Recently, the Parliament has received the assent of the President for the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (The Act). The Act has introduced several amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) and other incidental laws. While the Bankruptcy Code provides for collective action of creditors, the Amendments to the SARFAESI Act and other Acts seek to streamline the processes of creditors individually taking action against the defaulting debtor.
THE KEY POINTS OF THE AMENDMENT ACT ARE:
- The Act provides registration of creation, modification and satisfaction of security interest by all secured creditors and provision for integration of registration systems under different laws relating to property rights with the Central Registry so as to create Central database of security interest on property rights.
- The Act provides for the creation of two new Central Registries/Databases to help quickly and efficiently cross-checking the various properties against a debtor’s name at the time of a default. One Registry maintains a record of all transactions involving secured loans. The other Central Database maintains a record of all property registered under different systems in the Country (immoveable, moveable, intangible).
- The Act gives powers to the Reserve Bank of India (RBI) to regulate and monitor the activities of Asset Reconstruction Companies (ARC’s) in a changing business environment. The RBI may carry out audits and inspections in ARC’s, and even penalise them in cases of non-conformance with RBI guidelines.
- The Act removes the stamp duty on assignment of loans by banks and financial institutions in favour of Asset Reconstruction Companies (ARC’s) as long as the asset/property is being transferred for the purpose of securitisation or reconstruction.
- The Act enables non-institutional investors to invest in security receipts.
- The Act gives specific timeline for taking possession of secured assets against which a loan had been provided, upon a default in repayment with the assistance of the District Magistrate. The Act provides that this process will have to be completed within 30 days by the District Magistrate.
- The Act gives priority to secured creditors, after registration of security interest with the Central Registry, in repayment of debts.
- The Act empowers the District Magistrate to assist the banks to convert their outstanding debt into equity shares and hold a stake of 51% or more in the company, thereby taking over the management of a company in case of default of the company to repay its loans.
- The Act allows the Debt Recovery Tribunal (DRT) to restore a secured asset or management of a business to the borrower, after examining facts related to the case.
- The Act includes Debenture Trustee in the definition of secured creditors.
DEBENTURE TRUSTEE – A debenture trustee is a person or entity that serves as the holder of debenture stock for the benefit of another party.
DEBENTURE TRUSTEE AS SECURED CREDITORS – Definition of secured creditor under the Amended SARFAESI Act:
Section 2(1) (zd) defines – “secured creditor” means—
- any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l);
- Debenture Trustee appointed by any bank or financial institution; or
- an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or
- Debenture Trustee registered with the Board appointed by any company for secured debt securities; or
- any other trustee holding securities on behalf of a bank or financial institution,
in whose favour security interest is created by any borrower for due repayment of any financial assistance.
Since the definition of “secured creditor”, as amended, includes a Debenture Trustee for debt securities, the enforcement will be carried out by the Debenture Trustee. In case of secured debentures, the Debenture Trustee is the holder of security interests, which he holds in trust for the debenture holders.
Under this Amended Act, If there is a default in repayment and the debt is qualified as non-performing asset in nature. The Debenture Trustee being a secured creditor can take enforcement action under section 13(2) of the SARFAESI Act.
The Amended SARFAESI Act introduces a proviso to section 13(2) is as follows:
- the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and
- in the event of default, the Debenture Trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the Debenture Trustee.
In case of debt securities, If the debentures issued or invested are not in the books of the trustee at all. Therefore, the question of such debentures or debt securities being an Non-Performing Asset in the books of the trustee does not arise. It is in the light the proviso of sub-section (2) provides that the classification as an Non-Performing Asset in the books of the secured creditor will not be applicable. The Debenture Trustee can take action as provided under the security documents.
DEFAULT – The Amendment Act inserted Sub-clause (ii) in the definition of default as follows:
Section 2 (1) (j) “default” means—
- non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; or
- non-payment of any debt or any other amount payable by the borrower with respect to debt securities after notice of ninety days demanding payment of dues served upon such borrower by the Debenture Trustee or any other authority in whose favour security interest is created for the benefit of holders of such debt securities;
ENFORCEMENT OF SECURITY INTEREST BY DEBENTURE TRUSTEE
A Debenture Trustee has to send two notices for the enforcement of security interest, one for constituting default under Section 2(1)(j) and the other for demanding payment in terms of section 13(2) under the SARFAESI Act. The steps, for enforcement of security interest by a Debenture Trustee, are:
- There has to be a default as defined under Section 2(1)(j) on scheduled payment, as per the terms of issue of the debentures.
- The Debenture Trustee has to serve a notice demanding payment. This is a 90-days’ notice, required in terms of section 2(1)(j) to constitute a case of default.
- If, after 90 days of abovementioned notice, the demanded payment is not settled by the issuer/borrower then the Debenture Trustee may serve a notice in terms of section 13(2), demanding payment within 60 days of the notice. This notice has to satisfy all the requirements of Section 13(2), including the details of the secured asset, etc.
- If, after service of the second notice under section 13 (2), the issuer/borrower does not pay the amount demanded in the notice, the Debenture Trustee may take the measures mentioned in section 13 (4).
The Amendment to the SARFAESI Act gives Debenture Trustees a strong right on the enforcement possibilities and widens the scope the role as Debenture Trustees hold the security interest for and on behalf of the debenture holders. Now after the Amendments the Debenture Trustees will play a significant role in enforcement of security interests which goes beyond identifying such stress situations which may jeopardise the security interests they hold and taking timely and appropriate action in that regard.
The Indian Lawyer