R. SREEDHAR
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
The Supreme Court of India upheld the constitutional validity of the SARFAESI Act, 2002 in 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 that 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 led by Justice Arun Mishra, in Pandurang Ganpati Chaugule and Others v. Vishwarao Patil Murgud Sahakari Bank Ltd., [2020 (3) CTC 558] held that the Cooperative Banks established as Cooperative societies are 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 Application.
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; by-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 allowing 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 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 with certain special powers to take immediate action on the defaulting borrowers without needing to resort to court or other Tribunals. Some crucial provisions are discussed here:
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 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, there shall be no transfer of the secured assets by assignment or sale and any steps taken thereof shall not be continued.
Section 14 of the Act
Under this provision, 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, 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 that they deposit at least 25% of the claim.
WHEN THE ACCOUNT IS CLASSIFIED AS NON-PERFORMING ASSET (NPA)
Under Section 2 (o) of the Act and as per the guidelines of the Master Circular of RBI an asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. A Non performing asset (NPA) is a loan or an advance where:
a) Interest and/or instalment 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 is 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’.
CONCLUSION
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 to allow 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 institution of legal action against the defaulter. SARFAESI Act is a fiery weapon when it goes to the hands of the secured creditors which would definitely be an effective and enabling law to recover the dues from the borrowers.
The Author, Mr. R. Sreedhar, is a practising advocate and the founder of Sreethi Law Firm. He is also currently designated as an Additional Government Pleader for Government of Puducherry at Madras High Court. He is available for comments at rsreedharadvocate@gmail.com.
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