SARFAESI Act Amendment 2016 - Some highlights

A NOTE ON THE AMMENDMENT MADE IN SARFAESI ACT 2002 AND DRDBFI ACT 1993 AND SOME OTHER ACTS BY AMMENDMENT ACT OF 2016

The Indian Parliament on August 9, 2016 has passed a act named ,The Enforcement of Security Interest and Recovery of Debt laws and Miscellaneous Provision (amendment Act),2016. The proposed amendment act received the assent of the President on 17 August 2016. It proposes some very important changes in the existing Acts which are required to be known by all dealing with these acts.

The act proposes to amend following Acts:-

1. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

2. Recovery of Debts Due to Banks and Financial Institution Act, 1993

3. The Indian Stamp Act, 1899 4. The Depositories Act, 1996

The salient points of the amendment Act are as under

1. Amendments to SARASEI ACT

1. Now the definition of debt will include the unpaid portion of the purchase price of any tangible asset, given on hire or financial lease or conditional sale and any right, title, or interest in any intangible asset, which form security of any loan, extended by secured creditor, to acquire such intangible assets. Thus, all tangible assets though acquired by secured debtor under any lease or hire purchase agreement shall be realizable under this Act though the ownership of the assets remains with secured creditors. Similarly, all intangible assets like brand assets, patent, copy right, acquired with the financial assistance of secured creditor or mortgaged to them will form a realizable security. New provision regarding realization of debt security has also been included. In case of debt security if there is a default in repayment, secured creditor will give notice for repayment of debt amount within a period of 90 days. In case of debt security there is no need of account being classified as NPA. If the Debtor fails to repay the loan within the period of notice,the proceedings under sec 13 of the Act may be initiated by the secured creditor.

2. A new provision has been added if the entire loan including interest ,expenses, charges, has been repaid before the date fixed for the sale of the secured assets no sale will take place.

3. A major and effective amendment has been made in sec 14 of the Act. it was being observed that District Magistrate, while acting upon the application moved by secured creditors, were taking a long time in taking possession of the secured assets .

3. The amendment stipulates that District Magistrate will have to take possession of the secured assets within 30 days from the date of application.

4. The amendment also empowers the secured creditor to convert the loan into equity. Where the secured creditor has converted its loan into equity and thus the holding of secured creditor in the equity of the company becomes more then 51% the secured creditor may take over the management of the company. The district magistrate on the application moved by secured creditor will assist the secured creditor in taking over the management of the borrower company. In such a case there is no need of the account being classified as NPA.

5. The rights above mentioned will be available to ARC also once ARC takes over the account or the secured assets from secured creditors.

6. For the purpose of moving application before DRT u/s 17 of the Act the jurisdiction of the tribunal is now clearly defined and will be as follows;-

(A) Where the cause of action wholly or partially arises.

(B) Where the secured asset is located.

This in general terms it may be said to fall within the jurisdiction of DRT where property is situated or where the financing branch of the secured creditor is situated.

7. Application of the third party. It has now been fully settled by Apex Court that no court except DRT will have the right to decide the claim of any third party regarding the secured assets, including the claim of title. The apex court and various High courts had previously observed if the DRT decide a claim in favour of third party it does not have power to restore back third party’s possession on the property. To overcome this short coming it has been provided that in the event DRT allows the application of the third party it may order for restoration of its possession also.

8. CENTRAL REGISTRY. This amendment has widened the scope of central registry. It provides that the central government in consultation with the state governments and other authorities operating registration system will establish a central Data Base where registration made under Registration Act , Motor Vehicle Act, Patent ACT, and Design Act will be registered

9. The act further provides that no secured creditor will be able to take action against any mortgage property unless that is registered with central registry. It will be duty of the secured creditor to get the secured interest registered with central registered within 30 days of its creation. The provision of the central registry may be extended to all creditors whether secured or unsecured, of the borrower, but the unsecured borrower will not be entitled to take any action under the provisions of this Act.

Any tax officer issuing any order of attachment against the property of the creditor shall have to get such attachment order registered with central registry. Simultaneously any creditor obtaining any decree against any property of the borrower will have to get the decree registered with central registry. These provisions will come into operation from the date of notification. Since registration is of properties and vehicles are a state matter and procedure will have to be synchronized with states hence it may take some time in being operational.

10. The act has put the question of supremacy of the charge at rest. There was a controversy on the point whether the charge of a secured creditor supersede the crown dues. The new act provides that the dues of secured creditors will have precedence over the dues or taxes payable to central government or state government or local authority.

11. OPERATION AND MANAGEMENT OF ARC. This act has also made amendments regarding operation and management of Arcs. On one hand it has given them more powers on the other hand it has made the control of RBI over ERC stricter. It has been provided that RBI shall have power of inspection and audit of ARCs. If the guidelines of RBI are not followed RBI will have power to impose fine. Clear-cut procedure has been provided for imposing fines. ARC now may take over both tangible and now intangible account whether those have been classified NPA or not. Once the account is taken over by ARC it will have the same power to deal with the account as secured creditor had with regard to that account. Any document relating to transfer of account or the assets will not attract stamp duty. ON transfer of assets the ARC will be entitled to get their name mutated in all government records. Thus the amendments made fulfills the requirement of tapping certain gaps existing in the present Act and facilitate the secured creditors to make expedite recovery.

AMENDMENTS IN RECOVERY OF DUES TO BANK AND FINANCIAL INSTITUTION ACT 1993

1. The act has included the debt securities and financial lease in the definition of debt. the word property was not defined in the Act till now. A new definition of property is included which means, movable, immovable, tangible, intangible, assets and recoverable. The words secured creditors, security interest, tangible, intangible, in this Act will beat the same meaning as the defined in SARFAESI Act.

2. The act has amended and clarified the service condition of presiding officers of DRT and has bestowed more power of superintendence upon Chairman of DRAT.

3. The procedure to be followed by DRT has been defined clearly. DRT, under whose jurisdiction the secured creditor has that branch which hold the defaulter’s account, will have the jurisdiction in the matter. The procedure to be followed by DRT has been described more elaborately so that the application filed by secured creditor maybe decided expeditiously. The secured creditor while filing application will file all documentary evidences including statement of account having all entries made in the account of borrower. Similarly the defendant too will have to file its reply within 30 days of receiving summons to file reply along with all the documents it wants to rely upon and details of counter claim if any made by defendant. The DRT may on the request the secured creditor may pass an order to defendant to furnish details of properties, other than those mortgaged,. If the defendant does not follow orders DRT may pass order of his detention in civil prison. DRT may make attachment of mortgaged property before judgment. The application and the reply now may be filed on line in electronic form. All the orders will be posted on the web site of DRT and will be deemed as communicated to parties.

4. Where liability is admitted by the defendant either in part or in full, the DRT may pass order to deposited amount within 30 days failing which recovery certificate will be issued against the borrower.

5. The tribunal on receipt of written statement will fix a date for hearing and within 30 days of conclusion of hearing will pass an order as it deems fit and may direct the recover officer to take action against the security interest created in favour of secured creditor.

6. An appeal against the order of the DRT will now be filed within 30 days instead of 45 days as provided earlier. The appellant will now have to deposit 50% of the decreed amount instead of 75% as provided earlier. This may be reduced upto 25% by DART and similarly the time of filing of appeal too may be extended by fifteen days in exceptional circumstances.

7. Recovery officer too may stay the recovery proceedings if the defaulter deposits 25% of decreed amount along with a reasonable proposal for payment of balance amount and the secured creditor having decree agree to that. We do hope that these amendments will help the secured creditor in early recovery of their stressed amount and DRT to work more efficiently.