FAQs on Securitization, Is your flat gone in NPA?

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By Legal Cell

Q.1.  Once an Account is not serviced for 90 days and Bank classified the Account as NPA, is it compulsory for the Bank to initiate Securitisation  Act ?

Ans :-  Yes. Through it is not compulsory under the law, it is in the interest of the Bank that the situation may not go out of control, it is necessary for you to issue Securitisation Notice to the borrower and guarantor, so that it will work as a pressure..

Q.2. Once the notice is given, if the borrower pays overdue installments dues with interest and charges within 60 days period of notice, whether Bank can normalize the Account ?

Ans :-  If the pays over-due installments with interest and charges upto the date of their making the payment, there is nothing wrong in the Bank treating the Asset as Performing Asset, as Securitisation Act does not say that it cannot invoke Securitisation Act repeatedly for the same Account. If in the bank’s view, the party is genuine and they had genuine difficulty and they pay the money – overdue installment and interest and other charges, with a covering letter that they will not default in future, and thereby requesting the Authorised Officer to withdraw the notice, in our opinion, there is nothing wrong in regularizing the account; however, the Bank has to take a commercial decision in this matter. Authorised Officer is advised to take the Bank’s permission before treating the Account as Performing Asset. However, depending upon the party, you can even refuse to stop the proceedings unless entire amount with interest and charges are paid tho Bank, as per the Securitisation Notice.

Q.3. If during the period of 90 days before treating the account as NPA, small amount is paid which is not servicing the overdue installments and interest & charges, whether Bank can accept the money and treat this account as NPA and issue notice under Sec.13(2) of the Securitisation Act ?

Ans :- Mere paying a small amount may be a mischievous act on the part of the borrower and unless the installment with interest & charges are not fully serviced for 3 months, the Account need to be treated as NPA. The very fact that he has not serviced the entire amount of installment and bank charges for 90 days, etitle the Bank to treat the account as NPA and Bank may issue notice under Securitisation Act. However, since issuing Securitisation Notice is not compulsory, administrative decision has to be taken, to be issued for a future date.

Q.4. How soon after expiry of 60 days, Bank should act to proceed and take physical possession of the Assets?

Ans:- There is no such date given in the Secritisation Act, but in case of movable properties, it is in the interest of the Bank to proceed forthwith and take physical possession after the expiry of 60 days notice period. If it is movable item, perishable, the Authorised Officer can forthwith sell and recover the money. Such recover movable property must be taken care of and insure as if a person of ordinary prudence would do if the material belongs to himself. Insurance and other charges can be debited to the Defaulters Account. If the movable property is not likely to fetch sufficient money to even cover the cost of storing, the Authorised Officer may sell the same at once.

Q.5. What is the mode of sale of movable property ?

Ans:- It can either be sold by public notice, news paper or by calling for quotation from businessmen who are dealing with such material and or by Private Treaty, but all those actions of the  Authorised  Officer must be transparent and principle of natural justice has to be followed. We have already explained in earlier paras.

Q.6. When the notice under Sec. 13 are not accepted by the borrower and guarantor, wht should be done ?

Ans:-  If notices are dispatched at the last known address available with the Bank and if the notices come back with the reason “Refused” then it the notices is returned with the reason “Left” it is batter that you must paste the notice on the publish in two newspapers one in vernacular language, then proceed with the matter after 60days. If the Borrower and Guarantor are Registered Company, notice sent to Registered Address will be enough. Notices under Securitisation Act can even be enough. Notice under Securitisaton Act can even be served by e-mail, fax, courier or hand delivery. But all these must be properly authenticated to show that in fact attempt has been made to deliver the notice. The best way of ensuring that notices are served is to send by Registered Post A.D and send a copy under UPC.

Q.7. Whether Authorised  Officer can straight away go to the borrower and take physical possession of the secured asset without the help of Judicial Magistrate of District Magistrate ?

Ans:- Through in certain cases, it can be done but it is advisable to make an application under Sec. 14 of the Act and once the Magistrate passes an order, court officers proceed to the site and by taking police help they take physical possession of the secured asset themselves and then the officer of the court will hand over the recovered charged property to the Authorised Officer. Hence, through physical possession is taken by the Court Officer, the Authorised Officer of the Bank must be physically present at the site while taking over of any of the assets charged to the Bank, by the Court officer, as directed by the Magistrate.

Q.8. There is a fear that Authorised Officer may be beaten up or ill-treated by the Borrower or guarantor?

Ans:- Since taking of physical possession of the assets charged to the Bank is to be recovered by the Officer of the Court, with the help of police, the question of any attack on the Authorised Officer dose not arise. However, the Court officers alongwith police must be accompanied by the Authorised Officer of the Bank to the site as after the court officers take physical possession of the property, the Authorised Officer Should take charge from the court officer. Therefore, the presence of Authorised Officer is a must while taking physical possession of the property, and nobody, normally; dare to challenge the Court Officer and Police. The Panchanama draw by the Court Officer, must also be signed by the Authorised Officer.

Q.9. While taking physical possession of the property, what all to be ensured ?

Ans:-  The court officer will draw the Panchanama of the items seized by him and he will take 2 signatures from independent witnesses and after taking the physical possession witnesses and after taking the physical possession of immovable property, Authorised Officer should fix a board at the site giving the full description that under Securitisation Act, this property has been attached by the Bank ( name of the Bank, Address of the Bank must be specifically mentioned ) and a notice preferably on a metallic sheet must be fixed at the premises properly fixing the nail and preferably photo must be taken of the site after fixing the Banks name plate. The Authorised Officer must also put Bank’s lock  to the premises and he should safeguard the property as if he would have done if it has been his own property. In certain cases, the property may be of very high value, then Bank may even engage some Security Guards to safeguard the said properties till such time properties are disposed off.

Q.10. If it is a movable property, what action is to be taken?

Ans :- If It is a movable property, the court officer will take physical possession of the property and make a Panchanama with 2 witness and Authorised Officer must properties to an official godown or post security guards at the site to safeguard the property of the Bank.

Q.11. under the amended Securitisation Act after getting the notice under Sec. 13, within what period the objections / representations can be made by the Borrower and Guarantors ?

Ans :- It should be done within a specified time limit of 60 days, which is shown in the notice under Sec. 13 of the Act. Before expiry of 60 days after getting the notice, they should make representation / objection in writing, and the Authorised Officer must reply by giving proper Speaking Order within 7days of such representation.  This reply must preferably be drafted by a legal Man so that from reading of the reply, it must be seen that justice is not only done, but also appears to have been done by the Authorised Officer. Just rejecting the representation may result into invoking Article 226 & 227 the Constitution on India by the borrower and High Court in a writ may interfere, thereby action under Securitisation Act will be  delayed and unnecessary legal expenses will have to be incurred by the Bank.

Q.12. Can yhe property of Guarantor be attached ?

Ans :- YES. You can attach the Guarantor’s property as long as Bank has the charge on that property and such properties can be attached irrespective of belonging to the borrower or guarantor. What is required is property must be charged to the Bank and while issuing notice of 60 days, you ensure that borrower as well as guarantors are served with Sec. 13 Notice, without exception.

Q.13. In certain cases, charged properties are sold or assigned by the borrower, in that case what is to be done?

Ans :- If after recept of the Securitisation Notice, during the period of 60 days or thereafter, if the borrower or guarantor sells the property which is charged to the Bank, this sale or assignment is an illegality and therefore the Purchaser or the Assignee will not get the title. Moreover, as per Sec. 29 of the Act, if any person contravenes or abets the contravention, the provision of the Act or any rule made thereunder, he shall be punishable with imprisonment, which may extend for a period of one year or with fine, or with both. Therefore, if anybody transfers or sells the charged properties, after getting the Securitisation Notice, the person who is the Purchaser, the Borrower and the Guarantor (in which the Bank has a secured interest), and if disposed, they may be prosecuted under Sec.29 before the Judicial Magistrate 1st Class Court. Sec.29 provides that not only the contravention of the provisions of the Act but also rules made therein. Therefore, it is difficult for the Offender to escape from the clutches of laws, if any monkey business is done by him by disposing of the secured assets charged to the Bank, after getting the Notice u / s 13(2) of the Act.

Moreover, in case of immovable properties, those are charged to the Bank normally charged by creation of a Equitable or Registered Mortgage and almost all the Original Title Deeds are with Bank, as such, Original totle deeds are left with Mortgagor. Hence, he cannot sell or dispose off the immovable properties, if done the Purchasers right to the property will be subject to Banks first claim being satisfied. However,  Banks right to declare the sale/assignment as invalid cannot be denied to the Bank. Even criminal case can be filed by the Bank against all concerned.

Q.14. If at the time of creation of Equitable Mortgage, whether drawing of a MEMORANDUM OF ENTRY is required ?

Ans: YES. If the State in which such Equitable Mortgage is made, there is a state stamp Act, which prescribes stamp duty to be paid on such Stamp Act which prescribes stamp duty to be paid on such Equitable Mortgage created in the State, you must draw Memorandum of Entry and affix the requisite stamp duty and keep it with the Title documents. If no stamp is affixed on the Memorandum of Entry which is required under State Law, the Stamp Officer of the State can enter the Bank and take physical possessioin of all those mortgaged documents, thereby the Bank will be bereft of the security. Not only the Bank should draw the Memorandum of Entry and affix stamp as required by State Law, but also the Memorandum of Entry must be entered in a Register maintained by the Bank for that purpose. Avoiding to pay Stamp Duty on Memorandum of Entry is AKIN to sitting on a volcanic point.

Q.15. Can the mortgage of immovable property be created by deposit of title deeds of the properties in a state where no stamp duty is prescribed on Memorandum of Entry ?

Ans : YES. This can be done but it will be a moral wrong on the part of the Bank as the intention is very clear to evade the legally payable State revenue, as if avoided to help the Borrower. However, when the Equitable Mortgage is created in a State where there is no prescription of stamp duty payable on MOE, it will be a perfect mortgage even if the property is situated outside that State. But, besides the aforesaid moral wrong, the Bank if it wants to invoke Securitisation Act or any other legal proceedings and rely upon the mortgage created outside the State, it is necessary that, within 30 days of these original documents being brought in the State in which there is prescription of stamp duty payable on such mortgage, the stamp duty must be paid, and then only mortgage can be recognized in a court of Law or Tribunal, or for the purpose of taking action under Securitisation Act, in the state where there is a requirement of paying stamp duty on MOE.

Where in a State, there is prescription of stamp duty to be paid on MOE, if not paid, the documents will not be admitted in EVIDENCE in the Court. Moreover, documents are liable for impounding. Therefore the Evidentiary value of the mortgage will be NIL, unless prescribed stamp duty is paid. Getting the MoE stamped at the time of going to Court is not a good practice as it may expose that the Bank is not stamping the Moe when executed, which is against law and attract serious reactions from the Government.

Even when such mortgaged documents are presented in the Court, the Court can impound the documents and send it to the State Authorities for non-stamping of those documents, which require such stamping under that State Law. Once such a document is impounded by the Stamp Authorities of the State, fine is to be paid many times of the duty not paid with further penal interest on such non-payment and Stamp Authorities may enter the Bank and take inspection of other MoE documents, if available, and take away the documents as the Stamp Officer has got Authority under the law, to do so.

Under  any circumstances, if there is no MOE made by the Bank, a fresh MOE must be made and given for stamping and stamps as well as penalties must be paid and the documents can be presented in judicial proceedings as documents can be presented in judicial proceedings as Evidence.In certain cases , banks do take a Power of Attorney to create such Equitable Mortgage in favour by the Bank officer himself. This is a danger in as much as if the mortgagor dies or become lunatic or is legally unable to contract , the Power of Attorney issues by him to the Bank Officer cannot be acted upon. Therefore , it is strongly advised that while creation of Equitable Mortgage, proper MOE must be drawn and signed only by the Bank Officer and witnesses of 2 other persons are taken and MOE must be properly stamped and alongwith that title documents of the property must be taken and alongwith Affiidavit and Undertaking  by the Mortagaor stating that he has deposited the title deeds with the Bank and created the mortagage and he shall up-keep the property in proper order to safegaurd the interest of the Bank. If such documents are taken, the Bank will have an absolute security as Evidence.

Evading stamp duty to be paid on MOE is very risky situation. However , some Solicitor Firm or Advocates may give an opinion favourable to the Bank, who look for tailor-made opinion, and such Legal Advisors give advice in writing that stamp duty is payable only on MOE and if no MOE is drawn, the mortgage is valid. Therefore , no stamp duty needs to be paid. But Stamp Act is very clear that if an Equitable Mortgage is created in a State, the Stamp Act apply, whether MOE is drawn or not. Therefore , obtaining such legal advice and acting on that is like a cat drinking milk by closing its eyes.

Q.16. Whether MOE can be signed by the mortgagor?

Ans: NO. MOE must be signed by the Bank Manager who accepts the titles deeds in a Notified Area under the Transfer of Property Act; with an intention to create a mortgage and with that intention the Mortgagor has handed over the documents. Therefore , Mortgagor has handed over the documents. Therefore , Mortgagor should not sign this MOE but he has to sign other  documents, to bring on record that he has created mortagage of his property in favour of the Bank. On the MOE, the Mortgagor and the Mortgagee both should never sign as it would amount to an Agreement and that attracts stamp duty, again. The declarations and undertakings to be taken from Mortgagor is annexed to Notes on Mortgages in this booklet.

Q.17. Whether Bank can take two actions for recovery , under  DRT Act and Securitisation Act simultaneously?

Ans: YES. There are a number of Court decisions to that effects. Copies of such decisions of DRAT and High Courts is enclosed for your information. Please read these Judgements carefully.

Q.18. Whether deposit given by the Bank for leasing premises can be recovered  under  DRT proceedings ?

Ans. As per DRT-II judgements dated 2/4/2004 reported in 2005(II) DRT- 133, which is confirmed by the DRAT, such money cannot be recovered by filling recovery proceedings under  the DRT , as DRT has held that this is not an amount recoverable under the DRT , as definition of ‘’Bank Activity’’ cannot be imparted in the present case. Copy of the judgement is enclosed.

With due respect , we defer with this judgement of the DRT and confirmed by DRAT , in as much as, once the Leave & Licence Agreement is terminated, the deposit lying with the lessor becomes a debt due to the bank. Therefore , the concerned bank may take this matter upto supreme court to get final judgement  on this issue.

Q.19. What are the basic title documents that the Mortgagor has to give to the Mortgagee so as to make the mortgage  effective?

Ans: the Transfer of Property Act,Sec.58(f) deals with creation of mortgage but does not specifically speak about the title deeds that needs to be given at the time of creation of Equitable Mortgage. However, the Bank must always insist upon all the Original Documents of title with the Link Documents of earlier transactions so that mortgage will be foolprrof. However , a copy of the Legal Opinion given dated 23/11/2004 and also copy of our Legal Opinion dated 3/12/2004 are enclosed to cover all aspects of law.

Q.20. Whether a ‘’Nominee’’ made in the society record or in any property , whether he becomes the owner of this property after the death of the person who nominated him? Can a person who acquired the property from a deceased in the capacity as a ‘’Nominee” , whether that property can be aliented or mortgaged by that ‘’Nominee’’ to third party?

Ans: NO

Nominee is holding the property in exercise of a fiduciary power. Therefore , Nominee has got no title other than holding the property in a fiduciary capacity while holding office of the Nominee. Our Opinion dated 21/5/2002 is enclosed.

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