The Road To Recovery

Updated: Jul 30 2002, 05:30am hrs
Self-financing is an obsolete concept in any liberalised economy. Historically, even the feudal society was dependent on the local mahajan for meeting deadlines of revenue collections and deposits. Folklore is replete with tales of avarice of this community; the reverse is true of today and tomorrow. Inspite of collaterals, cross guarantees etc, loan repayment remains an elusive phenomenon. This has been sought to be resolved by various legislations, the most recent being the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002, now a bill.

This ordinance/bill provides a two-prong formula for recovery of dues. In the first place, a lot of importance has been attached to the concepts of non-performing asset and asset reconstruction and securitisation, by creating a new category of companies. Behind the media hype, it appears that these companies are only debt collectors, to whom the banks and financial institutions can assign their debts. The companies will be entitled to take recovery measures which a bank or FI can also exercise, as provided in Section 13(4) of the Bill. For banks in the red, it means a clean balance sheet by passing on the buck.

Asset reconstruction has been defined to mean acquisition by the companies of the rights and interests of any bank or FI for realisation of the financial assistance rendered by them. Securitisation means the acquisition of financial assets by such a company from any originator, ie, owner, of the asset for the purpose of securitisation or reconstruction as the case may be. The bottomline is that the companies are really debt collectors, given sweeping powers which were so far exercised by debt recovery tribunals and civil courts and were not available to the debt recovery department of the lenders themselves.

Interestingly, under Section 13(4) of the Bill, the same measures may be taken by a secured creditor which definition includes the concerned bank(s) or FI(s) or a consortium thereof and could include the companies. The rights of a secured creditor against the borrower include the right to take possession of the secured assets, the right to transfer such assets by way of lease, assignment or sale for realisation of dues, takeover of the management of the secured assets, and appointing a manager for possession and management thereof. Under Section 29 of the State Financial Corporation Act, SFCs were already vested with similar powers in respect of industrial units, in case of default by the debtor.

There have been several decisions under Sec 29 which uphold the lenders right to resort to this speedy recovery mechanism without going though the court process. The courts have narrowed down the scope of judicial intervention except in instances of statutory violation or malafides. Yet the recovery rate has been far from effective. The additional dimension in the current legislation is extension of these powers to all banks and FIs without recourse to the legal process. But while Section 5(4) provides for saving of pending proceedings, Section 13(2) of the Bill doesnt make it clear whether the enforcement of rights under it precludes a creditor from filing a claim before the DRT. In fact, the impression conveyed is that of redundancy of the Tribunal.

The enforceability aspect is also unclear. Section 14 requires proper elaboration to provide for all possible situations and consequences and also certain defences. Surely, the cases for sale of hypothecated goods and that of takeover of management cannot be judged by the same benchmark. The specific situation should not be left to the discretion of the enforcement agency. The section on offences is general and does not make any distinction between borrowers and officers of the company/secured creditors. Finally, in the absence of rules defining and detailing the extent of the powers exercisable by the bank or companys officers, the required machinery for effective implementation of the legislation is lacking. The ordinance as it stands and the proposed Bill, without proper support mechanisms, is a damp squib.

The author is a corporate lawyer and partner in Khaitan & Khaitan, a Delhi law firm