Beginner’s Guide to the SARFAESI Act, 2002

I. Introduction

When two parties enter into an agreement for the provision of the requisite amount of money to one party, then the party lending the money is called the creditor and the party to whom the amount is lent is called the borrower. As security, the borrower gives the creditor some assets that the creditor may use/sell in case of default in repayment. If the borrower makes a default in the repayment for continuously 90 days, then the creditor has the power to declare the assets secured as Non-Performing Assets (NPA)². SARFAESI Act³ or Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is an act to regulate the securitisation and reconstruction of financial assets⁴. It also aims to provide for a Central database of security interests created on property rights and for matters incidental to it. It came into force on 21^st June 2002. The SARFAESI Act was passed after the recommendations of the Narasimhan Committee and had made forums such as Debt Recovery Tribunals (DRT) and Debt Recovery Appellate Tribunals (DRAT) for expeditious adjudication of disputes. The SARFAESI Act 2002 has aided in not only recovering the defaulting loans but also in reducing the levels of non-performing assets (NPAs) in banks and other financial institutions.

II. Analysis of the Act

SARFAESI Act is a law that permits Indian banks and financial institutions to sell or auction the assets/properties of the credit defaulters without any intervention from the courts. In 2013, the SARFAESI Act was amended to include the cooperative banks formally under the definition of banks that are eligible to use this Act.

Some of the important definitions as defined under section 2 of the SARFAESI Act are :

1) Debt: Debt refers to the unpaid portion of the purchase price of any tangible asset which is given on hire or financial lease. It is defined under section 2(ha) of the SARFAESI Act.

2) Default: As per section 2(j) of the SARFAESI Act, non-payment of any debt, upon which the accounts of the borrower is classified as a non-performing asset is called default

3) Hypothecation: It means a charge on any movable property as a security for financial assistance and is covered under section 2(n).

4) Asset reconstruction company: According to section 2(ba) of the SARFAESI Act, it is a company registered with the Reserve Bank for the purpose of carrying out the business of securitisation or asset reconstruction or both⁵.

5) Secured Asset: Property on which the security interest gets created. It is covered under section 2(zc).

6) Security Interest: Section 2(zf) of the SARFAESI Act refers to Security interest. It means any right, title or interest and includes charge, mortgage, hypothecation, assignment or any title on a tangible asset

7) Securitisation: As per section 2(z) of the Act, the acquisition of financial assets by any asset reconstruction company is known as securitisation.

III. Procedure for lodging a case under sarfaesi

The right of the creditor to enforce the security interest under the SARFAESI Act does not arise unless the account of the borrower has been classified as an NPA (non-performing asset) in the books of account of the secured creditor in accordance with the guidance issued by the Reserve Bank of India (RBI). Under section 13(2) of SARFAESI, the secured creditor must serve a 60 days notice to the borrower, demanding repayment of the amount due and specifying the borrower’s assets over which the secured creditor proposes to enforce its security interest. According to Section 13(13) of SARFAESI, the borrower cannot sell or put on lease any of the secured assets after the receipt of the demand notice.

If on receipt of the notice under subsection (2), the borrower raises any objection, then the secured creditor shall consider such objection, and if the secured creditor comes to the conclusion that such representation or objection is not acceptable, he shall communicate to the borrower within fifteen days of receipt of such objection, the reasons for non-acceptance of the objection, under section 13(3) of the SARFAESI. As per section 13(4) of the SARFAESI Act, if the borrower fails to repay the debt, then the creditor can enforce security interest over secured assets in 4 possible ways :

a) Taking possession of the secured assets of the borrower. This includes the right to transfer by way of lease or sale.

b) Take over the management of the business

c) Appoint any person to manage the secured assets

d) Require any person who has acquired any of the secured assets from the borrower to pay amounts sufficient to discharge the debt

In case the creditor is not able to recover the entire sum due to the enforcement of security interest over the assets secured, then such creditor may approach the Debts Recovery Tribunal (DRT) or the suitable/relevant court for the recovery of the balance amount⁶. The creditor may also, at the same time, pursue its remedies under the SARFAESI Act as well as the DRT. The creditor may approach the Chief Metropolitan Magistrate or District Magistrate to assist the secured creditor in taking possession of the secured asset. If there is more than one creditor, then only the creditor representing not less than sixty per cent of the outstanding amount can exercise the rights conferred under section 13(4) of the Act.

IV. Remedies available to the borrower under sarfaesi act

Some remedies are also available to the borrower. They are included in Section 17 of the SARFAESI. It states that any borrower who is aggrieved by the action taken by the creditor under section 13(4) can file a case within forty-five days from the date of such action. Any person who is aggrieved by the order made by the Debt Recovery Tribunal can approach the Debt Recovery Appellate Tribunal within thirty days of receipt of the order. Such an application can be filed before the DRT within the local limits of the following :

1) Place where the cause of action arose

2) Place where the secured asset is located

3) Place where the branch of a bank or a financial institution is maintaining an account wherein the debt claimed stands outstanding for the time being.

The application filed in the DRT must be disposed of within a period of sixty days from the date of such application. The DRT has also been given various powers under this Act. It has the power to declare the measures taken by the creditor as invalid or order the restoration of the possession of secured assets or may pass any such direction as may seem appropriate under the given circumstances.

V. Landmark judgements related to sarfaesi act

1. In the case of Atheeqa Begum v. Indian Bank and Ors⁷ (2013), the High Court held that taking over of the possession of the suit property is one of the coercive steps taken by the defendant under section 13(4). The fact that such steps were taken by the Bank is evident from the statements and documents provided by Plaintiff in her plaint. The Plaintiff, who is the aggrieved party, in this case, would then have only a specific remedy as provided in section 17 of the SARFAESI Act. Upon conjoint reading of section 17 and section 34, it is clear that there is a statutory bar on Civil Court to try cases in which action under SARFAESI Act has already been taken or are to be initiated. Thus the Civil Court cannot impose an injunction.

2. In the case of L&T Housing Finance Limited v. Trishul Developers and Another⁸, Supreme Court has held that a trivial procedural lapse will not render the entire proceeding initiated by a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("SARFAESI Act") bad in law, until and unless the alleged procedural lapse causes substantial prejudice to the debtor.

3. In the case of Bank of Baroda Vs. M/s Karwa Trading Company & Anr.⁹, the Supreme Court held that, by selling the mortgaged/secured property, it could not be said that the borrower is discharged from the entire liability outstanding against him.

4. The Supreme Court in Phoenix ARC Pvt. Ltd. Vs. Vishwa Bharati Vidya Mandir & Ors¹⁰. Held that, If proceedings are initiated under the SARFAESI Act, and the borrower is aggrieved by any of the actions of the private Bank/Bank/ARC, then the borrower has to avail the remedy under the SARFAESI Act, and no writ petition is maintainable.

5. In the Case of Mathew Varghese v. M. Amritha Kumar¹¹, the Supreme Court observed that a secured creditor was like a trustee of the secured asset, and thus the secured creditor cannot deal with the security in a ‘whimsical’ or ‘arbitrary’ manner. Section 13(8) of the SARFAESI Act was provided to protect the interest of borrowers, and it was important to balance the right of borrowers and creditors. In the light of this reasoning, the Supreme Court also held that unless 30 days’ clear notice was given to the borrower, sale/transfer could not be affected by a secured creditor under the SARFAESI Act. If a sale is notified after due notice, but the sale does not take place, the secured creditor cannot affect the sale/transfer of the secured asset on any subsequent date relying upon the earlier notification.

VI. Conclusion

Indian Financial sector plays an integral role in its developing economy. Thus, it becomes integral that the security rights of the banks should be granted protection. SARFAESI Act 2002 provides financial institutions and banks with powers to handle various types of bad asset issues. Before this Act came into effect, financial institutions and banks had to take recourse to civil suits to recover their dues, which is a lengthy and time-consuming process. Thus, the enactment of the SARFAESI Act has become a new weapon to strengthen the hands of cooperative banks by giving powers to recover the debt by selling off the collateral.

*****

VII. References

Websites

1. SARFAESI ACT, 2002- Applicability, Objectives, Process, Documentation, CLEAR TAX (Feb 04, 2022 - 06:36:33 PM), https://cleartax.in/s/sarfaesi-act-2002

2. CS Jaya Sharma, Highlights of SARFAESI Act, 2002, TAX GURU (Nov, 2019), https://taxguru.in/corporate-law/highlights-of-sarfaesi-act-2002.html

Journals

1. PANDEY, S. J., TILAK, V. G., & DEOKAR, B. (2013). Non-Performing Assets of Indian Banks: Phases and Dimensions. Economic and Political Weekly, 48(24), 91–93. http://www.jstor.org/stable/23527401

2. Carlton Pereira. (2004). Investing in NPAs: Will Investors Bite? Economic and Political Weekly, 39(42), 4602–4604. http://www.jstor.org/stable/4415668

Acts

1. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (India), https://www.indiacode.nic.in/handle/123456789/2006?sam_handle=123456789/1362

Cases

1. Atheeqa Begum v. Indian Bank and Ors, AIR 2013

2. L&T Housing Finance Limited v. Trishul Developers and Another , (2020) 10 SCC 659

3. Bank of Baroda Vs. M/s Karwa Trading Company & Anr., AIR 2020

4. Phoenix ARC Pvt. Ltd. Vs. Vishwa Bharati Vidya Mandir & Ors, AIR 2022

5. Mathew Varghese v. M. Amritha Kumar (2014) 5 SCC 610

*****