Section 15 SARFAESI: Manner and Effect of Takeover of Management

Taking over the business is one of the strongest measures the Act allows, and Section 15 sets out how it is done and what follows. The secured creditor publishes the appointment of new management, the old directors fall away, and the powers of the business pass to the appointed persons. It is a temporary displacement: once the debt is realised in full, the management goes back to the borrower. This note sets out the manner of takeover, its effect, and restoration.

1. How Management Is Taken Over

Figure 1: From the decision to the new management

• The measure. Takeover of management is a measure available under s.13(4)(b) on enforcement, and as a reconstruction measure under s.9(a) for an ARC (Topics 28, 18)
• Publishing the appointment, s.15(1). The secured creditor or ARC publishes a notice appointing as many persons as it thinks fit to manage the business of the borrower.
• Directors or an administrator. For a company the appointees act as directors; for other borrowers an administrator is appointed to take charge of the business and its property.
• Only where relatable to the security. The takeover is used where the business is connected to the security and is severable, not as a free-standing penalty (Topic 28)

2. The Effect on the Existing Management

Figure 2: The old board falls away

• Existing directors vacate, s.15(2). On publication of the appointment, the existing directors or managers are deemed to have vacated office, clearing the way for the new management.
• Management contracts terminated. Any contract of management between the borrower and such persons stands terminated by force of the section, not needing separate notice.
• Powers vest in the new management. The powers of the board or of those in charge vest in the appointed persons, who run the property and the business while the takeover lasts.
• Company safeguards. For a company, shareholders cannot nominate directors, and resolutions or winding up need the creditor's consent during the takeover, so the displaced owners cannot undo it.

3. Restoration of Management

Figure 3: A temporary displacement, not a permanent one

• During the takeover. The appointed persons manage the business, and the borrower's own management is displaced for the duration of the enforcement.
• On full realisation, s.15(4). On realisation of the secured debt in full, the secured creditor must restore the management of the business to the borrower, so the takeover is temporary.
• The equity-conversion exception. Where the debt has been converted into shares giving the creditor a controlling interest (s.9(g)), restoration does not apply in the same way, since control now rests on shareholding (Topic 18)
• The balance it strikes. Takeover preserves and runs the business to realise value, but returns it once the debt is paid, so it is a recovery tool, not an expropriation.

4. Frequently Asked Questions

How does a secured creditor take over the management of a borrower's business under Section 15?

Under Section 15(1), the secured creditor or asset reconstruction company takes over management by publishing a notice appointing as many persons as it thinks fit to manage the business of the borrower, acting as directors where the borrower is a company or as an administrator for other borrowers. On publication, Section 15(2) provides that the existing directors or managers are deemed to have vacated office, any contract of management with them stands terminated, and the powers of the board vest in the appointed persons. For a company, shareholders cannot nominate directors and resolutions or winding up require the creditor's consent while the takeover continues.

Is the takeover of management permanent?

No. The takeover is a temporary measure to preserve and realise the value of the business. Under Section 15(4), on realisation of the secured debt in full, the secured creditor must restore the management of the business to the borrower. The main exception is where the debt has been converted into shares of the borrower company, giving the creditor a controlling interest under the reconstruction power; in that case restoration does not operate in the same way, because control then rests on the shareholding rather than on the takeover itself. Otherwise, once the debt is cleared, the borrower's own management resumes.

5. Related Topics

• Topic 28: Section 13(4) Measures. Where takeover of management sits among the measures.
• Topic 18: Section 9 Reconstruction Measures. Takeover as a reconstruction tool for an ARC.