Civil Court is barred in terms of Section 34 of the Act and that the provisions of the Act, have overriding effect on any other law in terms of Section 35 of the Act. It is also pointed out that the outstanding dues towards the petitioners as on 21.9.2011 are as under:---

(a) Accrued interest upto 21.9.2011 amounting to  Rs.2,85,808/-

(b) Charges of enforcement agency Rs.1,28,600/-

(c) Charges of publication of notices dated 13.6.2011 Rs.24,192/-

(d) Charges of publication of notices dated 5.6.2010 Rs.18432/-

(e) Legal fee Rs.20,400/-

Total outstanding dues Rs.4,77,432/-

The writ petition was taken up for hearing on 29.9.2011 on the aforesaid date along with CWP No. 299 of 2011, which is also being decided by the present order. In the aforesaid case also, the Bank has engaged recovery/enforcement agency and is said to have paid a sum of Rs.1,28,608/- even before issuance of the notice under Section 13(2) of the Act, to such agency. The Chief General Manager of the Bank was called to explain the conduct of the officers of the Bank in claiming the amount paid to the enforcement agency, even before notice under Section 13(2) of the Act, was issued. Shri S.K. Sehgal, Chief General Manager of the State Bank of India, explained on 30.9.2011 that the Bank has issued instructions to claim charges (Civil Writ Petition No. 11662 of 2010 of the Enforcement Agencies only at the stage of taking over possession i.e. after the action under Section 13(4) of the Act is taken.

The counsel for the Bank thereafter, sought time to furnish additional affidavit to explain the claim of the charges paid to the enforcement agencies.

In CWP No. 11662 of 2010, an additional affidavit has been filed to the effect that the recovery case of the borrower was handed over to the recovery/enforcement agent on 12.9.2008 and possession of the secured assets i.e. plot measuring 403 square was taken on 4.2.2009 and a notice under Section 13(4) of the Act, was served on 4.2.2009. The notice was published in the newspapers on 9.2.2009. Since the borrower did not make payment of the outstanding dues, notice of sale was issued on 27.5.2009. After the deposit in part by the borrower, it is explained that the balance in the account of the borrower as on 5.6.2010 was Rs.2,17,445/- and that the borrower was also liable to pay the accrued interest and actual expenses incurred by the Bank in effecting the recovery. The borrower deposited an amount of Rs.2,17,444/- on 25.6.2010, but did not pay the accrued interest amounting to Rs.2,48,461/- as on 25.6.2010 and also an amount of Rs.1,71,224/- towards the expenses incurred by the Bank in effecting recovery. The details of the payments  are as under:- 

(i) Publication of notices paid to M/s Raghuvanshi Advertising on 21.7.2009 Rs.24192/-

(ii) Paid to M/s Vrinda Corporate Services Limited, the Enforcement Agent on 17.8.2009 Rs.40,000/-

(iii) Publication of notices paid to M/s Design Matters Advertising on 2.7.2010 Rs.18,432/-

(iv) Paid to M/s Vrinda Corporate Services Limited, the Enforcement Agent on 10.7.2010 Rs.44,300/-

(v) Paid to M/s Vrinda Corporate Services Ltd. Rs.44,300/- (Civil Writ Petition No. 11662 of 2010 Thus, it is pointed out that an amount of 4,19,685/- is still due and payable to the petitioner. 

Shri Pathela, has also filed documents such as the circulars dated November 3, 2006 and April 24, 2011 issued by Reserve Bank of India as well as the copies of the bills, submitted by the enforcement agency, M/s Vrinda Corporate Services Ltd. Vide circular dated 3.11.2006, the Reserve Bank of India has issued “Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks”. Para 5.5 of the said circular deals with “The Outsourcing Agreement”. It is contemplated that every such agreement should address the risks and risk mitigation strategies.

Para 5.7 of the said circular deals with the responsibilities of the recovery agents. Shri Pathela also relies upon the Bank’s Outsourcing Policy, 2011 contained in a master circular issued by the Banking Operations Department Corporate Centre, Mumbai. It is pointed out that the recovery agencies are carrying out a financial activity, which is covered under the outsourcing arrangement permitted as per the guidelines issued by the Bank.

Reliance was also placed upon circular dated 16.11.2002 issued by the office of the Chief General Manager of the Bank. The said circular deals with the procedure after issuance of notice under the Act. Clause (g) deals with taking possession of the immovable property, which reads as under:- 

“6. Procedure after issue of notice

xxx xxx

D. The guidelines that follow mainly cover the procedure for taking possession/ sale of secured assets and appointment of Enforcement Agencies to assist the branches.

(a)  xx

(g)  Taking possession of immovable property

i) Where the secured asset is an immovable property, the authorized officer may take, or cause to be taken (Civil Writ Petition No. 11662 of 2010 possession by delivering a Possession Notice to the borrower as per format given in Annexure 6.

ii) The notice should also be affixed on the outer door or at such conspicuous place of the property. 

iii) The possession notice should also be published in two leading newspapers, one in vernacular language, having sufficient circulation in that locality.

iv) The property should be kept in the custody of the Authorized Officer or in the custody of any person appointed/authorized by him, who shall take due care as a man of ordinary prudence would, under the similar circumstances, take of such property.

v) The Authorised Officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed of.”

xx xx xx

(o) Appointment of Enforcement Agencies (EAs)

It has been decided that, where warranted, Authorised Officers may enlist the services of Enforcement Agencies (EAs) for assisting them in enforcing security rights under the Ordinance (i.e. taking possession of the assets, maintenance and eventual sale). The Agencies so enlisted will be an Agent of the Authorised Officer. The salient features of the arrangement will be as under.”

In the circular dated 10.3.2005 issued by the Bank, attached as Annexure R-2 with CWP 299 of 2005, the remuneration structure for the enforcement agents is as under:---

For recoveries above Rs.20 lacs and upto Rs.50 lacs Rs.2 lacs plus 2.5% of the amount recovered in excess of Rs.20 lacs.

For recoveries above Rs.50 lacs upto Rs.5 crores Rs.2.75 lacs plus 1.5% of the amount recovered in excess of Rs.50 lacs.

For recoveries above Rs.5 crores Rs.9.50 lacs plus 1% of the amount recovered in excess of Rs.5 crores.

It is pointed out that after such circular, the remuneration payable to the enforcement agency has been revised vide Circular Letter No. CirCFO/Adv/358/2006-07 dated 23.2.2007.

The relevant extracts are as under:-

(Civil Writ Petition No. 11662 of 2010

Sr. No.            Item  Remuneration Payable

a) For recoveries upto Rs.1 lac       @ 20% of the amount recovered

b) For recoveries above Rs.1 lac and upto Rs.20 lacs Rs.20,000/- plus 10% of the amount recoveries in excess of Rs.1 lacs.

c) For recoveries above Rs.20 lacs and upto Rs.50 lacs Rs.2 lacs plus 2.5% of the amount recoveries in excess of Rs.20 lacs.

d) For recoveries above Rs.50 lacs and upto Rs.5 crores Rs.2.75 lac plus 1.5% of the amount recoveries in excess of Rs.50 lacs.

e) For recoveries above Rs.5 crores Rs.9.50 lacs plus 1% of the amount recovered in excess of Rs.5 crores.

Vide circular dated 5.5.2010, Annexure R-4 with CWP 299 of 2011, the remuneration structure for the enforcement agencies has further been revised, which reads as under:- 

“Proposed Fee Structure Situation A B C

a) For recoveries upto Rs.10.00 lacs 4% of the amount recovered maximum Rs.40,000/- (Minimum Rs.12,000/-) Rs.10,000/- Rs.5000/-

b) For recoveries above Rs.10.00 lacs and upto Rs.50.00 lacs Rs.40,000/- plus 2.5% of the amount recovered in excess of Rs.10.00 lacs Rs.15,000/- Rs.5000/-

c) For recoveries above Rs.50.00 lacs and upto Rs.1.00 crore Rs.1,40,000/- plus 2.00% of the amount recovered in excess of Rs.50.00 lacs Rs.20,000/- Rs.10,000/-

d) For recoveries above Rs.1.00 crore and upto Rs.5.00 crores Rs.2,40,000/- plus 1.25% of the amount recovered in excess of Rs.1.00 crore Rs.25,000/- Rs.15,000/-

e) For recoveries above Rs.5.00 crores and upto Rs.10 croes Rs.7,40,000/- plus 0.75% of the amount recovered in excess of Rs.5.00 crores Rs.30,000/- Rs.20,000/- (Civil Writ Petition No. 11662 of 2010

f) For recoveries above Rs.10 crores Rs.11,15,000/- plus 0.50% of the amount recovered in excess of Rs.10.00 crores Rs.30,000/- Rs.20,000/-

Situation A: In case physical possession has been taken and recovery is made whether before or after auction.

Situation B: In case recovery is made before possession but after obtaining DM permission and visit made by Enforcement Agents (EAs).

Situation C: In case recovery/settlement is made before possession and before DC permission but before case entrusted to EAs.”

It is, thus, contended by Shri Pathela that the procedure for enforcement agents is in accordance with the circulars issued by the Reserve Bank of India and also the guidelines issued by the Bank.

Learned counsel for the petitioner has controverted the said contention and relied upon circular dated 24.4.2008 issued by the RBI, after the judgment of the Apex Court in Manager, ICICI Bank Ltd. v. Parkash Kaur, AIR 2007 SC 1349, wherein the following is the condition:- 

“Taking possession of property mortgaged/hypothecated to banks.

(xii) In a recent case which came up before the Honourable Supreme Court, the Honourable Supreme Court observed that we are governed by rule of law in the country and the recovery of loans or seizure of vehicles could be done only through legal means. In this connection it may be mentioned that the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002, framed thereunder have laid down well defined procedures not only for enforcing security interest but also for auctioning the movable and immovable property after enforcing the security interest. It is, therefore, desirable that banks rely only on legal remedies available under the relevant statutes while enforcing security interest without intervention of the Courts.”

On the basis of such facts, learned counsel for the petitioner has argued that enforcement agents  may be permissible for (Civil Writ Petition No. 11662 of 2010 Bank to be engaged, but such enforcement agents are not contemplated under the Act, much less before the stage of taking of actual physical possession. It is argued that in all other actions for the recovery of the dues by the Banks, the Bank has to seek intervention of either the Court or the Tribunal but an action under the Act is permissible to be taken by the Bank through its authorized officers, therefore, the Bank cannot take assistance of an enforcement agency while taking action under the Act.

It is contended that the actions under the Act are contemplated by an Authorized Officer, as defined under Rule 2(a) of the Security Interest (Enforcement) Rules, 2002 (for short `the Rules’) to mean an Officer not less than a Chief Manager of a Public Sector Bank. In the present case, the notices under Sections 13(2) and 13(4) of the Act, have been issued by such authorized officer. The process of sale of assets is to be initiated after such deemed possession, by way of publication in the newspaper. The process of sale of immovable secured assets is regulated by Rule 8 of the Rules. The deemed possession is to be taken by the Authorized Officer by delivering a possession notice on the outdoor or at such conspicuous place of the property or in the newspaper. Before the property is put to sale, a 30 days notice is required to be served under Sub Rule 6 of Rule 8 of the Rules. It is argued that since the property mortgaged in favour of the Bank was an open plot, therefore, the act of taking possession does not require any preparation of inventory or any other expenses to secure the same. The Bank has claimed the dues to the enforcement agents even before notice under Section 13(4) was served upon the petitioner and published in the newspapers. It is contended that the claim of the enforcement agents is the fixed amount on the amount recovered and not for any services provided, which is apparent from the bill raised and produced by Counsel for the Bank. The (Civil Writ Petition No. 11662 of 2010 enforcement agents have raised the bills, with the following particulars:-

In the case of Sh. Mohinder Pal Singh Bill dated Particulars Amount (Rs.) 10.8.2009 Charges for enforcement as per Bank’s rates (on the recovery of First Rs.3,00,000/-) 40000.00 08.7.2010 Charges for enforcement as per Bank’s rates (on the recovery of Rs.11,86,000/-)  Less amount received Net Amount 128600.00 40000.00 88600.00 18.3.2011 Charges for enforcement (pending amount) 44,300.00 Thus, on the basis of circular dated 23.2.2007 and the aforesaid bills, it is argued by the learned counsel for the Petitioner that the amount paid to the enforcement agent is a reward to the enforcement agencies and not reimbursement of the expenses and thus, such amount, cannot be charged from the petitioner. It was explained by the counsel for the Bank that the recovery case of the petitioner was entrusted to enforcement agency on 12.11.2008 i.e., after issuance of notice under Section 13(2) of the Act on 15.5.2008, though the notices under Section 13(4) of the Act were issued on 4.2.2009 and 27.5.2009. Therefore, such charges have been rightly claimed from the petitioner as reasonable expenses to realize the security permissible under Section 13(7) of the Act as such amount has been claimed after notices under Section 13(4) were issued and published.

We have heard learned counsel for the parties at some length and find that the action of the Bank in engaging enforcement agency and claiming amount paid to such agency as unjustified and untenable.

Though the Reserve Bank of India, as per the circular dated 3.11.2006 has permitted outsourcing of certain financial (Civil Writ Petition No. 11662 of 2010 services, but some safeguards are to be kept in view while giving effect to the agreement engaging such enforcing agencies. Such agreement restricts the rights of the commercial bank in engaging enforcement agents for effecting recoveries under the Act as per clause (xii) of the Circular dated April 24, 2008. The process of recovery through the process of the Civil Court or the Debt Recovery Tribunal stands at a different footing. But in the case, where the recovery process is to be initiated under the Act, it is the Bank, the secured creditor, who is permitted to realize its security without the intervention of the Court or the Tribunal. Keeping in view the aforesaid fact, though the circular dated 3.11.2006 permits outsourcing of certain services, but such outsourcing is restricted in case, if the process of recovery is to be initiated under the Act. The Act and the Rules contemplate an action by the secured creditor through its authorized officer. It is Authorized Officer who has taken action under the Act, when notice under Section 13(4) of the Act, was published for deemed possession of the property. Before the issuance of the notice under Section 13(4), the enforcement agency is not expected to take any action. In fact that is the stand of the Chief General Manager of the Bank. Even after the possession in terms of Section 13(4) of the Act is taken, the secured creditors can claim such expenses as are properly incurred in terms of Section 13(7) of the Act. The said provisions contemplated for reimbursement of expenses which the secured creditors have incurred. There cannot be any fixed expenses payable to the Enforcement Agents, irrespective of the costs, charges and expenses incurred by such Enforcement Agents. Therefore, the fixed amount claimed by the Enforcement Agency, without proof of actual expenses, is beyond the scope of Section 13(7) of the Act or the guidelines issued by the Reserve Bank of India.

(Civil Writ Petition No. 11662 of 2010 Even otherwise, from the circular issued by the Bank and the bills submitted by the Enforcement Agencies, it transpires that the charges are claimed in relation to the amount recovered. Thus, the amount paid to the Enforcement Agencies is a reward for the services. The amount of reward cannot be passed on to anyone else. Such amount has to be paid to the Enforcement Agencies out of the assets realized or by the Bank out of funds at its disposal. Section 13 (7) of the Act, authorizes the secured creditors to claim charges, costs and expenses, which are actually incurred. The actual expenses incurred have no co-relation with the amount recovered or recoverable. Therefore, the claim of fixed charges in view of the amount recovered is beyond legislative sanction and not admissible.

Apart from the said fact, the Bank has claimed legal fee. The notices under Sections 13(2) and 13(4) of the Act are the notices on the performa circulated on 16.11.2002. The Authorised Officer of the Bank does not require any legal opinion in issuing such notices.

There is no justification to claim such legal charges from the borrower, which is not related to any professional services rendered by an Advocate to the Bank. There was no occasion for any legal advice in issuing notice under Sections 13(2) or 13(4)of the Act.

Learned counsel for the petitioner has further agued that the Bank has claimed interest on the amount of expenses including the charges of enforcement agencies, legal fee and advertisement expenses, which is not permissible in view of the judgment of this Court in Paramjit Singh v. UCO Bank Ghudani Kalan and another, 2007(4) PLR 747, wherein, similar expenses claimed by the Bank has been disallowed as not permissible in law. In view of the said fact, we are of the opinion that the Bank cannot claim interest on the expenses.  

(Civil Writ Petition No. 11662 of 2010

In CWP 299 of 2011, it is averred in the written statement that Rs. 64528/- is the due amount as on 22.8.2011 in the loan accounts of the petitioner whereas another sum of Rs.2,28,516 is payable on account of recovery agents fee, publication in newspapers and legal fee etc even after the petitioner has deposited a sum of Rs.5,00,000/- in terms of the interim order passed by this court to restore possession of the house on deposit of the said amount. The amount of deposit shows that the meager amount is due from the borrower towards interest, whereas, the major amount is towards the expenses allegedly incurred.

Consequently, we dispose of the present writ petitions with direction to the respondent-Bank to recalculate amount payable by the borrower(s) by deleting the charges/expenses of the Enforcement Agencies, legal fee and the interest on the amount of expenses. The Bank shall communicate within two weeks the due amount as on 6.7.2010 i.e. when the petitioner in CWP 11662 of 2010 made the last payment; and as on 31.5.2011 in CWP 299 of 2011, the date of last payment. The petitioners are granted one month thereafter to deposit the said amount so communicated. The deposit of the amount by petitioners shall give complete discharge of the dues of the Bank and the title deeds etc. shall be returned to the borrower within next two weeks. 

(HEMANT GUPTA) 

JUDGE

October 20, 2011      (G.S. SANDHAWALIA)

ds       JUDGE

 

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