Supreme Court confirms, sale certificates from confirmed auction sales do not require mandatory registration

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Barsha Dikshit and Neha Malu | resolution@vinodkothari.com

In the context of an auction sale conducted during liquidation or by a secured creditor, the sale certificate serves as a critical document, evidencing the transfer of title to the purchaser upon confirmation of the sale. Its legal nature and the procedural requirements such as registration and the payment of stamp duty have often been a subject of scrutiny and debate. 

The Hon’ble Supreme Court in the matter of State of Punjab & Anr. v Ferrous Alloy Forgings P. Ltd. & Ors. reaffirmed the principle that a sale certificate issued by the authorised officer is not compulsorily registrable under section 17(1) of the Registration Act, 1908. The Court further clarified that compliance with Section 89(4) of the Registration Act, which provides for forwarding of a copy of the sale certificate by the authorised officer to the registering authority, is sufficient to satisfy the statutory requirements. However, in instances where the purchaser voluntarily presents the original sale certificate for registration or uses the same for some other purpose, the document is liable to attract stamp duty as prescribed under the Indian Stamp Act, 1899, or the relevant state enactments governing stamp duty. 

This article examines the legal framework governing sale certificates in auction sales, analyzing the procedural and practical nuances associated with their registration and the evolving interpretations rendered by courts in the context of SARFAESI Act and Insolvency and Bankruptcy Code, 2016. 

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Recovery of debt by HFCs and initiation of SARFAESI action in case of a decided civil suit: Two significant rulings by High Courts

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-Shrestha Banerjee & Archisman Bhattacharjee I finserv@vinodkothari.com

Introduction

The High Courts of Madhya Pradesh and Kerala recently rendered two judgments delving into crucial legal inquiries surrounding the recoverability and enforcement of security interests in instances of borrower default via initiation of SARFAESI proceedings by financial institutions.

The Madhya Pradesh High Court’s ruling specifically addresses the recoverability of Housing Finance Companies (HFCs) in relation to the initiation of SARFAESI actions following borrower default. Conversely, the Kerala High Court’s judgement examines the enforcement of security interests through SARFAESI actions, where the same has been initiated without placing consideration on any judgement delivered by the civil courts concerning such recovery.

In this article, we aim to analyse both judgments, shedding light on their implications and legal interpretations.

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ARC rights to use SARFAESI for debts assigned by non-SARFAESI entities

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– Archana Kejriwal

Asset reconstruction companies, formed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’/‘the Act’) are an important part of the country’s ecosystem to tackle non-performing loans. ARCs buy and resolve non-performing loans by acquiring them from the financial system.

ARCs were traditionally focusing on acquiring large corporate loan exposures. However, recently, there is increasing participation of the ARCs in retail loans. When ARCs buy retail loans, it is quite likely that the lender or the loan does not qualify for SARFAESI right when the loan was with the lender. This may be either because of the nature of the lender (NBFCs having assets of less than Rs 100 crores) or the size of outstanding (less than Rs 20 lakhs). In such cases, once the ARC acquires the loans, will it have the rights under the SARFAESI Act?

The question becomes important, because in case of corporate loans, the advantage that ARCs had over the original lender was one of aggregation, that is, ARCs acquiring loans given to the same borrower by various lenders, and thus getting significant strength in relation to the borrower. This cannot be the case, obviously, with retail loans. Hence, if the acquiring ARC is no better than the outgoing NBFC, in what way does the transfer of the loans help to accelerate the recovery?

In this article, we discuss this important question.

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Display of information on repossession under SARFAESI

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– Eliza Bahrainwala, Executive, finserv@vinodkothari.com

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Vehicle financiers must follow SARFAESI process for repossession: Patna High Court

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Ruling holds self-help repossession as a breach of the borrower’s fundamental rights of livelihood and dignity

– Vinod Kothari, finserv@vinodkothari.com

Repossession of vehicles (from two-wheelers to four-wheelers), in case of borrowers’ defaults, has been done almost entirely using common law process, on the strength of the provisions of the hypothecation agreement. The roughly Rs 500000 crores auto finance market in India, including financing of passenger vehicles and commercial vehicles, rarely makes use of the process of SARFAESI Act for repossession of vehicles from defaulting borrowers, even though most of the NBFCs and all of the banks are authorised to make use of the process.

However, a recent Patna High Court, from a single judge of the Court[1], holds that since hypothecation is a “security interest” on the vehicle, the use of the process of the SARFAESI Act is mandatory, and any repossession action not adhering to the process of that Act is illegal. The Court has gone to the extent of ordaining all banks and NBFCs in the State to return the repossessed vehicles which are either not sold or are traceable to the borrowers on payment of 30% of the due amount, and in case of those vehicles which are not traceable or returnable, it permits the petitioners to seek compensation. It has simultaneously directed the Police to investigate and register cases of use of force or illegal tactics in repossession.

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Security Interest: Meaning, forms, registration, enforcement, and effects of non-registration

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-Team Vinod Kothari and Company | resolution@vinodkothari.com

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National financial information repository: One more or one for all?

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– Lovish Jain, Executive | lovish@vinodkothari.com

Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :

“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.

RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).

If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.

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Registration of Security Interest and Rights of Secured Creditors under IBC

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– Sikha Bansal, Partner & Neha Malu, Senior Executive | resolution@vinodkothari.com

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Read our writeups on the topic –

  1. CERSAI beyond SARFAESI – The multi-faceted effects of security interest registration
  2. Fragmented framework for perfection of security interest

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

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– 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].

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The sale of season: Holding period requirements for assignments and securitisation

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– Team Finserv | finserv@vinodkothari.com

Any sale or assignment or transfer, including securitisation, of loans is subject to a minimum seasoning with the originator. Under the extant regulatory provisions, such requirement is referred to as ‘Minimum Holding Period’ (MHP), which means the minimum period for which the originator should have held the loan exposures before the same is transferred to the transferee or Special Purpose Entity (SPE), as the case may be. This serves several purposes: that the loan was not originated for sale, the originator has had some equity in the loans, and that there is a benefit of hindsight of performance.

MHP requirements have always been a part of the regulations in India. However, on December 5, 2022, the Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021[1] (‘TLE Directions’) as well as the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021[2] (‘SSA Directions’). Among the other changes, there was a change in the MHP provisions; this change may have a significant impact on future transactions. 

This write-up intends to clarify the position with respect to the computation of MHP for different types of loans under TLE Directions as well as SSA Directions.

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