INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Megha Arora, JSA
case of non-compliance, such security interest would be held void against the liquidator and the other creditors of the company in the event of the winding-up of the company, although the obligation for the repayment of money secured by the charge will continue to subsist. RERA restricts the ability of companies and real estate developers to secure their borrowings. 3.6 Formalities When a Borrower Is in Default Where the borrower in default is solvent, it is not particularly difficult for a lender to seek to enforce its security pursuant to the provisions of the Insolvency and Bankruptcy Code 2016 (IBC). Separately, banks and financial institutions that have lent monies to a borrower are enti- tled to enforce their security interest without the intervention of a court/tribunal, subject to strict compliance with the Securitisation and Recon - struction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act). The SARFAESI Act defines borrowers to mean any person who has been granted financial assistance by any bank or financial institution, or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial insti - tution, and includes a person who becomes the borrower of an asset reconstruction company consequent to the acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance or who has raised funds through issue of debt securities. However, it should be noted that action under the IBC and the SARFAESI Act cannot be taken simultaneously, since a moratorium is declared upon the admission of an insolvency applica - tion under the IBC by a National Company Law Tribunal.
Many lenders are successfully using proceed - ings under the IBC to enforce their rights under the loan documentation. 3.7 Subordinating Existing Debt to Newly Created Debt Generally, where the priority of security is not contractually agreed between parties, the secu - rity created earlier in time will rank in priority to the security that is created subsequently. A first-ranking charge will have priority over a second-ranking charge at the time of security enforcement. However, it is possible for existing secured debts to become subordinated to new debts when an intercreditor agreement setting out the ranking of debt or a subordination agree - ment is signed. In Indian lending transactions, shareholder/pro - moter loans are typically unsecured and subor - dinated. 3.8 Lenders’ Liability Under Environmental Laws Lenders will not ordinarily incur liability under Indian environmental laws simply by holding a security interest. If a lender takes over man - agement and control of the borrower after the enforcement of security, such lender may incur liability as the person in possession of the pol - luting premises, or as a person responsible for the conduct of the borrower’s business. 3.9 Effects of a Borrower Becoming Insolvent The ideal outcome of an insolvency application under the IBC is a successful corporate insol - vency resolution process (CIRP), failing which liquidation is commenced. There are also pro - visions for voluntary liquidation. Where such a debtor goes into liquidation, the IBC provides the manner in which secured debt will be dis -
350 CHAMBERS.COM
Powered by FlippingBook