Tenants to seek remedy from DRT before invoking the Writ Jurisdiction of High Court against SARFAESI Action

In its recent Judgment[1], a Division Bench of the Madras High Court has pointed out that the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), has provided for an effective and alternative remedy to a person, claiming to be a tenant or has lease hold rights, on the secured asset by approaching the Debt Recovery Tribunal. The Amendment has vested upon the DRTs the jurisdiction to examine whether the lease or tenancy and other parameters, mentioned in Section 4A of the Amended Act and to pass such orders, as deems fit, in accordance with the provisions of Securitisation and Reconstructions of Financial Assets and Enforcement of Security Interest Act, 2002.

Noting the observation of the Apex Court in Union Bank of India v Satyavati Tandon that in cases relating to recovery of the dues of banks, financial institutions and secured creditors, stay granted by the High Court would have serious adverse impact on the financial health of such bodies/institutions, which ultimately prove detrimental to the economy of the nation, the Division Bench held that exercise of writ jurisdiction is extraordinary, only in the absence of alternate and efficacious remedy and when there is an efficacious and alternate remedy under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act or Securitisation And Reconstructions of Financial Assets Act, 2002, as the case may be, a writ petition seeking remedy against SARFAESI action is not maintainable.

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[1] B Rajini & Ors v Bank of Baroda, MANU/TN/3454/2016

Notification of Chapter III of the Insolvency and Bankruptcy Code 2016

Ministry of Corporate Affairs has vide Notification S.O. 3687(E) dated 09.12.2016 has brought in force Chapter III of the  Insolvency and Bankruptcy Code 2016 dealing with the liquidation process under the Code. The Chapter deals with the appointment of the Liquidator, his powers and duties and the procedure to be followed by the Liquidator under the new Code. The Notification is available here.

Issuing of Corporate Guarantee under Companies Act 2013

It is an usual practice in Corporate Lending by the Banks to obtain Corporate Guarantee from the holding or parent company or any other related/group company of the Borrower Company. Corporate Guarantee is a written declaration or guarantee of payment made by a known flagship, or holding or parent company, on behalf of its other business entity who would be normally smaller or a subsidiary company. This guarantee to banks is provided in consideration of bankers/vendors providing credit to a business on whose behalf the guarantee is made. A corporate guarantee is a guarantee in which a flagship or holding or parent company agrees to be held responsible for completing the duties and obligations of a smaller/ subsidiary company/debtor to banks/lenders, in the event that the smaller/subsidiary company/ debtor fails to fulfill the terms of the debtor-lender contract.

Section 185 Of The 2013 Act:

(1) Save as otherwise provided in this Act, no company shall, directly or indirectly,

-          advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or

-           give any guarantee or provide any security in connection with any loan taken by him or such other person:

o    Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

 (b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member; (d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Restrictions introduced under the Provision

Under the said provision of the new Act, a Company shall not directly or indirectly give any guarantee to its directors or any other entities in which the directors are interested. It shall apply to both Public and Private Companies.

Companies (amendment) act 2015 dated on 26th May 2015 has brought in some relief for the Holding Companies and their wholly owned subsidiaries. The Amendment has now allowed a Holding Company to give guarantee or provide security with respect to any loan made by a Bank or any other financial institution to its subsidiary company,  provided that the loans made under clause (c) and (d) are utilized by the subsidiary company for its principal business activities.

Recently the Ministry of Corporate Affairs has, vide their Notification, GSR 464E dated 05.06.2015, has brought in further relief for Private Companies. The Notification has is now permitting a Private Company to provide a guarantee or offer a security in connection with a loan taken by a sister concern, provided that

(a) There is no body corporate shareholder in the lending/guaranteeing company;

(b) The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is less than twice its paid up share capital or fifty crore Rupees, whichever is lower;

(c) There is no pending default in repayment of such borrowings by the lending company.

LIMITS FOR INVESTMENT AND GUARANTEE UNDER SECTION 186

According to Section 186 (2), a company cannot give loan, guarantee or provide any security or acquisition exceeding 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium, whichever is MORE.

If any Company prefers to give loan, guarantee or provide any security or acquisition beyond the said limit, Section 186 (3) requires the Company to seek approval from its share holder in the General Meeting by way of a Special Resolution.

Registration of Charges under Companies Act, 2013

A charge is a right created by any person including a company referred to as “the borrower” on its assets and properties, present and future, in favour of a financial institution or a bank, referred to as “the lender”, which has agreed to extend financial assistance. A charge may be fixed or floating depending upon its nature.[1]

Section 2(16) of the Companies Act, 2013 defines charges so as to mean an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.

 The following are the essential features of the charge which are as under:

•   There should be two parties to the transaction, the creator of the charge and the charge holder.
•  The subject-matter of charge, which may be current or future assets and other properties of the borrower.
•  The intention of the borrower to offer one or more of its specific assets or properties as security for repayment of the borrowed money together with payment of interest at the agreed rate should be manifested by an agreement entered into by him in favour of the lender, written or otherwise.

Need To Create Charge

When a company is in requirement of funds they may approach banks/ financial institutions for loans against the security of the assets of the company. However in the Multiple Banking lending where the same assets are offered as security for different banks question arises as to priority in respect of the charges in favour of different institutions.

The assets may be offered to the lending Banks with the consent of all the lenders, on pari passu charge basis, i.e., on the same footing. However if the earlier lending institution is not willing to share the priority over the assets on pari passu basis, the situation may be managed by securing consent of the earlier lending institutions to the creation of second and subsequent charges on the same assets. With their consents, the charges of all the lending institutions rank pari passu, i.e. on the same footing. However, the earlier lending institution may not give its consent to the creation of second charge on the ground that the realisable value of the asset charged in its favour is not adequate to cover its loan and as such it cannot share its right of charge with the lending institutions which seek second and subsequent charges.

Primarily, under section 77 of the Companies Act, 2013 every company creating a charge shall register the particulars of charge signed by the company and its charge – holder together with the instruments creating.

  Important points in the Act relating to charge creation:

 Any charge created within or outside India - on property or assets or any of the company’s undertakings - Whether tangible or otherwise,-  situated in or outside India shall be registered. Hence all types of charges are required under the Act to be registered whether created within or outside India.

Time limit for registration of a Charge (Under 2013 Amendment Act): A charge created by a company is required to be registered with the Registrar within thirty days of its creation in such form and on payment of such fees as may be prescribed.

Condonation of delay by Registrar: The Registrar may on an application by the company allow registration of charge within three hundred days of creation or modification of charge on payment of additional fee. The Registrar may, on being satisfied that the company had sufficient cause for not filing the particulars and instrument of charge, if any, within a period of thirty days of the date of creation of the charge, allow the registration of the same after thirty days but within a period of three hundred days of the date of such creation of charge or modification of charge on payment of additional fee. The application for delay shall be made in Form No.CHG-10 and supported by a declaration from the company signed by its secretary or director that such belated filing shall not adversely affect rights of any other intervening creditors of the company.

Condonation of delay by the Central Government: If company fails to register the charge even within this period of three hundred days, it may seek extension of time in accordance with Section 87 from the Central Government.

End of SICA (The Sick Industrial Companies (Special Provisions) Act, 1985)

Thirteen long years after the enactment of  Sick Industrial Companies (Special Provisions) Repeal Act, in 2003, the Government has notified the Act, bringing to an end the era of the BIFR and AIFR regimes. The notification has come in the light of the enactment of the Insolvency and Bankruptcy Code, 2016. The Act was notified by the Ministry of Finance vide its notifications S.O.3568(E) and S.O. 3569 (E) which is available here.

SICA Regime

The SICA regime which was introduced as a hand holding measure facilitating the revival of sick industrial units by financial restructuring, it was quite often resorted by the promoters as a tool for delaying the recovery process. It seems that the Repeal Act was shelved these many years only for the lack of a machinery to effectively substitute it. With the establishment of the NCLT under the Companies (Amendment) Act, 2013 and with the Insolvency and Bankruptcy Code putting a totally new system to tackle the insolvency issues the SICA had lost its necessity leading to its present repeal. 

Present Position

Section 4(b) of the Repeal Act was in fact modified by Section 252 of the Insolvency and Bankruptcy Code 2016, to the effect that from the date notified by the Government all proceedings pending before the BIFR and AAIFR shall abate and will come to an end.

The amendment has given an option to the Company whose appeal, reference or inquiry has abated to initiate fresh proceedings under the Insolvency Code before the National Company Law Tribunal (“NCLT”) in accordance with the provisions of Insolvency Code, within 180 days of the commencement of the Insolvency Code.

This notification has opened a new, but brief window for the secured creditors whose recovery measures were stalled due to the restrains imposed by Section 22 (1) of the SICA: 

22. Suspension of legal proceedings, contracts, etc.—

(1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof  [and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.

The present notification has automatically removed the bar on all the legal recovery proceedings imposed by S.22 of SICA, 1985, making it possible for the secured creditors to adopt the recovery measures including SARFAESI steps against the Company whose appeal, reference or inquiry was pending before BIFR or AIFR.

Key Changes under Security Interest (Enforcement) (Amendment) Rules 2002

Ministry of Finance (Department of Financial Services) has vide Gazette Notification No 775 has notified amendments to the Security Interest (Enforcement) Rules 2002. The Amended Rules are available here. The key changes made by the Amendment are discussed below:

2016 Amendment of Security Interest (Enforcement) Rules 2002
Rule	Existing Provision	Post Amendment
Rule 3 Sub-Rule 1: (Demand Notice)	The service of demand notice as referred to in sub-section (2) of section 13 of the Act shall be made by delivering or transmitting at the place where the borrower or his agent, empowered to accept the notice or documents on behalf of the borrower, actually and voluntarily resides or carries on business or personally works for gain, by registered post with acknowledgement due, addressed to the borrower or his agent empowered to accept the service or by Speed Post or by courier or by any other means of transmission of documents like fax message or electronic mail service.	(Hand Delivery of the Demand Notice has been included as a new mode of delivery of the Demand Notice.)
New Sub-Rule 5 inserted in Rule 3 (Demand Notice)	(NEWLY INSERTED)	“(5) The demand notice may invite attention of the borrower to provisions of sub-section (8) of section 13 of the Act, in respect of time available to the borrower, to redeem the secured assets.”  (The demand notice must inform the Borrower as to the time available to him for redeeming the mortgaged assest/s as per Section 13(8) of the Principal Act.)
Rule 3A Clause b (Reply to representation to the borrower)	If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make any changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within seven days from the date of receipt of the representation or objection.	For the words “seven days”, the words “fifteen days”, shall be substituted. (As per the Amendment 7 days window available for the Secured Creditor to modify the Demand Notice according to the objections of the Borrower, has been increased to 15 days)
Rule 3A Clause c (Reply to representation to the borrower)	If on examining the representation made or objection raised, the Authorized Officer comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection, the reasons for non-acceptance of the representation or objection, to the borrower.	For the words “one week”, the words “fifteen days”, shall be substituted. (As per the Amendment 7 days window available for the Secured Creditor to reply to the objections of the Borrower, has been increased to 15 days)
Rule 4 (Procedure after issue of notice) After Sub-Rule 2 new Sub-Rules 2A and 2B will be inserted.	(NEWLY INSERTED)	“(2A) The borrower shall be intimated by a notice, enclosing the panchnama drawn in Appendix I and the inventory made in Appendix II. (2B) All notices under these rules may also be served upon the borrower through electronic mode of service, in addition to the modes specified under rule 3.”
Rule 6 (Sale of movable secured assets) Sub-Rule 1 Clause C	Sale of Movable secured assets is done by holding public auction.	Sale of Movable secured assets is done by holding public auction including through e-auction mode. (Thus the amendment has made a clarification that e – auction is a mode of Public Auction envisaged under the Act.)
Rule 6 (Sale of movable secured assets) Sub-Rule 2 after the proviso following proviso shall be inserted	(NEWLY INSERTED)	Provided further that if sale of movable property by any one of the methods specified under sub-rule (1) fails and the sale is required  to be conducted  again,  the authorised  officer  shall serve,  affix and publish notice of sale of not less than fifteen days to the borrower for any subsequent sale.”
Rule 6 (Sale of movable secured assets) Sub-Rule 3	Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.	For the words “between the parties in writing”, the words “between the secured creditors and the proposed purchaser”, shall be substituted.
Rule 8 (Sale of immovable secured assets) After Sub-Rule 2 new Sub-Rule shall be inserted i.e. Sub-Rule 2A	(NEWLY INSERTED)	“(2A) All notices under these rules may also be served upon the borrower through electronic mode of service, in addition to the modes prescribed under sub-rule (1) and sub-rule (2) of rule 8.”
Rule 8 (Sale of immovable secured assets) Sub-Rule 5 Clause c	Sale of Immovable secured assets is done by holding public auction.	Sale of Immovable secured assets is done by holding public auction including through e-auction mode.
Rule 8 (Sale of immovable secured assets) Sub-Rule 8	Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.	For the words “between the parties in writing”, the words “between the secured creditor and the proposed purchaser in writing”, shall be substituted.