The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – CA Final Law Study Material

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – CA Final Law Study Material

Question 1.
Explain Asset Reconstruction, Financial Assets under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. [Nov. 10(4 Marks)]
Answer:
Meaning of Assets Reconstruction and Financial Asset:
(a) Asset Reconstruction: Sec. 2 (b) of SARFAESI Act, 2 002, asset reconstruction means acquisition by any asset reconstruction company (RC) of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance.

(b) Financial Asset: 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 beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire such tangible asset;

(vii) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset hr obtain licence of the intangible asset; or
(viii) any financial assistance.

Question 2.
Explain briefly the concept of “Securitization” under the provisions of the Securitisation and Recon-struction of Financial Assets and Enforcement of Securities Interest Act, 2002. [May 13 (4 Marks)]
Answer:
Concept of Securitisation:

As per Sec. 2(z) of SARFAESI Act, 2002 Securitisation means acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such asset reconstruction company from qualified buyers or issue of security receipts representing undivided interest in such financial assets or otherwise.

The process of securitisation helps the Asset Reconstruction Company to acquire financial assets like Loans from banks due to which the ARC shall 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.

Question 3.
Explain the meaning of the terms “non-performing asset” and “asset reconstruction” used in the SARFAESI Act, 2002. [May 14 (4 Marks)]
Answer:
Non-Performing Asset: Sec. 2(o] of SARFAESI Act, 2002 defines the term NPA 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,

(a) in case such 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 assets classifications issued by such authority or body;

(b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.

Asset reconstruction:

Meaning of Assets Reconstruction and Financial Asset:
(a) Asset Reconstruction: Sec. 2 (b) of SARFAESI Act, 2 002, asset reconstruction means acquisition by any asset reconstruction company (RC) of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance.

(b) Financial Asset: 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

Question 4.
ABC limited has issued listed bonds five years ago, which is due to be redeemed in the current year worth 50 crore. Market analyst feels that the projected cash flows and profitability seems inadequate to repay the bond value. The single largest bond holder BH Ltd. holds bonds worth 20 crore, and wants to explore its options under SARFAESI law, in case ABC limited fails to repay the debt.
Please advise whether BH Ltd. can have recourse to the SARFAESI Act. [MTP-Aug.18]
Answer:
Determination of Recourse availability under SARFAESI Act:

As per Sec. 2(zd) of SARFAESI Act, 2002, debenture trustee registered with the Board appointed by any company for secured debt securities in whose favour security interest is created by any borrower for due repayment of any financial assistance are covered within the definition of secured creditor.

Unlike NBFC for which a threshold of assets of 500 Crore is put for applicability of the SARFAESI Act, there is no such limit for debenture holders.
Accordingly, BH Ltd. can have recourse to SARFAESI Act.

Question 5.
RST Ltd. is a securitization and reconstruction company under SARFAESI Act, 2002. The certificate of registration granted to it was cancelled. State the authority which can cancel the registration and the right of RST Ltd. against such cancellation. [May 11 (4 Marks), MTP – Oct. 18]
Answer:
Cancellation of Certificate of Registration under SARFAESI Act, 2002:
As per Sec. 4 of SARFAESI Act, 2002, the Authority which can cancel certificate of registration is the Reserve Bank of India. Certificate may be cancelled in any of the circumstances mentioned u/s 4.

Rights of RST Limited against cancellation:

RST Ltd., can prefer an appeal to the C.G. (Secretary, Ministry of Finance, Government of India) within a period of 30 days from the date on which order of cancellation was communicated to it.
The C.G. must also give such company a reasonable opportunity of being heard before rejecting the appeal.

Question 6.
Referring to the provisions of the Securitisation & Reconstruction of Financial Assets & Enforcement of Securities Interest Act, 2002 state the circumstances under which the Reserve Bank of India may cancel the certificate of registration granted to a Securitisation Company. [Nov. 14 (4 Marks), MTP-Oct.18]
Or
On what grounds the Reserve Bank of India can cancel a certificate of registration granted to an Asset Reconstruction Company? [RTP – May 19]
Answer:
Circumstances under which the Reserve Bank may cancel Certificate of Registration:

As per Sec. 4 of SARFAESI Act, 2002, RBI may cancel a certificate of registration granted to an ARC, 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 Sec. 3; or
(e) fails to-

comply with any direction issued by the RBI; or
maintain accounts in accordance with the requirements of any law or any direction or order issued by the RBI; or
submit or offer for inspection its books of account or other relevant documents when so demanded by the RBI; or
obtain prior approval of the Reserve Bank in situations specified u/s 3 for substantial change in management, change of location and change of name.

Question 7.
Zebra Limited failed to repay the amount borrowed from Genuine Bank, which is, holding a charge on all the assets of the Company. Now, the Bank wants to acquire the Financial Assets of Zebra Limited, is the Bank bound to give notice of acquisition of financial assets to the obligor? State the Provisions in this regard with reference to the Securitization and Reconstruction of Financial Assets and Enforcement of Securities interest Act. 2002. [Nov. 19 – Old Syllabus (3 Marks)!
Answer:
Notice to obligor and discharge of obligation of such obligor:
Sec. 6 of SARFAESI Act, 2002 deals with the provisions related to notice to obligor and discharge of obligation of such obligor. Accordingly,

The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by any ARC, 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.

Where a notice of acquisition of financial asset is given by a bank or financial institution, the obligor, on receipt of such notice, shall make payment to the concerned ARC in discharge of any of the obligations in relation to the financial asset specified in the notice.

Where no notice of acquisition of financial asset is given by the 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 ARC.

Conclusion: Bank is not bound to give notice, however, if bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by any ARC, to the concerned obligor.

Note 1: It is assumed that the asset reconstruction company is acquiring the secured asset from the Bank. Answer may differ if other assumption is being taken.
Note 2: Answer given in suggested answer of ICAI is different. As per the suggested answer, Genuine Bank is bound to give notice to the Zebra limited.

Question 8.
High Growth Housing and Finance Limited is incorporated as a Public Limited company in 2012 and its net owned fund as on 31.3.2021 was ₹ 250 crore. The Board of Directors have decided to commence a business of securitisation and to apply to Reserve Bank of India. From the financial statements of the company it is seen that the company had incurred a net loss of f 2.00 crore in 2016 and posted good profits in the subsequent years till 2021.
The Board seeks your advice with regard to the conditions to be fulfilled for grant of approval by RBI as an ARC. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Conditions to be fulfilled for grant of approval by RBI as an ARC:

Sec. 3 of SARFAESI Act, 2002 deals with the provisions relating to Registration of ARC. Accordingly, no ARC 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 f 100 crores.

Every reconstruction company shall make an application for registration to the RBI in such form and manner as it may specify.

RBI may, for the purpose of considering to grant its approval for the application for registration of an ARC, require to be satisfied, by an inspection of records or books of such ARC, or otherwise, that the following conditions are fulfilled, namely:

(a) that the ARC has not incurred losses in any of the 3 preceding financial years;

(b) that such ARC 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 buyers or other persons;

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

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

(e) that a sponsor of an ARC is a fit and proper person in accordance with the criteria as may be specified in the guidelines issued by the Reserve Bank for such persons;

(f) that ARC has complied with or is in a position to comply with prudential norms specified by the Reserve Bank.

(g) that ARC has complied with one or more conditions specified in the guidelines issued-by
the Reserve Bank for the said purpose.

Question 9.
A newly formed ARC has acquired secured interest on few assets in steel sector. The sector is undergoing cyclical recession due to global meltdown and increase in raw material price. The management is now contemplating various options through which it can realise its assets.
What are the measures with the ARC management under the SARFAESI law?
Answer:
Measures available with ARC Management: –
As per Sec. 9 of SARFAESI Act, 2002, Asset Reconstruction company may, for the purposes of asset reconstruction, having regard to the guidelines framed by the RBI 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 takeover 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) to convert any portion of debt into shares of a borrower company.

Question 10.
Explain briefly the procedure relating to enforcement of security interest under SARFAESI Act, 2002. [Nov. 11 (4 Marks)]
Answer:
Procedure relating to enforcement of security interest:
Procedure relating to enforcement of security interest is contained in Sec. 13 of SARFAESI Act, 2002. Accordingly, 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. Steps involved are:

Issuing Notice to borrower: 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 NPA, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights conferred by Sec. 13(4).

Contents of Notice: Notice 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.

Consideration of borrower representations by secured creditors: 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 15 days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.

Secured creditors right to recover his secured debt: If the borrower fails to discharge his . liability in full within the above specified period, the secured creditor may take recourse to one or more of the following measures to recover his secured debt:

(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 business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:
(c) appoint any person (as 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.

Question 11.
Popular Limited defaulted in the repayment of term loan taken from a Bank against security created as a first charge on some of its assets. The bank issued notice pursuant to Sec. 13 of the SARFAESI Act, 2002 to the Company to discharge its liabilities within a period of 60 days from the date of the notice. The company failed to discharge its liabilities within the time limit specified.
Explain the measures to be taken by the Bank to enforce its security interest under the said Act. [May 17 (4 Marks), RTP-May 18]
Answer:
Measures to be taken by Bank to enforce its security:
Sec. 13(4) of SARFAESI Act, 2002, if the borrower fails to discharge his liability in full within the 60 days of serving notice, the secured creditor may take recourse to one or more of the following
measures to recover his secured debt:

(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 business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(c) appoint any person (as 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.

Question 12.
Beta Ltd. failed to repay the amount borrowed from KMP Bank Ltd. in accordance with the terms of lending. The loan was granted against the mortgage of its building. The Bank issued notice as required u/s 13 of the SARFAESI Act, 2002. It was decided by the bank to take possession of the building after getting necessary assistance from the judicial authority. State the provisions enumerated u/s 14 of the SARFAESI Act, 2002 in this regard. [May 18 – New Syllabus (3 Marks)]
Answer:
Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset (Sec. 14):
Sec. 14 of SARFAESI Act, 2002 provides the following:

The secured creditor may, for the purpose of taking possession or control of any such secured assets, 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-

take possession of such asset and documents relating thereto; and
forward such asset and documents to the secured creditor, within a period of thirty days from the date of application.

If no order is passed by the Chief Metropolitan Magistrate or District Magistrate within the said period of 30 days for reasons beyond his control, he may, after recording reasons in writing for the same, pass the order within such further period but not exceeding in aggregate 60 days.

Question 13.
M/s AWP Limited defaulted in repayment of a term loan taken from Nationalized Bank against the security created as first charge on its Land & Buildings. The Bank classified the debt from M/S AWP Limited as Non-Performing Asset. The Bank issued Notice pursuant to Section 13 of the SARFAESI Act, 2002 to the Company to discharge its liabilities in full within a period of 60 days from the date of Notice. The Company objected for full settlement and the time limit for settlement. The Bank did not respond to the objection of the Company. In the light of the provisions of the SARFAESI Act, 2002 decide:

Whether the objection of the Company is valid?
Whether the Bank has to respond to the objection of the Company?
Whether the Bank has right to enforce the security interest without the intervention of the Court? [Nov. 19 – New Syllabus (6 Marks), MTP-Oct. 20]

Answer:
Provisions relating to enforcement of security interest:
Procedure relating to enforcement of security interest is contained in Sec. 13 of SARFAESI Act, 2002. Accordingly,

Sec. 13(1) – 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.

Sec. 13(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 NPA, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights conferred by Sec. 13(4).

Sec. 13(3) – Notice 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.

Sec. 13 (3A) – 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 15 days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.

Conclusions: Based on the provisions of Sec. 13 as stated above, following conclusions may be drawn:

Objection of the company is not valid.
Bank is required to respond to objection of the company within 15 days of receipt of representation.
Bank has right to enforce the security interest without the intervention of the Court.

Question 14.
Glow Bright Limited, engaged in business of printing of advertisement material, took a term loan of ₹ 5 Crores from a Bank against security created as first charge on its printing machines. Glow Bright Limited made default in repayment of term loan to the Bank. Consequently, the Bank issued notice to the Company under SARFAESI Act, 2002 to discharge its liabilities. Answer the following with reference to provisions of SARFAESI Act, 2002

(i) What is the maximum period within which Glow Bright Limited must pay its liabilities?
(ii) What if Glow Bright Limited failed to discharge its liabilities within the specified time limit? [Nov. 20 – New Syllabus (3 Marks)]
Answer:
Enforcement of Security Interest:

(i) Period within which borrower must pay its liabilities:
As per Sec. 13(2) of SARFAESI Act, 2002, 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 NPA, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights conferred by Sec. 13(4).

(ii) Consequences if borrower fails to discharge his liability:
As per Sec. 13(4) of SARFAESI Act, 2002, if the borrower fails to discharge his liability in full within the 60 days of serving notice, the secured creditor may take recourse to one or more of the following measures to recover his secured debt:

(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 business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:

(c) appoint any person (as 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.

Question 15.
Apex Limited failed to repay the amount borrowed from the bankers, ACE Bank Limited, which is holding a charge on all the assets of the company. The Bank took over management of the company in accordance with the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by appointing four persons as directors.

The company is managed by a Managing Director. Mr. X. Referring to the provisions of the said Act, examine whether Mr. X is entitled to compensation for loss of office and also explain the effect of such takeover on certain rights of the shareholders of the company. [MTP-April 18, Oct. 19]
Or
Rockfort Limited failed to repay the loan borrowed from Nest Bank, which is holding a charge on all the assets of the company. The Bank took over management of the company in accordance with the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by appointing four persons as directors. The company is managed by Director Mr. Pawn, who has been now removed, referring to the provisions of the said Act, examine whether Mr. Pawn is entitled to compensation for loss of office. [MTP-Aug. 18, Nov. 18-Old Syllabus (4 Marks)]
Answer:
Compensation to Managing Director for loss of Office:

As per Sec. 16 of the SARFAESI Act, 2002, notwithstanding anything 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.

However, any such managing director or any other director or manager or any such person in charge of management has the right to recover from the business of the borrower, moneys recoverable otherwise than by way of such compensation.
Conclusion: Managing director is not entitled for any compensation for loss of office in the given case.

Effect of takeover on rights of the shareholders:
As per Sec. 15(3) of SARFAESI Act, 2002, where the management of the business of a borrower, being a company is taken over by the secured creditor, then, not withstanding anything contained in the company law or in the memorandum or articles of association of such company:

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

As per Sec. 15(4) of SARFAESI Act, 2002, the secured creditor is under an obligation to restore the management of the business of the borrower, on realisation of his debt in full, in case of takeover of the management of the business of a borrower by such secured creditor.

However, if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.

Question 16.
The management of Gangotri Ltd. was taken by LBV Bank Ltd. (Secured Creditor) complying the provisions of SARFAESI Act, 2002 and appointed two directors. The Board of Director of Gangotri Ltd. duly authorized by its Articles, appointed two alternate directors and the majority of the directors made a declaration required for voluntary liquidation proceedings.

A special resolution requiring the company to be liquidated voluntarily by appointing an insolvency professional to act as the liquidator was passed at the general meeting of the company. The Board of Directors and the shareholders passed the resolutions without the approval/consent of Directors appointed by LBV Bank Ltd. discuss the validity of the above resolutions under SARFAESI Act, 2002. Does an unsecured Creditor have recourse to this Act? |Nov. 18-New Syllabus (3 Marks)]
Answer:
Effect of Takeover of Management:

As per Sec. 15 of SARFAESI Act, 2002, when the management of business of a borrower is taken over by a secured creditor, the new directors or administrator appointed by secured creditors shall alone be entitled to exercise all powers of superintendence, direction and control of business of borrower.

Existing directors or authorized person of borrower shall cease to hold office and following consequence will follow:

(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.

Conclusion: Resolutions passed by the Board of Directors and the Shareholders are not valid.
Provisions of SARFAESI Act are not applicable to unsecured creditors, hence unsecured creditor does not have recourse to this Act.

Question 17.
Sharp Health Clinic Limited had availed the credit facilities from the United Bank Limited. The company made repayment of loan to some extent but not entirely and accordingly the Bank took recourse under the provisions of Sec. 13 (2) the SARFAESI Act, 2002. Consequently, possession of the mortgaged property was taken up and it was duly advertised.

The company also filed an application u/s 17(1) of the SARFAESI Act, 2002 before the Debts Recovery Tribunal, which was dismissed by the impugned order. Being aggrieved, the company approached court. Will the company succeed in its petition referring to in the SARFAESI Act, 2002? [Nov. 17 (4 Marks), RTP-Nov. 18]
Answer:
Appeal to Appellate Tribunal:

As per Sec. 18(1) of the SARFAESI Act, 2002, any person aggrieved, by any order made by the Debts Recovery Tribunal (DRT) u/s 17, may prefer an appeal along with prescribed fees to the Appellate Tribunal within 30 days from the date of receipt of the order of DRT.

No appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal 50% of the amount of debt due from him, as claimed by the secured creditors or determined by the DRT, whichever is less. However, the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than 25% of debt.

In the instant case, Sharp Health Clinic Limited filed an application u/s 17(1) of the SARFAESI Act, 2002 before the DRT, which was dismissed by the impugned order. Being aggrieved, the company approached court.

Conclusion: Sharp Health Clinic Limited can appeal to the Appellate Tribunal (Now NCLAT) by following the above provisions.

Question 18.
Under Section 31 of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, certain situations have been specified in which the provisions of this Act are not applicable. You are required to mention any four of such situations. [Nov. 15 (4 Marks)]
Answer:
Situations in which provisions of SARFAESI Act not applicable:
As per Sec. 31 of SARFAESI Act, 2002, 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 or the Sale of Goods Act, 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;
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934;

(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958;
(e) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930;
(f) 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;

(g) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
(h) any security interest created in agricultural land;
(i) any case in which the amount due is less than 20% of the principal amount and interest thereon.

Question 19.
Mr. AA, a farmer mortgaged his agriculture land and obtained a term loan for cultivation purpose from a Nationalized Bank. Due to continuous drought, Mr. AA could not honour the repayment schedule. Identify whether the Bank can initiate action invoking the provisions of the SARFAESI Act, 2002. [May 18 – New Syllabus (2 Marks)]
Answer:
Applicability of SARFAESI Act, 2002:

Section 31 of SARFAESI Act, 2002 provides the situations in which provisions of this Act are not applicable. One of such situations is any security interest created in agricultural land.
In the present case, security interest is created in agricultural land, hence, bank cannot initiate action invoking the provisions of SARFAESI Act, 2002.

Question 20.
A Bank issued a notice pursuant to Section 13 of the SARFAESI Act, 2002 to a company to discharge its loan which has already become time barred under the Limitation Act, 1963. The company did not settle the loan beyond the prescribed notice period. The Bank took recourse under section 13(4) of the SARFAESI Act, 2002 to take possession of the building to enforce its security interest. Discuss whether the Bank will succeed in its attempt. State whether the provision of SARFAESI Act, 2002 can over ride any other law? [Nov. 18 – New Syllabus (2 Marks)]
Answer:
Enforcement of Security Interest:

As per Sec. 36 of SARFAESI Act, 2002, no secured creditor shall be entitled to take all or any of the measures u/s 13(4), unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963.

In the present case, a Bank issued a notice pursuant to Section 13 of the SARFAESI Act, 2002 to a company to discharge its loan which has already become time barred under the Limitation Act, 1963. The company did not settle the loan beyond the prescribed notice period. The Bank took recourse under section 13(4) of the SARFAESI Act, 2002 to take possession of the building to enforce its security interest.

Conclusion: Bank will not succeed in its attempt as claim was not made within the period of limitation.
Overriding effect of SARFAESI Act, 2002: As per Sec. 35 of SARFAESI Act, 2002, 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.

Question 21.
ABC Bank has provided term loan of ₹ 10 crores to XYZ Ltd., a steel manufacturing company at an interest rate of 10% p.a. and principal amount is to be payable in equal quarterly instalments within 5 years from the date of disbursement of loan. The loan is fully secured against plant & machinery.

The company successfully repaid 4 instalments along with interest during the first year. From the start of second year, the EBITDA of the company fell drastically due to multiple factors including crash in steel prices, rise of coal and iron ore prices, and plant shut down. The company therefore couldn’t repay the 5th instalment but it paid the interest amount as and when due.

After the end of 60 days from the due date of the 5th instalment the credit manager of the bank decided to sell the loan to LMN Ltd., an asset reconstruction company, along with the overdue loan of 2 crore to another textile company, which was classified as NPA six months ago, and a loan of ₹ 2 crore to a farmer Mr. JKL, secured against agriculture land.
Please analyse and advise the manager whether he can do so?
Answer:
Analysis: Determination of Loan Amounts that can be sold:

(a) Loan to XYZ Ltd.: Outstanding balance of the loan amount is ₹ 8 Cr. Loan to XYZ Ltd. is a financial asset and bank has security interest. But security interest cannot be enforced as asset has not yet classified as NPA, (NPA classification shall happen after 90 days).
(b) Facts about loan to textile company has not been provided, so it cannot be decided whether or not such loan can be sold to ARC.
(c) Loan given to Mr. JKL being secured against agricultural land, cannot be sold as the provisions of SARFAESI act is not applicable to such assets (Sec. 31).

Question 22.
XYZ Finance Ltd. is an NBFC company with total assets of ₹ 550 crore, and an NPA of ₹ 50 crores in its balance sheet. The ₹ 50 crores loan consists of 9 cases of ₹ 5 crore each and 10 cases of ₹ 50 lakhs each. The management of the company wants to sell bad loans worth ₹ 50 crore to an ARC. Of the ₹ 50 crore, 45 crores is secured against various properties, while one case of 5 crore is unsecured.

During detailed discussion with the in-house legal counsel, it came to light that 1 case of ₹ 5 crores of the secured bad loan has not been registered with the central registry CERSAI, however this was not informed to the buyer in the preliminary discussion.
Please analyse and advise the CEO of XYZ Finance Ltd. how much bad loan can he sell to the ARC. (MTP-March 18)
Answer:
Determination of Quantum of Bad loan that can be sold:

SARFAESI Act, 2002 is applicable to only those notified NBFC which has an asset base of ₹ 500 crore or above. In the instant case, XYZ Finance Ltd. an NBFC company has total assets of ₹ 550 Cr., hence, it shall be able to sell the bad loans to ARCs through SARFAESI.

NBFCs can invoke provisions of SARFAESI Act, 2002 for only those cases which are over ₹ 1 crore.
SARFAESI is applicable to secured loans only.
As per section 2 6D, no secured creditor shall be entitled to exercise the rights of enforcement of securities unless the security interest created in its favour by the borrower has been registered with the Central Registry.
In the instant case, management of the company wants to sell bad loans worth ₹ 50 Crore to an ARC. Of the ₹ 50 crore, ₹ 5 crores are unsecured, hence cannot be sold.
Amount of 10 cases is below ₹ 1 Crore, hence 10 cases of ₹ 50 lacs each cannot be sold to ARC under SARFAESI.
One case of ₹ 5 Cr. is not registered with Central registry, hence cannot be sold.

Conclusion: XYZ Finance Ltd. are left with 7 cases of ₹ 5 crore each which can be sold to ARC subject to meeting all other conditions of the law.

Question 23.
A Nationalized Bank had provided a term loan of Rs. 20 crores to All Well Pharma Limited at an interest rate of 12% p.a. and principal amount is payable in equal half yearly instalments of Rs. 2 crores in 5 years from the date of disbursement of loan. The loan is fully secured against the plant and machinery of the company.

The company was regular in paying 3 half yearly instalments along with the interest during the first two years. Due to recession in the market and increased competition from multinational companies, the price of the goods manufactured by the company had fallen down and consequently the company has to close down the plant.

Hence, the company failed to pay the 4th instalment but it paid the interest amount as and when due. After a period of 2 months (60 days) from the due date of the 4th instalment, the Bank decided to sell the loan to an Asset Reconstruction company. It has also decided to sell a loan of Rs. 50 lakhs given to a farmer which is secured against the agricultural lands. The Manager seeks your advice on the above proposals in the light of the Provisions of the SARFAESI Act, 2002. [May 19 – New Syllabus (6 Marks)]
Answer:
Situations in which provisions of SARFAESI Act not applicable:
As per Sec. 31 of SARFAESI Act, 2002, the provisions of this Act shall not apply in certain situations including therein are:
(a) any security interest created in agricultural land;
(b) any case in which the amount due is less than 20% of the principal amount and interest thereon.
In the present case, company has paid 3 instalments i.e. ₹ 6 Crore. Outstanding balance is ₹ 14 Crore which is more than 20% of the principal amount and interest thereon. Hence, loan to All Well Pharma Ltd. is a financial asset and bank has security interest.

For enforcement of security interest under this Act, there has to be a default u/s 2 (1)(j) which requires the classification of asset as NPA. In the given case, the debts of bank are overdue by only 60 days, and asset is not classified as NPA.

Conclusion: Based on the discussion as given above, following conclusions can be drawn:
(a) Security interest in All Well Pharma Ltd. cannot be enforced as asset has not yet classified as NPA. (NPA classification shall happen after 90 days).
(b) Loan given to a farmer secured against agricultural land, cannot be sold as the provisions of SARFAESI act is not applicable to such assets.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – CA Final Law Study Material

Leave a Comment Cancel Reply