The changes in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act that give primacy to secured creditors will come into effect shortly. But guided by past experience, lenders are more inclined to use the Insolvency and Bankruptcy Code (IBC) for recovery of dues.
“I don’t see an improvement in cases, where the SARFAESI Act has been invoked. The waterfall mechanism has brought in clarity, but unless we have value in the asset to be unlocked, there is little banks can do,” said Ashok Kumar Pradhan, managing director and chief executive officer, United Bank of India (UBI).
“Priority was an issue with the SARFAESI. Statutory dues had the same priority in payment of debt,”” a lender said. However, with the notification, the debts due to any secured creditor would be paid in priority to all other debts, all revenues, taxes, cesses and other rates payable to the central government/state government/local authority.
The government notified on December 26, 2019, Sections 17, 18, and 19 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act 2016 (“SARFAESI Amendment Act”), which were enacted in 2016 to streamline the process.
However, with the amendments to the IBC in the last two rounds, the lenders feel it is the best tool for recovery where the lenders involved are more than one or it’s a big account.
“IBC is the best method for recovery especially since it has now been established that secured financial creditors have supremacy. Also, the issue of attachment of assets has been resolved,” said a lender.
While the attachment of assets has been dealt with in IBC, the same has not happened with SARFAESI. As Sunil Kanoria, vice chairman, Srei Infrastructure Finance, pointed out. “The issue of PMLA (Prevention of Money Laundering Act) needs to be sorted out in SARFAESI, too.”
“SARFAESI has not helped much. The National Company Law Tribunal (NCLT) is still preferred over SARFAESI as there is a definite timeline involved,” he added.
However, the number of cases referred under SARFAESI in the financial year 2018-19 was 248,312 vis-à-vis 91,330 in FY18.
Pending cases have been an issue with SARFAESI. According to a government reply to a question in Lok Sabha, as on June 30, 2017, there were 109,598 cases pending across Debt Recovery Tribunal (DRT) with recovery dues of Rs 6,35,000 crore.
Under the IBC, as of November 2019, the resolved cases were 160, said CRISIL. The number of cases admitted till September-end was 2,542.
The IBC was amended to give supremacy to secured financial creditors. Also, the last set of changes indemnified the corporate debtor from past criminal liabilities. The latter change was aimed at protecting the winning bidder since there were some cases where assets of the corporate debtor were attached under the Prevention of Money Laundering Act (PMLA). The lenders want the same clarity in SARFAESI.
Atul Pandey, partner, Khaitan & Co, however said that even if SARFAESI is invoked, as recently held by the Delhi High Court in April 2019, any attachment of property (under any other statute e.g. PMLA) will still continue to subsist, considering that that the intention of the legislature is to ensure that IBC, PMLA, Recovery of Debt and Bankruptcy Act and SARFAESI are read harmoniously.
Lenders said that in smaller cases such as housing loans, SARFAESI could be a better bet. It is also better for cases where only one lender is involved.
It is likely that some of the big-ticket cases may have moved DRTs to the NCLT for resolution but banks say that the delays in DRT resolution were adding to their non-performing assets (NPAs).