Personal Finance - functions

When the management of business of a borrower is taken over by an asset reconstruction company or by a secured creditor, the secured creditor may, by publishing a notice in a newspaper published in English and 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 for the following purpose:

(ii) In any other case, to be the administrator of the business of the borrower.

Effect of Notice as per Section 15(2): The following are the effects on publication of the notice:

(i) In any case the borrower is a company, all directors of the company immediately before the publication of notice shall be deemed to have vacated their offices.

(ii) In any other case, all persons holding any office having power of superintendence, direction and control of the business immediately before the publication of the notice shall be deemed to have vacated their offices.

(iii) Any contract of management between the borrower and any director or manager thereof holding office as such immediately before publication of the notice shall be deemed to be terminated.

(iv) The directors or the administrators shall take such steps as may be necessary to take into their custody or control all the property, effects and actionable claims to which the business of the borrower is entitled and all the property from the date of publication of the notice

Ø Shareholder or any other person shall not nominate or appoint any person to be a director of the company.

Ø No resolution passed at any meeting of the shareholders of such company shall be given effect unless approved by the secured creditor.

Ø No proceeding for winding up of such company or for the appointment of a receiver shall lie in Tribunal, except with the consent of the secured creditor.

Ø 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.

Ø 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.

No managing director or any other director or a manager or any person in charge of management of the business of the borrower shall be entitled to any compensation for the loss of office or for the premature termination of any contract of management entered into by him with the borrower.

RBI Guidelines with respect to takeover of business of the borrower by ARCs:

Eligibility Conditions: As per “Change in or Take Over of the Management of the Business of the Borrower by Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines, 2010” issued by RBI, as amended up to 30.6.2015 vide Notification No. RBI/2015-16/93 DNBR(PD)CC.No.04./SCRC/26.03.001/2015-16 dated July 01, 2015, the conditions under which an ARC can takeover the business of the borrower are as under:

Ø ARC can effect change or takeover the business of the borrower if the amount due to it from the borrower is not less than 25% of the total assets owned by the borrower and where the borrower is financed by more than one secured creditor (including ARC), secured creditors (including ARC) holding not less than 60% of the outstanding security receipts agree to such action.

Ø 'Total Assets' means total assets as disclosed in its latest audited Balance Sheet immediately preceding the date of taking action.

Ø the borrower makes a wilful default in repayment of the amount due under the relevant loan agreement/s;

Ø ARC is satisfied that the management of the business of the borrower is not competent to run the business resulting in losses / non- repayment of dues to the ARC or there is a lack of professional management of the business of the borrower or the key managerial personnel of the business of the borrower have not been appointed for more than one year from the date of such vacancy which would adversely affect the financial health of the business of the borrower or the interests of the ARC as a secured creditor;

Ø the borrower has without the prior approval of the secured creditors (including ARC), sold, disposed of, charged, encumbered or alienated 10% or more (in aggregate) of its assets secured to the ARC;

Ø there are reasonable grounds to believe that the borrower would be unable to pay its debts as per terms of repayment accepted by the borrower;

Ø the borrower has entered into any arrangement or compromise with creditors without the consent of the ARC which adversely affects the interest of the ARC or the borrower has committed any act of insolvency;

Ø the borrower discontinues or threatens to discontinue any of its businesses constituting 10% or more of its turnover;

Ø all or a significant part of the assets of the borrower required for or essential for its business or operations are damaged due to the actions of the borrower;

Ø the general nature or scope of the business, operations, management, control or ownership of the business of the borrower are altered to an extent, which in the opinion of the ARC, materially affects the ability of the borrower to repay the loan;

Ø the ARC is satisfied that serious dispute/s have arisen among the promoters or directors or partners of the business of the borrower, which could materially affect the ability of the borrower to repay the loan;

Ø failure of the borrower to acquire the assets for which the loan has been availed and utilization of the funds borrowed for other than stated purposes or disposal of the financed assets and misuse or misappropriation of the proceeds;

Ø fraudulent transactions by the borrower in respect of the assets secured to the creditor/s.

Ø non-payment of dues despite adequate cash flow and availability of other resources, or

Ø 'routing of transactions through banks which are not lenders / consortium members' so as to avoid payment of dues, or

Ø siphoning off funds to the detriment of the defaulting unit, or misrepresentation / falsification of records pertaining to the transactions with the ARC

The decision as to whether the borrower is a wilful defaulter or not, shall be made by the ARC keeping in view the track record of the borrower and not on the basis of an isolated transaction / incident which is not material. The default to be categorized as wilful must be intentional, deliberate and calculated.

Every ARC shall frame policy regarding change in or takeover of the management of the business of the borrower, with the approval of its Board of Directors and the borrowers shall be made aware of such policy. Such policy shall provide for the following:

(i) The proposal for change in or takeover of management of business of the borrower has to be examined and recommended to by an Independent Advisory Committee appointed by the ARC consisting of professionals having technical/finance/legal background. The Advisory Committee shall consider the following:

Ø Whether takeover would be necessary for effective running of the business leading to recovery of its dues.

Note:

To ensure independence of members of Independent Advisory Committee (IAC), such members should not be connected with the affairs of the ARC in any manner and should not receive any pecuniary benefit from the ARC except for services rendered for acting as member of IAC.

(ii) The Board of Directors including at least two independent directors of the ARC should deliberate on the recommendations of the Independent Advisory Committee and consider the various options available for the recovery of dues before deciding whether under the existing circumstances the change in or takeover of the management of the business of the borrower is necessary and the decision shall be specifically included in the minutes.

(iii) ARC to carry out due diligence and record details of such exercise, including the findings on the circumstances which had led to default in repayment of the dues by the borrower and why the decision to change in or takeover of the management of the business of the borrower has become necessary.

(iv) The ARC to identify suitable personnel/agencies, who can takeover management of the business of the borrower by formulating a plan for operating and management of the same effectively so that the dues of ARC are realised within the time frame. Such plan shall include:

Ø Borrower’s rights and liabilities at the time of takeover and at the time of restoration

Ø Rights and liabilities of the new management taking over the business at the behest of ARC

Ø Clarification to new management that their scope is limited to recovery of the dues of ARC by management of the business of the borrower in a prudent manner.

Ø Notice of 60 days shall be given to the borrower indicating the intention to effect change in or takeover of management and calling for objections, if any.

Ø The objections, if any, submitted by the borrower shall be initially considered by the IAC and thereafter the objections along with the recommendations of the IAC shall be submitted to the Board of Directors of the ARC. The Board of Directors of ARC shall pass a reasoned order within a period of 30 days from the date of expiry of the notice period, indicating the decision of the ARC regarding the change in or takeover of the management of the business of the borrower, which shall be communicated to the borrower.

Reporting: ARCs shall report to the RBI all cases where they have taken action to cause change in or takeover of the management of the business of the borrower for realization of its dues from the borrower