The object of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto and the Act came into force on 17th December, 2002.
The Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions.
The provisions of the Act would enable the banks and financial institutions to realise long-term assets, manage problems of liquidity and asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.
As per the Act, the first step would be to issue notice U/s. 13(2) by the authorised officer who is deemed to be armed with a money decree which attained finality. By the statute, the authorised officer is clothed with powers of Trial Court and Execution Court and the Code of Civil Procedure which governs the civil proceedings is no more necessary. To put it otherwise, by the Special Act, the authorized officer acts like a Civil Court clothed with powers hitherto exercised by it.
The various important and complicated issues are as follows:
- The action of the Bank under the SARFAESI Act, 2002 starts with classifying an account of the borrower as ‘NPA’ as per the Guidelines issued by the Reserve Bank of India. The Courts have repeatedly held that RBI guidelines are mandatory and every Bank/Secured Creditor should follow the RBI guidelines when it comes to classifying an account of the borrower as “Non-performing Asset” (NPA). Despite the guidelines, through an internal mechanism, if the Bank feels that the borrower can regularize the Account or the borrower is not a willful defaulter or if the Bank feels they will in no way get prejudiced by being liberal to the borrower to some extent, then, the Bank/Secured Creditor can adopt a reasonable approach in classifying an Account as ‘NPA’. Because, the object is to recover the outstanding loan amount and not to apply the guidelines technically. But, when it comes borrower, the borrower can question the action of the Bank in classifying his account as ‘NPA” if the classification is opposed to the guidelines issued by the Reserve Bank of India in this regard. The entire action of the Bank/Secured Creditor under the provisions of SARFAESI Act will get vitiated if the classification of account as ‘NPA” is illegal. When the classification as referred to is illegal, then, the borrower has two options to challenge the illegality. The borrower can approach the High Court under Article 226 of Constitution of India and the High Court can also entertain a Writ Petition from the borrower if the borrower could establish his case clearly. I don’t think that the High Court may insist on the principle of ‘Alternative Remedy’ at this state. Even otherwise, the borrower can file an Appeal to the Debt Recovery Tribunal under Section 17 of SARFAESI Act, 2002 questioning the measures initiated by the Bank under section 13 (4) of the Act and the borrower can expose as to how the Bank has not followed the RBI guidelines when it comes to classifying the Account as ‘NPA’.
- Once the Account is classified as ‘NPA’, then, in accordance with the procedure prescribed, the Bank will proceed to make a demand under Section13 (2) informing the borrower about the outstanding amount in the loan account and also the consequences. There is a general format to give a notice to the borrower under section 13 (2). The notice under section 13 (2) should substantially comply with the requirements and if the borrower raises a technical objection, those are not appreciated normally going by the precedents so far. Normally, borrowers may choose to remain silent after receiving a demand notice under section 13 (2), though, they can send their objections to the Bank/Secured Creditor. If the borrower sends any objections to the notice under section 13 (2) of the Act, then, the Bank should carefully consider those objections and should be fair in looking and replying to the objections. There should be a reply to the objections raised by the borrower under section 13 (3A). If the Bank chooses to ignore section 13 (3A), then, the entire action of the Bank under section 13 of the Act gets vitiated. If the Bank failed to reply to the objections raised by the borrower, then, the borrower can raise the same before the Debt Recovery Tribunal in an appeal under section 17 of the Act. This is the adjudication part and the Bank is supposed to act fairly at this stage considering the object of the special legislation ‘SARFAESI Act, 2002’.
- After the adjudication part is over, then, the Bank proceeds to issue a possession notice under section 13 (4) of the Act informing the borrower that they have taken symbolic possession of the property. This is not actual possession of the ‘secured asset’ or property of the borrower. The borrower gets a right to question the notice under section 13 (4) and all subsequent measures initiated by the Bank under section 17 of SARFAESI Act, 2002. In view of the clear provision in the Act about the time limit to file an appeal under section 17, the borrower is normally advised to file an appeal under section 13 (4) within the prescribed period. However, the subsequent and many judgments make it clear that all measures of the Bank under section 13 (4) of the Act can be questioned under Section 17 of the Act and as such, the cause of action to file an appeal under section 17 of the Act starts with the notice under section 13 (4) and it continues. That is why, even a challenge to the Sale Notice is entertained though the borrower is silent after receiving the notice under section 13 (4). As the object of the legislation is to help the Banks to recover the outstanding dues speedily, the Tribunals should be liberal when it comes to entertaining Appeals from the borrower under section 17 and substance can be appreciated at any stage.
- After the possession notice under section 13 (4) and if there is no stay of further proceedings, the Bank will proceed to take physical possession of the property under Section 14 of the Act through District Magistrate or Chief Metropolitan Magistrate etc. Before the Magistrate under Section 14 of the Act, there will not be any kind of adjudication and notice need not be given to the borrower at this stage. The Magistrate is required to look at the statutory compliance of Section 13 and if the is satisfied, he will assist the Bank in taking physical possession of the property. Normally, the Magistrate Court appoints an Advocate Commissioner to take physical possession of the property and the Bank officials too accompany him. The Magistrate Court can even grant police assistance to take physical possession of the property. If the property is under lock and key, then, the Magistrate Courtpermits to break-open the lock and thus, physical possession of the property is taken. If the borrower intends to question the order of the Magistrate under section 14 of the Act, he can approach the Debt Recovery Tribunal. Though it is very often seen where the borrower approaches the High Court challenging the action under section 14, the High Court may ask the borrower to approach Debt Recovery Tribunal. There are two conflicting views in this regard. On view supports that only High Court can look into the challenge to an order of the Magistrate under section 14 in view of the specific bar on other courts. Another view is that, as all measures under section 13 can be questioned under section 17 before the Tribunal, the borrower can certainly question the order of the Magistrate or the action under section 14 before the Debt Recovery Tribunal itself. It is to be noted that if there is a clear case, then the Debt Recovery Tribunal can restore the possession back to the borrowers even after taking physical possession.
- After taking physical possession of the property under section 14, if there is no impediment to proceed further through an order from the Tribunal or the High Court, the Bank will proceed to sell the property/secured interest and the Bank is supposed strictly comply with the provisions of the Act and the SARFAESI Rules in this regard. If the Bank violates the SARFAESI Rules while proceeding to auction the property, then, the entire auction can be set-aside on that ground alone. Even after the confirmation of sale in a public auction conducted by the Bank, the auction can be set-aside if the Debt Recovery Tribunal decides in favor of the borrower in his appeal under section 17 of the Act. From and out of the sale proceedings, the residue is to be returned to the borrower.
Though the procedure and process under SARFAESI Act, 2002 is clear and unambiguous, there is a general feeling among borrowers that the Debt Recovery Tribunal is not fair in many cases and the borrowers feel that the remedy before the Debt Recovery Tribunal is not speedy and effective. Despite the stringent provisions under SARFAESI Act, 2002, no one can undermine the rights of the borrower and his right to property. The observation of Supreme Court in this regard inKarnataka State Financial Corporation Vs. N.Narasimahaiah (2008 (5) SCC 176) is as follows:-
“40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation.”
“In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round.”