Securitization in India – SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or SARFAESI Act, 2002 allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. The Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions.

As stated in the Act, it has “enabled banks and FIs to realise long-term assets, manage problems of liquidity, asset-liability mismatches and improve recovery by taking possession of securities, sell them and reduce non performing assets (NPAs) by adopting measures for recovery or reconstruction.”

The SARFAESI Act, 2002 has been largely perceived as facilitating asset recovery and reconstruction. The Act has been passed based on the recommendations of Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms and to consider the need for changes in the legal system in respect of these areas. The provisions of the Act would enable the banks and financial institutions to realize long-term assets, manage problems of liquidity and asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

Provisions of the SARFAESI Act, 2002

The Act has made provisions for registration and regulation of securitization companies or reconstruction companies by the RBI, facilitate securitization of financial assets of banks, empower SCs/ARCs (Securitisation Companies and Asset Restructuring Companies) to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and FIs to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default.… Read the rest

Damages for Breach of Contract

Damages are a monetary compensation allowed to the injured party by the Court for the loss or injury suffered by him by the breach of a contract. The object of awarding damages for the breach of contract is to put the injured party in the same position, so far as money can do it, as if he had not been injured, i.e. in the position in which he would have been had there been performance and not breach. This is called the doctrine of restitution.

The rules relating to damages may be considered as under:

1. Damages arising naturally – Ordinary damages

When a contract has been broken, the injured party can recover from the other party such damages as naturally and directly arose in the usual course of things from the breach. This means that the damages must be the proximate consequence of the breach of contract. These damages are known as ordinary damages.

Example: A contracts to sell and deliver 5 tonnes of Farm Wheat to B at Rs.1000 per tonne, the price to be paid at the time of delivery. The price of wheat rises to Rs.1200 per tonne and A refuses to sell the wheat. B can claim damages at the rate of Rs.200 per tonne.

2. Damages in contemplation of the parties – Special damages

Special damages can be claimed only under the special circumstances which would result in a special loss in case of breach of a contract. Such damages, known as special damages, cannot be claimed as a matter of right.… Read the rest

Contingent Contracts

A contract may be unconditional or absolute on the one hand and conditional or contingent on the other. The absolute or unconditional contract is one without any reservations or conditions and is to be performed under any event. On the other hand, conditional or contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening or not happening of some future uncertain event. The event must be collateral to the contract. The condition may be precedent or subsequent. For example, goods are sent on approval, the contract is a contingent contract depending on the act of the buyer to accept or reject the goods.

According to the section 31 of the contract Act 1872, “A Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.”

A Contingent contract contains a condition promise. A promise is “absolute” or “unconditional” when the promise undertakes to perform it in any event. A promise is “conditional” when performance is due only if an even, collateral to the contract, dose or does not happen. “Collateral” means “subordinate but from same source, connected but aside from main line.”

The performance of such a contract depends on contingency and such contingency is uncertain. The test of determining whether the contract is contingent or not, is uncertainty. If contingency is certain it is not a contingent contract.

There are three essential characteristics of a contingent contract:

  1. Its performance depends upon the happening or non-happening in future of some event.
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Offer and Acceptance

One of the early steps in the formation of contract lies in arriving at an agreement between the contracting parties by means of offer and acceptance. One party makes a definite proposal to the other, and that other accepts it in its entirety.

Offer

An offer is also called a proposal. Sec.2 (a) of the Indian Contract Act defines a proposal as,

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.

The person making the proposal is called the “proposer”, or “offeror” and the person to whom the proposal is made is called the “offeree”.

Essentials of Valid Offer
  1. It must contain definite, unambiguous and certain and not loose and vague terms.
  2. It must intend to give rise to legal relationship. A social invitation, even if it is accepted does not create legal relationship, because it is not so intended.
  3. It must be distinguished from a quotation or an invitation to offer.
  4. An offer may be made to an individual or addressed to the world at large. An offer is called a specific offer when it is made to a particular person.
  5. Offer must be made with a view to obtaining the assent. The offer to do or not to do something must be made with a view to obtaining the assent of the other party addressed and not merely with a view to disclosing the intention of making an offer.
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Quantum Meruit in Business Law

‘Quantum meruit’ literally means ‘as much as earned’ or ‘as much as is merited’. When a person has done some work under a contract, and the other party repudiates the contract, or some event happens which makes the further performance of the contract impossible, then the party who has performed the work can claim remuneration for the work he has already done. Likewise, where one person has expressly or impliedly requested another to render him a service without specifying any remuneration, but the circumstances of the request imply that the service is to be paid for, there is implied a promise to pay quantum meruit, i.e. so much as the party rendering the service deserves. The right to claim quantum meruit does not arise out of contract as the right to damages does; it is a claim on the quasi-contractual obligation which the law implies in the circumstances.

The claim for quantum meruit arises only when the original contract is discharged. If the original contract exists, the party not in default cannot have quantum meruit remedy; he has to take resort to remedy in damages. Further the claim for quantum meruit can be brought only by the party who is not in default.

The claim for quantum meruit arises in the following cases:

  1. When an agreement is discovered to be void.
  2. When something is done without any intention to do so gratuitously.
  3. When there is an express or implied contract to render services but there is no agreement as to remuneration.
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Crossing of Cheques

Crossing means drawing two parallel transverse lines across the face of the cheque with or without the words “and company” in between the lines. It is a direction to the drawee bank not to pay the amount at the counter, but only through a bank. It is made to guard payment against forgery by unscrupulous persons.

Crossing of cheques is of two kinds: (1) General Crossing and (2) Special Crossing.

1. General Crossing

Sec. 123 of the Negotiable Instruments Act defines General Crossing as, “where a cheque bears across its face an addition of the words ‘And Company’ or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without the words ‘not negotiable’, that addition shall be deemed to be a crossing and the cheque shall be deemed to be crossed generally”. Two parallel transverse lines across the face of the cheque with or without the words, “& Co”, “Account Payee only”, “Not Negotiable”, constitute general crossing. The cheque which is crossed generally, is payable only to banker.

Specimens of General Crossing
  • “Account Payee” Crossing: When the words “Account Payee”, “Account Payee only” are added to the general or special crossing, it is called Account Payee Crossing. The collecting banker must collect the amount of the cheque for the account of the payee only and none else. Otherwise, it is not a collection in due course and the banker is liable if the title of the person for whom the bank collects, turns out to be defective.
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