The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) enable Banks and Financial Institutions(FIs) to recover defaulted loan from borrowers by adopting measures for recovery or reconstruction. The SARFAESI Act provides three alternative methods for recovery of Non-Performing Assets (NPAs), namely: – 1. Securitisation; 2. Asset Reconstruction; and 3. Enforcement of Security without the intervention of a Court or Tribunal. Out of these methods, the most important and widely used is the powers for Enforcement of Security without the intervention of a Court or Tribunal, which is discussed here.
The SARFAESI Act empowers Banks and FIs to issue demand notice to the defaulting borrowers and guarantors, calling upon them to discharge their dues in full within 60 days from the date of the notice. Thereafter, Banks are empowered to take possession of the security provided for the loan and sell or assign the right to the security, manage the same or appoint any person to manage the same.
Borrower, Secured Creditor, Secured Asset, Secured Debt & Security Interest defined
- Borrower is defined in SARFAESI Act as any person who has been granted financial assistance by any Bank or FI or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any Bank or FI in relation to such financial assistance;
- Secured Asset means the property on which Security Interest is created;
- Secured Creditor means any Bank or FI or any consortium or groups of Banks or FIs and includes a Debenture trustee, Securitisation company or reconstruction company, any other trustee holding securities in whose favour Security Interest is created for due repayment by any borrower;
- Secured Debt means a debt which is secured by any Security Interest;
- Security Interest means right, title and interest of any kind whatsoever upon property, created in favour of any Secured Creditor and includes any mortgage, charge, hypothecation, assignment, other than those specified as exempted.
When can Security Interest be enforced?
A Security Interest can be enforced by a Secured Creditor without the intervention of Court or Tribunal in accordance with the provisions of the SARFAESI Act.
Such action can be taken against a borrower, who is under liability to a Secured Creditor and makes any default in repayment of Secured Debt or any instalment thereof and the account is classified as NPA by the Secured Creditor.
What Security Interest cannot be enforced?
A Security Interest cannot be enforced, if it is:
- a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force;
- a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872;
- creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934;
- creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958;
- any conditional sale, hire-purchase or 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 (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908;
- it is an agricultural land
- the debt due is less than Rs. 1,00,000/-
- the debt due is less than 20% of the principal amount and interest thereon, i.e. the borrower has repaid more than 80% of the principle amount and interest.
Further, a Security Interest cannot be enforced if the debt is time barred under the Limitation Act.
Procedure of enforcement of Security Interest in case of default
When a Borrower defaults in repayment of a Secured Debt and after the Secured Creditor (Bank or FI) treats the defaulted debt as an NPA, the Secured Creditor may require the Borrower by notice in writing to discharge in full his liabilities within 60 days from the date of the notice. The notice shall give details of the amount payable by the borrower and the secured assets intended to be enforced.
The Borrower is entitled to make a representation or raise objection against the 60 days notice and it is the duty of the Secured Creditor to consider such representation or objection and communicate to the Borrower within 15 days, the decision taken on the representation or objection and if the same is not accepted, the reasons for non-acceptance.
If the Borrower fails to discharge his liability in full within the period specified, the secured creditor may take recourse to one or more of the following actions :-
- Take possession of the Secured Assets including the right to transfer by way of lease, assignment or sale for realising the Secured Assets.
- Take over management of the business of the Borrower including the right to transfer by way of lease, assignment or sale for realising the Secured Assets in cases where a substantial part of the Borrower is held as security for the debt.
- Appoint any person to manage the Secured Assets the possession of which has been taken over by the Secured Creditor.
- Require 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 such amount to the Secured Creditor.
Assistance in taking possession of the Secured Assets
For the purpose of taking possession or control of any Secured Asset, if found necessary, the Secured Creditor may request the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction the Secured Asset is situated or found, to take possession and handover the Secured Assets to the Secured Creditor.
Challenging the action of Secured Creditor
Any person who is aggrieved by the action taken by the Secured Creditor in the enforcement of Security Interest may file an appeal before the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date of enforcement by the Secured Creditor.
The Debts Recovery Tribunal, if it concludes that the action taken by the Secured Creditor are not in accordance with the provisions of the SARFAESI Act may declare the enforcement of Security Interest by the Secured Creditors as invalid and direct restoration of the Secured Assets to the borrower.
If it is found that the enforcement of Security Interest by the Secured Creditor is invalid, the borrower shall be entitled to the payment of such compensation and costs as may be determined by Court or Debts Recovery Tribunal.