ENFORCEMENT OF SECURITY INTERESTCentral

Section 15 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(1)1[When the management of business of a borrower is taken over by a 2[asset reconstruction companyunder clause (a) of section 9 or, as the case may be, by a secured creditor under clause (b) of sub-section (4) of section 13], the secured creditor may, by publishing a notice in a newspaper published in English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated, appoint as many persons as it thinks fit--
1. (a)in a case in which the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), to be the directors of that borrower in accordance with the provisions of that Act; or
2. (b)in any other case, to be the administrator of the business of the borrower.
(2)On publication of a notice under sub-section (1),--
1. (a)in any case where the borrower is a company as defined in the Companies Act, 1956 (1 of 1956), all persons holding office as directors of the company and in any other case, all persons holding any office having power of superintendence, direction and control of the business of the borrower immediately before the publication of the notice under sub-section (1), shall be deemed to have vacated their offices as such;
2. (b)any contract of management between the borrower and any director or manager thereof holding office as such immediately before publication of the notice under sub-section (1), shall be deemed to be terminated;
3. (c)the directors or the administrators appointed under this section shall take such steps as may be necessary to take into their custody or under their control all the property, effects and actionable claims to which the business of the borrower is, or appears to be, entitled and all the property and effects of the business of the borrower shall be deemed to be in the custody of the directors or administrators, as the case may be, as from the date of the publication of the notice;
4. (d)the directors appointed under this section shall, for all purposes, be the directors of the company of the borrower and such directors or as the case may be, the administrators appointed under this section, shall alone be entitled to exercise all the powers of the directors or as the case may be, of the persons exercising powers of superintendence, direction and control, of the business of the borrower whether such powers are derived from the memorandum or articles of association of the company of the borrower or from any other source whatsoever.
(3)Where the management of the business of a borrower, being a company as defined in the Companies Act, 1956 (1 of 1956), is taken over by the secured creditor, then, notwithstanding anything contained in the said Act or in the memorandum or articles of association of such borrower,--
1. (a)it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;
2. (b)no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the secured creditor;
3. (c)no proceeding for the winding up of such company or for the appointment of a receiver in respect thereof shall lie in any court, except with the consent of the secured creditor.
(4)Where the management of the business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him. 3[Provided that if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.]

Summary

When a lender takes over the management of a borrower's business, they must publish a notice in one English newspaper and one local language newspaper.
Upon publication of this notice, all existing directors or managers of the business are legally required to leave their positions.
Any management contracts between the business and its directors or managers are automatically cancelled.
The lender appoints new directors or administrators who take full legal control of all the business's property and assets.
These new directors or administrators have the sole power to run the business and use all powers previously held by the old management.
If the business is a company, shareholders are not allowed to appoint any new directors without the lender's permission.
No one can start a process to close down or wind up the company without the lender's consent.
Once the debt is fully paid back, the lender must return the management of the business to the borrower.

Practical examples

1A steel mill defaults on its massive loan. The bank uses the 2002 Act to take over management. They publish a notice in the Times of India and a local Marathi paper. Immediately, the CEO and the board of directors must leave. The bank appoints its own team of experts to run the mill until the debt is recovered.

2A furniture company is taken over by a lender. The shareholders want to vote in a new board of directors at their annual meeting. However, under the 2002 Act, their vote is useless unless the lender agrees to the new appointments. The lender refuses because they want their own administrators to keep control.

FAQ

1. What happens to the board of directors when a bank takes over a company under Section 15 of the Securitisation Act?

Under Section 15 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, all persons holding office as directors are deemed to have vacated their offices as soon as the takeover notice is published.

2. Must a bank return the business management to the owner under Section 15 of the 2002 Act?

Yes, Section 15(4) of the 2002 Act requires the lender to restore the management of the business to the borrower once the debt has been paid in full.

3. Can shareholders still run a company during a bank takeover under Section 15 of the Finance Law?

No, under Section 15 of the 2002 Act, shareholders cannot appoint directors or pass effective resolutions without the approval of the lender who has taken over.

4. Where must the takeover notice be published according to Section 15 of the 2002 Act?

The notice must be published in an English language newspaper and a local Indian language newspaper that circulates where the borrower's main office is located.

Test yourself

Q1.Under Section 15 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, what is the effect of the takeover notice on existing directors?

Q2.According to Section 15 of the 2002 Act, when must the lender give the business back to the borrower?

Q3.Under Section 15 of the Finance Law, what requirement exists for publishing the takeover notice?

Q4.Under Section 15 of the 2002 Act, can a company be wound up during a takeover?

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