Debt Recovery & Securitization

Rule 6 of the Security Interest (Enforcement) Rules, 2002 provides that the authorized officer may sell the movable secured assets taken possession under sub-rule (1) of rule 4 of the Security Interest (Enforcement) Rules, 2002 in one or more lots by adopting any of the following methods to secure maximum sale price for the assets, to be so sold – – obtaining quotations from parties dealing in the secured assets or otherwise interested in buying such assets; or – inviting tenders from the public; or – holding public auction including through e-auction mode; or – by private treaty.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6(a)(b) (Syllabus 2017).

Rule 7 of the Security Interest (Enforcement) Rules, 2002 provides that where movable secured assets are sold, sale price of each lot shall be paid as per the terms of the public notice or on the terms as may be settled between the parties, as the case may be and in the event of default of payment, the movable secured assets shall be liable to be ordered for sale again.

On payment of sale price, the authorized officer shall issue a certificate of sale in the prescribed form as given in Appendix III to The Security Interest (Enforcement) Rules, 2002 specifying the movable secured assets sold, price paid and the name of the purchaser and thereafter the sale shall become absolute. The certificate of sale so issued shall be prima facie evidence of title of the purchaser.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6(a)(c) (Syllabus 2017).

Rule 8 of Security Interest (Enforcement) Rules, 2002 which deals with Sale of Immovable Secured Assets under SARFAESI Act. It provides that the authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets. Every notice of sale shall be affixed on a conspicuous part of the immovable property and the authorised officer shall upload the detailed terms and conditions of the sale, on the web- site of the secured creditor, which shall include:

(a)the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor;

(b)the secured debt for recovery of which the property is to be sold;

(c)reserve price of the immovable secured assets below which the property may not be sold;

(d)time and place of public auction or the time after which sale by any other mode shall be completed;

(e)deposit of earnest money as may be stipulated by the secured creditor;

(f)any other terms and conditions, which the authorized officer considers it necessary for a purchaser to know the nature and value of the property.

However, the Authorised officer has given notice only for 21 days instead of 30 days as stated in the Rules. Further following details are missing in the website disclosure:

l the details of the encumbrances known to the secured creditor; l reserve price of the immovable secured assets below which the property may not be sold; l place of public auction or the time after which sale by any other mode shall be completed Accordingly, the notice and publication has not complied with the Rules and may be challenged.

In case of sale of immovable property in the State of Jammu and Kashmir, the provisions of Jammu and Kashmir Transfer of Property Act, 1977shall apply to the person who acquires such property in the State.

Alternate Answer to Above Paragraph After the abrogation of Article 370 & 35A of the Constitution of India and enactment of Jammu and Kashmir Reorganisation Act, 2019, sale of immovable property in the Union Territory of Jammu and Kashmir, the provisions of Jammu and Kashmir Transfer of Property Act, 1977 shall not applicable to the person who acquires such property in the State.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2017).

According to section 13(2) of the SARFAESI Act, 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)which includes (a) taking 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; Rule 4 of the Security Interest (Enforcement) Rules, 2002 provides that where the possession of the secured assets to be taken by the secured creditor are movable property in possession of the borrower, the authorized officer shall take possession of such movable property in the presence of two witnesses after a Panchnama drawn and signed by the witnesses as nearly as possible in Appendix I to The Security Interest (Enforcement) Rules, 2002.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6(a)(a) (Syllabus 2017).

(iii)Correct Section 18 of SARFAESI Act, 2002 empowers the secured creditors to make premature termination of any contract of managerial personnel, Directors etc., and no compensation for loss of office be paid. However, if the secured creditors have fully received their dues, then they should be restored their original position in the borrower company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(b)(iii) (Syllabus 2022).

(ii)Incorrect As per Section 18 (C) of SARFAESI Act , 2002:

(1)Where an application or an appeal is expected to be made or has been made under 17(1) or section 17A or 18 (1) or section 18B, the secured creditor or any person claiming a right to appear before the Tribunal or the Court of District Judge or the Appellate Tribunal or the High Court, as the case may be, on the hearing of such application or appeal, may lodge a caveat in respect thereof.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(b)(ii) (Syllabus 2022).

As per Section 2(1)(u) of the SARFAESI Act, 2002a Qualified Buyer (QB) means Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation, Trustee or ARC or any asset management company making investment on behalf of mutual fund, Foreign Institutional investor registered under the Securities and Exchange Board Of India Act, 1992 (15 of 1992) or regulations made thereunder, any category of non-institutional investors as may be specified by Reserve Bank of India or any other body corporate as may be specified by the Securities and Exchange Board of India.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2(b)(i) (Syllabus 2022).

(v)Incorrect Since both are special law and contains non obstante provisions. In case any Corporate Debtor / Borrower is subjected simultaneously under the two special law, the NCLT in the case, of re: Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd, held that the Insolvency and Bankruptcy CodeCode will prevail over the SARFAESI Act 2002.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(b)(v) (Syllabus 2022).

Insolvency and Bankruptcy Code, 2016 will prevail over SARFAESI Act, 2002.

Both of the Insolvency and Bankruptcy Code, 2016 and SARFAESI Act, 2002 serve different purposes and operate independently. However, there can be situations where conflicts arise between the two laws, especially when it comes to the rights and remedies available to creditors.

In general, if there is a conflict between the provisions of the SARFAESI Act and the IBC, the provisions of the IBC shall prevail in light of the provisions of section 238 of IBC, 2016 which provides as follows:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

It is to be noted that a similar non-obstante clause is present in Section 35 of SARFAESI Act, 2002 as well however, given that IBC is a later and more comprehensive legislation that deals specifically with insolvency and bankruptcy matters, including the resolution of default situations, it will prevail in case of any conflict in the provisions of both the Laws.

In the case of Canara Bank V/s Shri Chandramoulishvar Spg. Mills (P) Ltd., the NCLAT while referring to Supreme Court’s verdict in Innovative case has ruled that when two proceedings are initiated, one under the Insolvency and Bankruptcy Code, 2016 (the Code) and the other under the SARFAESI Act, 2002, then the proceeding under the Code shall prevail.

The appeal in the case was preferred by the Financial Creditor i.e., Canara Bank against the NCLT’s (National Company Law Tribunal) Order, whereby the application preferred by Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (application for initiation of corporate insolvency resolution process by operational creditor) against the Corporate Debtor i.e., M/s Sri Chandra Moulishvar Spinning Mills Private Limited was admitted by the Tribunal. The Appellant’s main grievance in the case was that he had already initiated proceedings under the SARFAESI Act, 2002 for recovery against the Corporate Debtor.

The NCLAT in view of the issue involved in the case, made reference to Supreme Court’s verdict in the case of Innoventive Industries Ltd. V/s ICICI Bank, whereby the Apex Court was of the view that if the application under Section 9 is complete and there is no ‘existence of dispute’ and there is a ‘debt’ and ‘default’ then the Adjudicating Authority is bound to admit the application. Thus, NCLAT upheld NCLT’s decision and also noted that such action cannot continue as the Code will prevail over SERFASESI Act, 2002.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(B) (Syllabus 2017).

(i)As per Section 3 of SARFAESI ACT, 2002

(1)No Asset Reconstruction Company shall commence or carry on the business of securitization or asset reconstruction without –

(a)Obtaining a certificate of registration granted under this section and

(b)Having net owned fund of not less than two crore rupees or such other higher amount as the Reserve Bank, may, by notification, specify.

Provided that the Reserve Bank may, by notification, specify different amounts of owned fund for different class or classes of asset reconstruction companies.

Reserve Bank of India vide its notification has raised minimum threshold of net owned funds to ₹ 100 cr . With further notification, the threshold has been increased to ₹ 300 cr. ₹ 200 cr to be met by 31st March 2024 and ₹ 300 cr by 31st March 2025.

To gain official registration under Section 3 of the SARFAESI Act, 2002, Crest ARC needs to meet certain financial criteria, the most important being that it should have a minimum net owned fund of ₹200 crores by 31st March, 2024. Crest currently has ₹1.5 crore in net owned funds, which does not meet the required amount.

(ii)The Net Owned Fund (NOF) is a key financial requirement for an Asset Reconstruction Company (ARC) to obtain registration under the SARFAESI Act. It represents the company’s capital base, which ensures the company has sufficient financial stability to acquire and manage distressed assets. For Crest ARC, having ₹1.5 crore in NOF instead of the required threshold means they will need to raise additional funds or work with the RBI to meet this requirement.

(iii)As per Section 3 (3) (a) of the SARFAESI ACT, 2002 the Reserve Bank may, for the purpose of considering the application for registration of a asset reconstruction company to commence or carry on the business of securitisation or asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such asset reconstruction company, or otherwise, that the following conditions are fulfilled, namely:

–that the asset reconstruction company has not incurred losses in any of the three preceding financial years;

Although Crest ARC has been profitable for many years, this recent loss may negatively impact their application. However, the company can explain that the loss was an exceptional event and does not reflect their overall performance, which has been strong for years.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 5(b) (Syllabus 2017).

Section 3 of SARFAESI Act provides that no Assets Reconstruction Company shall commence or carry of the business of securitization or asset reconstruction without:

(a)Obtaining a Certificate of Registration; and

(b)Having Net Owned Fund of not less than two crore rupees or such other higher amount as the Reserve Bank may, by notification, specify:

Provided that the Reserve Bank of India (RBI) may, by notification, specify different amounts of owned fund for different class or classes of asset reconstruction of companies which is ₹100 crore.

So, in the given case being proposed ARC net worth is 21,00,00,000/- is less than Required Net worth of 100, 00,00,000/- and also not under any specific category or exemption provided is not eligible for Registration as ARC under SARFAESI Act.

Further without granting a Valid Registration certificate from RBI as an Asset Reconstruction Company is not entitled to commence or carry the Business.

Ground of Rejection of application of Asset Reconstruction Company:

The Reserve Bank may, for the purpose of considering the application for registration of an Asset Reconstruction Company to commence or carry on the business of Securitization or Asset Reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such asset reconstruction company, or otherwise, that the following conditions are fulfilled, namely: -l that the Asset Reconstruction Company has not incurred losses in any of the three preceding financial years; l that such Asset Reconstruction Company has made adequate arrangements for realization of the financial assets acquired for the purpose of securitization or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on the investments made in the company by the qualified buyers or other persons:

l that the directors of Asset Reconstruction Company have adequate professional experience in matters related to finance, securitization and reconstruction.

l that any of its directors has not been convicted of any offence involving moral turpitude; l that a sponsor of an Asset Reconstruction Company is a fit and proper person in accordance with the criteria as may be specified in the guidelines issued by the Reserve Bank for such persons; l that Asset Reconstruction Company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank.

l That Asset Reconstruction Company has complied with one or more conditions specified in the guidelines issued by the Reserve Bank for the said purpose.

RBI can reject the application of M/s. ABC for registration as an ARC if any of the above grounds is not satisfied.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 5(B) (Syllabus 2017).

Section 31B of the Recovery of Debts and Bankruptcy Act, 1993: Priority to Secured Creditors.

Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and government dues including revenues, taxes, cesses and other rates due to the Central Government, State Government or local authority.

Explanation - For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.

Section 53(1)(e) of the Code provides that the following dues shall rank equally between and among the following:

(i)any amount due to Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii)debts owed to secured creditor for any amount unpaid following the enforcement of security interest;

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(b)(i) (Syllabus 2017).

Section 5 of the SARFAESI Act, 2002 states that, notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution—

(a)by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or

(b)by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.

Any document executed by any bank or financial institution under sub-section (1) in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2(b)(ii) (Syllabus 2022).

Section 5 of the SARFAESI Act, 2002 provides for the acquisition of rights or interest in financial assets of any bank or financial institution. Section 5 provides as under:

(1)Notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution -

(a)by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or

(b)by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.

(1A) Any document executed by any bank or financial institution under sub-section

(1)in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899.

Provided that the provisions of this sub-section shall not apply where the acquisition of the financial assets by the asset reconstruction company is for the purposes other than asset reconstruction or securitisation.

(2)If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the asset reconstruction company, such asset reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.

(2A) If the bank or financial institution is holding any right, title or interest upon any tangible asset or intangible asset to secure payment of any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire the tangible asset or assignment or licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on acquisition of such assets under sub-section (1).

(3)Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, power-of-attorney, grants of legal representation, permissions, approvals, consents or no­objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the asset reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, asset reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of asset reconstruction company, as the case may be.

(4)If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 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 asset reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the asset reconstruction company, as the case may be.

(5)On acquisition of financial assets under sub-section (1), the asset reconstruction company, may with the consent of the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or any court or other Authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or court or Authority shall pass orders for the substitution of the asset reconstruction company in such pending suit, appeal or other proceedings.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 5(b) (Syllabus 2017).

The contention of the legal counsel is not correct. In the case of Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd., the NCLAT while referring to Supreme Court's verdict in Innoventive case has ruled that when two proceedings are initiated, one under the Insolvency and Bankruptcy Code, 2016 (the Code) and the other under the SARFAESI Act, 2002, then the proceeding under the Code shall prevail. The appeal in the case was preferred by the Financial Creditor i.e., Canara Bank against the NCLT's (National Company law Tribunal) order, whereby the application preferred by Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (application for initiation of corporate insolvency resolution process by operational creditor) against the Corporate Debtor i.e. M/s. Sri Chandramoulishvar Spinning Mills Private Limited was admitted by the Tribunal. The Appellant's main grievance in the case was that he had already initiated proceedings under the SARFAESI Act, 2002 for recovery against the Corporate Debtor. The NCLAT in view of the issue involved in the case, made reference to Supreme Court's verdict in the case of Innoventive Industries Ltd. v. ICICI Bank, whereby the Apex Court was of the view that if the application under Section 9 is complete and there is no 'existence of dispute' and there is a 'debt' and 'default' then the Adjudicating Authority is bound to admit the application.

Thus, NCLAT upheld NCLT's decision and also noted that such action cannot continue as the Code will prevail over SARFAESI Act, 2002.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 3(i) (Syllabus 2017).