CAIIB BRBL Module C Unit 6 : Enforcement Of Security Interest

01/11/2023

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CAIIB Paper 4 BRBL Module C Unit 6 : Enforcement Of Security Interest (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Enforcement Of Security Interest”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module C (IMPORTANT ACTS/LAWS & LEGAL ASPECTS OF BANKING OPERATIONS – PART B) Unit 6 : Enforcement Of Security Interest, Aspirants must go through this article to better understand the topic, Enforcement Of Security Interest and practice using our Online Mock Test Series to strengthen their knowledge of Enforcement Of Security Interest. Unit 6 : Enforcement Of Security Interest

Enforcement Of Security Interest

Under the SARFAESI Act a secured creditor can enforce the security interest created in his favor without the intervention of the Court or Tribunal. This power given to the secured creditor, has an overriding effect over the provisions related to mortgage in the Transfer of Property Act, 1882, as in that Act Court intervention is required.
Section 13(2) of the SARFAESI Act speaks about the notice to be given by the secured creditors to the borrower, who has defaulted in making the repayment and whose account is classified as NPA. The notice should be given asking the borrower to discharge in full his liabilities to the secured creditors within sixty days from the date of notice.
The notice should give the details of the amount payable by the borrower and the secured asset intended to be enforced by the secured creditor in the event of non-payment of secured debt by the borrower.
Though the requirement for classification as NPA is a precondition for serving of the notice as per Section 13(2), such a requirement is dispensed with in case of secured debt raised by borrowers through debt securities as per amendment to Section 13 (2).
If the borrower on receipt of the notice under Section 13(2) from the secured creditor makes any representation or raises any objection, the reasons for overriding the objections of the borrower must be communicated to him by the secured creditor within 15 days of the receipt of such representation.
While directing that the reasons for the rejection must be conveyed to the borrower, the Supreme Court has clarified that the communication to the borrower giving the reasons for not accepting the objections of the borrower does not give an occasion to resort to any proceedings.

If the borrower does not pay in full as per the notice such non-payment by the borrower gives the secured creditor right to take recourse to one or more of the following measures to recover his secured debt:

Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for the realisation of money from the secured asset.
Takeover the management of the secured asset of the borrower
Appoint any person as manager to manage the security assets, the possession of which has been taken over by the secured creditor.

If the borrower pays the entire dues, costs charges and expenses incurred by the creditor at any time before the date fixed for sale or transfer, the secured creditor shall not sell or transfer the secured asset and no further steps shall be taken for sale or transfer.
In cases of joint finance or consortium finance by two or more secured creditors, no secured creditor can take any action of taking possession of secured asset, unless exercise of such right is agreed upon by the secured creditors representing not less than 60% in value of the outstanding dues on the record date.

In case the borrower is a company under winding up process, the dues payable to the workmen have pari passu charge with the secured creditors as provided in Sections 325 and 326 of the Companies Act, 2013.
When the borrower receives the notice from the creditor under Section 13(2), the borrower shall not transfer by way of sale, lease or otherwise, other than in the ordinary course of business, any of his secured assets referred to in the notice without prior written consent of the secured creditor. Non-compliance with this provision attracts penal provisions under the SARFAESI Act that provides for punishment of imprisonment of one year or fine or both.
The authorized officer is authorized to issue the sale certificate. Such a certificate is conveyance of immoveable property and requires stamping, as may be required under the relevant State laws.
Section 13(5A), (5B) and 5(C) allows a Secured Creditor to itself buy the immoveable property of a borrower, subject to certain terms and conditions. As per these sections” (5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorized by the secured creditor in this behalf, to bid for the immovable property on behalf of the secured creditor at any subsequent sale.

Chief Metropolitan Magistrate Or District Magistrate’s Assistance For Taking Possession Of Secured Asset

When the secured creditor is required to take possession or control of the secured asset or when the secured asset is required to be sold or transferred under the provisions of the SARFAESI Act, the secured creditor can take the help of the Chief Metropolitan Magistrate or the District Magistrate or any officer authorized by the Chief Metropolitan Magistrate or District Magistrate.
On such request being made the Chief Metropolitan Magistrate or the District Magistrate or authorized officer, as the case may be, shall take possession of the security asset and documents relating thereto and forward such asset and documents to the secured creditor. DM/CMM/ authorized officer has to pass order for taking possession of the secured assets within 30 days

Manner And Effect Of Take Over Of Management

When the secured creditor/Asset Reconstruction Company takes over the management of business of a borrower, he may publish a notice in a newspaper published in the English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated.
On publication of such a notice, the directors of the company, immediately before the publication of the notice, shall be deemed to have vacated their offices. As an effect of this, any management contract between the borrower and any directors or manager thereof shall be deemed to be terminated.
On publication of the above said notice and then after the appointments of directors or administrators as stated above, all the property and effects of the business of borrower are deemed to be in the custody of the directors or the administrators so appointed, as the case may be. They are empowered to take such steps as may be necessary to take into their custody or under their control all the property, effect and actionable claims to which the borrower is entitled.

Where the management of the business of a borrower which is a company as defined in the Companies Act, 1956, is taken over by the secured creditor, then following effects shall apply:

The shareholders of the company can not lawfully appoint any person to be a director of the company.
No resolution passed by the shareholders of the company shall be given effect to, unless approved by the secured creditor.
No proceeding for the winding up of such company or for the appointment of a receiver for the company shall lie in any Court, except with the consent of the secured creditor.

Application Against Measures To Recover Secured Debt

Any person, including the borrower, aggrieved by any of the measures taken by the secured creditor or his authorized officer for taking possession of the security may make an application along with the prescribed fees, to the Debts Recovery Tribunal having jurisdiction within forty-five days from the date on which such measures are taken.

If the Debts Recovery Tribunal declares the recourse taken by a secured creditor, is not in accordance with the provisions of this Act. person, it may, by order,—

Declare the recourse to any one or more measures taken by the secured creditor as invalid
Restore the possession of secured assets or management of secured assets to the borrower; and
Pass such other direction as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor.

The Debts Recovery Tribunal has to dispose of the application, in accordance with the provisions of the recovery of debts due to Banks and Financial Institutions Act. The application has to be disposed of as early as possible, but within sixty days.

The delay should not be beyond four months from the date of filing of the application. If any such application is not disposed of within four months, the aggrieved party can prefer an application to the Appellate Tribunal for seeking directions for the early disposal of the application.

Appeal To Appellate Authority

Any person aggrieved by any order made by the debts recovery tribunal can prefer an appeal along with the prescribed fees to the Appellate Tribunal within thirty days from the date of receipt of the order of debts recovery tribunal.
No appeal can lie unless the borrower deposits fifty per cent of the debt claimed by the secured creditor. The tribunal has powers for reasons to be recorded, to reduce this amount to twenty- five per cent of the claim amount

Right Of The Borrower For Compensation And Costs

If the debt recovery tribunal or the appellate tribunal

Holds that the possession of secured asset by the secured creditor is not in accordance with the provisions of the Act or Rules framed thereunder and
Directs the secured creditor or any other aggrieved person, who has filed the application or appeal, to return the secured asset to the borrower, then such borrower shall be entitled to payment of such compensation and costs as may be determined by the tribunal or the appellate tribunal.

No pecuniary limit is fixed by the Act for filing application under Section 17 or filing appeal under Section 18. Therefore, application before DRT and appeal before the DRAT against the actions initiated by the secured creditors under Section 13(4), would be normally accepted in all legally valid cases irrespective of amount.

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CAIIB 4 Module C Unit 6-Enforcement Of Security Interest ( Ambitious_Baba )