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| Mischief potentials of alternative credit default redressal regimes |
| S Murlidharan / Feb 06, 2012, 00:30 IST |
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On 30th August 2011, the Bombay High Court, in response to a writ petition filed by HDFC, ordered the Maharashtra government to in turn order Collectors and District Magistrates to take the mandate of section 14 of the Securitization Act, 2002 seriously, and not allow influence peddlers to scuttle the attempts by secured creditors in taking over the mortgage assets in the face of the inability or unwillingness of the borrower to pay off their dues.
The Securitization Act, overriding anything to the contrary contained in any law, allows the secured creditors to recover their dues without the intervention of the court but with the assistance of state apparatus, if necessary, to overcome resistance on the part of recalcitrant and incorrigible borrowers. HDFC’s grievance was the official apparatus looked askance or dilly-dallied and yielded to pressure exerted by the local bigwigs wielding influence. The Bombay High Court order would hopefully galvanise the state apparatus into action shedding sloth, if contrived, and enable the financial system to recover its dues; else the borrowers’ sickness, actual or contrived, would rub off on to the system through contagion effect with disastrous consequences.
In the face of this no-nonsense regime which allows secured creditors to take the law in their own hands, as it were, and recover their dues fast, it might appear that the parallel regime contemplated by the Companies Bill, 2011 (the Bill) with its implications for delay and the possible mollycoddling of the borrower, would have very few takers unless the secured creditors meet with resistance from unexpected quarters---lack of unity in their ranks given the fact that the coercive proceedings can be launched in case of joint financing only with the consent of those with exposure to at least 75% of the dues. The Bill on the other hand allows the concerns of the secured creditors to be articulated before the National Company Law Tribunal (the tribunal) even if only 50% the secured debts seek redress from it. But in a country where political and other pressures can stymie any meaningful action, one should not be surprised if the secured creditors even with 75 per cent support are prevailed upon not to rock the boat and settle for the soft Tribunal dispensation even if it means compromises or sacrifices for them. Such self-flagellation, so to speak, should not raise eyebrows given the fact that often the secured creditors are substantially state-owned with no body to kick and no soul to be damned. Didn’t the bankers of Kingfisher and Air India stoically restrain themselves from proceeding under the Securitization Act to recover their dues?
The SICA and its successor, the Bill, have for their leitmotifs, rehabilitation, with its implication of indulgence of the defaulter at the expense of the creditor. The Securitization Act on the other hand has for its leitmotif quick recovery without being detained by cloying sentimentality Nothing then can be more handy for the influence peddlers to bring pressure to bear upon lenders to not to press ahead with the coercive proceedings under the Securitization Act than the alternative regime contained in the Bill which in the event is frightening by its sheer existence.
To be sure, the Bill yields to the Securitization Act in the following two situations:
(1) If coercive steps are on under the Securitization Act, the Tribunal will have no jurisdiction to entertain sickness cases; and
(2) If and when the secured creditors choose to seek their salvation under the Securitization Act midway through the proceedings before the Tribunal, the Tribunal once again has to yield and its proceedings come to an abrupt halt.
Influence peddlers can be counted upon to hold back the creditors from asserting themselves by using the Securitization Act.
Secured creditors too might resort to forum shopping which might happen if they are for the nonce unable to mobilise three-fourth support for coercive proceedings or when they realise to their dismay that as things stand the security might not fetch enough money to pay them off and therefore wisdom lies in seeking their salvation before the tribunal which might thereafter expend considerable time and energy in going ahead with rehabilitation/recovery schemes or in finding the knight in the shining armour to rescue the borrower only to be asked to back off when the secured creditors have overcome the initial handicaps that held their hands. Should they be allowed to trifle with the Tribunal thus? Wouldn’t it be more appropriate if they were asked to take a call at the very outset—tribunal or own coercive efforts?
This is the least the government can do if it is for some reason reluctant to dismantle the alternative forum sought to be put up by the Bill
S. Murlidharan Chartered Accountant
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