Debt Recovery: Creditors To Lose Claim If They Fail To Share Borrowers’ Information
(Photographer: Dhiraj Singh/Bloomberg)

Debt Recovery: Creditors To Lose Claim If They Fail To Share Borrowers’ Information

Secured creditors, who fail to register their claims with the central registry, will not be able to enforce their claim against a borrower’s property.

The central registry, set up under the SARFAESI Act, provides a platform to banks and financial institutions to share information when a security interest is created over a borrower’s property. The intent of this central database is to prevent multiple financing against the same property.

The government has now notified parts of the 2016 amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, (SARFAESI), which makes it mandatory for secured creditors to share information with the central registry.

The provisions of this law allow creditors to recover debt via securitisation, asset reconstruction, and security enforcement without intervention of courts.

The government wants to encourage the use of the central registry by making it a central hub where every information relating to security over a borrower’s assets will be aggregated, said Anjan Dasgupta, partner at DSK Legal, a service law firm.

Incentivising Registration Of Claims

The recently notified amendment grants primacy to those secured creditors who register their security interest in a borrower’s assets. As per the amendment, registration of creation, modification or satisfaction of a security interest in the central registry is now mandatory, and will constitute a public notice.

By equating the registration of charge with public notice, the law will deem that a bank or financial institution was aware about such transaction or claim as it is meant to be a communication to the public at large.

Once a claim has been registered with the central registry, it would give that secured creditor priority over all other subsequent claims that are created over the borrower’s assets. Any further claims on such assets will be subject to prior claims registered by the secured creditor.

Dasgupta explained this by way of an illustration. Bank ‘A’, which is a secured creditor, registers its security transaction for a loan of Rs 100 extended against an asset having a similar value. Bank ‘B’ also extends a loan of Rs 50 against the same asset and registers the transaction in central registry.

In case of a default, bank ‘A’, being the first charge-holder, would recover the entire amount against the asset. Bank ‘B’ cannot utilise the security cover in such a case. But if bank ‘A’ fails to register its claim with the registry, it won’t be able to recover anything, and bank ‘B’ — having registered its claim — will be able to recover the entire amount.

Financial markets demand quicker and wider dissemination of information to the widest set of stakeholders and this move is aimed at that, Dasgupta said.

Going forward, we can see better coordination between lenders as the registry will help in better assessment of a borrower’s creditworthiness based on the securitised or collateralised asset. Information from the central registry will also help in the CIRP proceedings under the IBC.
Anjan Dasgupta, Partner, DSK Legal

Widening The Ambit Of Registration

The amendment also makes two other key changes:

  1. It makes way for the government to notify other transactions like hypothecation, lien, mortgage, etc. to be registered with the central registry. Currently, only securitisation and reconstruction transactions are shared with this central database.
  2. It allows the government to open the central registry to all kinds of creditors. Currently, only banks and financial institutions are allowed to share information with the central registry.

Atul Pandey, partner at Khaitan & Co., told BloombergQuint that by opening up the registry to all kinds of creditors, the challenge of information asymmetry around claims over an asset or property is likely to get resolved.

Further, any regulatory or government authority seeking to attach a borrower’s property for recovery of any dues or taxes must file such attachment order with the central registry.

The central registry will be a repository where all such claims and security interest or any attachment order in respect of the property will be recorded and would serve as a public notice, Leena Chacko, partner at Cyril Amarchand Mangaldas, said.

This would ensure that any party can have a comprehensive view of the extent of charges or claims over a property at any point of time. The mandatory disclosure will ensure transparency and persons who have security rights on the assets will be protected from any claims that emerge in the future
Leena Chacko, Partner, Cyril Amarchand Mangaldas

The amendments will come into effect starting Jan. 24.

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