The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act popularly known as SARFAESI Act was brought into effect in 2002. The object of the act was to achieve speedier recovery of the dues declared as Non-Performing Assets (hereinafter referred as “NPAs”) and better availability of the capital liquidity and resources to help in growth of economy of the country and welfare of the people in general which would subserve the public interest. Section 13 of the act contains provisions which lay down the manner in which a security interest can be enforced by a secured creditor. It grants vast powers to the creditor for the swift realisation of the financial dues pending to be paid by borrower to the creditor. Sometimes the creditors misuse these powers and harass the borrowers. To protect the interest of the buyers against such harassment by the creditors, various provisions have been added in the act in the form of section 17. The provisions given under section 13 and section 17 of the act are enumerated below:

RECOVERY PROCEEDINGS WITHOUT INTERVENTION OF COURT:

Section 13(1) of SARFAESI Act gives power to the secured creditor (banks/ Financial Institutions) that the creditor for the enforcement of security interest can initiate the recovery proceeding against the borrower without the intervention of any Court or Tribunal. Here “Security interest” means any type of security including mortgage and charge created on immovable properties given for due repayment of any financial assistance given by the creditor.

PROCESS FOR ENFORCEMENT OF SECURITY INTEREST:

Section 13 lays down a detailed process to be followed by the creditor for the enforcement of security interest.

• When the borrower makes a default in making the payment of the secured debt or an installment, the creditor may classify the account of borrower as NPA in respect of such debt. The creditor then sends a notice to the borrower requiring him to discharge his liabilities within 60 sixty days from the date of such notice.[1]

• The aforementioned notice must contain all the details of the pending amount payable by the borrower. The notice should also contain the details of the Secured Assets to be taken in possession by the creditor in the event of non-payment by the borrower. [2]

• After receiving the demand notice, borrower can either make representation or it may raise objections before the creditor. Creditor upon consideration of such representation/objection may either accept it or find it not acceptable.

• If the creditor does not accept the representation/objection made by the borrower, the creditor shall communicate the reasons for such non-acceptance to the borrower within 15 days of receiving the representation/objection from the borrower. [3]

• It is also pertinent to mention that after receiving the demand notice the borrower cannot transfer secured assets mentioned in the notice in any way without obtaining prior approval of the creditor.[4]

• In case the borrower fails to acknowledge the amount and is unable to discharge his liability after the serving of notice the creditor may:

1. Take the possession of the secured asset of the borrower with the right of transfer of the secured asset by means of lease, assignment or sale.
2. Take over the management of the business of the borrower with the right of transfer of the secured asset by means of lease, assignment or sale. Provided that such right of transfer can only be exercised by the creditor only if a substantial part of the business is held as security for the debt.
3. Appoint a manager for supervision of the secured assets whose custody has been taken over.
4. Require the following persons to pay money to the creditor on the behalf of borrower:
   1. Who have acquired any of the secured assets from borrowers.
   2. From whom any money is due or may become due to the borrower. [5]

The payment made by such persons to the secured creditor will be treated as if such payment is directly made to the borrower.[6]

• After taking the possession or takeover of the management of the secured asset the creditor can transfer such asset to the transferee along with all the rights in or in relation to such asset. The secured asset transferred will be treated as if such a transfer is made by the owner of the asset itself.[7]

• All the charges, costs and expenses incurred by the borrower while enforcing the security interest and taking action against the borrower shall be recoverable from the borrower.[8]

• In case the borrower pays the balance amount to the creditor with all costs, charges and expenses incurred by the creditor, either before the publication of notice of auction or inviting tender from public for sale of the secured assets, the creditor will not transfer the secured assets.[9]

In Bank of Baroda Vs. M/s. Karwa Trading Company & An., [10] The Hon’ble Supreme Court held that the borrower cannot be freed from the total responsibility due unless and until the borrower was ready to deposit/pay the complete amount payable, including all charges and expenditures, with the secured creditor. Furthermore, it held that a bank cannot be barred from disposing of the mortgaged property at public auction and realising the proceeds and recovering the remaining debts until the borrower deposits/pays the total amount due and payable, as well as the fees paid by the secured creditor.

• If the dues of creditor are not satisfied even after selling the secured assets, the creditor may file an application to Debts Recovery Tribunal or any other competent court for the recovery of the balance amount.[11]

• The creditor may also directly proceed against the guarantor or sell the pledged assets for recovery of the due amount.

In Mardia Chemicals Vs. Union of India, the constitutional validity of Section 13 and Section 17 particularly Section 17(2) of SARFAESI Act, 2002 was challenged. The Hon’ble Supreme Court upheld the constitutional validity noting that “certain provisions of the Act may be a bit harsh for some of the borrowers, but on the ground that the impugned provisions of the Act cannot be said to be unconstitutional for the very fact that the object of the Act is to achieve faster recovery of the dues declared as NPAs and for better availability of capital liquidity and resources to help in the growth of the country’s economy and borrowers.”. Though the hon’ble courtstruck downsub-section 2 of Section 17 declaring it ultra vires of Article 14 of the Constitution of India. It required borrower to deposit 75% of total amount claimed by the creditor before entertaining an appeal (petition), the court stated that it is an oppressive, onerous and arbitrary condition against all the canons of reasonableness.[12]

RIGHTS OF THE BORROWERS AGAINST THE ACTION OF CREDITORS UNDER SECTION 13:

The powers given to the Creditor under section 13 of the act are vast and there is tendency that the creditor might misuse such powers arbitrarily against the borrower. To protect the borrowers against such misuse of powers various safeguards have been provided by the act itself and the courts in various judgements have also uphold these rights and safeguards available to the borrowers.

• Right to Know: After receiving the 60 days’ notice the borrower has the right to file representation/objection before the creditor. After receiving such reply to the notice, the same must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower. [13]

• Right of Appeal: On measures having been taken by the creditor under sub-section (4) of Section 13 and before the date of sale/auction of the property the borrower can file an appeal (petition) under Section 17 of the Act before the Debt Recovery Tribunal within 45 days from the date on which such measures were taken. If a person is aggrieved by the order of the DRT, he can file an appeal to the Appellate Tribunal within 30 days from the date of the receipt of DRT order.

DRT or Appellate Tribunal on finding that the possession of asset by the secured creditor was wrongful it can direct the creditors to return the assets to the borrower, in such a case the borrower shall be entitled to the compensation and costs as may be determined by the DRT or Appellate Tribunal. The Tribunal can also direct the return of the secured assets even if the same had already transferred to a third party by the creditor.

• The borrowers can get their property back after remitting the all the pending dues, before the transfer is concluded.

• Right to approach High Court: Under Article 226, a High Court is empowered to issue writs, for the enforcement of a Fundamental Right and for any other purpose. Writ jurisdiction is an extraordinary jurisdiction of the High Court provided under Article 226 and 227 of the Constitution of India. Normally High Courts do not entertain a writ petition if an effective alternate remedy is available. In SARFAESI an explicit remedy of appeal in DRT and DRAT is provided under section 17 and 18 of the act.

In case of D. Ravichandran V/s Indian Overseas Bank the borrower challenged the 60 days’ notice issued by the bank before the Hon’ble Madras High Court. The hon’ble court in this case held that notice under section 13(2) of the Securitisation Act is really a show cause notice, and ordinarily this court does not interfere with show cause notices. The notice under section 13(2) of the Securitisation Act really does not affect any right or liability of the action because by itself the notice does not affect any right or liability of the borrower. Hence, challenge to the notice under section 13(2) of the Securitisation Act is premature, since it is possible that the secured creditor may be satisfied with the reply of the borrower to the aforesaid notice and may drop the proceedings. Hence, all the writ petitions challenging the notice under Section 13(2) of the Securitisation Act are dismissed on the ground that the writ petitions are premature, and the petitioners have an alternative remedy of raising all the points which they are raising in these writ petitions [14].

Though the high courts have made it quite clear that no writ petition will be heard if the petitioner has course to an effective alternate remedy but this rule of exhaustion of alternate remedy is rule of discretion and not one of compulsion. In Sravan Dall Mill P. Limited Vs. Central Bank of India[15] the petitioner questioned the grounds for classification of its account, by the respondent banks, as an NPA which is the preliminary condition for the creditor to take action against the borrower u/s. 13 of the act. The Andhra Pradesh High Court entertained the writ petition and ordered the respondent to consider the objections of the petitioner and communicate its reasoned decision to the petitioner. As no measures were taken under Section 13(4) by the respondent bank, no directions in this regard are issued till the bank passes appropriate orders on the objections of the petitioner under Section 13(2) of SARFAESI Act.

• Right to Compensation: The borrower has a right to get such compensation and costs from the creditor as may be determined by the DRT or DRAT where the possession of secured assets by the secured creditor is not in accordance with the provisions of SARFAESI Act and rules made thereunder. The court in such case directs the secured creditors to return such secured assets to the borrower along with the compensation and costs fixed by it. [16]

Conclusion:

Though section 13 of the act might seem draconian giving vast powers to the bank and financial institutions but at the same time to safeguard the interest of the borrowers the act has also provided various rights to the borrowers under section 17 of the act. The borrower can even get an order of re-possession of the ‘secured asset’ if the court finds that possession of the secured asset is illegally taken by the Bank. More recently the courts have been taking a liberal outlook in dealing with the appeals under section 17 and section 18, to establish a fair platform for the borrowers to bring their grievances.

[1] Section 13(2) SARFAESI Act, 2002

[2] Section 13(3) SARFAESI Act, 2002

[3] Section 13(3A) SARFAESI Act, 2002

[4] Section 13(13) SARFAESI Act, 2002

[5] Section 13(4) SARFAESI Act, 2002

[6] Section 13(5) SARFAESI Act, 2002

[7] Section 13(6) SARFAESI Act, 2002

[8] Section 13(7) SARFAESI Act, 2002

[9] Section 13(8) SARFAESI Act, 2002

[10] https://www.advocatekhoj.com/library/judgments/announcement.php?WID=14690

[11] Section 13(10) SARFAESI Act, 2002

[12] https://indiankanoon.org/doc/1059476/

[13] Mardia Chemicals Ltd. Etc. Etc vs U.O.I. & Ors. Etc.

[14] https://indiankanoon.org/doc/78357445/

[15] https://www.casemine.com/judgement/in/56b48d36607dba348fff1cb9

[16] Section 19 SARFAESI Act, 2002