Section 15 SARFAESI Act: Manner of exercise of action under section 13(4) by secured creditor

Section 15 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002: Manner of exercise of action under section 13 by secured creditor

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) When the management of business of a borrower is taken over by an asset reconstruction company under 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—

(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

(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),—

(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;

(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;

(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;

(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,—

(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;

(b)no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the secured creditor;

(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:

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.

Legal Commentary & Landmark Judgments: Section 15

Section 15 of the SARFAESI Act, 2002 sets forth the statutory procedure, governance consequences, and restoration mechanisms applicable when a secured creditor exercises the drastic power of taking over the management of a borrower's business under Section 13(4)(b).

Statutory Notice and Publication: The secured creditor must publish notice of management takeover in English and vernacular newspapers and file statutory returns with the Registrar of Companies.
Vacation of Office by Incumbent Management: Upon publication of notice, all existing directors or managers vacate office, and the secured creditor appoints new directors or an administrator to run the business.
Mandatory Restoration of Management: Under Section 15(4), management must be restored to the borrower upon full realization of the secured debt by the secured creditor.

Key Landmark Precedents:

Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 31: The Supreme Court observed that taking over management under Section 13(4)(b) r/w Section 15 is a drastic step; the secured creditor cannot act arbitrarily and must manage the entity prudently to preserve commercial value.
Authorized Officer, Indian Overseas Bank v. Ashok Saw Mill (2009) 8 SCC 366: The Supreme Court held that if the DRT finds the takeover of management or possession under Section 13(4) r/w Section 15 to be unjustified, it has full power under Section 17(3) to restore management and status quo ante to the borrower.

Courtroom Practice & Strategic Litigation Guidance:

Advise secured creditors to prefer physical possession and asset sale under Section 13(4)(a) over management takeover under Section 15, which attracts operational liabilities and third-party commercial claims. When defending borrowers, challenge lack of newspaper publication and seek immediate Section 17 interim restoration.

Section 15: Manner of exercise of action under section 13(4) by secured creditor

Section 15 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002: Manner of exercise of action under section 13 by secured creditor

Legal Commentary & Landmark Judgments: Section 15