Saturday, December 29, 2012

Om Prakash Shukla vs State Bank Of Bikaner








Rajasthan High Court
Om Prakash Shukla vs State Bank Of Bikaner And Ors on 6 March, 2012

IN THE HIGH COURT OF JUDICATURE FOR RAJ. AT JAIPUR BENCH, JAIPUR.
S.B. CIVIL WRIT PETITION NO. 999/2011
OM PRAKASH SHUKLA --- PETITIONER
VS.
(1) STATE BANK OF BIKANER AND JAIPUR HAVING ITS REGISTERED AND PRINCIPAL OFFICE AT TILAK MARG, 'C' SCHEME, JAIPUR.
(2) SHRI GOPAL LAL SAINI
(3) SMT.SATYABHAMA AGARWAL --- RESPONDENTS
Date of Judgment:- 6TH MARCH,2012.
HON'BLE MS. JUSTICE BELA M. TRIVEDI
Mr. Jayant Sharma, for the petitioner,
Ms. Anita Agrawal, for the respondents,
BY THE COURT

(1) In the instant petition, the petitioner who happens to be an Advocate by profession, has challenged the action of the respondent No. 1 Bank in issuing the public notice dated 25.11.2010, inviting tenders for the sale of the property being the House No. 1555, Choura Rasta, Chokdi Modi Khana, Jaipur, to be held on 28.11.11 under the provisions contained in the securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(hereinafter referred to as the said Act)and the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as 'the said Rules'). 

(2) It has been alleged in the petition that the petitioner was occupying part of the said premises as tenant since last many years, however, the officers of the respondent Bank had put lock on the said premises and now have invited tenders for the sale of said property through public auction. 

The petitioner has prayed for the following reliefs in the petition:-
i) the impugned Public Auction scheduled to be conducted on 28th of December, 2010 through the public notice/proclamation(Annex-6) by the Respondent No. 1 may kindly be declared as arbitrary, illegal unconstitutional, and against the law and consequently, may kindly be quashed so far as it affects the rights and premises of the petitioner; and
ii)respondents be directed to restore the possession of the petitioner on the disputed premises; and be also directed not to put up any hurdles in running the office in the premises in question either themselves or through their administrators, assigns, servants or authorized representatives in any manner; and
iii)the Hon'ble Court may kindly pass such other order or a direction which it may deem fit, just and proper in the facts and circumstances of the present case, in favour of the petitioner.
iv)The costs through out be also awarded in favour of the petitioner.

(3) It appears that when the matter was placed for admission hearing, the Court on 11.2.2011, had issued notice to the respondents and directed that in the meantime, petitioner shall not be dispossessed from the rented premises. It may be noted that when the petitioner had sought for the relief of restoration of possession of the disputed premises, as he was already dispossessed as per the allegations made by him in the petition, the ex-parte direction not to dispossess him appears to have been given inadvertently. As such it was the duty of the learned counsel for the petitioner to point out to the Court that the petitioner was already dispossessed from the disputed premises. 

(4) On the notices having been served, the petition was opposed by the respondent No.1-Bank by filing reply raising preliminary objection as to the maintainability of the petition and also disputing the tenancy rights of the petitioner. It was also contended that the auction notice was published in the news paper on 25.11.2010 after taking all the steps to recover the secured debt as per the provisions contained in the said Act. (5) It is pertinent to note that respondent No.3 Smt. Satyabhama Agarwal, the borrower and the mortgagor who had mortgaged the disputed premises with the respondent No.1 bank to secure the repayment of the loan taken by her from the bank, has chosen to remain absent though duly served with the notice in this petition.
(6) It has been sought to be submitted by learned counsel Mr. Jayant Sharma, for the petitioner that the petitioner being an advocate by profession was running his office in the disputed premises since 1982 and his tenancy rights were sought to be jeopardized when the respondent No. 1 locked the said premises, which was part and parcel of House No. 1555 Chaura Rasta Chowkari Modikhana, Jaipur. According to Mr. Sharma, the respondent No. 1 could not have dispossessed the petitioner without following the due process of law. Mr. Sharma has relied upon the judgment of Karnataka High Court in Hutchison Essar South Limited v. Union Bank of India and another reported in AIR 2008 Karnataka 14 and in case of M/s Nitco Roadways Private Ltd. & Ors. v. Punjab National Bank, reported in AIR 2011 KARNATAKA 27, to buttress his submission that the Creditor/Bank could take only symbolic possession from the tenants invoking the provisions of the said Act and that the tenant could not be thrown out by the Secured Creditor/Bank without following the due process of law. (7) On the other hand, the learned counsel Ms. Anita Agrawal for the respondent No.1 Bank, has vehemently submitted that the petition contains highly disputed questions of facts in as much as there was no document produced by the petitioner to show that he was the tenant of the respondent No.3 borrower in the disputed premises, when the respondent no.3 had created the mortgage in favour of the respondent Bank in the year 1996. According to her, the respondent bank had already taken over the possession of the disputed premises after taking measures under Section 13(4) of the said Act and that if the petitioner was aggrieved by the said measures taken by the bank in respect of the said mortgaged premises, the petitioner could have filed appeal in view of Section 17 of the said Act. Thus, according to Ms. Agrawal, there being an alternative, efficacious remedy available to the petitioner, the petitioner was not entitled to any relief in the petition, invoking extra ordinary jurisdiction of this court. Pressing into service, provisions contained in Section 35 of the Said Act, Ms. Agrawal submitted that the provisions of the said Act had an over-riding effect over the other law for the time being in force and that the validity of the said Act having also been upheld by the Apex Court, the petitioner could not challenge the action of the respondent taken under the said Act. She also submitted that the bank had already taken over the possession of the disputed premises, as admitted by the petitioner himself in the petition and had sought restoration of possession, however the Court had passed the ex-parte interim order on 11.2.2011 to the effect that the petitioner shall not be dispossessed from the rented premises. According to her when the petitioner was already dispossessed as per his own averments in the petition, such an order not to dispossess the petitioner from the rented premises had no meaning. (8) At the out set, it may be stated that though the petitioner had come with the allegations in the petition stating that he was dispossessed from the disputed premises by the respondent No.1 and his possession was required to be restored, the learned counsel for the petitioner could not have submitted and prayed before the Court, when the matter was placed for admission hearing on 11.2.2011, not to dispossess the petitioner. As rightly submitted by learned counsel Ms. Agrawal for the respondent bank, such an ex-parte interim order not to dispossess the petitioner would not have any meaning or effect when he was already dispossessed on the date of filing of the petition even as per his own averment. (9) There is also much force in the argument of Ms. Agrawal for the respondent No.1 Bank that the petitioner though has claimed tenancy rights in respect of the disputed premises, he has not produced any document worth the name to show that the premises in question was already let out by the respondent No. 3 Smt. Satyabhama Agrawal to the petitioner when she had mortgaged the said property with the respondent No.1 bank towards the security of the loan taken by her. The petitioner has produced the copies of certain letters addressed by third party to him mentioning the address of the disputed premises, which are of the year from 1985 to 1992. Apart from the fact that such letters do not establish any right much less tenancy rights of the petitioner, they related to the year prior to the date of mortgage which had taken place in the year 1996. The copy of notice produced at Annexure 5, allegedly addressed by one advocate named Man Mohan Lal Sharma to the petitioner also does not appear to be genuine one. Even otherwise, such copies of some letters written by third parties would not establish the tenancy rights of the petitioner in the disputed premises. It is also pertinent to note that there is no document worth the name produced by the petitioner to show that he was in possession of the disputed premises at the time of and after the mortgage was created by the respondent No.3 in favour of the respondent No. 1 bank, either in the capacity of tenant or otherwise. As rightly submitted by learned counsel Ms. Agrawal for the respondent bank, since the petition involves highly disputed questions of facts as regards the tenancy rights of the petitioner with regard to disputed premises, the petition, invoking extra-ordinary jurisdiction under Art. 226, 227 of the Constitution of India, could not be entertained. (10) It may also be noted that as held by the Apex Court in the case of S.P. Chengalvaraya Naidu v. Jagannath (AIR 1994 S.C. 853), the petitioner is bound to produce all the documents relevant to the petition and with-holding of relevant documents would amount to suppression of material facts and fraud with the Court. The petitioner in the instant petition having not produced the relevant documents to show his rights in the disputed premises and having sought to challenge the public notice Annexure 6 issued under the provisions contained under the said Act and the rules made thereunder, the Court has reason to believe that the petition has been filed as proxy litigation at the instance of respondent No. 3 to frustrate the recovery proceedings against the respondent No. 3. Such practice deserves to be strongly deprecated, and the present petition deserves to be dismissed on such ground alone. (11) So far as the maintainability of the petition is concerned, it would be relevant to reproduce certain provisions of the said Act. Section 13 deals with the enforcement of security interest created in favour of the secured creditor. Section 13(4) of the said Act empowers the secured creditor to take recourse to any one or more of the measures mentioned therein to recover his secured debt, in case the borrower fails to discharge his liability in full within the specified time limit. The relevant part of Section 13(4) of the said Act reads as under:- Section 13(4).-- In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset;
(b) ......
(c) ......
(d) ......

(12) Section 17 of the said Act enables any aggrieved person to make application to the Debts Recovery Tribunal having jurisdiction, against any of the measures referred to in Sub-section (4) of Section 13 taken by the secured creditor. Section 34 of the said Act bars the jurisdiction of the Civil Court to entertain any suit or proceedings in respect of the matter which Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. Section 35 of the said Act provides that the provisions of the Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. From the bare reading of the said provisions, it clearly emerges that the petitioner, if aggrieved by the coercive measures taken by the respondent bank under Section 13(4) of the said Act, had the remedy to apply to the Debts Recovery Tribunal having jurisdiction. Hence there being alternate efficacious remedy provided under the said Act, the petition is liable to be dismissed on the said ground also. (13) It was also sought to be submitted by the learned counsel Mr. Sharma for the petitioner that the respondent-Bank could have taken only the symbolic possession of the disputed premises and not the actual physical possession while taking measures under Section 13(4) of the said Act. There is also no force in the said submission of the learned counsel Mr. Sharma in view of the position of law settled by the Apex Court in case of M/s. Transcore Vs. Union of India & Anr. AIR 2007 SC 712 wherein the Apex Court dismissing the plea of symbolic possession, categorically held that the dichotomy between symbolic and physical possession does not find place in the said Act. The relevant para Nos. 55 and 56 of the said judgment are reproduced as under :-

55. The word possession is a relative concept. It is not an absolute concept. The dichotomy between symbolic and physical possession does not find place in the Act. As stated above, there is a conceptual distinction between securities by which the creditor obtains ownership of or interest in the property concerned (mortgages) and securities where the creditor obtains neither an interest in nor possession of the property but the property is appropriated to the satisfaction of the debt (charges). Basically, the NPA Act deals with the former type of securities under which the secured creditor, namely, the bank/FI obtains interest in the property concerned. It is for this reason that the NPA Act ousts the intervention of the courts/ tribunals.

56. Keeping the above conceptual aspect in mind, we find that Section 13(4) of the NPA Act proceeds on the basis that the borrower, who is under a liability, has failed to discharge his liability within the period prescribed under Section 13(2), which enables the secured creditor to take recourse to one of the measures, namely, taking possession of the secured assets including the right to transfer by way of lease, assignment or sale for realizing the secured assets. Section 13(4-A) refers to the word "possession" simpliciter. There is no dichotomy in sub-section (4-A) as pleaded on behalf of the borrowers. Under Rule 8 of the 2002 Rules, the authorised officer is empowered to take possession by delivering the possession notice prepared as nearly as possible in Appendix IV to the 2002 Rules. That notice is required to be affixed on the property. Rule 8 deals with sale of immovable secured assets. Appendix IV prescribes the form of possession notice. It inter alia states that notice is given to the borrower who has failed to repay the amount informing him and the public that the bank/FI has taken possession of the property under Section 13(4) read with Rule 9 of the 2002 Rules. Rule 9 relates to time of sale, issue of sale certificate and delivery of possession. Rule 9(6) states that on confirmation of sale, if the terms of payment are complied with, the authorised officer shall issue a sale certificate in favour of the purchaser in the form given in Appendix V to the 2002 Rules. Rule 9(9) states that the authorised officer shall deliver the property to the buyer free from all encumbrances known to the secured creditor or not known to the secured creditor. (emphasis supplied). Section 14 of the NPA Act states that where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred, the secured creditor may, for the purpose of taking possession, request in writing to the District Magistrate to take possession thereof. Section 17(1) of NPA Act refers to right of appeal. Section 17(3) states that if the DRT as an appellate authority after examining the facts and circumstances of the case comes to the conclusion that any of the measures under Section 13(4) taken by the secured creditor are not in accordance with the provisions of the Act, it may by order declare that the recourse taken to any one or more measures is invalid, and consequently, restore possession to the borrower and can also restore management of the business of the borrower. Therefore, the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed, not in accordance with the provisions of the Act, then the DRT is entitled to put the clock back by restoring the status quo ante. Therefore, it cannot be said that if possession is taken before confirmation of sale, the rights of the borrower to get the dispute adjudicated upon is defeated by the authorised officer taking possession. As stated above, the NPA Act provides for recovery of possession by non-adjudicatory process, therefore, to say that the rights of the borrower would be defeated without adjudication would be erroneous. Rule 8, undoubtedly, refers to sale of immovable secured asset. However, Rule 8(4) indicates that where possession is taken by the authorised officer before issuance of sale certificate under Rule 9, the authorised officer shall take steps for preservation and protection of secured assets till they are sold or otherwise disposed of. Under Section 13(8), if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the creditor before the date fixed for sale or transfer, the asset shall not be sold or transferred. The costs, charges and expenses referred to in Section 13(8) will include costs, charges and expenses which the authorised officer incurs for preserving and protecting the secured assets till they are sold or disposed of in terms of Rule 8(4). Thus, Rule 8 deals with the stage anterior to the issuance of sale certificate and delivery of possession under Rule 9. Till the time of issuance of sale certificate, the authorised officer is like a court receiver under Order XL Rule 1 CPC. The court receiver can take symbolic possession and in appropriate cases where the court receiver finds that a third party interest is likely to be created overnight, he can take actual possession even prior to the decree. The authorized officer under Rule 8 has greater powers than even a court receiver as security interest in the property is already created in favour of the banks/FIs. That interest needs to be protected. Therefore, Rule 8 provides that till issuance of the sale certificate under Rule 9, the authorized officer shall take such steps as he deems fit to preserve the secured asset. It is well settled that third party interests are created overnight and in very many cases those third parties take up the defence of being a bona fide purchaser for value without notice. It is these types of disputes which are sought to be avoided by Rule 8 read with Rule 9 of the 2002 Rules. In the circumstances, the drawing of dichotomy between symbolic and actual possession does not find place in the scheme of the NPA Act read with the 2002 Rules. (14) Thus, the said decision of the Apex Court clinches the issue to the effect that the dichotomy between the symbolic possession and physical possession does not find place in the said Act and that the security interest in the property created in favour of the Banks/FIS needs to be protected, when the measures have been taken by the banks under Section 13(4) of the said Act. The ratio of the above judgment was also followed by the Madras High Court in case of Sree Laxmi Products Vs. State Bank of India (supra). (15) At this juncture it would also be pertinent to deal with the submissions of the learned counsel Mr. Sharma that the respondent-Bank i.e. the secured creditor could not have ousted the petitioner-tenant of the mortgaged property without taking recourse to the remedy available under the Rajasthan Rent Control Act. Apart from the fact that the provisions of the said Act have the effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, in view of Section 35 of the said Act, the secured creditor could not have approached the rent Tribunal seeking possession of the mortgaged property as under Section 18 of the Rajasthan Rent Control Act, the Rent Tribunal has jurisdiction to hear and decide the petitions relating to the disputes between landlord and tenant and matters connected therewith ancillary thereto filed under the provisions of the Rent Act. This being neither the dispute between the landlord and the tenant, nor the proceedings having been filed under the provisions of the Rent Act, and there being specific powers conferred upon the secured creditors to take measures under Section 13(4) of the said Act to recover the secured debt, the question of respondent-Bank filing suit for eviction against the tenants of the mortgaged property under the provisions of the Rent Act does not arise. The said Act being the Central Act having the effect of overriding other State Laws in view of Section 35 of the said Act, this court does not find any force in the submission of learned counsel Mr. Sharma that the respondent-Bank was required to approach the Rent Tribunal seeking possession of the disputed premises and could not have taken the possession of the said premises under Section 13(4) of the said Act. While dealing with the similar contention as raised by Mr. Sharma in this petition, the Delhi High Court in case of Sanjeev Bansal Vs. Oman International Bank SAOG, 2006 (4) BC, 299 (DB), held interalia that the protection afforded by the Rent Control Act to a tenant is from the landlord of the premises and that such protection is not available against the mortgagee who seeks to enforce his right under the SARFAESI Act. The court further held that if the lease was created in contravention of Section 65-A of the Transfer of Property Act, by the mortgagor in favour of the lessee, neither the mortgagor nor the lessee can claim any protection to defeat the right of the mortgagee. (16) Mr. Sharma for the petitioner had relied upon the judgmentsof the Karnataka High Court, however said judgments have no application to the facts of the present case in as much as in both the cases, the question of the concerned petitioners being the tenants was not in dispute, which is very much disputed in the instant case as set- out herein above. That apart, in the case of Hutchison Essar South Ltd.(supra), the Karnataka High court has held interalia that if the secured asset is in the possession of the borrower, its possession can be taken in accordance with the provisions contained under Sections 13 and 14 of the Securitisation Act. If the borrower has inducted somebody overnight only to defeat the rights of the bankers, then also the provisions of Sections 13 and 14 of the Securitisation Act can be pressed into service for taking the possession . In the instant case, neither the possession of the petitioner nor the tenancy rights of the petitioner have been established. Even otherwise, as held by the Apex Court in case of M/S Transcore (supra), the dichotomy between the symbolic and physical possession does not exist in the said Act and that the Security interest created in favour of the Banks/Financial Institutions needs to be protected, when the measures have been taken by the Banks under Section 13(4) of the said Act, read with the said Rules. (17) In view of the above, there being no merits in the petition, the same deserves to be dismissed. Since the Court has found that the petition has been filed by the petitioner suppressing material facts by not producing the vital documents, and as proxy litigation at the instance of the respondent No. 3 , with a view to stall the recovery proceedings undertaken by the respondent No. 1 bank against the respondent no. 3 in respect of the disputed premises, the petition deserves to be dismissed with costs , which is quantified at Rs. 5,000/-. The petitioner shall pay the said cost to the respondent No. 1 bank, within two weeks from today. The petition stands dismissed accordingly.
(Bela M.Trivedi)J.

IJ/MRG.

All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.

M.R. Gidwani
PS-cum-J

Sunday, December 23, 2012

How to buy property in an auction




BL :Anand Kalyanarman :22 dec 2012


Tight timelines in the auction process necessitate deep pockets.
Do you yearn to buy a house in the city but find realty rates prohibitive?
 You could try bidding for properties being auctioned by banks.
The laws allow banks to recover dues from defaulting borrowers by auctioning the properties they pledged.
Banks may fix the reserve price (minimum price at which the property will be sold) for such properties 20-25 per cent lower than the going market rate. 
This could translate into a bargain buy for bidders. 
Also, since they are auctioned by banks, the title to these properties would likely be clear.

DEEP POCKETS NEEDED

The auction process, however, has tight timelines within which the buyer needs to arrange the money to close the deal. So, this requires that you have deep pockets. Banks issue a public notice in newspapers about the proposed auction and invite bids.
The notice includes the details of the property, date, time and venue of the auction, reserve price, and earnest money deposit.
It also mentions the date on which interested parties can inspect the property before submitting their bids. Bidders must submit their applications to the bank quoting their bid amount which should not be less than the reserve price. Along with this, they must pay earnest money deposit which may be around 10 per cent of the reserve price.
The auction usually takes place after 30 days from the date of the public notice. In this period, the borrower may still pay the money due to the bank.
If the borrower settles the dues, the auction will not happen and your earnest money deposit will be returned. If the auction takes place and you do not win the bid, your earnest money deposit is returned. If you win the bid, you will have to pay around 25 per cent of the bid price (less the earnest money deposit) on the day of the auction. You need to pay the balance amount within the next 15 days or an extended period agreed between you and the bank.
If you win the bid but do not pay the required amount within the specified periods, you will lose the money paid earlier. 
So, walk this path only if you have got the funds ready to go the whole way. Banks may offer loans to acquire such properties. But given the tight timelines, you will have to make arrangements for a loan before the auction date.

ONLINE OR OFFLINE?

Buying property through the auction route involves effort. You will need to scan newspapers for announcements by banks regarding such auctions, do the necessary due diligence, and organise the funds quickly. Else, you can contact real estate agents who may have this information. Also, Web sites such as www.foreclosureindia.com provide online listings of properties which banks advertise to auction.
In a normal (offline) property auction, bidders gather at the auction venue where their bids are considered. Banks may also allow competitive bidding among the bidders for improving their offers.
In online property auctions, the process is largely similar, but bidders place and revise their bids on a Web site.
 The online auction method has not yet been much successful in India. Observers attribute this to fears of online fraud, risk of manipulation by cartels, and lack of awareness among bidders.

WHAT TO WATCH OUT FOR

Despite the benefits, acquiring property through the auction route may not be everyone’s cup of tea. If the auction attracts aggressive bids, the price could go up and dilute the cost advantage. So, it is important that you make an assessment of the market value and bid prudently to get a good deal. 
Also, to be on the safer side, it is better to check the property documents before deciding to bid, or engage a lawyer to verify the title.
This apart, keep in mind that banks auction property on an ‘as-is-where is’, ‘as-is what-is’ basis.
This means that expenses on any repairs, renovation, unpaid property taxes, electricity dues and statutory liabilities will have to be borne by the buyer. The buyer also has to bear other expenses such as stamp duty and registration fees. So, do a proper inspection to assess the true cost of owning the property.
Besides, some people consider auctioned property unlucky, and have misgivings about buying something the owner does not willingly sell. 
This could be a reason why such properties may be priced at a discount to market rates.

‘Vulture funds’ that feed on sovereign debt






C.P. CHANDRASEKHAR :
Front Line :Volume 29 - Issue 25 :: Dec. 15-28, 2012
INDIA'S NATIONAL MAGAZINE
from the publishers of THE HINDU

A recent judgment in a U.S. court in a case involving debt restructuring by Argentina poses questions about sovereign default and by extension the huge volume of international debt and methods of its recovery.
REUTERS 
 
THE LIBERTAD, an Argentine naval vessel, was detained in Tema, Ghana, on October 21 under a court order obtained by NML Capital Ltd, a "vulture fund". The firm says it will release the ship only after Argentina pays it at least $20 million of the $300 million that Argentina owes it in defaulted sovereign bonds.

IMPERIALISM never gives. The Argentine debt saga is another instance of proof of the ways in which arms of the state and private capital from developed countries collude to extract surpluses from developing countries. As far back as 2001, after a major crisis, Argentina defaulted on more than $80 billion dollars of debt. That debt was accumulated through a process that began under the military dictatorship in the late 1970s and early 1980s and was facilitated by periodic efforts of the U.S. Treasury and the International Monetary Fund (IMF) to reschedule and restructure debt in order to avoid a default that would damage the balance sheets of banks. The shift to a neoliberal growth strategy in the1980s and after only aggravated the debt problem, while growth remained low and the economy experienced bouts of hyperinflation. That trajectory led up to the late 1990s crisis, which in turn finally precipitated the largest debt default in history.

Subsequently, in what was then considered an infeasible move, the government of President Nestor Kirchner decided not to repay in full the debt it considered illegitimate, given the circumstances in which it was incurred and expanded. The difficulty was that the debt agreement did not include any “collective action clauses”, which would have required all creditors to come to the table to negotiate a restructuring of the debt if a sufficient majority agreed to do so. Starting with an offer to repay just about 10 cents to every dollar, it launched on negotiations and arrived at a deal in 2005 with holders of about three-quarters of its total debt, in which the debt was exchanged for new bonds that were valued at 25-30 cents to a dollar. The rest decided to hold out for a settlement that offered more. With time, a significant number of the so-called “holdouts” turned weary. Finally, holders of around 70 per cent of the un-restructured debt agreed to a debt swap and “haircut”, reducing the share of the holdouts to just 7 per cent of the total debt in default.

In search of profits

The remaining holdouts were of two kinds. The first consisted of a bunch of retail creditors, substantially from Italy, who were in all probability attracted by the unusually high interest rates being paid on the bonds in order to attract creditors to lend to an excessively indebted nation. The other consisted of a set of “vulture funds”, particularly two—Elliott Management (a New York-based hedge fund) and its subsidiary, NML Capital, and Aurelius Capital Management—which had acquired some of the defaulted bonds for a pittance in the secondary market in the hope that they could profit by forcing the Argentine government to pay them back the full value. To realise this ambition, they exploited the fact that the debt agreement made it subject to U.S. law, and filed cases in the U.S. demanding full payment. The Argentine government insisted that it would not negotiate with or be held to ransom by the holdouts.

Victory in cases like this has not been the norm. Thus, an August 2012 IMF study found that there have been 186 cases of debt exchanges with private creditors in a total of more than 600 cases of debt restructuring since the 1950s involving 95 countries. Of these 186 cases, “57 involved a cut in face value (debt reduction), while 129 implied only a lengthening of maturities (debt rescheduling). However, both types of debt operations can involve a ‘haircut’, i.e., a loss in the present value of creditor claims.” However, there have been only 109 individual litigation cases since the 1980s, and the number of litigation “successes” leading to settlements or attachment of sovereign assets has been even smaller. Distressed sovereign debtors did indeed have some space.

Legal difficulties

However, with the rapid growth in sovereign debt since the 1980s, and the increasing frequency of debt crises, developed country creditors, governments and courts have been working to rein in sovereign debtors. The difficulty is that enforcement of foreign law on sovereigns is difficult because there are few assets of the latter located abroad that can be attached easily, and even when such assets are available, they are protected by considerations of sovereign immunity. But attempts have been under way to change or reinterpret legal doctrine to facilitate some kind of guarantee against sovereign restructuring involving a “haircut” for creditors.

These changes have encouraged what is now a major trend: the entry of the so-called “vulture funds”. These are financial firms that buy distressed debt at a discount in secondary markets and then go to court to get the debtor to settle in full or in substantial measure. Well known among these funds is Elliott Associates, a key player in the Argentinian drama. Elliott famously won a case against Peru, when it opted for an IMF-supported, debt-restructuring programme under the Brady Plan. Elliott purchased Peruvian debt worth $20.7 million for around $11 million, refused to accept Brady bonds in exchange, and then waged a long and costly legal battle for full settlement with interest to win an award of $56 million. In its case, Elliott, through its lawyers, argued that by making payments to its creditors who had accepted the Brady bonds issued under the restructuring, Peru was violating the pari passu clause in the original loan agreement, which promised “equal footing” treatment to all its creditors. Peru, it said, was wrongly privileging debt that had been restructured into Brady bonds, even though the holders of those bonds had accepted a loss that the holdouts were unwilling to incur.

The judgment set a new standard by agreeing to enforce its award through an unusual interpretation of what constituted Peruvian assets that could be attached. Elliott sought and won a restraining order on the transfer of the amounts credited by Peru to Chase Manhattan as interest payments on the Brady bonds, for which Chase was the U.S. fiscal agent. The argument was that these sums were still Peruvian property that could be attached to enforce the court’s award in favour of Elliott. It did the same against Euroclear, the Brussels clearing house that was the European intermediary for the same purpose.

Since Peru chose to settle rather than avoid default on the Brady bonds, the use of the pari passu clause as the legal basis had not been fully tested, nor was the right of a holdout creditor to attach funds remitted to third parties to enforce a legal award. This is what makes the Argentine judgment, in a case that was again led by Elliott through NML Capital, significant. In this instance, too, the pari passu clause was used as the basis for litigation. In February 2012, Judge Thomas Griesa of the United States District Court in Manhattan held that Argentina had, by making payments to exchange bondholders who had accepted the restructuring, discriminated against the holdouts and thereby violated the pari passu clause. Argentina went on appeal. But in October, the Second United States Circuit Court of Appeals in New York upheld Griesa’s judgment, stating that it had “little difficulty” in concluding that Argentina had, by giving holders of the restructured bonds priority, violated the “equal footing” obligation.

The appeals court then sent the case back to Judge Griesa, who was asked to decide on two issues. The first was whether the force of the judgment would apply to third parties engaged (as in the Peruvian case) in intermediating between Argentina and the exchange bondholders. The second was to assess how much Argentina would have to pay holders of the older bonds when it made the next set of payments to exchange bondholders.

It was at this point that Judge Griesa’s fundamental inclinations were made clear. He ruled in November that: (i) Argentina should pay the holdouts the full $1.33 million due to them if it paid the $3 million due to the holders of the restructured bonds on December 15; (ii) while Argentina had the right of appeal, it needed to keep the sum due to the holdouts in an escrow account until the matter was decided finally; and (iii) the judgment would be applicable to third parties as well, which would include the bond indenture trustee and the clearing system that were involved in managing transfers to the holders of new bonds. The last of these would imply that if Argentina did not comply with the judgment it would be forced to default on the remaining debt due to the holders of the restructured bonds as well. This despite the fact that the application to third parties is seen by many as violative of New York’s Uniform Commercial Code that protects such parties from injunctions directed at institutions in foreign jurisdictions. Argentina has gone on appeal again. Griesa’s judgment has been stayed. But, the same judges who were engaged in the last review would be responsible this time as well. The verdict may, therefore, validate Griesa’s injunctions. If that happens, Argentina may be forced to default once again on all the remaining debt.

Sovereign debt has always been considered as involving low risk of default, attracting investors despite lower returns. That began to change in the years when a supply-side-driven surge in private capital flows dramatically increased the ratio of private debt to gross domestic product in many countries, including poorer ones. As the risk of default consequentially increased, so did the interest rates offered.

This was a signal to investors that they were taking on risk. And the vulture funds were obviously buying into risk at a discount in order to profit. What the Argentine judgment does is that it forecloses any restructuring because it promises to insulate investors in sovereign debt from the dangers of risk. In the process, it does not give foreign debtors even the benefits that bankruptcy laws such as Chapter 11 give corporations in the U.S., so as to protect debtors and allow them to ensure orderly restructuring of debt wherever feasible.

As a result, it is not Argentina alone that has cause to be worried. The holders of restructured bonds, who stand to lose, are worried. The third parties also should be, as should those responsible for a clearing system that is being interfered with. And finally, countries in Europe and elsewhere contemplating restructuring of debt they are unable to service should be worried because the judgment could encourage more holdouts in any attempt at a restructuring that involves a haircut. These problems may be avoided in future debt agreements by including collective action clauses. But that leaves unresolved the question of dealing with the large volume of international debt that has been accumulated globally since the 1970s, at a time when a persisting recession has increased the possibility of default.

FDI limit in asset reconstruction companies raised to 74 per cent




             


 domain .b:21 Dec 2012

The government has decided to increase the ceiling for foreign direct investment (FDI) in asset reconstruction companies (ARCs) to 74 per cent from the existing 49 per cent.

This, however, is subject to the condition that no sponsor should hold more than 50 per cent of the shareholding in an ARC either by way of FDI or by routing through an FII. Foreign investment in ARCs would also need to comply with the FDI policy in terms of entry route conditionality and sectoral caps.

The 74-per cent foreign investment limit in ARC would be a combined limit for both FDI and FII and there will therefore be no prohibition on investment by FII in ARCs, an official release said today.


The revision in the ceilings for FDI and FII have been reviewed in consultation with stakeholders and the sector regulators, it said.


The total shareholding of an individual FII in an ARC, however, should not exceed 10 per cent of its total paid-up capital.

The limit of FII investment in security receipts (SRs) may also be enhanced to 74 per cent from 49 per cent at present.

Further, the individual limit of 10 per cent for investment of a single FII in each tranche of SRs issued by ARCs may also be dispensed with, the release said, adding that such investments should be within the FII limit on corporate bonds prescribed from time to time, and in compliance with the sectoral caps under the FDI regulations.

The Reserve Bank of India (RBI) will separately issue necessary notification / circular under the Foreign Exchange Management Act (FEMA).

Further, the Securities and Exchange Board of India (SEBI) will also issue necessary notifications under SEBI (FII) Regulations.

Under extant rules foreign direct investment in the equity capital of asset reconstruction company is permitted up to 49 per cent. Besides, foreign institutional investors registered with the Securities and Exchange Board of India (SEBI) has been allowed to invest in security receipts issued by ARCs up to 49 per cent of each tranche of scheme of SRs.

Germany's DVB Bank SE has sued aviation regulator Directorate General of Civil Aviation (DGCA) and Kingfisher


Money Control :22 Dec 2012

Germany's DVB Bank SE has sued aviation regulator Directorate General of Civil Aviation (DGCA) and Kingfisher

The case underlines the problems that leasing firms and financing companies face in recovering grounded planes from Kingfisher, as airports, banks and tax authorities scramble for the crisis-hit carrier's assets.

International Lease Finance Corp (ILFC) - owned by U.S. insurer AIG - is also struggling to take back Kingfisher planes it owns, one of which, an Airbus A-320, has been impounded by tax authorities for non-payment of dues by the carrier.

The DGCA must deregister the DVB-financed Airbus planes, now parked in Istanbul, before the bank can put them to use or lease them out.

"Our main trouble really is with the DGCA, which should deregister the aircraft," Carsten Gerlach, senior vice president of aviation finance at DVB, told Reuters.

"We have now filed a writ petition at the High Court in Delhi against DGCA and also Kingfisher, strictly focused on deregistration," Gerlach said by phone from Frankfurt.

However, the DGCA argues that those aircraft were not financed by DVB alone, so deregistering them would make the DGCA answerable to other financiers, who are also trying to recover their money, according to a senior government source with direct knowledge of the situation.

The DGCA and Kingfisher did not respond to requests for comment.

Meanwhile, leasing company IFCL has also asked the DGCA to deregister four Kingfisher-operated planes, but it faces separate obstacles.

These planes include an Airbus A-320 parked at Mumbai airport that was impounded by tax authorities last week after the carrier failed to settle long-pending dues.

"People just go the airport, see a plane in Kingfisher colours, and stake their claim on it," the source said, referring to the tax authorities' impounding of the Airbus.

"What they don't understand is that the plane may not belong to Kingfisher at all."

Kingfisher, owned by flamboyant liquor baron Vijay Mallya, has hit back at the tax authorities' actions, saying it is illegal for authorities to seize aircraft that are owned by foreign lessors.

"This will send a very wrong signal to any foreigner who wishes to do business in the aviation industry in India," the airline said in a statement last week.

Kingfisher has 33 scheduled passenger planes registered in India, according to data from the DGCA. It had a fleet of 64 a year back, when it was India's No. 2 carrier by market share.

It is saddled with a combined debt load of $2.5 billion, according to one estimate, and has not paid salaries for months.

Kingfisher, which has not flown since October, had its license suspended in October after months of canceled flights and staff walkouts.