CHAPTER III

ENFORCEMENT OF SECURITY INTEREST

13. (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.

(4) In case the borrower fails to discharge his liability in full within the period speci-fied in sub-section (2), the secured creditor may take recourse to one or more of the follow-ing measures to recover his secured debt, namely:-

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

(6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.

(7) Where any action has been taken against a borrower under the provisions of sub-section (4) all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956:

Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-l of 1956. section (1) of section 529 of the Companies Act, 1956, may retain the sale proceeds of his secured assets after depositing the workmen`s dues with the liquidator in accordance with the provisions of section 529 A of that Act:

Provided also that the liquidator referred to in the second proviso shall intimate the secured creditor the workmen`s dues in accordance with the provisions of section 529A of 1956 of the Companies Act, 1956 and in case such workmen`s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen`s dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:

Provided also that in case the secured creditor deposits the estimated amount of workmen`s dues, such creditor shall be liable to pay the balance of the workmen`s dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen`s dues, if any.

Explanation.-For the purposes of this sub-section,-

(a) "record date" means the date agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding on such date;

(b) "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

Chief Metro-politan Magis-trate or District Magistrate to assist secured creditor in tak-ing possession of secured asset.

Manner and effect of take over of management.

(11) Without prejudice to the rights conferred on the secured creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act.

(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.

14. (1) Where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him-

(a) take possession of such asset and documents relating thereto; and
(b) forward such asset and documents to the secured creditor.

(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.

(3) No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.

The Act as it is framed will hit the worker hard. BIFR (Board for Industrial and Financial Reconstruction), to which the loss making enterprises are referred, gives some hope for revival of the units and thus continuation of the jobs. This option seems to have been closed completely through the Act. Thus the bank or financial institution will gain at the cost of the workers.

Another serious drawback is denial of any opportunity to the workers for presenting their views before the Debt Recovery Tribunal (DRT). These terrific lacunae will severely hurt the interests of the workers. In short, the Act will take away whatever little protection is available at present in concerns which are loosing financially

According to the report of the Reserve Bank of India, employers were responsible for the sickness of 98% of about 2,70,000 enterprises, labour being concerned only with 2%. A similar observation was also made by BIFR.

Therefore, the government should immediately amend the Act and the succeeding bill to be presented to the Parliament with a view to protect the interest of the workers. Whatever the financial situation of an enterprise all efforts should be made to operate the unit profitably, for which, the workers will, I am confident, extend all cooperation. The workers` dues should be the first liability, if, unfortunately, the unit is sought to be closed.

Shanti G Patel

Ex-mayor of Mumbai, Ex-Member of Parliament

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is diametrically opposite to the SICA in intent and purpose. The Act is to bring amendment to Section 15 of the SICA, that after the commencement of the Act, no reference shall be made to BIFR; and after the commencement of the Act, where reference is pending before the BIFR, such reference shall abate if the secured creditors, representing not less than three fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measures to recover their secured debt under sub-section (4) of section 13 of the Act.

With the above amendments to SICA, BIFR will not be relevant anymore and the secured creditor can do whatever he deems fit. In other words, all the pending cases (as of July 2002, about 1500 cases) affecting over 15 lakhs workers will be done away with, causing serious difficulties and distress to the affected workers and naturally in turn to their families.

This Act, a prelude to the company law amendment bill placed before the Parliament, helps to achieve a task mandated to wind up sick companies as against revival / rehabilitation of sick companies and protection of workers interest. In effect, the sick industries would be sent to mortuaries instead of nursing homes.

Therefore, we oppose the Act as this is only meant to protect the interests of the secured creditors and not the workers.

H Mahadevan

Deputy General Secretary, AITUC

The Act is designed to solve the problem of NPA of banks and financial institutions through a fast track recovery mechanism. It dispenses with the principle of equitable distribution of money realised through sales of property and de-links the process of recovery of banks and FI`s debt from the winding up process, in which all the assets are subjected to pari- passu charge in favour of workmen, as secured creditors. As a result, there is a major derogation of procedural rights that the workmen have acquired in the winding up process. Transparent and enforceable right of information exists for workmen in relation to the Official Liquidator under the chapter V of the Companies Act, 1956. These procedural rights are eliminated in the Act. The Act allows the acquisition of assets, valuation of assets and sales without any right of access to information, of monitoring the process and intervention to enforce the workers` interest and public policy.

The Act facilitates the recovery of the bank`s and FI`s debts expeditiously by selling the properties of a company given as securities for financial assistance, outside the process of liquidation and "without the intervention of court or tribunal". Further, the de-linking of recovery of debts of banks and FIs from the winding up process means faster and immediate realization of their debts but not earlier or immediate realization of the workers` dues, which will remain subject to the existing winding up procedure. The difference in time period of recovery of dues between workers and institutional debts will lead to further devaluation of the money in the workers` hands. With the FI`s interest separated from the winding up process, the liquidation process will loose its major stakeholder and as a result the procedure itself will become slower and longer.

The Act also enmeshes the workmen in more legal complexity. The Act entitles the liquidator to represent the interest of workmen`s dues in the proceedings under the Act. This assumes that the liquidator will fairly and properly represent the interest of the workers. In reality this is not the case. So it will open another level of litigation to ensure fair and proper representation by the liquidator, leading to further delay and increase in cost of recovery. More important, it takes away the right of workers to represent in a matter, where it`s interest is vital, in a manner and through a representative it can freely decide and be confident of.

Earlier the workers were a part of the class of secured creditors that had equal rights. The Act in essence separates the security interest of the institutional creditors and elevates it to a higher level, for direct realization, through procedural rights. As a consequence, the workers security interests are scaled down in priority and the procedural rights are lowered, making it more indirect. This will result in downgrading the substantive right of workers security interest upon the company assets almost to a level of nullity.

This is more pronounced, and so clear, in the case of recovery of debt before the winding up. The Act is framed with the objective to allow and enable recovery of debts even before the liquidation proceeding comes into existence. This will make the Chapter V of Companies Act, 1956, and so the provisions of section 529, 529-A and 530 non -applicable.

The issue of workers` security interest over the property that is intended to be sold for recovery of security creditors debt, in case (i) where sales may lead to closure of the company, and (ii) where such sales liquidate all or substantial physical assets of the company without liquidating the company through a winding up procedure, is still to be settled in law.

The Act instead of resolving these legal issues, sanctions the sale of physical assets for recovery of debts in a pre-winding up phase, evading the issue of workers` security interest over such assets. It allows for restructuring of business and the cleaning up of the financial system without burdening it with the liability of securing the workers` dues. The government wants to wash its hands of the responsibility of ensuring workers` dues locked up in industrial economics.

The last point is concerned with public policy. More than Rs 1,10,000 crores debt is locked as Non Performing Assets. Many studies have shown that it is a result of corporate mis-management and malfeasance and dereliction of responsibility, if not outright collusion, on the part of the financial managers. The whole process of securitisation, if funded directly or indirectly from the national budget, will mean nationalization of private debt. This is not acceptable. If the corporate world has benefited from the malfeasance and converted public money into private capital then the corporate world should pay for cleaning up the financial system. The cost of securitisation and financial reconstruction should be financed through taxation of the corporations, may be through a special surcharge on the basis of the companies` bank debt.

If there is a positive aspect to this Act it is the provision for takeover of management in the event of default and debt becoming NPA. It is a belated recognition of the fact that the NPA has a correlation with the mis-management and malfeasance and any resolution of this problem requires the elimination of such management practice and their practitioners. Such power existed in the loan agreements but was never exercised. The Act provides for a legislative power over and above the contractual rights. Yet, more important, this power will have to be exercised by the government. So, the actions of the government to deal with corporate mis-management and malfeasance will come under the scrutiny of parliament and become an issue of public policy and debate.

Yet, it is precisely this provision that is being opposed by the business as and they have demanded its deletion. That speaks for the shallowness of corporate ethics. The capitalists want no regulation, no risk for mis-management, no corporate accountability for outright cheating and malfeasance. The fear is that the government may buckle under the business pressure but may not even consider the serious issue of workers` security interest. The bias against the workers and people is evident and will become more so with the evolution of the Act, with passage of time.

The trade union movement needs to struggle and campaign for:

1.      Securitisation of workers` dues and procedural right of workers in the recovery proceedings.

2.      Adequate and efficient institutional mechanism for fast and transparent winding up proceedings under the Companies Act.

3.      The cost of securitisation of debts and financial reconstruction to be financed by surcharge tax on the corporations.

4.      Retention of powers of management takeover for dealing with NPAs.

Ashim K Roy

Chemcial Workers Panchayat

The strategic retreat of the state in favour of capital after the globalisation in 1991, has enabled the capital, to progress more and pursue its agenda. Before 1991, poverty was considered, a result of social factor and society was responsible for every individual. Now, after the marketisation of society and concretisation of market relations, the individuals are responsible for their poverty and ignorance. The Society has become more dependent on the market that influences the welfare of the individual. So the fate of labour also depends on the market. This is the new philosophy. The post globalisation era has come up with a tendency to move towards capital and away from labour. In such a scenario, previous labour legislations are considered as obsolete and have resulted in anti labour legislation such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

In India, the business class generates a large amount of black income without declaring the actual profit. Due to the pressure of the management`s personal luxurious expenditure on the company and siphoning out of the profit, from the balance sheet to personal profit the companies become sick. The balance sheet of the company shows loss, so the company is unable to repay the money. To prevent the company from being declared sick and falling into disrepute, the financial institutions and the banks try to recover their money. So a law, a mechanism to recover their money was brought in, and the fate of the labour was left out.

This kind of a law if implemented would mean that the companies will close down and the labour will be unemployed. There has to be a way, a law and a strict move made to hold the management accountable for the losses of the company and for the black money they have siphoned out. It will prevent the companies from becoming sick and then the labours` interest will be protected.

Finally labour has to become more conscious and prevent black income from being generated by the management. The accountants, the auditors and many of the workers are aware of it. To prevent the company from being declared sick, the workers must participate in this public task, in their own interest. Tomorrow`s sickness will mean loss of their jobs. This consciousness has to come in the workers. So, not just this Act alone but a whole package is required, to check the black income generation of a company to and make the management accountable for the losses. The present package is very pro-capital.

(Based on the discussions with Arun Kumar, Chairperson, CESP,SSS, JNU)