Notes on Securitization Act

– By M.V. Kini & Co.

Questions are raised as to whether the bank is bound to accept only over due account in the account so that the notice under sec. 13 (2) gets discharged. This is to clarify at the cost of repetition that, once the amount has been declared NPA, there is no question of payment of overdue installments and the entire amount becomes payable and the bank advances are always repayable on demand. More so, when under securitisation Act, the account has been marked as NPA and notice under Sec. 13(2) of the Securitisation Act has been reserved on the borrower and guarantor, the entire amount outstanding becomes payable. On receipt of the overdue installments and interest etc. the bank is not bound to stop further action. On the contrary, the bank should insist for the clearance of the entire amount rather than allowing him to regularize the account, as no such provision is made in the Securitisation Act. However, if bank authorised officer feels that the account maybe allowed to continue, on its regularization, nothing stops the bank from the continuing with the account. If anytime in future, there is a default, bank can gain resort to Securitisation Act. However, a request must be obtained from the borrower and guarantor to that effect.

Once such a notice is issued by giving 60 days time, the borrower and the guarantor/s should pay the entire amount due in the account with the further interest and charges. The borrower is bound to pay the amount within specified time of 60 days after getting the notice. Under the amendment made in 2004, the borrower and the guarantor are entitled to make an application of objection by making a representation to the bank/authorised officer before the time of 60 days after getting the notice. Once such a representation is received, the Authorised officer is bound to study the objections seriously and communicate the rejection/acceptance within 7 days of getting such representation. However, if the authorised officer rejected the objection raised by the borrower and guarantor, will not entitle them to challenge such rejection by approaching any Civil Court under article 226 & 227 cannot be ruled out, as it is the “Fundamental rights” guaranteed to a citizen. Therefore, the authorized officer must give cogent reasons while demolishing the objections raised by the borrower and guarantor, so that it can be seen from the communication made by the authorised officer that he ahs applied his mind to the objections raised and the order must show that there has been application of mind by the authorised officer so that Writ Court will not interfere, and on reading of the reply, the court should be satisfied that the authorised officer has applied has mind and, apparently, the rejection is proper. Then the Writ may be dismissed at the stage of first hearing itself by the High Court.

Under the Sec. 13(4) what is required that, within 60 days notice period given by the authorised officer, the borrower must discharge his liability in full, and in the event of his failure, the bank may take recourse to one or more of the following measures to recover the secured debt.

• The authorised officer may take possession of the secured asset:

The right to take physical possession include the right to transfer by way of lease, assign or sale of all those properties which are secured to the bank by following the procedure prescribed by the Act and the Rules.

• The right to take over the management of business.

If the borrowers business is lucrative, in such cases, the bank may run the show as the bank get full authority to deal with all the assets including the right to lease, assign or sell all such assets subject to the fact that the business which the bank wants to take over, in that case, substantial part of the assets of the business must have been held as security for the debt..

• The bank may appoint any person as manager to manage the secured asset.

• If any secured asset has changed hands, the bank can recover the possession or money from the 3^rd party and he can recover so much money as is sufficient to adjust his secured debt. That means the authorised officer of the bank has the right to take monies from the 3^rd parties with whom the borrowers / guarantors money may be lying and any discharge given by the authorized officer to the 3^rd party will be a valid discharge as if the 3^rd party has made the payment to the original bank borrower / guarantor.

• The authorised officer also can take the management of the company and whatever the amount recovered from such process. The amount will held in trust by the authorised officer and to be applied firstly in payment of such cost, charges, expenses, second in discharge of the dues of the secured creditor and balance amount so remaining in the hands of authorised officer shall be paid to the person entitled to in accordance with the rights and interest.

However at any stage, before the sale of the property if the borrower and/or the guarantor pays off the entire dues of bank, there will be immediate termination of further proceedings under the Securitisation Act.

Wherever there is a joint facility and there are more than 1 secured creditor for such joint facilities, right to take action under the Securitisation Act may be initiated only when agreed upon by the secured creditors representing not less than 3/4^th in value of the amount outstanding as on the record sate. Such action shall be binding on all the secured creditors in the consortium. That is, if there is a consortium advance as on the date of determining the Account, if Banks/Financial Institutions representing 3/4^th of the advance outstanding agreed to take the secured right, the bank can proceed even inspite of the objection of 1/4^th of Consortium Members.

In the event, the borrower is a company and the company is under liquidation and the bank can come out of the liquidation proceedings and identify its secured asset and deal with the same, subject to payment of claim of workmen’s dues and if the workmen’s dues are not determined, the liquidator may indicate some figure, such figure must be kept aside out of the sale proceeds of the assets charged to the bank. There is no legal requirement of the secured creditor to wait in line along with other creditors before the liquidator. The bank can straight away identify its securities and dispose it of after the workmen’s payments are provided for.

If the company is under liquidation and the bank chooses to take its security separate from the liquidator and dispose of these securities, he should not pay the workmen’s dues in accordance with the provision of Sec. 529-A of the Companies Act, 1956 but also furnish an under taking to the liquidator to pay the balance workmen’s dues, if any, in future as per the requirement under section 529-A of the said Act.

Even after liquidating all the assets, if the outstanding in the account of the borrower is not fully satisfied, the bank may file an application before the DRT having jurisdiction (in the case of Jammu & Kashmir in a Civil Court in place of DRT) for the recovery of the balance amount from the borrower and/or guarantor. However, the balance amount to be recovered should be more than Rs. 10 Lacs, then only the DRT will have jurisdiction and for recovery of its balance dues, which will take years and bank has to prove its claim under CPC and Evidence Act. The bank can even proceed against the guarantor or sell the charged assets to recover its dues.

Authorised officer need bot be only one in respect of one case. If required, to meet the exigencies and to cover the different places, different authorised officers can be appointed under the Act even for a single case. Authorised officers may be appointed in each of the offices of the bank.

The Securitisation Act is very clear that once the 60 days notice is received by the borrower and/or the guarantor, then transfer by sale, lease or otherwise (other then in ordinary course of business) any of its secured asset referred to in the notice, without prior consent of the secured creditor, will be an irregularity under Sec. 29 of the said Act. If the bank can show that there is any violation of the provisions of the Securitisation Act, or of any rules made thereunder, it will deemed to be a criminal offence against the transferor under the Act, which is punishable with imprisonment for a term which extend to 1 year or fine or both.

Once the charged properties are taken possession by the authorised officer and after following the procedure prescribed under the rules, sale or assign or lease to any third party takes place, the certificate is given by the authorised officer is a valid transfer as if the conveyance of the property has been made by the owner of the charged property.