Full details of the recovery process through SARFAESI ACT 2002

(This article gives the details like rights of secured creditors, Application of mind and care is required in the service of notice of SARFAESI DEMAND NOTICE, POSSESSION NOTICE & SALE NOTICE, Special care to be taken while taking possession of movable properties, method of sale of secured property by way of inviting tenders from the public or by holding the public auction and  Supreme Court decision upholding Bank’s Contention on simultaneous action and other issues under SARFAESI Act. (Case study: M/S. Transcore Vs. Union of India & Indian Overseas Bank)

The SARFAESI ACT  is the acronym of Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The Act has been amended by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act 2004. The SARFAESI Act provides for Enforcement of Security Interest for the realization of the dues without the intervention of Courts or Tribunals which is treated as one of the most effective tools for recovery of  NPAs under existing laws. 

Rights of secured creditors under SARFAESI provisions:

The rights of secured Creditor (bank) to enforce this action arises only in respect of debt classified as NPA as per RBI norms. The Security Interest (Enforcement) Rules 2002 is notified by the Government of India on 20.09.2002. Banks have to follow certain protocols before they are able to repossess a property to and claim it to recover their dues.

The rules provide for exercising the rights of the secured creditor under the Act through the Authorised Officer. Under Rule 2a, the Security Interest (Enforcement) Rules 2002. The “Authorised Officer” means an officer not less than a Chief Manager of a public sector bank or equivalent as specified by the Board of Directors to exercise the rights of a secured creditor. The right to exercise the powers to invoke implement and act as a Secured Creditor is vested only with the Authorised Officer of the bank.

Once an account is classified as NPA, the bank would issue demand notice to the defaulting borrower and guarantor/s under section 13(2). ‘Demand Notice’ means the notice in writing issued by a secured creditor or authorized officer, as the case may be, to any borrower pursuant to section 13(2) of the Act (Rule 2b).  The notice gives details of dues and calls upon them to discharge their dues to the bank within 60 days from the date of the notice. If the borrower makes any objection on receipt of the notice, the bank should communicate its reply within fifteen days (earlier one week). The communication shall convey the reason for the non-acceptance of the objection or representation. The Secured Creditor may take recourse to one or more of the following measures under Sec 13(4); in case the borrower fails to discharge the liability of the bank demanded under sec 13(2).

Under Sec13 (4) a: “Take possession of the secured asset of the borrower including the right to transfer by way of lease, assignment or sale.”

Under Sec 13(4)b: “Take over the management of the secured asset, provided a substantial part of the business is held as security and or the business is severable, take over whole or part of such business which is relatable to the security for the debt “.

Under Sec 13(4) c: “Appoint any person to manage the secured assets, the possession of which has been taken over by the secured creditor.”

Under Sec 13(4) d:  “He/ She may require at any time by notice in writing to any person who has secured assets from the borrower and from whom any money is due or become due to the borrower to pay it to the secured creditor.” (Powers under sec.13(4)d can not be exercised until notice under sec.13(2) has been issued and the sixty days period has expired).

The SARFAESI Act prescribes the following procedure for issuance of sale notice when the sale is by way of inviting tenders from the public or by holding the public auction.

1. The sale notice shall be published in two leading newspapers one in the vernacular language having sufficient circulation in the locality by setting out the terms of sale.
2. Every notice of sale is affixed on a conspicuous part of the immovable property and may if the authorized officer deems it fit, put on the website of the secured creditor on the internet.

Further as per Ministry of Finance’s direction, all public sector banks, and financial institutions to upload all SARFAESI auction notices in the official website of the Government “tender.gov.in” to give wider publicity with a view of getting the better response.

Application of mind and care is required in the service of notice of SARFAESI DEMAND NOTICE, POSSESSION NOTICE & SALE NOTICE.

1. Date of commencement of 60 days-demand notice period: The 60 days, notice period commences to run only from the date of service of notice/paper publication as the case may be. (Not from the date of the notice).
2. Service of demand notice when the party is dead: Notice sent to the dead person is bad in law. The Authorized officer to ascertain the details of all the legal heirs and send notice to them.
3. Effect service of possession notices properly by delivering the notice to the parties, affixing the possession notice on the outer door or such conspicuous place of the property and also published in two leading newspapers (one in vernacular language) having sufficient circulation in that locality within 7 days from the date of taking possession. Possession notice should mention correct dues.
4. Effect service of sale notice, setting out terms of sale, by delivering the notice to the parties, affixing the sale notice on the outer door or such conspicuous place of the property and also published in two leading newspapers (one in vernacular language) having sufficient circulation in that locality. Sale notice should mention correct dues.
5. The Authorized officer has to carefully preserve the proof of service (acknowledgment) of notices and proof for having sent (POD from a courier company, Registered notice receipt, Ack.Due, etc.)

In case of immovable properties, a brief notice about possession of the property should be painted on the outer door/compound walls. In case of actual possession of secured property could not be taken, the bank has to file an application before Chief Metropolitan Magistrate/District Magistrate seeking the order for possession. If the recovery made after enforcing action under the SARFAESI act, is not enough to cover the entire dues, the bank may further file the application before DRT/Court within the limitation period of loan documents. The mailing of a 30 days sale notice copy to the borrower/mortgagor after 20 days of taking possession, is to enable the aggrieved person (as a right) to file the application within 45 days before DRT for the stay of sale transaction of the secured property.

Action flow Chart:

Special care to be taken while taking possession of movable properties(The authorized officer has to act in the following manner).

1.        Take possession and execute Panchanama.( Under Rule 4(1) & 4(2)
2.        Take inventory.
3.        Keep safe custody of movables by him directly or through agents under rule 4(3).
4.        The Authorised officer can immediately sell the movables taken into possession, if it is subject to speedy or natural decay or if expenses for keeping exceed value under Rule 4(3).
5.       Take steps to protection, preservation, and insurance Rule 4(4).
6.        Obtain estimated the value of movables and fix reserve price in consultation with the appropriate authority of the bank.
7.        Can sell to secure the maximum price in one or more lots by obtaining quotations, inviting tenders, holding a public auction or by private treaty under Rule 6.
8.       Issue 30 days sale notice to the borrower under Rule 6(2).
9.       Issue newspaper advertisements setting out the terms of sale in case of public tender or public auction in two newspapers               (one vernacular). The proviso to rule 6(2)
10.        Issue sale certificate of sale on receipt of full payment for movables sold.

The latest amendment to include NBFCs along with banks under the SARFAESI act. :

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is set up under section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The Bill provides that secured creditors will not be able to take possession over the collateral unless it is registered with the central registry. Further, these creditors, after registration of security interest, will have priority over others in repayment of dues. Do read Amendment 2019 to SARFAESI Act, 2002 which is about the registration process, right of enforcement of securities, and priority of secured creditors.

The Finance Ministry, Government of India has in the exercise of its powers under the SARFAESI Act, 2002 notified on August 5, 2016,(SARFAESI Act, 2016) that  all196 NBFCs are included under the definition of Financial Institutions as per the aforesaid Act. It was a major step in bringing out the NBFCs at par with the banks, focusing the manner in which recovery actions were taken by the NBFCs prior to this notification. In addition to 196 NBFCs covered under the SARFAESI Act,  NBFCs notified as Public Financial Institutions by the Central Government were also brought under the purview of the SARFAESI Act to exercise their powers.

Case study:

Supreme Court decision upholding Bank’s Contention on simultaneous action and other issues under the SARFAESI Act. (Case study: M/S. Transcore Vs. Union of India & Indian Overseas Bank

 Supreme Court judgment refers to the Recovery of Debts due to Banks and FI Act 1993 as the ‘DRT Act’ and SARFAESI Act as ‘ for brevity and framed the following three issues for consideration.

a)     Whether banks or financial institutions having elected to seek their remedy in terms of DR Act 1993 can still invoke the SARFAESI Act,2002 for realizing the secured assets without withdrawing or abandoning the OA filed before DRT under the DRT Act?

b)    Whether recourse to take possession of the secured assets of the borrower in terms of Section 13(4) of the NPA Act comprehends the power to take actual possession of the immovable property?

c)    Whether ad Valorem Court fee prescribed under Rule 7 of the DRT(Procedure) Rules 1993 is payable on an application under Section 17(1) of the NPA Act in the absence of any rule framed under the Said Act?

The Supreme Court after analysing the entire schemes and provisions of both the DRT Act and the SARFAESI Act as well as the arguments of both the parties; had delivered the judgment. The Court held that “the withdrawal of the OA pending before DRT under the DRT Act is not a pre-condition for taking recourse to the SARFAESI Act. The discretion is vested with the Banks/Financial Institutions to apply for a leave of the DRT for withdrawal depending upon the circumstance of each case”. The court did not spell out those circumstances.

Originally posted on 23 July 2014 modified and reposted on 20.02.2023

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