The type of security and mechanisms for taking over assets of a corporate borrower are described as under:

(a) Is the system of ownership rights in respect of both land and other property reasonably stable and certain in this economy?

(b) In particular:

(i) is the system of land ownership and rights sufficiently developed to encourage lending on the security of land; and

(ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property?

 

The "real property" security law is substantially covered by legislation. Under Indian Law, the law recognised immovable property, moveable property in corporate property, and intellectual property. The law relating to immovable mortgages and charges is found in the provision of the Transfer of Property Act, 1882, (hereinafter "TP Act") the provisions of Registration Act 1908, and the provisions of Code of Civil Procedure 1908. The property law in India relating to security was developed in over time when and modern day banking was not in view. The TP Act regulates and deals with transfer of property inter vivos rather than transfer by operation of law. It does not deal with the law of succession nor with Government grants. The TP Act is not exhaustive and only consolidates the law. Consequently, the Courts in exercise of their jurisdiction as courts of equity do lay down principles, not inconsistent with the TP Act. It is in this respect that the Indian Courts are different from those in England. In India there are no separate courts of equity (as in England) and are both courts of law and equity. Accordingly, on some of the important concepts, where equitable doctrines apply, Indian courts have taken a different view. Generally, the TP Act deals with subjects such as essentials of a valid transfer, doctrine of notice, special types of transfer, law relating to priorities, sales, mortgages, lease, exchanges and gifts. The law relating to assignment of actionable claims is also of the TP Act.

The system of ownership rights in respect of immovable law is reasonably states and certain.

There are separate laws for agricultural lands and land ceiling laws and land reform acts by each State which impose ceilings on land holding and use of land holding. When industrial user is to be ensured conversion of agricultural land to non-agricultural land is required and the land rent as an annual rental value or ground rent changes. Consolidation of holdings and conversion of ribbon rights for industrial purposes requires sanction from the Collector or the authority designated under local laws. The system of land ownership and rights is sufficiently developed to deal with the security lending on land rights. Provisions for lessors, as state authorities giving consent to the lessees lenders for creating mortgage over leasehold properties and for step-in rights are will known in India.

In relation to movable property and incorporeal or intangible assets and intellectual property the law in India is equally well developed. The filing requirements for registering a charge in relation to such property is different than that in relation to immovable property. There are separate authorities constituted under the Trade Marks Act, the Copy Right Act and the Patents Act which would be relevant for securing an interest in intellectual property. Goodwill as an intangible asset and non-compete rights can also be charged by assigning these in favour of the security agent acting on behalf of the lenders/ the lenders under either a deed of assignment or a hypothecation. Documented rights are treated as movable property and are capable of being charged by a floating charge under hypothecation.

(a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)?

(b) In practice, which of these types of security are most commonly employed by financiers?

(c) Is there a system of registration in this economy for any of these types of security taken by financiers?

(d) To what extent are priorities between competing securities regulated?

 

The type of security and mechanisms for taking over assets of a corporate borrower are described as under:

(a) Security over real property

Under the Indian Transfer of Property Act, 1982 the term "mortgage' is defined under Section 58(a) as follows:

"A mortgage is a transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an engagement which may given rise to a pecuniary liability".

Forms of a mortgage recognised in India are-

(1) Simple mortgage

(2) Mortgage by conditional sale

(3) Usufructuary mortgage

(4) English mortgage

(5) Mortgage by deposit of title deeds (Equitable mortgage)

(6) Anomalous mortgage.

Property law attaches different rights and liabilities in each of the six cases, some of which are briefly discussed as follows:

(1) In a simple mortgage, the mortgagor should personally undertake to repay the mortgage money and parties must expressly or impliedly agree that in the event of the mortgage or failing to repay according to his contracts, the mortgagee shall have a right to case the mortgage property to be sold, in this form of mortgage there is no possession nor is there an absolute transfer of the interest. It can be enforced only be suing and not without Court intervention.

(2) In a mortgage by conditional sale, there is ostensibly a sale with the condition that on default in payment of the mortgage money by a certain date, the sale would become absolute and on such payment being made, the sale can be avoided. From a banker's perspective this form is rarely used.

(3) Usufructuary mortgage involves delivery of possession or an undertaking on the part of the mortgagor to deliver it, and, secondly, the use of the usufruct until the mortgage dues are pad off. This too is rarely used in banking security creation.

(4) An English mortgage (or as is popularly known "legal mortgage") is a transaction by which a mortgagor binds himself to repay the mortgage money on a certain date, and transfers the mortgage property absolutely to the mortgagee subject only to a condition that the mortgagee will retransfer it to the mortgage or upon payment of the mortgage money as agreed. The three essentials of an English mortgage are;

(a) the undertaking to pay

(b) the property is absolutely transferred, and

(c) the transfer is subject to provision that the property would be reconveyed on redemption of the debt due.

The operative words are the same as those of an absolute conveyance. A characteristic feature of an English mortgage is that a right of sale without intervention of court is generally included as a covenant in the mortgage deed in order to enable the mortgagee to realize the mortgage money. This right of an English mortgagee is recognised by the Transfer of Property Act. This form of mortgage has a high stamp duty incidence in most states in India.

(5) "Equitable" mortgage or mortgage by deposit of title deeds, To facilitate the mercantile community in raising money with minimum stamp incidence after investigation of title and preparation in specified, notified towns such as Mumbai, Chennai, Calcutta and several others a corporate borrower is permit this mode of creating a mortgage. This special mode envisages that the debtor deposits the title deeds of his immovable property, where ever situate, with the creditor or his duly authorized agent with the specific intention of creating a security for the debt. This act of deposit creates a valid mortgage upon all properties comprised in the title deeds, the mortgage does not require any writing or registration and can be entirely oral. The bargain or agreement is not reduced in writing but a unilateral parole record of how the mortgage by deposit of title deeds was made is recorded. Forms recording the creation of a charge are recorded with the Registrar of Companies. It has substantially all the advantages of any of the other forms of mortgage. Hence, a holder of a registered instrument does not take priority. Thought a formal writing is not necessary, in actual practice a written memorandum is made after the deposit of title deeds, and separately confirmed by a letter communication by the corporate borrower. Such a memorandum states the fact of the deposit and the creation of the mortgage and does not require registration. However, if the memorandum is in itself the contract of mortgage, then it must be registered and stamped. The test is that the document should not constitute the 'bargain" between the parties. If it does, then is requires registration and this also clearly focuses the question of payment of stamp duty. Except in certain states which have expressly sought to levy of stamp duty on a memorandum evidencing a deposit of title deeds, most States in India do not so provide or have established several relations in respect of bank and financial institutions related transactions for project finance loan. [The State of Maharashtra and Gujarat have imposed stamp duty on the Memorandum of Entry]

(6) Anomalous mortgage is basically a residual category. In India, several kinds of mortgages based on local practices and molded by custom or the whim of the creditor are in existence. Mortgage which does not fall within any of the five categories described above is anomalous. These forms are also rarely if at all use in banking transactions.

Pledge

A pledge, a form of bailment in India, is recognised as a part of the law of contract and not property law. It envisions physical delivery of the pledged property being given to the pledgee. The right to property vests in the pledgee only so far as it is necessary to secure the debt. A pledgee has a right without intervention of the court to realize the security and if necessary, to sue upon the debt and retain the goods as collateral. If he sells the same without intervention of the court, he is required to give a reasonable notice of the intended sale to the pledger. The pledgee is bound to apply the sale proceeds towards satisfaction of the debt and pay over the surplus to the pledger. Generally, the law of pledges is well developed in India and the experience in relation to its enforcement has been successful. Form the point of view of working capital finance by the bank, certain special types of credit such as open credit system and key-loan system are typically secured by pledges. This from of lending security is applied to move able property of the corporate borrower.

Hypothecation

A hypothecation of tangible goods is also a favorite method of securing advanced from banks. A hypothecation is a mortgage of movables, unlike a pledge, there is no possession, and there is "constructive possession." Both in a pledge and hypothecation, legal possession is given but, in a pledge there terms of the hypothecation, the floating charge of the creditor is crystallized and enforcement is resorted to. Once the charge crystallizes or a Receiver is appointed by the creditor the right to deal with the hypothecated property is severely restricted and regulated through the court action or the Receiver appointed.

Pledge of shares

Shares are regarded as movable property/ goods and, in fact, are also covered by the Sale of Goods, Act, 1930. Having regard to some special modes of transfer for shares described in the Companies Act, a pledge can be created only with delivery of the share certificates and blank transfer deeds executed in the Statutory from duly signed and stamped by the transferor. Such pledge of shares is recognised as valid security over personal property of shares. The enforcement over a pledge of shares transfers the property in the shares.

Guarantees

The law relating to guarantees is contained in the Indian Contract Act, 1872. Guarantees are usually sought by banks when dealing with partnership firms or private companies. Financial institutions also require corporate or other guarantees in certain cases, including cases where security cannot be created, as assets have not come into existence or the final security cannot be validly created. The law of contract recognizes that a guarantee constitutes a separate cause of action and, is actionable at the instance of the beneficiary even without commencement of proceedings against the principal debtor. Moreover, as the guarantee grants a separate cause of action to the beneficiary, it can form the basis and subject matter of a separate proceeding for recovery. Depending upon the manner in which the guarantee is worded, the guarantor would not be discharged even in the case of winding up or insolvency of the corporate borrower as principal debtor or other similar circumstances. There are special rules regarding principal debtor or other similar circumstances. There are special rules relate to the waiver by or discharge of the guarantor in the event of the creditor and the principal debtor agreeing to any variations without the consent of the surety. These statutory provisions are subject to contract to the contrary. Inadequacy of particulars of the assets and net worth of individual guarantors is a major deficiency in successful enforcement of guarantees, particularly since decrees against guarantors even if obtained cannot be easily executed in the absence of corporate asset information about the guarantor. In case of inter bank guarantee or to a financial institution in respect of the performance of obligation by a borrower, Indian courts have strictly enforced their performance and excused their implementation only in rare circumstances for fraud only. Bank guarantees are regarded seriously by courts and, the guarantor is not easily discharged or excused.

Security in respect of hired assets

Hiring of assets, as a form of asset finance has manifested itself basically in the form of equipment leases and hire purchase contracts, both being forms of bailment. Despite stiff levies of sales tax, and recently, even on stamp duty for leases of movable property, these instrument remains popular particularly since it provides almost the entire finance for the asset. Subject to furnishing of security deposit or margin payments The Hire Purchase Act, 1972 was enacted, but an account of vociferous objection by the 'transport lobby' and others is not notified till date, (though there are indication that the same may be brought into effect shortly). The law relating to hire purchase and equipment leases continues to be a branch of law of bailment, (part of the law of contract). There are obvious practical problems in recovery of lease rentals and for resuming possession of leased property in the event of the transaction becoming a default case. Except assets such as motor vehicles or other stand-alone items like computers, typewriters, etc., industrial equipment leases in relation to plant and machinery or other such items are most problematic for recovery of physical possession as are inextricably linked with the rest of the factory, and frequently also are special purpose assets, not easily saleable nor reusable by other lessees or hires.

There is scope for special legislation in respect of the law governing hire purchase and equipment leases particularly in order to provide recovery and enforcement.

There are also nagging doubts in relation to the enforceability of covenants concerning payment of lease rentals during the "non-cancelable" or fixed period of the lease/ hire purchase, contract requiring such payment regardless of prior termination by reason of breach or default or otherwise.

With flourishing hire purchase and leasing finance activity, leasing and hire purchase companies themselves are significant borrowers from banks and financial institutions. The nature of security which can be given by a leasing company (a borrower to the bank/ financial institution) has several problems attached to it. Whilst the leasing company is the legal owner of the asset, it does not have possession and the asset is subject to the terms of the hire purchase /lease agreement and therefore to rights of "third parties" (possessory rights. The leasing company has documented covenants regarding actual control in respect of the location of the assets but since the asset is moveable it may frequently be mobile on a continuing basis without adequate reporting to the Lessor. Security for the Lenders of the Lessor Company in respect of such transactions have usually been structured as a hypothecation of the underlying tangible assets owned by the leasing company (subject to the lease/hire purchase agreement), together with a separate hypothecation of the receivables on the lease/ hire purchase contracts, such security may either be taken by the bank directly or by trustees acting on behalf of the bank or the lenders particularly as this offers some advantage in relation to stamp duty in some state. The enforceability and recoverability of the bank's advances from such assets, and the two fold security on the underlying assets and the receivables, has not adequately tested and there are no major judicial pronouncement and a number of practical problems could arise. In the recent securities scam, a few prominent leasing and financial services companies have become insolvent and their various properties attached" under special legislation's introduced on that behalf as they had traded in securities with notified persons. The effect of the transactions of security between the lender and the lessees/ hirers, are pending consideration and judicial determination in recovers proceedings where a number of highly complex legal issues are to be determined.

Trust Receipts

Trust receipts are executed by customers when they take delivery of the bill of lading or goods from the bank before payment of the amounts due. The customer than holds the goods or trust proceeds in trust for the bank and if the customer fails to deliver the goods or sale proceeds to the bank, then the becomes liable to the bank for criminal breach of trust. Trust receipts offer criminal remedies in case of a breach of trust and can be very effective. In practice, however, financial institutions by the very nature of their term finance, rarely use this form of security, though commercial banks are know to employ this security in some transactions. These are enforceable securities.

Ship Mortgage

A ship mortgage is required to be registered under the Merchant Shipping Act, 1958 in a statutory form. The mere fact of the mortgage does not by itself confer the power to sell without court's intervention; but the statutory form is limited in scope and inflexible in practice. Therefore a deed of covenant or a collateral agreement is also executed conferring various rights. Moreover, under the Merchant Shipping Act, in addition to the permissions required at the stage of creating a mortgage from the Indian Shipping Registry/ Central Government, fresh approvals of the Central Government are also necessary at the stage of enforcement for charging the Register of Shipping. This is a major deterrent in accepting ship mortgages having rights in accordance with international practice where ship financiers deal with standard Gibraltar type mortgages and nothing less. In a recovery action an admiralty court judgement operates as a judgement in "rem" and the transfer of title in the ship takes place free of encumbrances and liens, (but in exercise of the right of private sale). Several institutions like IFC (W) ICICI and the Development Bank of Singapore etc. hold shipping mortgages over Indian registered ships.

(c) There is a detailed system of registration and stamp duty in this country for any of three types of security taken by financiers:

Stamp Duty

Under the Constitution of India, the power to legislate relation to stamp duty is distributed between the Union and the State Governments. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty, are in the Concurrent list (i.e. on which both the Union and the State can legislate). The rates of stamp duty in respect of "bills of exchange cheques, promissory notes, and other like instruments are exclusively in the Union list. Fixation of Rates of duty in respect of documents other than those specified in the provisions of List I, are within the competence of the State Legislature "Stamp duties other than duties or fees collected by means of judicial stamps but not including rates of Stamp duties are matters of Common legislature powers of the Union & the States in the Concurrent list. The Indian Stamp Act, 1899 is the Central Legislation, which applies all over India, and on certain types of documents, with local amendments. Each state has also enacted its own laws. The taxable event or subject is the execution of the 'instrument' and not the transaction. There is no residual entry, in any of this legislation and therefore a document for which no rate of duty is prescribed is not stampable. Documents Stampable under Indian Law executed outside the territory of India become liable to stamp duty upon their entry into the State. Differential duty is payable in States which prescribe a higher rate of duty than the one applicable in the State execution. Consequences of inadequate stamping include inadmissibility in evidence, impounding of the document, liability to duty, penalty (upto 10 time the correct duty) and possible prosecution.

Legal innovativeness has unfortunately had to be deployed in order to side step these unreasonable levies based on short-sighted policies. The impact of such duties in restricting development by choking financial transactions, and movement of capital has been underestimated.

The Indian Registration Act, 1908 provides both for compulsory and optional registration. Compulsory registration operates as public notice. Compulsory registration essentially pertains to interests in immovable properties and documents which are compulsorily registrable, which if not so registered do not affect rights in the immovable property and are inoperative. The Registration Act concerns documents and not the transaction. The Indian Registration Act concerns registration of a document and not the transaction. The Indian Registration Act does not deal with registration of company charges which is dealt with under the Companies Act. The Registration Act provides for a method of public registration of documents so as to inform the public regarding legal rights and obligations arising and affecting particular properties and to perpetuate documents which may afterwards be of legal importance, and also to prevent fraud. Stamp laws by contrast are purely fiscal enactments, where as the Registration Act has a number of additional objectives such as conservation of evidence assurance of title, publicity documents, and preventing fraud. The Registration Act operates in close proximity to the sphere governed by the Transfer of Property Act and Stamp Act, particularly since the Registration administration is authorized to impound inadequately stamped documents.

The Companies Act, which has also prescribed filing particulars of a company charge proceed on the doctrine of notice, as such charges are subject to public inspection, and constitute proof of creation of the charge against the Official Liquidator or receiver.

In so far as "charge" or security interests" created properly believed to be movable, but in fact immovable in nature, non – registration of documents can be fatal to the enforceability of the security transactions. Certain provisions of the General Clauses Act, 1963, also contain important definitional matters relating to description of "movable" and immovable " properties and to that extent need to be read with these legislations.

If so far as transaction relating to lending by bank and financial institutions are concerned, the compulsorily registrable nature of certain types of mortgages and creation of security interests, is relevant. Moreover, priorities of different mortgagees and security, interest are also regulated by the Act, based on registrability and time of registration.

The registration procedures are archaic and lately computerization and microfilming and other mechanized mode of information storage are being implemented.

The rates of interest are regulated by money lending laws and laws of usury. Requirement to register as a moneylender in each state is quite normal and can affect the enforceability of a transaction.

(a) The information in relation to the nature of security over the assets of a corporate borrower have been explained above.

In addition, in relation to a debenture, the procedures in India contemplate that a debenture can be secured by a charge over immovable property created by either a legal mortgage or an equitable mortgage by deposit of title deeds. A debenture trust deed is executed which specifies the manner in which the agent and trustee acts on behalf of all the beneficiaries or holders of the debentures, convenes meetings of debentures holders and institutes legal proceedings on behalf of all the debenture holders. The right to institute legal proceedings is available to the debenture trustee and not to individual debenture holders. As a trustee the debenture holder is obligated by law to take action. The Securities Exchange Board of India has also prepared rules and regulations for registration of a debenture trustee and for its duties, obligations and a code of conduct. Any breach of such obligations may result in a cancellation of the certificate to carry on the activity as a debenture trustee. It is only a registered debenture trustee, who can accept the role of an agent and trustee for debenture holders in relation to a publicly offered debenture.

Lenders in India are also known to avail of liens by way of negative liens where undertakings not to perform certain acts or dispose of shareholding or create a security in relation to some of the licenses and approvals or authorities are awarded. Statutory licenses are not transferable and only a negative lien can, therefore, be taken by way of an undertaking. These forms are also common in India and are employed by financiers.

Under the Transfer of Property Act the priority of charges are determined by either the suit where the mortgage is instituted or the company court where the claims are to be adjudicated.

A senior charge and a junior charge receive priority in accordance with the

nature of the charge, the date of creation of the charge, the ceiling of charges, the upgradation of charges, etc. These are regulated by the terms of the charge and the registration of filings thereof.

(a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods?

 

(a) When a corporate borrower is in financial difficulty and a secured debt has become due, the secured creditor through its monitoring division normally invites the corporate borrower to propose a mode by which the accounts can be regularized and the delays in payment, or non-performance of the contractual obligations in relation to the financing agreements or the security documents in relation to the security are performed or regularized.

This would result in a novation of the schedule of payments or some of the terms and conditions of the financing agreements or the security agreements. It is also likely that the interest could be funded as a funded debt with a zero coupon rate, compound interest waived, penal interest waived and rescheduling of principle and interest done in a rearranged financing agreement.

Refinancing of secured lenders occurs only when one of the secured lenders in a consortium does not agree to continue with the lending and seeks to move out of the consortium. Refinancing, is rarely done by the same set of lenders unless there is an enhanced facility or an augmented project which is being done by way of balancing equipment being added or a new unit being added to achieve technical parameters.

In cases which are covered by Schedule-I of the Industries Development and Regulation Act, 1951, the Board of Industrial and Financial Reconstruction appoints an operating agency from one of the public financial institutions or the senior nationalized banks, to prepare a scheme of novation or arrangement whereby the banks could reschedule their debt or refinance the corporate borrower instead of enforcing their charges or liquidating the company.

The normal recovery procedures are available under the Code of Civil Procedure for enforcement of the contractual rights under a mortgage, hypothecation, pledge, lien, debenture trust deed etc. For certain notified banks and financial institutions, the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 is a summary remedy available. There are public money recovery acts or State Financial Corporation Acts which are recoursed by the State Financial Corporations and banks for summary procedures for recovery of money claims secured by the corporate borrower.

 

(b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)?

(c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)?

(d) In practice, which method(s) of enforcement are most commonly employed by security holders?

(e) Briefly describe the process involved in these method(s).

b) The various remedies available to security holders to enforce their securities under the law of this country are:-

1. Private Sale

The right of private sale though a very limited remedy, is conferred on the mortgagee under certain circumstances mentioned in Section 69 of the Transfer of Property Act. The remedy is unavailable if any of the parties is a Hindu, Mohammedan or Buddhist or a member of any other race of a prescribed tribe. Further, the mortgaged property should be in a notified area and it is necessary for the mortgage deed to confer a power of sale. In any case, a notice to recall or demand of the outstanding is required. A mandatory statutory notice period of three months has also to expire before the power can be validly exercised. These procedures are usually set out in the documents of loan and security executed between the borrower and the power should usually be exercised with care so as to obviate any subsequent challenge on the grounds that the creditor did not act with care, or in breach of the law.

The procedure for the sale of realisation would involve and advertising for or inviting purchase bids in case of sale by public auction or may be conducted by private treaty if a suitable buyer is located. In the case of movable properties, the mortgagee creditor will give delivery of the property and pass title to the same extent that the mortgagor could do in exercise of such a power of sale. The same is usually adequate for conferring the ownership on the purchaser. In so far as the sale of immovable properties in exercise of a right of private sale is concerned, it would be necessary for the mortgagee to execute a conveyance/ deed of indenture duly stamped/ registered for transferring title. The mortgagee will give only such covenant in relation to title as the mortgagee can give including, in respect of mortgagee's actions in the meanwhile.

The danger in exercise of this power is that the Defendant could challenge the right of sale on the ground that the same was improperly exercised and can further claim damages. Moreover, from a purchasers' point of view any Court sale in a mortgage action offers, (at least as a matter of perception), more certainty as to title and therefore also fetches the seller (mortgagee) a better price too.

 

2. Private Receiver

Section 69A of the Transfer of Property Act confers the power of appointing of a private receiver in an English mortgage. The person who is to be appointed as Receiver must be named in the mortgage deed, or an appointed as Receiver must be named in the mortgage deed, or an application needs to be made to the Court for such appointment. the powers of a private receiver are limited to receiving income of the mortgaged property generally or in part thereof. A private receiver being an agent of the mortgagor as such, the mortgagor is liable for the receivers' acts and defaults, unlike in the case of a court receiver who, being an official of the Court, is not an agent of any of the parties. Nonetheless, the private receiver is technically accountable to the mortgagee rather then mortgagor. His powers are very limited and he is considerably disadvantaged by not being in a position to exercise wide powers conferred on a Court Receiver as prescribed under Order 40, Rule 1 of the CPC.

In the case of smaller loans and agricultural loans appointment of a private receiver can be subject to major impediments. There are also additional practical difficulties in the appointment of a private receiver and sale of the security. Diverse practical enforcement problems exist and generally, the experience has been that despite the power conferred by the mortgage documentation, it is difficult in practice to appoint a receiver or sell the security without the Court's intervention. In bank lending, this is largely due to the manner in which these powers are implemented in practice rather than the problem with the legislation itself. One of the controversies which persists is whether the private receiver can sell without court intervention, the property hypothecated, to the mortgagee, if a specific power in that behalf is conferred. There is a division of opinion on this score, since there may be inadequate publicity and inadequate choice of purchasers.

At any rate, care thus has to be taken whilst drafting the mortgage, hypothecation, debenture trust to ensure reservation in favour of banks and financial institutions, the right to appoint receivers who may, among other things, be empowered to dispose of the security realizing the dues.

In Indian conditions, lenders themselves appear to be reluctant to resort to their power to take possession of their collateral without court intervention. In practice, some of the difficulties "perceived" by the lenders with reference to a private receiver are as follows:

a. lack of availability of persons to act as private receivers and fixing their remuneration,

b. even those which are available are inexperienced,

c. employee abuse, violence and harassment by labour

d. possibility of court actions against the lender by defendants contending that the private receiver has acted in excess of authority.

e. reluctance of law enforcement agencies such as the police to readily assist the private receivers in controlling unruly behaviour of taking possession. (Police authorities readily assist court appointed receiver)

f. high fee of the receiver.

g. other co-lenders who may approach a court may obtain a court receiver, who would then immediately displace the private receiver.

On the other hand a Court Receiver has the advantage of:

a. Court protection and backing

b. the appointment is respected by the Borrower and its employees as also by third parties.

c. the Court Receiver is an effective tool of a secured creditor when it seeks the appointment of Receiver, who will hold to the exclusion of official liquidator and remain outside the winding-up.

d. greater ability of the Court Receiver to seek police help

e. interference with the possession of a Court Receiver would be construed as interference with the possession of the courts since the property is custodian legis.

f. availability of existing institutions such as the Court Receiver attached to the Bombay High Court with experienced staff (unlike in the case of private receiver)

The Recovery of Debts due to Banks and Financial Institutions Act disappoints in as much as it does not even provide for the appointment of a receiver, nor is there any arrangement for preservation and realisation of the property. There is clearly a need for a provision in the legislation or, for the separate flotation of a corporation, conferring specialized receivership services, (much on the lines in Western countries). If such a body is state sponsored, its shareholding would probably be held by the financial institutions. In such a case conflict of interest would arise since, these institutions and banks would have cases pending with such bodies.

To sum up, a constructive and realistic re-look at the system of private receivers without intervention of courts is required, which needs some additional strengthening. It would, however, be a fair comment to state that the problems are as much a result of defective implementation as due to archaic legislation.

3. Sale by Pledge

A sale by a pledgee is possible only in respect of personal property. Typically, the pledge is in respect of tangible movable such as finished/semi-finished goods, shares and securities or items of machinery. The pledgee under Indian law has actual possession and not merely constructive possession as is in the case of a hypothecation. This right of the pledgee to sell the pledged security is reasonable effective in Indian conditions particularly in relation to the pledge of securities or goods which are otherwise easily disposable by sale. Under the Indian Contract Act, a notice by the pledgee to pledger of the intention to sell is mandatory, without which the can be declared invalid.

4. Special remedies for certain specific creditors

a) State Financial Corporation Act, 1951 (SFC Act)

State Financial Corporation ("SFC") have certain special remedies in case their borrower (being an industrial concern) is in default in repayment of any loan, advanced or guarantee. Accordingly, the SFC shall have the right to take over the management or possession of the concern including the right to transfer the secured property by the lease or sale. This power is exercisable without the intervention of the Court. Under Section 31 of the SFC Act, if the borrower (an industrial concern) or a guarantor are in default in respect of any payment obligation towards the SFC then it can apply to the Court for an order for the sale of the secured property, and for enforcement of the liability of any surety, for transfer of management of the concern to the SFC and also for injunctive reliefs restraining the concern from transferring or removing the plant and machinery. Section 32 of the SFC Act which has to be read conjuctively with Section 31 there of provides for a summary mode of trial with a show cause notice procedure being followed and also a hearing. The court is empowered to aggregate and adjudicate upon the claim in accordance with the provisions of the Civil Procedure Code. After investigation, the Court may pass appropriate orders the legal effect of proceedings under Sections 31/32 of the SFC Act has been construed by the Supreme Court as constituting proceedings for speedy summary recovery but are not suit proceedings. Accordingly, the power of a court when deciding cases under Section 31/32 of the SFC Act cannot be extended for conferring reliefs in favour of other co-lenders, as can be done in a mortgage suit. A separate suit by pari passu lenders requires to be instituted.

b) The Industrial Reconstruction Bank of India Act, 1984 (now renamed as Industrial Investment Bank of India)

The IRBI (Now IIBI) which set up under the IRBI Act (now IIBI Act) with a view to enable it to function as a principal credit and reconstruction agency for industrial revival, has been conferred certain special powers. These special powers include the following:-

i) Creation of a "declaratory charge' by operation of law (Section 37 of the IRBI Act;

ii) Power to take over the management or possession of the industrial concern and to transfer the same by way of lease or sale of the property secured (similar to Section 28 of the SFC Act);

iii) Enforcement of claims by approaching a court under a special petition (section 40 being similar to Sections 31 and 32 of the SFC Act),

c) Nominee Directors

Some special powers are also conferred on some institutions including powers to appoint nominee directors, on the board of the borrower companies. Statutory DFI's such as IDBI, IRBI (now IIBI) are conferred such powers by law, whereas other non –statutory DLF's like ICICI, exercise this power as a matter of contract.

A secured creditor does not normally participate in a winding up. Under the rules of insolvency it has three rights:-

1. A secured creditor can remain outside winding up.

2. A secured creditor can relinquish its security and participate in the winding up; or

3. A secured creditor may value its security and offer the official liquidator to make payment for such valued security before placing the same in the hotch-pot and the secured creditor can then prove for the residue as an unsecured creditor in winding up.

It is only such a secured creditor which does not have a valid security or is short of security, which attempts a winding up of a corporate borrower.

Winding up as an option rarely resorted to by a secured creditor as it normally prefers to remain outside winding up.

Under Indian law and the Companies Act, workers statutory charge has also been created whereby the unpaid wages in arrears, also receive a prorated payment along with secured creditors. They statutorily participate in the security to the extent of unpaid wages till the date of winding up when they are discharged by operation of law. The official liquidator represents their interest in any security claim.

Presently there are moves a foot in India whereby fixed deposit holders and inter-corporate deposit holder where companies have raised deposits from the public, are to receive a statutory charge upto 15% of the receivables. The C.M. Vasudev Committee Report has made this recommendation to the Reserve Bank of India but no rules or law has yet been formulated for this purpose.

The procedure for recovery of monies through an ordinary civil suit or a mortgage suit is the institution of a plant with documentary evidence of the nature of the mortgage and the notice issued and the total statement of account duly certified is filed in the court of original jurisdiction or before the Debt Recovery Tribunal for notified banks and financial institutions.

Upon written statement being filed the amount is adjudicated. As interim measures in a civil suit a court receiver can take possession of the property so that the promoters or the Board can no longer interfere with the corporate properties and security of the secured lenders. In summary proceedings where the debt is attempted or where no advance is permitted to be filed or no leave to file a written statement is granted, a decree can be drawn up for the amount and execution proceedings can commence.

In execution the assets against which the execution has to take place have to be ascertained. Where the security is enumerated in the mortgage this is comparatively easy but in those cases where the security is indeterminate or is a floating charge, the ascertainment of such security by a Commissioner or a receiver is required. In an unsecured claim which results in a money decree or an executable judgement, the judgement debtor is required to file a statement of assets against which the execution can proceed. Injunctions and attachments before judgement are also quite common under ordinary civil law.

(a) How effective is the judicial or court system for the purpose of enforcing secured property rights?

The procedure under the judicial or Court system for the enforcing of security and recovery of debts is reflected in the filing of the recovery suits. The procedure is as follows:

Suit Procedure

Suit of a civil nature are filed in Civil Courts. Suits are required to be filed in the court having territorial and pecuniary jurisdiction over the subject matter in accordance with established legal principles. Filing of suits entails the presentation of a plaint, in accordance with the forms generally prescribed under the code of Civil Procedure, 1908. The plaint is required to set out names, description and addresses of the parties, facts constituting the cause of action, facts showing that the court has Jurisdiction, reliefs sought and a statement of the value of the subject matter of the suit for the purpose of Jurisdiction and court fees. In actual practice may more details and facts are set out.

Before commencement of an action by way of a suit for recovery, it is usual to issue a demand notice recalling/ demanding outstanding amounts.

Upon institution of the suit by filing the plaint and compliance with procedural requirements in the court's registry, summons are issued to the defendant to answers the plaint. In the case of summary suit, the form of the summons is different. The defendant is required to submit his defense in the form of a written statement before the returnable date of summons, complete discovery of documents including the process of inspection of documents Leave to defend is required to be granted in a summary proceeding. The law of discovery of documents including the process of inspection of documents. The laws of discovery are not as wide ranging as those in the Western Countries.

At the time of trial, the issues are framed, evidence recorded (oral and documentary) and usually, extensive verbal arguments are advanced. The Court would then record it s judgements accepting or rejecting the case of the plaintiffs.

Summary Suits

The summary procedure is prescribed under order 37 of the Civil Procedure Code, (CPC) for certain types of commercial actions. The summary procedure relates to recovery of dues on negotiable instruments, deeds (other then penalties) liquidated demands, arising on a written contract or under an enactment, and enforcement of guarantees (guarantee sums) on such debts and liquidated damages. Order 37 applies to all High Courts and City Civil Courts (including District Courts) the summary procedure is not applicable to suits involving the enforcement of a security and are applicable to a money suit or claim only. Mortgage suits continue to be governed by Order 34 of the CPC. Accordingly, Order 37 has very limited utility to banks and financial institutions which have security and it is generally invoked only in respect of suits on guarantees or promissory notes. In a summary suit, (similar to provision s of Order 14 of U. K. Supreme Court practice) the right of the defendant to defend a suit is not automatic. The plaintiff is required to issue a 'summons for judgement" within a prescribed time frame. In reply thereto, the defendant may file an affidavit setting out reasons why the suit should be permitted to be defended.

It is only if the court comes to the conclusion that, "triable issues" arise or that the defendant has a real and substantial defense that leave to defend is granted. Usually, such leave is refused or conditional leave to defend is granted with the condition being that the defendant is required to deposit a sizeable amount of the claim in court as a condition of being permitted to defend the action. In some cases, even unconditional leave to defend is granted if the defendant has cogent case. Summary suits generally operate on a faster time table than regular suit proceedings.

Suit for enforcement of security.

Suits involving enforcement of security (whether on personal property or real property) form part of composite actions for recovery of the debts and for the enforcement of the security. The plaint would also contain suitable submissions and reliefs pertaining to the security. For mortgage suits, there are statutorily prescribed form in which a preliminary mortgage decree is to be passed, fixing a period of redemption during which the defendant may redeem the mortgage. If not, a final mortgage decree would be passed extinguishing the equity of redemption. The reliefs sought in the suit would include those for enforcement of the mortgage, interlocutory reliefs (which would include appointment of a receiver, grant of an injunction against alienation of assets, attachment of receiver, grant of an injunction against alienation of assets, attachment before judgement, etc. In a mortgage suit, even if other pari passu lenders are not co- plaintiffs, they may be joined as formal defendants as the court has the power to ascertain and declare the correct amounts due in favour of each party who have an interest in the limitation for that party as a defendant, even though he can obtain a declaration. Suitable reliefs are therefore sought. It is also the practice, to seek interlocutory relief such as the appointment of court receiver, attachment before judgement of properties and even injunctive reliefs.

These suits get blocked by the ingenious and often fraudulent defences propagated with substantial degree of success by the borrowers and their lawyers. The typical defences are as follows:

Typical Defences

Typical defences in suits filed by banks/ financial institutions include;

i) objections to jurisdiction on territorial or pecuniary grounds or inadequate payment of court fee.

ii) a bar of limitation,

iii) disputing the authority, of competence of official declaring the plaint.

iv) improper computation of the statement of claim including application of incorrect interest rates (as periodic revisions of interest merely notified by the bank not having been approved bilaterally),

v) documents being incomplete by reason of defective execution or inadequate particulars and therefore being unenforceable.

vi) security being invalid or unenforceable by reasons of inadequate stamping and for want of registration,

viii) improper from of security for e.g. security by way of hypothecation over what is in reality immovable property.

viii) official liquidator impeaching the security on the ground that the charge is not registered in accordance with company law,

ix) want of statutory approvals required for creation of security e.g. ULCRA permission, approval under Income Tax, 1961 approval under Foreign Exchange Regulation Act, 1973 (where the lender is a non-resident),

x) bank having lost or parted with the security (bank's liability for negligence) and therefore a counter claim by the defendant against the Plaintiffs.

xi) lender having been responsible for the sickness (or poor financial condition) of the borrower by reason of their the bank having committed various breaches of promise to lend or by virtue of excessive interference in the affairs of the bank or choking of working capital facilities leading to disruption of business and therefore causing losses.

xii) surety claiming discharge, by material alteration in the guarantee or in direct negotiations by the bank with the principal debtor without the consent of surety.

xiii) surety claiming to be discharged by reasons of nationalization or Takeover of the principal debtor,

xiv) invocation of provisions of the SICA or Relief undertaking statutes in diverse states, which result in suspension of some aspects of the recovery action and execution, for a duration of time.

xv) interest being questioned as being usurious.

xvi) exchange fluctuations being questioned as incorrect, and based on unfavourable.

xvii) liquidator questioning the rate of interest on the ground that it is penal ,

xviii) the scope and extent of the charge being questioned by other co- shares or banks and financial institutions questioning their respective securities.

The effectiveness of the suits is severely dented by the time frame involved.

Time Frame

Generally, the time frame with respect to suits is similar in most Courts, though it is possible that typical milestones in a litigation may differ from court to court. A trial in the first instance usually takes 8 to 12 years to come up for hearing for the first time from the date of institution of the suit in most Courts. Presently, in the Bombay High Court the delay period for the first trial is about 12 –15 years. Thereafter, an appeal is filed before a Division Bench of two judges of the High Court, a further period of 2 to 3 years at least is involved. If an appeal is filed before the Supreme Court thereafter (which is usually done if stakes are high), an additional delay of 10 to 12 years is clearly possible so that a delay of about 25 years from the date of original institution of a suit till final determination is usual. There are exceptions and sometimes, suits are expedited for earlier hearing where a question of public importance is involved. On the other hand a further slippage of the above time table is possible and a suit may well take around 30 years to be ultimately disposed off by the Supreme Court.

In certain commercial cities such as Bombay, the position regarding suit filed by banks and financial institutions is slightly better, and not as depressing, under Chapter XV of the Bombay High Court Rules", commercial causes" are treated as a separate class of suits. Commercial causes, include causes arising out of ordinary transactions of merchants, bankers and traders whether of a simple or complicated nature" and include amongst others, "banking transactions". There is a separate trial list of commercial causes and, one judge is specially assigned to hear such cases. The court, may be in respect of such cases, and for the speedy determination of such suits also the time- table is somewhat faster. However, this kind of special treatment to commercial causes is not available in all courts.

Preservation of Security, Costs and Interest.

At present, there is no reasonable ratio between the sum to be actually recovered and the cost incurred therefor. In smaller actions, costs for recovery may sometimes be higher than the amount recovered. Irrespective of recovery, costs will have to be incurred. In certain suits, the court fees/ incident fees are higher than 8% of the claim without a ceiling limit, while in others they are fixed amounts usually in the range of about Rs. 15,000-20,000. In the Union Territory of Delhi, the prescribed rate of Court fees is 1% of the claim ad valorem without a ceiling. This is in addition to all other litigation expenses towards preservation and realisation of security such as employment of security guards, supervision, repairs, etc. Since the appointment of the receiver will extend over a number of years, these expenses will be considerable, though unavoidable. Fortunately, these can be recovered as a first charge from the sale proceeds. On an average, these costs work out to about 15% of the claim. The indirect losses include losses due to delay leading to substantial, loss of interest amounts, particularly as the bank is not normally awarded interest on interest after the date of the suit (pendentelite interest may not be awarded by a contract rates). Though the CPC was amended to permit the awarding of commercial rate of interest, nonetheless, the cost of delay always works to the detriment of the lender and to the benefit of the debtor. Moreover, despite the amendment of the CPC many courts continue to award interest only at the rate of 6% or thereabouts per annum from the date of the suit. Lawyers' expenses can also considerable.

Execution

General Principles of execution and problems

Even after a decree is passed, the process of execution and realisation of the decretal amount can be cumbersome and time –consuming. Modes of execution include interalia attachment and sale (the actual mode of sale depending upon the type of property) distrait of movable assets, arrest of the defendants, etc. Order 21 of the CPC, provides a variety of options and an exhaustive of rules concerning execution. The general procedure for execution involves the filing of an application for execution which sets out the particulars of the suit and of the decree, the mode of execution as well as the property/ person with reference to the which execution is sought.

Difficulty in finding a suitable buyer who will pay a price adequate to cover the decree holder's dues, is often a major problem. The delay from the time of institution of the suit till the actual realisation and the enhancement of the costs in the meantime as a result of expenses of preservation of the security is prejudicial. Industrial assets are usually in a dilapidated condition by the time the decree is executed. Plaintiff lenders seek the leave of the Court to empower the court Receiver with the power of sale over the charged property/security. Other difficulties in the execution process include pendency or winding up proceedings or revival proceedings be