The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARFAESI Act 2002) provide for Enforcement of Security Interest for the realization of the dues without the intervention of Courts or Tribunals for recovery of NPAs by banks under various laws. In 2016 NBFC is included under the definition of the financial institution through amendment 2016 bringing about the NBFCs at par with the banks in respect of recovery action of secured creditors. However, few sections relating to registration of security interest by secured and other creditors, effect of registration of transactions, right of enforcement of securities, and priority to secured creditors were not notified in the said amendment. In view of the foregoing Section 17 to Section 19 of the 2016 Act have been notified by the Ministry of Finance, Department of Financial Services, vide Notification No SO. 4619 (E) dated 26th December 2019 and are effective from 24th January 2020.
Section 17 is for amendment in section 23 of Sarfaesi Act, 2002
Section 18 is for insertion of Chapter IVA to Sarfaesi Act, 2002.
Section 19 is about the omission of section 27 of Sarfaesi Act, 2002 regarding the penalty for non-filing, etc u/s 23 after its notification (30 days timeline for secured creditors to registration with CERSAI is removed)
Chapter IVA of the SARFAESI Act, 2002 is about the registration process, right of enforcement of securities, and priority of secured creditors inter alia contains the following important provisions.
- Section 26 B: Attachment orders issued by any Government authority for the recovery of Govt. dues may be filed with CERSAI.
- Section 26 C: Security interest or attachment orders filed with CERSAIshall have priority over any subsequent security interest created upon such property.
- Section 26 C: Filing of security interest with CERSAI shall be deemed toconstitute a Public notice from the date & time of filing with CERSAI.
- Section 26 D: Secured Creditors shall be entitled to enforce securities under SARFAESI Act only if the security interest is filed with CERSAI.
- Section 26E: After registration of security interest with CERSAI bySecured Creditors, their dues will be paid in priority over Govt. dues
The effect of amendment is as follows:
Under the new law, Secured Creditors who have not duly registered the security interest with the CERSAI shall not be entitled to exercise the right of enforcement of securities under Chapter III. In other words, it curtails the enforcement right of an un-registered secured interest of a Secured Creditor. In this context, the following entities are required to file details of security interest with CERSAI to be entitled to exercise the right of enforcement of securities.
- A secured creditor is required to file details of security interest with CERSAI (before the amendment also secured creditors were required to file the details of security interest).
- A party (not being a financial institution or bank) is required to file details of security interest with CERSAIhaving attachment order with respect to a property from a civil court or any other authority (This is a new clause introduced in the amendment which is effective only after 24.01.2020 amendment)
- Tax authority is required to file details of security interest with CERSAI on issuance of an attachment order for recovery of tax dues (This is a new clause introduced in the amendment which is effective only after 24.01.2020 amendment)
- Any other authority or officer of the Central Government or any State Government or local authority on issuance of an order for attachment of any property for recovery of any government dues is required to file details of security interest with CERSAI. (This is a new clause introduced in the amendment which is effective only after 24.01.2020 amendment).
Implications for the Banks:
After the introduction of new amendment to SARFAESI act, debt owed to a secured creditor like banks will get priority over all other claims including other debt and all revenue, taxes, cesses and dues payable to the Central and state governments and local authorities. If the charge is created on properties of the borrower/guarantor through mortgage/hypothecation in favour of the bank and same is registered and filed with CERSAI, Tax or Government Authorities, or other parties cannot claim any priority over the amount in respect of pending SARFAESI proceedings initiated by the Banks or the amounts already recovered by the bank by sale of secured properties of the borrower/guarantor under SARFAESI Act. Thus, in the above cases banks can successfully stop the claims if any made by the Tax Authorities, Government Authorities on the assets over which security interest has been created in favour of the Bank. Further, the said provision of SARFAESIAct has overriding effect over all other enactments.