Professional Documents
Culture Documents
The concept of Non Performing Assets (NPA) was introduced for the first
time by Reserve Bank of India in the year 1991 as per recommnedations of
Narsimhan Committee. Based on these recommendations, RBI laid down
Prudential norms for improving the financial health of commercial Banks and
the quality of Loan portfolio as well for Income Recognition and Provisioning
to fall in line with International Standard. Latest in this series, they have
issued Master Circular No. DBOD.No.BP.BC.12/21.04.048/2007-08 dated
July 2, 2007, (the transcript of the same is available at Intranet under RBI
circulars).
Non-Performing Assets
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Account or any other customer account remaining overdue for 90 days
will have to be treated as “Non Performing Asset”.)
There are various categories of classification based on age of NPA and also
there are provisioning requirements as prescribed by RBI. We give
hereunder the same as of 31.03.2008 hereunder:
Asset Classification Total Period in Provision Required
NPA (%)
Category
Sub Standard * 12 months 10%
Doubtful upto 1 year (D1) ** 24 months 20%
Doubtful 1 to 3 years (D2) ** 48 months 30%
More than 3 years (D3) ** More than 100%
48 months
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Branches should discuss the matter for accelerating provisioning in case of
realisability of the security is in doubt.
(xxxx denotes 4 digit branch numeric Code such as 0001 for Opera House etc.)
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Once the account is classified as NPA, it has to be analyzed as to why the
borrower could not service the interest or principal. Still there could be
other reason for account becoming NPA.
It is also to be cared at this stage that all the documents obtained by the
bank to secure the loans / advances sanctioned to any borrower are legally
enforceable and valid so as to take legal recourse against all concerned /
securities. Please note that Limitation Act provides validity of any document
in court of law for a period not exceeding 3 years from the date of
execution except mortgage documents which has limitation of 12 years.
However for execution of mortgage, we have to file suit at Civil Court and
not in DRT, which is very time consuming and hence should be avoided.
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if the amount in default is more than Rs. 10 Lacs
Criminal Complaint u/s For dishonour of cheques given by the customer for
138 of Negotiable repayment of the loan by way of PDC.
Instrument Act
Other Criminal Filing of complaints under Cr. Pr. Code of India for
Complaints any attempt of cheating , fraud, diversion of funds,
selling of securities without permission of the Bank,
any other such action.
Civil Suit Recovery suit before civil court in case the amount
of claim is less than Rs. 10 Lacs.
Even at times it is observed that branches do not take suit for recovery in
cases where they have initiated action u/s 138 of NI Act. Please note that it
is mandatory to keep our recourse to the borrower and the guarantors and
also to enforce their personal assets to take remedy of civil suit at DRT or
Civil Court.
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borrower so as to explore possibilities of settlement outside court by
way of OTS etc.
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Silent features of the Securitization Act-2002.
The Act deals with three parts; one part deals with the transfer of the
Non-performing Assets to Asset Reconstruction Company; Second part
deals with codifying the Law relating to Securitization of Assets and Third
part deals with enforcement of security interest by Banks and Financial
Institutions without intervention of Court. Here we shall discuss the third
part of the Act which relates to Enforcement of security interest by Banks,
Financial Institutions, Securitization Company and Asset Reconstruction
Company and more relevant for day to day activity at branches.
Section 1.3 – Authorised Officer – The Authorised Officer shall not be less
that the Chief Manager of a Public Sector Bank or equivalent or any other
person / authority exercising powers of superintendence, directions and
control of the business / affairs of the secured creditors as the case may
be and as specified by Board of Directors of the secured creditors.
Section 2(1)(f) - “borrower” means any person who has been granted
financial assistance by any Bank or financial institution or who has given any
guarantee or created any mortgage or pledge as security for the financial
assistance granted by any Bank or financial institution and includes a person
who becomes borrower of a securitisation company or reconstruction
company consequent upon acquisition by it of any rights or interest of any
Bank or financial institution in relation to such assistance;
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Section 2(1)(j) - “default” means non-payment of any principal debt or
interest thereon or any other amount payable by a borrower to any secured
creditor consequent upon which the account of such borrower is classified as
Non-Performing Asset in the books of the secured creditor in accordance
with the directions or guidelines issued by the Reserve Bank of India;
(iii) Any debt or any right to receive payment of money, whether secured
or unsecured;
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Section 2(1)(ze) - “secured debt” means a debt, which is secured by any
security interest;
Section 2(1)(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;
(a) a lien on any goods, money or security given by or under the Indian
Contract Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of
1930) or any other law for the time being in force;
(b) A pledge of movables within the meaning of section 172 of the Indian
Contract Act, 1872 (9 of 1872);
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(d) creation of security interest in any vessel as defined in clause (55) of
section 3 of the Merchant Shipping Act, 1958 (44 of 1958);
(f) Any rights of unpaid seller under section 47 of the Sale of Goods Act,
1930 (3 of 1930);
(g) Any properties not liable to attachment or sale under the 1st proviso to
sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5
of 1908);
(h) Any security interest for securing repayment of any financial asset not
exceeding one lakh rupees (Rs. 1 Lac);
(j) Any case in which the amount due is less than twenty percent (20%) of
the principal amount and interest thereon.
Section 36 – Limitation – The secured creditor can take action against the
defaulting borrowers under section 13(4) of the Act within the limitation
period prescribed under the Limitation Act 1963.
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All other sections of the Act are being discussed along with the procedure
at relevant place.
a. As per section 13 (2) of the 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 installment 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).
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d. Provided that where authorised officer has reason to believe that the
borrower or his agent is avoiding the service of the notice or that for any
other reason, the service cannot be made as aforesaid, the service shall be
effected by affixing a copy of the demand notice on the outer door or some
other conspicuous part of the house or building in which the borrower or his
agent ordinarily resides or carries on business or personally works for gain
and also by publishing the contents of the demand notice in two leading
newspapers, one in vernacular language, having sufficient circulation in that
locality.
g. Where there is more than one borrower, the demand notice shall be
served on each Borrower
2. If Borrower gives reply and raises any objection, or seeks time on some
grounds or challenges creation of charge or challenges balances outstanding
in the account or challenges any entries in the account (especially penal
interest, cost, insurance premium etc.), the reply of the Borrower has to be
considered and it has to be replied prior to taking any further action as
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decided by Supreme Court of India in the case of Mardia Chemicals Ltd. In
terms of sub Section 3 of Section 13 of the Act, it is mandatory to the
secured creditors to communicate with reasons for non acceptance of
the representation or objection within one week of receipt from the
borrower on the notice issued by the Authorised Officer u/s 13(2).
Appeal cannot lie before DRT against the notice issued, or reply given by the
Bank. But the averments made in notice and reply given by the Bank can be
one of the grounds for appeal for challenging the action taken by Bank after
possession is taken by the Bank. Hence, reply needs to be cautiously drafted
giving detailed explanation for not accepting the objections of the borrower.
a. Even though not statutorily required under the Act, we suggest that
branches send a further notice (under the head “for taking possession of
secured assets”) to the borrower/guarantor whose secured asset is to be
taken into possession at the end of 60th day of the statutory demand notice
u/s 13(2). Herein we need to advise the time and date when we will visit the
site of secured asset for taking possession,
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(Panchnama) to that effect be prepared and be signed by Authorised
Officer before two or more independent witnesses. In any case it should be
ensured that the Authorised Officer is not taking forcible possession of the
assets without the assistance of District Magistrate / Metropolitan
Magistrate as the case may be. For convenience of the branches, e. Under
the provisions of 13(13) the Borrower is prohibited from transferring assets
or creating lien after receipt of statutory notice u/s. 13(2). However
subsequent sale is not treated as void. Purchaser is only made liable to pay
the sale price, if any remained to be paid / due to the Borrower.
(ii) At the time of taking possession, the authorised officer shall make or
cause to be made an inventory of the property as nearly as possible and
deliver or cause to be delivered, a copy of such inventory to the borrower or
to any person entitled to receive on behalf of borrower.
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(iv) The authorised officer shall take steps for preservation and
protection of secured assets and insure them, if necessary, till they are sold
or otherwise disposed of.
(i) in the case of a debt, prohibiting the borrower from recovering the debt
or any interest thereon and the debtor from making direct payment thereof
and directing the debtor to make such payment to the authorised officer
(ii) in the case of the shares in a body corporate, directing the borrower to
transfer the same to the secured creditor and also the body corporate
from not transferring such shares in favour of any person other than the
secured creditor. A copy of the notice so sent may be endorsed to the
Registrar to the issue or share transfer agents of concerned body
corporate (iii) in the case of other movable property (except as aforesaid),
calling upon the borrowers and the person in possession to hand over the
same to the authorised officer and the authorised officer shall take custody
of such movable property in the same manner as provided in Sub-rule (1) to
(3) above;
(iv) movable secured assets other than those covered in this rule shall be
taken possession of by the authorised officer by taking possession of the
documents evidencing title to such secured assets.
(1) The authorised officer may sell the moveable secured assets taken
possession in one or more lots by adopting any of the following methods to
secure maximum sale price for the assets, to be so sold--
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(a) obtaining quotations from parties dealing in the secured assets or
otherwise interested in buying such assets; or
(2) The authorised officer shall serve to the borrower a notice of thirty
days for sale of the movable secured assets, under sub-rule (1):
Provided that if the sale of such secured assets is being, effected by either
inviting tenders from the public or by holding public auction, the secured
creditor shall cause a public notice in two leading newspapers, one in
vernacular language, having sufficient circulation in that locality by setting
out the terms of sale, which may include,--
(c) Minimum Reserve Price, if any, and the time and manner of payment;
(d) Date, Time and Place of public auction or the time after which sale by
any other mode shall be completed;
(f) ANY other item which the authorised officer considers material for a
purchaser to know in order to judge the nature and value of movable secured
assets.
(3) Sale by any methods other than public auction or public tender, shall be
on such terms as may be settled between the parties in writing.
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Sale of movable secured assets
(1) Where movable secured assets is 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 be sold again.
(2) On payment of sale price, the authorised officer shall issue a certificate
of sale specifying the movable secured assets sold, price paid and the name
of the prescribe form and thereafter the sale shall become absolute. The
certificate of sale so issued shall be prima facie evidence of title of the
purchaser.
(2) The possession notice shall also be published in two leading newspaper,
one in vernacular language having sufficient circulation in that locality, by
the authorised officer within a period not exceeding 7 days from the date
of taking possession
In case the possession is not handed over by the owner of the property
peacefully, we should prepare panchnama to that effect. Thereafter we
should file an application before the respective Metropolitan
Magistrate/District Magistrate in whose jurisdiction the assets are
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situated/located, thereby requesting to take the possession of the assets
and hand it over to the Bank in terms of Sec. 14 of the Act.
- White Paper, Pen, Marker, Scale, Locks, Sealing Wax, Match Box, Candle,
Calculator, 2 independent witness, Valuer, and Bank’s seal.
(4) The authorised officer shall take steps for preservation and protection
of secured assets and insure them, if necessary, till they are sold or
otherwise disposed off.
(5) Before effecting sale of the immovable property, the authorised officer
shall obtain valuation of the property from an approved valuer. Approved
valuer” means a person registered as a valuer under section 34 AB of the
Wealth-tax Act-1957, and approved by the Board of Directors or Board of
trustee of the secured creditor, as the case may be. Now in consultation
with the secured creditor, fix the reserve price of the property and may sell
the whole or any part of such immovable secured asset by any of the
following methods :--
(a) by obtaining quotations from the persons dealing with similar secured
assets or otherwise interested in buying the such assets; or
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(6) In any case, the authorised officer shall serve to the borrower a notice
of thirty days for sale of the immovable secured assets, under sub-rule (5):
Provided that if the sale of such secured asset is being effected by either
inviting tenders from the public or by holding public auction, the secured
creditor shall cause a public notice in two leading newspapers one in
vernacular language having sufficient circulation in the locality by setting out
the terms of sale, which shall include, -
(b) The secured debt for recovery of which the property is to be sold;
(c) Minimum Reserve Price, below which the property will not be sold;
(d) Date, Time and Place of public auction or the time after which sale by
any other mode shall be completed;
(e) Details about depositing Earnest Money as may stipulated by the secured
creditor;
(f) Details about the mode of payment and time schedule for the successful
buyer.
(g) any other detail which the authorised officer considers it material for a
purchaser to know in order to judge the nature and value of the property.
(8) Sale by any methods other than public auction or public tender, shall he
on such terms as may be settled between the parties in writing.
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(1) No sale of immovable property under these rules shall take place before
the expiry of thirty days from the date on which the public notice of sale is
published in newspapers or notice of sale has been served to the borrower.
(2) The sale shall be confirmed in favour of the purchaser who has offered
the highest sale price in his bid or tender or quotation or offer to the
authorised officer and shall be subject to confirmation by the secured
creditor:
Provided that no sale under this rule shall be confirmed, if the amount
offered by sale price is less than the Minimum Reserve Price fixed and
published in Public Notice.
Provided further that if the authorised officer fails to obtain a price higher
than the reserve price, he may, with the consent of the borrower and the
secured creditor effect the sale at such price.
(4) The balance amount of purchase price shall be paid by the purchaser to
the authorised officer on or before the fifteenth day of confirmation of
sale of the immovable property or such extended period as may be agreed
upon in writing between the parties.
Note:-
Please note that as per our extant guidelines, Authorised Officer can not
extend this period without approval from Financial Reconstruction and
Restructuring Group at Corporate Office..
(5) In default of payment within the period mentioned above, the deposit
shall be forfeited and the property shall be resold and the defaulting
purchaser shall forfeit all claims to the property or to any part of the sum
for which it may be subsequently sold.
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(6) On confirmation of sale by the secured creditor and if the terms of
payment have been complied with, the Authorised Officer exercising the
power of sale shall issue a certificate of sale of the immovable property in
favour of the purchaser 7) Where the immovable property sold is subject to
any encumbrances, the authorised officer may, if he thinks fit, allow the
purchaser to deposit with him the money required to discharge the
encumbrances and any interest due thereon together with such additional
amount that may be sufficient to meet the contingencies or further cost,
expenses and interest as may be determined by him.
(9) The authorised officer shall deliver the property to the purchaser free
from encumbrances known to the secured creditor on deposit of money as
specified above.
(10) The certificate of sale issued shall specifically mention that whether
the purchaser has purchased the immovable secured asset free from any
encumbrances known to the secured creditor or not. It should also indicate
clearly that the sale is “as is what is where is basis”. It is advisable to get
the draft Sale Certificate approved from Financial Reconstruction and
Restructuring Group (FRRG) / Legal Department.
(11) In cases where the Bank has already initiated legal action and suit is
pending before DRT and Bank has simultaneously taken action under
SRFAESI, on completion of sale process of secured assets, Authorised
Officer should file an application before DRT informing about the sale of
secured assets under SRFAESI in the format Comments:
Under Section 13(4) (a), the Secured Creditor can take over the possession
of Assets of the Borrower by following the procedures laid down in the Act
While exercising powers conferred under this section, secured creditor may
face some difficulties, which are enumerated below.
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to the Secured Creditor i.e. when only immovable assets are charged to the
Secured Creditor, but movable assets are not charged to the secured
creditor. The question of handing over of possession of movable assets
(which are not secured) to the Borrower will arise. If the Borrower and/or
his representative are not present or even present refuses to take delivery
of Assets, which are not secured, to secured creditor, then the question of
delivery and custody of those movable assets will arise. In that case the
secured creditor will have to take the custody of those assets as Trustee of
the Borrower. The Secured creditor will have to exercise the powers
conferred under section 176 of Contract Act 1872.
When possession of only Plant & Machinery (which is fastened to the earth)
is to be taken but the premises (either owned or hired by Borrower) are not
Secured Assets in favour of Secured Creditor, then secured creditor will
find it difficult to take actual possession of the said Plant & Machinery as
removal of Plant & Machinery may be difficult and the Borrower/owner of
the premises may object for keeping the said Secured Assets in the said
premises, by the Secured Creditor. In this eventuality, the Secured
Creditor will require to take only symbolic possession of the Secured Assets.
As per Section 13(4)(a) of the Act, Secured Creditor can after taking
possession of Secured Assets can sale, lease or transfer of Secured Assets
irrespective of any of terms and conditions in the Security Agreement,
whereby Secured Creditor can sell the Secured Assets by private treaty.
Under these Rules, Secured Assets may be sold by public auction to have
transparency in the actions taken by Secured Creditor.
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As per section 13(4) & 13(6) of the Act, the secured creditor while taking
possession of the secured assets does not get absolute right over the
property free from encumbrances. The secured creditor acquires same
rights as those of the Borrower. As a consequence thereof, auction
purchaser will acquire the same right, title and interest over the property,
which the Borrower has. As such, if there are any other charges other than
that of Secured Creditor, like Income Tax, Sales Tax, Municipal taxes,
electricity charges etc who have priority and claim over the immovable
property, then such charge will continue over the said property and auction
purchaser will require to satisfy those charges to get the property free
from encumbrances. This may result into reduction in distress value of the
secured property.
The Act is silent over the powers of Secured Creditor to decide the
objections, if any, raised by any person claiming any right, title or interest
over the property. Such person will have to move Debt Recovery Tribunal
and bring orders/directions to secured creditor. Unless such orders are
received, secured creditor can proceed further in the matter by overlooking
the objections of that person.
If there are no Bidders or Bids are less than the reserved price, then it will
be difficult for secured creditor to sell the properties. In that case, at
present, the secured creditor will be left with no alternative but to file
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recovery proceedings before Debt Recovery Tribunal or competent Civil
Court to recover the dues by presuming that there is no recovery from the
Borrower, unless borrower consents to sell property below reserved price.
As per section 13(4)(b) it is stipulated that, the secured creditor can take
over of the Management of Secured Assets but it is not stipulated of taking
over of Management of business or concern of the Borrower. However,
Section 15 & 16 of the Act deals with the provisions after taking over of
management of business of Borrower by Secured Creditor. The substantial
provisions in Section 13(4)(b) is silent over taking over of business of
Borrower, secured creditor may find it difficult to take over of Management
of business or concern of the Borrower. There is possibility of two
interpretations of provisions of section 13(4)(b) of the Act. If strict
interpretation of this provision is made then it may be argued that secured
creditor can only take over of Management of Secured Asset and secured
creditor is not entitled to take over of Management of business concern of
Borrower.
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Recovery of Debts Due to Banks and Financial Institutions Act 1993
Introduction:
The Act has come into force on the 24 th June 1993. The Act extends to
whole of India except the state of Jammu and Kashmir
The provisions of this Act shall not apply where the amount of debt due to
any Bank or Financial Institution or to a consortium of Banks / Financial
Institutions is less than Rs. Ten Lacs.
“Debt” under Section 2(g) of the Act means any liability (inclusive of
interest) which is claimed as due from any person by a Bank or a Financial
Institution or by a Consortium of Banks or Financial Institutions during the
course of any business activity undertaken by the Bank or the Financial
Institution or the Consortium under any law for the time being in force, in
cash or otherwise , whether secure or unsecured, or assigned, or whether
payable under a decree or order of any Civil Court or any arbitration award
or otherwise or under a mortgage and subsisting on, and legally recoverable
on, the date of application.
The Act indicates that its provisions are in favour of Banks and Financial
Institutions as if the debt to be recovered is a Tax. Provisions of Income
Tax Act 1961 and Income Tax (Certificate Proceedings) Rules 1962 for
recovery have been made applicable.
A Bank can file an application for the recovery of debt, due from the
defaulting borrower. However in such application the borrower can set up
counter claim against the Bank. Such counter claim may be in the nature of a
claim for damages or otherwise. Such counter claim has to be filed before
the borrower has delivered his defense or before the time limited for
delivering his defense has expired.
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Section 17 Jurisdiction, Powers and Authority of the Tribunal – Under the
provision of this Act, the Tribunal is to exercise the jurisdiction and
authority to entertain and decide application from Bank’s and Financial
Institutions for recovery of debt due. The clause 2 provides for jurisdiction
power and authority of Appellate Tribunal to entertain appeals against the
orders of the Tribunal.
Section 30 Appeal against the order of the Recovery Officer – Any person
aggrieved by an order of the Recovery Officer may within 30 days from the
date on which a copy of the order is issued to him, prefer an appeal to the
Presiding Officer of the Tribunal.
Section 34 Act to have overriding effect – The provisions of this Act shall
have effect notwithstanding anything inconsistent therewith contained in
any other law for the time being in force or in any instrument having effect
by virtue of any law other than this Act. The Provisions of this Act or the
rules made there under shall be in addition to and not in derogation of the
IFCI Act 1948, SFC Act 1951, UTI Act 1963, IRBI Act 1984 and Sick
Industrial Companies (Special Provisions) Act 1985 and SIDBI Act 1989.
Important;
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1. Before preparing filing of suit, it is mandatory for branches to seek
approval from competent authority at Corporate Office for filing of suit
at DRT. At present, the authority for approval lies with the authority,
one level higher, to the authority in whose powers, the sanction of the
facilities falls. In any case, the matter is to be referred to Financial
Reconstruction and Restructuring Group of the bank for approval..
2. Ensure that the Account has been classified as Non Performing Asset.
However this is not necessary, the account may have been recalled on
other deficiencies also.
3. Ensure that Branch has identified an advocate for handling the case at
DRT and that the advocate is on the approved panel of the bank and that
appointment of the advocate is approved by Financial Reconstruction and
Restructuring Group / Legal Department.
4. The due diligence on documents/securities is to be carried out to ensure
that the documents are not time barred and that advocate approval to
the loan documents is available to that effect.
1. Branch to verify once again that the documents are signed by the
Borrower / Guarantors as the case may be and are filled in all
respects and no column is left blank. Prepare a photocopy set of all the
documents and a brief history of the account and hand it over to the
advocate for issuing legal notice. Identify the parties to the suit. In
general, the borrower, all the personal guarantors in individual capacity,
Corporate Guarantor in Corporate capacity, Partnership firm in its
capacity as firm and all partners in their individual capacity, Any
Mortgagor of the property, Any other party such as Joint Charge Holder
banks etc. should be made party. It should be ensured that wherever we
have guarantee from partnership firm ,all the partners are individually
made party to the suit in addition to the firm. In case of bills of
exchange, both the drawer and drawee and other parties to the Bill of
Exchange will have to be made parties.
2. Before finalizing the figure for legal notice, branch should ensure that all
interest, compound interest, penal interest and charges as applicable
have been debited. Since Compounding of Penal Interest is not permitted
as per the decision of the Hon’ble Supreme Court, branch should identify
the impact of compounding of the interest from the date of
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classification as NPA and intimate to advocate so as to reduce the claim
amount by such impact..
3. The future interest rate should be determined on the basis of sanction
terms approved by Corporate Office and as per acceptance letter from
the borrower at the time of availing the facilities..
4. Branch should obtain the draft copy of the legal notice and shall review
the same and ensure that all the details pertaining to the parties to the
suit, outstanding amounts and our claims including future interest, details
of securities including mortgaged properties have been correctly
mentioned. If need be, the same may be referred to Financial
Reconstruction and Restructuring Group (FRRG) / Legal Department for
opinion.
5. Legal notice should be issued to all the parties to the suit by the
advocate returnable in 15 -–21 days and should be sent by Registered
Post A. D. to all the parties. (In case of a Notice for winding up of the
company , it is mandatory to give e 21 days time in terms of section 434
of the Companies Act, 1956).
6. Branch should obtain the acknowledgement of the mail from advocate and
put them in file.
In each case, we have to identify the interim relief’s relevant and seek
such relief’s from DRT.
8. Branch should get ready the Original Application wherein Certified Copies
of all the Loan Documents (Not Original as Original are filed at Later
Stage of Proceedings), Certified Copy of the Statement of each Account
as explained above, Demand Draft in favour of Registrar DRT for the
Court Fee Amount etc. The attestation as contemplated in sub-clause 2
of Rule 9 of the Procedure Rules 1993 shall be made at the end of the
document in the form given below:
(Signature)
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Name and designation of the authorized person with date
In this case the Tribunal can direct the defendant either to furnish the
security within such time as may be specified and in such sum as may be
specified for the purpose of producing and placing at the disposal of the
Tribunal, such property of the same value.
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As per Section 19(13) (B) of The Act, if the defendants fails to show
cause as to why he should not be directed to furnish security or fails to
furnish security as directed within such time as prescribed, the Tribunal
may order attachment of whole or any part of such property claimed by
bank and owned by defendant and which may appear sufficient to satisfy
the decree.
13. The Branch Head or the officer of the Branch holding Power of
Attorney from the Bank to go to DRT along with the advocate and tender
the OA before the Registrar as per the time frame of each Debt
Recovery Tribunal. Registrar will review the contents and issue Lodging
No. of the case. Then the Registrar will inform the objections
(irregularities in application) if any, the same need to be rectified /
removed by the branch. On removal of all the objections, OA No. of the
case will be given. Branch should remove the objections and / or comply
with the directions given by DRT within 7 days from the date of display
on the notice board, which may be extended by the Registrar for reasons
to be recorded up to 30 days. If the Branch fails to remove objections
or comply with the directions within the prescribed time limit, the
Registrar may for reasons to be recorded in writing, decline to register
the Application.
The DD/PO paid towards the fees will not be encashed by the DRT till
the application is registered and in case where registration is declined,
the DD / PO shall be returned to the applicant after the appeal period is
over. Branches should ensure that OA is never rejected at this stage.
14. Now the OA is ready for placing before the Presiding Officer. First the
interim relief application needs to be decided. The Registrar will forward
the case file to the Presiding Officer wherein branch officials may call
along with the advocate and present the matter for granting of interim
relief. (This process is done before serving of the summons to all other
parties.)
15. The Presiding Officer will allow the interim relief and the order will be
passed. The order along with other case documents need to be served to
all the defendants and is generally returnable within 15 days when the
interim relief sanctioned may be confirmed.
16. Now the OA will proceed in its usual course. In case branch is not able to
serve the summons or any other order of the Tribunal in person / fax or
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otherwise, the same can be done by Publication in Local News Paper after
obtaining order from the Tribunal to that effect.
17. One very important point for inclusion in OA is asking for Partial
Recovery Certificate on the basis of Admitted Liability. This helps in fast
disposal of the matter. Branch may discuss with the advocate and among
others, ask for relief by way of admitted liability as per Audited Balance
Sheet of the borrower or admission of liability made in the written
statement filed by the Defendants. (This is not available on the basis of
Acknowledgement of Debt, as AOD is one of the loan documents.)
1. After serving of the summons to all the defendants, Branch should file an
affidavit with the Registrar for service.
2. Now the case is marked for reply from the defendants on the application
of interim relief and the counter say as to why this relief should not be
confirmed.
3. Further the case is also for appearance of all the defendants. Generally
after service, the Registrar will give 2-3 dates and if no one appears then
the matter will be listed on regular board of the Presiding Officer for
Ex-Party Orders.
4. In case of appearance of all the defendants, the matter will remain with
the registrar for filing say on application of interim relief. Once the
reply is filed, the matter will be listed on regular board of the Presiding
Officer for further progress.
5. The Presiding Officer will hear the matter and necessary orders on
interim relief will be passed.
6. The DRT will now call written statement by all the defendants. This is
reply of all the defendants including their objections on any fact /
document / terms and conditions and their own reply in this matter.
Generally 3-4 week period is given to all the defendants for filing of WS.
In case WS is not filed, the case may be adjourned for 2-3 hearings and
then proceed for Ex-Party Judgment.
7. The defendants desirous of seeking inspection of original documents in
the custody of the Bank shall make an application within 10 days from the
date of his appearance in the proceeding.
8. In case the WS is filed, the branch is required to file their Claim
Affidavit with Original Documents. This is the stage of filing all original
documents. After the written statement is filed, the Applicant Bank has
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to file the Claim Application and Original Documents (CAOD). Then time
is given to the defendants to file their say and Objections on the
Applicant Bank’s CAOD.
9. After filing of the CAOD, the Presiding Officer will hear the arguments
of both the sides and then the matter will be decided and the Presiding
Officer will give the order. We presume that the decision is in favour of
the bank and hence this Order will be called the “Decree”. In case of any
adverse order against the bank, branch should immediately prepare for
filing of Appeal at Debt Recovery Appellate Tribunal against the orders.
Please note that the time limit for filing the appeal is 45 days from the
date of order passed at DRT as per Section 20 of RDBF Act.
10. At times it is observed that the defendants apply for Cross Examination
just with the intention of delaying the matter. Rule 12(7) provides that
if a defendant denies his liability to pay the claim made by the
applicant, the Tribunal may act upon the affidavit of the applicant who
is acquainted with the facts of the case. In this Rule, which deals with
the consideration of the applicant's bank application, there is no
reference to the examination of witnesses. This sub-rule refers only
to the affidavit of the applicant. Rule 12(6), on the other hand,
provides that the Tribunal may, at any time, for sufficient reason order
a fact to be proved by affidavit or may pass an order that the affidavit
of any witness may be read at the hearing. It is in the proviso to this
sub-rule that a reference is made to the cross - examination of
witnesses. It is common knowledge that hardly any transaction with the
Bank would be oral and without proper documentation, whether in the
form of letters or formal agreements. In such an event the bona fide
need for the oral examination of a witness should rarely arise. There has
to be a very good reason to hold that affidavits, in such a case, would not
be sufficient. (Refer CASE NO.: Appeal (civil) 4679 of 1995 UNION OF
INDIA & ANR. Vs. RESPONDENT: DELHI HIGH COURT BAR
ASSOCIATION & ORS. DATE OF JUDGMENT: 14/03/2002 BENCH: B.N.
Kirpal, Y.K. Sabharwal & K.G. Balakrishnan)
11. In case of decree, the Presiding Officer will order for issuance of
“Recovery Certificate”. Section 19(22) of The Act requires that the
Presiding Officer of the Tribunal shall issue a Recovery Certificate under
his signature on the basis of Order of the Tribunal in favour of the
Recovery Officer for recovery of the amount in question. Branch should
visit the typing clerk and check that the recovery certificate is drawn
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correctly as per the orders and includes the costs incurred by the Bank
for the legal action.
Recovery Proceedings
Declaration of Assets:
1. The Recovery Officer as per Section 28(4A) of The Act may order at
any stage of the execution of the certificate of recovery, to any person
or company and to its officers, against whom the certificate of recovery
is issued, to disclose and declare on affidavit the particulars of his or its
assets.
2. Branch should use this tool and approach the Recovery Officer
immediately on the beginning of execution of recovery process to obtain
these details, as it will help in getting information on other assets of the
judgment debtors that are not to the knowledge of the bank.
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Section 19(14), the application for attachment should clearly indicate the
specific details and value of the property to be attached.
2. The Recovery Officer will issue the Attachment Order. Section 19(15)
empowers the Tribunal to direct conditional attachment of whole or any
part of the property. Branch needs to serve this order and proceed for
attachment of the property.
- First branch officials along with the advocate and the Recovery
Inspector (In case the Recovery Inspector does not accompany,
branch should get an order from the Recovery Officer to execute the
attachment order) may visit to the attached property and ask the
Judgment Debtors to acknowledge the attachment order.
- At the same time, branch officials may affix a copy of the attachment
order on the conspicuous part of the property. A Black Board duly
painted may be used depending on the size of the property and also
depending on the kind of the property. If borrowers are reputed, this
exercise helps to bring them to negotiating table and settle the dues.
- After affixing the copy of order or putting the board, a panchnama
needs to be prepared detailing the entire process and should be got
signed by some independent witness.
- If Recovery Inspector has not accompanied the branch officials,
branch may file an affidavit confirming the execution of attachment
order.
- Some times the borrowers create lots of problem in execution of
these processes, in such case branch through the Recovery Officer
should approach the Police and ask for Police Protection to perform
the execution of the orders.
- A copy of the attachment order should also be served to the Sub
Registrar for recording of attachment on the Property Card. It will
help to protect from any 3rd party charge to be created by the
owners.
3. After filing of the affidavit, the Recovery Officer will issue notice to all
the defendants for settling terms and conditions of the proclamation of
sale. Branch should obtain this notice and serve the same to all the
defendants in person / registered post / fax etc. whatever means
possible.
4. During the notice period, branch should get the valuation of the property
through some approved valuer on the DRT panel. The copy of the report
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should be submitted to the Recovery Officer that will help to fix the
minimum reserve price.
5. On the date decided for settling the terms and conditions for
proclamation of sale (if no objection is raised from the defendants and
matter is not stayed), the Recovery Officer will issue the Proclamation of
Sale and Public Notice. The Proclamation of Sale will detail the Minimum
Reserve Price, Bid Deposit Amount, Date, Time and Venue of auction and
other terms and conditions of the auction / sale.
6. Branch should obtain the proclamation of sale and public notice and
arrange publication of public notice in leading local Newspapers. However
branch may opt for National Papers also depending upon the kind and
value of property and availability of expected bidders. It should be
ensured that the public notice is published in the paper 30 days prior to
the date of auction.
7. Now Branch to explore local buyers of the property and show them the
property, In case the property is not in possession of the bank, the
Recovery Officer will fix a date for inspection of the property after
serving a notice to the defendants.
8. On the auction date, branch officials should be present in DRT. Branch
should ensure that the expected bids are tendered with the recovery
officer before the cut off time.
9. At the time of opening of bids, the Recovery Officer will prepare a Bid
Sheet for Ist Bid and announce the bid amounts and name of the parties.
Then opportunity will be given for improving the bids. Branch officials
should use their relations with bidders and explore to get the bids
improved to the best possible. Again the 3rd and Final Bid will be called
and all the bidders would be asked to improve. If the Maximum Bid
Amount (if other wise in order) is greater than the Minimum Reserve
Price, the bidder will be declared successful bidder. The Recovery
Officer will issue a written order for the same. The successful bidder
will be required to deposit the remaining amount as per terms and
conditions of the proclamation.
10. The bid amount is to be deposited by the bidder with in 15 days and sale
confirmation will be done at the end of 30 days. Branch to keep in touch
with the bidder and ensure that the bid amount is deposited on time.
Immediately on completion of 30 days, the bidder and the branch should
call on the Recovery Officer and obtain an order for Confirmation of
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Sale. With the issuance of Confirmation of Sale, the sale becomes
absolute.
11. Now the bidder can take possession of the property, if the defendants
who have possession of the property create any obstacles, the buyer may
approach the Recovery Officer and may take possession of the property
with his help and police protection. However there is no role or
responsibility of the bank in this process and it does not affect the
branch claim on the amount of sale received by DRT.
12. Branch should file an application with the Recovery Officer for
disbursement of the amount of auction to part / full satisfaction of the
claim amount and shall obtain the proceeds as soon as possible to avoid
any complication at a later date. AS per Section 19(19) of The Act in case
of priority of other creditors, Adjudicating Officer (Presiding Officer in
DRT) has powers to distribute the sale proceeds in accordance with
inter-se agreement / arrangement between them and to the other
persons entitled thereto in accordance with the priorities in the law.
13. The bidder is required to deposit the poundage fee and get the Sale
Certificate issued in his name from DRT. This sale Certificate is basically
Title Deed of the property and needs to be registered with the Sub
Registrar Office immediately but not later than 120 days. Please note
that in case of delay beyond 30 days, the penalty is imposed by the
Registrar and hence should be taken care properly. However there is no
role or responsibility of the bank in this process.
14. As per Section 19(23), in case that a property is situated in jurisdiction
of another Tribunal, the copy of the Recovery Certificate may be sent to
that Tribunal for execution.
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2. After ascertaining the details of the property from the Net Worth
Statement filed at the time of applying for the credit facilities or
from market sources or personal contacts, branch should obtain the
Property Card of this property from the office of Sub Registrar. This
Property Card will act as a proof of ownership for the Recovery
Officer as well disclose any other charges on this property.
3. Branch should now file an application before the Recovery Officer
duly accompanied with an affidavit and the original property card for
attachment and auction / sale of the property of the guarantors
(defendants).
4. Now the procedure as explained above under “Attachment and Sale of
Mortgaged Property” point 2 to 13 needs to be followed.
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and finally auction / sale. The receiver may also call the tenants to
deposit the rent and keep the same in a designated account.
6. Branch may periodically review the balance outstanding and approach
the Recovery Officer for release of funds to the bank for part / full
settlement of bank’s dues.
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security deposits with vendors / Govt. Dept. and with any court and
any claim respecting any property etc.
2. To exercise this option, on exploiting all opportunities available, by
way of mortgage / hypothecation etc., branch may file an application
before the Recovery Officer, on the strength of Book Debt
Statement or Audited Balance Sheet or any other information which
the branch have in its custody and can satisfy the Recovery Officer
that there is an amount due and payable by other party to the
judgment debtor, for recalling that amount towards satisfaction of
decreed dues of the bank.
3. The Recovery Officer may direct such person / company / firm etc.
whom so ever to directly pay / deposit the amount due and payable to
the judgment debtor.
4. On receipt of the same, branch may obtain the amount from DRT.
Filing of Caveat –
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avoid any contempt proceeding. In case of any un-intentional violation due to
lack of communication or other wise, the matter should be referred to
Corporate Office immediately.
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Criminal complaint by filing of application under section 138 of
Negotiable instruments act, 1881 for dishonour of Cheques:
In the above context we have come across a judgment of the Supreme Court
in K. Bhaskaran vs. Sankaran Viadhyan Balan and another as reported in
Bankers' Journal issue of March 2000 at page no. 200. In this case the
Supreme Court has held that after the conditions of Section 138 of
Negotiable Instruments Act, 1881 are completed cause of action accrues and
even in case of unclaimed notice service will be presumed. We reproduce
below the relevant paras of the judgment.
"20. If a strict interpretation is given that the drawer should have actually
received the notice for the period of 15 days to start running no matter
that the payee sent the notice in the correct address, a trickster cheque
drawer would get the premium to avoid receiving the notice by different
strategies and he could escape from the legal consequences of section 138
of the Act. It must be borne in mind that Court should not adopt an
interpretation, which helps a dishonest evader and clips an honest payee as
that would defeat the very legislative measure.
21. Section 138 of the Act invites a liberal interpretation for the person who
has the statutory obligation to give notice because he is presumed to be the
loser in the transaction and it is for his interest the very provision is made
by the legislature. The words in Clause (b) of the proviso to section 138 of
the Act show that payee has the statutory obligation to "make a demand" by
giving the notice. The thrust in the clause is on the need to "make a
demand". It is only the mode for making such demand which the legislature
has prescribed. A payee can send the notice for doing his part for giving the
notice. Once it is dispatched his part is over and the next depends on what
the sender does."
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The Negotiable Instruments Act, 1881 (the Act) contains provisions for
penalties in case of dishonour of cheques due to insufficiency of funds in the
account of the drawer of the cheque. As the Government found the existing
provisions contained in Sections 138 to 142 of the Act deficient in dealing
with such cases, the Act has been amended by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act, 2002 to provide for such
reliefs.
Definition of Cheque: -
" A cheque in the electronic form means a cheque which contains the exact
mirror image of a paper cheque, and is generated, returned and signed in a
secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometrics signature) and asymmetric
crypto system"
The amendment further provides for dealing with such electronic cheques
and to make the Information Technology Act, 2000 applicable to the
Negotiable Instruments Act in relation to such cheques.
Period of notice:
Section 138 (1) (b) of the Act requires the payee or holder in due course to
give notice in case of dishonour of cheque within 15 days from the receipt
of information regarding dishonour of cheque. This period of 15 days has
been increased to 30 days.
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Nominee directors excluded:
At present complaint under Section 138 of the Act is to be filed within one
month from the expiry of 15 days from the date of the receipt of the notice
by the drawer of the dishonored cheque. Now the amendment has allowed
discretion to the Court to entertain the complaint after expiry of one month
if the complainant satisfies the Court that he had sufficient cause for
not making a complaint within such period.
Summary trial:
The Magistrate has been empowered to try the Section 138 cases as
summary trial as provided under Sections 262 to 265 of the Code of
Criminal Procedure, 1973. The amendment also provides for trial of the case
on day-to-day basis until conclusion and to conclude the same expeditiously
within 6 months from the date of filing of the complaint.
Service of summons:
The amendment provides that the offence punishable under the Act shall be
compoundable (means settlement for payment of money).
The following drafts of notices are enclosed for the use of branches and
departments at Corporate Office, to be issued on dishonour of cheque.
If the drawer of the cheque fails to pay within 15 days of the receipt of the
notice, a complaint has to be filed with the Judicial Magistrate of the first
class or Metropolitan Magistrate, as the case may be, within 1 month
thereafter. In case of any doubt or difficulty, Legal Department at
Corporate Office may be contacted.
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Declaration of the borrower as willful Defaulters
Procedure to be adopted –
a. Analyse the grounds of willful default and collect the related data and
documents.
b. Prepare a memorandum to Corporate Office committee through
Financial Reconstruction and Restructuring Group who is delegated
powers by Board to take such decision. Presently the committee
headed by Managing Director consists of any two SVPs / VPs from
Credit or Financial Reconstruction and Restructuring Group.
c. On receipt of approval from Corporate Office, a notice be sent to all
the parties i.e. the borrower and guarantors and directors as the case
may be in the prescribed format at appendix XXIII
d. In case there is no response from the borrower or other parties, the
branch may confirm the same to Financial Reconstruction and
Restructuring Group and report the name in willful defaulters list of
next quarter.
e. However there is provision to provide hearing before Grievance
Redressal Committee constituted by the bank in case the borrower
makes representation to the Branch and raises objections for such
declaration and seeks a personal hearing before Grievance Redressal
Committee. Branch should fix up an appointment through Financial
Reconstruction and Restructuring Group. The Grievance Redressal
Committee consists of Managing Director, any one of EVPs and any one
SVPs at present.
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f. On hearing the decision of the committee, further action is to be
taken to either to report the name in willful defaulter list of next
quarter or other wise. Branch is also required to communicate the
decision to the borrower in writing.
Purpose
A scheme was framed under which the banks and notified All India Financial
Institutions were required to submit to RBI the details of the wilful
defaulters. Wilful default broadly covered the following:
c) Assets financed either not been purchased or been sold and proceeds
have misutilised;
The term "wilful default" has been redefined in supersession of the earlier
definition as under:
Page | 49
A "wilful default" would be deemed to have occurred if any of the following
events is noted :-
(a) The unit has defaulted in meeting its payment / repayment obligations
to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has not utilised the finance from the lender for the
specific purposes for which finance was availed of but has diverted the
funds for other purposes.
(c) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has siphoned off the funds so that the funds have not
been utilised for the specific purpose for which finance was availed of, nor
are the funds available with the unit in the form of other assets."
(d) routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender;
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(f) shortfall in deployment of funds vis-à-vis the amounts disbursed /
drawn and the difference not being accounted for.
The identification of the wilful default should be made keeping in view the
track record of the borrowers and should not be decided on the basis of
isolated transactions/incidents. The default to be categorised as wilful must
be intentional, deliberate and calculated.
End-use of Funds
The following are some of the illustrative measures that could be taken by
the lenders for monitoring and ensuring end-use of funds:
Penal measures
Page | 51
There are certain penal measures prescribed against such willful defaulters:
It is also advised that the legal process, wherever warranted, against the
borrowers / guarantors and foreclosure of recovery of dues should be
initiated expeditiously. The lenders may initiate criminal proceedings against
wilful defaulters, wherever necessary.
It would be imperative on the part of the banks and FIs to put in place a
transparent mechanism for the entire process so that the penal provisions
are not misused and the scope of such discretionary powers are kept to the
barest minimum. It should also be ensured that a solitary or isolated
instance is not made the basis for imposing the penal action.
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While dealing with wilful default of a single borrowing company in a Group,
the banks / FIs should consider the track record of the individual company,
with reference to its repayment performance to its lenders. However, in
cases where a letter of comfort and / or the guarantees furnished by the
companies within the Group on behalf of the wilfully defaulting units are not
honoured when invoked by the banks / FIs, such Group companies should also
be reckoned as wilful defaulters.
J.P.C. Recommendations
(b) It is essential that banks closely monitor the end-use of funds and
obtain certificates from the borrowers certifying that the funds have been
used for the purpose for which these were obtained.
It should also be ensured that the penal provisions are used effectively and
determinedly but after careful consideration and due caution. Towards this
end, banks / FIs are advised to put in place a transparent mechanism, with
the approval of their Board, for initiating criminal proceedings based on the
facts of individual case.
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The Sick Industrial Companies Act, 1985
In number of cases where Bank has financed to the Industrial Company and
the facilities are classified as Non-performing or otherwise, the industrial
company may become a Sick Industrial Company. To deal with such
companies, BIFR (Board of Industrial Finance Reconstruction) has been
formed to deal with the cases under SICA Act 1985. It is therefore
necessary to study the various provisions of the SICAct-1985. For ready
reference the important definitions and powers of the Board are given
hereunder.
Note: It is very common that the Company files the reference with the
BIFR under the SICA Act 1985 to get the protection from any legal action
against the company to delay the process of recovery and hence we need to
make in depth analysis of all financial statements and other documents and
counter their claim before BIFR.
"Board" means the Board for Industrial and Financial Reconstruction (BIFR)
established under section, 4;
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"net worth" means the sum total of the paid-up capital and free reserves.
REFERENCE TO BOARD.
(1) Where an industrial company has become a sick industrial company, the
Board of Directors of the Company, shall, within sixty days from the date of
finalisation of the duly audited accounts of the company for the financial
year as at the end of which the company has become a sick industrial
company, make a reference to the Board for determination of the measures
which shall be adopted with respect to the company.
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Provided that a reference shall not be made under this sub-section in
respect of any industrial company by –
(a) the government of any State unless all or any of the industrial
undertakings belonging to such company are situated in such State;
The Board may make such inquiry as it may deem fit for determining
whether any industrial company has become a sick industrial company -
(a) upon receipt of a reference with respect to such company under section
15; or
(b) upon information received with respect to such company or upon its own
knowledge as to the financial condition of the company.
(3) The Board or, as the case may be the operating agency shall complete its
inquiry as expeditiously as possible and Endeavour shall be made to complete
the inquiry within sixty days from the commencement of the inquiry.
(4) Where the Board deems it fit to make an inquiry or to cause an inquiry to
be made into any industrial company under sub-section (1) or, as the case
may be, under sub-section (2), it may appoint one or more persons to be a
special director or special directors of the company for safeguarding the
financial and other interests of the company or in the public interest.
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POWERS OF BOARD TO MAKE SUITABLE ORDER ON THE
COMPLETION OF INQUIRY.
(1) If after making an inquiry under section 16, the Board is satisfied that a
company has become a sick industrial company, the Board shall, after
considering all the relevant facts and circumstances of the case, decide, as
soon as may be by order in writing, whether it is practicable for the company
to make its networth exceed the accumulated losses within a reasonable
time.
(2) If the Board decides that it is practicable for a sick industrial company
to make its networth exceed the accumulated losses within a reasonable
time, the Board shall give such time to the company as it may deem fit to
make its networth exceed the accumulated losses.
(3) If the Board decides that it is not practicable for a sick industrial
company to make its networth exceed the accumulated losses within a
reasonable time and that it is necessary or expedient in the public interest
to adopt all or any of the measures specified in section 18 in relation to the
said company it may direct any operating agency specified in the order to
prepare, having regard to such guidelines as may be specified in the order, a
scheme providing for such measures in relation to such company.
(1) Where an order is made in relation to any sick industrial company, the
operating agency specified in the order shall prepare, as expeditiously as
possible and ordinarily within a period of ninety days from the date of such
order, a scheme with respect to such company providing for any one or more
of the following measures, namely :-
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(c) the amalgamation of -
(ii) any other company with the sick industrial company (hereafter in this
section, in the case of sub-clause (i), the other company, and in the case of
sub-clause (ii), the sick industrial company, referred to as 'transferee
company');
(d) the sale or lease of a part or whole of any industrial undertaking of the
sick industrial company;
(2) The scheme prepared by the operating agency shall be examined by the
Board and a copy of the scheme with modification, if any, made by the Board
shall be sent, in draft to the sick industrial company and the operating
agency and in the case of amalgamation, also to any other company
concerned, and the Board shall publish or cause to be published the draft
scheme in brief in such daily newspapers as the Board may consider
necessary, for suggestions and objections, if any, within such period as the
Board may specify;
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3. Whether the Operating Agency has been appointed by BIFR?
4. Whether the Operating Agency has brought out any plan for
rehabilitation/restructuring of the Company?
5. We have to convey our views on the revival scheme if worked out by
OA and file our objections if any before the BIFR.
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