A brief introduction to the (SARFAESI) Act in the context of foreclosure of loans and disposal of assets pledged for obtaining those loans.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act
In theory, a loan is a simple transaction where a borrower wants money, and a lender advances it and collects interest on it and this arrangement continues until the loan is repaid by the borrower. In practice, however, it is observed that there are defaulters and they ruin the lenders financials. While in case of secured loans the borrower offers collateral such as real estate or machinery which serves as a security to the lender, authorizing it to seize and sell the asset to recover its money, in the event of default in repayment of loan by the borrower. The loan accounts where the borrower fails to repay the loan, then this asset becomes Non performing Asset (NPA).
Non-performing Asset (NPA) means an asset for which:
With an aim to provide a structured platform to the Banking sector for managing its mounting NPA stocks and keep pace with international financial institutions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was put in place to allow banks and Financial Institutions (FIs) to take possession of securities and sell them. As stated in the Act, it has “enabled banks and FIs to realize long-term assets, manage problems of liquidity, asset-liability mismatches and improve recovery by taking possession of securities, sell them and reduce NPAs by adopting measures for recovery or reconstruction.”
The main objective of the SARFAESI Act is to provide for the enforcement of security interest i.e. taking possession of the assets given as security for the loan. The Act empowers the lender, in the event of default by a borrower, to issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. If the borrower fails to comply with the notice, the bank or the financial institution may take possession of the security or Sale or lease or assign the right over the security;
The Security Interest (Enforcement) Rules 2002 lay down the procedure for enforcement of the secured assets.
Once the account is classified as a NPA the authorized officer designated by the secured creditor issues a demand notice u/s 13(2) of the SARFAESI Act for repayment of the outstanding dues as set out in the demand notice within 60 days.
The borrower may raise objections to the said notice in writing within 60 days and the secured creditor has to consider and reply to the said objections u/s 13(3A).
In case of non payment within the statutory period of 60 days, the authorised officer shall thereafter be entitled to take possession of the secured assets u/s 13(4). Possession may be physical or symbolic. The authorised officer shall make a panchanama and publish the possession notice. He shall be required to carry out valuation of the secured asset and then proceed to sell the secured asset by public auction. However, the secured asset can also be sold by private treaty if the parties agree. Upon sale, the authorised officer shall issue the sale certificate.
Any person aggrieved by the action taken u/s 13(4) can file an application u/s 17 to the Debt Recovery Tribunal setting out the grounds or reasons on which the action is claimed to be wrong. The Debt Recovery Tribunal shall pass an order on the said application preferably within four months. Either party can appeal against the order of Debt Recovery Tribunal to the Debt Recovery Appellate Tribunal u/s 18 of the Act. No further appeal is provided there from, but one can prefer a writ petition to the High Court and Special Leave Petition to the Supreme Court.
1. Can an NPA account be regularized?
Yes, provided the outstanding amount as on the date of issuance of notice u/s 13(2) is paid within time.
2. Who is an Authorised Officer?
The secured creditor may appoint any officer not less than the chief manager of a public sector bank or equivalent or any other person or authority as specified by the Board of Directors/Trustees as the case may be.
3. What assets are covered under SARFAESI?
Any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest in any other form except those excluded u/s 31 of the Act.
4. Can the guarantors’ personal property be proceeded against under SARFAESI?
Only those property given as security can be proceeded under the provisions of SARFAESI Act.
5. Can the rights of a third party such as a tenant be affected in case of action taken under SARFAESI?
Any rights created in favour of any third party before the creation of security interest in the asset will not be affected.
6. Are residential houses exempt from under SARFAESI Act?
No, there is no provision for exemption for any property secured to the bank/financial institution including mortgaged residential house save and except those specified u/s 31 of the Act.
7. What is the remedy available to the borrower upon receipt of notice u/s 13(2)?
The borrower can raise objections/representations, if any in writing to the secured creditor who has to deal with the same and reply back in writing.
8. Can the borrower or mortgagor transfer the asset after receipt of a notice u/s 13(2)?
No, S. 13(13) prohibits the borrower from transferring the asset after receipt of the notice u/s 13(2) save and except in the usual course of business.
9. What is the order u/s 14 passed by the Chef Metropolitan Magistrate or the District Magistrate? Is such an order mandatory?
The CMM or the District Magistrate may, on an application in writing being made by the secured creditor, pass an order for taking possession through its office by taking such steps, including force as may in his opinion be necessary. However such an order is not mandatory except where an obstruction may be apprehended.
10. When can the creditor take possession of the assets? Is taking of physical possession compulsory?
In case the outstanding demanded in the notice u/s 13(2) is not paid within 60 days, the creditor can take possession u/s 13(4). The creditor has the option of taking either symbolic or physical possession.
11. Can the creditor take possession of a running unit?
There is no bar under the SARFAESI Act which prohibits the secured creditor from taking possession of a running unit.
12. Can the secure creditor also take action under SARFAESI against a company in liquidation?
Yes, the secured creditor can take action against a company in liquidation in respect of its dues secured by the assets of the company. However, the secured creditor shall keep the Official Liquidator informed/updated about the steps being taken by it for liquidating the assets.
13. Can the secured creditor take action against a sick company which is registered with BIFR?
Yes, SARFAESI action can be initiated against any sick company registered with the BIFR provided 75% of the secured creditors agree. Upon 75% of the creditors agreeing, the proceedings before BIFR abate.
14. Is the borrower entitled to any prior notice at the time of taking possession u/s 13(4)?
No, the SARFAESI Act does not contemplate any such notice prior to action being taken u/s 13(4).
15. What is the remedy available to the borrower upon possession being taken? Within what time frame?
The borrower or any aggrieved person can make an application u/s 17 of the Act to the Debt Recovery Tribunal to challenge the action within 45 days from the action being taken u/s 13(4).
16. Can the party apply for waiver of court fees in an application u/s 17 of the Act?
No, there is no provision for waiver of any court fees except for an indigent person or a pauper.
17. What about the recovery of balance amount of liability after assets sold under SARFAESI Act?
The secured creditor can initiate proceedings under the RDDB & FI Act for recovery of balance amount due after sale of the secured assets.
18. What is the difference between RDDB & FI ACT and SARFAESI Act?
The RDDB & FI Act allows filing of proceedings for recovery of the entire defaulted amount including enforcement of the secured assets and recovery from the personal properties of the debtors whereas the SARFAESI Act confers power of enforcement only in respect of the secured asset/s.
19. Can the bank/financial institution proceed simultaneously under RDDB&FI Act and SARFAESI Act?
Yes, in view of the judgement dated 29-11-2006 of the Supreme Court in the matter of Re : Transcore Electricals vs UoI the secured creditor can proceed simultaneously under the RDDB & FI ACT and SARFAESI Act.
20. Can the secured creditor sell the secured asset immediately upon possession being taken?
Upon possession being taken, the secured creditor has to give a mandatory 30 days notice to the borrower prior to the date of sale.
21. Is the secured creditor compulsorily required to sell the secured asset?
No, he may lease out or assign the secured asset as provided u/s 13(4).
22. Is the property purchased under SARAESI action clear and free from encumbrances?
Any asset sold under SARFAESI action is sold on an as is where is and as is what is basis unless specified otherwise. Sale under SARFAESI is governed by the terms and conditions of sale forming part of the sale process.
23. What would happen to the excess amount in case of surplus after sale of the secured asset?
The owner of the secured asset shall be entitled to the surplus amount.
24. Is the sale certificate required to be registered?