People take home loans, education loans, auto loans, etc. The person who owes money to someone else is called debtor and the one to whom the money is borrowed is called creditor. A loan is “A bailment without reward ; consisting of the delivery of an article by the owner to another person, to be used by the latter gratuitously, and returned either in specie or in kind. A sum of money confided to another. ” [i]
Many a times due to financial crunches, they are not able to pay back the loan in time. This situation is mostly tackled by a communication between the lender and borrower which results in restructuring the loan or reducing the EMIs. But if no such consensus is made between the lender and the defaulting party then it can lead to seizure of property. SARFAESI Act, 2002 enables secured creditors to take the possession of the property of defaulting party without the intervention of courts.
So what happens when the property of the party, who makes default in payment, is seized? Are they provided any opportunity to get back their property or not? These are the crucial questions which arise in the minds of borrowers when they lose their property.
Right of secured creditor to take the possession of property
Section 13 of The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 gives powers to the secured creditor to take the possession of the property of borrower in case the person makes default in payment.
According to this Act, if borrower makes default in payment of loan or installment then the debt is classified as Non Performing Asset (NPA) and a notice is given to the borrower to pay his/her liability. If the borrower fails to respond to the notice in 60 days then the lender which is a financial institution has a right to take the possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset.
In other contracts too, when the creditor has to collect a secured debt then the contract itself provides for the right of creditor to take the possession of item in case the borrower makes default in payment.
Restoration of secured assets to borrower under SARFAESI Act, 2002
Section 13(4) of SARFAESI Act, 2002, gives the right to secured creditor to recover his/her debt by taking the possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset. Section 17 gives the borrower right to appeal to get back the secured asset. Following is the procedure to make the appeal:
- The aggrieved (borrower) has to make an application alongwith the prescribed fees to the Debt Recovery Tribunal having jurisdiction in this matter. According to Section 17A, in case of borrower residing in Jammu and Kashmir, the application with fees is to be made to Court of District Judge having jurisdiction in this matter.
- The application is to be made within 45 days from the date on which the possession was taken by the secured creditor .
- If the Debts Recovery Tribunal comes to the conclusion that the possession of borrower’s security was not in accordance with the provisions of this act, then it can declare the act of secured creditor as invalid.
- If the measure taken by creditor is declared invalid then tribunal can declare to restore the possession of secured property to the borrower.
- Any person aggrieved by the order of DRT can appeal within 30 days to the Appellant Tribunal (Section 18). While according to Section 18B, person residing in Jammu and Kashmir can make an appeal to High Court having the jurisdiction.
- If the possession was taken by secured creditor not in accordance with the provisions of this act then DRT or Appellant Tribunal directs the secured creditor to pay the compensation to the borrower in addition to restoration of possession of the asset.
Repossession of security by banks under Banking Codes and Standards Board of India
BCSBI is an independent and autonomous institution to monitor and ensure that the Banking Codes and Standards adopted by the banks are adhered to in true spirit while delivering their services.
According to the policy on collection of dues and repossession of security, the repossession of security is aimed at recovery of dues and not to deprive the borrower of the property. Following are some guidelines for the banks to take the possession of security:
1. Bank cannot start the process of recovery of dues through repossession without giving notice to the borrower. The notice should include the following details:
a. Number of days within which the payment is to be made;
b. Minimum time given to the borrower to pay the debt.
2. In case of sale of asset, a notice is to be issued to the borrower and the realization and valuation of security is to be done in a fair and transparent manner.
3. The bank has to take all the reasonable care after taking the asset in its custody.
4. After the sale of asset,
- If the amount received is less than the debt, bank has a right to recover from the borrower the balance due;
- If the amount received is more than the debt, bank has obligation to pay the excess amount to the borrower.
Opportunity for borrower to take back the security as per BCSBI
The bank uses the option to seize the property of defaulting party as a last resort. Under Banking Codes and Standards Board of India, if the bank takes the possession of the property of borrower, then the borrower can get the possession of the property back if the following conditions are fulfilled:
- Bank has not sold the property already
- If bank is satisfied with the genuineness of inability to pay the amount by borrower
- If the borrower has cleared the bank dues in full.
Bank can return the property back to the borrower within 7 days after receiving installments in arrears after getting convinced of the arrangements made by the borrower and getting the permission from:
- the competent authority of bank or;
- the court or Debt Recovery Tribunal in case the recovery proceedings were filed before such institutions.
Repossession of property under execution decree under Code of Civil Procedure, 1908
Section 51 of Code of Civil Procedure, 1908 is about “Powers of Courts to enforce execution”. Application for the execution of decree against the debtor under this section can be: Oral (Order 21, Rule 10) and Written (Order 21, Rule 11).
Court after the application can order execution of decree in the following manner:
- by delievery of any property specifically decreed;
- by attachment and sale or by the sale without attachment of any property;
- by arrest and detention in prison of judgment debtor. In case where decree is for payment of money, execution by detention in prison after giving the judgment debtor an opportunity of showing cause. Following are some provisions in case of arrest and detention: According to Section 56, a court cannot arrest a woman in execution of money decrees. A judgment debtor is released on fulfilling the conditions mentioned under Section 58 of CPC.
- by appointing a receiver
- When the decree cannot be executed in any of the modes prescribed under clause (a) to (d), then clause (e) can be applied.
Section 52 talks about the execution of decree against legal representative of deceased from the deceased person’s property. Legal representative can be made liable personally only if he/she neglects, avoids or evades to make payment from the property of deceased.
Article 136 of Limitation Act, 1963 says that for execution of any decree or order of civil court limitation period is 12 years. According to this, the period commences from the date when decree becomes enforceable or where the decree or any subsequent order directs any payment of money or the delivery of any property to be made at a certain date or at recurring period, when default in making the payment or delivery in respect of which execution is sought with the exception that an application for the enforcement or execution of a decree granting a perpetual injunction shall not be subject to any period of limitation.
Sale of property in execution of decree under Code of Civil Procedure, 1908
Section 60 of CPC provides a list of properties which can be sold in execution of decree and the properties which are exempted from sale. All saleable property (movable or immovable) belonging to the judgment-debtor or over which or the portion of which he has a disposing power which he may exercise for his own benefit may be attached and sold in execution of a decree against him.
- Sections 65 to 73 and Rules 64 to 94 of Order 21 relates to the sale of movable and immovable property.
- Court can sell the property which it has taken into custody.
- Under Rule 65 sale in execution of a decree is executed by an officer appointed by the court.
- According to rule 66, a proclamation is to be made regarding the intended sale of property. This proclamation is made after giving notice to judgment debtor and decree holder. The proclamation has the following details:
- Time and place of sale
- Property to be sold
- revenue assessed upon the estate
- any encumbrance to which property is liable
- the amount of recovery of which the sale is ordered
- Details relating to property
- Rule 68 says that without the consent in writing from judgment-debtor, sale of immovable property cannot be made before 15 days and in case of movable property, it cannot be sold before 7 days of proclamation made according to Rule 66.
- Court has discretion to postpone the sale in case the judgment debtor gives any justified reason after proclamation and before the seller has paid the price of property. (Rule 69)
- A decree holder cannot purchase the property sold without the express permission of court.
- Similarly, a mortgagee cannot purchase the property without the leave of the court.
- The proceeds of the sale are applied in accordance with Section 73 as follows:
- Firstly, for the expenses of auction
- Then in discharging the amount due under the decree
- In discharging interest and principal monies due
- Then distributed amongst the decree holders against the judgment debtor.
Rights of Judgment Debtor under Execution decree, CPC, 1908
- Setting aside a sale in execution as per Section 47 of Code- It was held in Shaukat Hussain @ Ali Akram and others Vs. Smt. Bhuneshwari Devi (dead) by L.Rs. & others,[ii] that, a judgment-debtor can ask for setting aside a sale in execution of a decree under section 47 C.P.C. and, in special circumstances which attract the provisions of Order XXI rule 90 he may also apply to the court to set aside the sale on the ground of material irregularity or fraud in publishing or conducting the sale provided he further proves to the satisfaction of the court that he has sustained substantial injury by reason of the irregularity or fraud.
Before the sale can be set aside merely establishing a material irregularity or fraud will not do. The applicant must go further and establish to the satisfaction of the Court that the material irregularity or fraud has resulted in substantial injury to the applicant.[iii]
- Setting aside the sale as per Order 21- According to Order 21 Rule 92(2), the court will have to set aside the auction if the judgment debtor deposits the money within 30 days of the date of sale and files the application. But if the deposit is made within 60 days of the date of sale, the court would have discretion, whether or not to grant the application.
So, the SARFAESI Act. 2002, Banking Codes and Standards Board of India and provisions of CPC, 1908 have some rules which aim at protecting the interest of debtors. They set certain guidelines and procedure for the creditors in case they have to opt this option of taking the possession of debtor’s property or enforcing execution decree against them. The debtors can retrieve their property back if they are vigilant about the laws and their rights under various provisions.
Edited by Pragash Boopal
Approved & Published – Sakshi Raje
[i] The Law Dictionary, What is LOAN, https://thelawdictionary.org/loan/ (Last visited July 20, 2019, 8.30 PM)
[ii] 1973 AIR (SC) 528
[iii] Saheb Khan Vs. Mohd. Yusufuddin and others, 2006 AIC (SC) 1871