Recovery of Dues by Banks under SARFAESI ACT, 2002
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002 ( SARFAESI Act, 2002) has been created a new legal frame work, new concepts about security and new procedures for recovery of dues by banks and financial institutions. This Act extends to whole of India including the State of J & K. It is effective from June, 2002. The Act is applicable also to housing finance companies whose names are notified by the Central Government for such applicability. The provisions of the Act, relating to enforcement of the security interest, applies to cases in which the security interests are created for due repayment of financial assistance. The Act has presupposed a simple thing, that there is an obligation on the part of the barrowers to repay loans and if they are unable to repay, then the securities for the loans to be sold for the recovery of loans. The Act has retrospective application, i.e. it applies for loans and securities created prior to the Act coming into operation of the Act. Prior to this Act no Indian Law has defined the term Hypothecation though the hypothecation is a very common type of charge on a security for a bank’s lending. This Act clearly defines hypothecation as a charge in or upon any moveable property, existing or future, created by a borrower, in favour of a secured creditor, without delivery of possession of the movable property to such creditor as a security for financial assistance and includes charge and crystallization of such charge into fixed charge on moveable property.
Whenever any bank or financial institution grants a loan or advance or makes subscription of debentures or bonds or gives guarantee or issues letters of credit or extends other credit facility, it is called financial assistance. All the Banking companies, Nationalized Banks, the State Bank of India as well as its subsidiary Banks and co-operative Banks are within the meaning of Bank for the purpose of this Act. This definition has excluded the Regional Rural Bank, so SARFAESI Act, 2002 is not applicable to RRB. The Financial Institutions means:
A public financial institution within the meaning of the Companies Act, 2013
Any institutions specified by the Central Government under the Recovery of Debts due to Bank and Financial Institutions Act, 1993
The ‘International Finance Corporation’, established under the International Finance Corporation (Status, Immunities and Privileges ) Act, 1958
Any other institution or non-banking financial company as defined in the Reserve Bank of India Act, 1934, which the Central Government may specify as a financial institution for the purpose of this Act.
Banks and Financial institutions lend money by obtaining security, except for the category of clean loans. The security obtained is to act as a protection for the money advanced and in the case of need, the money can be realized by the sale of securities. The lender’s rights over the securities, both moveable and immovable, for realization of the amount advanced, were limited and less effective since they were required to take help of the legal system which was taking unduly long time to complete prior to the passing of the SARFAESI Act, 2002. This Act, introduced major changes in the legal frame work for the recovery of dues by laying hands on the securities. The Act is a major step in financial sector reforms. It has brought a legal framework for the following important activities in the credit market:
Securitization of financial assets,
Reconstruction of financial assets,
Recognition of any ‘interest’ created in the security for due repayment of loan as s ‘security interest’, irrespective of its form and nature but when it is not in the possession of the creditor. Power to enforce such a security for the realization of money due to banks and the financial institutes in the event of a default, without the intervention of the Courts, Enabling provisions for the setting up a central registry for the purpose of registration of transactions of securitization, reconstruction and the creation of the security interest.
Constitutional Validity of the Act:
In Mardia Chemicals vs. Union of India(2004) 21 ILD 521 SC, a three member bench of the Supreme Court has declared this Act as Constitutionally valid , except a part of the section 17(2). The section 17(2) had laid down that when the lender intends to take action of taking possession of the security asset, the borrower can file an appeal to the DRT (Debt Recovery Tribunal) only after depositing seventy-five percent of the amount claimed by the lender. The Supreme Court has declared this condition of the deposit of 75 percent of the claim amount an unreasonable, oppressive, arbitrary and violative of the Article 14 of the constitution. After the Supreme Court decision in the Mardia Case and its fall out on the very intention of the legislation giving importance for recovery and prevent long legal battles the borrowers create without any payment, the Government of India has issued a notification amending the section17(2) of the SARFAESI Act, 2002. The amendment now stipulated payment of fifty percent amount instead of seventy five percent as originally enacted. An aggrieved person has now a right to refer the matter to DRT and then to the Appellate Tribunal by depositing fifty percent of the claimed amount.
Debt Recovery Tribunal (DRT): These Tribunals were established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to deal with the cases of recovery of debts above Rs. 10 lakh due to the banks and financial institutions.
When the secured creditor takes over the management of business of a borrower , he may publish notice in a newspaper published in the English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated for appointment of director if borrower is a company or administrator to empowered to take such steps as may be necessary to take into their custody or under their control all the property, effect and actionable claims to which the borrower is entitled. Any person, including the borrower, aggrieved by any of the measures taken by the secured creditor or his authorized officer for taking possession of the security may make an application along with prescribed fees, to the DRT within forty five days from the date on which such measures are taken. There can be different prescribed fees for the borrowers’ application and the application from other than borrower. The right to file an application is provided not only to the borrower but also to any person aggrieved by the action taken by the secured creditor. The DRT has to dispose of the application, in accordance with the provisions of Recovery of Debts due to Banks and Financial Institutions Act, 1993 and the Rule made there under. The application has to be disposed as early as possible, but within sixty days. If for any reason it is not possible to so dispose the application, the Tribunal has to record the reasons for delay, but such delay should not be beyond four months from the date of filing of the application. If any such application is not disposed within four months, the aggrieved party can prefer and appeal to the Appellate Tribunal for seeking direction for the early disposal of the application. Any person aggrieved by any order by the DRT can prefer an appeal along with the prescribe fees to the Appellate Tribunal within 30days from the date of receipt of the order of the DRT.
Dr. Sailaja Petikam