Enforcement of Security Interest: SARFAESI Act

Introduction

In developing country financial sector has played a vital role as it has increased
the economy of the Country. Securities and debt are the latest systems which are
introduced in the financial sector. As the latest techniques are introduced, the
law should also be adapted according to the changes made in society to keep
pace. As there are a lot of defaults made by the borrowers who took a loan from
the bank, financial sector etc. and fail to return it within a given time period. For
such situation Legislation has introduced a provision under Company Act 1956
but it was time taking and having lacuna, therefore the provision was removed
from Company Act 1956 and the power was vested in the new Act given by the
Legislation i.e the Recovery of Debts Due to Banks and Financial Institutions
Act 1993 (hereinafter RDDBFI Act).

The RDDBFI Act was introduced to reduce the burden of the Court, as it is a
Special court also known as Debt Recovery Tribunal which played an important
role where they have to recover outstanding loan which is due to the bank and
financial sectors. But the Debt Recovery Tribunal was not effective as it has
drawbacks, for instance, it took cases that amounted more than Rs. 10 lakh.
Debt Recovery Tribunal was overburdened by the lots of cases as it deals with
the loan recovery cases into the bank and financial sector.

In order to overcome the above issue, the government set up a committee,

called, Narsimham Committee I & II and Andhyarujina Committee which
recommended Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002, (hereinafter SARFAESI Act) to
protect the Non-Performing Assets (hereinafter NPA) which help the bank and
financial sector to recover money from the borrower and also protect the
economy. For that, the bank and financial sector sell those secured assets to the
Asset Reconstruction Company which loan on the secured asset. This gives
benefit to the bank and other financial sectors. 

Enforcement of Security Interest

Section 13 of the SARFAESI Act is about enforcement of security interest in

case of NPA. One needs to understand NPA before starting with the
enforcement of security interest.

Non- Performing Interest:

Non-Performing Asset is defined under section 2(o) of SARFAESI Act which

states that asset or account of the borrower which is classified by the bank or
financial institution as sub-standard, doubtful or loss assets, according to the
direction or guideline, given by the Reserve Bank of India or the bank or
financial institution.

Further, RBI has released a circular in 2015 which has define NPA assets under
para 2.1 Non- Performing Assets which states that non-performing assets are
those assets which put a halt to generate income for the bank, it also includes
lease assets. Further, Para 2.1.2 of the circular states that an NPA is a loan or
advance given by the bank or financial sector to the borrower, where the interest
or the instalment remains due for a period of 90 days or more or the account
remains ‘out of order’ which means “if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power for 90 days ”.

The NPA is classified intro three assets as mention under section 2(o) of the
Act:-
1.   Substandard:- These assets are NPA for a period of 12 months or less,
which will cause the liquidation of debt and also cause economic loss to
the bank or financial institute. 
2.   Doubtful Assets:- These are the assets which come under the
substandard assets for a period of more than 12 months.
3.   Loss Assets:- These are the assets where the loss of the assets is
identified by the Bank or financial sector or RBI and which not written
off.

The 2005 Guideline released by the RBI states that bank, financial sector or
non-banking financial sector can sell or purchase NPA from any other bank
or financial sector or non-banking financial sector.

Secured asset:- section 2(zc) define secured asset which means “the
property on which security interest is created”.

Secured creditor:- is defined under section 2(zd) which state that any bank
or financial institution or group of bank or any consortium which includes
debenture trustee appointed by a bank or financial institution or
securitisation company or reconstruction company or any trustee holding
securities on behalf of the bank or financial institution, in whose favour a
security interest is created on any default of repayment by the borrower.
 
SECTION 13 OF SARFAESI ACT 2002:-
Section 13(1) of the Act states that “Notwithstanding anything contained in
section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882 ),
any security interest created in favour of any secured creditor may be
enforced, without the intervention of the court or tribunal, by such creditor in
accordance with the provisions of this Act”. Further, section 13(2) states that
if the borrower makes any default in repayment or in paying installation
which he is under a liability to pay to the secured creditor and that asset is
classified as a non-performing asset by the bank in that case the secured
creditor sends a notice to the borrower in writing for the discharge of all his
liability within 60 days and if they are not able to pay off then, in that case,
the secure creditor will exercise all his right on that asset. Once the borrower
receives the notice he cannot sell or transfer the property unless prior
permission of the secured creditor as mention under clause 13 of the Act.
The notice should mention the detail about the amount which the borrower
has to pay and the enforcement of secured creditor right on the non-
performing assets according to section 13(3) of the Act.
Further, sub-clause 4 of section 13 of the Act state that in case the borrower
fails to pay the amount or instalment then the secured creditor can take
possession or management over the assets of the borrower which also give
the right to the creditor to transfer the property through lease, assignment or
sale. They can also appoint a manager to manage the asset which is taken
over by the secured creditor, further it also mentions that any person who has
acquired any of the secured assets or have any due to the borrower can pay
the amount to the secured creditor which is sufficient to repay off the
secured debt.
According to sub-clause 5 of the given Act, it states that if anyone repays the
amount which is due by the borrower, in that case, the secured creditor give
a valid discharge of the asset as if it was paid by the borrower itself. The
transfer of property under sub-clause 4, it will also transfer the right vested
on that property to the person mention under sub-clause 4 of the Act.
Further, according to sub-clause 7, if any expense incurred by the secured
creditor because of the action brought by the borrower, all such expense is to
be recovered from him. But if the borrower pays off all the due addition to
that the expense at any time before the fixed date for the sale of the property,
in that case, the secured creditor will neither transfer nor will take any
further action to transfer the secured assets as mention under sub-clause 8 of
the Act.
In case of financing of a financial asset by more than one secured creditors
or joint financing of a financial asset by secured creditors, no secured
creditor will be entitled to exercise any or all of the rights unless the exercise
of such right is agreed upon by the secured creditors having not less than
three-fourth as mention under clause 9 of the Act. Provided that if the
company is liquidated then the amount which is received after the sale of
secured assets is distributed according to section 529A of Company Act
1956, further, in case company is wound up and the secured creditor opted
for security than in that case he can retain the sale proceeding after
deposition of workmen’s dues as mention under section 529A of Company
Act 1956. But if the workmen’s due are unascertained, then the liquidator
can make an estimated amount for workmen’s due. If the amount paid by the
secured creditor for workmen’s due is more than he is entitled to take the
excess amount from the liquidator or if the amount is less than secured
creditor is liable to pay the balance amount to the liquidator. Further, the
secured creditor furnishes an undertaking to the liquidator to pay the balance
of workmen’s due.
Besides this, if the secured creditor has not received the full amount from the
proceeds of the secured assets, the secured creditor may file an application to
the Debt Recovery Tribunal having competent jurisdiction to the balance the
amount, as mentioned under the clause 10 of the Act. According to clause 11
of the given act if there is any guarantor or if there are any pledge assets then
the secured creditor will recover their money from them before taking any
measure as mention under subsection 4 of the given act. 
 
 
 
BY:- POOJA GUPTA