BANKS CAN SELL
SECURED ASSETS OF DEFAULTERS
The Supreme Court upheld the constitutional validity of the
security enforcement law - which allows banks to take over and
dispose of secured assets of defaulters - while also retaining
the borrowers' right to appeal against the lender.
In its verdict on the famous ICICI Bank
versus Mardia Chemicals case, the court has given the borrower
the right to question the bank's decision, which the bank
will have to mandatorily respond to. While the borrower will
have the right to move the debt recovery tribunal (DRT), the
banker can go ahead and sell the assets if the DRT does not
issue a stay order.
Significantly, the three-bench judge has
held that the borrower will no longer have to deposit 75%
of the outstanding loans with the DRT for making an appeal.
This will make it easier for the borrower to make an appeal.
"The verdict is a great decision
for ICICI Bank. For cases we have moved to take possession
of the collateral, we would consider properties for sale,"
said Kalpana Morparia, deputy MD, ICICI Bank. Besides taking
possession of the assets, the secured creditor may take over
the management or appoint any person to manage the assets.
However, Rasik Mardia, the promoter of Mardia Chemicals, said
that as a petitioner he has received more than what he was
looking for. "Our only point of concern was section 17(2)
that barred judicial remedies until a deposit of 75% of the
claim amount is made,"
The Supreme Court judgement puts an end
to the almost a year-old dispute between Mardia and ICICI
Bank.
Mardia the former had challenged the Securitisation and Reconstruction
of Financial Assets and Enforcement of Securities Interest
(SRAFESI) Act, which allows lenders to attach and sell secured
assets of defaulting clients.
The lenders of Mardia Chemicals had taken
possession of the company's Vatva plant in Surendranagar district
of Gujarat in December '02. Mardia's outstanding dues to lenders
is close to Rs 1,500 crore, of which the principal amount
is Rs 800 crore. Of this, the company owes around Rs 300 crore
to ICICI Bank, the principal lender to the company. The principal
due to ICICI Bank is around Rs 190 crore.
The court had earlier restrained banks
from selling the secured assets that have been attached. Several
borrowers in different courts in the country had also stalled
banks and institutions from disposing off assets which were
attached under the SRAFESI Act.
Once a borrower turns a defaulter (ie
non-payment of dues for 90 days), the lending bank has to
give a 60-day notice for enforcing the secured asset. After
responding to the borrowers' query, the bank has to wait another
45 days before selling the asset. Meanwhile, if the borrower
obtains a DRT stay, the sale process will be stalled.
Experts in the industry feel that the
introduction of the DRT clause could delay the repayment procedure
and substantially reduce the bargaining power of lenders.
The new Act was framed in such a way that it gives lenders
the right to attach and sell the securities pledged with them
without much legal intervention. Thus, in its original form,
it gave an upper hand to the lender.
