CERSAI beyond SARFAESI – The multi-faceted effects of security interest registration

– Sikha Bansal and Anirudh Grover | finserv@vinodkothari.com

Introduction

The rights of secured creditors are spread across various laws: common law, Companies Act, Insolvency and Bankruptcy Code (IBC) and the SARFAESI Act. In equal measure, the preconditions which are requisite to assert these rights are also spread over those very laws. 

It is lamentable that the security interest registration regime in India is fragmented, without any obvious sense of purpose or direction. This was discussed in our previous article Fragmented Framework for Perfection of Security Interest^[1].

Not only do multiple laws require registration of security interests, other essential information about credit facilities – such as the performance or non-performance of the borrower also require multiple registrations. For instance, when a financial facility is given, the RBI norms require mandatory submission of details with all 4 credit information companies^[2]; when the loan asset slips into special mention category, the classification has to be reported to a Central Repository of Information on Large Credits (CRILC)^[3]. Besides, IBC requires mandatory submission of financial information and information relating to secured assets to an information utility^[4] – in fact, RBI, through its circulars has also mandated submission of financial information to information utility^[5]. These multiple registration and reporting obligations on NBFCs further corroborates our premise of multiple registration for a similar underlying purpose.

The Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) is one such central registry set up under the SARFAESI Act. While the provisions relating to CERSAI had been there ever since SARFAESI came into existence; however, the relevance of CERSAI registration gained momentum pursuant to certain substantial amendments to SARFAESI in the year 2016 (as discussed later). Further, there have been recent developments recently, importantly the RBI’s decision to link the holding period of loans before their assignment or securitzation to CERSAI registration, under the RBI Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 and Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021. These developments will, admittedly, give a significant push to CERSAI registration

Hence, this write up captures the relevance and the upsides of CERSAI registration and downsides of non-registration.

Rights under SARFAESI Act

A secured creditor, as defined in Section 2(zd) of SARFAESI Act, has the right to enforce the security interest in terms of section 13 of the Act. However, one has to refer to section 23 and section 26D as well.

Section 23 of SARFAESI Act provides as follows –

• “The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed
• ….”

Section 26D of SARFAESI Act provides as follows –

“Notwithstanding anything contained in any other law for the time being in force, from the date of commencement of the provisions of this Chapter, no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry.”

Notably, section 26D was inserted vide The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016^[6]. Hence, prior to section 26D coming into force, there was no motivation for the secured creditors to file security interest with CERSAI. Now, a secured creditor intending to enforce security interest under SARFAESI Act needs to register the same with CERSAI.

As per rule 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 (‘CERSAI Rules’), the registration has to be done within 30 days from the date of transaction.

Needless to say, the need for CERSAI registration would not arise in cases where SARFAESI does not apply, that is, –

• The creditor is not a secured creditor in terms of section 2(zd) of SARFAESI, that is, the creditor is other than a bank or a financial institution, asset reconstruction company, etc.
• The transaction is the one covered under section 31 of SARFAESI, such as lien on goods, pledges of movables within the meaning of Section 172 of the Indian Contract Act 1872, creation of any security interest in any aircraft as defined in clause(1) of Section 2 of the Aircraft Act, 1934, etc.

Besides, it appears that the procedural machinery for filing security interest against vehicles is not presently available on CERSAI (see our latest write up here).

Rights under common law/contracts

While rights under laws like Recovery of Debts Due to Banks and Bankruptcy Act, 1993 and SARFAESI Act, are specific rights available to specific creditors under specific circumstances, those rights are only in addition to, and not in substitution of common law rights of a secured creditor to enforce security. For example, while SARFAESI enables the secured creditor to enforce the security without intervention from the court, it is quite open to the secured creditor to take recourse to the civil courts, commercial courts, etc. and enforce the security (and its rights) under common law and in terms of the contract between the creditor and the debtor. For instance, sections 67, 69, etc. of Transfer of Property Act, 1882 enable exercise of rights by the mortgagee against the mortgaged property with/without intervention of court.

Here, it would be relevant to weigh the comparative benefits of enforcement under SARFAESI and common law. When it comes to immovable properties, it may be lot more practicable for the secured lender to enforce his rights vested through the SARFAESI as recovering an immovable property through common law rights vested under Transfer of Property Act, 1882 or other allied laws might be more difficult and amenable to resistance of the debtors residing in these immovable properties. On the other hand, for movable properties, the lender may prefer the common law route and not rely on SARFAESI at all. 

In such cases where the secured creditor would rather prefer the common law route, CERSAI registration is of no relevance. The rights which a secured creditor asserts under the common law may not be based on any record of such security interest in any repository, and would, in fact, purely be derived from the terms of the contract between the parties.

Hence, non-registration under CERSAI has no downside in so far as common law rights of the secured creditor are concerned. .

Rights under Companies Act

In terms of section 77(1) of the Companies Act 2013, a corporate borrower is required to file details of charge with the registrar of companies, within 30 days of creation of charge.

Section 77(3) invalidates the security interest where such charge is not registered. It states as follows –

“77

…

(3)Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator(appointed under this Act or the Insolvency and Bankruptcy Code, 2016 as the case may be) or any other creditor unless it is duly registered under sub section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).”

Therefore, while the Companies Act insists on registration of charge with registrar of companies, there is no interrelation with registration under CERSAI. Also, note that the registration under Companies Act is the duty of the borrower (failing which the creditor can initiate the same); registration under CERSAI is the function of the creditor itself. In any case, irrespective of whether CERSAI registration is there, a secured creditor will be able to assert, prove and validate his security before the liquidator only if such charge is registered with RoC.

Hence, CERSAI has no relevance here.

Rights under Insolvency and Bankruptcy Code

Under IBC, a secured creditor has to furnish ‘proof’ of security in terms of Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016 wherein three sources of proof of security have been provided, viz.,

• the records available in an information utility (‘IU’), if any,
• certificate of registration of charge issued by the Registrar of Companies; or
• proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

The use of the word ‘or’ clearly signifies that the secured creditor can prove his security interest from any of the three sources mentioned above. Hence it can be said that even though CERSAI registration is one of the sources of proving the security interest it is not mandatory under the IBC framework to have a CERSAI registration as a creditor has recourse to other sources as well. However, as noted above, RoC registration is only for corporate borrowers; and CERSAI registration is for creditors falling in the category of banks and financial institutions. Hence, in case of individual borrowers, the creditor may either have to take recourse to CERSAI registration (where possible and applicable) or records of the IU.

Rights under RBI Master Direction on Transfer of Loan Exposures

As per the Master Direction – Reserve Bank of India( Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’) in order for a lender to transfer its loan exposure the compliance of minimum holding period (‘MHP’) is mandatory.

MHP is counted from the date of registration of underlying security interest with CERSAI. Notably, TLE Directions, as originally issued, did not make a reference to CERSAI. Thus, except in cases where CERSAI registration cannot be done, CERSAI registration becomes the starting point for MHP. We have discussed the relevance of CERSAI registration in the context of TLE Directions in our another article, ‘The sale of season: Holding period requirements for assignments and securitisation’.

Closing remarks

The table below encapsulates how a creditor benefits (or may not be actually benefited) from having a CERSAI registration.

Particulars	SARFAESI	IBC	Companies Act	Master Direction on TLE/SSA	Common Law
Whether CERSAI Registration is mandatory?	Yes	No	No	Yes	No
Effect of non registration with CERSAI	Disable the creditor from enforcing security interest.	No effect . However, such registration may help in proving the claim of the secured creditor.	No effect	Disable the lender from transferring its loan exposure	No effect.

Besides, RBI also has issued circulars advising banks and financial institutions to file charges with CERSAI.

While non-registration with CERSAI does not take away the common law rights of the secured creditor, nor does registration with CERSAI ensure smooth headway under other laws; however, given the discussion above, the importance of CERSAI registration for financial sector entities cannot be undermined.

However, at the same time, the relevance and need of multiple mandates on financial entities for the same purpose – that is, recording a debt and a default, needs to be reviewed. Whereas the objective of a debt (and consequently, a default) repository is to ensure collation of all data pertaining to the debt at one place, which can be referred and used by the lender as a conclusive proof in recovery/enforcement actions; multiple registrations may not help achieving the objective. In fact, multiple registrations, many a times, may end up causing lack of clarity and thus, can be counter-productive; besides increasing the compliance burden of the financial entities. Hence, in view of the authors, there might be a need for streamlining and consolidation of varied registration requirements.

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^[1] Also published on IndiaCorplaw Blog here: https://indiacorplaw.in/2021/03/fragmented-framework-for-perfection-of-security-interest-a-secured-creditors-nightmare.html

^[2] Para 100, Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

^[3] See para 8 of Prudential Framework on Resolution of Stressed Assets here: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

^[4]Section 215 of IBC, also, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/IUC19122017063A65D368CD4F6DAEC111841091C932.PDF

^[5] See RBI Notification on “Submission of Financial Information to Information Utilities’ dated December 19, 2017 here: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11189

^[6] https://drtcbe.tn.nic.in/Actsrules/SARFAESI%20AMENDMENT%20ACT%202016.pdf