Out of court sales of stressed assets or mortgaged immovable properties are invaluable recourses to enable banks and financial institutions to recover debts where the debtor has defaulted. They also reduce the overall number of non-performing assets. Such sales can be made either through public auctions or by way of a private treaty with a willing buyer.
A stressed asset is an asset repossessed from a defaulting borrower by a secured creditor. Bona fide purchasers of a stressed asset must carry out thorough due diligence in order to safeguard their own interests. In this way they will discover any defects in, or fetters on, the title before buying such an asset. In this article, we highlight some of the hurdles faced by bona fide purchasers at the time that they acquire such stressed assets.
A frequent challenge to the acquisition of stressed assets is where third parties are found in occupation and possession of such properties. Such third parties may appear to be tenants, lessees or licensees. It is not unknown for the defaulting borrower to create such relationships after the mortgage has been created. This is done in order to prevent the bona fide purchaser taking possession after the purchase has been completed. Often the purchaser may find that there is ongoing litigation involving occupants. Such occupants resist giving up possession.
This may delay the transfer of right, title and interest in favour of the purchaser, in consequence of which there may be a significant drop in the price of the asset. The purchaser, even post acquisition, is forced to begin protracted and costly litigation to evict the occupants and often suffers great delay in gaining possession. Those in unlawful possession usually fail to maintain the property, leading to greater than usual dilapidation.
Recent judgments of the Supreme Court have helped to secure vacant possession of stressed assets from unmeritorious or bogus tenants who claim possessory rights over secured assets. In Harshad Govardhan Sondagar v International Asset Reconstruction Company Limited, the Supreme Court upheld the eviction of tenants whose leases or tenancies had expired or stood determined, as well as those in possession under leases or tenancies contrary to the terms of mortgages, or created after the issuance of notice of default and demand by secured creditors. This, however, does not mean that bona fide tenants or lessees can be evicted without due process of law. This principle was recognised in Vishal N Kalsaria v Bank of India & ors, in which the Supreme Court held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) cannot override the provisions of the Maharashtra Rent Control Act, 1999, and that a bona fide tenant or lessee can be evicted only after the parties have followed due process as prescribed by the act.
The Supreme Court, in Bajarang Shyamsunder Agarwal v Central Bank of India, identified further circumstances under which a bona fide tenant cannot be evicted, but gave additional guidance on when a tenant is not entitled to possession, or when the tenant has to satisfy the conditions under section 65A of the Transfer of Property Act, 1882. It stated that section 35, the notwithstanding section in the SARFAESI Act, is couched in broad terms.
Another challenge faced by a purchaser is that the sale is usually on an as-is where-is basis. This implies that the secured creditor transfers the asset with all encumbrances known to it as on the date of publication of the sale notice. There may be encumbrances not known to the creditor, such as arrears of taxes or litigation, or there might be discrepancies in the information supplied at the time of due diligence.
In 2011, the Central Registry of Securitisation Asset Reconstruction and Security Interest was set up to maintain a centralized registry of transactions creating security interests over property. This is a resource that allows secured creditors to mitigate risk by preventing multiple financing against the same property as well as helping, to a limited extent, interested purchasers to discover existing encumbrances on such property. Further, amendments in 2016 to SARFAESI and the addition of section 20A provided for the integration of records registered with various registration systems. This has resulted in the Central Registry having a complete database of security interests in a property.
While steps are being taken towards easing acquisition of stressed assets, the reduction of risk in such acquisitions, especially against unknown liabilities, remains a challenge.
Vikram Wadehra is a partner and head of the Kolkata office of Vidhii Partners. Soumava Ghosh is an associate at the firm.
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