Debt Recovery & SARFAESI – CS Professional Study Material

Chapter 22 Debt Recovery & SARFAESI – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Debt Recovery & SARFAESI – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
Write a note on the following:
Cross examination at the Debt Recovery Tribunal (DRT). (Dec 2012, 2 marks)
Answer:
The recording of evidence by Debts Recovery Tribunals is somewhat unique. All evidences are taken by way of an affidavit. Cross examination is allowed only on request by the defense, and that too if the Tribunal feels that such a cross examination is in the interest of justice. Frivolous cross examination may be denied.

Question 2.
Write a note on the following : (June 2014)
(a) Overriding effect of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (4 marks)
(b) Objectives of asset reconstruction company (ARC). (4 marks)
Answer:
(a) Overriding effect of the Recovery of Debt due to Bank and Financial Institutions Act, 1993 (Section 34)
(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made thereunder shall be in addition to and not in derogation of, the other Act.
Case Law: Official Liquidator, U.P. and Uttarakhand v. Allahabad Bank and Others [2013] 177 Comp Cas 426 (SC).

(b)

• Asset Reconstruction Company means a company registered with Reserve Bank under Section 3 for the purposes of carrying on the business of asset reconstruction or securitisation or both.
• The problem of non-performing loans created due to systematic banking crisis world over has become acute.
• The buying of impaired assets from bank or financial institution by ARC’S will make their balance sheets cleaner & they will be able to use their time, energy & funds for development of their business.
• The main objective of the ARC is to work as an agent of the banks or financial institutions for the purpose of recovering their dues from the borrowers on payment of fees or charges, to act as receiver of properties of any bank or financial institution or to carry on such ancillary or incidental business with the prior approval of RBI when ever necessary.

Question 3.
Write note on the following:
Mode of recovery of debt determined by Debt Recovery Tribuhal (DRT). (June 2015, 4 marks)
Answer:
As per the provisions of Section 25, the Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of Section 19, proceed to recover the amount of debt specified in the certificate by one or more of the following modes, namely:

(a) attachment and sale of the movable or immovable property of the defendant;
(b) taking possession of property over which security interest is created or any other property of the defendant and appointing receiver for such property and to sell the same;
(c) arrest of the defendant and his detention in prison;
(d) appointing a receiver for the management of the movable or immovable properties of the defendant.
(e) any other mode of recovery as may be prescribed by the Central Government.

Question 4.
On what grounds is RBI entitled to exercise its power under section 4 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to cancel the ‘certificate of registration’ issued by it to any asset reconstruction company? What formalities have to be undertaken by RBI before cancellation of certificate of registration? (June 2012, 4 marks)
Answer:
RBI is entitled to exercise its power to cancel the certificate of registration issued by it to any asset reconstruction company under Section 4 of the SARFAESI Act, 2002.

The Grounds for cancellation of certificate of registration are as under:

• If the company ceases to receive Or hold any investment from qualified institutional buyer or ceases to carry on asset reconstruction business.
• If the company fails to comply with the conditions of registration or fails to comply with the direction of RBI.
• If the company fails to maintain its accounts or it does not submit documents on inspection by RBI.
• Reserve Bank of India should give an opportunity to such company before cancelling the registration of such company.

Question 5.
(a) Section 35 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 provides that the provisions of the 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. Further, in accordance with section 37, the provisions of the Act or the rules made thereunder shall be in addition to and not in derogation of any other law for the time being in force.
Write a note on the combined effect of these two provisions. (Dec 2012) (5 marks)

(b) Write a comprehensive note on the constitutional validity of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 referring to decided case law. (5 marks)
Answer:
(a) The combined effect of Section 35 and 37 is that in case Of any conflict, then the SARFAESI Act 2002 shall have the overriding effect over such Act or Acts.

Therefore the provisions of SARFAESI Act, 2002 shall have the binding power and cannot be put on hold because of conflict with any other legislation.

In addition to this Section 34 of SARFAESI Act 2002, no civil court shall have any jurisdiction to entertain any suit or proceeding in respect of any matter in which a Debt Recovery Tribunal or the Appellate Tribunal is empowered by or under this SARFAESI Act, 2002.

(b) In case of Union of India v. Delhi High Court Bar Association (2002), the petitioners have challenged the constitutional validity of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 on the ground that the Act is unreasonable and is violative-of Article 14 of the Constitution and that it is beyond the legislative competence of the Parliament to enact such a law.

This Act had been challenged for depriving a person of legal remedies in ordinary civil courts. However, the Supreme Court held that there is no such right that the dispute should be adjudicated only by a civil court, and the replacement of the jurisdiction of civil courts by independent and specialized tribunals is completely legal and constitutional.

Question 6.
(a) “Non-performing assets constitute a real economic cost to the nation because they reflect the application of scarce capital and credit funds to unproductive uses.” Comment and discuss how securitisation has gained importance in India. (Dec 2012) (5 marks)

(b) Define the following in brief in relation to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:
(i) Originator
(ii) Security receipt
(iii) Qualified buyer. (2 marks each)

(c) You are the Company Secretary of an asset reconstruction company and allowed to operate securitisation activities throughout India. To expand the business horizon of the company, the present management wants to induct cash rich and experienced businessman in the management by transfer of shares from the promoters which entail a substantial change in the management of your company. The new person also wants to shift the registered office from Delhi to Mumbai. The present managing director has sought your views for formalities to be completed in this regard. (4 marks)
Answer:
(a) NPAs constitute a real economic cost to the nation because they reflect the application of scarce capital and credit funds to unproductive uses. Money which got locked up in NPAs are not available for productive use. Banks have to create a provision or need to write them off which is charge on their profit.

Increase in NPA affects the financial strength of banks.
Earlier, banks used to take recourse to the long route of filing cases in courts against faulty borrowers, Tribunal cases take lot of time. Thereafter Debt Recovery Tribunals were set up which again does not prove to be of much help as they were overburdened by the huge number of cases referred to them.

Thereafter a new Act was introduced which is known as Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) which is proving to be very useful to bank in collecting dues from faulty borrowers.

(b) (1) Originator: Originator means the owner of a financial asset which is acquired by a securitization company or reconstruction company for the purpose of securitisation or asset reconstruction.

(2) Security Receipt: It means a receipt or other security, issued by a securitization company to any qualified Institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of,on undivided right, title or interest in the financial asset involved in securitization.

(3) Qualified Buyer: It means a Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation, Trustee or asset reconstruction company which has been granted a certificate of registration under sub¬section 4 of section 3 or any asset management company making investment on behalf of mutual fund or a foreign institutional investor registered under SEBI Act, 1992 or regulations made thereunder, or any other body corporate as may be specified.

(c) With reference to the Notification No. DNBR(PD-SC/RC)No 01 dated February 24, 2015 of Reserve Bank of India, RBI’s prior approval is required for any substantial change in management by way of transfer of shares namely:

1. any transfer of shares by which the transferee becomes a sponsor
2. any transfer of shares by which the transferor ceases to be a sponsor
3. an aggregate transfer of ten percent or more of the total paid up share capital of the SC/RC by a sponsor during the period of five years commencing from the date of certificate of registration

In this case, prior approval of Reserve Bank is required by Asset Reconstruction Company where it is looking for a substantial change in management or change of location of its registered office or change in its name. With same, the company is also required to comply the provisions of Companies Act 2013.

Question 7.
Explain the provisions relating to appeal to the Debt Recovery Appellate Tribunal. State the quantum of amount to be deposited for entertainment of appeal by such Tribunal. (June 2013, 8 marks)
Answer:

• As per the provisions of Section 20 of RDB & FI Act, 1993, any person aggrieved by an order made or deemed to have been made by a Debt Recovery Tribunal may prefer an appeal to an Appellate Tribunal.
• No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.
• An appeal has to be filed within the prescribed period of 30 days from the date on which a copy of order made by the tribunal is received.
• The Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.

Deposit of amount of debt due, on filing appeal:
As per the provisions of the Act, where an appeal is preferred by any person from whom the amount of debt is due to a Bank or a Financial Institutions or a consortium of Banks or Financial Institutions, then such appeal shall not be entertained unless such person has deposited 50% of the amount of debt so due from him with the Appellate Tribunal.

Appellate Tribunal, may reduce the amount to be deposited by such amount which shall not be less than 25% of the amount of such debt so due to be deposited.

Question 8.
The Securitisation and Reconstruction of Financial i Assets and Enforcement of Security Interest Act, 2002 is an Act for speedy recovery of debts by the secured creditors. However, there are some exceptions where the Act is not applicable. Mention any six such circumstances. (June 2013, 6 marks)
Answer:
Section 31 of the SARFAESI Act, 2002 provides for non – applicability of SARFAESI Act in certain cases.
The provisions of the Act shall not apply to:

• A lien on any goods, money or security given by or under, the Indian Contract Act, 1872 or the Sale of Goods Act, 1930.
• Pledge of movables as per the Indian Contract Act, 1872.
• Creation of any security in any aircraft as per the Aircraft Act, 1934.
• Creation of security interest in any vessel as defined in Merchant Shipping Act, 1958.
• Any rights of unpaid seller under Section 47 of The Sale of Goods Act,1930.
• Any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act)] or sale under the first proviso to Sub-section (1) of Section 60 of the Code of Civil Procedure, 1908.
• Any security interest for securing repayment of any financial asset not exceeding one lakh rupees.
• Any security interest created in agricultural land.
• In case the amount due is less than 20% of the principal amount and interest thereon.

Question 9.
(a) What is the composition of Debt Recovery Tribunal (DRT) ? State the qualification and eligibility to get appointment on the same. (Dec 2013, 5 marks)
(b) Explain non-performing assets (NPAs) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (4 marks)
Answer:
(a) Composition of Debt Recovery Tribunals:
Presiding officer:- The tribunal shall consist of one person only, to be called the presiding officer, to be appointed by notification by Central Government.

Qualification of presiding officer:- Any person who is or who has been or is qualified to be the District Judge may be appointed as a presiding officer who shall hold office for a term of 5 years from the 1 date on which he enters his office or until he attains the age of sixty two years, whichever is earlier.

Recovery officers The Central Government shall appoint one or more recovery officers and such other officers and employees as the government may think fit. The Recovery Officer and other Officers and employees of the tribunal shall discharge their function under the general superintendence of presiding officers.

Procedure for filing appeal to Appellate Tribunal: Section 18
(1) Who can appeal:- Any person aggrieved, by any order made by the Debts Recovery Tribunal under section 17, may prefer an appeal along with the prescribed fees within thirty days from the date of receipt of the order of Debts Recovery Tribunal.
(2) Sum to be deposited with appeal:- The borrower, preferring an appeal.as above has to deposit at least 50% of the amount due from him as claimed by the creditors or determined by the DRT, whichever is less.
(3) Power of Appellate Tribunal: Appellate Tribunal has power to reduce the amount to deposit to not less than twenty-five percent of debt that is required to be deposited with the appeal.

(b) “Non-performing asset” means an asset or account of a borrower, which ‘ has been classified by bank or financial institution as sub-standard, doubtful or loss asset.
(a) In case such a bank or financial institution is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to asset classification issued by such authority or body.

(b) In any other case in accordance with the directions & guidelines relating to asset classification & issued by the Reserve Bank of India.

Question 10.
State the grounds on which RBI is entitled to exercise its powers under section 4 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to cancel the ‘certificate of registration’ issued to any asset reconstruction company? State the procedure being followed by RBI before cancellation of certificate of registration. (Dec 2013, 5 marks)
Answer:
Section 4 of the Securitization Act provides power to Reserve Bank to cancel certificate of Registration issued by it, if the company:

1. Ceases to receive or hold any investment from qualified buyer or
2. Ceases to carry on asset reconstruction business or
3. It fails to comply with the certificate of registration.
4. Fails to fulfill the conditions of Section 3(3).
5. Fails to comply with the directions of RBI.
6. Fails to maintain accounts.
7. Fails to submit documents on inspection by RBI.
8. Obtains approval from RBI for any substantial change in management. Before cancelling registration, Reserve Bank 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.

Question 11.
(i) What are the remedies available to the secured lenders under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, if borrowers do not make payment? (June 2014) (5 marks)
(ii) What measures can an asset securitisation company take under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for the purpose of assets reconstruction? (5 marks)
Answer:
(i) (a) The provisions relating to enforcement of security interest are as follows:
1. No intervention of court or tribunal in enforcement of security interest: Any 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 provisions of the Act.

2. Notice by secured creditors to borrower to discharge liabilities within 60 days: The secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditors within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any right under Sub Section (4).

3. Secured creditor to consider the representation or objection of the borrower: If borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the creditor comes to the conclusion that the representation made by borrower are not tenable shall communicate within fifteen days of receipt of objection together with the reasons for non-acceptance of objections or representation.

4. Measures for secured creditor in case of default by the borrower [Section 13(4)]:
In case if the borrower fails to pay amount due within specified time, 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 asset of the borrower, including the right to transfer by way of lease, assignment.
(b) Takeover of the management of the business of the borrower including right to transfer by way of lease assignment.
(c) Appoint any person to manage any secured asset.
(d) Require any person who has acquired any of the secured assets from the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

5. Right of action in case of joint finance of a financial asset- In that case no secured creditor shall be entitled to exercise any or all of the rights, conferred on him unless exercise of such right is agreed upon by a secured creditors representing not less than 3/4 in value of the amount outstanding as on a record date. And such action shall be binding on all the secured creditors.

6. In case the full amount is not realised on sale of secured asset then unsatisfied amount may be recovered by filing application in debt recovery tribunal.
Advantages of Enforcement of Security Interest Under (SARFAESI) Act 2002.

1. Banks can take possession of the security and sell without the intervention of court.
2. A very efficient & time effective process.
3. Shareholder cannot pass resolution or appoint directors without the consent of the bank.
4. It is only when bank consent has been taken that a proceeding of winding up of a borrower company or appointment of receiver shall be in any court.
5. As soon as the notice of taking over of management of the business of the borrower is issued all the directors of the company shall be deemed to have vacated the office.

(b) The decree shall be considered as a debt because the SARFAESI Act defines that:
“debt” shall have the meaning assigned to it in Clause (g) of Section 2 of Recovery of Debts Due to Bank and Financial Institution Act 1993. According to this, debt means any liability (inclusive of interest) which is claimed alleged as due from any person by a bank or a financial institution or by a consortium of bank or financial institutions during the course of any business activity, undertaken by a bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured or assigned or whether payable under a decree or order of any Civil Court or any arbitration award or otherwise or under a mortgage and subsisting on and legally recoverable on the date of the application.

Thus it can be concluded that decree can be considered as debt.

(ii) As per the provisions of the Act, ARC can take the following measures for the purposes of asset reconstruction:

• Proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower.
• The sale or lease of a part or whole of the business of the borrower.
• Rescheduling of payment of debts payable by the borrower.
• Settlement of dues payable by the borrower.
• Taking possession of secured assets in accordance with the provisions of the Act.

It may do the following functions also:

• act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower.
• act as a manager
• act as receiver.

Question 12.
(a) State, whether a Civil Court shall have jurisdiction to entertain any suit in respect of any matter which falls under the purview of the Debt Recovery Tribunal or its appellate authority. (Dec 2014) (5 marks)
(b) What features have been enshrined in the Enforcement of Security
Interest and Recovery of Debts Laws (Amendment) Act, 2012 to strengthen the regulatory and institutional framework related to recovery of debts due to banks and financial institutions? (5 marks)
(c) Mention any five transactions or events to which the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 shall not apply. (5 marks)
Answer:
(a) Section 34 provides that 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).

(b) Yes, the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 amended the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and Recovery of Debts due to Banks and Financial Institutions (RDBFi) Act so as to strengthen the regulatory and Institutional framework related to recovery of debts due to banks and financial institutions.

The following are the salient features of Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012:
(a) The amendment provides for conversion of any part of debt in to shares of a borrower company and such conversion shall deemed always to have been valid as if the provisions of said conversion were enforce at all material times.

(b) Now the definition of bank under clause (c) of Section 2 of the Act includes multi cooperative bank.

(c) Increased the period of response to be sent by the Banks or financial institutions to be representation of the borrower from seven days to fifteen days.

(d) Empowers the banks or financial institutions to accept the immovable property in full or partial satisfaction of the claim of the bank against the defaulting borrower.

(e) Enables the banks or any person to file a caveat so that before granting any stay, the bank or such person is heard by the Debts Recovery Tribunal.

(f) Provides for registration of transactions of securitisation, reconstruction or creation of security interest in the central registry, which are subsisting on or before the establishment of Central Registry and also to give powers to Central Government to extent time for filing of such transactions with the Central Registry.

Question 13.
Discuss in general, the process involved in securitisation. (Dec 2014, 5 marks)
Answer:
Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Basically Securitisation is a method of raising funds by way of selling receivables for money.

The process leads to the creation of financial instruments that represent ownership interest in, or are secured by a segregated income producing asset or pool of assets. The pool of assets collateralises securities. These assets are generally secured by personal or real property (e.g. automobiles, real estate, or equipment loans), but in some cases are unsecured (e.g. credit card debt, consumer loans).

Steps in securitisation

1. Acquisition of Financial Assets by Asset Reconstruction Company from the originator. Here financial assets are loans backed by properties. The originator is banks or FIs who has lent money to the original borrower.
2. The SPV, with the help of an investment banker, issues security receipts which are distributed to investors, and
3. the SPV pays the originator for the financial assets purchased with the proceeds from the sale of securities.

Question 14.
(i) “The official liquidator cannot have recourse to the doctrine of election. He can challenge the order passed by the recovery officer and appeal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 but cannot approach the company Court/Tribunal to set aside the auction or confirmation of sale when the same has been confirmed by the recovery officer under the Act.”
Comment on the above statement giving the options, if any, available to the official liquidator in this regard. (June 2015) (5 marks)

(ii) The provisions of the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 do not apply to certain cases. List out six such cases where the provisions of the Act do n6t apply. (5 marks)
Answer:
(i) In the of Pravin Gada Vs. Central Bank of India [2013] 176 Comp Cas 101 (SC), Allahabad Bank Vs. Canara Bank [2000] 101 Comp Cas 64(SC) and Rajasthan Financial Corporation Vs. Official Liquidator 72005] Com Cas 387 (SC), Supreme Court held that anyone who is aggrieved by any act done by the Recovery Officer can prefer an appeal.

The Debts Recovery Tribunal has the powers under the 1993 Act to make an enquiry as it deems fit and confirm, modify or set aside the order made by the Recovery Officer in exercise powers under Sections 25 to 28 of the 1993 Act. Thus, the auction, sale and challenge are completely codified under the 1993 Act, regard being had to the special nature of the legislation.

The official liquidator has a role under Companies Act, 2013. He protects the interests of the workmen and the creditors and, hence his association at the time of auction and sale is appropriate. He has been conferred locus to put forth his stand in these matters.

Since, it is the Debts Recovery Tribunal which would have the exclusive jurisdiction when a matter is agitated before the Debts Recovery Tribunal, the official liquidator does not have a choice either to approach the Debts Recovery Tribunal or the company Tribunal. The language of the 1993 Act, being clear, provides that any person aggrieved can prefer an appeal.

The official liquidator whose association is mandatorily required is indubitably a person aggrieved relating to the action taken by the Recovery Officer which would include the manner in which the auction is conducted or the sale is confirmed. Under these circumstances, the official liquidator cannot have recourse to the doctrine of election. He has only one remedy, i.e., to challenge the order passed by the Recovery Officer before the Debts Recovery Tribunal and further appeal under the 1993 Act, and not approach the company Tribunal to set aside the auction of confirmation of sale when a sale has been confirmed by the Recovery Officer under the 1993 Act.

Question 15.
Fair Deal Ltd. (FDL) is aggrieved by the order of the Debt Recovery Tribunal (DRT). The management of FDL has decided to file an appeal against the order of DRT. Advise. (Dec 2015, 5 marks)
Answer:
The order of the Tribunal Officer can be challenged by filing an appeal to debt recovery appellate tribunal having jurisdiction in this matter. The appeal shall be filed to the appellate tribunal within 30 days from the date on which such an order has been made by tribunal.

Question 16.
Subrata, one of the guarantors for debt facilities taken by Krishna Ltd., is aggrieved against the order of recovery officer of the Debt Recovery Tribunal (DRT). He intends to initiate action against order of the recovery officer. Advise him about next course of action. (Dec 2015, 5 marks)
Answer:
The order of Recovery Officer can be challenged by filing an appeal to Debt Recovery Tribunal within 30 days of passing of an order. The tribunal may after giving a reasonable opportunity of being heard pass such order as it think fit, confirm, modify or set aside the order of the Recovery Officer in exercise of his power under Section 25 to 28 of recovery of debt due to Bank & Financial institutions Act, 1993.

Question 17.
(a) Subrata, one of the guarantor for debt facilities taken by Great Herald Ltd. is aggrieved by an order of Debt Recovery Tribunal. Advise him about the further course of action. (June 2016) (5 marks)

(b) Debt Recovery Tribunal has passed an order for recovery of ₹ 5 crore against Prism Ltd. and its directors. What modes of recovery are available to recovery officer? Advise. (5 marks)
Answer:
(a) Section 20 of the Recovery of Debt due to Banks and Financial Institutions Act, 1993 provides that any person aggrieved by an order made, or deemed to have been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter. No appeal shall lie to the Appellate Tribunal from an order made by a tribunal with the consent of the parties.

Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and it shall be in such form and accompanied by such fee as may be prescribed. Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.

On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders there on as it thinks fit, confirming, modifying or setting aside the order appealed against.

The Appellate Tribunal shall send a copy of every order, made by it to the parties to the appeal and to the concerned Tribunal. The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as possible and Endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

In view of this provision, Sub rata being aggrieved by the order of Debt Recovery Tribunal may appeal to Appellate Tribunal having jurisdiction in the matter.

Question 18.
Mention the other functions of securitisation company or reconstruction company as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (June 2016, 5 marks)
Answer:
Some of the other functions of Asset Reconstruction Company are as under:

• To 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;
• To 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;
• To act as receiver if appointed by any Court or Tribunal.

Question 19.
(a) Explain the meaning of non-performing assets and their classification. What is the role of Reserve Bank of India in connection with non-performing assets? (June 2016) (5 marks)
(b) List out the cases where provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are not applicable. (5 marks)
Answer:
(a) “Non-performing asset” means an asset or account of a borrower, which has been classified by bank or financial institution as sub-standard, doubtful or loss asset.
(a) In case such a bank or financial institution is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in-force, in accordance with the directions or guidelines relating to asset classification issued by such authority or body.

(b) In any other case in accordance with the directions & guidelines relating to asset classification & issued by the Reserve Bank of India.

Question 20.
With the help of decided case law, comment on the constitutional validity of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. (Dec 2016, 5 marks)
Answer:
In case of Union of India v. Delhi High Court Bar Association (2002) , the petitioners have challenged the constitutional validity of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 on the ground that the act is unreasonable and is violative of Article 14 of the Constitution and that it is beyond the legislative competence of the Parliament to enact such a law.

This Act had been challenged for depriving a person of legal remedies in ordinary civil courts. However, the Supreme Court held that there is no such right that the dispute should be adjudicated only by a civil court, and the replacement of the jurisdiction of civil courts by independent and specialized tribunals is completely legal and constitutional.

Question 21.
What are the various measures taken by assets reconstruction or securitisation company for the purpose of assets reconstruction? What are its other functions? (Dec 2016, 5 marks)
Answer:
As per the provisions of the Act, ARC can take the following measures for the purposes of asset reconstruction:

• Proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower.
• The sale or lease of a part or whole of the business of the borrower.
• Rescheduling of payment of debts payable by the borrower.
• Settlement of dues payable by the borrower.
• Taking possession of secured assets in accordance with the provisions of the Act.

It may do the following functions also:

• act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower.
• act as a manager
• act as receiver.

Some of the other functions of Asset Reconstruction Company are as under:

• To 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;
• To 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;
• To act as receiver if appointed by any Tribunal.

Question 22.
(a) Explain “Property” under Recovery of Debts (and Bankruptcy) Act, 1993. (June 2017) (4 marks)
(b) Explain “Financial Asset” under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. (2 marks)
Answer:
(a) As per Section 2(jb) of [Recovery of Debts and Bankruptcy] Act, 1993 property means:
(a) immovable property;
(b) movable property; ‘
(c) any debt or any right to receive payment of money, whether secured or unsecured;
(d) receivables, whether existing or further; and
(e) intangible assets, being know-how, patent, copy right, trade mark, license, franchise or any other business or commercial right of similar nature, as may be prescribed by the Central Government in consultation with Reserve Bank of India.

Under Section 2(1a) “secured creditor” shall have the meaning as assigned to it in clause (zd) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).

(b) Financial Asset
‘Financial asset’ under Section 2(l) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002 means debt or receivable and includes:

• a claim to any debt or receivables or part thereof whether secured or unsecured; or
• any debt or receivables secured by, mortgage of, or charge on, immovable property; or
• a mortgage, charge, hypothecation or pledge of movable property; or
• any right or interest in the security, whether full or part underlying such debt, receivables, or beneficial interest in property movable or immovable or debt receivables, whether such interest is exiting, future, accruing, conditional or contingent or any financial assistance.

Question 23.
(i) Measures to be taken by Assets Reconstruction or Securitisation Company for the purpose of Assets Reconstruction. (June 2017) (5 marks)
(ii) Assistance to take possession of secured assets from the Chief
Metropolitan Magistrate or the District Magistrate under (SARFAESI) Act, 2002. (5 marks)
(iii) Right to lodge a “Caveat” under (SARFAESI) Act, 2002. (5 marks)
(iv) “Demand Notice” under Security Interest (Enforcement) Rules, 2002. (5 marks)
Answer:
(i) Measures that can be taken by Assets Reconstruction or Securitisation Company for the purposes of asset reconstruction having regard to the guidelines framed by the Reserve Bank In this behalf are:

• Proper management of the business of the borrower, by change in, or takeover of the management of the business of the borrower;
• Sale or lease of a part or whole of the business of the borrower;
• Rescheduling of payment of debts payable by the borrower;
• Enforcement of security interest in accordance with the provisions of the Act;
• Settlement of dues payable by the borrower;
• Taking possession of secured assets in accordance with the provisions of the Act;
• To convert any portion of debt info share of a borrower company.

Provided that conversion of any part of debt into shares of a borrower company shall be deemed always to have been valid, as if the provisions of this clause were in force at all material times.

(ii) Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 provides for assistance for taking possession of secured asset from the Chief Metropolitan Magistrate or the District Magistrate.

In simple terminology, the essence and meaning of Section 14 of the Act is that a secured creditor may seek the help and assistance of the Chief Metropolitan Magistrate or the District Magistrate for the purpose of taking over of the possession of the secured asset or property instead of resorting to recovery of the asset by means of self-help.

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 to 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.

• Take possession of such asset and documents relating thereto; and
• Forward such asset and documents to the secured creditor.

An application by the secured creditor shall be accompanied by an affidavit duly affirmed by the authorised officer of the secured creditor. On receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall satisfy the comments of the affidavit and pass suitable orders for the purpose of taking possession of the secured assets.

(iii) Right to lodge a Caveat
Section 18C of SARFAESI Act deals with the right to lodge a caveat:
Where an application or an appeal is expected to be made or has been made under sub-section (1) of Section 17 or Section 17A or sub-section (1) of Section 18 or Section 18B, the secured creditor or any person claiming a right to appear before the Tribunal or the Court of District Judge or the Appellate Tribunal or the High Court, as the case may be, on the hearing of such application or appeal, may lodge a caveat in respect thereof.

Where a caveat has been lodged:
(a) the secured creditor by whom the caveat has been lodged (hereafter in this section referred to as the caveat or) shall serve notice of the caveat by registered post, acknowledgment due, on the person by whom the application has been or is expected to be made

(b) Any person by whom the caveat has been lodged (hereafter in this section referred to as the caveat or) shall serve notice of the caveat by registered post, acknowledgment due, on the person by whom the application has been or is expected to be made.

Where after a caveat has been lodged, any application or appeal is filed, the Court/Tribunal shall serve a notice of application or appeal filed by the applicant or the appellant on the caveat or.

Where a notice of any caveat has been served on the applicant or the Appellant, he shall periodically furnish the caveat or with a copy of the application or the appeal made by him and also with copies of any paper or document which has been or may be filed by him in support of the application or the appeal.

Where a caveat has been lodged, such caveat shall not remain in force after the expiry of the period of ninety days from the date on which it was lodged unless the application or appeal referred to in sub-section (1) has been made before the expiry of the said period,

(iv) Demand notice under Security interest (enforcement) Rules, 2002 Rule 3 (1) SECURITY INTEREST (ENFORCEMENT) RULES, 2002 provides that the service of demand notice as referred to in sub-section (2) of Section 13 of the SARFAESI Act shall be made by delivering [including hand delivery] or transmitting at the place where the borrower or his agent, empowered to accept the notice or documents on behalf of the borrower, actually and voluntarily resides or carries on business or personally works for gain, by registered post with acknowledgment due, addressed to the borrower or his agent empowered to accept the service or by Speed Post or by courier or by any other means of transmission of documents like fax message or electronic mail service.

If the authorized officer has reason to believe that the borrower or his agent is avoiding the service of the notice or that for any other reason, the service cannot be made as aforesaid, the service shall be effected by affixing a copy of the demand notice on the outer door or some other conspicuous part of the house or building in which the borrower or his agent ordinarily resides or carries on business or personally works for gain and also by publishing the contents of the demand notice in two leading newspapers, one in vernacular language, having sufficient circulation in that locality.

Where the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate as specified under sub-rule (1).

Any other notice in writing to be served on the borrower or his agent by authorized officer, shall be served in the same manner as provided in this rule.

Where there is more than one borrower, the demand notice shall be served on each borrower.

The demand notice may invite attention of the borrower to provisions of sub-section 1(8) of Section 13 of the Act, in respect of time available to the borrower, to redeem the secured assets.

Question 24.
“Recovery Officer acts in an arbitrary manner.” Analyse the statement in the light of the provisions of Recovery of Debts and Bankruptcy Act, 1993 citing judicial pronouncements, if any. (Dec 2017, 5 marks)
Answer:
The Recovery Officer on receipt of the decree from the Presiding Officer is duty bound to make recovery in the manner provided under the Recovery of Debts and Bankruptcy Act, 1993. To enable his duties, Section 29 of the Act provides that the provisions of the Second and Third Schedule to the Income-Tax Act, 1961 and the Income-Tax (Certificate Proceedings) Rules, 1962 shall as far as possible apply with necessary modifications.

Provided that any reference under the said provisions and the rules to the ‘assesse’ shall be construed as a reference to the defendant under the Recovery of Debt and Bankruptcy Act. On a challenge the Apex court in the case of UOI vs. Delhi High Court Bar Association and Others (2002) 4 SCC 275, observed that “by virtue of Section 29 of the Act, the provisions of Second and Third schedule to the Income-Tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules,1962 have become applicable for the realization of dues by the Recovery Officer.

Detailed procedure for recovery is contained in these Schedules to the Income-tax Act, including provisions relating to arrest and detention of tha defaulter. It cannot, therefore, be said that the Recovery Officer acts in an arbitary manner. Hence statement given is denied.

Furthermore, Section 30, after amendment by the Amendment Act, 2000, gives a right to any person aggrieved by an order of the Recovery Officer, to prefer an appeal to the Tribunal. Thus now an appellate forum has been provided against any order of the Recovery Officer which may not be in accordance with the law. There is, therefore, sufficient safeguard which has been provided in the event of the Recovery Officer acting in an arbitary or an unreasonable manner.

Question 25.
What is a securitisation and who are the parties involved in securitization? Briefly explain the action points or steps in securitisation? (Dec 2017, 5 marks)
Answer:
Securitisation:
Securitisation is a method of raising funds by way of selling receivables for money. Securitisation under section 2(1 )(z) means acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.

Steps involved in Securitisation

• Acquisition of Financial Assets by Asset Reconstruction Company (i.e. SPVs) from the originator.
• SPV, with the help of an investment banker, issues security receipts which are distributed to investors.
• SPV pays the originator for the financial assets purchased with the proceeds from the sale of securities.

Six Parties involved in Securitisation:

1. The Originator (Banks / FIs who has lent loan against properties).
2. SPVs (Asset Reconstruction Company).
3. Investors (To whom securities are issued).
4. The obligator (i.e. original borrower of the loan).
5. Rating agency.
6. Administrator, etc.

Question 26.
“More and more banks are embarking on forming of Asset Reconstruction Companies such that they can manage their risks better and can concentrate on lending”. Explain the salient features and functions of an Asset Reconstruction Company in the context of the above statement. (June 2018, 5 marks)
Answer:

• Asset Reconstruction company means a company incorporated under provisions of Companies Act, 2013 for purpose of assets reconstruction.
• The problem of non-performing loans created due to systematic banking crisis world over has become acute.
• Focused measures to help the banking systems to realise its NPAs has resulted into creation of specialised bodies called asset management companies which in India have been named Asset Reconstruction Companies (‘ARCs’).
• The buying of impaired assets from banks or financial institutions by ARCs will make their balance sheets cleaner and they will be able to use their time, energy and funds for development of their business.’
• ARCs may be able to mix up their assets, both good and bad, in such a manner to make them saleable.
• The main objective of Asset Reconstruction Company (‘ARC’) is to act as agent for any bank or financial institution for the purpose of recovering their dues from the borrowers on payment of fees or charges, to act as manager of the borrowers’ asset taken over by banks, or financial institution, to act as the receiver of properties of any bank or financial institution and to carry on such ancillary or incidental business with the prior approval of Reserve Bank wherever necessary.
• If an ARC carries on any business other than the business of asset reconstruction or securitisation or the business mentioned above, it shall cease to carry on any such business within one year of doing such other business.

Question 27.
“More and more banks are embarking on forming of Asset Reconstruction Companies such that they can manage their risks better and can concentrate on lending”. Explain the salient features and functions of an Asset Reconstruction Company in the context of the above statement. (June 2018, 5 marks)

Question 28.
“Banks and financial institutions do have free hands to take possession of assets of a defaulting debtor under Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002″. Are there any exceptions to the statement under the Act? Explain. (June 2018, 5 marks)
Answer:
Section 31 of the SARFAESI Act, 2002 provides for non – applicability of SARFAESI Act in certain cases.
The provisions of the Act shall not apply to:

• A lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930.
• Pledge of movables as per the Indian Contract Act, 1872.
• Creation of any security in any aircraft as per the Aircraft Act, 1934.
• Creation of security interest in any vessel as defined in Merchant Shipping Act, 1958.
• Any rights of unpaid seller under Section 47 of The Sale of Goods Act,1930.
• Any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act)] or sale under the first proviso to Sub-section (1) of Section 60 of the Code of Civil Procedure, 1908.
• Any security interest for securing repayment of any financial asset not exceeding one lakh rupees.
• Any security interest created in agricultural land.
• In case the amount due is less than 20% of the principal amount and interest thereon.

Question 29.
SARFAESI Act is a complete code in itself and there is no lacuna or ambiguity in it to warrant reading something more into it or to borrow anything from the Companies Act. Comment on the statement in light of decided case laws. (Dec 2018, 5 marks)
Answer:
The combined effect of Section 35 and 37 is that in case of any conflict, then the SARFAESI ACt 2002 shall have the overriding effect over such Actor Acts.

Therefore the provisions of SARFAESI Act, 2002 shall have the binding power and cannot be put on hold because of conflict with any other legislation.

In addition to this Section 34 of SARFAESI Act 2002, no civil court shall have any jurisdiction to entertain any suit or proceeding in respect of any matter in which a Debt Recovery Tribunal or the Appellate Tribunal is empowered by or under this SARFAESI Act, 2002.

Pegasus Assets Reconstruction (P) Ltd. v. Haryana Concast Ltd., civil appeal nos. 3646 of 2011,9293-9294 of 2014 and 14736 to 14738 of 2015, date December 29, 2018, [2015] 64 taxmann.com 394(SC)

Considering section 283 of the Companies Act, 2013/Section 456 of Companies Act, 1956 read with section 13 of the SARFAESI Act, 2002, the Supreme Court in the matter of winding-up and custody of company’s property opined that SARFAESI Act, 2002 is a complete code in itself and there is no lacuna or ambiguity in it to warrant reading something more into it or to borrow anything from Companies Act, 2013.

The Court mentioned that as per section 13 of the SARFAESI Act, a secured creditor has right to enforce its security interest without intervention of Court or Tribunal and the powers under Companies Act, 2013 cannot be wielded by Company Judge to interfere with proceedings by a secured creditor who has opted to stay outside winding-up process to realize its secured interest as per provisions of SARFAESI Act.

Question 30.
“Any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor”. Explain the procedure for enforcement of security interest under Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 20G2 (SARFAESI) . (June 2019, 5 marks)
Answer:
Section 13 of SARFAESI Act, 2002 deals with enforcement of security interest by a creditor which provides as under:
(a) 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 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 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 section 13(4) of the Act.

(b) If on receipt of the notice, the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within fifteen days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.

In case the borrower fails to discharge his liability in full within the period specified above, the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:

1. take possession of the secured assets of the borrower
2. takeover the management of the business of the borrower
3. appoint any person (hereafter referred to as the manager)
4. 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.

Question 31.
Under what circumstances the Certificate of Registration of an Asset Reconstruction Company issued under SARFAESI Act, 2002 can be cancelled? (Dec 2019, 3 marks)
Answer:
Section 4 of the SARFAESI Act, 2002 dealing with the cancellation of certificate of registration, provides as under:
The Reserve Bank may cancel a certificate of registration granted to asset 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 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 —

1. comply with any direction issued by the Reserve Bank under the provisions of this Act; or
2. maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve Bank of India under the provisions of this Act; or
3. submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or
4. obtain prior approval of the Reserve Bank required under sub-section (6) of Section 3 of the Act.

Question 32.
A bank took over the management of a Company in terms of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and appointed 5 directors consequently removing Suresh, an executive director. Suresh demanded compensation for loss of office as well as his unpaid salary for the last 2 months. Will he be entitled for compensation for loss of office and unpaid salary? (Dec 2020, 3 marks)
Answer:
(i) As per Section 16(1) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) any director, manager or Managing Director is disentitled from claiming any compensation for loss of office.

(ii) However, as per Section 16(2) of the Act, the aforesaid provision does not affect the rights of such person to recover from the business of borrower, moneys recoverable otherwise than by way of compensation.

(iii) In the given case, Suresh, the removed executive director can claim his unpaid salary but not any compensation for loss of office.

Question 33.
How could the rights of dissenting shareholders to a scheme of merger be resolved? (Dec 2020, 3 marks)
Answer:

1. The rights of dissenting shareholders can be resolved by resorting to Section 235 of the Companies Act, 2013 in the manner provided under Rule 26 of Companies (Compromise, Arrangement, and Amalgamation) Rules, 2016.
2. If nine-tenths of the shareholders are agreeable to the merger, then the acquiring company can, after serving notice, duly acquire the shares of the dissenting group.
3. The dissenting shareholders need to be served notice in the manner prescribed under the Rule 26.

Question 34.
“Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)” is a legislation for fast recovery of debt by the secured creditors but there are certain exceptions” – briefly elucidate with at least 5 circumstances, where the legislation cannot be applied. (Dec 2020, 5 marks)
Answer:
Section 31 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) excludes the following for the purpose of attachment or enforcement under the said Act.

1. A lien on any goods, money or security given by or under the Indian Contract Act, 1872 or Sale of Goods Act, 1930 or any law for the time being in force
2. A pledge of immovable within the meaning of Section 172 of Indjan Contract Act, 1872
3. Creation of any security in any air craft as defined in clause (1) of Section 2 of Air Craft Act, 1934
4. Creation of security interest in any vessel as defined in clause (55) of Section 3 of Merchant Shipping Act, 1958
5. Any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930
6. Any property not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of Section 60 of Code of Civil Procedure, 1908
7. Any security interest for securing repayment of any financial asset not exceeding one lakh rupees
8. Any security interest created on agricultural land
9. Any case in which the amount due is less than twenty per cent of the principal amount and interest thereon.

Question 35.
“The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) has a provision for Right to Caveaf. Explain briefly. (Aug 2021, 3 marks)
Answer:
Section 18C of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 deals with the right to lodge a caveat. It provides that:
(1) Where an application or an appeal is expected to be made or has been made section 17(1) or section 17A or section 18(1) or section 18B, the secured creditor or any person claiming a right to appear before the Tribunal or the Court of District Judge or the Appellate Tribunal or the High Court, as the case may be, on the hearing of such application or appeal, may lodge a caveat in respect thereof.

(2) Where a caveat has been lodged under sub-section (1),—
(a) the secured creditor by whom the caveat has been lodged (hereafter in this section referred to as the caveator) shall serve notice of the caveat by registered post, acknowledgement due, on the person by whom the application has been or is expected to be made under sub-section (1);

(b) any person by whom the caveat has been lodged (hereafter in this section referred to as the caveator) shall serve notice of the caveat by registered post, acknowledgement due, on the person by whom the application has been or is expected to be made under sub-section (1).

(3) Where after a caveat has been lodged under sub-section (1), the Tribunal or the District Judge or the Appellate Tribunal or the High Court, as the case may be, shall serve a notice of application or appeal filed by the applicant or the appellant on the caveator.

(4) Where a notice of any caveat has been served on the applicant or the Appellant, he shall periodically furnish the caveator with a copy of the application or the appeal made by him and also with copies of any paper or document which has been or may be filed by him in support of the application or the appeal.

(5) Where a caveat has been lodged under sub-section (1), such caveat shall not remain in force after the expiry of the period of ninety days from the date on which it was lodged unless the application or appeal referred to in sub-section (1) has been made before the expiry of the said period.

Question 36.
Discuss the Jurisdiction of Debt Tribunal as per section 179(2) of the IBC, 2016. (Dec 2021, 3 marks)
Answer:
Section 179(2) of the Insolvency and Bankruptcy Code, 2016 provides that the Debt Recovery Tribunal shall, have jurisdiction to entertain or dispose of-

1. any suit or proceeding by or against the individual debtor;
2. any claim made by or against the individual debtor;
3. any question of priorities or any other question whether of law or facts, arising out of or in relation to insolvency and bankruptcy of the individual debtor or firm under this Code.

Question 37.
An Asset Reconstruction Company is subject to audit and inspection by Reserve Bank of India (RBI). Elucidate the powers of RBI in this regards under SARFAESI Act, 2002. (Dec 2021, 5 marks)
Answer:
Section 12 B of the SARFAESI Act, 2002 deals with the powers of Reserve Bank of India to carry out audit and inspection of an Asset Reconstruction Company (ARC), which are given below: –
(1) The Reserve Bank may, for the purposes of this Act, carry out or caused to be carried out audit and inspection of an asset reconstruction company from time to time.

(2) It shall be the duty of an asset reconstruction company and its officers to provide assistance and cooperation to the Reserve Bank to carry out audit or inspection under sub section (1).

(3) Where on audit or inspection or otherwise, the Reserve Bank is satisfied that business of an asset reconstruction company is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such asset reconstruction company, the Reserve Bank may, for securing proper management of an asset reconstruction company, by an order-

(a) remove the Chairman or any director or appoint additional directors on the board of directors of the asset reconstruction company; or
(b) appoint any of its officers as an observer to observe the working of the board of directors of such asset reconstruction company:
Provided that no order for removal of Chairman or director under clause (a) shall be made except after giving him an opportunity of being heard.

(4) It shall be the duty of every director or other officer or employee of the asset reconstruction company to produce before the person, conducting an audit or inspection under sub-section (1), all such books, accounts and other documents in his custody or control and to provide him such statements and information relating to affairs of the asset reconstruction company as may be required by such person within the stipulated time specified by him.

Question 38.
“The Insolvency and Bankruptcy Code, 2016 will prevail over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).” Examine the statement with the help of decided Case laws. (June 2022, 3 marks)

Question 39.
E-auction i.e. Auction on an online portal is fool proof method.’ Discuss and describe the steps taken for auction under the Insolvency and Bankruptcy Code, 2016. (June 2022, 3 marks)

Question 40.
Explain the measures provided to the secured creditor for taking possession and selling the secured asset in terms of Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). (June 2022, 5 marks)

Question 41.
ARC India Ltd. (ARCIL) filed winding-up petition of MF Ltd. (MFL) before the Company Court/Tribunal. ARCIL was having security interest in MFL and wanted to dispose of the assets for which it has requested the Company Tribunal to give permission. Prior to the order of winding-up, an order was passed by the Company Judge declining permission to ARCIL (appellant) to sell the assets of MFL under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Aggrieved by the order of Company Judge, ARCIL has filed an appeal before the division bench. The division bench has permitted ARCIL to sell the secured assets of MFL which is in liquidation in accordance with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

On the basis of the valuation report of the registered valuer, the fair market value of the properties was fixed by the Sale Committee at 30 crore and distress market value was fixed at 15 crore. In auction, two bidders emerged at top, offering 40 crore and 41 crore. The Company Judge has refused to confirm the sale conducted by the Sale Committee on the ground that there was a huge gap between bid amount and fair market value.

The Company Judge has not assigned any other reasons for not confirming the sale in favour of the highest bidder. Official Liquidator has made a statement that he was a party to the sale proceedings and he never objected to the proposal of the Sale Committee and today also he is not in a position to contend that the price quoted by the highest bidder is on the lower side or that the properties in question can be sold at a higher price.

In spite of the request of ARCIL and statement given by the Official Liquidator, the Company Judge set aside the proceedings of the sale and also directed refund of the security amount to all the bidders. The Company Judge further ordered to the Official Liquidator to get a fresh valuation report.

Keeping in view the above facts and circumstances, you are required to give your opinion as to
(i) Whether the Company Judge has committed an error in not approving the report submitted by the Sale Committee, without giving any reason?
(ii) Whether ARCIL would be successful in getting favourable order from division bench? (June 2012, 9 marks)
Answer:

• In the above case, Company Judge has committed an error in not approving the report submitted by the Sale Committee, without giving any reason.
• In ‘Asst. Commissioner Commercial Tax Department Works Contract & Leasing V/s Shukla & Bros (2010), it was held by Supreme Court that recording of reasons is an essential feature of dispensation of justice.
• Recording of reasons are soul of the orders & non-recording of reasons hampers the proper administration of justice.
• Non recording of reasons may cause prejudice to the affected party.
• In this case, ARCIL would be successful in getting the favourable order from division branch & division branch should reverse the order of Company Judge & confirm the sale of assets of the company in favour of highest bidder.

Question 42.
XYZ Bank Ltd., being a secured creditor, filed an application before the Debt Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to recover ? 5 crore from Gem Pvt. Ltd. Recovery certificate was issued by the Tribunal and the recovery officer sold the property of the company mortgaged to the bank in auction, based on the recovery certificate. However, the company was in liquidation and the official liquidator challenged the sale of the property of the company before the company Tribunal. The bank has sought your expert opinion in the matter.

Substantiate your opinion with reasons and case law, especially on the question of jurisdiction of the company Tribunal in the matter. (Dec 2014, 5 marks)
Answer:
Section 34 of the Recovery of Debts due to Banks and Financial institutions Act, 1993 lays down that the 1993 Act would have overriding effect. The DRT has exclusive jurisdiction to sell the properties in the proceeding instituted by the Bank but at the time of auction and sale it is required to associate the official liquidator.

Any one who is aggrieved by any Act of the Recovery Officer can prefer and appeal before the Debt Recovery Tribunal. Hence the official liquidator has to approach the Tribunal rather than the Company Tribunal to challenge the order of the Recovery Officer. The Company Tribunal has no jurisdiction to set aside the sale:

1. (2013) 177 Comp. Cas 426 (SC official liquidator UP & Uttarakhand v. Allahabad Bank & Others.
2. Allahabad Bank v. Canara Bank (2000) 101 comp. Cas 4 (SC) relied upon.

Question 43.
Oriental Bank of India (OBI) extended loan of ₹ 20 crore to Aamran Fabricators Ltd. (AFL). Debt Recovery Tribunal (DRT) has issued order against AFL for recovery of outstanding dues amounting to ₹ 28.5 crore as against the claim of ₹ 30 crore filed by OBI. Aggrieved by the order of Debt Recovery Tribunal, AFL wants to file appeal in Debts Recovery Appellate Tribunal under section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Explain the pre-conditions to be fulfilled for filing of an appeal against the order of DRT. (June 2016, 5 marks)
Answer:
Section 18 of the SARFAESI Act, 2002 provides that 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. 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.

It may be noted that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty percent of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less. Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty- five per cent of debt referred above.

Question 44.
M/s. Speed Airways Pvt Ltd. a borrower, filed a case before a civil court that Diligent Bank, a secured creditor, has not issued any letter to the company for demanding of repayment of loan and stating its intention to enforce the secured interest. Rather, fraudulently transferred the funds from its account to another company only to classify it as NPA as per the provisions of SARFAESI Act, 2002. In the light of the decided case, state whether the case is maintainable. (June 2018, 5 marks)
Answer:
Golf Technologies (P). Ltd. & Anr v. Axis Banj Ltd. & Ors (DEL):
SARFAESI Act – section 13 and 17 – jurisdiction of civil court- recovery proceedings initiated by bank against the defaulting borrower- borrower filed civil suit alleging fraud played by the bank- whether maintainable.

issue:
The plaintiffs’ case is that the letter dated 31.12.2012 was not issued by them and that it was fraudulently created by the Bank, hence the transfer of monies from the plaintiffs’ account to M/s. Tulip Telecom Limited was wrong and the said amount was depleted from their account only to classify it as an NPA. This according to the plaintiffs amounts to fraud and would-form the basis of the maintainability of the present suit.

This is a suit challenging the measures taken by defendant Bank under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest. The ground alleged in the suit is fraud by the bank played upon the plaintiffs.

On 21.4.2015, after summons were issued, the Bank took a preliminary objection to the maintainability of the suit on the ground that the appropriate remedy available to the plaintiffs js under Section 17 of the Act and that it was always open to the plaintiffs to have approached the Debts Recovery Tribunal (for short “DRT”) concerned for the reliefs sought in the present suit. Accordingly, the learned counsels for the parties were heard on the issue of maintainability of the suit.

Decision held – Suit Dismissed
Grounds for Dismissal
As per Mardia Chemicals (supra), jurisdiction of civil courts can be invoked only v\. Hen the action of the secured creditor is alleged to be fraudulent or his claim so absurd and untenable. The plaint does not aver any complicated facts leading to the case of fraud or how the measures adopted by the Bank are fraudulent/absurd/ untenable. There is nothing in the plaint which would lead to the conclusion that the plaintiffs’ case falls under the exception carved out by Mardia Chemicals (supra), i.e., the plaintiffs’ grievances ought to be determined in a suit.

There is no force in the contention of advanced on behalf of the plaintiffs that the DRT is not empowered to determine the issues sought to be agitated in the present suit. It is not as if the remedy provided under Section 17 of the Act is illusory. The expression “evidence produced by the parties” occurring in Section 17(3) would include all such which can be produced by the plaintiffs to show that the measures taken by the Bank under Section 13 were not in conformity with the provisions of the Act. Is has been so held in V.Thulasi (supra).

In the context of the preceding discussion this Court is of the view that the ground of fraud raised by the plaintiff can be duly addressed in proceedings under Section 17 of the SARFAESI Act, 2002 and the said plea of fraud, in the peculiar facts and circumstances of the case, does not fall in the exception carved out in Mardia Chemicals (supra).

Therefore, the suit is not maintainable and is accordingly, dismissed.

Question 45.
Global Finance Bank Ltd. has extended ₹ 100 crore to GEO Ltd. against mortgage of 50 acre of landed property with building. GEO Ltd. is being liquidated. Global Finance Bank Ltd. seeks to realise the mortgaged property given as security. Advise Global Finance Bank Ltd. about realising its security. (June 2019, 5 marks)
Answer:
Regulation 37 of the IBBI (Liquidation Process) Regulations, 201.6 deals with realisation of security interest by a secured creditor (Global Finance Bank Ltd.).

1. Global Finance Bank Ltd. who seeks to realize its security interest shall intimate the liquidator of the price at which he proposes to realise its secured asset.
2. The liquidator shall inform the Global Finance Bank Ltd. within twenty one days of receipt of the intimation, if a person is willing to buy the secured asset before the expiry of thirty days from the date of intimation at a price higher than the price intimated.
3. Where the liquidator informs the Global Finance Bank Ltd. of a person willing to buy the secured asset, Global Finance Bank Ltd. shall sell the asset to such person.
4. If the liquidator does not inform Global Finance Bank Ltd. or the person does not buy the secured asset, Global Finance Bank Ltd. may realise the secured asset in the manner it deems fit, but at least at the price intimated.
5. Where the secured asset is realised under (iii) above, Global Finance Bank Ltd. shall bear the cost of identification of the buyer.
6. Where the secured asset is realised under (iv) above, the liquidator shall bear the cost incurred to identify the buyer.
7. The provisions of this Regulation shall not apply if Global Finance Bank Ltd. enforces its security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993.

Question 46.
Omega Ltd. is a securitisation and reconstruction Company in terms of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). The certificate thus issued was cancelled by the competent authority. However, Omega Ltd. is holding certain investments of Qualified Institutional Buyers (QIB) at the time of cancellation. Offer your views regarding the authority that cancels the registration and the rights of Omega Ltd. against such cancellation. (Dec 2020, 5 marks)
Answer:
(i) Reserve Bank of India (RBI) is the Authority to cancel the registration granted to an Asset Reconstruction Company in terms of SectIon 4 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002 (SARFAESI).

(ii) Omega Ltd. can prefer an appeal to the Central Government within a period of 30 days of cancellation communicated to it. The Central Government shall give such company an opportunity of being heard before disposal of such application.

(iii) In if the Asset Reconstruction Company (ARC) is holding investments for qualified institutional buyers, after cancellation of registration, it shall be deemed to be ARC until ¡t repays the entire investments held by it together with interest, if any, within such period as the RBI directs.

Debt Recovery & SARFAESI Notes

A. Purpose /Objective of SARFAESI Act
The main purpose of the SARFAESI Act is to enable and empower the secured creditors to take possession of their securities and to deal with them without the intervention of the court and also alternatively to authorise apy securitisation or reconstruction company to acquire financial assets of any bank or financial institution.

B. Asset Reconstruction Companies
Asset Reconstruction Company means a company registered with Reserve Bank under section 3 of SARFAESI Act for the purposes of carrying on the business of asset reconstruction or securitisation, or both.

C. Measures for Asset reconstruction
Section 9.deals with the measures for Asset Reconstruction. Without prejudice to the provisions contained in any other law for the time being in force, an asset reconstruction company may, for the purposes of asset reconstruction, 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;
(g) conversion of any portion of debt into shares of a borrower company:

D. Power of Reserve Bank to determine policy and issue directions
The Reserve Bank may give directions to any asset reconstruction company generally or to a class of asset reconstruction companies or to any asset 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 asset reconstruction company;
(c) the fee and other charges which may be charged or incurred for management of financial assets acquired by any asset reconstruction company;
(d) transfer of security receipts issued to qualified buyers.

E. Manner and effect of takeover of Management (Section 15)
(1) When the management of business of a borrower jS taken over by a asset reconstruction company under clause (a) of section 9 or, as the case may be, by a secured creditor under clause (b) of sub-section (4) of section 13], 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, 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, 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, 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:

F. Need and objective of Recovery of Debts [and Bankruptcy] Act, 1993
It was established with a view to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions, and for matters connected therewith or incidental thereto.

G. Establishment of Tribunal
Section 3 of the Recovery of Debts [and Bankruptcy] Act, 1993 deals with the establishment of tribunal. Section 3 states that:
1. The Central Government shall, by notification, establish one or more Tribunals, to be known as the Debts Recovery Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act.

1 A. The Central Government shall by notification establish such number of Debts Recovery Tribunals and its benches as it may consider necessary, to exercise the jurisdiction, powers and authority of the Adjudicating Authority conferred on such Tribunal by or under the Insolvency and Bankruptcy Code, 2016.

2. The Central Government shall also specify, in the notification referred to in sub-section (1), the areas within which the Tribunal may exercise jurisdiction for entertaining and deciding the applications filed before it.