The Hindu Business Line : Recovery in fits and starts

WITHIN a couple of years of its passing, amendments have been made to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESI). A similarly long-sounding Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Ordinance 2004 has been issued ostensibly with a view to implement the suggestions of the apex court in the Mardia Chemicals case.

The amendments

The amendments are functional and minimal. Defaulting borrowers would have to deposit at least 50 per cent of the decreed amount upfront if they prefer an appeal to the Debts Recovery Appellate Tribunal (DRAT) against orders of the Debt Recovery Tribunals (DRTs). The DRT has been given power to reduce the upfront payment to a maximum of 25 per cent of the decreed amount.

The Government has prescribed 120 days of the application being filed as the time limit for the DRT to adjudicate on the case. At the end of this period, the borrower can get into the act by filing an appeal before the DRAT if the DRT maintains a stoic silence on the issue at the end of the four-month period.

In a prudent move, the Ordinance empowers the DRAT to transfer all cases pending before various DRTs to a single DRT to centralise and speeden up matters. Since banks and financial institutions took over a lot of assets and were finding it difficult to proceed logically in a few cases, the Ordinance empowers the to them take over the management of the errant company. The RBI has also been empowered to call for periodic returns and information.

Delay tactics

Mardia Chemicals was successful in stalling implementation of the radical changes proposed in the original SARFESI ordinance for more than a year. Since the decision of the Supreme Court, banks/FIs are busy implementing the Ordinance to get whatever they can out of the errant borrowers. Their haste is justified since Basel-II norms are only within handshaking distance and banks need to take a hard look at their NPA portfolio. The Ordinance has had a positive effect on the NPAs of banks. To get maximum value out of the Ordinance, banks should ask for some more powers.

An escape route

A good majority of the sick companies that have earned the ill-reputation of being a non-performing asset, end up in the cosy arms of the Board for Industrial and Financial Reconstruction. Once there, they draw a reference to the provisions of SICA, which state that no one can touch them. This is further justified by a ruling of the Chennai High Court in the TTJ Industries case.

TTJ owed money to banks, which promptly issued the notices under SARFESI to the company. Banks had, however, already filed a case before the DRT and the company was also registered with the BIFR. Since the borrower had given a residential house property as collateral, the logical conclusion of any swift move by the bank would have been that he would have had to stay outside the house and not inside it.

The Chennai High Court ruled that when DRT-BIFR are involved, it would not be appropriate to pursue action under SARFESI. All that the defaulting borrowers have to do would be to get themselves registered with the BIFR to escape SARFESI. With the BIFR itself on the verge of sickness, this provides an escape route to errant borrowers to stay in peace for 4-5 years.

Single body needed

In State Bank of India & Ors.vs Pro. O.L of Volvo Steel Ltd (2004 49 II CC 297), the Gujarat High Court rejected the contention of Volvo Steel that just because the DRT had passed an order appointing the Official Liquidator as the provisional liquidator of the company, action under SARFESI cannot be taken.

The Gujarat High Court took solace from the Andhra Pradesh High Court decision in Pennar Patterson Ltd vs State Bank of Hyderabad 2001 (106 Comp Cases 338) and that of the Supreme Court in Mardia Chemicals vs Union Bank of India (2002 39 SCL 897). An errant borrower unsuccessfully attempted to convert a writ court into a fact finding court in Ravindra Agarwal vs Bank of India (2004 49 II 295).

Basic facts, such as whether the borrower had cleared his dues or not, came up before the Madhya Pradesh High Court in the above case. To avoid such cases, it may not be a bad idea to insert provisions for restructuring/rehabilitating companies in SARFESI itself. A single body that attempts to restructure a unit or else dispose of the assets would appear to be more effective than three different bodies working in different directions and attempting a joint effort with the efflux of time.

(The author is a Hyderabad-based chartered accountant.)

More Stories on : Non-Performing Assets | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A review act

There's a shared stake in arresting managerial diversion

IS security is no overhead

Can over-confidence trip Lalu Prasad?

Laughter in the House

Complexities of monetary policy-making

Recovery in fits and starts

Society and development

Fiscal management