The SARFAESI Act provides a clear, time-bound pathway for secured creditors to enforce security interests without initial court intervention, while preserving borrower remedies and safeguards at each step. This guide explains the notice process, possession and management takeover, magistrate assistance, appeals, and borrower rights in a concise, practitioner-friendly format.
When enforcement starts
- Enforcement typically begins after a payment default and classification of the account as a non-performing asset, followed by a written demand notice granting a 60-day period to discharge liabilities in full.
- If dues remain unpaid after the notice period, the secured creditor may proceed with statutory measures, including possession or management takeover, to recover the secured debt.
Core enforcement measures
- Take possession of the secured asset, including the right to transfer by lease, assignment, or sale for recovery of dues.
- Take over the management of the borrower’s business, or appoint a manager, if necessary to protect and realize the security effectively.
Magistrate’s assistance for possession
- Where peaceful possession is not feasible, the secured creditor may seek administrative assistance from the Chief Metropolitan Magistrate or the District Magistrate to obtain possession of the secured asset.
- Upon satisfaction of the statutory prerequisites, the Magistrate may pass appropriate orders for taking possession and handing over the asset to the secured creditor or its authorized officer.
Manner and effect of management takeover
- A takeover of management aims to safeguard going-concern value, stabilize operations, and improve realizations; it may involve replacing key managerial personnel and exercising control over business decisions.
- During the takeover, directors’ powers are suspended to the extent of the takeover, and the secured creditor (or its appointee) manages the business solely to protect and realize the security.
No compensation for directors’ loss of office
- Directors are not entitled to compensation for loss of office arising from a lawful takeover of management under the enforcement framework.
- Any service or separation claims must yield to the statutory priority of secured debt recovery where the law so provides.
Application against creditor’s measures
- Aggrieved borrowers (or affected parties) may challenge the creditor’s measures before the Debt Recovery Tribunal within the prescribed period after enforcement steps are taken.
- The Tribunal can examine the legality of the measures, grant interim reliefs, and pass appropriate orders, including restoration, subject to conditions.
Appeal to appellate authority
- A party aggrieved by the Tribunal’s decision can appeal to the Debts Recovery Appellate Tribunal within the statutory timeframe, subject to pre-deposit requirements prescribed by law.
- The appellate forum reviews questions of fact and law within the contours of the statute, and may affirm, modify, or set aside the Tribunal’s order.
Borrower’s right to compensation and costs
- If enforcement action is found unlawful or irregular, the borrower may be entitled to compensation and costs as determined by the adjudicating forum.
- This remedy underscores the balance between swift recovery and due process, incentivizing creditors to adhere strictly to procedural and substantive requirements.
Practical compliance checklist
- For lenders: ensure accurate NPA classification, serve a compliant demand notice, maintain detailed records, value assets using eligible valuers, and document possession/management steps.
- For borrowers: review the demand notice promptly, raise representations with evidence, consider settlement or restructuring options, and, if needed, file a timely application before the Tribunal.
- For both sides: preserve correspondence, maintain transparent valuation and sale processes, and adhere to timelines to avoid avoidable legal setbacks.
This concise, practice-oriented overview helps align enforcement steps with statutory safeguards, promoting fair, efficient, and defensible recoveries while protecting legitimate borrower rights.
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