The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) - A Fiery Weapon

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a fiery weapon as it would be the last resort for the Banks/Financial Institutions to invoke the Act for recovering the money from the borrowers. The act focuses on enhancing the rights of secured creditors against defaulting debtors. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was replaced with the new law as a result of the recommendations of the Narashiman Committee-I and the introspecting Committee under Andhyarujna.

CONSTITUTIONAL VALIDITY OF SARFAESI ACT

Supreme Court has declared the constitutional validity of the SARFAESI Act, 2002 in the notable case Mardia Chemicals Ltd. Vs. Union of India [(2004)4 SCC 311]. The court allowed the borrowers to appeal against the lenders in the Debt Recovery Tribunal (DRT), without depositing 75% of the debt amount and if the tribunal does not issue a stay order, the lender may sell the assets.

Co-Op Banks Are Also Covered Under the Act

Recently a five-judge constitution bench of the Supreme Court of India comprising of Justice Indira Banerjee, Justice Vineet Saran, Justice MR Shah, Justice Aniruddha Bose and headed by Justice Arun Mishra, in Pandurang Ganpati Chaugule and Others v. Vishwarao Patil Murgud Sahakari Bank Ltd., [2020 (3) CTC 558] Supreme Court had held that the Cooperative Banks established by the Cooperative societies is also recognised as Banks under the SARFAESI Act, 2002.

OUTSTANDING FEATURES OF THE ACT

Similar to Section 69 of the Transfer of Property Act, the power of selling the property adopting the due process of law was given to the Bank for the first time by enabling the borrower to approach the Debt Recovery Tribunal by way of a Securitisation Appeal.

Under the SARFAESI Act, 2002 the creditors are conferred with the right to seize the secured asset and sell off the same in order to recover dues promptly bye-passing the expensive and tedious legal process through courts. This is a procedural law and has retrospective effect. Asset Reconstruction Company (ARC) was also formed under this Act letting the banks to sell their Non-Performing Assets (NPA) to the ARC. The first Asset Reconstruction Company of India, ARCIL, was also set up under this Act. The Act is an effective tool for the recovery of NPA and is effective and against the secured loans. The Act intends to -

• securitise the financial assets (securitisation)

• Fund the securitisation

• Incorporate companies as SCO (Securitisation Company) and RCO (Reconstruction Company)

• Enforce Security interest by the secured creditor (without court intervention)

• Act as an agent of banks

• Reconstruct the financial assets

OBJECTIVE AND PURPOSE OF THE ACT

The Act was originally legislated for the purpose of recovering the loan from the defaulters and also from the entrepreneurs who failed to renew their business loans availed towards working capital, etc., The intention of the Act is not to smudge the borrower in terms of failure of repayment of the loan but to realise the money in a time bound manner from the borrower who is duty bound to pay the amount under contract. The Provisions of the SARFAESI Act is time bound and if the SARFAESI Act is invoked in a proper way the entire task of recovery would be completed within 6 months. The act confers, the banks/NBFCs, certain special powers to take immediate action on the defaulting borrowers without needing to resort to court or other Tribunals. Some crucial provisions may be discussed hereunder;

Section 13 of the Act

This Provision deals with Enforcement of security interest. The Bank has to trigger a Demand Notice under section 13(2) of the Act as a first measure to recover the dues. Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section.

In case the borrower fails to discharge his liability in full within the period specified in sub-section (2) of section 13, the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely: —

(a) take 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;

(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

Similarly, where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets.

Section 14 of the Act

Under this section, The District Magistrate or the Chief Metropolitan Magistrate may pass orders enabling the secured creditor to take physical possession of the property by appointing an advocate commissioner and for doing so the borrower is not entitled for a notice of hearing. Provided further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit, pass such orders suitable for the purpose of taking possession of the secured assets within a period of thirty days from the date of application to the Magistrate.

Section 17 of the Act

Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer may make an application along with such fee, as may be prescribed, to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken. Thus, it is open to the borrower or third party to challenge the possession notice or sale notice issued under section 13(4) or to challenge the possession notice issued under Sec.14 of the District Magistrate or Chief Metropolitan Magistrate. However, the DRT is empowered to pass interim conditional orders and not any blanket stay.

Section 18 of the Act

This Provision enables the aggrieved party to file an appeal before the Debt Recovery Appellate Tribunal challenging any order of the Debt Recovery Tribunal provided, they have to deposit at least 25%.

WHEN THE ACCOUNT IS CLASSIFIED AS NON-PERFORMING ASSET (NPA)

The Non-Performing Asset in accordance with the provision under Section 2 (o) of the Act as per the guidelines of the Master Circular of RBI that an asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. A Nonperforming asset (NPA) is a loan or an advance where:

a) Interest and/or installment of principal remains overdue (unpaid) for a period of more than 90 days in respect of a term loan,

b) The account remains ‘out of order’ for a period of more than 90 days (the outstanding balance being in debit or in excess of the limit sanctioned) in respect of an overdraft/cash credit,

c) The bills remain overdue (unpaid) for a period of more than 90 days in case of the bills purchased and discounted,

d) The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

e) The instalment of principal or interest thereon remains overdue for one crop season for long duration crops, Banks should classify an account as NPA, if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.

An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credit continuously for 90 days as on the date of the balance sheet, or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.

CRITICAL ANALYSIS

To conclude, the Banker should be vigilant before extending financial support to the needy. Likewise, the borrower should also be prompt in making their repayments. The borrower should be vigilant not allowing the account to be classified as NPA. Each and every instalment is important to the borrower. Delay or default in even a single instalment would definitely crash his entire profile and also would lead to trigger legal action against the defaulter. It is a fiery weapon when it goes to the hands of the secured creditors which would definitely an effective and enabling provision to recover the dues from the borrowers.

REFERENCE

[1] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, https://legislative.gov.in/sites/default/files/A2002-54.pdf

The Author is Mr. R. Sreedhar, is a practising advocate before the High Court of Madras, and the Founder of Sreethi Law Firm, having 18+ years of professional experience in handling litigations on writs, criminal, appellate and original jurisdiction in addition to various tribunals. He is a scholar holding Master degree in law, Master degree in corporate law, Master degree in criminal justice administration and a Master degree in Human Rights. He has also done Post Graduation Diploma in Intellectual Property and Forensic Science.