A bank advances a loan to a borrower and holds an asset of the borrower as a security till the repayment of the loan. In case of default of the borrower to repay the loan or secured debt, the bank or financial institutions have several remedies.
Initially, the banks had to subject themselves to a long legal route against the defaulting borrower. They had to institute suits in the court which was time-consuming. The Debt Recovery Tribunal also did not prove to be of much help as they were overburdened with cases. Banks did not have any power for seizing the assets charged to them. This gave rise to the SARFAESI Act 2002.
This Act enables the banks and financial institutions to enforce their interest and improve recovery by exercising power to take possession and sell the securities secured by the borrowers against their loans. When the borrower who is under a liability to pay a secured creditor defaults, the account of such a borrower is termed as a non-performing asset (NPA)
Hence the purpose of this Act is to enable and empower the secured creditors to take possession of the securities and deal with them without the intervention of the court themselves or transfer it to an asset reconstruction company for unblocking their funds.[i]
Section 69 of Transfer of Property Act 1882 lays down that right of the mortgagee to sell the mortgaged property or any part of it in case of default of payment of mortgage money without court intervention in case where the mortgage is an English mortgage, where Government is the mortgagee and where mortgaged property is situated in Kolkata, Mumbai or Chennai.
Further section 69A states that the mortgagee can exercise a power of sale through the appointment of a receiver of income of the mortgaged property.[ii]
Enforcement of Security Interest under Section 13 of the SARFAESI Act 2002 read with Security Interest (Enforcement) Rules 2002
Now, under section 13 of the SARFAESI Act 2002, the provision states as under-
Notwithstanding anything contained under section 69 and 69A of the Transfer of Property Act 1882 a secured creditor can enforce his interest in case of default by the borrower in repayment of loan without the intervention of court. The borrower who defaults in payment of the loan in a whole or installments, his account is held as a non-performing asset. Non-performing asset means an asset or account of the defaulting borrower which has been classified as a loss asset by a bank or financial institution.
Notice by a secured creditor to the borrower
A secured creditor sends a notice to the borrower to discharge his liability within 60 days. The notice contains details like the amount due from the borrower and details of the asset held as security. On receipt of the notice by the borrower, he may raise questions or objections to the creditor. The creditor may within 15 days of receipt of such objections communicate the reasons for non-acceptance of the objections. However, the borrower is not entitled to make an application to Debt Recovery Tribunal in case of non-acceptance by the creditor and no borrower can transfer the secured asset without the permission of the creditor.
When the borrower fails to discharge his liability
A secured creditor sends a notice to the borrower to discharge his liability within 60 days. If the borrower fails to discharge his liability the secured creditor can enforce his rights in the following manner-
1. The creditor can take possession of such security and have the right to transfer such security by the way of sale, lease or assignment till the extent of debt recoverable.
2. The creditor can take over the management of the business of the borrower till the extent of debt due and sell, lease or assign it.
3. He can appoint a manager to manage the secured asset. In case where the secured asset is sold by the borrower to a third party, a notice should be given that the third party will pay the debt due from the borrower to such a bank or financial institution.
4. Further, the secured creditor or an officer authorized by him can sell the secured asset through an auction.
The secured creditor must possess all the lawful rights in such a property as that of a true owner. All incidental costs and charges shall be borne by the borrower. However, if the borrower pays his dues and incidental costs before the notice of auction or lease or sale, the creditor shall not transfer such asset.
Where there are more than one creditors
Where there are more than one creditors who are financing a secured asset and the borrower defaults in repayment, the creditors shall agree upon the rights of each creditor. When the creditors representing 60% of the outstanding amount agree on the rights, that action will be binding on all the creditors.
When the security is insufficient for the repayment of the whole of the debt
When dues of the creditors are not satisfied from the sale of the secured asset, he may file an application with the Debt Recovery Tribunal.
Section 14 of the Act states that when a default occurs, the creditor can file an application accompanied with an affidavit in the Chief Metropolitan Magistrate and the District Metropolitan Magistrate to take possession and control of the secured asset and forward it to the creditor.
The Chief Metropolitan Magistrate and the District Metropolitan Magistrate shall pass an order within 30 days from the date of application. This time limit can be further extended up to a period of 60 days with providing reasons in writing.
Central Government has set up a Central Registry and appointed a person for the control and superintendence of the Registry. The Central Registry has been established to register the transactions of securitization and reconstruction of financial assets and creation of security interest. This has been laid down under section 26D of the Act. [iii]
M/s Hindon Forge Pvt. Ltd. & Anr. v State of Uttar Pradesh [iv] The Court held that section 17 of the Act states that the borrower aggrieved by the measures taken by the secured creditor under section 13(4) pertaining to the recovery of secured debt from the borrower by way of taking possession, management of business or by appointing a manager for managing the security, can file an application with the Debt Recovery Tribunal within 45 days from the date on which such action has been taken by the creditor. However, the borrower or any aggrieved party can apply even before the actual or physical possession of the security is taken by the bank or financial institution. Therefore he can file an application when he possesses the notice and not necessarily wait for the sale notice to be issued or actual sale takes place.
M/s Mardia Chemical Ltd. v. Union of India and others [v] , The Supreme Court declared that SARFAESI Act 2002 was not unconstitutional, solely because it was an Act that favoured the lender that is the banks and financial institutions and provided limited relief and remedies to the borrowers. The Court also struck down section 17 (2) and laid down that the borrower’s objections regarding the notice should be considered and not rejected ritually. The reasons for such refusal of the borrower’s objections shall be communicated to him.
Frequently Asked Questions
- What is the remedy available to the borrower to recover the secured debt?
Under section 17 of the Act, the borrower is can file an application with Debt Recovery Tribunal if he is aggrieved by any action taken by the secured creditor or his authorized representative under section 13(4) for the recovery of secured debt by possession of asset or taking over management of business and other measures under the Act.
Such an application shall be filed within 45 days from the date on which action has been taken.
If the Debt Recovery Tribunal is of the opinion that the creditor has not acted in accordance with the Act he may pass an order for restoration of the asset. [vi]
- What is the remedy available to the creditor in case of shortfall in the secured debt?
Under section 13(10) read with rule 11, if the secured asset is insufficient to fulfil the debt due from the borrower, the creditor can file an application with the Debt Recovery Tribunal. Such an application can be filed by his authorized officer or agent or legal practitioner to the Registrar of the Bench within whose jurisdiction the case lies. The application shall be sent to the Registrar through registered post.[vii]
Edited by Sakshi Agarwal
Approved & Published – Sakshi Raje
[i] Corporate Restructuring, Insolvency, Liquidation and Winding Up Part II, Lesson 22, I.C.S.I. , Web modules https://www.icsi.edu/media/webmodules/Corporate_Restructuring_Insolvency_Liquidation.pdf
[ii] The Transfer of Property Act, 1882, No. 4
[iii] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No.54; section 13, 14 and 26A
[iv] Civil Appeal No. 10873 of 2018
[v] (2004) 4 SCC 311
[vi] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No.54; Section 17
[vii] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No.54; section 13(10)