SARFAESI ACT

The SARFAESI Act, also known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, was enacted in 2002 with the intention of enabling banks to recover non-performing assets (NPAs) without the intervention of a court. The SARFAESI Act authorizes Indian banks and financial institutions to sell or auction the assets/properties of credit defaulters without involving the courts.

LIMITATION IN CASE OF MORTGAGE UNDER SARFAESI ACT

Where there is a mortgage in the favour of the Bank, the limitation period becomes 12 years to realize the debt by acting upon the mortgage. The provision given in the SARFAESI Act is quite clear that a bank cannot commence SARFAESI action after the limitation term has expired, and the limitation period must be governed by Article 62 of the Limitation Act, the limitation for the mortgaged property is 12 years.

PROVISION IN THE LIMITATION ACT

SECTION 62- To enforce payment of money secured by a mortgage or otherwise charged upon immovable property, the limitation period is twelve years, from the date when the money sued for becomes due.

PROVISION IN THE SARFAESI ACT

SECTION 36- No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963). A reading of the preceding provision will reveal that if a claim in respect of a financial asset is made within the limitation period stipulated by the Limitation Act, 1963, then the measure taken by the secured creditor under Section 13 (4) is also regarded to be within limitation.

CALCULATION OF LIMITATION PERIOD

According to the requirements of the Restriction Act, the 12-year limitation period begins on the date the money becomes due. In many cases now, if the limitation is strictly applied as contemplated by Section 36 of the SARFAESI Act, 2002, banks may be unable to invoke the provisions of the SARFAESI Act, 2002 because obtaining the ‘Certificate of Recovery’ in Original Application under Section 19 of the RDDBI Act, 1993 may take considerable time. According to the Bank, the limitation period under Section 36 begins on the date the ‘Certificate of Recovery or the decree’ is issued. On the contrary, the borrowers contend that the proceedings under the RDDBI Act, 1993 and the SARFAESI Act, 2002 are separate, even though they can now proceed concurrently, and that the limitation under Section 36 is to be calculated separately based on the loan transaction and default while the Bank proceeds under the provisions of the SARFAESI Act, 2002. Courts have interpreted the ‘Decree or Certificate of Recovery’ as a ‘debt’ or a ‘financial asset’ under the SARFAESI Act, 2002, putting the bank in a favorable position.

The Hon’ble High Court of Madras in the case of; M/s. Consolidated Construction Consortium Ltd Vs. M/s. Indian Bank, 2010 AIR (Mad) 68, observed that-

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’s definition of “debt” is found adopted in the SARFAESI Act. “Debt” refers to any obligation (inclusive of interest) claimed as owing from a person by a bank, financial institution, or group of banks or financial institutions during any business activity carried out by the bank, financial institution, or group in accordance with any law, whether payable in cash or otherwise, or pursuant to a decree or order of a civil court, pursuant to an arbitration award, or otherwise, or pursuant to a mortgage. A simple reading of the definition of ‘debt’ would exhibit and demonstrate that given a ‘decree debt’ might be interpreted as a ‘debt’. It is self-evident and axiomatic that obtaining a decree will take a significant amount of time, which in some cases may exceed ten or fifteen years. In such a case, if the twelve-year period of limitation for enforcing the mortgage is calculated from the date of accrual of the cause of action based on the mortgage due under the bank, then the relevant portion of the definition of ‘debt’, as contemplated would be trivial. Therefore, the twelve-year limitation period must be calculated from the date of the decree or the debt recovery certificate issued by the Tribunal.

WRITTEN BY: RIDDHI SINGH