The borrowers have at times connived with unsecured creditors encouraging them to initiate liquidation proceedings under the Companies Act or with the Labour Unions to take up their cause in the Labour Courts. The Courts immediately issue a stay order restraining the FIs / banks from take over or sale / disposal of the assets of the company. This can be expected under the Ordinance as the borrower himself cannot go into appeal unless he first deposits 75 per cent of the dues with the Court.
Excise and Sales Tax Authorities are also known to act in a similar manner. Legally speaking, even after takeover of the secured assets by the FIs/Banks, the borrowing company does remain in existence and continues to be liable to honour the liabilities of all its unsecured creditors including import Duty, Electricity Charges, Excise Duty, Sales Tax, Wages etc. Nonetheless, such creditors frustrate the efforts of the FIs/ banks to complete the sale of the secured assets.
There are certain peculiar problems in certain specific industries, where they require Industrial License or specific Government Approvals or special rights like Mining Lease etc. these approvals are obtained in the name of the borrowing company. When the FIs/banks takeover and sell the assets, the purchaser is unable to put them to use until he once again obtains similar approvals. Which may or may not be coming forth in the desirable time frame. As the assets without the corresponding license, approval or rights have no economic value, the license and the approvals must be bundled along with the secured assets under a specific provision of law.
FIs / banks are taking over the secured assets only. These assets are sought to be sold to recover their dues. Excess recovery, if any, from the sale proceeds belongs to the company as the company continues to be in existence. The dues being claimed by the unsecured creditors, the labour, customs, excise, sales tax, electricity boards and local authorities are all recoverable from the company. They have no right on the secured assets. However, their position and monopoly gives them the power to dictate. They insist on clearance of their dues to facilitate or restore operations at the same site. If the dues are small, the purchaser often negotiates a settlement with these authorities. No purchaser would like to purchase productive assets and then go into litigation aganist a financial demand they are not obliged to pay. This leaves the FIs / banks saddled with assets that cannot be sold for extraneous reasons.
Some States have recognized this practical difficulty and have issued notifications to these to these authorities not to recover such dues from the purchaser. Recently, the Rajasthan Government has taken a bold initiative and has made available to the purchaser: - the unutilized benefit of Sales Tax Exemption / Deferment Scheme, - that he will not be required to make payment of outstanding dues of various Departments of the State Government including electricity, commercial tax, state excise, land and building tax, etc. Further, the Departments will be provided necessary registration and other facilities to the purchaser as per the prevailing rules.
In order to ensure that the FIs / banks are successful in takeover and sale of the secured assets, the Government must make suitable amendments under the provisions of Section 40 of the Ordinance. Some of the provisions, which may be required to be incorporated before the Ordinance becomes an Act, are as under:
No Courts shall entertain any frivolous litigation by the unsecured creditors or workers of the company in respect of their dues. The company and its directors will be personally liable for the payment of such dues.
The dues on account of import duty, excise, sales tax, electricity, water, etc are the dues payable by the company and not by the purchaser. Such Authorities must take recourse for the recovery of their dues against the borrowing company. Further, the Authorities must co-operate and expedite re-connection and restoration of facilities and services to the purchaser.
Various Industrial Licenses, Approvals and Specific Permissions like Mining Lease etc shall go with the assets of the company i.e. once the FIs / banks, takes over the assets of the borrowers such approvals shall automatically vest in the FIs / banks, who, in turn, shall have the right to assign the same to the prospective Purchaser. The defaulting borrowing company shall stand divested of all such Licenses Approvals and Special Permissions when it is divested of the related secured assets.
The related intangible assets such as Patents, Brands, Goodwill etc, if any, shall be deemed to be transferred to the FIs / banks and the defaulting borrowing company shall have no right, title or interest in such assets once they are divested of the related secured assets.
In the case of housing facility at site, the local land authorities must agree, facilitate and expedite bifurcation of the land into separate plots to enable segregation of the production and the housing facilities. Creation of a separate access to the housing facility, if necessary, must also be permitted.