Creditor Protection

8/4/2019 Creditor Protection

1/44

Shardul S. Shroff, Managing PartnerAmarchand Mangaldas, New Delhi

Kuala Lumpur

November 11, 2005

Recovery on Collaterals by

Secured Lenders in India


2/44

OverviewOverview

Creditor Rights

Creation

Perfection

Enforcement

Rehabilitation & Reconstruction

Working of the Legal System


3/44

Creditor Rights


4/44

Creditor RightsCreditor Rights

Indian Contract Act, 1872.

Loan Agreements.

Pledge. Hypothecation.

Also

Guarantees and Indemnities.

Creation

Moveables (including charge over debts and receivables)


5/44


6/44

PerfectionPerfection

Indian Registration Act, 1908. Compulsory registration for immoveable properties.

State appointed Registrars and Sub-registrars.

Non registration - document invalid and inadmissible asevidence.

Registration of documents


7/44


Indian Stamp Act, 1899.

The taxable event is the execution of the instrument andnotthe transaction.

Variable; Prescribed under state enactments or amendments.

Ad valorem 5 % in advanced states; 12% in backwardstates.

Under stamped document liable to be impounded; Penalty

payable. There is no residual entry, in any of this legislation.

Therefore, a document for which no rate of duty isprescribed is not stampable.

Stamping of documents


8/44


9/44


Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002.

Central Registry to maintain records of transactions:

Securitization of financial assets.

Reconstruction of financial assets.

Creation of security interest.

Securitization


10/44

Creditor RightsCreditor Rights

The International Finance Corporation (Status,

Immunities And Privileges) Act, 1958 and The AsianDevelopment Bank Act, 1966

IFC and ADB have been granted a special status.

Possess full juridical personality and full capacity

to contract

to acquire, and dispose of immoveable and movableproperty

to institute legal proceedings Tribunals have recognised IFC to be a multilateral

financial institution thereby giving it a status of securedcreditor under SICA

Special Status


11/44

EnforcementEnforcementTwo options

Private Enforcement

Banks and Financial Institutions

Securitization & Reconstruction of

Financial Assets & Enforcementof Security Interest Act, 2002

Through Courts

Banks and Financial Institutions

Recovery of Debts due to Banks &

Financial Institutions Act, 1993

Others

Civil Procedure Code 1908

Negotiable Instruments Act, 1881

Others

Transfer of Property Act, 1888

State Financial Corporations Act,1951


12/44

EnforcementEnforcement

The Securitization Act, 2002

Secured Creditors defined to mean Banks, FIs andSecuritization Companies

A wide power of the Central Government to notify any otherBank, NBFC or other Institution as a Financial Institution

has been reserved. Indian Bank Association has recommended inclusion of

NBFCs within the scope of the Act.

The Recovery of Debts Act, 1993

FIs defined to include public financial institution underCompanies Act, 1956, a Securitization Company.

Central Government can notify any other institution to be FIkeeping in mind business activity and area of operation.

Scope of the Acts


13/44

Limitation in accordance with the Limitation Act, 1963

Court Fees and Deposits

Under Recovery of Debts Act, 1993

At the stage of Application as specified in rules maximum of Rs.

1,50,000.

At the stage of Appeal deposit of 75% of debt amount and courtfee specified in rules

Under Civil Procedure Code 1908

Ad valourem From 1% to 6%

Differs from state to state



14/44



Notice calling for discharge of liabilities within sixty days.

In case of default, secured creditor has power to:

Take possession of the secured assets.

Take over the management of the business of the borrower.

Transfer of asset by sale / lease / assignment.

Appoint a person to manage the secured asset. Joint Financing Above said rights available only after

consent of 3/4th of value of all secured creditors.

Creditors private right of enforcement


15/44



Securitization Company can take following measures:

Change or take over the management of the business

sale or lease of the business

rescheduling the payment of debt

Settlement of dues payable

taking possession of the secured goods



16/44


Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002.

Exceptions lien on goods, money or security, pledge ofmovables, security in any aircraft or a vessel, conditionalsale, hire-purchase or any security interest for securing

repayment of any financial asset not exceeding Rs. 100,000.

Appeal to Debt Recovery Tribunal within 45 days, which hasto disposed of in 60 days and reasons for extension of timehas to be recorded in writing.

Further appeal to Appellate Tribunal within 30 days and after50% of debt as pre-deposit.



17/44


Private Sale: Transfer of Property Act, 1882

A Limited Remedy only in case of English Mortgage

Mortgage deed to confer a power of sale.

A notice to recall or demand of the outstanding to be issued.

A mandatory statutory notice period of three months toexpire before the exercise of the power.

The Debtor can challenge the right of sale on the ground ofimproper exercise of the power and claim damages.



18/44


Private Receiver: Transfer of Property Act, 1882

Power to appoint a private receiver in an English mortgage.

The person named in the mortgage deed, or upon applicationmade to the Court for such appointment.

Power of the Receiver limited to receiving income of themortgaged property.

Not a very effective practical remedy due to variousinfrastructural constraints.



19/44


State Financial Corporations Act, 1951

Sale of security interest without intervention of court hasbeen recognized and available to the State FinancialCorporations



20/44


Recovery of Debts Act, 1993.

Pecuniary jurisdiction of Rs. 1,000,000.

Mandate to dispose of the application expeditiously within180 days of the date of the application.

Recovery through:

Attachment and sale.

Arrest of defendant.

Appointment of receiver for management of properties.

Enforcement through courts


21/44


Recovery of Debts Act, 1993.

Statutory right to appeal

Limitation - 45 days from the date of the order.

Payment of 75% of decree amount.

Sale proceeds to be distributed amongst the securedcreditors in accordance with the provisions of theCompanies Act

Power to issue ex-parte ad interim orders Stay, injunctionor attachment.



22/44


Code of Civil Procedure, 1908.

Execution through:

Attachment and sale of properties.

Arrest and detention.

Statutory first appeal.

Second appeal on a substantial question of law.

Every Appeal from money decree requires pre-deposit ofthe disputed amount.

Revision power to High Court if no appeal provided.



23/44


Code of Civil Procedure, 1908.

Attachment and sale before judgment.

Appointment of receivers before or after decree.

Ex parte ad interim orders.

Summary Procedure if satisfy following conditions:

Suits upon bills of exchange, hundies and promissory notes

Suits in which the plaintiff seeks to only recover a debt or

liquidated demand in money arising out of a written

contract, or an enactment where the sum to be recovered

has been fixed or out of a guarantee.



24/44


Negotiable Instruments Act, 1881

Criminal action upon dishonor of a cheque deterrent

Imprisonment of two years

Imposition of fine maximum limit being double the amountof the cheque.

Courts have recognized the power of the Magistrate to awardcompensation and held that there is no pecuniary limit for thesame.

Nominal Court Fee

Substantial increase of filings in the recent years



25/44


Companies Act, 1956

A secured creditor can choose to stand outside theprocess of winding up.

Pari Passu charge with the workers dues

Priority over crown debts


26/44

Rehabilitation and Reconstruction


27/44

Rehabilitation & ReconstructionRehabilitation & Reconstruction

Scheme of compromise or arrangement

Merger, amalgamation, asset-sale, hive-off, etc.

Approval by 3/4th of creditors in value and shareholderspresent and voting.

Court supervised and mandated.

Companies Act,1956.


28/44


Sick Industrial Companies (Special Provisions) Act, 1985.

Through Board for Industrial and Financial Reconstruction.

Financial Reconstruction, takeover of management, sale /lease of undertaking / assets, rationalization of management

merger / amalgamation. Consent of each of the creditor making any concession under

the scheme has to be mandatorily obtained.

In absence of consent of even a single creditor the Board mayrecommend winding up of the company.

Sick Industrial Company


29/44


Sick Industrial Companies (Special Provisions) Act, 1985.

Order of the Board cannot substitute the consent of theCreditors.

Appeal - Against order of the Board.

Limitation 45 days.

Board has a power to pass an order restraining the sickindustrial company from alienating or disposing of the assetsof the company.

Sick Industrial Company


30/44


Non-statutory, voluntary system based on inter-creditor and

debtor-creditor agreements.

Notified by Reserve Bank of India for Banks and FinancialInstitutions.

Exposure of Rs. One Billion ($ 2173913) and above by banks andfinancial institutions.

Approval of 75% of lenders by value and 60% in number.

Three tier structure.

Corporate Debt Restructuring


31/44

Working of the Legal System


32/44

Enforcement: The Reality

Court has upheld the validity of Securitization Act, 2002 -Mardia

Chemicals vs. UOI & Ors., AIR 2004 SC 2371. The Act was challenged as a draconian law and placing arbitrary

power in the hands of the banks and financial intuitions.

The Preamble of the Act speaks about the purpose of the Act in following words

There are certain areas in which the banking and financial sector do nothave a level playing field as compared to other participants in the financialmarkets in the world. Our existing legal framework relating to commercialtransactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery ofdefaulting loans and mounting levels of non performing assets of banks and

financial institutions. The provisions would enable banks and financialinstitutions to realize long term assets, manage problem of liquidity, assetliability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non performing assets byadopting measures for recovery or reconstruction.

Recognition of Creditors Rights by Courts


33/44


Court has upheld the validity of the Recovery of Debts Act,

1993 - Union of India vs. Delhi High Court Bar Association, AIR 2002 SC1479.

The Act was challenged to be unreasonable and arbitrary.

The Preamble of the Recovery of Debts Act speaks about the purpose of theAct in following words

Banks and financial institutions at present experience considerabledifficulties in recovering loans and enforcement of securities charged withthem. The Committee on the Financial System headed by Sh. M.

Narasimham has considered the setting up of the Special Tribunals withspecial powers for adjudication of such matters and speedy recovery ascritical to the successful implementation of the financial sector reforms.



34/44


Upholding of the Securitization and Recovery of Debts Act

represents:

A definite judicial trend in favour of reform in the bankingsector.

Inclination of the Courts to uphold creditor rights. Inclination of the Courts to assist and not cause any hindrance

to the Banking reform in line with the policy of theGovernment to reform the banking system and law.



35/44


Power of the Courts to order sale of immoveable property

before passing a decree upheld

ICICI v. Karnataka Ball Bearing Corporation, (1999)7 SCC 488.

Courts have recognized and enforced foreign awards and

decrees passed in foreign currenciesRenusagar Power Co. Ltd. v. General Electric Co., AIR 1994 SC 860;

Forasol v. Oil and Natural Gas Commission, AIR 1984 SC 241.



36/44


The right to recover possession and sale or realization of

movable securities by the Banks under HypothecationAgreements has been recognized by the Courts

State Bank of India v. S.B.Shah Ali, AIR 1995 AP 134. and K.A.Mathai v. Kora Bibbikutty, (1996) 7 SCC 212.

Courts have also recognized the right of the creditor totake possession of the movables and its sale under the hire purchase agreement.

Charanjit Singh Chadha v. Sudhir Mehra, (2001) 7 SCC 417. and

K.A. Mathai v. Kora Bibbikutty, (1996) 7 SCC 212.



37/44


Tribunals have held that under SICA the consent of all the

creditors is mandatory and BIFR does not have power tocompel the creditors to agree to the scheme or grantconcessions

Re: M/s. Industrial Development and Investment Co. Pvt. Ltd.

Appeal No.55/1997. and Upper India Couper Paper Mills Co. Ltd. Vs.BIFR & Ors. Appeal No.151 of 1995

Courts have recognized wide powers of the debts recoverytribunal to issue interim and ad interim order

The tribunal can exercise powers contained in Code of CivilProcedure and can even go beyond the Code as long as it passesorders in conformity with the principles of natural justice

Allahabad Bankv. Radha Krishna Maity, (1999) 6 SCC 755. andICICIv. Grapco Industries Ltd., (1999) 4 SCC 710.



38/44


The interests of the Secured Creditors have been secured by

the grant of ex parte interim injunctions by the Courts on aregular basis.

The Grounds of granting ex parte injunctions are:

Prima Facie case Balance of Convenience

Irreparable loss



39/44


Statistics not readily available but certain trends and

statistics show: ADB RETA report suggests:

All the RETA economies including India have a reasonablewell developed ownership and property rights regime and it isreasonably simple and commercially efficient to take securityover land.

India offers relatively easy access to creditors in respect to theliquidation process and little or no evidence of abuse of the

same. The attitude of denial towards the admission of financial

difficulty is extremely common and corporate debtors disputethe debt due when insolvency proceedings are commenced.

Statistics and Studies


40/44


Suits involving enforcement if security get blocked by the

ingenious and often fraudulent defenses propagated withsubstantial degree of success by the borrowers. A trialusually takes eight to twelve years.

The company court does not readily wind up companies

unless there is a persistent default of several creditors or themagnitude of unsecured debt is adequate and of sufficientextent.



41/44


Doing Business in 2005 World Bank Study

Cost to create collateral in India 11.3% of per capitaincome in comparison to 0.3% in Singapore, 1% in USA and0% in China.

To register a commercial property in India follow six

procedures, 67 days and 13.9% cost to register a property incomparison to three procedures and nine days and 1.5% ofthe cost of property in Singapore.

It takes 10 years to close a business in India and cost of

insolvency is 8% of the cost of estate.



42/44


RBI Report on bankruptcy and BIFR working

BIFR procedure under SICA has been reported to be dilatory.

The value of the companys assets is depleted by misuse andmisappropriation by the debtor.

Commonly cited reasons for delay are:

Workload and Dilatory tactics used by the managementand workers

Lack of cooperation from creditors when asked to makeconcessions

Cumbersome process with endless procedural delays

Amendment to the Companies Act, 1956 propose NationalCompany Law Tribunals to substitute the BIFR.



43/44


RBI Report on Trend and Progress of Banking In India, 2003-04.

Statistics and Studies: NBFCs


44/44

Thank you !

amarchand & mangaldas & suresh a. shroff & co.amarchand & mangaldas & suresh a. shroff & co.

Amarchand TowersAmarchand Towers

216, Okhla Industrial Estate216, Okhla Industrial Estate

New DelhiNew Delhi--110020, INDIA110020, INDIA

Telephone 91Telephone 91 112 690 2500112 690 2500

Facsimile 91Facsimile 91 112 692 4900112 692 4900

[email protected]@amarchand.com

Documents

Creditor Protection