SARFAESI Act & Debt Recovery – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 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”. Explain the procedure for enforcement of security interest under Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI).
Answer:
Section 13 of SARFAESI Act, 2002 deals with enforcement of security interest by a creditor. Following are the relevant provisions

(a) Where a secured borrower makes any default in repayment of loan H amount or any instalment thereof, he may be classified as Non-Performing Asset (NPA) by the secured creditor. The secured creditor may send a written notice to the borrower, demanding repayment of his full liability within 60 days from the date of notice. Such notice shall f 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.

(b) If the borrower makes any representation or raises any objection, the secured creditor may either accept or reject the objection. If the secured creditor rejects the representation or objection, he shall communicate the same within 15 days, along with reasons for rejection.

(c) In case the borrower fails to discharge his full liability within the specified period, the secured creditor may take one or more of the following measures to recover his secured debt

take possession of the secured assets of the borrower, the secured creditor has the right to lease, assign or sale for the purpose of realizing the secured asset;
takeover the management of the business of the borrower;
appoint any person (as the manager), to manage the secured assets, where the possession of such assets is taken over by the secured creditor.
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.

(d) Where any action has been taken against a borrower, all costs, charges and expenses, properly incurred by secured creditor shah be recoverable from the borrower. Any amount recovered from the borrower shall be first applied against payment of such costs, charges and expenses and thereafter in discharge of the actual liabilities.

(e) Upon sale of all secured assets, if the debts of secured creditor are not fully satisfied, he may apply to the Debts Recovery Tribunal (DRT), for recovery of balance amount from the borrower.

(f) Further, the secured creditor is entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures, mentioned above.

(g) Once a borrower receives a written notice from the secured creditor, he is not allowed to transfer any of his secured assets. Thus, the borrower cannot sale, lease any of his secured assets referred in the notice, without prior written consent of the secured creditor.

Question 2.
Under what circumstances the Certificate of Registration of an Asset Reconstruction Company issued under SARFAESI Act, 2002 can be cancelled?
Answer:
An Asset Reconstruction Company (ARC) shall be registered with Reserve Bank of India (RBI) for the purpose of commencement or carrying on the business of securitization or reconstruction. Section 4 of the SARFAESI Act, 2002 deals with the cancellation of certificate of registration. The RBI may cancel a certificate of registration granted to asset reconstruction company, if such company

(a) ceases to carry on the business of securitization 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) fails to comply with any direction issued by the RBI under the provisions of this Act; or
(e) fails to maintain accounts as per the requirements of any law or any direction or order issued by the Reserve Bank of India under the provisions of this Act; or
(f) fails to submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or
(g) fails to inform the RBI about any substantial change in the management of such ARC.

However, before cancelling such certificate of registration, the RBI shall give a reasonable opportunity of being heard to such ARC. If RBI rejects or cancels registration, the Asset Reconstruction Company may appeal to the Central Govt. Such appeal must be made within 30 days from date of communication of rejection or cancellation order, as the case may be.

Question 3.
Short Note – Securitization
Answer:
Securitization is the process of pooling and repackaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors. The process leads to creation of financial instruments that represent ownership interest in asset pool. These assets are secured by property (e.g. automobiles, real estate, or equipment loans), but in some cases are unsecured (e.g. credit card debt, consumer loans). Hence, this, pool of assets serves as a security/collateral for such financial instruments. Securitization is a method of raising funds by way of selling receivables for money. The parties in securitization are:

Banks or Financial Institutions that have lent loan against property (i.e. Originator),
SPVs registered as Securitization or Asset Reconstruction Company,
Investors who have acquired security from SPV,
Original borrower i.e. the Obligator,
A rating agency, and
Appointed administrator are involved in securitization.

Question 4.
List out the cases where provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are not applicable.

Question 5.
“Banks and Financial Institutions do have a free hand 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 under that Act?

Question 6.
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 not apply.
Answer:
As per Section 13 of the SARFAESI Act, 2002, banks and financial institutions can take possession of assets of a defaulting debtor. However, as per Section 31 of the SARFAESI Act, 2002, following are the cases where the Act does not apply
(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;

(d) creation of security interest in any vessel as per Section 3 of the Merchant Shipping Act, 1958;

(e) any conditional sale, hire-purchase or lease where no security interest has been created;

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

(g) any properties not liable to attachment or sale as per Section 60 of Code of Civil Procedure, 1908;

(h) any security interest for securing repayment of any financial asset not exceeding ₹ 1 lakh.

Question 7.
What is securitization and who are the parties involved in securitiza-tion? Briefly explain the action points or steps in securitization?
Answer:
Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. The process leads to creation of financial instruments that represent ownership interest in asset pool. These assets are secured by property (e.g. automobiles, real estate, or equipment loans), but in some cases are unsecured (e.g. credit card debt, consumer loans). Hence, this pool of assets serves as a security/collateral for such financial instruments. Securitization is a method of raising funds by way of selling receivables for money.

The parties involved in securitization process are

Banks or Financial Institutions that have lent loan against property (i.e. Originator),
SPVs registered as Securitization or Asset Reconstruction Company, Investors who have acquired security from SPV,
Original borrower i.e. the Obligator,
a rating agency, and
appointed administrator is involved in securitization,

The steps involved in securitization are
(a) Asset Reconstruction Company formed as SPV generally by banks or financial institutions acquires assets from the originator i.e. defaulting borrower;

(b) the SPV, with the help of an investment banker, issues security receipts which are distributed to investors; and

(c) the SPV pays the originator (original borrower of the loan) for the financial assets purchased with the proceeds from sale of securities. In the process of securitization, the lender bank or financial institution removes non-performing assets that burdens a financial entity.

Question 8.
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.
Answer:
In the landmark case of BPV Classic Tea Factory vs. Corporation Bank, it was held that SARFAESI Act, 2002 is a special Act while the Companies Act 2013, is a general law and therefore, with regard to enforcement of a security asset provisions as contained in SARFAESI Act, 2002 alone would apply with regard to sale of an immovable property by secured creditor and same cannot be challenged before Company Court under provisions of the Companies Act, 2013.

Hence, in cases of any conflict with other Acts, the SARFAESI Act, 2002 shall have the overriding effect over such Acts. The provisions of the SARFAESI Act, 2002 have the binding power and cannot be put on hold because of conflict with any other legislation.

In Pegasus Asset Reconstruction vs. Haryana Concast Ltd., in the matter of winding-up and custody of company’s property, the Supreme Court was of the opinion that SARFAESI Act, 2002 is a complete code in itself and there is no lacuna or ambiguity in it. There is no need to study any other law or borrow from the Companies Act, 2013. The secured creditor
has the right to enforce its security interest without the intervention of the Court or Tribunal and the Companies Act, 2013 cannot interfere with the provisions of SARFAESI Act, 2002.

Question 9.
Mention the other functions of Securitization company or Reconstruc-tion company as per the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Answer:
As per Section 10 of the SARFAESI Act, 2002, a Securitization or Reconstruction Company may do the following functions
(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties;
(b) act as a manager as per Section 13(4) on such fee as may be mutually agreed upon between the parties;
(c) act as receiver if appointed by any Court or Tribunal.
(d) to carry out any ancillary or incidental business with prior approval of the RBI.

No Securitization Company or Reconstruction Company shall act as a manager if acting as such gives rise to any pecuniary liability. It is important to note here that Securitization Company or Reconstruction Company which has been granted a certificate of registration cannot commence or carry on any business other than that of securitization or asset reconstruction without prior approval of the Reserve Bank.

Question 10.
Explain “Financial Asset” under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Answer:
→ The main purpose of SARFAESI Act, 2002 is to enable and empower the secured creditors to take possession of their securities and to deal with them, without the intervention of Court.

→ The secured creditors may also authorize any securitization or reconstruction company to acquire financial assets of any bank or financial institution.

→ As per Section 2 of SARFAESI Act, 2002, a ‘Financial asset’ means debt or receivable and includes the following
(a) a claim to any debt or receivables or part thereof whether secured or unsecured; or
(b) any debt or receivables secured by, mortgage of, or charge on, immovable property; or
(c) a mortgage, charge, hypothecation or pledge of movable property; or
(d) any beneficial interest in property movable or immovable or debt receivables, whether such interest is existing, future, accruing, conditional or contingent or any financial assistance; or
(e) any right or interest in the security, whether full or part underlying such debt, receivables; or
(f) any financial assistance.

Question 11.
Explain the term ‘Security Interest’ under the SARFAESI Act, 2002
Answer:
According to Section 2 of the SARFAESI Act, 2002, ‘Security interest’ means right, title or interest of any kind, (except Section 31), upon property created in favour of any secured creditor and includes

(a) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, 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 the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

(b) such right, title or interest in any intangible asset or assignment or license of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or license of intangible asset.

Question 12.
Measures to be taken by Assets Reconstruction or Securitization Company for the purpose of Assets Reconstruction.
Answer:

The main purpose of SARFAESI Act, 2002 is to enable and empower the secured creditors to take possession of their securities and to deal with them, without the intervention of Court.
The secured creditors may also authorize any securitization or reconstruction company to acquire financial assets of any bank or financial institution.
As per Section 9 of the SARFAESI Act, 2002, the measures that can be taken by Assets Reconstruction or Securitization 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 into share of a borrower company.

Question 13.
Assistance to take possession of secured assets from the Chief Metropolitan Magistrate or the District Magistrate under SARFAESI Act, 2002.
Answer:

The main purpose of SARFAESI Act, 2002 is to enable and empower the secured creditors to take possession of their securities and to deal with them, without the intervention of Court.
The secured creditors may also authorize any securitization or reconstruction company to acquire financial assets of any bank or financial institution.
Section 14 of the Securitization 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.
The Chief Metropolitan Magistrate or the District Magistrate is empowered to facilitate taking possession of secured asset. The possession of secured asset may be for sale or transferring the asset for recovery of funds.
For the purpose of taking possession or control of secured assets, the secured creditor may make a written application to the Magistrate (within jurisdiction).
Such application shall be supported by an affidavit with details such as total financial assistance provided, amount due, nature of security interest existing, proof of default, status of NPA, copy of notice sent to the defaulting party etc.
On receiving such application & affidavit, the Magistrate shall pass necessary orders (in 30 days for taking possession of such asset and related documents. Due to any reasons duly written, such order cannot be passed within 30 days, the same may be sent within 60 days.
The Magistrate may authorize any subordinate officer to take possession of the secured assets and forward the same to the secured creditor.
The Magistrate is empowered to use force, in case of any wrongful resistance. Any action or order of the Magistrate is not questionable in any court or before any authority.

Question 14.
Samadhan Assets Management Company Ltd. is an Asset Recon-struction Company duly registered by the Reserve Bank of India. However, registration of the AMC is cancelled. The directors of the Co. seek your advice on their rights and obligations.
Answer:
→ Globally, the issue of non-performing loans is becoming bigger and there is a need for focused efforts for realization of NPA. This led to the creation of specialized entities known as Asset Reconstruction Companies (‘ARCs’), which buy impaired assets from banks or financial institutions and provide liquidity to such banks.

→ Asset Reconstruction Company means a company incorporated under provisions of Companies Act, 2013, for purpose of assets reconstruction. In India, ARC needs to be registered with RBI, and then it can carry on its activities.

→ However, RBI has the power to cancel the Certificate of Registration issued by it to any ARC, if the company –

ceases to carry on asset reconstruction business,
fails to comply with conditions of registration,
fails to comply with RBI directions,
fails to maintain accounts,
fails to submit necessary documents to RBI,
fails to inform RBI about any substantial change in management

→ On receiving the communication from RBI, as to cancellation of Registration, the ARC, if aggrieved may appeal to Central Government within 30 days of receipt of any such order.

→ However, the ARC has obligation to repay the entire investments held by it together with interest.

→ Till such time, it will be deemed to be recognized as an ARC for the investments held by it on behalf of qualified buyers. Repayment needs to be made within such period as may be permitted by the Reserve Bank of India in the ‘Order of Cancellation’ of registration.

Question 15.
Asset Reconstruction Company (ARC) acts as an agent for any bank or financial institution for the purpose of recovering their dues from bor-rowers. Explain the statement with legal provisions.

Question 16.
“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.
Answer:
→ In the current scenario, rising non-performing assets (NPA) is a big menace and there is a need for focused efforts for realization of NPA.

→ Hence, there is a need for creation of specialized entities known as Asset Reconstruction Companies (‘ARCs’), which shall buy the impaired assets from banks or financial institutions and provide liquidity to such banks.

→ ‘Asset Reconstruction Company’, means a company registered with Reserve Bank of India under Section 3 of SARFAESI Act, 2002 for the purposes of carrying on the business of asset reconstruction or securitization or both.

→ An ARC buys NPAs from the banks (at a discount), and the Bank’s Balance Sheet looks cleaner and better. Hence, banks can focus their time, energy and funds for development.

→ The main objective of asset reconstruction company (ARC) is
(a) to act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrowers on payment of fees or charges,
(b) to act as manager of the borrowers’ asset taken over by banks, or financial institution,
(c) to act as the receiver of properties of any bank or financial insti-tution, and
(d) to carry on such ancillary or incidental business with the prior approval of Reserve Bank of India wherever necessary.

Question 17.
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.
Answer:

The main purpose of SARFAESI Act, 2002 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 authorize any securitization or reconstruction company to acquire financial assets of any bank or financial institution.
Section 34 of the SARFAESI Act, 2002, 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 this Act to determine.
Further, 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 and Bankruptcy Act, 1993.
The facts mentioned in the given case are similar to case of M/s Golf Technologies Pvt. Ltd. vs. Axis Bank Ltd. The suit was dismissed on the ground that civil court has no jurisdiction to decide the case which Debt Recovery Tribunal has power except in case of fraud.
Accordingly, the case of M/s Speed Airways Pvt. Ltd. will not be main-tainable in the court. It can approach Debt Recovery Tribunal.

Question 18.
Right to lodge a “Caveat” under SARFAESI Act, 2002.
Answer:

The main purpose of SARFAESI Act, 2002 is to enable and empower the secured creditors to take possession of their securities and to deal with them, without the intervention of Court.
Where an appeal is made to the DRT, District Court, DRAT or High Court, the secured creditor or his legal representative may lodge a caveat in respect thereof (Section 18C).
The caveator shall serve notice of the caveat to the concerned persons. Where a caveat has been lodged, the respective Adjudicating Authority shall serve a notice of appeal filed by the applicant or the appellant on the caveator.
Where a notice of any caveat has been served on the applicant, he shall periodically furnish the caveator with a copy of 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, it shall not remain in force after the expiry of the period of 90 days from the date on which it was lodged.

Question 19.
“Recovery Officer acts in an arbitrary manner.” Analyze the statement in the light of the provisions of Recovery of Debts and Bankruptcy Act, 1993 citing judicial pronouncements, if any.
Answer:

The Recovery of Debts & Bankruptcy Act, 1993 was enacted to provide for speedy adjudication of matters relating to recovery of debts due to banks and financial institutions.
The Act provides for setting up separate tribunals to hear such matters and these are termed as Debt Recovery Tribunals (DRT). A DRT shall consist of one person, known as the Presiding Officer, along with one or more Recovery Officers who shall operate under superintendence of the Presiding Officer.
On receipt of the decree from the Presiding Officer, the Recovery Officer is duty bound to make recovery in the manner provided under the Act.
In the case of UOI vs. Delhi High Court Bar Association, it was held that realization of dues by Recovery Officers shall be made in accordance with the Income-tax Rules, 1962. A detailed procedure for recovery is contained in these Rules, including provisions relating to arrest and detention of the defaulter.
Further, as per Section 30, any person aggrieved by the order of the Recovery Office has the right to appeal to the Tribunal. Thus, there is an appellate forum available against any order of the Recovery Officer.
Hence, sufficient safeguard has been provided in the event of the Recovery Officer acting in an arbitrary or an unreasonable manner.
Thus, it cannot be said that the Recovery Officer acts in an arbitrary manner.

Question 20.
Explain “Property” under Recovery of Debts and Bankruptcy Act, 1993.
Answer:
→ The Recovery of Debts & Bankruptcy Act, 1993 was enacted to provide for speedy adjudication of matters relating to recovery of debts due to banks and financial institutions.

→ The Act provides for setting up separate tribunals to hear such matters and these tribunals are termed as Debt Recovery Tribunals (DRTs).

→ Section 2 of the Recovery of Debts and Bankruptcy Act, 1993 defines ‘Property’ as –
(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 future; and
(e) Intangible assets, being know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature, as may be prescribed by the Central Government in consultation with RBI.

Question 21.
‘Demand Notice’ under Security Interest (Enforcement) Rules, 2002.
Answer:
→ The Security Interest (Enforcement) Rules, 2002 lays down the procedural aspects of enforcement of security interest by the secured creditors.

→ A Demand Notice under the Security Interest (Enforcement) Rules, 2002 is a formal notice demanding that the person to whom the notice is addressed perform an alleged legal obligation such as paying a sum of money or acting on a contractual commitment.

→ Following are the guidelines relating to Demand Notice
(a) The demand notice shall be served at a place where the borrower or his agent resides or carries on business.
(b) The notice may be sent by registered post, speed post or courier or fax or e-mail.
(c) If the borrower or his agent is avoiding the service of the notice, a copy shall be affixed on the outer door or some other visible part of the house or building where the borrower or his agent resides or carries on business.
(d) Also, demand notice shall be published in two leading newspapers (including vernacular language).
(e) 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.
(f) Where there is more than one borrower the demand notice shall be served on each borrower.

Question 22.
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?
Answer:
When a borrower makes any default in repayment of secured debt or any instalment thereof, the account of borrower is classified as Non-Performing Asset (NPA).
The money locked up in NPAs is not available for productive use as well as it reduces banks’ profits. High NPA levels adversely impact the financial strength of banks.

It is well settled that a bank’s main source of funds is the deposits received from general public. Hence, continuous rise in NPA threatens a bank’s deposit repayment capacity and further reduces investor confidence.
Generally, in case of NPA, banks take the long legal route against defaulting borrowers. A lot of time is wasted in getting decrees and execution thereof before the banks could make some recoveries.
All these issues resulted in the emergence of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002)
The main purpose of SARFAESI Act, 2002, 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.’
As per Section 2 of SARFAESI Act, 2002, a Non-Performing Asset means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset.
Non-performing Assets (NPA) can be further classified into
(a) Sub-standard assets (after 90 days from due date and for a period of 12 months thereafter),
(b) Doubtful assets (after 12 months after classified as sub-standard), and
(c) Loss assets (where perceived irrecoverable by the banks suo-motu or based on auditors). But the amount has not been written off, wholly or partly.

Question 23.
With the help of decided case law, comment on the constitutional validity of the Recovery of Debts and Bankruptcy Act, 1993.
Answer:

The Recovery of Debts & Bankruptcy Act, 1993 was enacted to provide for speedy adjudication of matters relating to recovery of debts due to banks and financial institutions.
The Act provides a procedure that is distinct from the existing Code of Civil Procedure in order to ensure a speedy adjudication.
The Act provides for setting up separate tribunals to hear such matters and these are termed as Debt Recovery Tribunals (DRT).
In case of Union of India v. Delhi High Court Bar Association, the petitioners have challenged the constitutional validity of the Recovery of Debts and Bankruptcy Act, 1993 on the ground that the Act is unreasonable and is violative of Article 14 of the Constitution. This Act had been challenged for depriving a person of legal remedies in ordinary Civil Courts.
A three-judge bench of Supreme Court upheld the validity of the Recovery of Debts and Bankruptcy Act, 1993, which provides establishment of DRTs for recovery of outstanding loans. The Court added that the special machinery of a Tribunal for expeditious adjudication and recovery of debts due to banks and FIs squarely falls within the ambit of powers of the Parliament.
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 24.
What are the various measures taken by assets reconstruction or securitization company for the purpose of assets reconstruction? What are its other functions?
Answer:
→ The main purpose of SARFAESI Act, 2002 is to enable and empower the secured creditors to take possession of their securities and to deal with them, without the intervention of Court.

→ The secured creditors may also authorize any securitization or reconstruction company to acquire financial assets of any bank or financial institution.

→ No securitisation company or Reconstruction Company shall act as a manager if acting as such gives rise to any pecuniary liability.

→ An Asset Reconstruction Company (ARC) shall be registered with Reserve Bank of India (RBI) for the purpose of commencement or carrying on the business of securitization or reconstruction.

→ As per Section 9 of SARFAESI Act, 2002, measures that can be taken by Assets Reconstruction or Securitization 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 pro-visions of the Act;
To convert any portion of debt into share of a borrower company.

→ Other functions of Asset Reconstruction Company (ARC) are

to act as an 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 insti-tution and
to carry on such ancillary or incidental business with the prior approval of Reserve Bank of India wherever necessary.

Question 25.
Subrata, one of the guarantors 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.

Question 26.
Oriental Bank of India (OBI) extended loan of ₹ 20 crores 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 Securitization 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.
Answer:

The Recovery of Debts & Bankruptcy Act, 1993 was enacted to provide for speedy adjudication of matters relating to recovery of debts due to banks and financial institutions.
The Act provides for setting up separate tribunals to hear such matters and these are termed as Debt Recovery Tribunals (DRT).
According to Section 20, any person aggrieved by an order passed by a DRT, may appeal to the Debt Recovery Appellate Tribunal (DRAT), having jurisdiction in the matter. However, no appeal shall lie to the DRAT from an order made by the DRT with the consent of the parties
Every appeal shall be filed within 30 days from the date of the DRT order. The appeal may be filed after 30 days, if there were sufficient reasons for the delay.
On receipt of an appeal, the Appellate Tribunal may pass such orders as it thinks fit confirming, modifying or setting aside the order. But the DRAT shall provide the opportunity of being heard to the parties to the appeal.
Appeal filed before DRAT shall be resolved within 6 months from the date of receipt of appeal.
Where an appeal is made to the DRAT, the borrower must deposit 50% of the amount of debt. The Appellate Tribunal shall not entertain the appeal unless such amount is deposited. However, the Appellate Tri-bunal may, for reasons to be recorded in writing, reduce such deposit amount to upto 25% to be deposited.
In the given case, the aggrieved party is advised to apply to the DRAT, within 30 days.

Question 27.
Debt Recovery Tribunal has passed an order for recovery of ₹ 5 crores against Prism Ltd. and its directors. What modes of recovery are available to recovery officer? Advise.
Answer:
→ The Recovery of Debts & Bankruptcy Act, 1993 was enacted to provide for speedy adjudication of matters relating to recovery of debts due to banks and financial institutions.

→ As per provisions of Section 25 of the Recovery of Debts and Bankruptcy Act, 1993, the Recovery Officer shall, on receipt of the copy of the certificate.

→ The recovery officers, shall 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) arrest of the defendant and his detention in prison;
(c) appointing a receiver for managing the movable or immovable properties of the defendant.
(d) any other mode of recovery as may be prescribed by the Central Govt.

SARFAESI Act & Debt Recovery – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

SARFAESI Act & Debt Recovery – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes