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Will Debt-Recoveries manage to Recover

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016:
-Vipul Dharmani, Partner, Chandigarh Office

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act) were enacted for expeditious recovery of loans of banks and financial institutions and also provided for enforcement of security interest in case of default in payment of dues of the bank and financial institutions. Though, RDDBFI Act specifically provides for a period of 180 days for disposal of the recovery applications, however the same often remain pending for many years, due to lengthy procedures and huge work-load on the DRTs.

Therefore in order to facilitate expeditious disposal of the said recovery applications and to realize the objects of the prevalent debt recovery laws, the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (the Act), has been passed, which received assent of the President of India on 12th of August, 2016duly published in the Official Gazette on 16th of August, 2016 and shall come into effect from such date, as may be notified by the Central Government. The said Act has been passed to suit changing credit landscape and augment ease of doing business and for affecting far reaching changes to the enforcement of security interest and recovery of debts.

The said Act aims to expeditiously resolve cases of debt recovery by making amendments to four laws, i.e. (i) The SARFAESI Act, 2002, (ii) RDDBFI Act, 1993,(iii) the Indian Stamp Act, 1899, and (iv) the Depositories Act, 1996.

Amendments in the SARFAESI Act, 2002:
The amendment recognizes the Asset Reconstruction Companies being a company incorporated under the Companies Act, 2013 and registered with Reserve Bank of India under Section 3 of the Act for the purpose of carrying on the business of asset reconstruction and securitization.
The Act extends the benefit of remedies under the SARFAESI Act, 2002 to debt securities, listed in the stock exchanges in accordance with the regulations made by the Board under the Securities and Exchange Board of India Act, 1992. The Act also amends the definition of financial assets to include, among others, hire purchase, financial lease and conditional sale and thereby extending its ambit.

The Act further provides that the debenture trustee can enforce its security with respect to listed debt securities under the SARFAESI Act,in the event of non-payment of debt after 90 days notice of default has been served on the borrower and for this, such debt is not required to be classified as a non-performing asset.
Under the amended Act the process of secured creditors taking possession over a collateral, against which a loan had been provided with the assistance of the District Magistrate has to be now completed within 30 days. The Act also empowers the District Magistrate to assist banks in taking over the management of a company, in case the company is unable to repay loans, but the same will be done in case the Banks convert their outstanding debt into equity shares, and consequently hold a stake of 51% or more in the said company.

The amendmentprovides for creation of a central database to integrate records of property registered under various registration systems with the central registry, which includes integration of registrations made under Companies Act of 2013, the Registration Act of 1908, Motor Vehicles Act of 1988, the Merchant Shipping Act of 1958, the Patents Act of 1970 and the Designs Act of 2000 etc., as the same shall act as public notice.The registration of collateral security with the central registry has been made mandatory for the secured creditors, so as to enable them to take possession over the collateral securityand after registration of security interest, shall have priority over others in repayment of dues.

The Act,before amendment, empowered the Reserve Bank of India (RBI) only to examine the statements and any information of the Asset Reconstruction Companies (ARCs) related to their business; however, the amendment empowers the RBI to carry out audit and inspection of ARCsand has been armored toeven penalize a company, due to its failure to comply with any directions issued by the RBI. Furthermore, the amended Act provides for exemption in stamp duty in accordance with the provisions of Section 8 F of the Indian Stamp Act, 1899 and the provides that the same shall not be charged on transactions undertaken for transfer of financial assets in favour of ARCs by any Bank for the purpose of acquiring financial assets.

Amendments in RDDBFI Act, 1993:
The amended Act aims at streamlining and speeding-up the entire adjudication process of the recovery applications before DRTs, right from e-filing of the applications and written statements, service of summons and notices through electronic form and display of interim and final orders of on the website of the DRTs and DRATs. The amended Act makes it mandatory for the defendant to file written statement within 30 days of receiving the summons and a further15 day extension may only be granted, that too under compelling circumstancesto after recording the reasons in writing by the Tribunal. It has been further provided that the DRTsshall make every effort to complete the entire proceedings in two hearings and shall issue the recovery certificate within 30 days of completion of hearing. On an application being filed for recovery of debt, the Tribunal shall issue summons to the defendant directing it to disclose the properties other than those identified by the applicant-bank or financial institution and in case the same is not disclosed by the defendant, civil imprisonment has been prescribed.

Furthermore, the amended Act provides that till the pendency of a recovery application, the defendant be restrained from transferring assets, except in the ordinary course of business,but not without the prior approval of the Tribunal over which security has been created in favour of the applicant or where the value of the secured assets in not sufficient to satisfy the debt, other assets specified by the applicant or such other assets as disclosed to the Tribunal.

The amended Act makes requirement of deposit mandatory for grant of stay and right to appeal. Under the amended Act, an order of grant of stay on recovery under a recovery certificate may be granted, only if the borrower makes a upfront payment of 25 % and gives an unconditional undertaking to pay the balance within a reasonable time and furthermore 50 % of the debt under the recovery certificate will have to be deposited for making an appeal against the order of the Recovery Officer.

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 is a welcome change for the Banks and financial institutions, who are presently knee-deep in financial crisis due to large number of accounts being in default. The amendment Act, aiming towards streamlining procedures shall be greathelp in expeditious disposal of recovery cases by the DRTs, who are already over-burdened due to large number of pending cases. However, only time will tell, if the amendment to the security interest and recovery laws actually meet its objectives and vision and help debt-recoveries recover.

We now await the Notification by Central Government of this new Act.