Recovery of dues by banks

Recovery of dues by Banks
Recovery of dues by Banks

1.         Introduction:

Most of the companies and us approach Banks and Financial Institutions for loans. The reason for the loan may differ from person to person and company to company. All Banks should function in accordance with the guidelines/norms issued by the Banker’s Bank ‘The Reserve Bank of India’. Subject to the lending norms of Reserve Bank of India, the Banks and Financial Institutions sanction loans for different purposes. Though, the Banks and Financial Institutions can lend money even without security, normally, the Banks and Financial Institutions insist for security for the repayment of loan. The fixed assets, receivables etc. can be securities acceptable to the Banks and Financial Institutions for sanctioning the loans. The loan entitlements, the procedure for sanctioning the loan, the security issues etc., are exclusively governed by the guidelines/norms issued by the Reserve Bank of India. Again, loan, being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction. The prime objective of Bank is to receive deposits and use those deposits efficiently so as to make money. The Banks will also render certain specific services on behalf of its customers. The Reserve Bank of India will issue guidelines and norms considering the policy of the Government too. Exercising control over flow of money from Banks and Financial Institutions, the Reserve Bank of India promotes the balanced growth. The Reserve Bank of India can contain inflation through certain measures and it is a financial measure to contain inflation as everybody knows.
When a borrower fails to repay the money to the Bank, what the Bank can do for recovering the loan is to file a civil suit earlier. We all know the issue of delay in rendering justice in traditional civil courts and with the inevitable delay, the Banks could not recover its dues effectively and it resulted in liquidity problems. Bank pays interest to the deposit holders; however, the Banks could not make money by using the deposits as the recovery gets delayed frequently. This led the government to appoint various committees for financial sector reforms. The concentration was on effective recovery by the Banks and Financial Institutions apart from other things.

It may be interesting and worthwhile to examine how the laws of the land have undergone changes to suit the current requirement of the banking and finance industry to protect the money lent by them and the consequent financial exposure undertaken by them.

Historically, in India the remedy available to lenders has been to file an ordinary money suit for recovery against the defaulting borrower for the outstanding amounts or to file a summary suit as provided for under Order 37 of Code of Civil Procedure 1908. Both these options have been time consuming. Another option available to the lender was to apply for foreclosure of mortgage, where borrower or guarantor had provided security by way of mortgage, in respect of outstanding towards the lender. Foreclosure and money suits have proved to be a long drawn battle in the court, consuming several years in litigation, owing to the delay on account of various reasons. The Indian courts, lower courts as well as high courts, were saddled with cases filed by the domestic banks, foreign banks and financial institutions. The delay in the disposal of such cases was deplorable.

The economic meltdown, being faced by the western world and the consequent retardation, has raised alarms for everyone connected with the financial world and India is no exception. India has a plethora of legislations, which govern and regulate the laws relating to recovery of money by the lenders. It may be important to note that although at a nascent stage, various judicial reforms have been carried out from time to time, which have controlled the burgeoning non-performing assets (NPAs) with the lenders. All these reasons lead to the banks and financial institutions to opt method, which makes the harassment of the customer, through their recovery agents. The Supreme Court, while emphasising that banks and other financial institutions cannot resort to muscle power for recovery of their loans, strongly expressed its intent of “putting an end” to this practice.

“…Banks have right to recover loans, but only through legal means,” the Bench comprising Justices A R Lakshmanan and Altamas Kabir made it clear, as it asked for the guidelines issued by Reserve Bank of India and Indian Bank Association on the issue of recovery of loans by defaulters[1].

The Bench was hearing an appeal filed by India’s largest private bank, ICICI, against an Allahabad High Court order, rejecting its plea to quash the criminal cases registered by the Uttar Pradesh Government against the managing director and other top officials for allegedly using criminal force against a loan defaulter. The case was registered at the instance of the High Court there on a complainant from an owner that the bank had sent musclemen to seize the vehicle for non-payment of loan instalments.[2]

In the case of ICICI Bank v. Shanti Devi Sharma & Others[3] a Bench of the Supreme Court comprising Dalveer Bhandari, J. and Tarun Chatterjee, J. warned ICICI (on May 15, 2008) against the use of musclemen to recover loans.[4]

The Supreme Court went on to remind financial institutions that they are bound by law. The recovery of loans or seizure of vehicles can only be done through legal means; we live in a civilized country and are governed by the rule of law.

In this case, the Supreme Court’s decision says, Mrs Sharma has alleged that her son, Rahul Dev Sharma, aged 34, committed suicide as a result of the manner in which ICICI Bank’s recovery agents had repossessed his motorcycle. In an FIR, she alleged that on October 16, 2005 at about 1.00 p.m., two recovery agents (referred to as ‘goons’) forcibly entered her son’s bedroom and started harassing and humiliating him for loan payments that were overdue on his two wheeler and on his personal loan. They repossessed the bike in the presence of his friends who ridiculed him for having lost it.

Therefore, it is strongly felt that judicial reforms are required to ensure that the rights of the Banks and Financial Institutions (FIs), popularly referred to as “lenders”, lending money to the corporates and individuals, are adequately protected.


2.         Judicial Reforms in Banking and Financial Sector:

Since the courts were overburdened with the money suits, inter alia, impacting the lender in a very serious way, it was deemed necessary to carry out changes in the law to support the lender in recovering the outstanding from delinquent borrowers.

The Committee on Financial Systems, headed by Shri M Narasimhan, had considered the setting up of the “special tribunals” with special powers for adjudication and speedy recovery of such matters as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues to the banks and financial institutions could be realised without delay.

In 1981, a committee under the Chairmanship of Shri T Tiwari had examined the legal and other difficulties faced by banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of special tribunals for recovery of dues of the banks and financial institutions by following a summary procedure.

Consequently, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 in short DRT Act was passed.  The DRT Act definitely eased the pressures on the courts at an all India level and the Debt Recovery Tribunals (DRT) is today deemed to be effective tribunals to redress the grievances of the lenders.

The rationale behind the Act is contained in the Tiwari Committee Report, which stated:

“The civil courts are burdened with diverse types of cases. Recovery of dues due to Banks and Financial Institutions is not given any priority by the civil courts. The Banks and Financial Institutions like any other litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly long periods.”


3.         Constitutional validity of the RDDBFI Act, 1993:

After 9 years of evolution of the Act was challenged for its constitutional validity in Union of India & Another v. Delhi Bar Ass. & Others[5].

The Constitutional validity of the Act was challenged on grounds of unreasonableness & that it violates Article 14 of the Constitution and that the same is beyond the legislative competence of the Parliament.

The validity of the Act was firstly challenged before the Delhi High Court in Delhi Bar Ass. & Others v. UOI & Another[6]. The Delhi High Court held that the DRT could be constituted by the Parliament even though it was not within the purview of Articles 323A and 323B of the Constitution of India and that the expression ‘administration of justice ‘ as appearing in List IIA of the Seventh Schedule to the Constitution includes Tribunals as well as ‘administration of justice’; the impugned Act was unconstitutional as it erodes the independence of the judiciary and was irrational, discriminatory, unreasonable, arbitrary and was hit by Art 14 of the constitution. It also quashed the appointment of the Presiding Officer of the Tribunal. The aforesaid conclusions were on the basis that the Act in particular, section 17 did not have a provision for a counter claim as provided in the Code of Civil Procedure, 1908 and was irrational and arbitrary. The Act lowered the authority of the High Courts on the basis of the pecuniary jurisdiction and eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal.

The court referred to DK Abdul Khader v. Union of India[7] where it was held that a Tribunal could not be constituted for any matter not specified in Art 323A & 323B of the Constitution.

3.1.      Finding of the Supreme Court:

It was held by the SC that “While Articles 323A and 323B specifically enable the legislature to enact laws for the establishment of tribunals, in relation to the matters specified therein, the powers of the Parliament to enact a law constituting a tribunal like a banking tribunal is not taken away” It was further specified that the recovery of dues is an essential function of any banking institution. In exercise of its legislative powers relating to banking, parliament can provide the mechanism by which monies due to banks and financial institutions can be recovered.

The preamble to the Act states “… for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto’ this would squarely fall within the ambit of entry 45 of List I of the Constitution.

The Supreme Court disagreed with the view taken by the Delhi High Court that the provisions of the Act are in any way arbitrary or bad in law. In fact it held that the Act has been amended and whatever lacunae or infirmities existed have now been removed by the amending Act with the framing of more rules.

The view taken by the Delhi High Court was that the Act eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal. The SC held that the decision of the Delhi High Court proceeds on the assumption that it is an absolute right of anyone to demand that a civil court adjudicate his dispute. Where Arts 323A &323B contemplate establishment of Tribunals and this does not erode the independence of the judiciary, there is no reason to presume that the banking tribunals and the appellate tribunals so constituted would deny justice to the defendants or that the independence of the judiciary would stand eroded.

All these issues came before various courts after the introduction of the Act nine years ago. Now, almost all issues have come to rest and the Act is all set to take its vengeance on defaulters of loans and debts owed to banks and financial institutions.


4.         Problems in the DRT Act, 1993 leads to the passing of SARFAESI Act, 2002:

With the enactment of the DRT Act, the banking sector expected that most of the NPAs would be easy to recover, as against the conventional system of recovery of loan through civil courts, where considerable time, money and efforts were required to recover debt. However, in spite of DRT Act, on account of non-realisation of the NPAs, the Banks and Financial Institutions were facing problems relating to liquidity and asset liability mismatch, since their assets were blocked for considerable time in unproductive asset. There was no legal provision for facilitating securitisation of financial assets, and banks had no power to take possession of securities created in their favour in order to secure the facilities. Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.
Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.

In furtherance of financial reforms and extending the object of RDDBFI Act, 1993, the Government has enacted The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The SARFAESI Act, 2002 is to curtail the delay in the process of adjudication between the Banks and its borrowers. The question of recovery by the Banks and Financial Institutions will arise when the borrowers commit default in repaying the debt. When there is default, then, the Banks will categorize the account as Non-performing Asset in accordance with the norms prescribed by the Reserve Bank of India.

Therefore, to improve the health of the economy as well as the banking sector, stimulus was required to be given in the form of legal provisions, empowering banks with more powers to recover the assets blocked in Non-performing Assets.


5.         Background of the SARFAESI Act, 2002:

The pre-eminent problem faced by Banks and Financial Institutions is that of increasing bad debts euphemized as Non-performing Assets (NPAs).

To look in the prevailing problem and bring out suggestions three committees set up, namely, the Narasimham Committee I, Narasimham Committee II, and the Andhyarujina Committee.

Narsimham Committee I was constituted in 1991, it then mentions that according to the international practice, an asset is treated as non-performing when the interest is overdue for at least two quarters. Income of interest is considered as such, only when it is received and not on the accrual basis[8]. The Committee suggested that the same should be followed by the banks and financial institutions in India and advance is to be shown as Non-perfoming Asset where the interest remains due for more than 180 days.

Narasimham Committee II submitted its report in April, 1998 and recommend that banking industry should switch over to international practices with regard to recognized income by introducing a 90 days norm.

Andhyarujina Committee was constituted under the chairmanship of Sri T.R. Andhyarujina, former Solicitor General of India, in February 1999 to formulate specific proposals for giving effect to the suggestions made by the Narasimham Committee. The Committee submitted its report in May 2000, which cast the way for the passing of the present SARFAESI Act, 2002, the main recommendation of the Committee is as follows:

  1. Banks must vest with power of taking possession and sale of securities

without the intervention of the court as regards mortgaged properties;

b. The existing Recovery of Debts Due to Banks and Financial Institutions

Act, 1993 should be amended to make its provisions more effective; and

c. Amendment should also be made in the Contract Act, 1872 by making

provision of giving more time to Banks and Financial Institutions to  enforce their claims under Guarantee.


6.         Objects of the SARFAESI Act, 2002:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in short “SARFAESI Act” was enacted with the objective of regulating securitization and reconstruction of financial assets and enforcement of security interest created in favour of secured creditors.

The Act provides for three alternative methods for recovery of NPAs:

(a) securitisation;

(b) asset reconstruction; and

(c) enforcement of security without intervention of court.

More recently, the current Minister for Law and Justice Mr. Veerappa Moily has made statements assuring that the pendency in the courts will be checked and that the average time spent on litigation pending in the courts will be brought down.  He has also indicated setting up of commercial courts to speed up the disposal of commercial disputes. It is also heartening to note that in the Budget 2010-2011 speech, the Finance Minister indicated towards carrying out further judicial reforms in the interest of the financial world.


7.         Applicability of the SARFAESI Act, 2002:

The provision of the Act, 2002 is applicable only if the amount of the NPA loan account exceed Rupees One Lakhs; and

NPA loan account is more than twenty percentage of the principal and interest.

NPAs should be backed by securities charged to the banks by way of hypothecation, mortgage or assignment and the secured assets are not hit by the provision of the section 60 of the Code of Civil Procedure, 1908.

The secured asset must not be a lien on any goods, money, or security given by or under the Indian Contract Act, 1872 or the Sales of Goods Act, 1930 or under any other law for the time being in force; a pledge of movable within the meaning of section 172 the Indian Contract Act, 1872; security in aircraft/shipping vessels under section 3 of the Merchant Shipping Act, 1958; conditional sale, hire purchase, or lease where no security interest has been created; right of unpaid seller under section 47 of the Sale of Goods Act, 1930; property exempted under section 60 of the Code of Civil Procedure, 1908; security interest of any financial asset not exceeding one lakh rupees; security interest in agricultural land; case in which amount is less than twenty percent of the principal amount and interest thereon[9].


8.         Securitisation: Meaning.

The concept of securitisation has been adopted more recently from the American financial system and has been described as processing of acquiring financial asset and packaging the same for investments by several investors. The term ‘securitisation’ has not been defined as such, but has been used in certain rules, regulations and notifications. In the recently enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “the Securitisation Act”) the term securitisation has been defined as “a mechanism for acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interests in such financial assets or otherwise”[10].

In Mardia Chemicals Ltd., v. Union of India[11] Supreme Court held that the practice of securitization of debts is in vogue all over the world. That is to say a measure of replenishing the funds by recourse to the secondary market. There are organizations who undertake exercise of securitization. Such organizations take over the financial assets and in turn issue securities.

Simply to say that, securitization is system to convert securities into cash, yet it is different from transfer of negotiable instruments or actionable claims as current in every day practice in the commercial field.


9.         Reconstruction of the Financial Assets:

The second concept contemplated under the SARFAESI Act, 2002 is reconstruction of financial assets, defined as “assets reconstruction”, which means acquisition by any securitization company or reconstruction company of any rights or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance[12].

The concept of ‘financial assistance’ denotes any loan or advance granted or any debentures or bonds subscribed or any guarantee given or letters of credit established or any other credit facility extended by any bank or financial institution[13].

Thus, asset can be acquired only:

a. for the purpose of realization of the financial assistance; and

b. when the borrower is in default;

but not otherwise.


10.       Difference between RDDBFI Act, 1993 and SARFAESI Act, 2002:

The main difference between RDDBFI Act, 1993 and SARFAESI Act, 2002 is as follows:
10.1. The RDDBFI Act, 1993 enables the Bank to approach the Tribunals when the debt exceeds the prescribed limit i.e. Rupees Ten Lakhs.

10.2. Under RDDBFI Act, 1993, the Debt Recovery Tribunal will adjudicate the amount due and passes the final award.

10.3. The SAFAESI Act, 2002 provides a procedure wherein the bank or financial institution itself will adjudicate the debt. Only after adjudication by the bank or financial institution, the borrower is given right to prefer an appeal to the Tribunal under SARFAESI Act, 2002.

10.4. The Banks or Financial Institutions can invoke the provisions of SAFAESI Act, 2002 only in respect of secured assets and it should comes under the definition of NPA and the amount of due must exceed Rupees One Lakhs NPA loan account is more than twenty percentage of the principal and interest and not all loan.

In Garlon Polylab Industries Ltd. v. State Bank of India[14] it has been held by the Allahabad High Court that SARFAESI Act, 2002 being a special act overrides provisions of Recovery of Debts Due to Banks and Financial Acts, 1993 or any other Act of Parliament or State Legislature pertaining to the field it covers.


11.       Procedure to invoke remedy under SARFAESI Act, 2002:

11.1     Resolution of disputes through Arbitration or reconciliation:

Where any disputes relating to securitization or reconstruction or non-payment of any amount due including interest arises amongst any or the parties, namely, the bank, or financial institution, or securitization company or reconstruction company or qualified institutional buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly [15].

Under the SARFAESI Act, 2002, an exhaustive procedure has been laid down under the SARFAESI Act, 2002 along with rules defining the manner in which banks may exercise against the delinquent borrower to enforce the security interest in the asset.

11.2.    Classification of account as Non-performing Asset (NPA):

Invocation of Act for enforcement of security is triggered by classification of the account as “Non-performing Asset” by the Banks and Financial Institutions referred to as the secured creditors. In terms of the present Reserve Bank of India guidelines, in case any amount, which is due and payable by the borrower and has not, been paid for more than ninety days, the said account can be classified as NPA.

Further, the secured creditor can take over the management of the business of borrower, where substantial part of the business of the borrower is held as security for the debt.

In case any financial asset has been financed by more than one secured creditor, the notice can be issued only with the consent of secured assets representing not less than three-fourth in value of the amount outstanding.

11.3.    Power to take possession under section 13 of SARFAESI Act, 2002:

The procedure to take possession is as follows:

11.3.1. Upon classification of account of the secured creditor as non-performing asset, who defaults in the payment of secured debt or any installment thereof, the Bank or Financial Institution gives a prior notice to the defaulting borrower including the mortgagors and guarantors under section 13(2) calling upon them to pay the entire due amount within a period of sixty days[16].

11.3.2. The notice referred under section 13(2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower[17].

11.3.3.  Under section 13(3A) the borrower who receives the notice under section 13(2), may make the representation or send his objections to the authorised officer of the bank within the said time limit.

11.3.4. The authorized officer of the bank/secured creditor shall consider such representation or objections and if after considering such representation or objection secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall within one week from the date of its receipt of such representation or objection the reasons for non-acceptance it, to the borrower[18]. This enables the Bank to correct itself if it is wrong in the process of adjudication. Before this exercise is done and the borrower has been suitably replied to, the secured creditors cannot take possession of the secured asset and management of business of the borrower.

11.3.5.  In case the payment is not made by the borrower in full within the stipulated 60 days time period mentioned in the notice under section 13(2), the secured creditor may take one or more recourse mentioned in under section 13(4) namely,

i. To take possession of the secured assets of the borrower including the   right to transfer by way of lease, assignment or sale for releasing the secured asset. When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession[19].

ii. To take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset[20].

iii. Appoint the manager, to manage the secured asset whose possession has  been taken[21].

iii. Requiring money from any person who has acquired any of the secured assets from the borrower and from whom any money is due to the borrower, to pay to the secured creditor, by notice in writing[22].

11.3.6.  If the secured creditor obtains the possession of the secured asset or take over the management under section 13(4), it shall vest in the transferee all rights in or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset[23].

11.3.7.  The sale proceed shall, in the absence of any contract to the contrary, be held by the secured creditor in trust, to be applied, firstly, in the payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money received shall be paid to the person entitled thereto in accordance with his rights and interests[24].

11.3.8.  If the borrower paid or tendered the dues with all costs, charges and expenses to the secured creditors then secured creditor shall not sold or transferred the secured asset[25].

11.3.9.  If the dues are not fully satisfied from the sale proceeds of the secured assets, the secured creditor may file an application before the Debt Recovery Tribunal (DRT) having jurisdiction or competent court, as the case may be for the recovery of the balance amount from the borrower(s)/guarantor(s)[26].

11.4.    Application for assistance:

Where the possession of any secured asset is required to be taken by the secured creditor or if secured asset is required to be sold or transferred by the secured creditor, the secured creditor may for the very same purpose request in writing to the jurisdictional Chief Metropolitan Magistrate or District Magistrate to take the possession thereof. Such Magistrate may thereupon take possession of such asset and forward the same to the secured creditor. And may use or cause to be use such force as may, in his opinion, be necessary[27].

In Apex Electricals Ltd. v ICICI Bank Ltd[28] it has been held by the Gujarat High Court, that the rights of the bank under sub section (1), (2), (3) and (4) of section 13 cannot be read as creating a lawless situation, but should and must be preserved by maintaining rule of law and not allowing the disturbances of law and order situation. And such rights of secured creditor cannot be read as giving authority or power to the secured creditor to apply force of muscle power for taking measure under section 13(4) of the Act, and for such situation where muscle power required secured creditor resort of the provisions of section 14 of the present Act.

11.5.    Right to appeal:

Any person aggrieved on account of any measure taken under section 13(4) by the secured creditor may make an application, along with requisite fees, to the Debt Recovery Tribunal within forty five days from the date on which such measures has been taken[29].

If the Debt Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that the measures under section 13(4) are in contravention of the provision of the Act, it may declare the same invalid and restore the possession of the secured asset to the borrower[30].

And if the Debt Recovery Tribunal finds the measures taken by the secured creditor under section 13(4) in conformity with the provision of this Act, it may allow the secured creditor to proceed with the measure taken by him[31].

Aforesaid application must be disposed off as expeditiously as possible within sixty days from the date of such application. However, it may extend such period for reasons to be recorded in writing, for four months from the date of the making of the application[32].

In case the borrower is the resident of the State of Jammu and Kashmir, the application under section 17 shall be made to the Court of District Judge in that State having jurisdiction over the borrower[33].

11.6.    Remedy under section 17 of the SARFAESI Act, 2002 bars writ petition:

In V. Sriramulu v Karur Vyasa Bank Ltd[34] it has been held that proceeding under section 13(4) doest not perform any public duty and is not amenable to a writ petition of mandamus and the person aggrieved has the liberty to file an application under section 17 of the SARFAESI Act, 2002.

In Barak Valley Tea Co. v. Union of India[35] it has been held that any person aggrieved with an action under section 13(4), may invoke remedy under section 17 and this statutory remedy cannot be bypassed by invoking the writ petition.

11.7.    Appeal to Appellate Tribunal:

Any person aggrieved by an order of the Debt Recovery Tribunal passed under section 17 may prefer an appeal, along with requisite fees, to the Appellate Tribunal within thirty days from the date of the receipt of the order of the Debt Recovery Tribunal.

The appellant is bound to deposit fifty percent of the amount of the debt due from him, as claimed by the secured creditors or determined by the Debt Recovery Tribunal, which ever is less. However Tribunal may reduce such amount to not less than twenty five percent of the debt referred above.

In case the borrower is the resident of the State of Jammu and Kashmir, the appeal shall lie to the High Court having jurisdiction over the matter[36].

While it all appears to be simple, there is lot of criticism on this SARFAESI Act, 2002.

The criticism is that it is being misused by the Banks and Financial Institutions. In the course, we had to consider the following aspects:

It is pertinent to note that strong checks and balances have been put in place to ensure that there is no abuse of powers vested in the lenders.


12.       Important case laws under SARFAESI Act, 2002:

The Supreme Court of India and several high courts have delivered important judgments on various contentious issues, which arise under SARFAESI Act, 2002. Some of the issues and judgments are briefly discussed as under:

In Mardia Chemicals Ltd v. Union of India[37] laid down a strong foundation for the enforcement of SARFAESI Act, 2002. The Supreme Court upheld the validity of the Act, thereby putting an end to a large number of pending and expected litigation on the vies of the Act throughout the country. The Hon’ble Supreme Court observed that though a loan transaction may have a character of private contract, yet the question of great importance behind such transactions, as a whole having far reaching effect on the economy of the country, cannot be ignored when financing is through banks and financial institutions, utilising the money of people in general.  Therefore, where public interest is involved to such a large extent, and it may become necessary to achieve an object, which serves the public purpose, individual rights may have to give way.  Public interest has always been considered to be above the private interest. Even if few borrowers are affected by the enactment, it would not impinge upon validity of the Act, which otherwise serves larger interest.

In Sushil Kumar Agarwal v. Allahabad Bank[38] it has been held by the DRT that the words “without intervention of court” are more significant. If a suit had already been filed in court, there is definite intervention of court in the matter. Hence, pending its suit in the civil court, the bank cannot resort to simultaneous action under section 13(4).

In Transcore v. Union of India[39], it was held by the Supreme Court that the object of SARFAESI Act, 2002 and DRT Act, 1993 is the same, namely recovery of debts.  Conceptually, there is no inherent or implied inconsistency between the remedies provided under the two Acts and they are cumulative in nature for secured creditors.  Secured creditors are given the right to choose one or more of them. Though the DRT Act is a complete code in itself for recovery of debts and provides for various modes of recovery, it does not provide for expeditious enforcement of security interest of a non-adjudicatory process as has been provided for under the SARFAESI in order to prevent asset-liability mismatch in the balance sheet of the lender. It is for this reason that SARFAESI Act, 2002 is treated as an additional remedy, which is not inconsistent with the DRT Act, 1993. These two Acts together constitute one remedy and, therefore, the doctrine of election does not apply and banks and financial institutions are permitted to invoke one Act notwithstanding pendency of proceedings under the other Act.  Therefore, simultaneous proceedings for the recovery of debt under the DRT Act, 1993 as well as SARFAESI Act, 2002 are permissible.

In ICICI Bank v. Shanti Devi Sharma[40], while acknowledging that banks have vast powers under the Act, the Supreme Court held that the banks also have equal responsibilities and banks and financial institutions cannot adopt unfair practices for repossession of secured assets. Unfair trade practices have no place in India, which is civilised society governed by the rule of law.

In ATV Projects India Ltd. v. State of Maharashtra[41] the Division Bench of Bombay High Court held that statutory and equally efficacious remedies are available to a borrower under section 17 of the SARFAESI by filing application before the DRT against the action taken by secured creditor under section 13(4) of the Act. Therefore, a borrower cannot invoke extraordinary jurisdiction of the high court under article 226 to circumvent the legal process provided under special statute.

13.       Section 69 of the Transfer of Property Act, 1882 and section 13 of the SARFAESI Act, 2002:

Section 69 of the Transfer of Property Act, 1882, was modelled on the English Conveyancing Act, 1881 and the English Law of Property Act, 1925. Section 69 was later remodelled by amending Act 20 of 1929 drawing the principles from the English law.

Section 69 of the Transfer of Property Act, 1882 contains five sub-sections. Sub-sections (1) and (2) as detailed hereunder, deal with the circumstances under which the mortgagee’s right to exercise the power of sale without the intervention of the court arises. Sub-sections (3) and (4) respectively dwell on the title of the purchaser from the mortgagee and the manner of deployment of sale proceeds of the mortgaged property by the mortgagee, his duties and responsibilities. Sub-section (5) states that nothing in this section applies to powers conferred before the first day of July, 1882.

Basically we are concerned with the sub section (1) and (2) of section 69 of Transfer of property Act, 1882.

The power of sale, under Section 69, can be exercised only in the three cases mentioned in clauses (a), (b) and (c) of sub-section (1).

13.1.    Section 69(1)(a):

The first case in which the mortgagee can have the power to sell is mentioned in clause (a) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. It lays down the following conditions for the acquisition of the power, namely:

(1) that the mortgage must be an English mortgage, as defined in Section 58(e) of the Transfer of Property Act, 1882, and

(2) neither the mortgagor nor the mortgagee must be-

(i) a Hindu, Mohammedan or Buddhist, or

(ii) a member of any other race, sect, tribe, or class from time to time specified in this behalf by the State Government in the Official Gazette.

The power of sale is inherent in the mortgagee, if Conditions (1) and (2i) mentioned above are satisfied.

If the conditions in Section 69(1) (a) and Section 69(2) are complied with, mortgagee’s power of sale arises suo motu.


13.2.    Sections 69(1)(b):

The words “expressly conferred” in clauses (b) and (c) indicate that the inherent power available under clause (a) is not available under clauses (b) and (c).

To bring a case under Section 69(1) (b), it is necessary to establish that:
(i) a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed, and

(ii) the mortgagee is Government. This clause is applicable only where the mortgagee is the Government and does not extend to any other person. It applies both to the State Governments and the Central Government.

13.3.    Requirement of Section 69(1)(c):

Section 69(1)(c) requires that-

(i) a power of sale without the intervention of the court must have expressly been conferred on the mortgagee by the mortgage deed, and

(ii) the mortgaged property, or any part thereof, must, on the date of the execution of the mortgage deed, have been situate within the towns of Calcutta, Madras, Bombay or in any other town, or area, which the State Government may, by notification in the Official Gazette, specify in this behalf.

Therefore, it is observed that the three cases mentioned in clauses (a), (b) and (c) of sub-section (1) of Section 69 of the Transfer of Property Act are independent and mutually exclusive. Clause (a) applies only where the mortgage is an English mortgage and the parties do not belong to certain religions, or sects, etc. Clause (b) applies to cases where the mortgagee is the Government. Under clauses (a) and (b), it is not necessary that the property mortgaged should be situated in any particular place. It may be situated in any part of India. But an essential condition of clause (c) is that the mortgaged property must be situated within any of the towns or area, specified in the clause.

13.4.    Conditions for exercise of power:

Section 69(2)(a) and Section 69(2)(b) specify the conditions for exercise of the power. These conditions are imperative and cannot be varied by an agreement between the parties. The power to exercise the right of sale arises when

(i)         (a) notice in writing requiring payment of the principal money has been

served on the mortgagor, or on one of several mortgagors, and

(b) default has been made in payment of the principal money, or of part thereof, and

(c) such default has continued for three months after such service; or

(ii)               some interest under the mortgage amounting at least to five hundred rupees is

(a)    in arrear, and

(b) remains unpaid for three months after becoming due.

Conditions (i) and (ii) are in the alternative. It is sufficient if any one of them is fulfilled.
The power of sale under Section 69(1) can be exercised by the mortgagee only when the conditions under Section 69(2) are fulfilled.

No notice is necessary when default is made for the payment of interest. It is sufficient that interest under the mortgage amounting at least to five hundred rupees is in arrear and unpaid for three months after becoming due.

13.5.    Notice cannot be waived:

The notice required by Section 69(2) (a) is not only necessary but is imperative and even the period of three months cannot be curtailed by agreement of the parties.

13.6.    Secured creditor right to sell: Present Situation:

At present, an attempt has been made to change the situation by passing the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002), which protects the interests of the banks and other financial institutions by providing ways to recover their amounts by selling the assets of the mortgagor. Now, section 69 of the Transfer of Property Act, 1882 lost its relevance in the present scenario.

13.7.    Section 13 of the SARFAESI, Act 2002 overrides section 69 Transfer of Property Act, 1882:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, fondly called by bankers as Securitisation Act, has recently been enacted conferring powers on banks and financial institutions, if they are secured creditors, to realize the securities by sale etc., without intervention of court. The Act contains a provision overriding the provision of Section 69 of the Transfer of Property Act, 1882. Sub-section (1) of Section 13 of the said Act reads as under:

“13. (1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.”

The provisions of the Act have been made applicable exclusively to banks and financial institutions as secured creditors to enforce their security interest with a view to recovering their debts. That is, if the banks and financial institutions are secured creditors having lent against securities like mortgage of immovable property, charge, hypothecation they can take over and sell such securities after giving 60 days’ notice to the borrowers so as to adjust the loan, without resort to litigation in a competent court of law. The provisions of the Act cannot be considered to have been extended to the secured creditors in general. In a nutshell, the Banks and Financial Institutions in the matter of recovery of their debts ex curia can ignore the provisions of Section 69 of the Transfer of Property Act, 1882 whereas other creditors have to file a suit in a competent court for recovery of the loan. Otherwise, Section 69 of the Transfer of Property Act, 1882 still remains on the statute and is applicable to other creditors who are not Banks and Financial Institutions. Hence the suggestion for the amendment to make the law uniform to all creditors who have lent against mortgage securities.


14.       Effect of SARFAESI Act, 2002 on the economy / banking sector:

The enactment of SARFAESI has been a major factor in improving the health of banks by enabling the banks to reduce their NPAs to substantially lower levels.  As per the information available with the RBI, the net NPA which stood at 7.63 per cent as in year 1998 has been reduced to 1.12 per cent by March, 2009. On account of availability of dual remedy, i.e., remedy under the SARFAESI and DRT Act, the banks and financial institutions have been able to substantially resolve the NPAs.


15.       Section 138 of the Negotiable Instrument Act: Boon for Banks and Financial Institutions:

Banks and Financial Institutions lend money to the borrowers, it may may secured or unsecured, but in both the cases borrowers is liable to pay the same in the form of equated monthly installments (EMIs) for which borrower is required to give post dated cheque for each installment equal to the tenure of the loan.

Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, which were further, modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

Chapter XVII[42] of the Negotiable Instrument Act, 1881 specifically deals with the penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts.

15.1.    Section 138 runs as dishonour of cheque for insufficiency, etc., of funds in the accounts:

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for [“a term which may extend to two year”][43], or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
(b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, [“within thirty days”][44] of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
(c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability].

15.2.    Question of maintainability of criminal charge with a civil liability:
There is nothing in law to prevent the criminal courts from taking cognizance of the offence, merely because on the same facts, the person concerned might also be subjected to civil liability or because civil remedy is obtainable. Civil and criminal proceedings are co extensive and not exclusive[45].

15.3.    Shortcoming in Section 138 of Negotiable Instrument Act, 1881:

Though insertion of the penal provisions have helped to curtail the issue of cheque lightheartedly or in a playful manner or with a dishonest intention and the Banks and Financial Institutions are now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil money recovery suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for any specified reason. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/ recovery of the amount due to him for the reason of dishonoured cheque.

16.       Reserve Bank of India Guidelines for the recovery of loans:

A more comprehensive version of Guidelines was recently released on April 24, 2008. The Guidelines expressly reference the 5.5.2003 Guidelines at (ix)[46] with regard to the methods by which recovery agents collect on security interests. In addition, the April 24, 2008 Guidelines further referred paragraph 6 of the “Code of Bank’s Commitment to Customers” (BCSBI Code) pertaining to collection of dues.

RBI has expressed its concern about the number of litigations filed against the banks in the recent past for engaging recovery agents who have purportedly violated the law. In the letter accompanying its April 24th, 2008 Guidelines on Engagement of Recovery Agents, RBI stated: “In view of the rise in the number of disputes and litigations against banks for engaging recovery agents in the recent past, it is felt that the adverse publicity would result in serious reputational risk for the banking sector as a whole.” RBI has taken this issue seriously, as evidenced by the penalty that banks could face if they fail to comply with the Guidelines.

The relevant portion of the Guidelines formulated by RBI is set out as under:

Banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the above guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of dues.

Complaints received by Reserve Bank regarding violation of the above guidelines and adoption of abusive practices followed by banks’ recovery agents would be viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, Reserve Bank may consider extending the period of ban or the area of ban. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery process.

It is expected that banks would, in the normal course ensure that their employees or agents also adhere to the above guidelines during the loan recovery process.”


17.       Role of Lok Adalat’s in the recovery of bank dues:

The lok adalat is an effective mechanism for the settlement of banks dues. The lok adalat, as the word suggests, is organized for the “Lok” or for the people, thus aiming to the benefit of the masses and thereby strengthening the legal services.

The Legal Service Authority Act, 1987 gives a Lok Adalat a legal structure, conferring on it the power of the civil court, thereby formalizing the structure.

Preferring the lok adalat route to the time-consuming process of fighting civil cases in courts, banks have started queuing up at the State Legal Service Authority to recover bad loans.

On January 6, 2010 the Tamil Nadu State Legal Service Authority conducted an exclusive mega lok adalat for the Central Bank of India and helped the bank to dispose of 226 cases and recover a whopping Rs 11.2 crore on a single day. A total of 1,430 cases had originally been listed for hearing[47].

Lok adalats, the most popular of all alternative disputes redressal (ADR) mechanisms, are very effective in bringing about expeditious remedy because the settlements are done after mutual consultation and consent. The settlement is final, as neither of the parties can appeal against the lok adalat ruling. No court fee too needs to be paid for the exercise.

Pointing out that the Legal Services Authority Act had provisions to hear pre-litigation cases, T. Mathivanan, member-secretary of the TNSLSA, said it would reduce the burden on judicial forums, as in case of non-settlement of these disputes they would end up as civil suits in courts[48].

Therefore, now the time has ripe to grant the Lok Adalat a formal structure and to establish it as compulsory pre trial mechanism, as well as an optional settlement mechanism at any other stage of the trial, in the dispute.


18.       Suggestions:

18.1.    Central Registry : Need of the Hour:

The Central Government may, by notification, set up or cause to be set up  a registry to be known as Central Registry with its own seal for the purpose of registration of securitization and reconstruction of financial asset  and creation of security interest under SARFAESI Act, 2002[49].

Where the borrower is a company, there is a strong mechanism in place to verify the charges created by a company on its assets by way of searching the records of the company maintained with the concerned Registrar of Companies. However, there is no mechanism to verify such charges/encumbrances created by any individual, person, HUF, association of persons or any other entity (other than incorporated company). Therefore, it was a welcome step when the SARFAESI envisaged the establishment of a central registry for maintaining data relating to the charges created on any asset by any person.

Sections 20-26 of SARFAESI Act, 2002 relate to the concept of central registry. The Act came into force in the year 2002, but it is disappointing to note that the government has till date not notified the sections on establishing the central registry. Once the central registry is established and notified, substantial benefits will accrue to the lenders and innocent third parties. Some of these benefits are listed below:

a. Charges/encumbrances created on any asset by any unregistered entity including individuals, HUF, association of persons can be easily tracked and the information can be readily available.

b. Chances of use of false title deeds or false representations on the title of the assets can be eliminated. Accordingly, fraud on title of properties can be controlled, minimised and eliminated.

c. Due diligence on portfolio securitization can be eased out.

d. Due diligence on sale and purchase of assets/properties would become easy and transparent.

e. Gullible public and innocent buyers who are generally left in the hands of unscrupulous real estate brokers and builders can be saved and their interests protected.
f. Data on charged and encumbered properties can be made available in a transparent manner giving the industry reflection and exposure of the Lenders on such assets.

g. Once such a central registry is established the possibility of protecting the property in the nature of the title insurance on real estate properties can emerge in a big way.

As of date, the land records are not computerised in all the states and thus tracing the title to all the properties is still a complex problem. With the creation of a central registry, the lender can have a fair sense of the risk being undertaken by them to provide finance against the property, thereby making lending more easily and safely.


19.       Conclusion:

As we say above no law which deals with the recovery of the loan disbursed by the Banking and Financial Institutions are complete in itself, if we talk about the ordinary money recovery suit filed under the civil procedure in the Civil Court it will take a long to decide, and the laws which specifically deals with the recovery matters like Recovery of Debts Due to Banks and Financial Institutions Act 1993, it only competent to deals with the unsecured loan and for secured loan the remedy under it is not up to the mark and on the other hand the proceeding under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 deals specifically with the secured loan i.e. asset and there are lots of complications under the Act for obtaining possession without the intervention of the court and for taking peaceful and lawful possession the Banks and Financial Institutions will constrained to file an application for support before the Chief Metropolitan Magistrate or District Magistrate, which is itself a time taking process. So far as the provision of section 138 of Negotiable Instrument is concerned, it is competent only to put a defaulter behind the bars and do not provide any expeditious remedy for the recovery of the cheque amount. Thus, in all the aforesaid remedies are not complete in itself and dependent on others, which lead to the multiciplicity of the litigation and which directly or indirectly responsible of the pendency of cases in the Court of Law.


[1]…recovery…loans-only…/22687/United States visited on 25.08.10.

[2] bank-loans-only-throug /22687/ posted

on 07.02.2007 visited on 25.08.10.

[3] 2008 (7) SCC532

[5] (2002) 4 SCC 275.

[6] AIR 1995 Del 323.

[7] AIR 2001 Kant 176.

[8] Mardia Chemicals Ltd. v. Union of India AIR 2004 SC 2371.

[9] Section 31 of the the SARFAESI Act, 2002.

[10] Section 2(1)(z) of the SARFAESI Act, 2002.

[11] AIR 2004 SC 2371

[12] Section 2(1)(b) of the SARFAESI Act, 2002.

[13] Section 2(1)(k) of the SARFAESI Act, 2002.

[14] 2003(3) BC 626 (AII) (DB).

[15] Section 11 of the SARFAESI Act, 2002.

[16] Section 13(2) of the SARFAESI Act, 2002.

[17] Section 13(3) of the SARFAESI Act, 2002.

[18] Section 13(3A) of the SARFAESI Act, 2002.

[19] 13(4)(a) of the SARFAESI Act, 2002.

[20] 13(4)(b) of the SARFAESI Act, 2002.

[21] 13(4)(c) of the SARFAESI Act, 2002.

[22] 13(4)(d) of the SARFAESI Act, 2002.

[23] 13(6) of the SARFAESI Act, 2002.

[24] Section 13(7) of the SARFAESI Act, 2002.

[25] Section 13(8) of the SARFAESI Act, 2002.

[26] Section 13(10) of the SARFAESI Act, 2002.

[27] Section 14 of the SARFAESI Act, 2002.

[28] 2004 (1) Bank J 613 (Guj).

[29] Section 17 of the SARFAESI Act, 2002.

[30] Section 17(3) of the SARFAESI Act, 2002.

[31] Section 13(4) of the SARFAESI Act, 2002.

[32] Section 13(5) of the SARFAESI Act, 2002.

[33] Section 17A of the SARFAESI Act, 2002.

[34] 2006(4) BC 222 (AP).

[35] 2006 (133) Comp. Cas. 937 (Gau)

[36] Section 18B of the SARFAESI Act, 2002.

[37] 2004 (4) SCC 311.

[38] 2004 (2) BC 94 (DRT, Ranchi).

[39] (2008) 1 SCC 125.

[40] (2008) 7 SCC 532.

[41] (2007) 6 Mah LJ 231 (Bom)

[42] Inserted by Act 66 of 1988, sec. 4 (w.e.f. 1-4-1989).

[43] Substituted by Act 55 0f 2002, sec. 7 for “a term which may extended to one year” (w.e.f. 6-2-2003).

[44] Substituted by Act 55 of 2002, sec. 7, for “within Fifteen days” (w.e.f. 6-2-2003).

[45] Smt.Gayathri v. Smt.Clement Mary 2003 (Karnataka).

[46] “(ix) A reference is invited to (a) Circular DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003 regarding Guidelines on Fair Practices Code for Lenders (b) Circular DBOD.No.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006 regarding outsourcing of financial services and (c) Master Circular DBOD.FSD.BC.17/ 24.01.011/2007-08 dated July 2, 2007 on Credit Card Operations.

[48] Ibid.

[49] Section 20 of the SARFAESI Act, 2002.