Amendments to Debt Recovery Laws: Impact of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2013

In Depth

Amendments to Debt Recovery Laws: Impact of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2013

Purti Marwaha | May 2013

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act) was enacted with the objective to counter the slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions.

The Securitisation Act empowered the banks and financial institutions either directly or through an asset reconstruction and securitisation companies (which were brought into existence in terms of the Securitisation Act) to acquire the physical assets of the defaulting borrowers without interference of the judicial / quasi judicial authorities in the event of the borrower failing to make the payments.

The enactment is now a decade old and it has achieved some positive results in the nature of secured creditors getting the armour in their hands to recover their debts without inordinate delay. However, to overcome the shortcomings in the principal enactment and to resolve the issues faced by the secured creditors to recover their debts, a need was felt to amend the Securitisation Act.

Accordingly, the Securitisation Act has now been amended in terms of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012, with effect from 3rd January 2013, which has not only strengthened the hands of the secured creditors to liquidate their dues expeditiously but also brought in certain procedural variances to the principal enactment.

The Amendment Act deals with a series of amendments both substantive and procedural; however, the amendments, which will have a material impact in the recovery process, are being elucidated in this article.

CONVERSION OF ANY PORTION OF DEBT INTO SHARES/EQUITY OF THE DEFAULTING COMPANY

Section 9 of the principal enactment has been amended by insertion of Section 9(g), which inter alia provides for conversion of any portion of debt into shares/equity of the defaulting company.
This amendment is expected to bring in a remarkable change in the principal enactment as the secured creditors will now have an option to take a meaningful participatory role in the management of the defaulting company by becoming the shareholders of the defaulting borrower company.
It shall strengthen the existing provisions of Section 13(4)(b) of the Securitisation Act, which provided for takeover of management and business control of the defaulting company by the secured creditor(s). Earlier, in the absence of such a power to acquire the shareholding of the defaulting company, the secured creditors were not able exercise the power in a meaningful way. It is now perceived that the right to management control coupled with the acquisition of shares will facilitate the secured creditor(s) to play effective role in the company.

AMENDMENT TO SECTION 13(9)

Consent of 3/4th of the secured creditors for taking an action under the Securitisation Act has been reduced to 60%: Another consequence of far reaching nature is the amendment to Section 13(9) of the Securitisation Act and the explanation thereto, whereby the consent of 3/4th of the secured creditors for taking an action under the Securitisation Act has been reduced to 60%.
It favours the creditors who intend to proceed under the Securitisation Act and is in line with the purpose of the Securitisation Act.
This amendment is expected to result in substantial increase in the number of acquisitions through the securitisation route.
The reduction in percentage of the consenting creditors to take an action under the Securitisation Act will enable secured creditors having lesser exposure in value to also take an action under the Securitisation Act despite some of the significant percentage of secured creditors opposing the action.
This amendment will exert enhanced pressure on the borrowers and may result in the borrowers coming to the negotiating table at a faster pace.

AMENDMENT TO SECTION 13 BY INTRODUCTION OF CLAUSES 5A, 5B AND 5C

Further, the amendment to Section 13 by introduction of Clauses 5A, 5B and 5C have also changed the dynamics of the Securitisation Act as it is now expected that

The secured creditors may themselves bid for the immovable property at any subsequent sale in the event of the earlier sale being postponed for want of a bid amount higher than the reserve price and also enables the secured creditors to adjust their claims in the process.
This amendment is likely to bring liquidity and settlement of debts and would remedy a situation prior to the said enactment that if the assets could not be sold despite acquisition, the secured creditors remained remediless in recovering the dues.
However, the steps as entailed in the newly inserted clauses shall be taken more proactively by the securitisation and asset reconstruction companies as compared to the banks and financial institutions.
It can be said that the recent amendments are aimed at speedy recovery and has shifted the balance heavily in favour of the secured creditors, which can be to the detriment of genuine borrowers who are not willful or habitual defaulters. However, the true intent and purpose of the Securitisation Act can be achieved only if the provisions of these amendments are applied in its correct and meaningful perspective.