AN INTRODUCTION I-47

Transcription

1 CONTENTS I-47 About the author I-5 Foreword to Sixth Edition I-7 Preface to Sixth Edition I-9 Foreword to Fifth Edition I-13 Preface to Fifth Edition I-15 Preface to Fourth Edition I-17 Foreword to Third Edition I-19 Preface to Third Edition I-21 Foreword to Second Edition I-23 Preface to Second Edition I-25 Foreword to First Edition I-29 Preface to First Edition I-31 Chapter-heads I-35 List of cases I-93 AN INTRODUCTION 0.1 Reforms in Financial Sector I Rights of mortgagee under TP Act I Act is major step in reforms I Comparable provisions of the Uniform Commercial Code of USA I Concepts of UCC in present Act I Economic benefits of SARFAESI Act I Reforms required in SARFAESI Act I Other reforms for inheritance to Property Rights I Reforms relating to Property Rights I Historical background of the new legislation I Recommendations of CFS in 1991 I Narsimhan Committee II I Subsequent Developments I-133

2 CONTENTS I Constitutional validity of the Act I Amendments to the Act consequent upon Supreme Court judgment I-135 DIVISION ONE LAW RELATING TO SECURITISATION ASSET RECONSTRUCTION & RIGHTS OF SECURED CREDITOR SECURITISATION S.1.1 Securitisation of Financial Assets 3 S.1.2 What is Securitisation? 3 S.1.3 Credit enhancement 4 S.1.4 Essential terms of securitisation 5 S.1.5 Why securitise? 6 S.1.6 Advantages of Securitisation 7 S.1.7 What type of assets can be securitised? 7 S.1.8 Structure of a securitisation issue 8 S.2.1 Securitisation outside the purview of SARFAESI Act 9 S.2.2 Use of Trust structure for securitisation 9 S.2.3 Constraints in undertaking securitisation under the SARFAESI Act 10 S.2.4 Legality of securitisation of loans of banks under the Banking Regulation Act, S.3.1 Securitisation under other laws 11 S.3.2 National Bank for Agriculture and Rural Development Act, 1981 (NABARD) 12 S.3.3 Securitisation under RBI Guidelines 12 S.3.4 Revised RBI Guidelines 14 S.4.1 Accounting Norms for Securitisation 15 S.4.2 Accounting for securitisation 16 S.5.1 Transactions similar to securitisation 16 S.5.2 Factoring Regulation Act, S.5.3 Assignment of receivables in International Trade 19

3 I-49 CONTENTS S.5.4 Common provisions in UN Assignment Convention and SARFAESI Act 19 S.5.5 Forfaiting 20 S.6.1 Amendment suggested to SARFAESI Act 20 S.6.2 Tax issues relating to securitisation 20 S.7.1 Multiple regulations for securitisation 24 S.7.2 RBI Guidelines on Securitisation of Housing Finance 25 S.7.3 Legislative measures for development of market for securitized debt instruments 27 S.7.4 SEBI Regulations for Securitised Debt Instruments 28 S.7.5 Suggestions for reforms for Uniform Law of Securitisation 29 S.7.6 Recommendation of CFSA 31 ASSET RECONSTRUCTION AR.1.1 Asset Reconstruction 32 AR.1.2 Reforms Suggested 32 AR.1.2A Reforms Implemented 33 AR.1.3 Other problems of ARCs 35 AR.2.1 Issues involved in Take-over of Management 37 AR.2.2 RBI Guidelines on Take-over or change in management 37 AR.3 Appointment of Administrators 40 AR.4 Creation of environment conducive for asset reconstruction 40 RIGHTS OF SECURED CREDITORS SC.1.1 Policy consideration for priority to secured creditors 41 SC.1.2 Advantages for banks 41 SC.1.3 Rights of secured creditors 41 SC.1.4 Priority for secured creditors over other claimants 42 SC.1.5 Doctrine of priority to Crown Debts - Applicability in India 43 SC.1.6 Existing laws recognizing common law doctrine 47 SC.1.7 Priority to secured creditors under Insolvency Laws 49 SC.1.8 Validity of State Laws giving priority to Government claims 49 SC.1.9 Inconsistency of State Sales Tax Laws with Union Laws 52 SC.2.1 Position of priority to secured creditors over claims of revenue 57 SC.2.1A New Company Law 60 SC.2.2 Suggestions for further reforms 60A

4 CONTENTS I-50 DIVISION TWO SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 CHAPTER I PRELIMINARY 1. Short title, extent and commencement Extension of Act [Section 1(2)] Coverage of Act Law extended to certain Housing Finance Companies A Law extended to Regional Rural Banks B Law extended to Co-operative Banks C Statement of objects and reasons Applicability to existing cases a Supreme Court views on retrospective operation of the Act b Enforcement in pending cases Effective date of the Act Flexibility to handle financial assets Existing Law A United Nations Convention on the Assignment of Receivables New law supplemental to Transfer of Property Act Enforcement of Security Interest Interpretation of statutes Mischief rule A Harmonious Construction B Inconsistency between general law and special law C Non obstante clauses in two conflicting statutes Parliamentary Debates 77

5 I-51 CONTENTS Purposive interpretation Relevance of various parts of the Act to interpretation Headings in statutes Explanation Proviso Press notes and circulars of Government Non obstante clause Definition clause Object of the Act Reconstruction of financial assets Benefits of sound secured transactions law Judgments of High Courts on constitutional validity Constitutional validity of the Act Validity of enforcement action after judicial determination of a bank s claim or during the pendency or any litigation Remedy of raising dispute under State Co-operative Societies Acts Amendments to SARFAESI and DRT Acts Definitions Appellate Tribunal [Section 2(1)(a)] Asset Reconstruction [Section 2(1)(b)] Sale of Non-Performing Assets Sale of Non-Performing Assets inter se by banks Bank [Section 2(1)(c)] Applicability to Co-operative Banks Co-operative credit societies acting as banks Stay on Government Notification a Gujarat High Court declares Govt. Notification as unconstitutional b Author s view 106

6 CONTENTS I Constitutional validity of extending SARFAESI Act to co-operative banks Banking company [Section 2(1)(d)] Board [Section 2(1)(e)] Borrower [Section 2(1)(f)] Nature of Guarantors Liability Central Registry [Section 2(1)(g)] Cause to be set up Registry established Corresponding new bank [Section 2(1)(h)] A Debt [Section 2(1)(ha)] A-1 Debts under the SARFAESI Act Debts Recovery Tribunal [Section 2(1)(i)] Jurisdiction of Debt Recovery Tribunals Default [Section 2(1)(j)] Amendment of the definition of default Concept of default a Rights of secured creditors on default RBI Directions on Asset Classification Prudential norms for asset classification Applicability of RBI NPA norms to HFCs A Borrowers right to get his account classified as Non-Performing Asset Wilful Defaulters A Non-co-operative borrowers Grievances Redressal Mechanism Losses under derivative contracts whether Loans Financial Assistance [Section 2(1)(k)] Loans and advances Credit facilities Financial asset [Section 2(1)(l)] Any debt or receivable Any debt or receivable secured by mortgage

7 I-53 CONTENTS Mortgage charge, hypothecation or pledge Any right or interest in security underlying such debt or receivables Any beneficial interest in property Any financial assistance Wide definition under the Act Financial asset definition restricted by section Whether financial assets include retail loans below Rs.1 lakh Can originator bank continue to recover loans on behalf of ARC Financial Institution [Section 2(1)(m)] Financial institutions definitions in other laws a Securitisation or reconstruction companies b Are securitization or reconstruction companies financial institutions (FIs)? c Revised RBI Guidelines on sale of assets by SC/RC to another Are securitisation or reconstruction companies NBFCs Public financial institutions A Public financial institutions under New Company Law Financial Institutions under section 45A of the Reserve Bank of India Act, Financial Institutions under DRT Act Applicability of SARFAESI Act to various financial institutions Hypothecation [Section 2(1)(n)] Floating charge Powers of enforcement of hypothecation charge 141

8 CONTENTS I Powers of enforcement under SARFAESI Act whether against public policy A Supreme Court view on Hypothecation Courts declare the law to be valid Supreme Court on validity of SARFAESI Non-Performing Asset [Section 2(1)(o)] Amendment to the definition of NPA Income recognition principles Asset Classification Norms of RBI A Whether asset classification is discretionary B Constitutional validity of definition of NPA Norms applicable to Asset Classifications Prudential Norms Guidelines for classification of assets Upgradation of loan accounts Accounts regularized near about the balance sheet date Asset classification to be borrower-wise and not facility-wise a Advances under consortium arrangements Accounts where there is erosion in the value of security/frauds committed by borrowers Loans with moratorium for payment of interest Agricultural advances Government guaranteed advances A Projects under implementation Transactions involving transfer of assets through direct assignment of cash flows and the underlying securities Income recognition Sale of financial assets to ARCs 166

9 I-55 CONTENTS Sale of financial assets to banks/fis/ NBFCs Prudential Guidelines on Restructuring of Advances by Banks Key Concepts General Principles and Prudential Norms for Restructured Advances Corporate Debt Restructuring (CDR) Mechanism General principles and Prudential Norms for Restructured Advances Off-balance sheet exposures of Banks Relaxation of Prudential Norms for foreign exchange Derivative Contracts Relaxation of Prudential Norms for delayed Infrastructure Projects Other relaxation Provisioning Norms Prudential norms on creation and utilisation of floating provisions Summary of Asset Classification norms Asset Classification whether discretionary Asset classification dependant on applicable RBI Guidelines Relaxation of classification Notification [Section 2(1)(p)] Obligor [Section 2(1)(q)] Originator [Section 2(1)(r)] Prescribed [Section 2(1)(s)] Property [Section 2(1)(t)] Applicability to financial asset of private parties Reforms suggested in regard to property rights 207

10 CONTENTS I Qualified institutional buyer [Section 2(1)(u)] The expression qualified institutional buyers is also defined in SEBI Guidelines Reasons for exclusion of PF/Pension/ Gratuity Funds Reconstruction company [Section 2(1)(v)] Foreign Direct Investment in Asset Reconstruction Companies FII investment in Security Receipts Dr. Raghuram Rajan Committee Recommendations Registrar of Companies [Section 2(1)(w)] Reserve Bank [Section 2(1)(x)] Scheme [Section 2(1)(y)] Securitisation [Section 2(1)(z)] Securitisation under SARFAESI Act Terminology used in the Act Applicability of NBFC Regulations RBI Directions and Guidelines for securitisation or reconstruction companies Regulation of securitisation and reconstruction companies Check list for banks and financial institutions desirous of undertaking securitisation transactions under the Act Check list for reconstruction of assets RBI Guidelines to banks on sale of NPAs Impact of Gujarat High Court Judgment on Securitisation Transactions Securitisation company [Section 2(1)(za)] Memorandum of Association Security agreement [Section 2(1)(zb)] Secured asset [Section 2(1)(zc)] Secured creditor [Section 2(1)(zd)] Definitions under Insolvency Laws 228

11 I-57 CONTENTS Secured Creditor under Companies Act Rights of secured creditors under Insolvency Laws Restricted meaning of secured creditors under the Act a Validity of such classification of secured creditors Secured creditor has priority over claims of Revenue Supreme Court on statutory priority to State Sales Tax dues Priority to central taxes Secured Debt [Section 2(1)(ze)] Recovery of debts written off Security interest [Section 2(1)(zf)] Uniform Commercial Code of USA Rights of enforcement of security interest Security interest under English Law Excluded Security Interest a Possessory security interest b Title retention contracts c Small loans d Agricultural loans Definition of secured loan Concept of comprehensive security interest Security receipt [Section 2(1)(zg)] Why security receipt Sponsor [Section 2(1)(zh)] Restrictions on investment in ARC RBI Guidelines on Foreign Investments State Bank of India and Subsidiary Bank [Section 2(1)(zi) & (zj)] Definition under other Acts relevant [Section 2(2)] 239

12 CONTENTS I-58 CHAPTER II REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS AND FINANCIAL INSTITUTIONS 3. Registration of securitisation companies or reconstruction companies Registration of securitisation companies or reconstruction companies Application for registration Conditions for registration Shareholding pattern in Securitisation or Reconstruction Companies Foreign investment in Asset Reconstruction Companies Reforms Suggested Structure of securitisation or reconstruction company Arrangement for servicing assets Management of Financial Asset Independent Directors Disqualification of Directors Restriction on Sponsors Compliance with RBI prudential norms A Minimum owned fund requirement Compliance with RBI guidelines Registration by RBI RBI can reject application for registration Approval of RBI for change in management Cancellation of certificate of registration Cancellation of certificate of registration Appeal against order of cancellation Consequences of cancellation of registration Acquisition of rights or interest in financial assets Acquisition of rights or interest in financial assets Financial assets of any bank or financial institution 254

13 I-59 CONTENTS Deployment of funds by ARCs for restructuring acquired loans A Revised RBI Guidelines on sale of assets by SC/RC to another Overriding effect to provision Applicability of Companies Act to issue of debentures SEBI Regulations in regard to Debenture Issue SARFAESI Act supplemental to SEBI Regulations Can Securitisation Company acquire standard assets? A Exception for Distressed Assets Interpretation of securitisation by Courts Transfer of rights to securitisation or reconstruction company Transfer despite restrictions in other laws Continuation of legal proceedings Transfer of pending proceedings Exception in regard to BIFR proceedings NCLTs replacing BIFR Assignment of secured loans to securitisation company Investment in security receipts by banks and Financial Institutions Restrictions on Investment in non-slr Securities Conversion of debt into equity Investment in securitised assets Securitisation of Housing Finance Stamp duties for securitisation documents Contrary view on documentation Conclusion on stamp duties Stamp duty on agreement Changes required in State Laws 271

14 CONTENTS I Reserve Bank guidelines for debentures Documentation for Securitisation Offer document Debenture Debenture document Security receipt State stamp duties Acquisition of retail loans Can asset reconstruction company acquire retail assets not exceeding Rs. 1 lakh? Can Originator Bank continue to recover retail loans after acquisition by Asset Reconstruction company? 275 5A. Transfer of pending applications to any one of Debts Recovery Tribunals in certain cases 276 5A.1 Transfer of recovery proceedings in DRTs Notice to obligor and discharge of obligation of such obligor Notice to debtor optional Obligor to make payment to concerned company Effect if notice to obligor is not given Parallel provisions in Transfer of Property Act, United Nations Convention on Assignment of Receivables Factoring Regulation Act Issue of security by raising of receipts or funds by securitisation company or reconstruction company Raising money by issuing security receipts Provision whether overrides Companies Act, SEBI Act & SCRA Offer to QIBs other than by offer to public Can ARC acquire assets in trust for the benefit of investors? Bankruptcy remoteness of transactions Power to set up trusts under sub-section (2A) 285

15 I-61 CONTENTS Rating of Security Receipts (SRs) issued by the Trusts set up by ARC and computation of Net Asset Value (NAV) of SRs Rating procedures Computation of NAV Investment in security receipts Rights of security receipt holders in case of default Meeting of security receipt holders Security Receipts are Securities Exemption from registration of security receipt Registration of security receipt not required Measures for assets reconstruction Asset reconstruction measures Conversion of debt into shares a RBI Guidelines Takeover of management of borrower Need for power to takeover management Such power to takeover management will be disincentive to entrepreneurship Burden of rehabilitation should not be on lender Whether default is necessary for action under section RBI guidelines for takeover of management Steps ARCs need to take for takeover of management Sale or lease of the business of the borrower Policy to be framed by ARC A Power to secured creditors to takeover management Power to takeover management under other Laws 305

16 CONTENTS I Whether show cause notice necessary for action under section Reconstruction under the Companies Act Reconstruction under SARFAESI Act Powers under section 9(a) different from those under section 13(4) Sale or lease business of borrower Scheme under section Reschedulement of debt Enforcement of security interest Settlement of debt with borrower Conversion of debt into equity Constitutional validity of section Other functions of securitisation company or reconstruction company Other functions of securitisation or reconstruction company Can ARC give advice to banks and Financial Institutions? Prohibition of other business Can one ARC acquire assets from another ARC Structure of SPV Resolution of disputes Arbitration mandatory for dispute resolution Whether defaulting borrower can invoke section Power of Reserve Bank to determine policy and issue directions Reserve Bank can determine policy and issue directions A Framework for revitalizing distressed assets Specific powers of RBI 320A Guidelines and directions of the Reserve Bank for securitisation companies and reconstruction companies 320B

17 I-63 CONTENTS Recent directive on capital adequacy 320C Deployment of funds by ARC 320D 12A. Power of Reserve Bank to call for statements and information 320D 12A.1 Power of Reserve Bank to call for statements and information A.1-1 Quarterly statements to be submitted to RBI 321 CHAPTER III ENFORCEMENT OF SECURITY INTEREST 13. Enforcement of security interest Enforcement of security interest Scope of power of enforcement Distinction between foreclosure and enforcement of securities Powers of enforcement under section 69 of the Transfer of Property Act, Foreclosure rights to mortgages in USA A Powers to extend to all types of securities Powers of enforcement and rights of borrowers Exploring possibility of revival Corporate Debt Restructuring Scheme Reschedulement/Restructuring of Loans Enforcement of security without intervention of court [Section 13(1)] A Whether DRT is a court for the purposes of section Jurisdiction of DRTs and Civil Courts Registration of security interest Action against guarantors Supreme Court on guarantors rights Suggested steps for recovery action Right of SFCs to take action under section

18 CONTENTS I Retroactive operation of powers of enforcement Notices under section Formats of notices under the Act Notice of default [Section 13(2)] a Pre-conditions for notice under section 13(2) two conditions require to be fulfilled b Whether jurisdiction of civil court is barred after notice under section 13(2) Default in secured debt or instalment Action under section 13 in respect of claim settled by co-operative Tribunal Publication of photographs of defaulting borrowers A Contrary view of Kolkata High Court Default in debt rescheduled after notice under section 13(2) OTS Proposals a Company under winding up Section 13 and Rule 9 of the Security Interest (Enforcement) Rules, Requirements of notice [Section 13(3)] Claim of interest on loans by secured creditors against companies under winding up Form of Notice A Reply to borrower [Section 13(3A)] A-1 Representation by borrower Measures to recover secured debt [Section 13(4)] Leave of winding up court Enforcement action against company under winding-up Power to take-over management 359

19 I-65 CONTENTS Distinction between power to takeover management under section 9(a) and section 13(4)(b) Taking possession of assets A Taking possession directly Procedure for taking possession A Applicability of O.21, Rule 64 CPC to sale under section 13(4) B Rule 8 of the Security Interest (Enforcement) Rules, C Disclosure of encumbrances D Sale of secured assets below reserve price E Whether waiver of Rule 9(1) & (4) by the parties permissible Symbolic possession (SARFAESI Act) Taking possession through Recovery Agents Recovery modes available to banks and FIs Use of force under Contractual Powers Rule of Law Relief Undertakings under State Laws Objects of Relief Undertaking Act Scheme under section 391 of Companies Act for relief undertaking Debt Recovery proceedings against relief undertaking Action under SARFAESI Act against Relief Undertakings Secured Creditor vis-a-vis Depositors Taking over management of assets Appointment of manager Debtor to pay directly to secured creditor Secured creditors need to act in a fair and reasonable manner a Public Auction negotiations with bidders Applicability of SFC cases to SARFAESI powers Validity of notice under section 13(2) 380

20 CONTENTS I Power of DRT to grant stay Priority of Secured Creditor overdues of Central Excise/Income-tax Rights of Secured Creditor in Winding-up proceedings Whether sale can be set aside on receiving higher offer Setting aside sale in Public auction A Sale of Securities Pledge of goods Simultaneous Proceedings under DRT Act and SARFAESI Act Whether sale of assets by secured creditors holding 75% share binding on minority secured creditors? Power to frame Scheme under Companies Act A Power to extinguish tenancy rights Security interest Concept of security interest recognised Powers overriding provisions of Transfer of Property Act Distribution of sale proceeds of assets Secured Creditor entitled to recover costs and expenses Powers of Secured Creditors in the event of insolvency Sections 29 to 31 of the State Financial Corporations Act, a Section 38 of SIDBI Act Relevance of Court pronouncements under the SFCs Act Safeguard to borrowers and natural justice Position of lenders rights under common law Ruling of the Supreme Court on the issue of natural justice 402

21 I-67 CONTENTS Effect of action under section 13(4) on BIFR proceedings Valid discharge to debtor of borrower [Section 13(5)] Right of secured creditor to purchase property Provisions of Banking Regulations Act, Capital gain on sale of mortgaged property purchased by bank Transfer as if it is made by owner of asset [Section 13(6)] Finality of sale under section Rights of purchaser in auction Appropriation of sale proceeds [Section 13(7)] Surplus after sale of secured asset and right of set-off Right of redemption by borrower [Section 13(8)] Banks to consider settlement proposals Non-compliance with court orders Amendment to sub-section (9) Notice where more than one secured creditors [Section 13(9)] Co-ordination issues between banks and financial institutions Scheme approved by 75% creditors binding on minority a Binding nature of decision of 60% creditors Lease and hire purchase excluded Lease Hire purchase Secured creditors Inter se priority amongst secured creditors Payment of workmen s dues Interest on Workmen s Dues payable under sections 529 & 529A 421

22 CONTENTS I Priority for claims of workmen Application to DRT for balance amount [Section 13(10)] Action against guarantor and sale of pledged goods [Section 13(11)] Authority to exercise powers [Section 13(12)] Prohibition on transfer of assets on receipt of notice [Section 13(13)] One-time settlement schemes Power of Court to direct settlement One-time settlement - Non-discretionary Loans obtained by fraud Liability to repay loans in fraud cases Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset Amendments by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, Assistance in taking possession of secured assets Similar provisions in other laws Scope of powers under the section Nature of proceedings under section Writ petitions against orders of DM/CMM Application to Chief Judicial Magistrate Manner and effect of take-over of management Taking over management of business of the borrower Whether taking possession amounts to take-over of management Power of takeover Management by State Financial Corporations RBI Guidelines for Securitisation or Reconstruction Companies No compensation to directors for loss of office Effect of take-over on directors 446

23 I-69 CONTENTS 17. Right to appeal Application against action of secured creditor Applicability of section 19(1) of DRT Act to the Appeal Supreme Court declares sub-section (2) invalid a Limitation period A Powers of DRTs under section Procedure for dealing with application by DRT Writ petitions against possession notice Constitutional validity of amended section Application under section 17(1) Can DRT entertain application to declare that guarantee is extinguished? Scope of remedy under section Fees for application and appeal Validity of fees for application Writ petition against action under section A. Making of application to court of District Judge in certain cases A.1 Appeals for borrowers of Jammu & Kashmir Appeal to Appellate Tribunal Appeal against order of DRT Fees for appeal Requirement of pre-deposit Supreme Court jurisdiction A. Validation of fees levied A.1 Validation of fees already charged B. Appeal to High Court in certain cases B.1 Validation of fees for borrowers in J&K C. Right to lodge a Caveat C.1 Caveats C.2 Right to lodge a Caveat 472

24 CONTENTS I Right of borrower to receive compensation and costs in certain cases Amendment to section Compensation can be awarded by DRT 474 CHAPTER IV CENTRAL REGISTRY 20. Central Registry Establishment of Central Registry Applicability of the Registration System Securitisation and Reconstruction Companies Why one more Registry Satisfaction of reconstruction transaction Transactions which need registration Effective date of the registry system Registration of subsisting mortgages Suggestions for further reforms Registration of factoring transactions Registration under other Acts also required Transactions requiring registration Effective date of registration Suggestions for setting up Central Registry Central Registrar Appointment of Central Registrar Register of securitisation, reconstruction and security interest transactions Central Register to record transactions Filing of transactions of securitisation, reconstruction and creation of security interest Filing of particulars with Central Registrar Registration of past transactions Modification of security interest registered under this Act Filing of modification of security interest 490

25 I-71 CONTENTS 25. Securitisation company or reconstruction company or secured creditor to report satisfaction of security interest Satisfaction of security interest to be reported Right to inspect particulars of securitisation, reconstruction and security interest transactions Inspection of Central Register A. Rectification by Central Government in matters of registration, modification and satisfaction, etc A.1 Condonation of delay in registration A.2 Effect of failure to register 493 CHAPTER V OFFENCES AND PENALTIES 27. Penalties Penalty for not filing particulars Penalties for non-compliance of direction of Reserve Bank Penalty for violating RBI directions Offences Punishment for offences Cognizance of offences Cognizance of offences 497 CHAPTER VI MISCELLANEOUS 31. Provisions of this Act not to apply in certain cases Exclusion from provisions of the Act Lien on any goods Pledge of movables Security in any aircraft Security in any vessel Conditional sale, hire purchase and lease transactions a Treatment of Hire-purchase/ lease as secured transactions Rights of unpaid seller 502

26 CONTENTS I Properties exempt from attachment Security interest in agricultural land a Whether Agricultural Land used for Commercial Purpose Excluded b Payment of land revenue Loans not exceeding rupees one lakh Loans with 20% balance outstanding A. Power to exempt a class or classes of banks or Financial Institutions A.1 Power to grant exemption Protection of action taken in good faith Protection to secured creditor Notice under section 13(2) whether defamation Similar provisions in other laws Offences by companies Offences by company and firms Civil Court not to have jurisdiction Bar to jurisdiction of Civil Court Suit for partition of family property Bar to jurisdiction cannot be questioned Reasons for barring jurisdiction of Civil Courts Proceeds of crime The provisions of this Act to override other laws Overriding provisions Priority amongst mortgagee and depositors of the company Limitation Limitation Act is fully applicable Notice for recovery of time-barred debt Limitation for execution of decree Limitation for action under section 13(2) Claim under section 13(2) within limitation period but measures under section 13(4) beyond limitation 522

27 I-73 CONTENTS Limitation for claim of shortfall after sale of secured assets Limitation under section Application of other laws not barred Provisions of other laws also applicable Power of Central Government to make rules Power to make rules Certain provisions of this Act to apply after Central Registry is set up or cause to be set up Provisions of registration to apply only after Central Registry is set up Establishment of central registry Power to remove difficulties Power to remove difficulties Amendments to certain enactments Amendments to other Acts Securitisation company or ARC as PFI a Amendment to section 4A of the Companies Act Security receipt as security Amendments made to SICA A When can reference be treated as pending Section 22 of SICA Present status of BIFR & NCLTs Amendment to Companies Act, Revival and Rehabilitation of Sick Companies under the new Companies Act, Repeal and saving Protection to actions taken under ordinance Lender s liability Enforcement of securities is a contractual right Demand for Lender s Liability Law Working group set up 544

28 CONTENTS I Need for law on lender s liability Corporates need to tune their operation to new regime Environmental Liability Position in USA Position in India Supreme Court on lender s liability Model code for collection of dues Future agenda for Lender s Liability Law Caution for borrowers 548A DIVISION THREE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 CHAPTER I PRELIMINARY 1. Short title, extent, commencement and application Historical background of the Legislation Statement of Objects Amendments to the Act Applicability of the Act Constitutional validity of the Act Supreme Court on constitutional validity Further Amendment Pecuniary Jurisdiction Jurisdiction conferred on Debt Recovery Tribunal s (DRTs) by SARFAESI Act, Pending SLP in Supreme Court Definitions Appellate Tribunal Application Application to DRT equivalent to plaint for civil suit for recovery of debt 563

29 I-75 CONTENTS 2.3 Appointed Day Bank Applicability to co-operative banks Amendment of definition of Bank A Meaning of debt A-1 Decretal debt A-2 Loss caused to bank A-3 Fraudulent debts A-4 Recovery of debts written off A-5 Debt due under decree or order of any Civil Court A-6 Debt whether includes interest A-6a Claims under derivative contracts A-7 Recovery of machinery on hire Admiralty jurisdiction - Whether can be entertained by DRT Debt defined in SARFAESI Act Financial Institutions Specified Company or Specified Undertaking of UTI whether Financial Institution Securitisation and Asset Reconstruction Companies Extent of jurisdiction of DRTs 580 CHAPTER II ESTABLISHMENT OF TRIBUNAL AND APPELLATE TRIBUNAL 3. Establishment of Tribunal Debts Recovery Tribunals Composition of Tribunal Composition of the Tribunals Qualifications for appointment as Presiding Officer Term of office Age limit for Presiding Officer 582

30 CONTENTS I Staff of Tribunal Recovery Officer Qualifications for Recovery Officers Establishment of Appellate Tribunal Appellate Tribunal Composition of Appellate Tribunal Qualifications for appointment as Chairperson of the Appellate Tribunal Term of office Chairperson of Appellate Tribunal Staff of the Appellate Tribunal Salary and allowances and other terms and conditions of service of Presiding Officers Filling up of vacancies Resignation and removal Safeguards against removal from service Amendments to DRT Act by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, Power of investigation Orders constituting Tribunal or an Appellate Tribunal to be final and not to invalidate its proceedings Service Conditions of Chairperson of Appellate Tribunals, Presiding Officers, Recovery Officers and other staff members Powers of Appointment of Presiding Officers and Chairpersons 590 CHAPTER III JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS 17. Jurisdiction, powers and authority of Tribunals Powers of Tribunal Claims that can be entertained by Tribunal Claim against the bank 592

31 I-77 CONTENTS Amendment of plaint Applications for setting aside ex parte orders Execution of decree of Foreign Court Claim of set off and counter-claims before DRT Transfer of pending cases Application for transfer under section 24 CPC Admiralty jurisdiction Property of notified person Suit for Specific Performance A. Power of Chairperson of Appellate Tribunal A.1 Supervisory powers of Chairperson of Appellate Tribunal A.2 Power to transfer cases Bar of jurisdiction Jurisdiction of civil court barred Jurisdiction of the High Court Suits for Damages, Specific Performance Relevant date for bar of jurisdiction Revision application against orders of DRT Ex parte orders passed by Civil Courts Debt Recovery by Multi-State Co-operative Banks 603 CHAPTER IV PROCEDURE OF TRIBUNALS 19. Application to the Tribunal Recovery provisions prior to establishment of Tribunals Who can avail DRT jurisdiction Whether co-operative banks are covered by the Act? A Amendments to section 19 of the DRT Act 613

32 CONTENTS I Pecuniary jurisdiction of DRTs Amendment to sub-section (1) regarding enforcement measures by secured creditors Simultaneous action under DRT & SARFAESI a Action under DRT Act pending SARFAESI Action Action during pendency of suit Need for amendment of section Claims of other banks/fis Form of Application and fees A Refund of court fees Simplified Procedures of the Tribunal Written Statement Amendments for the purpose of expediting the hearing before the Debts Recovery Tribunals Amendment to section Discretion to grant adjournments Set offs and counter-claims by defendants Claim for compensation and damages before the Banking Ombudsman and right of set-off Parallel proceedings before Ombudsman and DRT Written statement claiming set-off Counter-claim against the Bank or FI Counter-claim is same as cross-suit Position prior to amendment of section Applicant can file reply Applicant can ask for exclusion of the counterclaim Supreme Court on maintainability of counter-claim or set-off 632

33 I-79 CONTENTS Counter-claims and set-offs Reconsideration of view on transfer of suits making counter-claims Whether DRT is a Court for the purpose of Insolvency Laws Power to pass interim orders DRT can direct the borrower to furnish security Injunction in DRT cases Valuation of property Conditional attachment Compliance with provisions of sub-section (13) Powers of DRT to attach properties or order detention of defendant Power to appoint receiver of any property Power to appoint Commissioner for preparation of inventory Sale of assets belonging to a company Powers of Winding-up - Court and the DRT Powers of winding-up a company under sections 433 and 434 of the Companies Act Supreme Court on jurisdiction of DRT and Company Court Objection to under-valued sale Winding up proceedings and debt recovery proceedings Computation of dues of workmen for the purpose of section 529A of the Companies Act Current status of the law Powers of DRTs under the DRT Act Supreme Court may re-examine applicability of section Payment of workmen s dues under the SARFAESI Act 664

34 CONTENTS I Power of DRT to pass interim or final orders Opportunity of hearing Discretion of DRT to award interest A Settlement proposals during the pendency of DRT proceedings Service of copies of orders passed by DRT Certificate of recovery Transfer of Recovery Certificate to other DRTs Directions for expeditious disposal Inherent powers of DRT Inherent powers of Civil Courts Other issues relating to DRT jurisdiction Ousting jurisdiction by agreement Delayed payments pursuant to settlement Joint and several liability Proof of documents Applicability of section 41(b) of the Specific Relief Act, 1963 to DRTs Recovery certificates - Whether a decree of the Court Whether DRT is a Court for the purpose of Insolvency Laws Whether filing case in DRT amounts to defamation of the borrower Writ against DRT orders Power of DRT to restrain defendant from travel One time settlement RBI Guidelines Appeal to the Appellate Tribunal Appeal against order of DRT Appeal against interim orders Appeal against ex parte order of DRT Further appeal against order of Appellate Tribunal Writ jurisdiction of High Court 684

35 I-81 CONTENTS Setting aside decree of DRT in writ proceedings One-time Settlement Scheme of RBI Challenge to DRT proceedings on the ground that there was no service of summons Deposit of amount of debt due on filing appeal Pre-deposit of 75 per cent amount to entertain appeal Whether requirement of 75 per cent deposit onerous Constitutional validity of section Constitutional validity of section 21 in view of Supreme Court judgment in Mardia Chemicals case Procedure and powers of the Tribunal and the Appellate Tribunal Principles of natural justice Natural justice requirements under the DRT Act Procedures to be based on Principles of Natural Justice Applicability of Code of Civil Procedure to Debt Recovery Proceedings Provisions applicable to DRT proceedings Revisional jurisdiction of the High Court over DRT proceedings Applicability of section 24 of CPC to DRT proceedings Transfer of civil suit to Tribunal Powers of Registrar Amendment to Pleadings Cross-examination of witness Constitutional validity of rules 53 and 54 of Second Schedule Proceedings before the Tribunal and Appellate Tribunal whether Judicial Right to legal representation and Presenting Officers 723

36 CONTENTS I Limitation Limitation period for enforcement of recovery certificate Limitation for execution of decree Condonation of delay in application for setting aside ex parte order Important Provisions of the Limitation Act, Legal principles applicable in regard to limitation period Distinction between rights and remedies Blank Documents Limitation period for loan outstanding in Live Accounts and loans payable on demand 731 CHAPTER V RECOVERY OF DEBTS DETERMINED BY TRIBUNAL 25. Modes of recovery of debts Enforcement of orders of DRT Power of Recovery Officer to evict tenants on sale Modes of recovery - Attachment and sale of property A Contempt proceedings against the Recovery Officer Deposition by Attorney in DRT proceedings Arrest and detention of defaulting borrowers under DRT Act Power to arrest judgment-debtor under CPC Power to impound passport of defaulter Constitutional validity of powers of arrest of defendant and detention in civil prison Liability for sales tax on sale of movables Sale of surplus assets by a company to repay overdue debt One Time Settlement 742

37 I-83 CONTENTS 25.5 Powers of DRT to sell assets of a company (in liquidation) Whether DRT Act prevails over the Companies Act, Power of DRT to sell assets of a company (under Liquidation) Validity of certificate and amendment thereof Powers of Tribunal to review its orders Amount certified in recovery certificate cannot be challenged before Recovery Officer Withdrawal of certificate of recovery Stay of proceedings under certificate and amendment of withdrawal thereof Tribunal can stay recovery proceedings and grant time Can banks settle claims and obtain consent orders DRT s powers to settle claims Delayed Settlement Other modes of recovery Powers of Recovery Officer Objections to Garnishee Order Applicability of Second Schedule to the Incometax Act, Sale of assets of company under liquidation A Power to order disclosure of assets Applicability of Third Schedule to Income-tax Act Case Law under section 226 of the Income-tax Act Power to order arrest or impound passport Direction to borrower s wife to deposit passport in the Court Attachment of Principal Deposit Account of the State Government with RBI 758

38 CONTENTS I Application of certain provisions of Income-tax Act Certificate Proceedings under Income-tax made applicable to recovery proceedings Third party objection to attachment and sale - Rules applicable to recovery proceedings Some important provisions of the Schedule Can Recovery Officer exercise Powers of Civil Court Public auction - Payment of purchase price by the highest bidder Attachment and sale of assets Income Tax (Certificate Proceedings) Rules, Third Party claims over attached properties Protection of bona fide purchases Defaults in payment of purchase price Appeal against the order of Recovery Officer DRT to hear appeal against order of Recovery Officer Limitation - Condonation of delay Further appeal to Appellate Tribunal Writ Petitions against DRT orders 768 CHAPTER VI MISCELLANEOUS 31. Transfer of pending cases Transfer of pending cases Object of transfer of cases to DRT Pending the recovery proceedings of multi-state co-operative banks Transfer of execution proceedings from Civil Court to DRT Transfer of DRT cases to High Court Transfer of pending cases Remand of suit by Appellate Court to the Trial Court 776