TOPA & SARFAESI ActA Paradigm Shift

By the students of 2nd LLB,Sundeep Bedi

Deepsh BanberuKunal R. Sarpal

Dhanashree KendheInayat Dhanda

Dr. Manish Machave

Overview• Background – The rationale behind the

Acts• Introduction & Explanation of key terms• Definitions • Relevant provisions• Comparative Analysis• Case Laws• Conclusion

BackgroundBackground, Why the Act was

necessary?

Illustrations, then and now

Practical applications of the SARFAESI law in comparison to

other Countries.

Introduction• Relevance of the Rights of

Mortgagee under TOPA in comparison to SARFAESI

• Concept of Securitization• Understanding the Rights of

Mortgagee• The difference in the procedure

under TOPA in comparison to SARFAESI

• Assets that can be securitized

Sections Under the Transfer of Property Act

• 68. Right to sue for mortgage-money

• (1) The mortgagee has a right to sue for the mortgage-money in the following cases and no others, namely,-

• (a) where the mortgagor binds himself to repay the same;• (b) where, by any cause other than the wrongful act or default of the

mortgagor or mortgagee, the mortgaged property is wholly or partially destroyed or the security is rendered insufficient within the meaning of section 66, and the mortgagee has given the mortgagor a reasonable opportunity of providing further security enough to render the whole security sufficient, and the mortgagor has failed to do so;

• (c) where the mortgagee is deprived of the whole or part of his security by or in consequence of the wrongful act or default of the mortgagor;

• (d) where, the mortgagee being entitled to possession of the mortgaged property, the mortgagor fails to deliver the same to him, or to secure the possession thereof to him without disturbance by the mortgagor or any person claiming under a title superior to that of the mortgagor:

Section 68 continued…• PROVIDED that, in the case referred to in clause (a), a

transferee from the mortgagor or from his legal representative shall not be liable to be sued for the mortgage-money.

• (2) Where a suit is brought under clause • (a) or clause • (b) of sub-section • (1), the court may, at its discretion, stay the suit and all

proceedings therein, notwithstanding any contract to the contrary, until the mortgagee has exhausted all his available remedies against the mortgaged property or what remains of it, unless the mortgagee abandons his security and, if necessary, re-transfers the mortgaged property.

Section 69• 69. Power of sale when valid• (1) 5[***] A mortgagee, or any person acting on his behalf, shall,

subject to the provisions of this section have power to sell or concur in selling the mortgaged property or any part thereof, in default of payment of the mortgage-money, without the intervention of the court, in the following cases and in no others, namely,-

• (a) where the mortgage is an English mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Mohammedan or Buddhist or a member of any other race, sect, tribe or class from time to time specified in this behalf by the State Government, in the Official Gazette;

• (b) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage-deed and the mortgagee is the government;

• (c) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage-deed and the mortgaged property or any part thereof was, on the date of the execution of the mortgage-deed, situate within the towns of Calcutta, Madras, Bombay, or in any other town or area which the State Government may, be notification in the Official Gazette, specify in this behalf.

Section 69 continued…• (2) No such power shall be exercised unless and until-• (a) notice in writing requiring payment of the principal money has

been served on the mortgagor, or on one of several mortgagors, and default has been made in payment of the principal money, or of part thereof, for three months after such service; or

• (b) some interest under the mortgage amounting at least to five hundred rupees is in arrear and unpaid for three months after becoming due.

• (3) When a sale has been made in professed exercise of such a power, the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized or improper or irregular exercise of the power shall have his remedy in damages against the person exercising the power.

Section 69 continued…• (4) The money which is received by the mortgagee, arising from

the sale, after discharge of prior encumbrances, if any, to which the sale is not made subject, or after payment into court under section 57 of a sum to meet any prior encumbrance, shall, in the absence of a contract to the contrary, be held by him in trust to be applied by him, first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale; and, secondly, in discharge of the mortgage-money and costs and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorized to give receipts for the proceeds of the sale thereof.

• (5) Nothing in this section or in section 69A applies to powers conferred before the first day of July, 1882.

Section 69A• 69A. Appointment of receiver• (1) A mortgagee having the right to exercise a power of sale under section

69 shall, subject to the provisions of sub-section (2), be entitled to appoint, by writing signed by him or on his behalf, a receiver of the income of the mortgaged property or any part thereof.

• (2) Any person who has been named in the mortgage-deed and is willing and able to act as receiver may be appointed by the mortgagee.

• If no person has been so named, or if all persons named are unable or unwilling to act, or are dead, the mortgagee may appoint any person to whose appointment the mortgagor agrees; failing such agreement, the mortgagee shall be entitled to apply to the court for the appointment of a receiver, and any person appointed by the court shall be deemed to have been duly appointed by the mortgagee.

• A receiver may at any time be removed by writing signed by or on behalf of the mortgagee and the mortgagor, or by the court on application made by either party and on due cause shown.

• A vacancy in the office of receiver may be filled in accordance with the provisions of this sub-section.

Section 69A continued…• (3) A receiver appointed under the powers conferred by this

section shall be deemed to be the agent of the mortgagor, and the mortgagor shall be solely responsible for the receiver's act or defaults, unless the mortgage-deed otherwise provides or unless such acts or defaults are due to the improper intervention of the mortgagee.

• (4) The receiver shall have power to demand and recover all the income of which he is appointed receiver, by suit, execution or otherwise, in the name either of the mortgagor or of the mortgagee to the full extent of the interest which the mortgagor could dispose of, and to give valid receipts accordingly for the same, and to exercise any powers which may have been delegated to him by the mortgagee, in accordance with the provisions of this section.

Section 69A continued…• (5) A person paying money to the receiver shall not be concerned to

inquire if the appointment of the receiver was valid or not.

• (6) The receiver shall be entitled to retain out of any money received by him, for his remuneration, and in satisfaction of all costs, charges and expenses incurred by him as receiver, a commission at such rate not exceeding five per cent, on the gross amount of all money received as is specified in his appointment, and, if no rate is so specified, then at the rate of five per cent on that gross amount, or at such other rate as the court thinks fit to allow, on application made by him for that purpose.

• (7) The receiver shall, if so directed in writing by the mortgagee, insure to the extent, if any, to which the mortgagee might have insured, and keep insured against loss or damage by fire, out of the money received by him, the mortgaged property or any part thereof being of an insurable nature.

Section 69A continued…• (8) Subject to the provisions of this Act as to the application of insurance

money, the receiver shall apply all the money received by him as follows, namely,-

• (i) in discharge of all rents, taxes, land revenue, rates and outgoings whatever affecting the mortgaged property;

• (ii) in keeping down all annual sums or other payments, and the interest on all principal sums, having priority to the mortgage in right whereof he is receiver;

• (iii) in payment of his commission, and of the premiums of fire, life or other insurances, if any, properly payable under the mortgage-deed or under this Act, and the cost of executing necessary or proper repairs directed in writing by the mortgagee;

• (iv) in payment of the interest falling due under the mortgage;• (v) in or towards discharge of the principal money, if so directed in writing by

the mortgagee, and shall pay the residue, of any of the money received by him to the person who, but for the possession of the receiver, would have been entitled to receive the income of which he is appointed receiver, or who is otherwise entitled to the mortgaged property.

Section 69A continued…• (9) The provisions of sub-section (1) apply only if and as far as a contrary intention

is not expressed in the mortgage-deed; and the provisions of sub-sections (3) to (8) inclusive may be varied or extended by the mortgage-deed; and, as so varied or extended, shall, as far as may be, operate in like manner and with all the like incidents, effects and consequences, as if such variations or extensions were contained in the said sub-sections.

• (10) Applications may be made, without the institution of a suit, to the court for its opinion, advice or direction on any present question respecting the management or administration of the mortgaged property, other than questions of difficulty or importance not proper in the opinion of the court for summary disposal, A copy of such application shall be served upon, and the hearing thereof may be attended by such of the persons interested in the application as the court may think fit.

• The costs of every application under this sub-section shall be in the discretion of the court.

• (11) In this section, "the court" means the court which would have jurisdiction in a suit to enforce the mortgage.

Definitionsz.Securitisation means acquisition of

financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;

• ze.   secured debt means a debt which is secured by any security interest;

• zf.   security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;

• zc.   secured asset means the property on which security interest is created;

• zd.  secured creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes-

i. debenture trustee appointed by any bank or financial institution; or

ii. securitisation company or reconstruction company; oriii. any other trustee holding securities on behalf of a

bank or financial institution; in whose favour security interest is created for due repayment by any borrower of any financial assistance;

• za. securitisation company means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation;

• zb. security agreement means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

• zg.  security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation;

Summary of the provision under TOPAConclusion of Part A

Now, beginning with the SARFAESI Act, 2002

,The Securitization & Reconstruction of Financial Assets & Enforcement of

Security Interest Act, 2002 • Why this Act was necessary?

• Basic Overview

• What to expect?

• Provisions, Analysis and Case Laws (M. R. Umarji & mention the name of the other authors)

Section 9• What does it deal with?

• 9. Measures for assets reconstruction : -• Without prejudice to the provisions contained in any other law for

the time being in force, a securitisation company or reconstruction company may, for the purposes of asset reconstruction, having regard to the guidelines framed by the Reserve Bank in this behalf, provide for any one or more of the following measures, namely:-

• a.     the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower;

• b.    the sale or lease of a part or whole of the business of the borrower;

• c.     rescheduling of payment of debts payable by the borrower;• d.    enforcement of security interest in accordance with the

provisions of this Act;• e.     settlement of dues payable by the borrower;• f.     taking possession of secured assets in accordance with the

provisions of this Act.

Section 13• What does it deal with?

• 13. Enforcement of security interest.-• 1. Notwithstanding anything contained in

section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

Section 13 continued…• 2. Where any borrower, who is under a liability to

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

Section 13 continued…• 3. The notice referred to in sub-

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

Section 13 continued…• 4.     In case the borrower fails to discharge his liability in full within the

period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-

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

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

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

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

Section 13 continued…• 5. Any payment made by any person referred to in

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

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

Section 13 continued…• 7.  Where any action has been taken against a

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

Section 13 continued…• 8. If the dues of the secured creditor

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

Section 13 continued…• 9. In the case of financing of a financial asset by more than one

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

• Explanation.-For the purposes of this sub-section,-• a. record date means the date agreed upon by the secured creditors

representing not less than three-fourth in value of the amount outstanding on such date;

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

Section 13 continued…• 10. Where dues of the secured creditor are not fully satisfied

with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

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

Section 13 continued…• 12.  The rights of a secured creditor under this

Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

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

Section 14• 14. Chief Metropolitan Magistrate or District Magistrate to

assist secured creditor in taking possession of secured asset.-• 1.     Where the possession of any secured asset is required to be

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

• a.     take possession of such asset and documents relating thereto; and

• b.    forward such asset and documents to the secured creditor.

Section 15• 2. For the purpose of securing compliance with

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

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

Section 15 continued…• 15. Manner and effect of takeover of management.-• 1.     When the management of business of a borrower is

taken over by a secured creditor, the secured creditor may, by publishing a notice in a newspaper published in English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated, appoint as many persons as it thinks fit-

• a.     in a case in which the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), to be the directors of that borrower in accordance with the provisions of that Act; or

• b.    in any other case, to be the administrator of the business of the borrower.

• 2.     On publication of a notice under sub-section (1),-

• a.     in any case where the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), all persons holding office as directors of the company and in any other case, all persons holding any office having power of superintendence, direction and control of the business of the borrower immediately before the publication of the notice under sub-section (1), shall be deemed to have vacated their offices as such;

• b.    any contract of management between the borrower and any director or manager thereof holding office as such immediately before publication of the notice under sub-section (1), shall be deemed to be terminated;

• c.     the directors or the administrators appointed under this section shall take such steps as may be necessary to take into their custody or under their control all the property, effects and actionable claims to which the business of the borrower is, or appears to be, entitled and all the property and effects of the business of the borrower shall be deemed to be in the custody of the directors or administrators, as the case may be, as from the date of the publication of the notice;

• d.    the directors appointed under this section shall, for all purposes, be the directors of the company of the borrower and such directors or as the case may be, the administrators appointed under this section, shall alone be entitled to exercise all the powers of the directors or as the case may be, of the persons exercising powers of superintendence, direction and control, of the business of the borrower whether such powers are derived from the memorandum or articles of association of the company of the borrower or from any other source whatsoever.

Section 15 continued…• 3. Where the management of the business of a borrower, being

a company as defined in the Companies Act, 1956 (1 of 1956), is taken over by the secured creditor, then, notwithstanding anything contained in the said Act or in the memorandum or articles of association of such borrower,-

• a.     it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;

• b.    no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the secured creditor;

• c.     no proceeding for the winding up of such company or for the appointment of a receiver in respect thereof shall lie in any court, except with the consent of the secured creditor.

Section 15 continued…• 4. Where the management of the

business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him.

Important case laws• M/s. Transcore V. Union of India - Held

that, the secured creditor can simultaneously proceed under both, DRT and SARFAESI.

• Mardia Chemicals Ltd. V. Union of India - SC, upheld the validity of the Act, especially that sub-section (2) of section 17 of the Act, which was earlier declared as unconstitutional under the act.

Thank you!• Students of 2nd LLB

• Presenters,• Deepesh & Kunal

• Researchers • Dhanashree, Inayat & Dr. Manish

• For feedback and presentation copy, please write to kunal.sarpal@gmail.com