(u) The borrowers are entitled for the above exhaustive and perfect approach on account of highest possible powers donated to the creditor for the simple reason as to when the powers are high, the standard of duty is also correspondingly high. The approach has to be more cautious due to obvious smell of partisan and biased approach of the DRTs towards the alleged secured creditors.

(2) Concepts and Law relating to ‘Possession’ and ‘Ownership’ particularly with reference to the Securitisation Act:- 

The borrowers must study the concepts and law relating to ‘Possession’ and ‘Ownership’ particularly with reference to the Securitisation Act. Our views  are as under:-

(a)     Any good book on ‘Jurisprudence’ i.e. Science of Law has separate chapters on ‘Possession’ and ‘Ownership’

(b)    Even separate books are available on these two important topics.

(c)     Concept of ‘Possession’ is multi-faceted and multi-dimensional. Possession may be ‘constructive’, ‘permissive’, ‘symbolic’, ‘prescriptive’, and ‘adverse’. In law possession means a capacity of a person having such control on property that he legally enjoy it to the exclusion of others having no better right than himself.

(d)    Possession has also the effect of creating ownership either by obtaining control by the user and possession for a length of time prescribed by law which is technically known as prescription.

(e)     In the legal sense, the term ‘ownership’ carries the connotation of right over a thing to the exclusion of all other persons. It implies non-interference by others in the exercise of that right and must be distinguished from mere holding a thing in one’s possession. Normally the ownership implies the right to possess, the right to use, the right to manage, the right to the capital and right to income.

(f)      When these concepts are specifically applied to the matters being dealt with under the Securitisation Act, the actions under Sec 13(4) can only be initiated when there is ‘Debt Due’ and all efforts to ‘Revive and Rehabilitate’ have failed. Further notice for ‘Symbolic Possession’ with advertisement will be the cause of action to approach to DRT by an application (akin to a civil suit) under Sec 17 of the Act. Consequently till the said suit is finally decided, the physical possession and ownership of the alleged secured assets of the borrower can not be disturbed.

Bank officials were to be arrested, bail refused by sessions as well as High Court, Supreme Court in its order dated 07.12.07 asks them to report to Police Investigating Officer on 09.12.07 & interrogation to be carried out continuously for 5 days and as and when necessary thereafter :- Seven Bank Officials of a Cooperative Bank in Mumbai were to be arrested for investigation in the matter of SARFAESI Act proceedings pertaining to Wings Entertainment Ltd., one of our clients in Mumbai. The anticipatory bail application of the said bank officials was rejected by Sessions Judge on 21.11.07. The High Court Mumbai in its order of 26.11.07 confirmed the said order of the court below vide proceedings in the matter of Jayant A. Joshi & others vs State of Maharashtra, Criminal Application no 3825 of 2007. The said officials have appealed to Supreme Court. In the hearing held on 7th December '07, the Supreme Court has asked the said officials to report to the police on 09.12.07 and interrogation is to be carried on continuously for 5 days and as and when needed thereafter. The investigation report is to be submitted to the Supreme Court on 07.01.08 for the hearing to be held on 08.01.08.   

Strategy & Advice for Borrowers and Guarantors

in respect of

Notice under securitisation / securitization act

Purchase of NPAs by ARCIL and Counter-claims against the sellers:- The asset reconstruction companies like ARCIL are buying NPAs from the financial institutions and banks on average price of 24% and then they will sell at higher price. On the other hand the ARCIL will contest cases in DRTs for 100% claims with future interest. Such intended recoveries and earnings are much more exorbitant than the Pathans and Village money lenders. Hence it is all the more necessary to file counter-claims against ARCIL for the wrong doings of the lenders who should also be made parties. We have full expertize to prepare such counter-claims.  

DRTs, DRT solutions, Debts NPA Recovery Tribunal, DRTs matters, DRTs WS, DRTs Legal Opinions, DRTs Arguments, DRTs Documents, Appellate DRTs, Bank litigations, securitisation / securitization, Counter-claims etc.

Counter-claim is the only defence for the borrowers against Notice under Securitisation Act and or Original Application under the DRT Act:- Under the present provisions of law, the only legal defence for the borrowers is Counter-claim giving quantum of loss and damages suffered due to wrong doings of the lenders. The pleadings must be prepared by a person having mastery of facts and mastery of law. The documents such as project report, application for financial assistance, loan sanction letters, correspondence, balance sheets, annual reports need to be referred to properly keeping in view the law of pleadings, law of torts, law of damages, principles of natural justice, equity and good conscience. If you are unable to get such pleadings prepared, our professional services may be utilized. With our drafting of pleadings, you get additional advantage of expert advice during course of litigation from beginning to end. Since our clients are from all parts of the country and due to our focussed attention, you get complete and exhaustive guidance. All our clients are having upper hand over the lenders. In many cases the lenders have come forward to waive total interest and settle at fraction of the principal amount. In one of the cases the proposal of the lender is to waive the total claim provided the borrower withdraws the damage claim, which the borrower has declined.

Counter-claim must be prepared much in advance of the Notice under Securitisation Act or filing of the Original Application under the DRT Act:- The counter-claim or damage suit must be prepared much in advance of the recovery action initiated by the lender. The most appropriate stage is as soon as the lender declares the unit as NPA. The said counter-claim or damage suit must be ready before the lender issued Notice under Securitisation Act or files Original Application is filed by the lender in DRT. With such advance action only, the counter-claim or the damage suit will attain proper quality standards from legal considerations. As soon as the legal Notice from the lender under Securitisation or DRT Act is received the said counter-claim or damage suit is updated and filed before expiry of the Notice Period. Since prima facie there is no debt due, the lender can not take any action for the possession of the assets till the litigation pertaining to the said counter-claim or damage suit is decided by the court of law. Even if any attempt is made by the lender to take possession, the property can not be sold. Further steps in the DRT should be as outlined in the next para. 

Winning bank litigations in DRT:- The first step is perfect pleadings drafted by a person having mastery of facts and mastery of law. The borrower must setup his counter-claim in money value based on law of damages and law of torts. In almost all the cases, the counter-claim is much more than the claim of the lender. These are the condition precedents before commencement of litigation in DRT. The next important step is thorough preparation of the case by the borrower as well as his advocate much in advance of the commencement of the trial in DRT. The borrower and his advocate must prepare at least 7 days before the date. In case the counter-claim has been drafted by us, the outcome of the said preparation must be discussed with us on phone so that our guidance is also available prior to the date. The proceedings on the date must be properly recorded in the DRT. All the relevant facts must be obtained much before the arguments and through preparation must be made. No arguments be held at any stage till all the facts are discovered. Long dates should be resisted. With proper alertness and vigilance by the borrower who must work in unison with his advocate in advance will ensure winning bank litigations in DRTs. It must be understood that the battle is long drawn, time consuming and expensive. Even after winning in DRT, the borrower and his advocate will have to work hard in facing the appeals in ADRT, High Courts and Supreme Court. If the pleadings are drafted by us, we provide all guidance from DRT to Supreme Court.  

The Supreme Court rules that simultaneous proceedings under Securitisation Act and DRT Act are valid:- This ruling was given by a Bench comprising Justices Arijit Pasayat and S H Kapadia in its 86-page judgment favouring dual remedy for banks and FIs. Sarfaesi Act is treated as an additional remedy, which is not inconsistent with the DRT Act," said Justice Pasayat. "Sarfaesi Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Therefore, we hold that withdrawal of proceedings pending before the DRT is not a pre-condition for taking recourse to Sarfaesi Act."

With such change in law, the Government will again have to amend the DRT Act 1993. The only remedy left is counter-claim or damage suits against the banks and financial institutions. Wherever the damages are more than the claim of the lenders, the executory actions under Securitisation or DRT Act will have to wait till the damages are finally decided. Since 2001 we have emphasized all the aspects of filing of counter-claim or damage suits against the lenders as this is the only remedy for the borrowers and guarantors facing recovery actions.

The said judgment of the Supreme Court in the matter of M/s Transcore vs Government of India and another, Civil Appeal No 3228 of 2006 decided on 29.11.06 can be seen by clicking the link SC Judgment on DRT, Securitisation, Transcore

The above Supreme Court Judgment and our Comments:-

(1) In almost all the cases, the facts are same in both the proceedings viz DRT and Securitisation. (2) Hence the defence is also same in both the proceedings. The counter-claim or damage suit will also be same. (3) The litigant borrowers and guarantors should prepare exhaustive pleadings giving full facts, law and damages based on law of torts and law of damages. The person who is preparing the pleadings must have mastery over banking, finance and law. Since we possess this expertise, our help may be taken. (4) In almost all the cases, we have found that the loss and damages are more than the claim of the lenders, the cases must be fought properly. (5) It is observed that the lenders are unable to tender proper replies and hence they must be called to witness box and cross examination conducted till the admit the wrong doings. (6) With such approach only, one can win in DRT

Securitisation Act and Precautions for the Borrowers and Gurantors:- The following are important precautions:-

(1) After borrowing, the problems arise if there are difficulties in payment of interest or installments. Under such situation, efforts must be made to record all the dealings with the lenders in writing. If  possible, obtain copies of all the documents signed by you.

DRAT Mumbai stays taking physical possession under Securitisation Act in appeal under sec 17:- The DRAT Mumbai in its order dated 02.08.06 in the matter of Maze Plastics vs Bharat Co-operative Bank Ltd awarded ad interim stay on taking physical possession of the properties including residential flat subject to pre-deposit of Rs. 20 lacs as against alleged dues of more than Rs. 75 lacs. The said pre-deposit shall be invested in FDR in the name of Registrar DRAT, Mumbai until disposal of appeal.    

Our Client wins against Bank, DRT Mumbai declares possession of factory illegal under Securitisation act:- in the matter of M/s Aarti Cables vs Bharat Co-operative Bank, the PO DRT Mumbai passed an important judgment on 16.09.05 against the bank declaring the possession of the factory under Securitisation Act as illegal. 

Simultaneous NPA Recovery action under DRT Act and Securitisation Act barred:- As per the recent amendment in DRT Act, the banks will have to first withdraw the case before DRT in order to initiate action under the Securitisation Act vide news item titled 'Banks seek amendment to debt Recovery act of 1993' in the Financial Express dated 11th January 2005. Our following comments appear in the Financial Express below the said news item:-

Bank NPA Recovery and Defence

The bankers have been aiming at and pursuing route to easy NPA Recovery. This is simply not possible due to our Constitution which is one ot the best in the world. As per the latest provisions, the bankers will have to withdraw from DRT before initiating action under Securitisation Act. Once they withdraw, they can not go back to DRT in future. Even if they withdraw the counter-claim, if any, of the borrower will continue. After withdrawing from DRT, if they proceed under Securitisation, the NPA Recovery action will have to wait till the counter-claim is decided. The bankers are in a fix. At the most they can resort to Securitisation Act only in respect of the new cases. In that eventuality they will have to abide by the provisions of law laid down by the Supreme court in the matter of Mardia Chemicals. Thus what ever way the bankers proceed, the NPA Recovery is not easy. The best route to NPA Recovery is to help the borrower to run his business profitabily and all other routes are difficult. - Ram Kishan on behalf of www.drtsolutions.com

Bombay High Court rules in Borrower's favour in respect of Notice under Securitisation Act- On 6th Sept. '04, the Bombay High Court ruled in favour of the Borrowers in respect of three writ petitions relating to Notice under the Securitisation Act. The bank did not attend properly to the objections raised by the borrowers. The Court asked the bank to issue fresh notices.

DRT rules in Borrower's favour, asks Bank to pay Damages- Vide news item at page 8 of the ET dated 17.07.04 with the title "It's a first, DRT rules in borrower's favour, asks bank to pay damages"  This news item is also available on internet ET edition. In what may be a disappointment to the banking sector, the debts Recovery tribunal (DRT) has ruled in favour of the borrower under the new NPA Recovery law, and has even directed the lender to pay damages for the number of days the property was attached. This is the first time under the securitisation / securitization Act that a bank has lost a case against a borrower. The case gains significance as banks looked to the securitisation / securitization Act as a route to quick NPA Recovery of bad loans. The bank has been asked by DRT Mumbai to return the secured property back with per day damages as well as cost of the appeal. This is an important judgment upholding our contentions past several years and also propounded in this web site. The award and fear of damages for the wrong doings of the banks and the financial institutions alone can usher in requisite level of responsibility and accountability. Then only proper financing would be done in time and in adequate amount keeping in view the requirements of business and industry, the same would be nursed promptly during incipient sickness, financial help would be provided during such situations and circumstances beyond the control of the entrepreneurs etc. All such measures will result in definite surplus generation in the business and there will be definite NPA Recovery which is the only and the best NPA Recovery much compared with the litigation route which does not result in virtually any NPA Recovery except legal fights.  

Cooperative Banks and not Societies are covered under Securitisation Act- The Department of Economic Affairs of the Central Govt. has already issued a notification no SO 105(E) dated 28.01.03 extending applicability of the Securitisation Act to the Cooperative Banks. The Bombay High Court also decided accordingly in the case of Shamrao Vithal Cooperative Bank Ltd. vs Star Glass Works [2003] Mah LJ 1. The societies are not covered under the Securitisation Act.

Important Questions and our Answers in respect of securitisation / securitization Act- A leading Financial Association of the country has asked 6 important questions and desired to publish the answers in form of our interview. The said 6 questions and answers are given below. The visitors and readers my interact by sending e-mails to us:-

Question No (1):- Section 17 of the securitisation / securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, 2002, which required borrowers to deposit 75% of the dues to appeal in court, has been quashed. Do you think now there is a scope for defaulters to misuse the relaxations and flood the court with cases?

Our Answer The Supreme Court has dealt with legality of the said deposit in detail and has rightly quashed it. It is an essential assumption and desired pre-requisite that the readers have gone through and have understood the relevant contentions of the Supreme Court. Easy approach to court of law to redress grievances is foundation of democratic society. Flooding of the cases, if that be so, is a sign of vibrant and developing democracy. It is a well known fact that the bureaucracy in lending banks and financial institutions particularly in public domain is highly conservative, averse to responsibility and accountability, can not take any risk which many a times is needed in dynamic business environment, its officials pass the buck to either lower or higher level, tends to take group decisions to avoid individual accountability and responsibility, such group decisions entail huge amount of time which no business process can sustain etc. etc. All such weaknesses, defaults and wrongdoings will now be highlighted in the said appeal along with the counterclaim for the loss and damages suffered by the business. As regards misuse by the defaulters, huge deposit can not be the permissible remedy or deterrent in democratic set up. Resolution of the grievances of the borrowers is by way of proper legal fight only. Most of the said lenders unfortunately are as weak litigants as weak financiers. The legal fight by the borrowers will force the other side to improve its strengths. It is unpalatable reality that the required strength can only be attained by way of privatization of the financial sector which is long overdue. The flood of the litigations, if that be so, will also ultimately improve judicial process and its competency as well as its efficiency.   

Question No (2):- What do you think is the likely impact of rescinding of Sec.17 on the overall Non Performing Assets (NPAs in NPA Recovery of the banks?

Our Answer There will be salutary impact on the NPAs and NPA Recovery of the banks due to rescinding of the sec. 17 of the securitisation / securitization Act. The wrong doings of the banks and the financial institutions will be presented and revealed before the judiciary and hence the bankers will be forced to arrive at mutual settlements due to counter-claims. Such exposure of the banks will also force them to amend their approach in future and thus it would minimize the future NPAs and NPA Recovery. Further side benefits would be that the judiciary in DRTs will become more knowledgeable, competent and efficient due to larger number of such litigations. The black sheep among the borrowers will also be located and punished. 

Question No (3):- One of the major objectives of the Act, was to productively deploy assets worth thousands of crores of rupees in sick assets at a fast pace. However, one of major problems of Sarfaesi Act is delays, due to court stays in a particular case. How can this problem be overcome and matters be expedited? 

Our Answer Before suggesting any solution, the underlying realities and historical facts, circumstances and consequences need to be understood and related actions taken. In most of the sick industrial units it is observed that the major cause of sickness is due to external factors which are beyond the control of the entrepreneur. In our country there is no ‘no fault’ insurance. We have not yet enacted ‘Lenders’ Liability’ Bill though it was to be done along with the securitisation / securitization Act. The lender banks and the financial institutions, in most of the cases, instead of helping in nursing and rehabilitation, wrongly apply pressure for NPA Recovery. The entrepreneur is left with no options but first to fend himself and his dependents. His such act is highlighted and termed as diversion of funds, willful defaulting etc, Further the statutory and mandatory RBI Guidelines in existence since 1976 are openly flouted by the lending banks and financial institutions. Ultimately the matter lands in court of law. Earlier the civil suits used to take years and decades. The correct approach should have been to improve the efficiency of the judicial system in the civil court instead of creating DRTs. The judicial system needed to utilize modern Information Technology. Adequate numbers of judges should have been  appointed. The system of training of the judges needed to be evolved. Instead, separate courts like DRTs were created and new statutes like DRT Act 1993 were enacted. Such an approach without fundamental corrections was bound to fail. Similar approach continued by enacting another piece of legislation in form of securitisation / securitization Act 2002. It was destined to meet the same fate as the DRT Act 1993. The advocates, judges and the judicial systems are same except the statutes. All wrong doings of the lending banks and financial institutions will now be brought out in quicker process and earlier time frame. It is well known that the administrative machinery in the banks and financial institutions can not match the fighting spirit of the industrial and business community. Above all our country has one of the best constitutions in the world. Unfortunately it is so comprehensive that it has become the paradise for the legal community to cause delay as one of the means of defense. In this context again, the judges and advocates dealing with DRTs cases need to be trained in proper understanding of the facts relating to banking, industrial finance etc. Assuming that all such preliminary and pre-requisite infrastructure has been created and evolved properly, there will not be any problem as posed by this question. Till such time, the existing state of affairs will continue. It is submitted that how so ever serious problems of NPA Recovery may be but no short cuts in the judicial system can be devised by way of legislation as it would be struck down on the touchstone of our constitution when agitated before the Supreme Court of India. In fact, it reflects on the agency which drafted such defective legislation or the legislative body like the parliament which passed it or on the President of India who approved it. In view of all these factors, there is no such isolated solution for the problem posed in this question and it is outcome of deficiencies of the system as a whole. It is needless to mention that the industrial finance involves complex facts adjudication of which definitely will take time and mere emphasis on NPA Recovery alone will not result in quicker NPA Recovery of alleged debts. The DRT Act 1993 has cut down the adjudication process to some extent but the execution through DRT Act 1993 or securitisation / securitization Act 2002 will be highly time consuming due to the basic reality that generation of the funds was the only desirable source of NPA Recovery rather than the sale of securities in case industrial finance which distinctly differs from personal finance. Unfortunately the age old principles of NPA Recovery of personal finance are being wrongly applied for NPA Recovery of debts involving industrial finance. For detailed elaboration and clarification of these concepts, the readers are advised to visit our web site www.drtsolutions.com as space of this interview column is too small to deal with such important topic in an appropriate manner. 

Question No (4):- As per the Act, secured creditors are given the right to take over management of the defaulting companies or take possession of the mortgage assets of loan defaulters. Don’t you think this clause has to be reworked as it is tilting towards the lenders?

Our Answer Any right presumes and as well as is based on corresponding duty. The more serious is the impact of certain right, more responsibility is assigned to the corresponding duty. If the secured creditors have chosen the right for extreme step of taking over the management of the company or possession of the mortgaged assets, the standard of their duties is very high. It is well known that the bureaucracy in Indian Public Sector banks and financial institutions is highly inefficient and commits several wrong doings in respect of statutory duties laid down in the RBI Guidelines in existence since 1976. Hence in most of the cases, legally it would be difficult to exercise the said extreme rights of taking over the management or possession of assets. The said clause is similar to sec 29 of the State Financial Corporations Act which is existing since 1951. It is well known that in many cases the SFCs have not been successful in exercising such rights due to failure in their own duties. Hence there is no need for reworking the said clause. We have copied the securitisation / securitization Act from a similar act in USA. But the copying is not complete. We have not enacted the Lenders’ Liability Act which should have been done along with the securitisation / securitization Act. Further in US, the lender and borrower create a third agency with whom trust deed is created, During any dispute, the matter is decided by the said third agency including any action on the mortgaged assets. Such arrangements is more practical than that in our country. Further in US there is wide application of law of torts, The wrong doer, whether borrower or lender, are very much afraid of damages. Hence the bureaucracy is much more accountable and responsible due to fear of damages compared with that in our country. We find that the banks and financial institutions openly violate the statutory RBI Guidelines in existence since 1976. In US, the courts and judicial system has adopted modern IT technology since 1980, which we have just started. Such infrastructure and culture (i.e.. to be afraid of damages before committing any wrong doing) are greater need compared with any amendments in the Act. Another important aspect is emphasis on comprehensive trial at DRTs stage rather than tendency to sort out the matters through writs at the High Court level. With passage of time, the claims of the lenders will be adjudicated upon more comprehensively along with the counterclaims and in that eventuality, the award of damages will usher in requisite level of accountability and responsibility in the banks and financial institutions.  A very recent example of award of damages by the DRTs Court in the matter of securitisation / securitization act against a bank has been reported in the Economic Times, Mumbai dated 17.07.04 at page 8 ‘ …DRTs rules in borrower’s favour, asks bank to pay damages’ In this particular case the DRTs has ruled that the bank should pay the borrower Rs. 500 per day damages from the day of taking possession till handing over the secured property. Besides the bank should pay the borrower the cost of making the appeal. This is just the beginning. Such instances will be going up in future in the litigations relating to DRTs Act and securitisation / securitization Act.  

Question No (5):- 75% deposit called for by the Act was widely criticized by borrowers. Do you recommend a lower percentage? If a deposit is not the best way, in which other way can it be ensured that borrowers do not use the legal framework to block NPA Recovery of loans?

Our Answer The situation has been best described and analyzed by the Supreme Court in its judgment delivered on 8^th April 2004 in respect of Mardia Chemicals. If we consider from practical angles, most of the NPA Recovery litigations relate to sick or closed industrial units. They or even a healthy unit can not have liquid sparable funds to the extent of 75% of alleged dues. They can not raise or procure such funds as all the assets are already mortgaged with the lending banks and financial institutions. Further as also rightly found out by the Supreme Court, the said appeal under the sec 17 of the Act is not an appeal which is a misnomer in this particular case, In fact it is first application of grievance before the judiciary and in such application there can not be any precondition of any deposit. Since at this stage it is not known whether there is any debts due or not, condition of any deposit is baseless and illegal. Hence there is no justification even for any limited or lower deposits. It is a wrong notion that we should restrict the borrowers in approaching the courts with the presumption that they may misuse the legal framework to block NPA Recovery of loans. Greater number of litigation will bring more number of leading judgments and ultimately the cases will come down. Further due to such litigations, lot of problems between the lenders and borrowers will be solved as the analysis and decisions on rights and liabilities between the parties would be contained in the said judgments. All advanced societies welcome greater activity in the arena of judiciary rather than restricting it.         

Question No (6):- As per the Act, if the objections against the action of the lender filed by the borrowers are rejected by the lenders, then the borrowers have no option but to approach the High Court. This clause is more in favor of the lenders. What can be the other options for borrowers? 

Mr. Ram Kishan is an Attorney at Law and Injury Claims based at Indore. He has been handling litigations pertaining to sick industrial units past more than 20 years. Details of his approach and solutions are available at his web site www.drtsolutions.com. He can be approached through his e-mail id ramkishandrt@gmail.com  The borrowers may discuss their cases on M-9691103689 during week days.

Mardia case - DRT extends the stay upto 13th July, Mardia to appeal to DRAT- Vide news item at page 5 of the ET dated 05.07.04. The DRT has extended the stay up to 13th July by which time Mardia has to appeal to ADRAT i.e. Appellate Debts Recovery Tribunal. His case was very strong but the level of judiciary in DRTs in our country has not yet developed to requisite standards and hence the matter has been pushed to higher courts the chain of which starts from ADRAT, High Court and Supreme Court. The case may travel back and forth among these courts till justice has been found. In our view the application of law of torts would have given much greater strength than the promissory estoppel.

RBI Guidelines available from us:- As per law and Supreme Court judgments, the RBI Guidelines are statutory and their violations constitute an important defense for the borrowers and guarantors. We have prepared an useful compilation of the same in various formats viz. subject wise, date wise etc.

securitisation / securitization Act - Govt may plug gaps, DRT Act may also be amended:- Vide news item at page 1 of the Economic Times dated 15.06.04. It is reported that consequent on stay by DRT Ahmedabad in the matter of Mardia Chemicals, the Govt is considering amendment to the securitisation / securitization Act. The Govt is requested to enact the Lenders' Liability Bill along with such amendments. Further there are certain lacunae such as after submission of objections by the borrowers to the notice under securitisation / securitization act, if the same are rejected by the lenders, the borrowers have no option but to approach the High Court. It would be better if the borrower is allowed to approach the DRTs In respect of sick companies, the fees at various stages must be reduced. It appears that the intended amendments, if are not based on justice, equity and good conscience, the matter would again be referred to the Supreme Court.  

Mardia ne maar diya - Vide editorial in the ET dated 03.06.04. The contentions and perception in the editorial are wrong and misplaced. The writer of the said editorial has not studied the Supreme Court judgment properly. It is a pity that in our country, the entrepreneurs have to fight for their legitimate rights because the bureaucracy has upper hand in framing the law as well as in the judicial activities. In developed countries like USA, (vide page 159 of the book Taxmann's Law & Practice Relating to securitisation / securitization & Reconstruction of Financial Assets & Enforcement of Security Interest - by M.R. Umarji, 2nd Edition April 2004) the practice followed is to create mortgage by a trust deed by which the legal title to the property is transferred to a trustee (usually a lawyer) with power of sale in the event of default. This creates an equity as against in our country one of the two parties having dispute if any i.e. the lending bank or FI wields such power. No body is looking to the faults of the banks which are not providing adequate and timely finance to the borrowers when they actually need funds. The only solution is to raise counterclaim against the wrong doings of the lenders under law of torts as proposed in this web site. The bank bureaucracy will become responsible and accountable due to fear of damages. Further the Lenders'  Liability Bill must be enacted without further delay. In fact it was to be done along with the securitisation / securitization Act but the bureaucracy has scuttled it. All these aspects have been ignored in this editorial.  

Mardia gets stay from DRT against Bank - Vide news item at page 1 in the ET dated 2.6.04, the DRTs Ahmedabad has awarded stay against any further action after attachment by ICICI Bank in the matter of notice under securitisation / securitization act. This order is presumably under sec. 17 of the securitisation / securitization act.

SC on Mardia :- (1) Finally the SC has awarded its judgment on 8th April. The judgment is in favour of the Borrowers and Guarantors. The doors for going to court before taking of possession have been restored. The draconian condition of 75% deposit for appeal has been removed. The full text of the judgment is available at www.judis.nic.in As suggested by us long back, the only defence is damage suit or counterclaim which has to be appropriate as suggested in this web site. The average advocates do not have in depth knowledge of banking, business and industrial finance and hence they can not prepare such counterclaim. We can do so because of specialization and long experience. Please speak to us on phone at M-9691103689.

(2) The judgment is, however, incomplete. Several issues have not been touched. Arguments have not been exhaustive. The parties must approach the Supreme Court for Review.

(3) Recent News Items and comments are given below.

(4) Important extracts of the judgment are also given below.

(5) Our suggested strategy for borrowers and guarantors with reference to NPA Recovery at different stages are as under:-

(5a) If you are facing losses in business and are unable to pay interest and installments dues in time i.e. you apprehend that your account is going to be classified as 'NPA', it is a time to plan strategy. The banks will declare your account as NPA just after 90 days. You must use this 90 days time in planning your litigation. You may phone us. We shall help you to plan the said strategy. You need to prepare certain damage suit and writ petition so that the damage suit is filed at appropriate time. The moment bank issues notice under securitisation / securitization Act, the writ may be filed. These actions will prevent the bank in taking further actions. The party will get sufficient time to pay attention to improve the business.

(5b) If you have received notice under the Act, you must immediately contact us on phone. Depending on the facts, we shall advise you for further action.

(5c) If the possession of the unit or management has been taken over by the secured creditor, you have no option but to approach the DRTs. In special circumstances, one may approach the High Court or Civil Court. Please speak to us on phone. Proper damages claim or counterclaim alone can provide suitable action to obtain stay from DRTs.

(6) As stated in this web site, whether you like it or not, you have to fight with the tool of law. With our advice, you can save yourself as well as your business.

securitisation / securitization Act - Court Fee for appeal to DRTs:- The recent imposition of fee vide news item at page 16 of the Economic Times dated 01.06.04 is unreasonable, arbitrary and hence illegal. The underlying principles have been laid down in the above judgment of the Supreme Court. Accordingly the court fee should have same as that for any application i.e. Rs. 250=00 only. At the most, the court fee could have been a nominal amount just like that in an Injunction and Declaratory Suits. The Ministry of Finance is totally wrong if it desires to discourage the borrowers by prescribing a heavy appeal fee. This is against equity, justice and good conscience. The borrowers must file writs against the said imposition of heavy court fee in light of the principles laid down by the Supreme Court.   

securitisation / securitization Act - Writs in respect of Private Banks, Cooperative Banks, Foreign Banks etc. :- The borrowers and guarantors should understand that the writ jurisdiction can not be used against private banks, co-operative banks, foreign banks etc. which are not authorities under the Article 12 of the Constitution. The Supreme Court in its latest judgment dated 08.04.04 has specifically mentioned this aspect in the para 68 of the judgment reproduced below under the para entitled 'Important extract from the SC judgment.

Comments on News Items :-

(1) Article 'Why settle for false teeth?' at editorial page in the Economic Times dated 19.04.04 - extract as under:- A dispassionate reading of the judgment makes it clear that as compared to status quo before the ruling, borrowers have gained. .... Clearly the ruling has blurred the powers given to the banks/FIs under the Act. 

(2) Banks say 'Easier Norms For Appeal Against Seizure Order Will Delay Action'  - 'SC Ruling to hit NPA Recovery, seek stringent laws' :- vide news item dated 19.04.04 published at page 14 of the Economic Times dated 20.04.04. The bankers feel that the Act got diluted with the waiver of a provision requiring defaulters to to deposit 75% of the loan amount. .... the initial fear psychosis would wean away. ....The process of NPA Recovery would be hit since the defaulters are now more free to move courts and there would be roadblocks in the form of "frequent" judicial intervention... Another banker said "big fishes" would now be able to buy more time as the act has become "toothless" with the removal of punitive action.   

(3) No direct attachment of defaulter's assets :SC:- vide news item dated 14.04.04 published at page 16 of the Economic Times dated 15.04.04. after receiving the notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections howsoever brief they may be, must be communicated to the borrower.

(4) The SC has restored the borrower's right to justice:- vide view points reported at Editorial Page of the Economic Times dated 14.04.04  Mr. Mardia stated that the Supreme Court has accepted the borrowers' argument that the concept of lenders' liability cannot be ignored. The Supreme Court has not only restored the borrower's right but also made lenders accountable. By this order the lenders are also liable for any default. Now the real defaulters will be punished whether they are borrowers or lenders. If lenders agree/commit to lend an amount and if they do not lend the full amount as committed and the project fails because of their negligence, carelessness or high-handedness, they will be held responsible by way of lender's liability and the borrower can file a NPA Recovery suit against the lenders.       

(5) Mardia Jubilant:- vide news item dtd 09.04.04  "Mardia to prolong legal battle", Mr. Mardia commented that the closed legal channels for borrowers have now been restored and the securitisation / securitization Act has become toothless,

Our Comments:- Mr. Mardia is perfectly right. He can now expedite his pending damage suit of Rs.5600 crores against the ICICI bank claiming principal amount of Rs. 800 crores. Our view is that Mr. Mardia should have based his damage suit on law of torts instead of promissory estoppel.

(6) Mardia too claims victory :- vide news item dtd 09.04.04  "Mardia too claims victory", Mr. Mardia stated that as a petitioner he had received more than what he was looking for.

Our Comments:- Mr. Mardia is again right. 

Important Extracts from the SC judgment

(1) Extract from para 33 of the SC judgment, dealing with issues to be decided:-

33. Taking an overall view of the rival contention of the parties, we feel the main questions which broadly fall for consideration by us are :

i)          Whether it is open to challenge the statute on the ground that it was not necessary to enact it in the prevailing  background  particularly when another statute was already in operation?

ii)         Whether provisions as contained under Section 13 and 17 of the Act provide adequate and efficacious mechanism to consider and decide the objections/disputes raised by a borrower against the NPA Recovery, particularly in view of bar to approach the civil court under Section 34 of the Act?

iii)        Whether the remedy available under Section 17 of the Act is illusory for the reason it is available only after the action is taken under Section 13(4) of the Act and the appeal would be entertainable only on deposit of 75% of the claim raised in the notice of demand?

iv)        Whether the terms or existing rights under the contract entered into by two private parties could be amended by the provisions of law providing certain powers in one sided manner in favour of one of the parties to the contract?

v)         Whether provision for sale of the properties without intervention of the court under Section 13 of the Act  is akin to the English mortgage and its effect on the scope of the bar of the jurisdiction of the civil court?

vi)        Whether the provisions under Sections 13 and 17(2)  of the Act are unconstitutional on the basis of the parameters laid down in different decisions of this Court?

vii)       Whether the principle of lender's liability has been  absolutely ignored while enacting the Act and its effect? 

(2) Extract from para 34 of the SC judgment, stating that borrowers rights under the constitution can not be ignored:-

34. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy.  But certainly,  what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution.  The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.  

(3) Extract from para 44 of the SC judgment, stating that borrowers objections, if any about dues or in classification of NPA and or NPA Recovery be expeditiously be resolved:- 

44. Nonetheless dues or disputes regarding classification of NPAs should be considered and resolved by some internal mechanism.  In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If there is any difficulty or any objection pointed out by the borrower by means of some appropriate internal mechanism it must be expeditiously resolved.   

(4) Extract from para 45, 46, 47 and 48 of the SC judgment, purpose of 60 days notice and remedies to the borrower to ventilate his grievance:- 

 45. ….we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be  taken under sub-section (4) of Section 13  in case of non-compliance of notice within 60 days.  The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to  the notice. There may be some  meaningful consideration of the objections raised rather than to ritually reject them and  proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them  before proceeding to take measures under sub-section (4) of Section 13.  Such reasons, overruling  the objections of the borrower, must also be communicated to the borrower  by the secured creditor.  It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy……. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give  an occasion to resort to such proceedings which are not permissible under the provisions of the Act.  But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the   secured creditor who intends to resort to harsh steps of taking over the management/business of  viz. secured assets without intervention of the court.  Such  a  person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the  right to know the reason of non- acceptance and of his objections.    It is true, as per the provisions under the Act, he may not be  entitled to challenge the reasons communicated or the likely action of  the secured creditor at that point of  time unless his right to approach the Debts Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken  under sub-section (4) of Section 13 of the Act. 

46. ….it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections,  if raised and before he takes the measures like taking over possession of the secured assets etc.  

47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking  measures under sub-section (4) of Section 13 of the Act.  It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice.  Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act.  

48. The next safeguard available to a secured borrower within the framework of the Act is to approach the Debts Recovery Tribunal under Section 17 of the Act.  Such a right accrues only after measures are taken under sub-section (1) of Section 13 of the Act.   

(5) Extract from para 64 of the SC judgment, holding illegal the 75% deposit along with submission before Debts Recovery Tribunal :- 

64. The condition of pre-deposit in the present case is bad rendering the remedy illusory on the grounds that (i) it is imposed while approaching the adjudicating authority of the first instance, not in appeal,  (ii)there is no determination of the amount due as yet (iii) the secured assets or its management with transferable interest is already taken over and under control of the secured creditor (iv) no special reason for double security in respect of an amount yet to be determined and settled (v) 75% of the amount claimed by no means would be a meager amount (vi) it will leave the borrower in a position where it would not be possible for him to raise any funds to make deposit of 75% of the undetermined demand.  Such conditions are not alone onerous and oppressive but also unreasonable and arbitrary.  Therefore, in our view, sub-section (2) of Section 17 of the Act is unreasonable, arbitrary and violative of Article 14 of the Constitution

(6) Extract from para 68 of the SC judgment, stating that writs does not lie against Private Banks, Co-operative banks, Foreign Banks etc. :- 

68. ...So far remedy under Article 226 of the Constitution of India is concerned, the submission is that it may not always be available since the dispute may be only between two private parties, the banking companies, co-operative Banks or financial institutions, foreign banks, some of them  may not be authorities within the meaning of Article 12 of the Constitution of India against whom a writ petition could be maintainable...

(1) The High Court Gujrat asked Mardia Chemicals to 'To file counter-claim against ICICI bank in DRTs' vide page 6 of the Economic Times dated 13.03.03. 

Our Comments:- This is legal validation of our stand which we have emphasizing on this web site past several months.

claim must be framed and kept ready so that as soon as the notice is received, the counter-claim is filed within 60 days. Please study this web site and in case of any difficulty or clarification contact us on our off. cum res. phones +91-731-4049358, Mobile- 969110-3689 or through e-mail at our ID ramkishandrt@gmail.com
 

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Objections to be raised on the Notice under Securitisation Act 2002

One of our Associate Advocates prepared the following objections on the Notice under Securitisation Act 2002. The bank submitted evasive reply. The case has been filed before the High Court.  The bank is finding it difficult to contest in High Court. The name of the bank and the party, reference to their correspondence etc have not been given due to obvious reasons. The purpose of the illustration is just to show that as to how deeply we should prepare the objections. This approach will give the temporary relief. The real defence is by way of counter-claim.

1.                  At the outset my client states that if the alleged dues which has been totally denied by my clients as stated in your Securitisation notice bearing Ref No       . The alleged debts which is alleged to have been transferred to NPA in 2001 clearly means that its your own admission that all the alleged debts are barred under section 36 of the SARFAESI ACT. Needless to say the relationship between the banking and the customer are governed by article 1 of the law of limitation i.e. three years. Admittedly this notice is bad in law as you have issued the same beyond the period of limitation of three years from the date of transfer of NPA this itself render your notice as bad, null and void and illegal.  

2.                  My clients further states that the notice issued by you is lacking in material contents, particularly with regard to statement of account as to how the amount mentioned against outstanding as on        alongwith interest have been arrived at. It also fails to furnish the correct details with regard to secured assets against which you propose to take action under 13 [4] of the 2002 Act. You may kindly note that in section 13 [3] it is specifically stated that “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”. Without such correct and specific details, you have created a situation in which the company is not in a position to give an effective reply. 

3.         My clients further states that and call upon you to establish an authority given to you to issue this notice under section 13(2) of SARFAESI ACT 2002 as an authorized officer duly authorised by the other consortium banks also to issue this notice dated      as defined under section 2e of the SARFAESI ACT 2002 failing which adverse inference will be drawn u/s. 114G of the Indian Evidence Act that you are not correctly and legally authorised to give the notice  

4.      My clients further states that you have not provided us with a copy of your authorisation for issuing the said notice under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Hence you have no right to take steps under the aforesaid Acts. 

5.                  a.   My clients further states that on pursuing the notice and schedule A of the various loan facilities given by the lead bank        in which it is stated that the NPA of the various facilities which are much more detailed out in Schedule A of the notice and outstanding inclusive of the interest as on      are much more detailed out facilitywise as stated above. This clearly reveals that the interest has been charged and debited to the NPA account which is against the accounting guidelines that you can never charge the interest once the account is transferred to a NPA. This results that the demand in the impugned notice is exorbitant and without the authority of the law which itself renders the notice bad in law as held in DRAT Bombay Bharat Co-op. Bank v/s. Cyril Kotian reported in banking cases

b.      My clients further states that on pursuing the notice and schedule A of the various loan facilities given by the lead bank        in which it is stated that the NPA of the various faculties which is much more detailed out in Schedule B of the notice and outstanding inclusive of the interest as on        are much more detailed out facilitywise as stated above. This clearly reveals that the interest has been charged and debited to the NPA account which is against the accounting guidelines that you can never charge the interest once the account is transferred to a NPA. This results that the demand in the impugned notice is exorbitant and without the authority of the law which itself renders the notice bad in law as held in DRAT    

c.       My clients further states that on pursuing the notice and schedule A of the various loan facilities given by the lead bank        in which it is stated that the NPA of the various faculties which is much more detailed out in Schedule C of the notice and outstanding inclusive of the interest as on        are much more detailed out facilitywise as stated above. This clearly reveals that the interest has been charged and debited to the NPA account which is against the accounting guidelines that you can never charge the interest once the account is transferred to a NPA. This results that the demand in the impugned notice is exorbitant and without the authority of the law which itself renders the notice bad in law as held in DRAT Bombay Bharat Co-op. Bank v/s. Cyril Kotian reported in banking cases    

d.      My clients further states that on pursuing the notice and schedule A of the various loan facilities given by the lead bank        in which it is stated that the NPA of the various faculties which is much more detailed out in Schedule D of the notice and outstanding inclusive of the interest as on      are much more detailed out facilitywise as stated above. This clearly reveals that the interest has been charged and debited to the NPA account which is against the accounting guidelines that you can never charge the interest once the account is transferred to a NPA. This results that the demand in the impugned notice is exorbitant and without the authority of the law which itself renders the notice bad in law as held in DRAT Bombay Bharat Co-op. Bank v/s. Cyril Kotian reported in banking cases    

6.                My clients further calls upon you to produce the proof of service as required under section 3(1) of Security Interest ( Enforcement )Rules 2002 on each and every borrower as defined under section 2(i)(f) under the SARFAESI ACT owe on the person duly authorised to receive the Securitisation notice by the borrower non compliance of this requirements renders your action as bad in law.  

7.                  There is no default on our part and you have wrongly classified the so called debt as a Non Performing asset. You have even not mentioned the date on which you classified the account as NPA on notice given to guarantors     . We therefore hereby call upon you to furnish to us the directions and the guidelines that of the Reserve Bank of India that you claim to have followed. We deny the correctness of the balances due that your claim in respect of the accounts of the Company. We deny that the interest calculation and the rate thereof and the method of calculating the same are correct and binding on us. We deny that an amount as shown in your notice and or any amount or interest at the rate of     % charged by        Bank,    % charged by    Bank,   % charged by the    Bank and   % charged by    Bank Ltd per annum either simple or compounded as claimed is due from us or any of us as claimed. 

8.         We strongly object that you have classified us as defaulter on page 1 inspite of the fact that (i) you have extended / renewed the working capital facilities at         occasions  i.e on _____________________you have already recovered Rs._____ by way of interest and charges.   

9.         My clients states that the impugned notice bearing Ref No.          dated     is misconceived, bad in law void abinitio and not maintainable in law at all for reasons that the mandatory provision of Sec. 13(3) of the said Act is not at all complied with . Under section 13(3) bank is liable to give full details and particulars of its dues. You have not complied with the said mandatory provision hence on this ground alone your said impugned notice is misconceived, bad in law hence you should withdraw your such illegal impugned notice forthwith. 

10.     My clients  further states that and call upon you  that you can exercise the right when the financial assistance is done by more than one secured creditor. No secured creditor shall be entitled to exercise any  or all of the rights conferred upon him sub section 4 unless exercise of such rights is agreed upon by the secured creditors representing not less than 3/4^th of the value of the amount outstanding on as a record date. You are called upon to establish 3/4^th of the value as on the record date. In is continent to note over here that no details has been provided that how you have satisfied the requirement of section 13(9) especially you have not mentioned the record date as specified in the section. Thus you act is contrary to the SARFAESI ACT which itself render your notice as bad in law.

2.                  My client further state that you have not given the particulars of the security documents executed by the borrower for the various facilities given by the different bank which is much more detailed out in the said notice. Thus the notice is contrary to section 13(3)  to the SARFAESI ACT.

3.                  My client further states that the secured transactions are not registered as contemplated under section 20 of the SARFAESI ACT and calls upon you to furnish the details to the borrowers if you have registered the same with the central registry. Non registration with the central registry means you have not followed the SARFAESI statues i.e. section 20 which renders your notice as bad in law. 

4.                  My clients would like to further draw your attention that you were aware of the fact that the net worth of the company has been gradually wiped out from       and it is in within your knowledge. As it has been clearly seen from the audited balance sheet submitted to you from time to time. You are aware of the fact that the company became sick under the provision of SICA and the same has been reported by the auditor in the auditor report for the period ending       . We call upon you to produce documents to show that what steps has been taken by you as per Reserve Bank of India to rehabilitate the sick unit.  We draw your attention on RBI Circular No.          which is mandatory and statutory for you to follow that. What steps you have taken for rehabilitation when you came to know the incipient sickness. It is clear from the circular that before taking any cohesive steps for recovery all the remedies available for the rehabilitation should be exhausted. Non compliance of the same renders your notice under section 13(2) of the SARFAESI ACT 2002 as bad in law and against the mandate of the RBI directives which is binding upon you.

5.                  My clients further states that they have written a letters requesting you to comply with the circular no.       on Corporate Debt Restructuring System (CDR), which are detailed out below, which has been denied by the lead bank that the said circular is not applicable to Urban Co-op. Banks and therefore they cannot accede their request. Hence my clients has further written to you to restructure the account as per your own guidelines so that they can restart the unit at the earliest which will also facilitate to repay the debts to which you have not replied so far.

The said act is completely unilateral, arbitrary, which itself renders your notice under section 13(2) as bad in law, null, void abinitio for non compliance of the circular. Hereto Annexed mark Exhibit _____ is the copy of letters.

6.                  My Clients further call upon you to disclose the steps taken under Circular No.URB 1801/PK6357C Mantralay Bombay for the One Time Settlement scheme. The said circular was binding upon you. You are called upon to produce the written communication issued under the circular to my client for One Time Settlement Scheme. Non following of the RBI Circulars means your act is arbitrary and violating of principle of natural justice. It will render you notice under section 13(2) as null, void abinitio. My clients further state that they have written a letter dated 24-12-2003 to offer them the benefit under One Time Settlement scheme which you have not replied so far. My client says that you have not followed the mandatory guidelines of the circular mentioned above which is binding upon you in the said act is arbitrary which render your notice under 13(2) bad in law. Hereto Annexed Mark as EXHIBIT is the copy of Circular No.URB 1801/PK6357C of Mantralay Bombay and our letter dated 24-12-2003. 

7.                  My clients further states that you have sanctioned following adhoc limits. 

in which the consent of the guarantors has not been obtained that amounts to the variation in the contract between the principal borrower and the secured creditor with out guarantors consents. Hence all the guarantors including that of secured immovable assets stand discharged under section 133 of the Indian Contract Act.  

8.                  You are well aware that about the characteristic of Industrial Loan as well as standard of duty of care towards such financed units. You are also aware that there have been ups and down in the life cycle of the Industrial Unit. Your bank is also fully aware about responsibilities as laid down in the statutory RBI Guidelines in existence since       which have laid special emphasis on the requirements of SSI units classified as priority sector by the government and RBI. The willful violation of the statutory RBI Guidelines, breach of duty and or care negligence, malfeasance, misfeasance indulged by your Bank has caused huge loss and damages to my clients, which is much more than your claim. Hence there is no debt due under Securitisation Act because of huge counter claim. 

9.                  My Clients say that the surety stand discharged under the various provision of the contract act and further say that the acknowledge given by the principal debtors is not binding on the sureties. 

10.              It may be noted that the company was enjoying market reputation for last around _____ years and have never defaulted with any bank or financial institutions so far. But the bank with its mollified intention has classified the account as non performing asset when it did not qualify for such classification. All this could have been avoided and the company could have functioned normally as it has done for last ______ years if the undue haste would not have been shown by the bank in classifying the company as Non Performing Assets. 

11.              My clients further states that the alleged dues have wrongly been classified as ‘Non Performing Assets’ If the amount of loss and damages due to your wrongful acts is considered, the assets would have never been classified as NPA at all. Hence you have no right to securities and to give notice as given and to seek recourse to the measures under the provisions of the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 

12.              My clients further states that sanctioning the limits beyond the drawing powers as framed by the RBI Directors will amount to fraud on the guarantors it is certain law that the fraud vitiates everything. My clients further states that on pursuing your notice bearing Ref No.      you have classified our account as NPA though it was never NPA and further my clients call upon you to give the detailed working of the various facilities mentioned in the notice given by the different banks including the lead bank forming consortium the basis of working of NPA. A precondition for issuing the notice under section 13(2) of the SARFAESI ACT that the account should be NPA before issuing the notice which itself is not satisfied. Thus your notice under section 13(2) is null, void and bad in law abinitio. 

13.              My clients call upon you to establish that how the NPA have been worked out as per the RBI directives on the date on which the various Banks which is much more detailed out in the notice has transferred to the NPA Account.

23.       The averments made in Notice us 13(2) pages     to borrower and pages       to guarantor are not admitted. It is denied that the Company has defaulted to repay the alleged outstanding dues as detailed or otherwise on page  . It is denied that you as alleged secured creditors are entitled to take recourse under the Securitisation Act or as claimed on page   without interruption of the court or otherwise. The requisitions made in the said page    are illegal and unauthorized and we hereby call upon you not to take any of the actions, measures as threatened on page     

Without prejudice to what is stated herein above we state as under:-             

At the outset, please note that Company has filed a reference with the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies Act, 1985 (“SICA”)  and the same has been duly registered as case No.  . Copy of the said registration was already submitted to you on    however the said copy is once again annexed hereto as    and the Bank has given an undertaking to the Hon’ble High Court in suit no.    passed by the Justice    . where you have given an undertaking that you will abide by the order passed by the Hon’ble BIFR hereafter on the application to BIFR. Hereto Annexed and marked     is the copy of order dated   . In view thereof, kindly inform us as to whether consent of 75% of the secured lenders in terms of the amount outstanding has been obtained before issue of the captioned notice to the Company & if so, kindly forward to us a copy thereof forthwith.   If the consent has not been so obtained, the notice is void abinitio & illegal, since under section 22 of SICA, all proceedings against the Company are stayed.  We deny each and every allegation made in your notice and nothing stated therein shall be deemed to be admitted unless expressly admitted herein. 

24.       The  company is before BIFR therefore any  action taken   while  the  company  is  before  BIFR   is  violative of Sec. 22(1) of SICA and therefore  bad in law and is required to be quashed and set aside. 

25.              It is further submitted that notice under reply makes it very clear that your decision to proceed under 2002 Act, was taken without considering the material facts, more particularly, about chances of revival of the company for which proceedings are pending before the BIFR.  

26.       My clients further states that they have  written letter dated     for the settlement or revival of the liabilities in which you have replied letter dated    that your letter does not make any mention for settlement of liabilities which is very crucial for the bankers. You have not co-operated with my clients for the settlement of your liabilities neither you have shown called upon to give further information for settlement of liabilities that you require. The said act of yours is purely arbitrary, non co-operative attitude and violative of article 14 of the constitution which render your notice under section 13(2) as bad in law, null, void abinitio. Hereto annexed and marked     is the copy of the letters dated   . 

27.       My clients further state that memorandum of the title of deposit date is     for the property situated at  

is not properly stamped and it is not also registered and it cannot be relied upon and it cannot be read as evidence in any judicial proceedings. Hence the notice issued based on this particular documents under section 13(2) of SARFAESI ACT bearing Ref No.    is bad in law, null and void, illegal abinitio. 

28.              My clients say that you have charged the penal interest in your account for which you have not quantified. My clients dispute the account to the effect as it is against the law as laid by Hon’ble Supreme Court judgment in     hence account is incorrect and not as per the laws.

29.              Various promissory notes alleged to be executed for which my client calls upon you to furnish the copy and to give the inspection is under stamped or improperly stamped under the provisions of the Bombay Stamp Act and Indian Stamp Act being the Bill of Exchange cannot be referred and relied upon by you while issuing the notice under section 13(2) of the SARFAESI ACT being inadmissible as an evidence in any Quasi judiciary or judiciary function that it self renders your notice as bad, null and void abinitio. Needless to say this is incurable defect. And it is not executed properly as per the negotiable instrument act.  

30.              My clients further calls upon you to produce the letter of authority as required under section     of the     Act from. 

And also under the relevant provisions of the     Act which is mandatory to be followed. Non following of the same results in non following of the statues which is not permissible in law. Any documents having the signature obtained without proper letter of authority as per the provisions of section    of the   Act and relevant provision of    Act renders the execution of the documents as bad in law and cannot be acted and relied upon while issuing the notice under section of SARFAESI ACT 2002. 

31.              My clients call upon you to produce the Registration of Charges as required u/s.     act,  duly registered with the Registrar of the company. Failing with charges created is bad in law. 

32.              My clients call upon you to produce advice for the interest charged duly acknowledged by us in order to enable us to verify your account. We also call upon you to produce us the acknowledgment signed by us. 

33.       My clients states that they have entered in to an unique correspondence as below for adhoc facilities and for standing the units and for settlement of your liabilities. The details of which is Exhibited  

My clients calls upon you that it is absolutely necessary for you before recalling the advances as per the RBI DIRECTIVE as mentioned in Circular no.     which clearly states that before recalling the advances it was incumbent upon you to follow the RBI directive which are reproduce before you as under for your ready reference.  

My clients calls upon you to show what steps you have taken to rehabilitate the sick unit before recalling the advances. Needless to say RBI directive are binding on you, non compliance of the same renders your action as bad in law and there are to be read as statue  as held in _____ , which itself renders your notice as bad in law since you have not complied with the mandatory guidelines of recalling of the advance a prior procedure was to be followed by you before taking cohesive action under section 13(2). The same reproduced above,. The said cohesive steps taken by you without complying RBI mandatory guidelines before recalling the advances which is binding upon you renders your notice under section 13(2) as bad in law, null, void abinitio for non compliance of the circular.  

34.              My client further states that you have issued a letter dated   bearing Ref No.which you have granted the following

1.            To issue NOC to    to allow to create first charge on fixed assets to be financed by   and second charge on other fixed assets of the company.

2.            To induct   in Consortium..

And on pursuing your notice you have classified the account as NPA as on   . Hence you are granting additional facilities on the same day. Thus your both the acts are contradicting each other i.e. you are transferring to NPA and you are ready to grant NOC for the financial facilities from the other financial institutions. Needless to say the said act of yours is nothing but an arbitrary one as you cannot consent to give the NOC when the assets are classified as NPA to other financial institutions. This clearly reveals that the accounts was never NPA as on    thus the basic condition of the issue and notice is defeated under section 13(2) which itself renders your notice as bad in law, null void abinitio. Hereto Annexed mark as EXHIBIT __is the copy of the letter   .

35.              My client further states that as per the Minutes of the meeting conveyed on   at        and which was attended by person and which was much more detailed out in the said Minutes of meeting. It was clearly observed on page    that the action under Securitisation act is not advisable at this stage as their unit is in a running condition. Also the unit is showing profit in first quarter in the current year as declared in the newspapers and on pursuing your notice you have transferred the same as NPA in   . Thus you are called upon to contradict your own observation that how you have come to the conclusion that the account has been classified as NPA as on    where you, yourself has admitted in the minutes dated   that the action under the Securitisation act is not advisable. This clearly reveals that the account was never NPA as in   as pleaded under section 13(2) of SAFARSEI ACT. Thus you are not allowed to aprobate and reprobate that the account is NPA in 2001 and  account as on    action under Securitisation act is not advisable. You are estopped by the doctrine of the promissory estopple under section   of the Indian Evidence act from contending the contrary. You are requested to give an judicial reasoning for this query raised by the borrower with the due application of mind as laid down in Maradia Chemicals. Hereto Annexed and marked as EXHIBIT __ is letter dated    

36.              My clients further states that they had entered in to a lengthy correspondence which is detailed out as below and also the letters are exhibited which is been duly acknowledged by all the bankers to co-operate for settlement of the insurance claim.  

And my clients was requesting you to release an adhoc facility against the insurance claim for which you have not provided. My clients was providing status of the claim to you regularly but due to inactions, non co-operative attitude for restarting the unit my client has incurred a strong damages which is entitled to claim as set off or counter claim against your alleged dues which is likely to exceed much more than your alleged dues. Hence there is no debt due. This itself renders your notice under section 13(2) as bad in law, null, void abinitio as the counter claim / set off exceeds your alleged dues and there is no debt due at all. . 

37.              My clients further states that they have entered in to a lengthy correspondence as follows and the letters are exhibited ____ to the reply of your notice in which they requested you to permit them to give in exchange the two machinery mentioned in the letters so that they can restart the unit by repairing partially damaged machines for which you have not cooperated.  

Your non co-operation is totally arbitrary, unilateral which renders your notice under section 13(2) as bad in law, null, void abinitio. 

38.              My clients further states that you have not credited the interest in their margin money account for the reason best known to you. Needless to say they are entitled to earn interest at the prevailing   rate during the period which you have not done so for the reasons best known to you. My clients margin a/c.no.is ____. The ledger account of which is Annexed as Exhibit ______ . With this letter it will clearly reveals that you have not credited the interest on the margin money . The said act of your is against the RBI directive, banking law, accounting standards applicable to banks and has denied the interest income unilaterally. Neither you have given credit in the other accounts, the said acts of yours is totally arbitrary, unilateral , against the banking law and RBI directives which renders your notice under 13(2) of the SARFAESI ACT as bad in law.

39.              My clients further states that there was a margin of L/C bearing A/c No.    in which the credit in the margin account is shown to the tune of Rs.  which you have transferred to your various other accounts without any authority of the law and in violation of your sanction letters and without our consent the said act of yours is completely arbitrary. Hence to that extent your demand is exorbitant and hence your notice under 13(2) is bad in law, null and void abinitio. Hereto Annexed mark Exhibit _____ is the copy of A/c No.   for the period   .

40.              My clients further states that as per the certificate issued by you which is exhibited ____ to this letter in which you have credited    and transferred the said amount to the OD A/c.   as on   . It is pertinent to note over here that you have yourself has stated in the demand notice that the said account is NPA. My clients calls upon you to establish the non service of principal amount and interest for unservice for 180 days as per the RBI directives and also as held in the judgement given by   High Court and my clients furthers calls upon you that without the consent of my clients under which authority of the law you have transferred the above mentioned amount in OD   . The said act is unilateral arbitrary and without affording opportunity to my client to rebut the said act and thus violating the principle of natural justice. Hence on this ground only your notice under 13(2) is exorbitant and bad in law, null and void abinitio.

41.              My clients further states that   has demanded Rs.   under working capital term loan bearing interest at   %. My clients call upon you to produce the letter of sanction, disbursement, documents executed to get the said loan. My clients denies that they have received a working capital term loan which has been shown as plant & machinery a/c.no.  . You are called upon to produce all the documents related to sanction and disbursement of the same working capital term loan account. Hereto Annexed and marked Exhibit_____ is the copy of passbook of Plant & Machinery. So your demand in the notice under section 13(2) for Rs.    is exorbitant without authority of law. Hence the said notice under 13(2) is bad in law, null and  void abinitio.

42.              My clients further states that as per the schedule A of the said Notice the   Bank has debited to my clients a bank guarantee worth Rs. . My clients calls upon you to give the complete details to which you have released the payment to the parties, you have paid under the said bank guarantees and if you have not paid under the bank guarantee then how you have debited to my clients Rs.   in violation with out disbursing or releasing the fund under bank guarantee you have debited my client the above mentioned amount which renders your demand exorbitant and without authority of the law. And you are requested to produce the proof if you have given the payment under bank guarantee. My clients further states that they are enclosing herewith the certificate of the following statutory bodies that they have not received the payment under the said bank guarantees and you have falsely debited to my clients without disbursing the amount under the bank guarantee, which is against the banking law. That you are debiting the amount without releasing the fund under bank guarantees.  You are called upon to give a detailed explanation for this. Hereto Annexed and marked Exhibit _____ is the certificate of other bodies. My clients has called upon you on various dates as mentioned below for the renewal of bank guarantee in which you have neither renewed it nor released the payment under the said bank guarantee.  

RENEWAL OF BANK GUARANTEE IN FAVOUR OF   . 

Hereto Annexed and marked Exhibit _____ is the list of correspondence duly acknowledged by you.

43.              My clients further states that they have written a letter dated   to all the Consortium bank to refund the excess interest charged which are much more detailed out in the said letters. You have not replied the same so far. Neither you have not given satisfactory reply. The same has been audited by Chartered Accounts M/s.  bearing registration no. ______. Hence to that extent your demand is exorbitant and you have violated the principle of natural justice by not replying the said letter or by not reversing the excess interest charged which is much more detailed out below.

Hereto annexed Mark Exhibit ____ is the copy of the letters dated to Bankers alongwith the certificate of the Chartered Accountants. 

Hereto annexed Mark Exhibit ____ is the copy of the letters dated to Bankers alongwith the certificate of the Chartered Accountants. 

44.              My clients further states that in the minutes of consortium meeting of    held on  at the   at   AM. in which you have demanded name, address, phone no of the Debtors, so that the bankers can initiate recovery by execution of power of attorney. My clients further states that in the said minutes you have asked my clients not to recover directly from their debtors. In case if my client does so the matter will be viewed very seriously by all the bankers. My clients call upon you that without getting your claim adjudicated by the competent judicial forum, how you can recover and under which authority of law. The said acts of yours is totally without authority of law, arbitrary and you have exceeded your jurisdiction under the banking laws initiating recovery proceedings and asking the debtors to deposit the amount with you and without providing proper opportunity to my  client to rebut your action which amounts to the violation for principle of nature justice, arbitrary, your exceeding your jurisdiction under the banking law without trying to get the recovery without any decree or recovery certificate from the competent judicial forum.

My clients further states that in continuation of para no.  that you have obtained the power of attorney without any authority of law for which now the debtors of the company are not paying directly to my client as you have issued a letter to them asking them to deposit with you the outstanding due. Because of this said arbitrary acts of yours the most of the debtors have become time bar. My clients states that you are responsible for the said loss to the company. Neither you have informed us about the recovery status nor you have allowed us to recover from our debtors which has ultimately resulted as a time bar debt for which you are responsible. Hence because of your said arbitrary action, violation of natural justice and exceeding your jurisdiction under the banking law, you have raised an exorbitant demand which renders your notice under section 13(2) as bad in law, null and void. Hereto Annexed and marked Exhibit is the copy of minutes    

45.              My client further states that and calls upon you to give the detailed explanation by the which in their letter dated  in which you have stated that the account has become NPA from  while on pursing the notice especially the schedule C in which the date of NPA is . You are call upon to answer that why they are contradictory statements with respect to the date of NPA so it clearly specifies that the date as stated in schedule C i.e. NPA since    is not the date of NPA. Thus the said acts of your is totally arbitrary and violative of article 14 of the Constitution which it self renders the notice bad in law, null and void abinitio. Hereto Annexed and marked as EXHIBIT __ is letter dated  .

Note :- The following material existed on this site before the above judgment of the Supreme Court. Now it is only matter of history and record.

Our Comments on securitisation / securitization Act 2002 by

Strategy & Advice for Borrowers and Guarantors

 Important News :- (1) Proceedings of Supreme Court of India on securitisation / securitization in case of Mardia Chemicals :- The arguments are nearly over. The final judgement  of the Supreme Court is expected within a month. In the meantime, the bankers have illegally commenced action under the securitisation / securitization Act. Such wrongful actions can be challenged through writs to be filed in the High Courts and stays obtained.  

(2) Mr. Ram Kishan has written an article captioned 'securitisation / securitization Act - Legislative Analysis & Suggestions' copy of which is available.

(3) The Supreme Court has observed that there are several illegalities in the Act. The process of finalization may take time. The DRTs Act took 9 years.

The High Court Gujrat has asked Mardia Chemicals to 'To file counter-claim against ICICI bank in DRTs' vide page 6 of the Economic Times dated 13.03.03. 

Our Comments:- This is legal validation of our stand which we have emphasizing on this web site past several months.

(2) The borrowers and guarantors need not be afraid of notices under the securitisation / securitization Act. The Financial Express dated 24.03.03 at page 2 in the item captioned 'It Is Not Enough Getting Noticed; NPA Recovery Matters' has reported that more than 10,000 notices involving Rs. 8000 crores have been issued by the bankers but the NPA Recovery has been less than even one per cent. We have been, right from the beginning, have been advising the borrowers and the guarantors not to be worried about such notices but if proper legal defence such as counter-claim is resorted to such coercive NPA Recovery will not be possible.

(3) State Relief Acts in Maharashtra, Gujrat and Rajasthan provide temporary stay against the securitisation / securitization Act vide news item 'Banks to boycott states going easy on defaulters' in the Economic Times dated 11.01.03 at page 1.

Our comments:- Apart from such temporary relief, the best solution is to set up counter-claim for the default committed by the banks and financial institutions under the law of torts as described in this web site.
(4) By 26.11.02, both houses of the parliament had passed the securitisation / securitization Bill. Our comments on the Act are given below. In the present circumstances, there is only two course of action. Either settle or fight legally. For legal fight, the short term measure is questioning of constitutional validity of the Act. The long term measure is by raising the counter-claim in proper form. Our advise is that proper counter-claim must be framed and kept ready so that as soon as the notice is received, the counter-claim is filed within 60 days. Side by side, if possible, the constitutional validity of the Act must be challenged. In most of the cases, both the actions are possible. Please study this web site and in case of any difficulty or clarification contact us on our off. cum res. phones 0731-4049358, Mobile- 9691103689 or through e-mail at our ID ramkishandrt@gmail.com
    (5) As per the interview held with Mr. S.S. Kohli, Chairman and Managing Director, Punjab National Bank published at page no. 2 of the Financial Express dated 18.11.02, the following useful points emerged:-
    (a) The Ordinance, and now the Act,  is ambiguous in respect of cases pending with debts Recovery tribunals (DRTs) or the Board for Industrial and Financial Reconstruction (BIFR) The Act, also does not contemplate parallel proceedings in DRTs and civil courts as well as action under the Act.
    (b) If in respect of a pending proceeding before a DRTs or court, action under the Act is intended to be taken, then the proceedings before the DRTs or court should be withdrawn, and subject to availability of limitation, action under the Act is to be taken.
Our Comments :- If the case is pending in DRTs or BIFR, legally no action can be initiated under the securitisation / securitization Act as two NPA Recovery actions can not be proceeded with simultaneously. The bank will have to withdraw its case from DRTs or BIFR if it desires to initiate any actions under the securitisation / securitization Act. If the party has filed counter-claim, even if the bank has withdrawn the case from DRTs, the action under the Act can not be initiated till the counter-claim is adjudicated upon as the party will not normally withdraw the counter-claim. If the counter-claim is bigger than the bank's claim, no action under the securitisation / securitization Act can be initiated as there is no debts due.
    (c) In cases where reference to BIFR is pending, there are different views as to whether the consent of BIFR is required. 

    (6) Consequent on repromulgation of the said Ordinance, its legal validity was questioned by several Companies in the various High Courts in the country. All the cases have been transferred to the Supreme Court. Now the constitutional validity of the securitisation / securitization Act is under examination by the Supreme Court. Our comments in this page have been very useful for such questioning.

    (7) In the matter of Mardia Chemicals Ltd.,  The bank has taken over the assets and given its management to ITCOT vide pg. 14, The Economic Times 29.11.02. The matter is now pending in the Supreme Court. The Problem and Our Solution is furnished at page 'News and Views'

    (8) The banks and financial institutions have issued over 5000 notices which have now become effective after passing of the Bill by the Parliament. The affected parties have no choice either to settle or fight their counter-claims. 

     (9) Jaipur High Court had granted stay to Modern Group (promoted by H.S. Ranka) for operation of the Ordinance in the matter of writ petition challenging constitutional validity. Mumbai High Court has also granted stay. These stays indicate that prima facie, the Ordinance and now the Act is illegal on account of its obvious inequities, anomalies and contradictions. The battle is going to be long drawn as many parties are competent enough to indulge in litigation till the final verdict of the full bench of the Supreme Court. In the meantime the RBI guidelines issued in Dec. 2002 and reproduced by us in the page 'RBI Guidelines' on 'Lenders' Liability' will strengthen the case of the industries. The forthcoming 'National Law Tribunal' will also affect the litigation. Further the falling equity of the public sector banks and financial institutions will drive them to disinvestment. Above all the counter-claim filed by the borrowers will ultimately defeat the banks and FIs as they have already committed several wrongs. Our legal opinion and counter-claims are bringing lot of relief to the borrowers and guarantors.

(10) The Mardia Chemicals Ltd. The Company had challenged the constitutional validity of the secs. 13 and 34 of the ordinance. The lender can not be judge of its own case. The sweeping powers could result in corruption, despotism, favoritism and biased decisions. The lender's liability had been questioned. Most of the problems arose due to non-disbursement of timely and full sanctioned amount of loan. Such wrongful action affected flow of funds from other consortium members. Further due to waival of recoveries of huge amounts of other borrowers, the conduct of the lender has been iniquitous. The claims are disputed being extravagant or fanciful. The powers are arbitrary and untrammeled. It is learnt that the Company has filed a damage suit against the bank and its officials under promissory estoppel. Recently the Gujrat High Court has decided that the Mardia Chemicals should file counter-claim against the ICICI Bank in DRTs.

Our Comments:- We announced on this page long back that the Company should have filed its counter-claim in DRTs or the counter-suit in the civil court which ever is permissible. The legal defence should have been based on law of torts rather than promissory estoppel.

(11) The IDBI has set up a 10-member cell headed by its executive director to go ahead with action after expiry of the notice period. Some parties are putting up their proposal for settlement. Those whose proposals are not accepted, will have no option but to fight legally. For them, only our approach of counter-claim will provide the relief.

(12) Several parties are ready to question the Act. Side by side they are getting ready with counter-claims to be filed at proper time.

(14) The Union Bank of India issued 300 notices. Hardly a dozen borrowers approached the bank. These were the smaller clients having dues between Rs. 1 to 3 crores. Some parties have obtained stay against the notices. 

(15) The bankers have joined hands and have decided that the action will be initiated by DSC (short for Designated Secured Creditor) which will approach to the DRTs or Court before issue of any notice. Such decisions by the banks indicate that the Act has not been so strong as thought earlier.

(16) As per the news item 'RBI To Move MoF To Make NPA Recovery Ordinance Iron-clad' vide the Financial Express dated 2nd September '02 page 5, the bankers are trying to devise strict rules to take over the properties with least legal interference. If the rules are one sided, they will provide obvious grounds for judicial review resulting in stay during the litigation.

(17) As per the news item 'NPA Law May Not Bring Change In Management, Feel Experts' vide the Financial Express dated 9th September '02 page 3, the threat for take over of management will grow as the the parliament has passed the bill. Only in those cases where there is possibility of easy repayment, the notices were being issued. Banker need clarification about the sections 9 and 13(4) due to difference between take over of the assets and take over of the management of the secured assets. Hence the bankers are playing safe. 

(18) Under such circumstances, for borrowers and guarantors, the counter-claim is the only defence against the said Act.

(19) The Act prescribes the shape of things to come in future and intent of the legislature in respect of assets created with the financial assistance from the banks and the financial institutions along with quick realization in case of default. The Act is highly impractical, contains several anomalies, inequities, contradictions and should be legally challenged. In its present form it can not be applied to existing borrowers and guarantors. If it is to be applied to future borrowers and guarantors, the banks and the financial institutions will have to carry out major changes in their documents which will be very difficult and time consuming. During the intervening period, the only solution is to file counter-claims against the banks and the financial institutions under the law of torts. Those who do not create their legal defence, may be put to unnecessary troubles due to misuse of this Act. At the end of this page, kindly go through further useful comments.

Our comments on various sections of the Act are as under :-

(1)   Sec.2(1)(b) “ asset reconstruction” means acquisition by any securitisation / securitization company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance.”

Comments:- The right or interest will include the counter-claim which will stand transferred to the securitisation / securitization company

(2)   Sec. 2(1)(f) “borrower” means any person who has been granted financial assistance  … or who has given any guarantee or created any mortgage or pledge as security for the financial assistance and includes a person who becomes borrower of a securitisation / securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance.”

Comments:-  borrower can not include guarantor, this will create great anomaly and for existing guarantors it is a material variation from the guarantee agreement. Hence it can not apply to existing guarantors. If this is to be applied to future guarantors, the documents will have to be modified and no person will come forward for tendering guarantee.

(3)   Sec 2(1)(j) “default” means ….in accordance with the directions or guidelines issued by the Reserve Bank.

Comments:- All other RBI Guidelines since 1976 including those on industrial sickness will also apply.

(4)   Sec2(1)(l) “financial asset” means debts, claim, receivables, mortgage, any right or interest in the security, any beneficial interest in the property .. whether such interest is existing, future, accruing, conditional, or contingent, any financial assistance

Comments:- asset will include liability also i.e. counter-claim

(5)   Sec 2(1)(o) “non-performing asset” means ….in accordance with the directions or guidelines issued by the Reserve Bank.

Comments:- All other RBI Guidelines since 1976 including those on industrial sickness will also apply.

(6)   Sec 5(2) “ If the bank or financial institution is a lender in relation to any financial assets acquired  … such securitisation / securitization or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of each bank or financial institution shall vest in such company in relation to such financial assets.

Comments:- In case of counter-claim which if is more than the alleged debts due, there is no debts due and hence the assets can not be taken over by the lender or the proposed securitisation / securitization company and reconstruction company.

(7)   Sec 5(3) All rights and liabilities by the securitisation / securitization company

Comments:- Such liabilities of the securitisation / securitization company will also include the counter-claim.

(8)   Sec 5(4)  “ If on the date of acquisition of financial assets … any suit or appeal  … Is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of sec 15 of SICA, the same shall not abate or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation / securitization or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation / securitization or reconstruction company, as the case may be.

Comments:- counter-claim will be against the securitisation / securitization or reconstruction company, as the case may be. Hence the disposal of the assets will not be possible if the counter-claim is more than the alleged debts.

(9)   Sec 6(1) “The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by … to the concerned obligor and any other concerned person and to the concerned registering authority 

(10)Sec 9 “ ... securitisation / securitization company or reconstruction company may, for the purpose of asset reconstruction, having regard to the guidelines framed by the Reserve Bank  .. following measures (a) the proper management by change in or by take over of, the management of the business of the borrower (b) sale or lease of a part or whole of the business of the borrower (c) rescheduling of the debts (d) enforcement of security interests as per this ordinance (e) settlement of dues (f) taking possession of assets with the provisions of this ordinance

Comments:- Virtually the combined role of the banks and BIFR is intended to be done by the securitisation / securitization company and reconstruction company, which will not be practicable. Legally the process may take long time.

(11) Sec 10(1) Any securitisation / securitization company and reconstruction company may (a) act as an agent for any bank or FI for the purpose of recovering their dues from the borrower on fee or charges (b) act as a manager vide Sec 13(4)(c), (c) act as receiver if appointed by any court or tribunal provided that no securitisation / securitization company and reconstruction company shall act as a manager if acting as such givers rise to any pecuniary liability

      Comments:- In the event of counter-claim being higher than the alleged dues, the said securitisation / securitization company and reconstruction company cannot be appointed as receiver.

(12) Sec 12(1) & (2) … the securitisation / securitization company and reconstruction company shall be bound to follow the policy (of the RBI) so determined and the directions (of the RBI)  so determined.

      Comments:- Thus relevant RBI Guidelines since 1976 including those on industrial sickness are statutory and mandatory on the proposed SC and RC.

 (13) Sec 13(1) … security interest …may be enforced without the intervention of court or tribunal … in accordance with the provisions of this ordinance.

Comments:- here the word ‘court’ excludes ‘High Courts’ and ‘Supreme Court’ - with such strict provisions, the responsibility and accountability of the banks and FIs is considerably increased and under no circumstances, they should be allowed to violate the law including the statutory RBI Guidelines since 1976 including those on industrial sickness and in that eventuality, damage suit or counter-claim is the only remedy. – in this section, debarring civil courts creates anomaly with reference to the comments under serial no. (17) below.

(14)Sec 13(2) … creditor may require the borrower by notice in writing to discharge his liability in full within 60 days from the date of the notice failing which the creditor shall be entitled to exercise any or all the rights…..”

(14)Sec 13(4) ..if borrower fails to discharge his liability within 60 days, ..creditor may take recourse to one or more of .. measures for realizing the secured assets :- (a) take possession.. including the right to transfer (b) take over management  .. including the right to transfer (c) appoint any person as manager to manage the assets taken over (d) any other person who had take over to pay to the creditor so much of the money as is sufficient to pay the .. creditor.

Comments:- This power is only in respect of take over of the secured assets and not take over of the business. It would be difficult for the bankers to implement this. Further on account of such powers it is all the more important for the borrowers and guarantors to file counter-claims and damage suits. Such provisions are highly impractical and will give rise to corruption, unnecessary delays and infructuous litigations. Ultimately the banks and financial institutions will be the loser as they will be saddled with huge number of litigations..

(15) Sec 13(6) Any transfer of ..assets .. by the creditor or by the manager shall vest in the transferee all rights in, or in relation to, the secured assets transferred as if the transfer had been made by the owner of such secured assets.

      Comments:- such assets will carry the liability of the damage or counter-claim also 

(16)Sec 13(9) Explanation (b) “amount outstanding” .. as per the books of account from the secured creditor.

Comments:- It is observed that the accounts maintained by the banks and FIs are always much on higher side and all the entries need to be checked with reference to the RBI Guidelines since 1976 including those on industrial sickness .

(17)Sec 13(10) “Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the .. creditor may file an application .. to the DRTs having jurisdiction or a competent court, as the case may be, for NPA Recovery of the balance amount from the borrower”

Comments:- Under such provisions, again, it is all the more important to raise and contest the counter-claim which will also provide proper strength for negotiation and settlement, If so decided – reference to competent court which if is a civil court creates anomaly vide provision under serial (13) above. Side by side, if possible, the constitutional validity of the Act also must be challenged.

(18)Sec 13(11) “ .. secured creditor shall be entitled to proceed against the guarantors or sell the .. assets without first taking any of the measures specified in sec 13(4) in relation to the secured assets under this ordinance

Comments:- on account of such provisions, the guarantors should file their counter-claims

(19)Sec 13(12) “ The rights of a secured creditor under this ordinance may be exercised by one or more of his officers authorized ..in such manner as may be prescribed.”

Comments:- with such wide powers, the officers will have to be more law abiding, it would have been more appropriate to mention the suitable level of the officers with reference to the amount involved. – once again the defaulting officers can only be booked if the borrower has raised counter-claim

(20)Sec 14(1)(2)(3) “…No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section will be called in question in any court or before any authority

Comments:- here the word ‘court’ excludes ‘High Courts’ and ‘Supreme Court’ - with such enforcement powers, again it is all the more important to raise and contest counter-claim. Side by side, if possible the Act must be challenged.

(21) Sec 17(1) “Any person aggrieved by any of the measures referred to in sec 13(4) .. may prefer an appeal to the DRTs .. within 45 days from the date on which such measures had been taken.

      Sec 17(2) “Where an appeal is preferred by a borrower, such appeal shall not be entertained by DRTs unless the borrower has deposited with DRTs 75% of the amount claimed in the notice ..: Provided that DRTs for reasons to be recorded in writing, waive or reduce the amount to be deposited

      Comments:- with such harsh and impractical condition for appeal, it is all the more essential to setup and contest counter-claim. Such provisions are impractical and will create unnecessary delays, corruption and infructuous litigations.

 (22) Sec 19 “If DRTs or ADRTs .. on an appeal .. holds the possession of . assets as wrongful and directs .. creditor to return such .. assets to the borrower, such borrower shall be entitled to payment of such compensation and costs as may be determined by the DRTs or ADRTs

      Comments:- early preparation or filing of counter-claim will be useful for the favourable disposal of appeal as above

(21) Sec 29 “.. any person contravenes or attempts to contravene or abets the contravention of the provisions of this Ordinance or of any rules made thereunder, he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both

(22) Sec 34 “No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRTs or an ADRTs is empowered under this Ordinance to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Ordinance or under the DRTs Act

(23) The Schedule

  Amendment in SICA :-

“.. no reference to BIFR where assets have been acquired”

“.. where a reference is pending before BIFR, such reference shall abate if the ..creditors,   representing not less than three fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such ..creditors, have taken any measures to recover their secured debts under sec 13(4)  

Comments Under such provisions raising of counter-claim becomes highly essential.

Further useful comments:-

(1) The issue dated 14th Oct. '02 of The Financial Express contains an important article (First Part) titled 'NPA Recovery Ordinance Won't Do Miracles, Unless...' written by bankers.

(2) The bankers are aiming at very strict rules. The banks wish to appoint private agents who are well equipped even with muscle powers so that  there is no hurdle in taking over the assets or the management. As per the law the banks will be using the police force and side by side they wish to use the private agents with muscle power. Under such coercive framework, the counter-claim becomes all the more important.

(3) The Act applies to secured creditors. In most of the cases, the financial institutions are the secured creditors, they have the first charge and the bankers have the second charge. The bankers are jittery over this.

(4) The first ARC (i.e. Asset Reconstruction Company) has been formed by a consortium of financial institutions and banks. Formation of such Company is legally questionable. The private sector will not come forward so easily as there are numerous legal complications and anomalies.

(5) The foreign financial institutions are not keen to finance the ARC as they find that the legal base is questionable. This shows that the said Act contains illegal terms and conditions.

(6) The constitutional validity of the said Ordinance has been questioned in the Delhi High Court by Mardia Chemicals Ltd. and also in the Mumbai High Court. Jaipur High Court has awarded stay to the Modern Group for operation of the Ordinance in the matter of writ petition challenging the constitutional validity of the Ordinance. Petitions are also being filed in various other High Courts in the country. Finally all the cases are clubbed and this matter is being adjudicated upon by the Supreme Court. On account of our specialization and in-depth knowledge, we can be greatly helpful.

(7) The individual parties getting notice under the said Act, may question the Act and prepare their counter-claim and file within 60 days of the date of notice. It is needless to mention that our quality of counter-claim is of highest order in the country. Ultimately a counter-claim or a counter-suit is the only remedy. (24.10.05)