Application of Section 17, 18 and 19 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 and its Effect on SARFAESI Act
India’s banking sector crisis is just the old wine in a new bottle and the sole reason for such a withered position is the inflation of bad debts. Where the bank is termed as the fuel of business, it has been overburdened due to the decline in the profitability of commercial sector banks. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or SARFAESI Act came as a saviour to lighten the unpleasant situation. The Narasimham Committee recommended that the legislative instrument allows for the bank to encash the financial assets which were pledged or mortgaged while availing the loans without the need of Court intervention by selling the assets directly to ARC (Asset reconstruction companies).
This Act empowers three methodologies to recuperate NPAs i.e. Securitization, Asset Reconstruction, and Security Enforcement without Court’s intervention. On 12th August, 2016, the Ministry of Law and Justice intended amendments to specific sections of the SARFAESI Act but were not notified. After three years, on 26th December, 2019, three of the sections of the amendment Act i.e. Section 17, 18, and 19 were notified in the official gazette to be brought into effect from January 24, 2020, which were termed as SARFAESI Amendments.
The sections of SARFAESI amendments that are notified to come in effect from 24th Jan, 2020 which will in turn amend the SARFAESI Act are Sections 17, 18, and 19. Chiefly, these sections belong to Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 that incorporates amendments to be brought under SARFAESI Act through Notification No SO. 4619 (E) dated 26th December 2019 . These amendments mainly revolve around registration of security interest by Secured and other Creditors, effect of registration of transactions, and right of enforcement of securities and priority to Secured Creditors.
SECTION 17 OF THE AMENDMENT
This section deals with the amendment to be brought under Section 23 of the SARFAESI Act. Section 23 at present deals with the Filing of transactions of securitisation, reconstruction and creation of security interest and can be found in Chapter IV of the Act. Presently, every transaction has to be filed with the Central Registrar within thirty days (30) after the date of such transaction or creation of security by the securitisation company or Reconstruction Company or the Secured Creditor. This position now has been eclipsed by the Amendment and the thirty-day (30) period has been omitted. Further, a right has been provided to Central Government to notify those types of transactions referring to the creation of a security interest over the property which requires registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) which in turn is a central online security interest registry of India.
SECTION 18 OF THE AMENDMENT
This amending Section has hosted a new chapter to the SARFAESI Act i.e. Chapter IV-A. The subject-matter of the inserted chapter deals with the registration of Secured Creditors and other creditors. Section 26-B to Section 26-E has been added into the legislation through this newly introduced chapter.
Currently Chapter IV deals with Central registry that articulates registration of transaction of securitization and reconstruction of financial assets and creation of security interests under this act.
In this section, the Central Government has extended the scope of registration including in its periphery all the creditors (other than Secured Creditors as defined under 2(1)(zd)) for creation, modification or satisfaction of any security interest over any property of the borrower. Earlier, Securitisation Company or Reconstruction Company or the Secured Creditor has to file the details with Central Registry but after the amendment now the creditor much like the others above-mentioned will also have to file particulars of the transaction with the CERSAI. However, these creditors (other than Secured Creditors) will still remain disentitled to exercise any right of enforcement of securities under this Act. Moreover, this section permits both; the Government authorities as well as the any individual having attachment order w.r.t. a property file the attachment order with CERSAI.
This clause articulates the effect of registration of the transactions by Secured Creditor or other creditor and the filing of attachment orders as per this Chapter. The effect is that such registration will be deemed to constitute a public notice from the date of its filing so as to make aware of the existence of interests that is been levied on the property. Furthermore, these claims which are pre-registered with CERSAI shall take the position of priority by overriding any subsequent interest created on that same property which means that, an unregistered creditor will not be able to claim the priority as enjoyed by the registered security interest.
This section has a limited approach keeping it only to the Secured Creditors. This section illuminates that Secured Creditors who have not duly registered the security interest with the CERSAI shall not be entitled to exercise the right of enforcement of securities under Chapter III. It basically curtails the enforcement right of an un-registered secured interest of a Secured Creditor. Earlier non-registration by a Secured Creditor does not lose its claim wholly but now the position has been changed.
This section deals with the privileged priority that a Secured Creditor enjoys over the debts and revenues, etc. payable to the Government authorities. The reasoning of this amendment is to harmonize the provisions of this Act with Section 53 of the Insolvency and Bankruptcy Code that pertains to the liquidation process and a Waterfall Mechanism for the distribution of assets. However, this Section states an explanation to the priority rule that where the proceedings under IBC are pending, the priority of secured creditors in payment of debt shall be subject to the provisions of that Code. Their claims over secured assets getting priority over other claimants reinforces the basic principles of bank lending against charged security.
SECTION 19 OF THE AMENDMENT
Section 19 has its sole effect on Section 27 of the SARFAESI Act which currently incorporates Penal provisions with a penalty on defaulters up to 5,000 per day for default in filing (Section 23), modifying (Section 24), and satisfaction (Section 25) of security interests. Through this Section 19 of the amendment Act coming into effect, Section 27 of the SARFAESI Act has been omitted those penal provisions that were covered under Section 27 will now be ineffective.
These amendments made in the SARFAESI Act have aggrandized the scope of a creditor to include creditors other than secured creditors. Such out of weight creditors have gained a respectful seat through registration under SARFAESI in improving recovery. Besides, by making registration with CERSAI which is a condition precedent for getting right to enforcement; it will also help the Central government to integrate the database of security interests over an asset.
Furthermore, now Secured creditors who are registered with CERSAI shall enjoy the priority by overriding the government dues and revenues on such assets due to the privilege they enjoy. These amendments have been added to bring consistency with the subsisting provisions of IBC code rather than contradicting them. However, the practical advantage or disadvantage of the amendment Act can be analysed only after its examination when it brought into effect.