Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to provide a swift and efficient mechanism for banks and financial institutions to recover their non-performing assets (NPAs). Chapter III of the Act, dealing with the enforcement of security interests, empowers secured creditors with various measures. Among these, Section 13(4)(b) allows the secured creditor to take over the management of the business of the borrower. Section 15 of the SARFAESI Act elaborates on the manner and consequences of such a takeover. This article aims to provide a comprehensive analysis of Section 15, examining its legislative provisions, judicial interpretations, interplay with other laws, and practical implications in the Indian legal landscape.

The Supreme Court in Bajarang Shyamsunder Agarwal v. Central Bank Of India And Another^[1] noted that once the process of realizing the secured interest takes place, the secured creditor acts as trustee and is required by law to realize it strictly in accordance with the provisions of Sections 13, 14, and 15 of the SARFAESI Act. This underscores the significance of Section 15 within the broader scheme of enforcement.

Legislative Framework of Section 15, SARFAESI Act, 2002

Section 15 of the SARFAESI Act outlines the specific procedures and legal effects when a secured creditor decides to take over the management of the borrower's business, a measure contemplated under Section 13(4)(b) of the Act. The key provisions of Section 15 are as follows:

• Section 15(1): Stipulates that if the management of the borrower's business is sold or transferred, the secured creditor can, by publishing a notice in a newspaper, appoint individuals as directors (if the borrower is a company) or as an administrator (for other entities).
• Section 15(2): Mandates the publication of a notice in a newspaper in English and a vernacular language, circulated in the place where the borrower's principal office is situated, for the purpose of taking over the management.
• Section 15(3): Details the consequences upon publication of such notice:
  • (a) All persons holding office as directors of the company (or in any other managerial capacity if not a company) shall be deemed to have vacated their offices.
  • (b) The management of the business of the borrower shall vest in 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 or be continued, except with the consent of the secured creditor.
  • (d) No person shall be entitled to any compensation for the loss of office.
• Section 15(4): Empowers the secured creditor to appoint, with the approval of secured creditors representing three-fourths in value of the amount outstanding, any person as manager or administrator to manage the business of the borrower.
• Section 15(5): Grants the manager or administrator appointed under sub-section (4) the power to exercise all powers of the directors (or persons in charge of management if not a company), including the power to sell or transfer any part or whole of the business.
• Section 15(6): Provides for the restoration of the management of the business to the borrower once all dues are recovered by the secured creditor.

The objective of these provisions is to enable the secured creditor to run the borrower's business as a going concern, potentially making it profitable or more valuable for eventual sale, thereby facilitating the recovery of secured debts.

Judicial Interpretation and Analysis of Section 15

Interplay with Section 13(4)(b) and Procedural Aspects

Section 13(4) of the SARFAESI Act enumerates the measures a secured creditor can take upon the borrower's failure to discharge liabilities after a notice under Section 13(2).^[2] Section 13(4)(b) specifically allows the secured creditor to "take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset."^[3] Section 15 provides the detailed mechanism for implementing this measure. The Madhya Pradesh High Court in M/S Nest Educational And Welfare Society Samiti v. Icici Bank Limited^[4] observed, in the context of taking possession of a running establishment, that physical possession of such an entity can be taken only in compliance with Section 15 read with Rule 8(3) of the Security Interest (Enforcement) Rules, 2002. This highlights the procedural importance of Section 15 when the measure involves not just asset possession but control over a functioning business.

The publication of notice as mandated by Section 15(2) is a critical procedural safeguard, ensuring transparency and informing stakeholders about the change in management.

Consequences of Taking Over Management: The Bar on Winding Up (Section 15(3)(c))

One of the most significant consequences of publishing a notice under Section 15(2) is detailed in Section 15(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 or be continued, except with the consent of the secured creditor." This provision aims to protect the secured creditor's efforts to manage and realize the secured asset (the business itself) without interference from parallel liquidation proceedings.

The Andhra Pradesh High Court in Lpl Infrastructures Limited v. Kumar'S Metallurgical Corporation Limited^[5] specifically dealt with Section 15(3)(c). The court considered the plea that when the management of a company is taken over by a secured creditor under Section 15(3)(c), no proceedings for winding up shall lie. The court distinguished between mere possession of assets and the taking over of management, implying that the bar under Section 15(3)(c) applies specifically when management is taken over. This aligns with the legislative intent of allowing the secured creditor an unhindered opportunity to revive or sell the business as a going concern.

The general supremacy of the SARFAESI Act in matters of enforcement against secured assets, as upheld in cases like Pegasus Assets Reconstruction Private Limited v. Haryana Concast Limited And Another^[6] (which emphasized SARFAESI's precedence over the Companies Act in secured asset sales), lends further weight to the operational sphere of Section 15(3)(c). However, this must now be viewed in conjunction with the Insolvency and Bankruptcy Code, 2016.

Appointment and Powers of Administrator/Manager

Section 15(4) and 15(5) provide for the appointment of a manager or administrator. This individual effectively steps into the shoes of the erstwhile directors or managers and is vested with significant powers, including the authority to dispose of the business. The requirement for approval from secured creditors holding three-fourths in value for such an appointment ensures that this drastic step is taken with substantial creditor consensus.

Distinction from Other Enforcement Measures

Taking over management under Section 15 is distinct from merely taking possession of secured assets under Section 13(4)(a) or seeking assistance for possession under Section 14.^[7] While Section 14 deals with obtaining physical possession, often with magisterial assistance, Section 15 concerns the operational control and direction of the borrower's entire business. This distinction is crucial as the legal consequences and procedural requirements differ significantly.

Borrower's Remedies

A borrower aggrieved by measures taken under Section 13(4), including the takeover of management under Section 13(4)(b) read with Section 15, has the right to appeal to the Debts Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.^[8] The DRT can examine whether the secured creditor's actions were in accordance with the provisions of the Act and the rules made thereunder.^[9]

Interplay of Section 15 with Other Laws

Companies Act, 2013

Section 15 directly impacts corporate governance as envisaged under the Companies Act. The deemed vacation of office by directors (Section 15(3)(a)) and the bar on winding-up proceedings (Section 15(3)(c)) are significant departures from the normal operation of company law. While SARFAESI aims for creditor-driven resolution for secured debts, these provisions must be harmonized with the broader objectives of corporate law, such as protecting shareholder interests and ensuring orderly winding up where necessary, subject to the specific carve-outs made by SARFAESI.

Insolvency and Bankruptcy Code, 2016 (IBC)

The advent of the IBC, 2016, has introduced a new paradigm for insolvency resolution. Section 238 of the IBC states that its provisions shall have effect notwithstanding anything inconsistent therewith contained in any other law.^[10] This raises questions about the continued applicability and scope of Section 15(3)(c) of the SARFAESI Act once a Corporate Insolvency Resolution Process (CIRP) is initiated under the IBC.

In Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeep Desai And Others,^[10] the National Company Law Appellate Tribunal (NCLAT) held that Section 18 of the IBC (regarding the duties of the Interim Resolution Professional to take control and custody of assets over which the corporate debtor has ownership rights) will prevail over Section 13(4) of the SARFAESI Act. By extension, if a CIRP commences, the moratorium under Section 14 of the IBC would kick in, prohibiting, inter alia, "the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority." This would likely override the secured creditor's ability to continue managing the company under SARFAESI Section 15 or to prevent winding-up petitions if the CIRP itself leads to a liquidation order under the IBC.

Thus, while Section 15(3)(c) provides a shield against winding-up proceedings under the Companies Act, its efficacy is significantly curtailed once the IBC framework is invoked, as the IBC provides a comprehensive mechanism for insolvency and liquidation that overrides conflicting provisions in other statutes like SARFAESI.^[11]

Practical Implications and Challenges

The power to take over management under Section 15 is a potent tool for secured creditors. However, its practical application presents challenges:

• Expertise in Management: Financial institutions may lack the specific industry expertise required to run the borrower's business effectively. The appointment of a competent administrator or manager is crucial but can be difficult.
• Operational Risks: Managing a distressed business involves significant operational, financial, and legal risks.
• Employee and Stakeholder Concerns: The takeover can lead to uncertainty among employees, suppliers, and customers, potentially affecting the business's viability.
• Balancing Interests: The secured creditor, while managing the business, must act in a manner that is fair and aimed at maximizing the value of the secured assets, keeping in mind the residual interests of the borrower and other stakeholders. The Supreme Court in Mardia Chemicals Ltd. v. Union of India^[12] emphasized the need for fairness and transparency in the SARFAESI process.

Despite these challenges, Section 15 offers a strategic option for secured creditors, particularly where the borrower's business is potentially viable if managed properly, or where a sale as a going concern is likely to yield better recovery than a piecemeal sale of assets.

Conclusion

Section 15 of the SARFAESI Act, 2002, provides a detailed statutory framework for secured creditors to take over the management of a defaulting borrower's business. It is a powerful enforcement measure designed to enhance the recovery of secured debts by allowing the creditor to control and potentially rehabilitate or sell the business as a going concern. Key features include the mandatory publication of notice, the automatic vacation of directorships, the vesting of management in the secured creditor, and a temporary bar on winding-up proceedings under the Companies Act.

Judicial interpretations have clarified the scope and application of Section 15, particularly its interplay with Section 13(4)(b) and the consequences of its invocation. However, the enactment of the Insolvency and Bankruptcy Code, 2016, has significantly altered the landscape, with the IBC's provisions generally overriding those of the SARFAESI Act in cases of conflict, especially concerning moratoria and liquidation processes.

While Section 15 remains a relevant tool in the SARFAESI arsenal, its application requires careful consideration of practical challenges and the overarching legal framework, particularly the IBC. The ultimate goal remains the efficient resolution of NPAs while balancing the rights and interests of all stakeholders involved.