Vol 7 (2010) - Issue 4

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Course of Action Available to a Secured Creditor: The Indian Legal Perspective

I. Introduction
In view of the fact that, in most bankruptcies, the creditors receive much less than the full amount owing to them, it can be seen that there is a decided advantage to be gained by the taking of security for a debt. Should the debtor subsequently become bankrupt the creditor may realise his security and thus pay himself in full, and moreover may avoid the delay which the unsecured creditors will experience before they receive any payment at all. Naturally, the prudent creditor will have done his best to satisfy himself, before giving credit that the security offered by the debtor is worth at least as much as the amount of the debt to be incurred.

The creditor who stipulates for security does so with the specific object of minimising his loss or avoiding it altogether in the event of the debtor’s insolvency. Even the principle of pari passu distribution of assets does not apply to the rights of secured creditors, suppliers of goods under agreements reserving title or creditors for whom the company holds assets on trust.1 This however is not because these are exceptions to the rule but because such assets do not belong to the company.

In England, a secured creditor has a number of options: – He can surrender his security and prove for the full amount of the debt due to him,3 a procedure rarely used since it appears to have no possible advantages; – he can value his security in his proof and prove for the balance for the debt; – he can realise his security and, if the proceeds are insufficient to cover the amount due, can prove for any deficiency; and – he can simply rest on his security without lodging a proof at all.

Thus, the secured creditor needs to examine his options carefully. The position is very much the same in India. By taking security he acquires a proprietary interest in the mortgaged assets; only the equity of redemption remains the property of the debtor and available, in the event of his insolvency, for the general body of his creditors. On the debtor’s failure the secured creditor may resort to his security, which he is usually free to realise for his own benefit and at a time of his own choosing without reference to and independently of the insolvency, and without regard to the effect upon other creditors. Such a resort to his security, in India, is had through a simpliciter civil suit for recovery of debt and under various legislations in India namely, the Provincial Insolvency Act, 1920, the Presidency Towns Insolvency Act, 1909, Companies Act, 1956 and more recently the SARFAESI Act, 2002.