India is the world’s third largest economy. In order to keep pace with the fast evolving economies of the developed countries and to secure its position amongst the fastest developing countries, it is of utmost interest that the financial stability and growth of the country remains fluid and unharmed. Banks and financial institutions are responsible for the flow of liquid money throughout the economy and they play the key role in maintaining and regulating the country’s economic growth. The banking sector of our country is increasingly trying to match the international standards and norms of banking, however, it is faced with innumerous hurdles that hamper the proper working of these institutions. The government of India has stepped in to ensure that there are certain legal frameworks that the banking sector has to abide by, only to accommodate a larger scope for development. These legal frameworks were first introduced by the government through the Recovery of Debts due to Banks and Financial institutions Act, 1993, subsequent to which the Debt Recovery Tribunals and Debt Recovery Appellate Tribunals were established for expeditious adjudication of disputes with regard to ever increasing non-recovered dues, which is one of the most common impediment to the proper functioning of the banking sector. Non-recovered loans, bad loans, or Non-performing Assets cause interruption in the financial growth of the country, and the government cannot afford it. The Recovery of Debts due to Banks and Financial institutions Act, 1993, however had a number of loopholes, which were yielded by the borrowers and lawyers to their own advantages. The government introspected on these issues and on the recommendation of the committee under Mr. Andhyarujina, brought about a legal reform in the banking sector laws in the form of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002.
It is a legislation that helps financial institutions to ensure asset quality in multiple ways. This means that the Act was framed to address the problem of NPAs (Non-Performing Assets) or bad assets through different processes and mechanisms.
The SARFAESI Act gives detailed provisions for the formation and activities of Asset Securitization Companies (SCs) and Reconstruction Companies (RCs). Scope of their activities, capital requirements, funding etc. are given by the Act. RBI is the regulator for these institutions.
This article is going to deal with the enforcement of security interests in detail and chalk out the various procedures undertaken by the financial institutions to recover their debts and the remedies and reliefs available to the borrowers in case such procedures are initiated against them.
WHAT IS ENFORCEMENT OF SECURITY INTERESTS?
The Act vests with the bank the power to issue notice to the defaulting borrower and guarantor, asking them to repay the debt within 60 days from the date of the notice. However, if the borrower fails to comply with the notice, the bank or the financial institution may enforce security provided by the borrower, that is, the bank’s security interest, by any of the following provisions, as laid down in the Act:
a) Take possession of the security;
b) Sale or lease or assign the right over the security;
c) Appoint Manager to manage the security;
d) Ask any debtors of the borrower to pay any sum due to the borrower.
If there are more than one secured creditors, the decision about the enforcement of SARFEASI provisions will be applicable only if 75% of them are agreeing.
Chapter III of the SARFAESI Act deals with the enforcement of security interest.
Section 13 of the Act provides that notwithstanding anything contained in Sections 69 or 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the court’s intervention, by such creditor in accordance with the provisions of the Act. Section 13(2) of the Act provides that when a borrower, who is under a liability to a secured creditor, makes any default in repayment of secured debt, and his account in respect of such debt is classified as non- performing asset, then the secured creditor may require the borrower, by notice in writing, to discharge his liabilities within sixty days from the date of the notice, failing which the secured creditor shall be entitled to exercise all or any of the rights given in Section 13(4) of the Act. Section 13(3) of the Act provides that the notice under Section 13(2) of the Act shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank. Section 13(3-A) of the Act was inserted after the decision of the Supreme Court in Mardia Chemicals case, and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same. Section 13(4) of the Act provides that if the borrower fails to discharge his liability within the period specified in Section 13(2), then the secured creditor, may take recourse to any of the following actions, to recover his debt, namely-
“(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt;
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, 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 the secured creditor, so much of the money as is sufficient to pay the secured debt.”
SECTION 17 OF THE SARFAESI ACT AND WHAT IT ENTAILS
Section 17 of the Act which provides for an appeal to the DRT, reads as follows:
“17. Right to appeal.–(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application along with such fee, as may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measures had been taken:
Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.
Explanation.–For the removal of doubts it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub-section (1) of Section 17.
(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.”
Sometimes, in furtherance of section 13 of the Act, the Bank may fix the reserve price and sell the property for a very low price affecting the borrower and also the Bank at times. Addressing these concerns, the judiciary has maintained that all actions initiated by the Bank under the provisions of SARFAESI Act, 2002 can be challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002.
The borrower or any person aggrieved can approach the Civil Court in a very limited situation where actually there is fraud or serious dispute with regard to the title of the ‘secured asset’/property mortgaged. Though there can be no bar on the jurisdiction of High Courts under Article 226 in dealing with the grievances of the borrower against the Bank when the Bank initiates action, the High Courts come secondary to the DRT in such matters.
The Banks have enormous support from the legal-framework in recovering their dues from the borrowers. Perhaps, in the absence of the SARFAESI Act, 2002, the Banks would’ve had a very difficult time recovering their assets. However, from the borrowers’ point of view, it is alleged that they do not have an effective remedy against the illegal action being initiated by the Bank using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT can look into all allegations while entertaining an appeal under section 17 of the Act and it includes the issue of disputes pertaining to the actual ‘debt’. Then, it is also settled that the DRT can order re-possession of the ‘secured asset’ when it is found that the Bank has illegally taken the possession of the ‘secured asset’.
The DRT can either allow the Appeal filed by the borrower under section 17 or dismiss it. If the DRT allows the Appeal filed by the borrower under section 17, then, it can order re-possession of the ‘secured asset’ if the physical possession of the ‘secured asset’ is already taken, or it have direct the Bank to provide the borrower with cost due to its illegal activities.
When the borrower prefers an Appeal under section 17 against the Bank, the DRT can grant ex-parte stay of proceedings against the Bank if there is sufficient ground to that affect from the averments in the ‘Grounds of Appeal’ and also the documents produced. If there is a caveat, then, the procedure differs. Normally, the DRT orders notice to the Bank irrespective of the fact as to whether it grants stay or not in-favour of the borrower. The DRT can also ask the borrower to make some deposit while granting stay and it is also reasonable as the borrower has to make the payments towards installments to the Bank in any case and there can be some time lapse between the demand notice issued by the Bank under section 13 (2) and the appeal.
If there is no interim order against the Bank while the Appeal is pending and the Bank is allowed to proceed with the sale proceedings, the issue gets complicated. The borrower should be allowed to raise any point and additional grounds by way of additional affidavit in the pending Appeal and there is nothing wrong in it and technicalities are to be ignored.
In Authorised Officer, Indian Overseas Bank & Anr. Vs. Ashok Saw Mill, the main question which fell for determination was whether the DRT would have jurisdiction to consider and adjudicate post Section 13(4) events or whether its scope in terms of Section 17 of the Act will be confined to the stage contemplated under Section 13(4) of the Act?
On an examination of the provisions contained in Chapter III of the Act, in particular Sections 13 and 17, this Court, held as under :
“In order to prevent misuse of such wide powers and to prevent prejudice being caused to a borrower on account of an error on the part of the banks or financial institutions, certain checks and balances have been introduced in Section 17 which allow any person, including the borrower, aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor, to make an application to the DRT having jurisdiction in the matter within 45 days from the date of such measures having taken for the reliefs indicated in sub- section (3) thereof.
The intention of the legislature is, therefore, clear that while the banks and financial institutions have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting the DRT with authority after conducting an adjudication into the matter to declare any such action invalid and also to restore possession even though possession may have been made over to the transferee.”
In the case of Mardia Chemicals Ltd. v. Union of India and Ors., it was held that the requirement of deposit of 75% of the amount claimed before entertaining an appeal under section 17 of the SARFAESI Act is illusory and an unreasonable condition. The condition is invalid and struck down as it is ultra vires of Article 14 of the Constitution of India.
In the case of Dr. Dipankar Chakraborty v. Allahabad Bank & Ors., Justice Debangsu Basak observed that, “the Act of 2002 gives an independent right to a secured creditor to proceed against its financial assets and in respect of which such asset the secured creditor has security interest. The right to proceed, however, is subject to the adherence to the provisions of limitation as enshrined in the Limitation Act, 1963. The provisions of the Limitation Act, 1963 are, therefore, attracted to a proceeding initiated under the Act of 2002.”
In the case of United Bank Of India vs Satyawati Tondon & Ors, it was held that, “both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders under Sections 17 and 18 and are required to decide the matters within a fixed time schedule. It is thus evident that the remedies available to an aggrieved person under the SARFAESI Act are both expeditious and effective.”
In the case of Sadhna Shivhare and others v. Chief Manager, Punjab and Sind Bank and another, the Bank had committed the erroneous mistake of not providing the appellants with the notice under section 13(4) before initiating action under section 13(2), and therefore, owing to the failure on the part of the Bank to comply with all the procedural requirements of the SARFAESI Act before enforcing their security interest, the appeal was allowed by the DRT and the notice issued by the Bank under Section 13(2) was quashed.
In the case of Cyril Kotian & Anr. v. The Bharat Cooperative Bank (Mumbai) Ltd., the notice issued by the Bank under Section 13(2) of the Act was illegal for the reason that it was signed by a Deputy General Manager without explaining as to how he was authorised to sign the same. There was no cause of action for issuing such notice. The amount claimed was highly exaggerated and excessive. The appeal under section 17 was allowed and the learned Judge held that the act of taking possession on the basis of an illegal notice, cannot be sustained and since the appellant was deprived of the possession, unlawfully some amount towards the damages must be awarded.
In the case of Pankaj Shah v. Cosmos Co-Operative Bank Ltd., the appellant was not the borrower, however, he had ownership over certain raw materials that the respondent no. 1 took possession of along with the immovable property of respondent no. 2, who was the defaulting borrower. The securitization application was allowed and the respondent was directed to hand over the possession of raw materials within 15 days from the date of passing the order.
The system is aimed at speedy recovery and is balanced heavily towards the Bank, thus genuine borrowers who don’t have mala fide intention of defaulting are also affected in a grave manner . There is a prevalent feeling of helplessness amongst the borrowers due to the lack of remedies and even if someone gets a relief, they feel that the relief provided is ineffective.
It is definitely important to improve the financial health of the Banks/Financial Institutions, there is no justification for a completely biased legal system where the borrower is harassed like anything. Bank officials exercise great discretion and the Bank officials must be extremely happy with the legal provisions now governing the recovery of ‘secured loans’ under SARFAESI Act, 2002. It has become totally one-sided affair and ordinary citizens & small businesses may feel it better to approach the private money leaders for their financial needs rather approaching Banks and Financial Institutions in this country.
However, with the recent judicial pro-activism of the Courts and Tribunals, borrowers and aggrieved persons have been increasingly getting reliefs against illegal and wrong acts of the Banks. A more liberal outlook has been adopted by the Judiciary in dealing with appeals under section 17 and section 18, in order to facilitate the establishment of a fair platform for the aggrieved parties to bring their grievances to.
 Mardia Chemicals Ltd. v. Union of India and Ors., (2004) 4 SCC 311.
 4 (2009) 8 SCC 366.
 (2004) 4 SCC 311.
 W.P. No. 16511 of 2016, Calcutta High Court.
 (2010) 109 RD 151 (DRAT).
 (2004) 4 BC 175 (DRT).
 (2005) 4 BC 217 (DRT)