Section 15 of the SARFAESI Act: Manner and Effect of Takeover of Management
Section 15 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 governs the appointment of new directors or administrators after takeover of a borrower's business management, the consequences of that appointment and restoration of management after recovery.
Meaning and scope of Section 15
The term borrower refers to a person liable to a secured creditor in the circumstances covered by Section 2. A secured creditor holds an enforceable security interest, subject to the Act. An asset reconstruction company is an entity carrying on asset reconstruction under the statutory registration framework. Takeover of management means assumption of control of the borrower's business, distinct from merely taking possession of an individual secured asset.
Section 15 operates in connection with Section 9(a) (asset reconstruction measures involving change or takeover of management) and Section 13(4)(b) (secured creditor's enforcement power to take over management of the borrower's business in the circumstances specified by law). These powers remain subject to applicable statutory conditions and regulatory directions.
Section 15(1): Public notice and appointment
Where management has been taken over by an asset reconstruction company under Section 9(a), or by a secured creditor under Section 13(4)(b), Section 15(1) provides for appointment through a notice published in both an English-language newspaper and an Indian-language newspaper circulating where the borrower's principal office is situated.
- Company borrower: Persons may be appointed as directors in accordance with the company-law reference contained in Section 15(1)(a).
- Other borrower: One or more persons may be appointed as administrators of the borrower's business under Section 15(1)(b).
The statutory text refers to the Companies Act, 1956. Company-law questions arising in current proceedings must also be examined in light of the Companies Act, 2013, applicable repeal and saving provisions and other governing law; the statutory reference should not simply be rewritten without legislative authority.
Section 15(2): Legal consequences of the notice
Vacation of existing offices - clause (a)
Upon publication, the former directors of a company borrower, or persons exercising superintendence, direction and control in other cases, are deemed to vacate their respective offices.
Termination of management contracts - clause (b)
Management contracts between the borrower and the directors or managers holding office immediately before publication are deemed terminated.
Custody of property and claims - clause (c)
The newly appointed directors or administrators must take necessary steps to obtain custody or control of the borrower's property, effects and actionable claims. The property and effects of the business are deemed to be in their custody from the date of publication.
Exclusive management powers - clause (d)
Newly appointed directors or administrators alone exercise the powers previously held by the directors or management, whether sourced from the company's constitutional documents or otherwise.
Section 15(3): Restrictions during takeover
Where a secured creditor takes over management of a company borrower, Section 15(3) operates notwithstanding the company-law and constitutional-document provisions referred to in that subsection. In particular:
- Shareholders or other persons cannot nominate or appoint directors.
- Shareholder resolutions cannot be implemented without secured creditor approval.
- Proceedings for winding up or appointment of a receiver require the secured creditor's consent, subject to the interaction of this provision with other applicable laws, including insolvency legislation.
The restrictions should be understood within the scope of a lawful takeover and the applicable legal framework; they do not dispense with overriding statutory requirements.
Section 15(4): Restoration of management
When the secured creditor has realised its debt in full, Section 15(4) requires restoration of the borrower's business management. The proviso introduced by the 2016 amendment creates an exception where the secured creditor, jointly with other secured creditors, an asset reconstruction company, a financial institution or another assignee, converts part of the debt into shares and thereby acquires a controlling interest in the borrower company. In that situation, the secured creditors are not required by this provision to restore management to the borrower.
Practical safeguards and remedies
Before takeover, the relevant creditor should establish the statutory basis for action, satisfy applicable conditions under Sections 9 or 13, observe applicable RBI directions and maintain evidence of publication and appointment. Borrowers should examine the notices, creditor authorisation, enforcement steps and the availability of remedies under the SARFAESI Act, including Section 17 where an aggrieved person challenges a measure under Section 13(4). The appropriate remedy and limitation period depend on the measure challenged and the facts.
Related provisions and official resources
Read Section 15 with Section 9, Section 13 and Section 14. For the legislation and regulatory directions, consult the official India Code, Reserve Bank of India and e-Gazette portals. Regulatory directions should be checked for amendments and applicability to the creditor concerned.