Recovery structure under multiple Debt Recovery laws - Clarity, the need of the hour?

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (‘Enforcement Act’) was published in the Gazette on August 16, 2016.The Enforcement Act will amend four existing acts i.e. the  Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’), the Recovery of Debts due to the Banks and Financial Institutions Act, 1993 (‘DRT Act’), the Indian Stamp Act, 1899 and the Depositories Act, 1996. The primary purpose of this amendment is to ensure that creditors have sufficient recourses for expeditious recovery of bad loans.

Changes to the SARFAESI Act

A significant change now brought about by the Enforcement Act is the amendment in the SARFAESI Act that allows secured creditors to take over collateral against which a loan had been provided, upon default in repayment. It has further been provided that this process will have to be completed within 30 days by the District Magistrate.

Another interesting amendment brought about to the SARFAESI Act is the change in the definition of the term ‘debt securities’. It has now been provided that debt securities would mean securities listed on Indian stock exchanges. It can thus be said that  the benefit of remedies under the SARFAESI Act and the DRT Act  have been extended to debt securities listed on Indian stock exchanges. An amendment brought about by the Enforcement Act to section 2 and section 13 the SARFAESI Act now enables a debenture trustee to enforce its security with respect to listed debt securities under SARFAESI Act in the event of non-payment of debt after 90 days’ notice of default has been served on the borrower. For this provision to apply, such debt is not required to be classified as a non-performing asset (NPA). According debenture trustees the same rights as other secured creditors (banks and financial institutions) is a useful step. However there are certain issues that remain with respect to the same. Currently listed debt securities have been exempted from the NPA requirement under the Enforcement Act and the SARFAESI Act. However requirement that an account should be classified as an NPA before banks and financial institutions enforce their security under the SARFAESI Act still remains. There may be a scenario where a default in respect of all debts by a borrower will entitle some secured creditors to invoke SARFAESI Act provisions earlier than others.

Another amendment now expands the definition of financial assets and includes hire purchase, financial lease and conditional sale within its ambit. Further secured creditors are now enabled to take over a company and restore its business on acquisition of controlling interest in the borrower company.

The Enforcement Act has mandated for creation of a central database to integrate records of property registered under various registration systems with this central registry.  This includes integration of registrations made under Companies Act, 2013, Registration Act, 1908 and Motor Vehicles Act, 1988. Registration of security interest with the Central Registry will be mandatory for enforcement of security under the SARFAESI Act and will act as public notice.

Other Changes:

The Enforcement Act also confers wide powers on the Reserve Bank of India (‘RBI’) to regulate Asset Reconstruction Companies (‘ARCs’). The Act empowers RBI to audit and inspect ARCs and also grants them the freedom to remove the chairman or any director and appoint central bank officials to its board. The central bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

There have been changes made to the DRT Act as well. Revamping the DRT mechanism, the Enforcement Act has allowed electronic filing of recovery applications, documents and written statements. Stay on recovery under a recovery certificate will be granted only if the borrower pays 25 per cent of the debt upfront and gives an unconditional undertaking to pay the balance within a reasonable time. It is now prescribed that 50 percent of the debt under the recovery certificate will need to be deposited for making an appeal against the order of the Recovery Officer. The Enforcement Act provides that the DRT will make every effort to complete the proceedings in two hearings and shall issue the recovery certificate within 30 days of completion of hearing.

The District Magistrate has a time period of 60 days to clear an application by the creditor to take over possession of the collateral.

Conclusion:

The intent of the legislature towards simplifying recovery procedures for creditors needs to be appreciated. However earlier this year, the both houses of the Parliament passed the Insolvency and Bankruptcy Code, 2016.The existence of dual laws  various and forums  i.e. NCLT and DRTs to deal with the debt recovery problems of secured creditors may result in more time being spent in resolving confusion and create opportunity for litigation. In view of the same, the legislators may need to provide some more clarifications on the excising recovery structure for creditors.