Banking News

Recovery through SARFAESI ACT 2002


(This article gives the details like rights of secured creditors, Application of mind and care is required in the service of notice of SARFAESI DEMAND NOTICE, POSSESSION NOTICE & SALE NOTICE, Special care to be taken while taking possession of movable properties, method of sale of secured property by way of inviting tenders from the public or by holding the public auction and  Supreme Court decision upholding Bank’s Contention on simultaneous action and other issues under SARFAESI Act. (Case study: M/S. Transcore Vs. Union of India & Indian Overseas Bank)

The SARFAESI ACT  is the acronym of Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The Act has been amended by Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act 2004. The SARFAESI Act provides for Enforcement of Security Interest for  the realization of the dues without the intervention of Courts or Tribunals which is treated as one of the most effective tools for recovery of  NPAs under existing laws.

Rights of secured creditors under SARFAESI provisions:

The rights of secured Creditor (bank) to enforce this act arises only in respect of debt classified as NPA as per RBI norms. The Security Interest (Enforcement) Rules 2002 is notified by the Government of India on 20.09.2002. The rules also provide for exercising the rights of the secured creditor under the Act through the Authorised Officer. Under Rule 2a ,the Security Interest (Enforcement) Rules 2002. The “Authorised Officer” means an officer not less than a Chief Manager of a public sector bank or equivalent as specified by the Board of Directors to exercise the rights of a secured creditor. The right to exercise the powers to invoke implement and act as of a Secured Creditor is vested only with the Authorised Officer of the bank. Once an account is classified as NPA,the  bank would issue   demand notice to the defaulting borrower and guarantor/s under section 13(2). ‘Demand Notice’ means the notice in writing issued by a secured creditor or authorized officer, as the case may be, to any borrower pursuant to section 13(2) of the Act (Rule 2b).  The notice gives details of dues and. calls upon them to discharge their dues to the bank within 60 days from the date of the notice. If the borrower makes any objection on receipt of the notice, the bank should communicate its reply within one week. The communication shall convey the reason for non-acceptance of the objection or representation.The Secured Creditor may take recourse to one or more of the following measures under Sec 13(4); in case the borrower fails to discharge the liability of the bank demanded under sec 13(2),

Under Sec13 (4) a: “Take possession of the secured asset of the borrower including the right to transfer by way of lease, assignment or sale.”

Under Sec 13(4)b: “Take over the management of the secured asset, provided a substantial part of the business is held as security and or the business is severable, take over whole or part of such business which is relatable to the security for the debt “.

Under Sec 13(4) c: “Appoint any person to manage the secured assets, the possession of which has been taken over by the secured creditor.”

Under Sec 13(4) d:  “He/ She may require at any time by notice in writing to any person who has secured assets from the borrower and from whom any money is due or become due to the borrower to pay it to the secured creditor.” (Powers under sec.13(4)d can not be exercised until notice under sec.13(2) has been issued and the sixty days period has expired).

The SARFAESI Act prescribes the following procedure for issuance of sale notice when the sale is by way of inviting tenders from the public or by holding the public auction.

  1. The sale notice shall be published in two leading newspapers one in the vernacular language having sufficient circulation in the locality by setting out the terms of sale.
  2. Every notice of sale be affixed on a conspicuous part of the immovable property and may if the authorized officer deems it fit, put on the website of the secured creditor on the internet.

Further as per Ministry of Finance’s direction, all public sector banks, and financial institutions to upload all SARFAESI auction notices in the official website of the Government “tender.gov.in” to give wider publicity with a view of getting the  better response.

Application of mind and care is required in the service of notice of SARFAESI DEMAND NOTICE, POSSESSION NOTICE & SALE NOTICE.

  1. Date of commencement of 60 days-demand notice period: The 60 days,notice period commences to run only from the date of service of notice/paper publication as the case may be.(Not from the date of the notice).
  2. Service of demand notice when the party is dead: Notice sent to the dead person is bad in law. The Authorized officer to ascertain the details of all the legal heirs and send notice to them.
  3. Effect service of possession notice properly by delivering the notice to the parties, affixing the possession notice on the outer door or such conspicuous place of the property and also publish in two leading newspapers (one in vernacular language) having sufficient circulation in that locality within 7 days from the date of taking possession. Possession notice should mention correct dues.
  4. Effect service of sale notice, setting out terms of sale, by delivering the notice to the parties ,affixing the sale notice on the outer door or such conspicuous place of the property and also publish in two leading newspapers (one in vernacular language) having sufficient circulation in that locality. Sale notice should mention correct dues.
  5. The Authorized officer has to carefully preserve the proof of service (acknowledgement) of notices and proof for having sent (POD from courier company ,Registered notice receipt, Ack.Due etc.)

In case of immovable properties, a brief notice about possession of the property should be painted on the outer door/compound walls.In case of actual possession of secured property could not be taken, the bank has to file an application before Chief Metropolitan Magistrate/District Magistrate seeking  the order for possession. If the recovery made after enforcing action under SARFAESI act, is not enough to cover the  entire dues, the bank may further file the application before DRT/Court within the limitation period of loan documents. The mailing of a 30 days sale notice copy to the borrower/mortgagor after 20 days of taking possession, is to enable the aggrieved person (as a right) to file the application within 45 days before DRT for the stay of sale transaction of secured property.

Action flow Chart:

Special care to be taken while taking possession of movable properties(The authorized officer has to act in the following manner).

  1.        Take possession and execute Panchanama.( Under Rule 4(1) & 4(2)
  2.        Take inventory.
  3.        Keep safe custody of movables by him directly or through agents under rule 4(3).
  4.        The Authorised officer can immediately sell the movables taken into possession, if it is subject to speedy or natural decay or if              expenses for keeping exceed value under Rule 4(3).
  5.       Take steps to protection, preservation, and insurance Rule 4(4).
  6.        Obtain estimated the value of movables and fix reserve price in consultation with the appropriate authority of the bank.
  7.        Can sell to secure the maximum price in one or more lots by obtaining quotations, inviting tenders, holding public auction or by         private treaty under Rule 6.
  8.       Issue 30 days sale notice to the borrower under Rule 6(2).
  9.       Issue newspaper advertisements setting out the terms of sale in case of public tender or public auction in two newspapers               (one vernacular). Proviso to rule 6(2)
  10.        Issue sale certificate of sale on receipt of full payment for movables sold.

 Case study:

Supreme Court decision upholding Bank’s Contention on simultaneous action and other issues under SARFAESI Act. (Case study: M/S. Transcore Vs. Union of India & Indian Overseas Bank

 Supreme Court  judgment  refers to the Recovery of Debts due to Banks and FI Act 1993 as ‘DRT Act’ and SARFAESI Act as ‘ for brevity and framed the following three issues for consideration.

a)     Whether banks or financial institutions having elected to seek their remedy in terms of DR Act 1993 can still invoke the SARFAESI Act,2002 for realizing the secured assets without withdrawing or abandoning the OA filed before DRT under the DRT Act?

b)    Whether recourse to take possession of the secured assets of the borrower in terms of Section 13(4) of the NPA Act comprehends the power to take actual possession of the immovable property?

c)    Whether ad vaorem Court fee prescribed under Rule 7 of the DRT(Procedure) Rules 1993 is payable on an application under Section 17(1) of the NPA Act in the absence of any rule framed under the Said Act?

The Supreme Court after analysing the entire schemes and provisions of both DRT Act and SARFAESI Act as well as the arguments of both the parties; had  delivered the judgment. The Court held that “the withdrawal of the OA pending before DRT under the DRT Act is not a pre-condition for taking recourse to the SARFAESI Act. The discretion is vested with the Banks/Financial Institutions to apply for leave of the DRT for withdrawal depending upon the circumstance of each case”. The court did not spell out those circumstances.

Related article: Key features of amendment Bill 2016 to SARFAESI ACT 2002 (Category: Loans and advances)

(5) Comments

  1. sunil sethi

    Bank issued 13(2) notice on 5.12.2012. Some of these notices were dated 5.11.2012 for which the corrigendum was issued on 18.12.2012. !3(4) notice was issued on 11.2.2013. Issue for consideration : a) 60 days period is to be counted from 5.12.2012 or 18.12.2012. (refer Anil kumar agrawal vs icici bank dt 17/10/2011 Chattisgarh High Court. b) Is the notice u/s 13(4) legal. i.e issued before 60 days period if considered w.e.f 18/12/2012

    1. Surendra NaikSurendra Naik - Post author

      The legal decision in the case of Anil kumar agrawal vs ICICI Bank Dated 17/10/2011 at Chattisgarh High Court, it is clear that the limitation prescribed under section 13(2) of the Act, 2002 would be computed from the date of the corrigendum letter in the instant case (18.12.2012) and not from the date the first notice under section 13(2) of the Act, 2002.

  2. Sunil Sethi

    Will appreciate your opinion on item (b) I.e Corrigendum to notice u/s 13(2) notice was issued on 18/12/2012 and notice u/s 13(4) for possession was issued on 11/02/013 I.e before the expiry of mandatory 60 days period required u/s 13(2) of the Act. Can the action of the bank be termed as illegal.

    1. Surendra NaikSurendra Naik - Post author

      I am not able to find the correct position under the statute. As per the opinion of my lawyer friends the secured creditor cannot rely on earlier notice as such notification to be treated as lapsed when the corrigendum to notice u/s 13(2) is issued. Some friends still argue that it is 60 days from original notice. Therefore, I am unable to provide you the correct legal position in the matter.

  3. Sunil Sethi

    13(2) notice was issued on 5.11.2012. Corrigendum to 13(2) notice is issued on 18.12 2012. The bank issues a letter on 11.2.2013 that the possession of the mortgaged assets would be taken on 23.2.2013 u/s 13(4) of the sarfaesi act. On 20.2.2013 & 23.2.2013. the bank take physical possession & issues notice in Appendix -IV under rule 8(1) on 20.2.2013 & 23.2.2013. JPlease enlighten : 1. Whether cause of action u/s 13(4) has started on 11.2.2013. 2. If so , has the bank initiated action u/s 13(4) prematurely. Refer : Analkumar Rajkishore Mishra vs. Dena Bank [AIR 2011, Guj. 187] I (2012) BC 622 (Guj.) (DB)

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