SARFAESI Law
PROCEDURE UNDER THE SARFAESI ACT, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) allows banks and financial institutions to recover their dues exceeding one lakh rupees by proceeding against secured assets of the borrower/guarantor without the intervention of the court/tribunals. The Government is not involved in commercial decisions or recovery proceedings of banks or financial institutions. As such, to address any concerns about property valuation, there are adequate provisions under Rule 8 (5) of the Security Interest (Enforcement) Rules, 2002 under the SARFAESI Act, that cast a duty on the Authorised Officer of the secured creditor (bank or financial institution) to obtain the valuation of the property from an approved valuer (as defined in the Rules) and, in consultation with the secured creditor, fix the reserve price of the property before putting the property on sale. Any aggrieved debtor/borrower has recourse to filing appeal in the Debts Recovery Tribunal (DRT) against action under the SARFAESI Act and further recourse to appeal against the DRT’s decision is available in the Debts Recovery Appellate Tribunal. The SARFAESI Act does not differentiate between debtors/borrowers on any basis, including the financial status or debt value.
In the Statement of Object and Reasons of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002, it is stated that the recovery of loans was a slow process which consequently resulted in the “mounting levels of Non-Performing Assets”. This act provides for the realization of any security interest in the favour of any secured creditor “without the intervention of the court or tribunal”[1]. This has resulted in a speedy recovery of Non- Performing Assets.
Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under S. 13 of SARFAESI Act, 2002. If the borrower of financial assistance makes any default in repayment of the loan or any instalment and his account is classified as Non-Performing Asset by a secured creditor, then secured creditor may require before the expiry of the period of limitation[2]by written notice. The Impugned Act, does not cover a certain class of assets, for example, any asset other than a non-performing asset, or unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principles stated in S. 31 of the SARFAESI Act,2002.
WHAT IS THE PROCEDURE FOR SALE/AUCTION THAT THE SECURED CREDITOR NEEDS TO FOLLOW?
The procedures laid down in the SARFAESI Act,2002, as well as the Security Enforcement (Rules), 2002, are mandatory, and no divulgence from the same is permitted, as held by the Hon’ble Supreme Court of India.[3] The procedures to be followed under the Act,2002 are stated hereinbelow.
Procedure of Physical Possession of the secured asset:
- If the borrower defaults in repayment, under S. 13(2) a demand notice is to be sent by the Secured Creditor to the borrower to discharge his liabilities. Such notice persists for 60 days. The demand notice shall contain details and amounts of the amount payable by the borrower.[4] This demand notice can also be objected to by the borrower, which should be replied by the secured creditor within 15 days, and the reply should enumerate the reasons for non-acceptance of such objection. This position was clarified by the Hon’ble Supreme Court of India[5]and later amended into the SARFAESI Act, as S. 13 (3A).
- When the 60 day period concludes, without any discharge by the Borrower, actions can be taken by the Secured Creditor as enumerated under S. 13 (4)- wherein they can take possession of the secured assets, take over the management of the asset, appoint any person to manage the secured asset, require any person who has acquired any of the assets from the borrower to pay the secured creditor.
- The actions under S. 13 (4) are appealable as enumerated in S. 17- 18. Therefore, the borrower can appeal the actions of the secured creditor in Debt Recovery Tribunal, DRAT, writ in High Court and SLP in Supreme Court.
Procedure of Sale and Auction under the SARFAESI Act,2002:
- A Sale Notice is required in the case of auctioning off of the secured asset if inviting tenders from the public, or by way of public auction. This sale notice shall be published in 2 leading newspapers, on the website of the secured creditor, and as per the Directions of the Ministry of Finance directions, upload the tender notice on tender.gov.in.
- The sale notice or possession notice should be effectively served, I.e. in 2 newspapers in circulation in the area as provided for in the SECURITY INTEREST (ENFORCEMENT) RULES,2002.
- More particularly, the procedure for an auction of immovable assets is given in Rule 8, Security Interest (Enforcement) Rules,2002. the methods of sale of the immovable secured assets include:
- by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or
- by inviting tenders from the public;
- by holding public auction; or
- by private treaty.[6] (after the possession of the asset by a Bank or Financial Institution, they might be willing to sell it to an appropriate buyer through a private deal with a third party)
Procedure regarding payment by purchaser:
The first step is determining the Reserve Price which is the minimum fair market value of the immovable asset as stipulated by the authorized officer, followed by the relevant notice according to the obligations enumerated in Rule 8 (6). The bidding process for public auction shall be done in accordance with Rule 9, Security Interest Rules, 2002 wherein the bidder shall deposit:
- Earnest money deposit (at the time of bidding)
- 25 percent of the accepted sales price (including EMD) after successful bidding
- 75 percent of the balance amount within 15 days of the auction.
Upon completion of the above, the sale certificate shall be issued to him. Otherwise, any sale by any other method other than public auction shall be on terms and conditions as decided by the parties.[7]It is also mandated under the Security Interest Rules,2002 that the amount of sale shall not be less than the reserved price.
WHAT ARE THE OTHER REMEDIES AVAILABLE TO SECURED CREDITORS?
Section 14 of the Act, 2002 provides a provision for the assistance of the Chief Metropolitan Magistrate andDistrict Magistrate in taking possession of the property. According to the Hon’ble High Court of Madras has held that this provision should be given a purposive interpretation in consonance with the Statement of Objects and Reasons of the SARFAESI Act,2002. It was held that the purpose of this provision is to aid the secured creditor of obtaining possession of the asset as soon as possible, and convert a Non-Performing Asset into a source of recovery for the amount due, and transfer the secured asset to a willing third party.[8]
However, it is pertinent to mention that all the rights and interests of symbolic and/or physical possession guaranteed to the secured creditor under the Act,2002 extinguish after the sale to the third party is complete. From the date of the registration of the sale deed, the secured creditor does not have any remedy or course of action under S. 13 or S. 14 of the SARFAESI Act,2002.
In instances where the secured creditor is unable to claim possession over the secured asset after the expiry of the period of the demand notice under S. 13(2) of the Act,2002 specifically due to tenancy rights that might exist over the said asset, the rent or any other amount which might become due on the said secured asset from the lessee to the borrower (if any) becomes due to the secured creditor. This position was enumerated in S. 13 (4) of the Act,2002, and was solidified by the Hon’ble Supreme Court [9].
Therefore, within the 4 walls of the Act,2002 the secured creditor is well protected if the correct procedure is followed. The SARFAESI Act,2002 is one such legislation that genuinely removes unnecessary and frivolous litigation from the courts, and provides safeguard against the initiation of such litigation at the option of both, the defaulting borrower as well as the secured creditor.
CHECKLIST FOR ENFORCEMENT OF SECURITY INTEREST IN CASE OF IMMOVABLE ASSETS
| SR. NO. | COMPLIANCES | RELEVANT PROVISIONS |
| 1 | Bank/FI to give a Power of Attorney/ Letter authorising its concerned official to take steps under the Act. | Sec 13 (12) read with Rule 2(a) |
| 2 | Sending of Demand Notice for enforcement of Security Interest. | Sec 13(2) read with Rule 2(b) & 3 |
| 3 | Notice can be sent by Registered Post or Speed Post or Courier or Fax or Email | Rule 3(1) |
| 4 | If Borrower avoids notice, service shall be made by affixing the notice in some conspicuous place of his residence/ business and by publishing the notice in two leading newspapers, one in a vernacular language having sufficient circulation | Proviso to Rule 3 (1) |
| 5 | If more than one Borrower (which includes guarantor), individual notice to be served on each of them. | Rule 3(4) |
| 5A | In case any reply/representations are received, the Bank to suitably adjudicate upon and decide. | Section 13(3A) |
| 5B | Issue Notice for taking possession of Secured Asset u/s 13(4) of Act . | Sec 13(4) |
| 5C | Take symbolic possession of the Secured Assets | Sec 13(4) |
| 6 | File an application before the Chief Metropolitan Magistrate or District Magistrate for taking actual possession of the property | Sec 14(1) |
| 7 | Comply with the order of the Chief Metropolitan Magistrate or District Magistrate | Sec 14(2) |
| 8. | Liaising with the Court Receiver, Police authorities, etc. | |
| 9. | Deposit of fee with Police authorities, if any, in case the police force is to be made available by police station in Utter Pradesh | |
| 10 | After taking the possession a notice in terms of Appendix IV will be sent to the Borrower, which will also be affixed on the Property. | Rule 8(1) |
| 11 | The said notice will also be published in two leading newspapers one in vernacular language within 7 days. | Rule 8(2) |
| 12 | Name of Bank/FI to be displayed on the Property. | Rule 8(1) |
| 13 | Insurance cover to be arranged | Rule 8(4) |
| 14 | Take Photographs | Not specified |
| 15 | Security Guards to be deployed at the site of the Property. | Rule 8(4) |
| 16 | Valuation of property by an approved valuer before effecting the sale | Rule 8(5) |
| 16A | Serve on the Borrower a notice of 30 days for sale. | Rule 8(6) |
| 17 | Obtaining Quotations/Inviting tenders/Holding Public Auctions/ Signing Private Agreement for sale of the property. | Rule 8(5) |
| 18 | If sale is by way of inviting tenders from public or holding of public auction, a public notice to be published in two leading news papers one in vernacular language, having sufficient circulation, setting out the terms of the sale. |
Proviso to Rule 8(6) |
| 19 | Notice and Publications to be affixed on conspicuous part of the property and put on the website of the Bank. | Rule 8(7) |
| 20 | Sale other than public auction/tender to be on terms settled between the parties in writing. | Rule 8(8) |
| 21 | Sale to be confirmed in favour of highest bidder | Rule 9(2) |
| 22 | No sale to be confirmed on less than reserve process. However sale at less than Reserve price can be made with the consent of Borrower | Proviso to Rule 9(2 |
| 23 | 25% of the sale price to be deposited forthwith and balance within 15 days | Rule 9(3) and (4) |
| 24 | If balance is not deposited the deposit would be forfeited and the property be resold. | Rule 9(5) |
| 25 | Sale of Property to be made effective from execution of Sale Deed | Not specified |
| 26 | If the terms of payment have been complied with, the Bank/FI shall issue a certificate of sale in favour of the purchaser | Rule 9(6) |
| 27 | The certificate of sale to specify whether the property is free from encumbrances known to the Bank | |
| 28 | Acknowledgement from buyer of having taken over the physical possession of property to be obtained by the Bank/FI. | Not specified |
| 29 | In case the dues of the Bank/FI are not fully met with the sale proceeds of the property, Bank/FI may file an application before Debt Recovery Tribunal or Court having jurisdiction, for recovering the balance amount. |
Sec 13(10) Read with Rule 11 |
WHAT ARE THE REMEDIES AVAILABLE TO BORROWER?
- Any person, aggrieved by any of the measures referred to in sub-section (4) of sector 13 taken by the secured creditor may make an application under section 17 of the Act to the Debts Recovery Tribunal, within forty-five days from the date on which such measures had been taken.
- Procedure prescribed under the DRT Act is to be adopted by the DRT for disposal of such applications filed un/s 17 of the Act.
- Powers of DRT under Securitisation Act
In addition to the power of the DRT under DRT Act, a DRT has following additional powers:
- to restore for ordering restoration of the management of the secured assets to the borrower or restoration of possession of the secured assets to the borrower.
- to order payment of cost/compensation to the borrower if it holds that the possession of the secured assets by the secured creditor is not in accordance with the provisions of the Act.
References:
- S. 13 (1), SARFAESI Act, 2002.
- S. 36,SARFAESI Act,2002.
- ITC Limited v. Blue Coast Hotels Ltd. &OrsCIVIL APPEAL Nos. 2928-2930 OF 2018.
- S 13 (3), SARFAESI Act,2002.
- Mardia Chemicals Ltd. v. Union of IndiaTransfer Case (civil) 92-95 of 2002.
- Rule 8 (6), Security Interest Rules,2002.
- Rule 8(8), Security Interest Rules,2002.
- Kathikkal Tea Plantations v. State Bank of IndiaMANU/TN/1926/2009.
- Harshad Govardhan Sondgar v. International Asset Reconstruction((2014) 6 SCC 1).
