DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW
2023-2024

PROJECT
LAW AND ECONOMICS

THE SARFAESI ACT, 2002 AND ITS ISSUES

Submitted to: Submitted by:

Dr. A.P. Singh Sudhanshu Tewari
(PROFESSOR) Enrollment No- 190101158
(LAW)

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 ACKNOWLEDGEMENT

I have taken a lot of effort into this project. However, this would not have been possible
without many individuals' kind support and help. I would like to express my sincere thanks to
all of them.

I express my deep gratitude towards my teacher for the subject Dr. A. P. Singh, for giving
me his exemplary guidance, monitoring and constant encouragement throughout the project.

My thanks and appreciation also go to my colleague in developing the project and the people
who willingly helped me with their abilities.

Sudhanshu Tewari

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 TABLE OF CONTENT

INTRODUCTION......................................................................................................................4

SARFAESI ACT, 2002 VIS-A-VIS NON-PERFORMING ASSETS.......................................5

1. WHAT IS A NON-PERFORMING ASSET?.................................................................5

2. SARFAESI ACT............................................................................................................5

CRITICAL ISSUES UNDER SARFAESI ACT, 2002..............................................................6

1. NPA CLASSIFICATION & SETTLEMENT OF ISSUES AT AN EARLY STAGE

ITSELF...........................................................................................................................7

2. POWERS OF DRT.........................................................................................................8

3. SALE OF ASSETS UNDER THE SARFAESI ACT, 2002.........................................10

4. HIGH COURT’S JURISDICTION IN A PROCEEDING...........................................11

5. CIVIL COURT’S JURISDICTION IN A PROCEEDING..........................................12

CONCLUSION........................................................................................................................14

BIBLIOGRAPHY....................................................................................................................15

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 INTRODUCTION

The Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest (SARFAESI) Act, 2002 is a significant legislation in India's financial regulatory
framework, aimed at addressing non-performing assets (NPAs) in the banking sector. Enacted
to empower banks and financial institutions to tackle the rising problem of bad loans, the
SARFAESI Act provides them with the authority to enforce security interests in the event of
loan default by borrowers.

This legislation enables banks to initiate proceedings for the recovery of outstanding loans
without the intervention of the court, thereby expediting the recovery process and reducing
the burden on the judiciary. Through provisions for asset reconstruction and securitization,
the Act aims to enhance the efficiency and effectiveness of the debt recovery process.

However, the SARFAESI Act has also been a subject of debate, with concerns raised
regarding its potential misuse and implications for borrowers' rights. Critics argue that the Act
may disproportionately favor lenders over borrowers and lack adequate safeguards to prevent
abuse of power by financial institutions.

In this project, we will delve into the various issues associated with SARFAESI Act and their
implications.

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 SARFAESI ACT, 2002 VIS-A-VIS NON-PERFORMING ASSETS

1. WHAT IS A NON-PERFORMING ASSET?

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank. A “non-performing asset” was defined as a credit facility in respect of
which the interest and/or installment of Principal has remained “past due” for a specific
period of time. The specific period was reduced in a phased manner.

2. SARFAESI ACT

Under this act secured creditors (banks or financial institutions) have many rights for
enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of
financial assistance makes any default in repayment of loan or any installment and his
account is classified as Non-Performing Asset by the secured creditor, then secured creditor
may require before expiry of period of limitation by written notice to the borrower for
repayment of due in full within 60 days by clearly stating amount due and intention for
enforcement. Where he does not discharge dues in full within 60 days, then without
intervention of any Court or tribunal; the Secured creditor may take possession (including
sale, lease, assignment) of secured asset, or take over management of business of borrower or
appoint manager for secured asset or without taking any of these action may also proceed
against guarantor or sell the pledged asset, if any.

The law does not apply to unsecured loans, loans below ₹100,000 or where remaining debt is
below 20% of the original principal. This law allowed the creation of asset reconstruction
companies (ARC) and allowed banks to sell their non-performing assets to ARCs. Banks are
allowed to take possession of collateral property and sell it without the permission of a court.

In Mardia Chemicals Ltd. v. ICICI1 Bank, on 8 April 2004, the Supreme Court of India
declared the SARFAESI Act to be constitutionally valid. The Court said that a borrower may
appeal against the lender in the debt recovery tribunal, without having to deposit 75% of the
amount of the debt. If the tribunal does not stay the order, the lender may sell the assets.

1
(2004) 4 SCC 311.

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 CRITICAL ISSUES UNDER SARFAESI ACT, 2002

It is always welcome to enable the Banks to recover their dues using the provisions of the
SARFAESI Act, 2002. It is known that it is very difficult for the Banks to approach the Civil
Court asking for a decree and getting that decree executed. With the intention of enabling the
Banks to reduce their NPAs through faster recovery of dues, ‘The Recovery of Debts Due to
Banks and Financial Institutions Act, 1993’ was enacted. Despite constituting ‘Debt Recovery
Tribunals’ under the RDDBI Act, 1993 and providing special procedure to be followed before
the Tribunal, Banks could not reduce their NPAs as expected and it has led the legislature to
enact ‘The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002’. It is all appreciable as the Banks deal with the public money and
public interest is obviously involved in reducing the Banks’ NPA Accounts.

However, no one in this country should be denied of an effective remedy and the criticism is
that the provisions of SARFAESI Act, 2002 are being misused by the Banks at times and it is
draconian. The issue went to the Supreme Court and the constitutional validity of SARFAESI
Act, 2002 was upheld, however, the judiciary was very much cautious of the interests of the
borrowers and providing them an effective remedy. From then, the judiciary in this country
has made every effort to ensure that the object of the SARFAESI Act, 2002 is not diluted and
at the same time, the interests of the borrowers are also protected. Lot of confusion was there
initially as to how certain provisions of SARFAESI Act, 2002 are to be interpreted; however,
many issues are settled now with judiciary taking consistent stand on many issues.

We cannot simply brush aside the concerns of the borrowers and the interest of the borrowers
in the property mortgaged with the Bank. Though right to property is not a fundamental right,
the Supreme Court has highlighted the significance of right to property as it is a
Constitutional Right and the relevant observation of the Supreme Court in Karnataka State
Financial Corporation Vs. N. Narasimahaiah2, is as follows: -

"40. Right to property, although no longer a fundamental right, is still a constitutional

right. It is also human right. In the absence of any provision either expressly or by
necessary implication, depriving a person therefrom, the Court shall not construe a
provision leaning in favour of such deprivation."

2
(2008) 5 SCC 176.

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 "In a case where a Court has to weigh between a right of recovery and protection of a
right, it would also lean in favour of the person who is going to be deprived
therefrom. It would not be the other way round."

In-spite of the clarifications and the efforts of the judiciary in providing guidance as to how
the provisions of SARFAESI Act, 2002 are to be interpreted and followed, many still believe
that certain issues are still to be addressed under SARFAESI Act, 2002. Some of the critical
issues under the SARFAESI Act, 2002 are dealt with hereunder.

1. NPA CLASSIFICATION & SETTLEMENT OF ISSUES AT AN EARLY STAGE

ITSELF

Many borrowers feel that they are being harassed by the Bank officials unreasonably and
using the provisions of the SARFAESI Act, 2002. They claim that they are not ‘willful
defaulters’ and even if there is some kind of default, they are willing to correct the same and
honor the commitments agreed upon. While in some cases, the Bank Officials rightly show
some kind of interest in helping the borrowers within the legal framework, in some cases, the
Bank Officials act unreasonably and invoke the provisions of SARFAESI Act, 2002 by
classifying the account as ‘Non-performing Asset’ even if there is a possibility of regularizing
the loan account.

Obviously, the Bank should follow the guidelines issued by the Reserve Bank of India in
classifying any loan account as ‘Non-performing Asset’. But it is a question of interpretation
largely and as to how the Bank Officials want to use the guidelines. Normally, the issue of
classification of account as ‘Non-performing Asset’ is not dealt with by the Tribunal, or the
Courts and they tend to support the classification of any loan account as NPA if there is a
default in payments as agreed. But the guidelines issued by the Reserve Bank of India with
regard to Asset Classification are not one-sided and it all depends upon interpretation of those
guidelines in respect of a particular ‘loan account’ or borrower.

Dealing with the subject, the High Court of Andhra Pradesh in M/s. Sri Srinivasa Rice and
Floor Mill Vs. State Bank of India3 was pleased to observe as follows:

“There is, as considered earlier in the judgment, no statutory format, express or by

necessary implication, that requires the respondent bank to follow a particular or
formal procedure or requires a formal declaration as a condition precedent to
classification of debt as NPA. From the scheme of the Act in general and the
provisions of Sec.13 (2) in particular the conclusion is compelling that the legislature
3
2007 (4) ALT 317: 2007 (4) ALD 649.

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 has consecrated the power, authority and discretion (to classify a debt as a NPA) to
the secured creditor within the generic guidelines to be ascertained from the
definition of a non performing asset [Sec.2(o)].

A wide margin of discretion is available to the respondent bank as the secured

creditor, within the legislative presents of the Act, to assess and classify a debt but
within the legislative framework. This Court is not constituted an appellate authority
over the bank’s exercise of discretion in this area. The respondent bank, as
legislatively recognized is an institution having the requisite expertise to form a
commercial judgment on known principles of banking practices and procedures
fertilized by R.B.I directions and guidelines to assess and classify a debt as NPA.
From the wealth of material pleaded in the counter-affidavit the bank had assessed
the debt as non-performing asset. On facts, the petitioners have miserably failed to
establish that such assessment by the bank is perverse or irrational to a degree
warranting oversight and correction in judicial review.”

2. POWERS OF DRT

Section 17 of the SARFAESI Act, 2002 provides a right of appeal against the action initiated
by the Bank under the provisions of SARFAESI Act, 2002. The borrower or any one
aggrieved can challenge the possession notice issued under section 13(4) 4 and there is a time-
limit prescribed for preferring an appeal. However, as the Courts have rightly made it clear
that the borrower is entitled to question all measures initiated by the Bank pursuant to the
possession notice under section 13(4) and with this interpretation, there is no much relevance
to the time-limit prescribed to prefer an appeal though it will be in the interests of the
borrower to prefer an appeal as early as possible if there is a genuine grievance with the
Bank.

While the rights of the borrowers or the persons aggrieved to prefer an appeal under section
17 of the SARFAESI Act, 2002 is almost settled, the issue of powers of Debt Recovery
Tribunal under section 17 of the Act are still debated. From the stage of maintaining that ‘the
DRT is supposed to only look into the procedural issues’, with the interpretation of Courts,
the scope of powers of DRT under section 17 of SARFAESI Act, 2002 is significantly
expanded though certain issues still require consideration.

Emphasizing that the Debt Recovery Tribunal is empowered to set-aside a sale conducted
under the provisions of the SARFAESI Act, 2002, the Hon’ble Supreme Court of India in
Indian Overseas Bank v Ashok Saw Mill5 held:
4
SARFAESI Act 2002, s. 13(4).
5
(2009) 8 SCC 366.

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 “23. 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. The consequences of
the authority vested in DRT under Sub-Section (3) of Section 17 necessarily implies
that the DRT is entitled to question the action taken by the secured creditor and the
transactions entered into by virtue of Section 13(4) of the Act. The Legislature by
including Sub-Section (3) in Section 17 has gone to the extent of vesting the DRT with
authority to even set aside a transaction including sale and to restore possession to
the borrower in appropriate cases.”

Emphasizing that the Debt Recovery Tribunal can look into the issue of claims and counter-
claims under section 17, the Madras High Court in Misons Leather Ltd. Vs. Canara Bank6
held:

“In a given case, the claim of the Bank/Financial Institutions may be barred by
limitation or there may be cases, where the adjustment of the amount paid is not
reflected in the notice or the calculation of interest may not be in accordance with the
contract between the parties. Needless to say that all such grounds, which render the
action of the Bank/Financial Institutions illegal can be raised in the proceedings
under Section 17 of the Act before the Debt Recovery Tribunal.”

Dealing with the issue straight away, the Hon’ble Calcutta High Court earlier in Star Textiles
and Industries Ltd Vs. Union of India7 , observed:

“(14.) THE legislature having conferred power on the Debts Recovery tribunal to
decide as to whether measure(s) taken by the secured creditor in terms of Section
13(4) of the Act is/are in accordance with the provisions of the Act or not, it
necessarily has to decide whether pre-conditions for issuance of notice under Section
13(2) existed or not. That would involve a determination as to whether there has been
default on the part of the borrower to repay the secured debt or not and further, as to
whether classification of the account as non-performing asset has been made in
accordance with the directions or guidelines as referred to in Section 2 (o) of the Act
or not. If the Debts Recovery tribunal is satisfied that recourse has been taken to
measures specified in section 13(4) of the Act not in accordance with the provisions
contained in sections 13 (2) read with 2 (o) of the Act, it has the authority to declare
the action of the secured creditor as invalid. At the same time, the Debts Recovery
tribunal may in a given situation find no fault and uphold the action of the secured
creditor. Also, in the exercise of power conferred by Section 17 of the act, the Debts
Recovery Tribunal may uphold partially the action of the secured creditor by
pronouncing that amount "x" is not the correct computation of liability, but it is "x -

6
2007 (4) MLJ 245.
7
2008 (3) WBLR 385

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 y" which is the liability. That would amount to determination of the exact amount of
debt due and payable by the borrower.”

3. SALE OF ASSETS UNDER THE SARFAESI ACT, 2002

Sale of Assets by the Bank under the provisions of SARFAESI Act, 2002 is often criticized
by the borrowers. In some cases, the auction process is hurriedly completed, and it would be
extremely difficult for the borrowers to get the transaction set-aside though the DRT is
empowered to do so under section 17. It is the responsibility of the Bank to ensure that they
get the maximum possible price for the property in Public Auction as they are the trustees of
the property and as the balance sale consideration, after adjustments, goes to the borrower.
There is lot of complication in this process, and it is very difficult for the borrowers at times
to fight with the Banks and it has something to do with the issue of lack of proper
understanding of procedures and law under SARFAESI Act, 2002.

Not only while auctioning the properties under SARFAESI Act, 2002, the Bank exercise
enormous amount of discretion when many properties are available for auction and the
disposal of a property chosen by the borrower clears the debt. Even from the point of view of
the bidder or purchaser, there can be issues. There may be cases rights the bidder or the
purchaser paid the entire sale consideration and litigation coming to Courts leading to non-
conferment of complete ownership right. If the delay between the payment of sale
consideration and actual conferment of clear title is more, the bidder or purchaser is also in
trouble as he will only get a minimum interest over his investment if the Sale is finally set-
aside, and the Bank is asked to repay the Sale Consideration to the auction-purchaser.

Dealing with the rights of the borrower in getting maximum possible price to the property in
a public auction conducted by the Bank and the vis a vis responsibility of the Banks, the
Hon’ble Madras High Court in K. Raamaselvam & Others Vs. Indian Overseas Bank8, was
pleased to observe as follows:

“For example, if the secured creditor, on the basis of the relevant materials, comes to
a conclusion that the highest bid offered, even though higher than the reserve price,
does not reflect the true market value and there has been any collusion among the
bidders, the secured creditor in its discretion may refuse to confirm such highest bid
notwithstanding the fact that the highest bid is more than the upset price. This is
because the secured creditor is not only interested to realise its debt, but also
expected to act as a trustee on behalf of the borrower so that the highest possible
8
AIR 2010 Mad 93.

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 amount can be generated and surplus if any can be refunded to the borrower. The first
proviso in no uncertain terms makes it clear that no sale can be confirmed by the
authorised officer, if the amount offered is less than the reserve price specified under
the Rule 8(5). However, the subsequent proviso gives discretion to the authorised
officer to confirm such sale even if the bid is less than the reserve price, provided the
borrower and the secured creditor agree that the sale may be effected at such price
which is not above the reserve price. This is obviously so because the property
belongs to the borrower and as security for the secured creditor and both of them
would be obviously interested to see that the property is sold at a price higher than
the reserve price. However, if both of them agree that the property can be sold, even it
has not fetched a price more than the reserve price; the authorised officer in its
discretion may confirm such auction.”

4. HIGH COURT’S JURISDICTION IN A PROCEEDING

Though High Courts used to entertain writ petitions under Article 226 of Constitution of India
challenging the notice under section 13(2) of SARFAESI Act even initially, there was a
considerable amount of restraint, and the emphasis was always to ensure that the borrower
raises all his issues under section 17 of the Act by preferring an Appeal. The jurisdiction
under Article 226, 227 and Article 32 of Constitution of India are untouchable, and the Courts
can only take a decision as to when to exercise such a jurisdiction or not. It is laudable that
the High Courts have not proceeded in diluting the provisions of the SARFAESI Act, 2002
and the Courts have strengthened the process in public interest and in the interests of the
Bank.

However, considering the effectiveness of remedy available before the Debt Recovery
Tribunal and clear arbitrariness in dealing with the borrowers under SARFAESI Act, 2002,
many feel that there is no wrong if the High Court entertains Writ Petitions under Article 226
and as the High Court will also pass reasoned order as, now a days, it is not taking much time
to get a Writ Petition disposed of. Again, the Courts understand the need of early disposal of
Writ Petitions in SARFAESI matters and great caution is exercised in this regard as I feel.

Many believe that the borrowers are unnecessarily made to approach the Debt Recovery
Tribunal where the process is slow for the borrowers and where the borrowers are made to
deposit substantial amount of outstanding due for getting any interim stay. Once the borrower
approaches the Debt Recovery Tribunal and if he is aggrieved of the proceedings of the DRT
or any order, the next remedy available for him is to file an appeal before the DRAT which is
again a very slow process and not effective. Again, if it is a challenge against the final order

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in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to deposit
substantial amount and it can even be 75%. Thus, the borrower is made to deposit the entire
money or forget his property even when his grievance is not adjudicated. Emphasizing that
ordinarily the borrower is not allowed to knock the jurisdiction of High Court under Article
226 in SARFAESI matters, the Calcutta High Court, in Annapurna v. State of West Bengal9,
was pleased to observe as follows:

“25. The overriding provision in Section 35 of the Act and the intent thereof apparent
from Section 37 thereof that provides that the Act is in addition to, and not in
derogation of, certain other regulatory and general statutes, conceives of a single
window redress before the Debts Recovery Tribunal. The jurisdiction under Article
226 of the Constitution cannot be taken away by such a statute but a grievance
capable of being redressed by the tribunal under the said Act should ordinarily not be
allowed to proceed in the High Court.”

5. CIVIL COURT’S JURISDICTION IN A PROCEEDING

There is a clear bar under section 34 of the SARFAESI Act, 2002 on Civil Courts in dealing
with SARFAESI related issues. It is also very difficult to convince a particular Civil Court
that it has jurisdiction to entertain a particular suit against the Bank irrespective of Bank
referring to the provisions of SARFAESI Act. The Civil Court’s jurisdiction is not
completely barred and in fact cannot be barred even in cases where the Bank has invoked the
provisions of SARFAESI Act, 2002. If the DRT is not clearly empowered to deal with certain
issues raised by the borrower or to be raised by the borrower or the aggrieved person, the
borrower or the aggrieved can certainly approach Civil Court and it is settled. But, when a
borrower is entitled to approach the Civil Court depending upon the facts of that particular
case, then, it is certain that it is not easy to convince a Civil Court that it has jurisdiction to
entertain a particular suit against the Bank when the Bank has invoked the provisions of
SARFAESI Act, 2002. If the Civil Court is convinced of entertaining a particular suit against
the Bank, then, obviously, there can be an injunction against the Bank in proceeding under
the provisions of SARFAESI Act and there is nothing to worry on this as only very few
negligible cases qualify to be maintained before a Civil Court. There is nothing to worry for
the Banks too with regard to Civil Court’s jurisdiction and they are entitled to immediately
seek redresses under Article 227 if they feel that the Civil Court is exercising the jurisdiction
which is not vested.

9
AIR 2009 Cal 236.

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There can really be genuine cases which can be and should be decided by the Civil Court.
However, with some borrowers trying to stall the SARFAESI proceedings by filing a suit in
Civil Court and High Courts coming heavily, it is often felt that the borrower has no remedy
before a Civil Court if the Bank invokes the provisions of SARFAESI Act once. It is a
misconception, and a Civil Suit before a Civil Court against the Bank is maintainable in
appropriate cases irrespective of whether the Bank has invoked the provisions of SARFAESI
Act or not.

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 CONCLUSION

In conclusion, the analysis of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002, reveals its significant impact on the
Indian financial landscape. Introduced to address the mounting issue of non-performing
assets (NPAs) and streamline the process of asset recovery, the SARFAESI Act empowers
financial institutions with enhanced tools for the speedy resolution of bad loans.

Through a detailed examination, it becomes evident that the SARFAESI Act has brought
about a paradigm shift in the approach towards debt recovery by providing creditors with the
authority to take possession of collateral and sell it without the intervention of the court. This
has not only expedited the recovery process but also acted as a deterrent against loan
defaulters.

However, the Act has faced criticism regarding its implications on borrower rights and due
process. The balance between the interests of lenders and borrowers remains a subject of
debate, necessitating continuous review and refinement of the legislation.

Despite its shortcomings, the SARFAESI Act has undeniably bolstered the confidence of
financial institutions, improved asset quality, and contributed to the overall health of the
banking sector. Moving forward, it is imperative to address the challenges and ensure that the
Act evolves in line with the dynamic financial landscape, fostering a conducive environment
for sustainable economic growth.

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 BIBLIOGRAPHY

LEGISLATION:
1. The Recovery of Debts Due To Banks And Financial Institutions Act, 1993
2. Securitization And Reconstruction of Financial Assets And Enforcement Of Security
Interest Act, 2002

BOOKS:
1. ML Tannan, Tannan’s Banking Law, Student Edition (1st Edn, Lexis Nexis 2015).
2. Xcess Board, Action Under the SARFAESI Act - A Short Commentary & The Law
(Xcess Infostore Pvt Ltd 2013).

ONLINE SOURCES:

1. SCC Online
2. Taxmann.Com

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