Updated: Dec 8, 2019
Narasimham Committee I and II and Andhyarujina Committee was constituted by the Central Government for the purpose of examining banking sector reforms, therefore, these Committees have made suggestions to form new legislation for securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court .
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 which was enforced in the year 2004, allows banks and other financial institution to auction residential or commercial properties to recover loans. It also enables banks to recover their Non-Performing Assets (NPAs) without the intervention of courts.
What is Securitization?
Securitization is the process of pooling and repackaging of financial assets into marketable securities that can be sold to investors.
What is asset reconstruction?
Asset reconstruction is the activity of converting a bad or non-performing asset into a performing asset.
What is mean by ‘enforcement of security interests’?
The Act empowers the lender (banker), when the borrower defaults, to issue a notice to the defaulting borrower and guarantor, calling to repay the debt within 60 days from the date of the notice.
The prime objectives of the SARFAESI Act are as follows:
The Act details the procedures for NPAs’ transfer to the asset reconstruction companies for the purpose of asset reconstruction.
The Act specifies the legal framework for scanning activities in India.
The Act confers powers to the financial institutions to take custody of the immovable property, which is charged or hypothecated, for debt recovery.
The Act imposes the security interest without any intervention from the court.
Formation of the SARFAESI Act, 2002
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was circulated –
To regulate securitization and reconstruction of financial assets
Enforcement of the security interest for
Matters connected therewith or incidental thereto
It extended to the whole of India. Amendment in the (SARFAESI) Act, 2002 vide the enforcement of the Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. The main features of the amendment to the SARFAESI Act in 2016 are-
empowers the ARCs (Asset Reconstruction Companies)
rejuvenates Debt Recovery Tribunals (DRTs)
Enhances the effectiveness of asset reconstruction under the new bankruptcy law.
Regulatory powers to the RBI on the working of ARCs.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 or SARFAESI Act Amendments have been made in 2016 because of “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016”. The act added new definitions to SARFAESI, widened the scope of debts and secured creditors and bestowed upon RBI new powers in relation to making of policies :
1. Definition of “ARC” added. A company registered with RBI for the purpose of securitization and asset reconstruction.
2. Definition of “Borrower” expanded by adding funds raised by him by way of issuance of debt securities.
3. Definition of “Debt” expanded by adding unpaid portion of purchase or any right/title/interest on unpaid portion.
4. Definition of “Default” expanded by including defaults regarding debt securities. However, a 90 day notice for payment has to be given in such case.
5. Definition of “Financial Assistance” expanded by including funds provided for acquisition of tangible assets on hire/financial lease/conditional sale/contract/assignment/purchase of debt securities.
6. Definition of “Financial Asset” is expanded by adding beneficial right, title or interest in any tangible property given on hire/conditional sale/contract which secures the obligation to pay any unpaid portion of purchase price. Any right, title or interest on any intangible asset or license or assignment of such intangible asset, which secures the obligations to pay any unpaid portions of purchase.
7. Definition of “Financial Institution” is expanded by adding ARC and debenture trustee appointed for debt securities and registered with board.
8. Definition of “Financial Lease” added. It means a lessor’s right in a tangible asset under a lease where at the expiry of lease or upon such payment, the lessee becomes the owner of the asset.
9. Definition of “Negotiable Document” added. It means a document which embodies a right to delivery of tangible assets and satisfies the requirements for the negotiability under any law for the time being in force including warehouse receipt and bill of lading.
10. Definition of “Property” now includes intangible assets, being know-how, patent, trademark, copyright, license, franchise, any other business or commercial right of similar nature.
11. Definition of “Qualified Institutional Buyer” expanded by adding any other category of non-institutional investors specified by RBI.
12. Definition of “Secured Creditor” expanded by adding – holding right title or interest upon financial asset, bank appointed debenture trustee, ARC, debenture trustee registered with SEBI and appointed by company, any other trustee holding securities on behalf of a bank
13. Definition of “Security Interest” has been amended but it isn’t a substantial change.
Applicability of SARFAESI Act, 2002
The provisions of this Act applies to outstanding loans (above Rs. 1 lakh), which are classified as Non-Performing Assets (NPA). NPA loan accounts amounting to less than 20% of the principal and interest are not covered under this Act. The SARFAESI Act isn’t applicable for:
Money or security issued under the Indian Contract Act or the Sale of Goods Act, 1930.
Any conditional sale, hire-purchase, lease or any other contract in which no security interest has been created.
Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.
Any properties not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908.
Features of SARFAESI Act, 2002
1. SARFAESI Act is Procedural in nature – This act is procedural in nature and lays a procedure for providing remedy of enforcement of security interest in secured assets, not through Court but by the secured creditor directly with the intervention of the Tribunal and Appellate Tribunal are not relevant for holding the Act is not of procedural nature.
2. Retrospective provisions of SARFAESI Act- The provisions of this Act have been held to be retroactive in nature. The language used by the legislature in this Act is more than sufficient to show the intention of the legislature to include the transactions of loan already entered into on the date when the Act came into force and therefore, merely because in sub-section (2) of the Section 13 there is a use of words “makes any default”, it cannot be read that the Act would not apply to the loan transaction and security created prior to the Act came into force. If such interpretation is given, it will frustrate the very intention of the legislature and also nullify the effect and operation of number of provisions of this Act. As such the Act intends to cover up all the transactions of loan already entered into the subject to the provisions within the period of limitation and the defaults in making repayment and the debts already classified as non-performing assets and such future contingencies too.
3. Constitutional validity of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- The constitutional validity of this Act has been upheld by the Supreme Court. There was failure on the part of borrower to discharge his liability in full within the period specified. Notice of 60 days as required was given. After measures under Section 13(4) are taken, mechanism provided under Section 17 of the Act is for the borrower to approach Debt Recovery Tribunal (DRT). On measures taken under Section 13(4) before the date of sale/auction of property, it would be open to the borrower to file appeal (petition) under Section 17 of Act before DRT. Borrowers would get reasonably fair deal and opportunity to get matter adjudicated upon before DRT. Impugned provisions of the Act were not unconstitutional as the object of the Act is to achieve speedier recovery of dues declared as NPAs and better availability of capital liquidity and resources to help in growth of the economy of the country and welfare of the people in general to save public interest. The Constitutional validity of the Act and its provision was upheld except Section 17(2) of Act, which was declared Ultra vires Article 14 of Constitution.
4. Action under SARFAESI Act during pendency of civil suit- During pendency of the bank’s civil suit, the bank can resort to simultaneous action under Section 13(4) of the Act.
5. Writ Jurisdiction- The remedy of appeal is available under the Act against actions relating to recoveries of dues of banks and financial institutions. Hence, it is not necessary to resort to writ jurisdiction under Article 226 of the Constitution. Section 13(4)(d) gives power to creditor to require the borrower to pay to the secured creditor a sum of money sufficient to discharge the secured debt such notice is given under Section 13(2). The action to be taken is contemplated under Section 13(4)(d) of the Act. The order passed by the DRT directing bank to proceed under the section during pendency of the petition was upheld.
6. Can Co-operative Banks take action under SARFAESI Act- The provisions of this Act enabling co-operative banks to take resort to the Act cannot be challenged on the ground that members of co-operative banks are governed by the provisions of the bye-laws which inter-alia, provide for filing of suits before the Nominee, which cannot be nullified by the provisions of the present Act. Validity of Securitization Act so far as inclusion of co-operative banks is concerned cannot be challenged on the ground that since provisions for recovery by co-operative bank is already made under Gujarat Co-operative Societies Act and therefor remedy under any other law is excluded.
Recovery under SARFAESI Act, 2002
According to Press Release from Ministry of Finance, The Central Government administers the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) which 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 Authorized 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.
Substantive amendments were made in the SARFAESI Act on 14.8.2016 through the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, in consultation with stakeholders. At present there is no proposal to amend the SARFAESI Act or the Rules framed thereunder.
Formation of Panel on SARFAESI Act
State Level Bankers Committee (SLBC) meeting decided to constitute a sub-committee to study the Agriculture Department’s demand that all land under agriculture in the State should be offered protection as per law under Section 31(i) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act.
The panel will have representatives of the Reserve Bank of India, NABARD, SLBC, and the State government.
Section 31(i) exempts agricultural land from the provisions of the SARFAESI Act. But in Kerala, banks ‘misinterpret’ the law to mean only paddy fields, Agriculture Minister V.S. Sunil Kumar alleged.
“Paddy fields constitute only 2.20 lakh hectares plus another 90,000 hectares lying fallow. On the other hand, coconut farming covers 7.5 lakh hectares and rubber 11 lakh hectares. Other agricultural crops cover several lakhs of hectares. But the exemption from the Act is offered only to paddy land. This is a violation of the Act,” he said, urging the banks to take corrective measures.
On their part, banks denied that such a distinction existed. On the other hand, at the time of applying for a loan, the land is usually shown as non-agricultural in nature. The claim that it is in fact agricultural land crops up only at a later stage, such as in the event of recovery measures, the banks said.
Also, in revenue records, land is distinguished as only dry land or wetland, and not whether it is agricultural or non-agricultural, they said.
S.M.N. Swamy, Regional Director, RBI, said there appeared to be a grey area in this issue. Clarifications would have to be requested as it was the first time that the issue had been raised.
Rights of the Home Loan Borrower under SARFAESI Act, 2002
“Borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;
“Secured Creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes-
(i) Debenture trustee appointed by any bank or financial institution; or
(ii) Securitization company or reconstruction company; or
(iii) any other trustee holding securities on behalf of a bank or financial institution; in whose favour security interest is created for due repayment by any borrower of any financial assistance;
“Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to assets classifications issued by the Reserve Bank;
“Secured Asset” means the property on which security interest is created;
“Security Agreement” means an agreement, instrument or any other document or arrangement under which security interest is created in favor of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;
The Borrower always face lot of problems when he takes loan from any Bank, or financial institution. If any disputes arises between borrower and Bank or financial institution the borrower approaches a professional asking for legal advice, the professional may not be in a position to give clear suggestion to the borrowers.
It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 i.e Right to appeal under the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal on the request made by the borrower. If Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.
The usual grounds of an appeal under section 17 of the Act can be as follows:
1. If there is error by Bank in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request.
2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.
3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.
4. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account cannot be treated as ‘Non-performing Asset’.
5. If the Borrower has not received any notice under section 13 (2) of the Act by the Bank and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it.
6. The Auction process is unfair and illegal.
7. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act.
8. The Bank has failed to proceed against the borrower and instead harassing the guarantor.
9. If the Bank illegally proceed against the property of the guarantor without proceeding against the borrower first.
10. If there was no ‘valid mortgage’ with the Bank at all.
11. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.
Conflicts between Company Law and the SARFAESI Act
Indian legal framework for recovery of debt and for dealing with companies in distress is spread across various statutes. Creditors can seek recourse under the provisions of statutes such as the Companies Act, 1956 (as may be replaced from time to time), the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The enactment of these statutes also led to the establishment of agencies such as the Board for Industrial and Financial Reconstruction, the debt recovery tribunals and the debt recovery appellate tribunals to exercise the powers vested in such agencies. Though each statute was enacted for a distinct purpose and carefully laid down the mechanism and the scenarios in which a creditor can seek redressal, in practice, an overlap between the powers entrusted to the authorities under the respective statutes does occur.
The Supreme Court dealt with one such conflict in its judgment dated 29 December 2015 in the case of Pegasus Assets Reconstruction Private Limited v M/s Haryana Comcast Limited and Another. The case involved a conflict between winding-up proceedings under the Companies Act, 1956 (Companies Act), and enforcement proceedings under the SARFAESI Act. On account of conflicting decisions of Delhi High Court and Punjab and Haryana High Court, the Supreme Court was faced with the question whether, under the provisions of the Companies Act, a court or an official liquidator can place any fetters on the enforcement of a secured asset by a secured creditor under the SARFAESI Act.
Examining the objects of and reasons for the SARFAESI Act, the Supreme Court held in this case that the intent behind enactment of the legislation was to enable a secured creditor to enforce security without the intervention of a court or tribunal. The Supreme Court observed that enabling an official liquidator appointed during the course of winding-up of a company to wield control over the realization of security interest by a secured creditor would result in a conflict of interests and rights granted to the official liquidator and the secured creditor under the respective statues.
As regards workmen’s dues, the Supreme Court observed that the interest of the workmen in respect of the dues payable to them under section 529 and 529A of the Companies Act has been adequately protected by the provisions of section 13(9) of the SARFAESI Act. The SARFAESI Act has specific provisions stipulating how the sale proceeds of secured assets of a company in liquidation have to be distributed in accordance with the provisions of section 529A of the Companies Act. Accordingly, the Supreme Court held the SARFAESI Act is a self-sufficient code and that there is no need for harmonizing the provisions of the SARFAESI Act with those of the Companies Act.
Prior to the judgment in the Pegasus case, various high courts had conflicting judgments on the issue. Madras High Court in Bharat Heavy Electricals Limited v Arunachalam Sugar Mills Limited (2011) took the view that the sale of assets of a company in liquidation by a secured creditor would require the consent of the official liquidator. In contrast, Andhra Pradesh High Court in Indian Bank v Sub-Registrar (2014) was of the view that such a sale could take place without the leave of the official liquidator or the relevant court under the Companies Act.
The Supreme Court’s judgment brings much needed clarity on the issue and also helps restore the basic intent of the SARFAESI Act, which is to enable secured creditors to enforce their security interest without the interference of courts or liquidators. Enabling courts or liquidators to interfere in such matters would lengthen the process of recovery for secured creditors.
The decision in Pegasus also assumes importance in light of the proposed reforms to the insolvency and bankruptcy law in India. The draft Insolvency and Bankruptcy Code, 2015, placed before the parliament seeks to amend section 13(9) of the SARFAESI Act by making the procedure set down in that provision subject to the provisions of the code. The draft code further lays down the order of priority of distribution of the proceeds arising from the sale of liquidation assets, explicitly stating that such priority would be followed regardless of anything contained in any other law. Once such provisions are implemented, there will be greater certainty on the subject.
Difference between SARFAESI Act and Insolvency and Bankruptcy Code, 2016
1. SARFAESI Act, 2002 provides a safety net to secured financial creditors (banks and financial institutions) by empowering them to enforce their security interests without the intervention of any court. On the other hand, under IBC, the rights and interests of all types of creditors have been taken into consideration including that of secured creditors
2. Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 clearly provides that during the insolvency resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.
3. The Code is a welcome step in resolving issues faced in these archaic laws. Moreover, it consolidates laws relating to insolvency and repeals the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Other than that, the Code also amends 11 laws, including the Companies Act, 2013, Recovery of Debts and Bankruptcy Act, 1993 (DRT Act), and Securitization and Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002 (SARFAESI Act). From the amendments, it is clear that all these 11 Acts are affected by the enactment of the Code.
4. Code has differentiated liquidation and Insolvency process between Corporate Debtors (which shall be dealt by the NCLT) and Individuals and firms liquidation process (which shall be of the jurisdiction of DRT), the Corporate Debtors default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government). The Code devises two separate processes for corporate insolvency matters and individual/ un-incorporated bankruptcy matter. Part II of the Code deals with corporate insolvency mechanism pertaining to companies incorporated under the Companies Act, 1956 and 2013 and limited liability partnership incorporated under the Limited Liability Partnership Act, 2008; matters in this regard will be dealt by the National Company Law Tribunal. Part III deals with the bankruptcy process for individuals and partnership firms (unincorporated entities) and is maintainable before the Debt Recovery Tribunal.
Issues under SARFAESI Act, 2002
1. NPA classification & settlement of issues at an early stage itself
Many borrowers feel that they are being harassed by the Bank officials unreasonably and using the provisions of SARFAESI Act, 2002. They claim that they are not ‘willful defaulters’ and even if there is some kind of default, they are willing to correct the same and honour the commitments agreed upon. While in some cases, the Bank Officials rightly show some kind of interest in helping the borrowers within the legal frame-work, in some cases, the Bank Officials act unreasonably and invoke the provisions of SARFAESI Act, 2002 by classifying the account as ‘Non-performing Asset’ even if there is a possibility of regularizing the loan account. Obviously, the Bank should follow the guidelines issued by the Reserve Bank of India in classifying any loan account as ‘Non-performing Asset’. But, it is a question of interpretation largely and as to how the Bank Officials want to use the guidelines. Normally, the issue of classification of account as ‘Non-performing Asset’ is not dealt with by the Tribunal or the Courts and they tend to support the classification of any loan account as NPA if there is a default in payments as agreed. But, the guidelines issued by the Reserve Bank of India with regard to Asset Classification are not one-sided and it all depends upon interpretation of those guidelines in respect of a particular ‘loan account’ or borrower. Dealing with the subject, the High Court of Andhra Pradesh in M/s. Sri Srinivasa Rice and Floor Mill Vs. State Bank of India (2007 (4) ALT 317: 2007 (4) ALD 649: 2007 AIR(AP) 252) was pleased to observe as follows: “There is, as considered earlier in the judgment, no statutory format, express or by necessary implication, that requires the respondent bank to follow a particular or formal procedure or requires a formal declaration as a condition precedent to classification of debt as NPA. From the scheme of the Act in general and the provisions of Sec.13 (2) in particular the conclusion is compelling that the legislature has consecrated the power, authority and discretion (to classify a debt as a NPA) to the secured creditor within the generic guidelines to be ascertained from the definition of a non performing asset [Sec.2(o)]. A wide margin of discretion is available to the respondent bank as the secured creditor, within the legislative presents of the Act, to assess and classify a debt but within the legislative framework. This Court is not constituted an appellate authority over the bank’s exercise of discretion in this area. The respondent bank, as legislatively recognized is an institution having the requisite expertise to form a commercial judgment on known principles of banking practices and procedures fertilized by R.B.I directions and guidelines to assess and classify a debt as NPA. From the wealth of material pleaded in the counter-affidavit the bank had assessed the debt as non-performing asset. On facts, the petitioners have miserably failed to establish that such assessment by the bank is perverse or irrational to a degree warranting oversight and correction in judicial review.”
2. Powers of DRT
Section 17 of SARFAESI Act, 2002 provides a right of appeal against the action initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrower or any one aggrieved can challenge the possession notice issued under section 13 (4) of SARFAESI Act, 2002 and there is a time-limit prescribed for preferring an appeal. However, as the Courts have rightly made it clear that the borrower is entitled to question all measures initiated by the Bank pursuant to the possession notice under section 13 (4) and with this interpretation, there is no much relevance to the time-limit prescribed to prefer an appeal though it will be in the interests of the borrower to prefer an appeal as early as possible if there is a genuine grievance with the Bank.
While the rights of the borrowers or the persons aggrieved to prefer an appeal under section 17 of SARFAESI Act, 2002 is almost settled, the issue of powers of Debt Recovery Tribunal under section 17 of the Act are still debated. From the stage of maintaining that ‘the DRT is supposed to only look into the procedural issues’, with the interpretation of Courts, the scope of powers of DRT under section 17 of SARFAESI Act, 2002 is significantly expanded though certain issues still requires consideration.
Emphasizing that the Debt Recovery Tribunal is empowered to set-aside a sale conducted under the provisions of the SARFAESI Act, 2002, the Hon’ble Supreme Court of India in CIVIL APPEAL NO. 4429 OF 2009 (2009 (8) SCC 366, 2009 (8) MLJ 897; 2009 (8) SCJ 979) was pleased to observe as follows:
“23. The intention of the legislature is, therefore, clear that while the Banks and Financial Institutions have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting the DRT with authority after conducting an adjudication into the matter to declare any such action invalid and also to restore possession even though possession may have been made over to the transferee. The consequences of the authority vested in DRT under Sub-Section (3) of Section 17 necessarily implies that the DRT is entitled to question the action taken by the secured creditor and the transactions entered into by virtue of Section 13(4) of the Act. The Legislature by including Sub-Section (3) in Section 17 has gone to the extent of vesting the DRT with authority to even set aside a transaction including sale and to restore possession to the borrower in appropriate cases.”
Emphasizing that the Debt Recovery Tribunal can look into the issue of claims and counter-claims under section 17, the Madras High Court in Misons Leather Ltd. Vs. Canara Bank (2007 (4) MLJ 245), was pleased to observe as follows:
“In a given case, the claim of the Bank/Financial Institutions may be barred by limitation or there may be cases, where the adjustment of the amount paid is not reflected in the notice or the calculation of interest may not be in accordance with the contract between the parties. Needless to say that all such grounds, which render the action of the Bank/Financial Institutions illegal can be raised in the proceedings under Section 17 of the Act before the Debt Recovery Tribunal.”
Dealing with the issue straight away, the Hon’ble Calcutta High Court earlier in Star Textiles and Industries Ltd Vs. Union of India (2008 (3) WBLR 385), was pleased to observe as follows:
“(14.) THE legislature having conferred power on the Debts Recovery tribunal to decide as to whether measure (s) taken by the secured creditor in terms of Section 13 (4) of the Act is/are in accordance with the provisions of the Act or not, it necessarily has to decide whether pre-conditions for issuance of notice under Section 13 (2) existed or not. That would involve a determination as to whether there has been default on the part of the borrower to repay the secured debt or not and further, as to whether classification of the account as non-performing asset has been made in accordance with the directions or guidelines as referred to in Section 2 (o) of the Act or not. If the Debts Recovery tribunal is satisfied that recourse has been taken to measures specified in section 13 (4) of the Act not in accordance with the provisions contained in sections 13 (2) read with 2 (o) of the Act, it has the authority to declare the action of the secured creditor as invalid. At the same time, the Debts Recovery tribunal may in a given situation find no fault and uphold the action of the secured creditor. Also, in the exercise of power conferred by Section 17 of the act, the Debts Recovery Tribunal may uphold partially the action of the secured creditor by pronouncing that amount "x" is not the correct computation of liability, but it is "x - y" which is the liability. That would amount to determination of the exact amount of debt due and payable by the borrower.”
3. Sale of Assets under SARFAESI Act
Sale of Assets by the Bank under the provisions of SARFAESI Act, 2002 is often criticized by the borrowers. In some cases, the auction process is hurriedly completed and it would be extremely difficult for the borrowers to get the transaction set-aside though the DRT is empowered to do so under section 17. It is the responsibility of the Bank to ensure that they get the maximum possible price for the property in Public Auction as they are the trustees of the property and as the balance sale consideration, after adjustments, goes to the borrower. There is lot of complication in this process and it is very difficult for the borrowers at times to fight with the Banks and it has something to do with the issue of lack of proper understanding of procedures and law under SARFAESI Act, 2002. Not only while auctioning the properties under SARFAESI Act, 2002, the Bank exercise enormous amount of discretion when many properties are available for auction and the disposal of a property chosen by the borrower clears the debt. Even from the point of view of the bidder or purchaser, there can be issues. There may be cases where the bidder or the purchaser paid the entire sale consideration and litigation coming to Courts leading to non-conferment of complete ownership right. If the delay between the payment of sale consideration and actual conferment of clear title is more, the bidder or purchaser is also in trouble as he will only get a minimum interest over his investment if the Sale is finally set-aside and the Bank is asked to repay the Sale Consideration to the auction-purchaser.
Dealing with the rights of the borrower in getting maximum possible price to the property in a public auction conducted by the Bank and the vis a vis responsibility of the Banks, the Hon’ble Madras High Court in K. Raamaselvam & Others Vs. Indian Overseas Bank, 2009 (5) CTC 385, 2009 (5) LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, was pleased to observe as follows:
“For example, if the secured creditor, on the basis of the relevant materials, comes to a conclusion that the highest bid offered, even though higher than the reserve price, does not reflect the true market value and there has been any collusion among the bidders, the secured creditor in its discretion may refuse to confirm such highest bid notwithstanding the fact that the highest bid is more than the upset price. This is because the secured creditor is not only interested to realize its debt, but also expected to act as a trustee on behalf of the borrower so that the highest possible amount can be generated and surplus if any can be refunded to the borrower. The first proviso in no uncertain terms makes it clear that no sale can be confirmed by the authorized officer, if the amount offered is less than the reserve price specified under the Rule 8(5). However, the subsequent proviso gives discretion to the authorized officer to confirm such sale even if the bid is less than the reserve price, provided the borrower and the secured creditor agree that the sale may be effected at such price which is not above the reserve price. This is obviously so because the property belongs to the borrower and as security for the secured creditor and both of them would be obviously interested to see that the property is sold at a price higher than the reserve price. However, if both of them agree that the property can be sold, even it has not fetched a price more than the reserve price; the authorized officer in its discretion may confirm such auction.”
4. High Court’s Jurisdiction in a proceeding under SARFAESI Act, 2002
Though High Courts used to entertain writ petitions under Article 226 of Constitution of India challenging the notice under section 13 (2) of SARFAESI Act even initially, there was a considerable amount of restraint and the emphasis was always to ensure that the borrower raises all his issues under section 17 of the Act by preferring an Appeal. The jurisdiction under Article 226, 227 and Article 32 of Constitution of India are untouchable and the Courts can only take a decision as to when to exercise such a jurisdiction or not. It is laudable that the High Courts have not proceeded in diluting the provisions of SARFAESI Act, 2002 and the Courts have strengthened the process in public interest and in the interests of the Bank..
However, considering the effectiveness of remedy available before the Debt Recovery Tribunal and clear arbitrariness in dealing with the borrowers under SARFAESI Act, 2002, many feel that there is no wrong if the High Court entertains Writ Petitions under Article 226 and as the High Court will also pass reasoned order as, now a days, it is not taking much time to get a Writ Petition disposed of. Again, the Courts understand the need of early disposal of Writ Petitions in SARFAESI matters and great caution is exercised in this regard as I feel. Many believe that the borrowers are unnecessary made to approach the Debt Recovery Tribunal where the process is slow for the borrowers and where the borrowers are made to deposit substantial amount of outstanding due for getting any interim stay. Once the borrower approaches the Debt Recovery Tribunal and if he is aggrieved of the proceedings of the DRT or any order, the next remedy available for him is to file an appeal before the DRAT which is again a very slow process and not effective. Again, if it is a challenge against the final order in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to deposit substantial amount and it can even be 75%. Thus, the borrower is made to deposit the entire money or forget his property even when his grievance is not adjudicated.
Emphasizing that ordinarily the borrower is not allowed to knock the jurisdiction of High Court under Article 226 in SARFAESI matters, the Calcutta High Court, in Annapurna Vs. State of West Bengal, 2009 (4) CalLT 557, 2009 AIR(Cal) 236, was pleased to observe as follows:
“25. The overriding provision in Section 35 of the Act and the intent thereof apparent from Section 37 thereof that provides that the Act is in addition to, and not in derogation of, certain other regulatory and general statutes, conceives of a single window redress before the Debts Recovery Tribunal. The jurisdiction under Article 226 of the Constitution cannot be taken away by such a statute but a grievance capable of being redressed by the tribunal under the said Act should ordinarily not be allowed to proceed in the High Court.”
On the same lines and in support of exercise of extraordinary jurisdiction under Article 226 even in matters where SARFAESI Act is invoked and dealing with the argument of availability of alternative remedy, the Hon’ble Madras High Court in Sheeba Philominal Merlin & Another Vs. The Repatriates Co-op Finance & Development Bank Ltd., Chennai & Others, 2010 (4) LW 497, 2010 (5) CTC 449, 2010 (7) MLJ 882, was pleased to observe as follows:
“35. With regard to alternative remedy, it is seen that there is a statutory violation by not issuing notice under Section 13(2) and 13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002. There is contravention of statute and violation of principles of natural justice and also violation of constitutional right to hold property as per Article 300A of the Constitution of India. It has been held by the Honorable Supreme Court in Vimala Ben Ajith Bhai Patel -Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right to property can be taken away only as per law and right to hold the property has been glorified as "Human Right".
“36. That apart, it is well settled law that availability of an alternative remedy is not an absolute bar for exercising the writ jurisdiction and it is only a self-imposed restraint on its power. This has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs- Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of availability of alternate remedy miserably fails. The petitioners cannot approach the Tribunal, as the measures taken by the Bank were belatedly known to the petitioners and by that time the time prescribed under the Act was over. The Judgment in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact, justifies the contention of the petitioners. As per the judgment, Courts cannot extend the time limit prescribed by the Statute. As such the only remedy for the petitioners is to file a writ petition which has been rightly done by them.”
“37. The Tribunal is not competent to look into violation of fundamental rights and constitutional rights and this Court being a custodian of Constitutional rights is entitled to examine the matter. A Constitution Bench of the Honorable Supreme Court in its judgment in State of West Bengal and others -Vs- The Committee For Protection of Democratic Rights, West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of the Constitution of India can be exercised for enforcing any legal right conferred by a statute and it is further held that under Article 226 of the Constitution of India, the High Court has got more wider power than the Honorable Supreme Court. In Secretary Cannanore Muslim Educational Association, Kanpur vs. State of Kerala reported in 2010 (5) SCALE 184, the Apex Court held that the High Court is conferred with wide power to “reach injustice whenever it is found". Therefore as injustice is writ large and glaring, necessarily the judicial arm of this court has to reach there and it cannot be prevented by plea of availability of alternative remedy.”
5. Civil Court’s jurisdiction
There is a clear Bar under section 34 of SARFAESI Act, 2002 on Civil Courts in dealing with SARFAESI related issues. It is also very difficult to convince a particular Civil Court that it has jurisdiction to entertain a particular suit against the Bank irrespective of Bank referring to the provisions of SARFAESI Act. Civil Court’s jurisdiction is not completely barred and in fact cannot be barred even in cases where the Bank has invoked the provisions of SARFAESI Act, 2002. If the DRT is not clearly empowered to deal with certain issues raised by the borrower or to be raised by the borrower or the aggrieved person, the borrower or the aggrieved can certainly approach Civil Court and it is settled. But, when a borrower is entitled to approach the Civil Court depending upon the facts of that particular case, then, it is certain that it is not easy to convince a Civil Court that it has jurisdiction to entertain a particular suit against the Bank when the Bank has invoked the provisions of SARFAESI Act, 2002. If the Civil Court is convinced of entertaining a particular suit against the Bank, then, obviously, there can be an injunction against the Bank in proceeding under the provisions of SARFAESI Act and there is nothing to worry on this as only very few negligible cases qualify to be maintained before a Civil Court. There is nothing to worry for the Banks too with regard to Civil Court’s jurisdiction and they are entitled to immediately seek redressel under Article 227 if they feel that the Civil Court is exercising the jurisdiction which is not vested.
There can really be genuine cases which can be and should be decided by the Civil Court. However, with some borrowers trying to stall the SARFAESI proceedings by filing a suit in Civil Court and High Courts coming heavily, it is often felt that the borrower has no remedy before a Civil Court if the Bank invokes the provisions of SARFAESI Act once. It is a misconception and a Civil Suit before a Civil Court against the Bank is maintainable in appropriate cases irrespective of whether the Bank has invoked the provisions of SARFAESI Act or not.
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