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| M J Antony: Insecure creditors | | A new SC decision seems to undo efforts made to cut short debt recovery procedure |
| M J Antony / New Delhi Jul 29, 2009, 00:38 IST |
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Law-makers have been racking their brains in recent years to reduce the hurdles in debt recovery. Their last attempt was the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act). The main object of the law was to enable a secured creditor to enforce his right in the case of non-performing assets without the intervention of the court or tribunal. It was thought that it would be easier if the tribunals were kept at arm’s length. But it would seem that the law has tied more knots in recovery proceedings than before.
In a judgment delivered two weeks ago, the Supreme Court has declared that the action taken by the secured creditor, according to the Act, is open to scrutiny by the debt recovery tribunal (DRT). “The action taken by the secured creditor can not only be set aside but even the status quo ante can be restored by the tribunal.” (Indian Overseas Bank vs Ashok Saw Mill).
Intervention by the courts and the tribunal has resulted in seven years of litigation in this case. The borrower and the creditor have used several legal stratagems in all the legal forums, till the creditor lost in the Supreme Court. The judgment seems to undo much of the impact of the laws passed to cut short the debt recovery procedure. The 2002 Act was substantially amended two years after its enactment to overcome certain difficulties brought about by a Supreme Court judgment (Mardia Chemicals vs Union of India, 2004). After the present blow, the main players like banks and financial institutions are likely to call for another look at the law.
The two crucial provisions are in Chapter III of the Act. Section 13 deals with enforcement of security interest. According to it, where any borrower makes default in repayment and his account in respect of such debt is classified by the secured creditor as non-performing asset, the latter can issue notice to the borrower to discharge his liabilities within 60 days.
If the borrower fails to do so, the creditor has several options. He can take possession of the secured assets, including the right to transfer by way of lease, assignment or sale for realising the debt. He can also take over the management of the secured assets of the borrower. These are wide powers, and there is no mention of court’s intervention in this section. But Section 17 operates as a check on misuse of the powers conferred on the creditors and to prevent prejudice to the case of the borrower.
This latter provision confers a right of appeal to the borrower to move the DRT within 45 days of creditor’s action. The intention of Parliament, says the Supreme Court, is clear. “While the banks and FIs have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting the DRT with authority after conducting adjudication into the matter to declare any such action invalid and also to restore possession even though possession may have been made over to the transferee.”
Thus the DRT is clearly vested with the power to question the action taken by the secured creditor and the transactions entered into with third parties like the purchaser of the auctioned property. The tribunal can even set aside the transactions, including sale, and restore possession of assets to the borrower in appropriate cases. Earlier, there seems to have been certain doubts about the power of the tribunal in this respect. The Madras and Bombay high courts had given contrary judgments. But the Supreme Court said that after the 2004 amendment to the law, there is no room for such differences. The tribunal indeed has power to intervene even after the take-over or sale of the assets by the creditor.
The consequence is that the recovery steps taken by the creditors will again be bogged down by litigation at several levels. The present Indian Overseas Bank case itself is an example. The parties have been playing the cat and mouse game since 2002 with ample support from the legal profession. The twists and turns over the years are too numerous to be recalled. The Recovery of Debts due to Banks and Financial Institutions Act 1993, which took away the jurisdiction of civil courts and vested the powers in a special tribunal was found to be inadequate in the past and the new law was passed to further overcome the snags.
However, the new SARFAESI Act also seems to be slipping slowly in the slough of despondency.
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