The Hindu Business Line : NPA chase with millstones tied

IT IS a well-known fact that companies do sometimes deliberately avoid registration and banks are either blissfully unaware of the default or choose to turn a blind eye on a default. The provisions of Part V of the Companies Act apply to modifications of the charges as much as their original registration. If default is made in filing the necessary particulars for registration of a charge or of any modification to it, Section 142 requires imposition of penalties on the company and in certain circumstances on its concerned officers.

Section 141 enables rectification of the register of charges through the Company Law Board/Tribunal in certain circumstances and subject to certain conditions.

The law should be amended to require the immediate submission to the Registrar of attested or notarised copies of loan agreements to be registered in due course within 30 days.

A maximum of seven days should be allowed for such intimation of charge through the filing of the copies of the relevant documents so that the `secured' creditors will know whether they are exposed to any risk by the debtor, within a few days.

Since the creditor is the party likely to be adversely affected by non-registration of a charge, the duty of registration may be discharged with more alacrity and promptitude by the creditor than the company. The expenses that registration may entail as also interest or penalty for default may, however, be required to be borne by the company. This is as true of the Central Registry under the Security Interest Act as of the registration of charges under the Act.

It is to be borne in mind that a bank is not a charitable institution. As long as it is run on business lines, it has to enforce its securities and realise its dues, so that others in need of loans do not suffer for want of adequate liquid resources in the bank. Whether the default of the debtor is wilful or in circumstances beyond his control is irrelevant from the point of view of the bank.

Subrogation of the `security interest' from banks to a new `securitisation company', specially constituted for that purpose, is bound to make `enforcements' of dues more mechanical and ruthless and less susceptible to influences, pressures, and predilections.

The Government should not merely gear the enforcement machinery suitably and make it more efficient but also have thorough analysis made of the existing load of arrears of dues to the banks. There should be no illusions about the limits of possibility in reducing the arrears through the Security Interest Act. Not only unsecured debts but also secured debts which cannot be treated as `non-performing assets' are outside its ambit. Whatever debts are capable of realisation will be recovered by the banks themselves in the ordinary course of their business.

The extraordinary powers available under the Security Interest Act can be invoked only in regard to "an asset or account of a borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classifications issued by the Reserve Bank [Section 2(i)(o)].

Desperate remedies can be applied only to bad cases. How much can one realistically hope to salvage out of doubtful or bad debts? One incidental by-product of this kind of focus on doubtful debts is that areas of action which have been neglected due to sheer inertia in a bank's establishment will get the glare of publicity and, therefore, the banks will have to give them the maximum possible attention — more share of their programme of action than they have so far received. As a consequence, debtors who have been indifferent to their obligations and who are capable of meeting such obligations with some exertion, will pay up. We can safely assume that borderline cases will be cleared satisfactorily.

As for cases which are beyond redemption, it is too much to believe that securitisation companies will achieve any spectacular success where banks have failed. Banks have been notoriously harder, stricter and more punctilious in small cases than in big ones where the stakes are higher for a variety of reasons.

The securitisation and reconstruction companies will have a challenging task — not breathing life into debtors without means of livelihood which will be beyond their competence or call of duty, but recovering as much money as possible from those who have outwitted the banks, having frittered away all the borrowed funds directly or indirectly by diverting them to foolhardy projects, chasing wild cats or wilder geese, with or without the banks' knowledge.

High Court writ jurisdiction

There is no justification for assuming that there will be no legal road blocks in the way of the administration of the Security Interest Act, despite Section 34 ruling out exercise of their jurisdiction by civil courts. The Gujarat High Court has dismissed a large number of writ applications filed before it challenging the vires of the Act.

While upholding the constitutional validity of the various provisions of the Security Interest Act, the High Court has pointed out that the court will not entertain any petition disputing the action of the secured creditor under sub-section (4) of Section 13, only if the action is not perverse on the face of it or it does not lead to any absurd result or situation which cannot be remedied by the forum provided under Section 17 or 18 read with the powers under Section 19 or there is no inherent lack of right/power with the secured creditor — Apex Electricals Ltd vs ICICI Bank Ltd (2003 57 CLA 278).

Rejecting the contention that banks which are not nationalised or financial institutions for which there is no deep and pervasive control of the Government are not amenable to the jurisdiction of the court under article 226 of the Constitution of India, the High Court observed thus: "When any person, may be statutory body, having deep and pervasive control by the Government or may be other class of secured creditors covered within the meaning of financial institutions, is exercising statutory rights and powers for enforcement of security, it would fall within the scope of power of this court under article 226 of the Constitution of India."

There may be similar rulings from the other High Courts till all vexing questions are set at rest by the Supreme Court. Litigation is, therefore, inevitable for the present.

(Concluded)

(By arrangement with Corporate Law Adviser, New Delhi.)

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