RBI NOTIFICATION

RBI/2007-2008/296
DBOD.No.Leg.BC.75 /09.07.005/2007-08

Taking possession of property mortgaged / hypothecated to banks

In a recent case which came up before the Honorable Supreme Court, the Honorable Court
observed that we are governed by rule of law in the country and the recovery of loans or seizure
of vehicles could be done only through legal means. In this connection it may be mentioned that
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002 framed
thereunder have laid down well defined procedures not only for enforcing security interest but
also for auctioning the movable and immovable property after enforcing the security interest. It
is, therefore, desirable that banks rely only on legal remedies available under the relevant statutes
while enforcing security interest without intervention of the Courts.

(xiii) Where banks have incorporated a re-possession clause in the contract with the borrower
and rely on such re-possession clause for enforcing their rights, they should ensure that the re-
possession clause is legally valid, complies with the provisions of the Indian Contract Act in
letter and spirit, and ensure that such repossession clause is clearly brought to the notice of the
borrower at the time of execution of the contract. The terms and conditions of the contract should
be strictly in terms of the Recovery Policy and should contain provisions regarding:

(a) notice period before taking possession (b) circumstances under which the notice period can
be waived (c) the procedure for taking possession of the security (d) a provision regarding final
chance to be given to the borrower for repayment of loan before the sale / auction of the property
(e) the procedure for giving repossession to the borrower and (f) the procedure for sale / auction
of the property.

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Standard Chartered Bank vs . V . Noble Kumar and Ors . ( 22 . 08 . 2013 - SC )1

There are three methods for the secured creditor to take possession of the secured assets;

(i) where the secured creditor gives the requisite notice under rule 8(1) 2 and where he
does not meet with any resistance, the authorised officer will proceed to take steps as
stipulated under rule 8(2) onwards to take possession and thereafter for sale of the
secured assets to realise the amounts that are claimed by the secured creditor
(ii) (ii) where the secured creditor meets with resistance from the borrower after the
notice under rule 8(1) is given he will take recourse to the mechanism provided under
section 14 of the Act viz. making application to the Magistrate who will scrutinize the
application as provided in section 14, and then if satisfied, appoint an officer
subordinate to him as provided under section 14 (1)(A) to take possession of the
assets and documents and after the possession is taken the assets and documents will
be forwarded to the secured creditor
(iii) third, where the secured creditor approaches the Magistrate concerned directly under
section 14 of the Act, where the Magistrate will thereafter scrutinize the application
as provided in section 14, and then if satisfied, authorise a subordinate officer to take
possession of the assets and documents and forwards them to the secured creditor as
under clause (ii) - Contention that such a construction would deprive the borrower of
a remedy under section 17 is rooted in a misconception of the scope of section 17 -
Provision of "appeal" under section 17[14] is available to the borrower against any
measure taken under section 13(4) - Taking possession of the secured asset is only
one of the measures that can be taken by the secured creditor - In any of the three

1
Para 37
2
8. Sale of immovable secured assets- (1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken
possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the
possession notice on the outer door or at such conspicuous place of the property. (2) 13[The possession notice as referred to in sub-rule (1) shall
also be published, as soon as possible but in any case not later than seven days from the date of taking possession, in two leading newspaper] one
in vernacular language having sufficient circulation in that locality, by the authorised officer. (3) In the event of possession of immovable
property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or
appointed by him, who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar
circumstances, take of such property. (4) The authorised officer shall take steps for preservation and protection of secured assets and insure them,
if necessary, till they are sold or otherwise disposed off. (5) Before effecting sale of the immovable property referred to in sub-rule (1) of rule 9,
the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve
price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:- (a) by obtaining
quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or (b) by inviting tenders from
the public; (c) by holding public auction; or (d) by private treaty. (6) the authorised officer shall serve to the borrower a notice of thirty days for
sale of the immovable secured assets, under sub-rule (5): Provided that if the sale of such secured asset is being effected by either inviting tenders
from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in vernacular
language having sufficient circulation in the locality by setting out the terms of sale, which shall include, - (a) the description of the immovable
property to be sold, including the details of the encumbrances known to the secured creditor; (b) the secured debt for recovery of which the
property is to be sold; (c) reserve price, below which the property may not be sold; (d) time and place of public auction or the time after which
sale by any other mode shall be completed; (e) depositing earnest money as may stipulated by the secured creditor; (f) any other thing which the
authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. (7) Every notice of sale
shall be affixed on a conspicuous part of the immovable property and may, if the authorised officer deems it fit, put on the website of the secured
creditor on the Internet. (8) Sale by any methods.

Source: - http://gurubrs.net/images/RBI_pdfs/Security_Interest_Enforcement_Rules.pdf

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 situations, after the possession is handed over to the secured creditor, the subsequent
specified provisions of rule 8 concerning the preservation, valuation and sale of the
secured assets, and other subsequent rules from the Security Interest (Enforcement)
rules, 2002, would apply.

Transcore
Vs.
Union of India (UOI) and Anr.

Section 13(6) inter alia provides that any transfer of secured asset after taking possession or after
taking over of management of the business, under Section 13(4), by the bank/FI shall vest in the
transferee all rights in relation to the secured assets as if the transfer has been made by the owner
of such secured asset. Therefore, Section 13(6) inter alia provides that once the bank/FI takes
possession of the secured asset, then the rights, title and interest in that asset can be dealt with by
the bank/FI as if it is the owner of such an asset. In other words, the asset will vest in the bank/FI
free of an encumbrances and the secured creditor would be entitled to give a clear title to the
transferee in respect thereof.3

It also held that Rule 8 of the Security Interest (Enforcement) Rules, 2992, deals with the stage
anterior to the issuance of sale certificate and delivery of possession under Rule 9. The Hon'ble
Apex Court also held that taking of symbolic possession, is to protect the property from creating
third party rights and when such symbolic possession is taken, then as per Section 13(6) of the
Act, the rights, title and interest, on the asset, can be dealt with, by the bank/financial institution,
as if, it is the owner of such an asset. The asset would vest in the bank/financial institution free of
all encumbrances and the secured creditor would be entitled to give a clear title to the transferee
in respect thereof.4

Kalyani Sales Company and Anr. vs. Union of India (UOI) and Anr. (08.12.2005 - PHHC) :
MANU/PH/0505/20055

41. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002.

3
Transcore vs. Union of India (UOI) and Anr. (29.09.2006 - SC) : MANU/SC/8844/2006 para 26.
4
https://indiankanoon.org/doc/24904044/ para 30, V.Sambandan vs The Punjab National Bank on 4 January, 2017
5
http://www.manupatrafast.com/pers/Personalized.aspx para 41-43.

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Section 13(4). In case the borrower fails to discharge his liability in full within the period
specified in Sub-section (2), the secured creditor may take recourse to one or more of the
following measures to recover his secured debt, namely:-

(a) take possession of the secured assets of the borrower including the right to transfer by way of
lease, assignment or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset:

Provided that the right to transfer by way of lease, assignment or sale shall be exercised only
where the substantial part of the business of the borrower is held as security for the debt :

Provided further that where the management of whole of the business or part of the business is
severable, the secured creditor shall take over the management of such business of the borrower
which is relatable to the security for the debt;

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the
possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured
assets from the borrower and from whom any money is due or may become due to the borrower,
to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by
him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the
secured asset shall not be sold or transferred by the secured creditor, and no further step shall be
taken by him for transfer or sale of that secured asset.

8. Sale of immovable secured assets:- (1) Where the secured asset is an immovable property, the
authorised officer shall take or cause to be taken possession, by delivering a possession notice
prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the
possession notice on the outer door or at such conspicuous place of the property.

(2) The possession notice as referred to in Sub-rule (1) shall also be published in two leading
newspaper, one in vernacular language having sufficient circulation in that locality, by the
authorised officer.

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(3) In the event of possession of immovable property is actually taken by the authorised officer
such property shall be kept in his own custody or in the custody of any person authorised or
appointed by him, who shall take as much care of the property in his custody as a owner of
ordinary prudence would, under the similar circumstances, take of such property.

9. Time of sale, issue of sale certificate and delivery of possession etc- (1) to (5) ....

(6) On confirmation of sale by the secured creditor and if the terms of payment have been
complied with, the authorized officer exercising the power of sale shall issued a certificate of
sale of the immovable property in favour of the purchaser in the Form given in Appendix V to
these rules.

(7) Where the immovable property sold is subject to any encumbrances, the authorised officer
may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the
encumbrances and any interest due thereon together with such additional amount that may be
sufficient to meet the contingencies or further cost, expenses and interest as may be determined
by him.

(8) On such deposit of money for discharge of encumbrances, the authorised officer may issue or
cause the purchaser to issue notices to the persons interested in or entitled to the money
deposited with him and take steps to make the payment accordingly.

(9) The authorised officer shall deliver the property to the purchaser free from encumbrances
known to the secured creditor on deposit of money as specified in Sub-rule (7) above.

(10) The certificate of sale issued under Sub-rule (6) shall specifically mention that whether the
purchaser has purchased the immovable secured asset free from any encumbrances known to the
secured creditor or not.

42). The right to move an application Under Section 17 of the Act accrues to any person
aggrieved by any of the measures referred to in Sub-section (4) of Section 13 of the Act. Sub-
section (4) of Section 13 of the Act empowers the secured creditor to take possession of the
secured immovable assets of the borrower after the expiry of 60 days of notice served Under
Section 13(2) of the Act. In many cases, the bank or the financial institutions have taken actual
physical possession of the secured assets of the borrower in terms of Section 13(4) of the Act,
whereas in some cases only a symbolic possession has been taken. We are of the opinion that if
the physical possession is taken soon after the expiry of 60 days, the remedy of an application
Under Section 17 of the Act becomes illusory and meaningless. The person is dispossessed even
before adjudication of the objections by the first adjudicatory authority. On the other hand, Sub-
section (8) of Section 13 of the Act provides that the secured assets shall not be sold if the dues

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of the secured creditor together with all costs, charges and expenses are tendered to the secured
creditor at any time before the date fixed for sale or transfer. The possession is taken as per
notice appended as Appendix IV in terms of Rule 8(1) of the Security Interest (Enforcement)
Rules, 2002. The notice, in fact, cautions the borrower in particular and the public in general not
to deal with the property. Undoubtedly, the notice is in the nature of attachment and only
contemplates a symbolic possession. The actual physical possession of immovable property
under Sub-rule (3) of Rule 8 can be taken by the secured creditor of property, such as a vacant
plot or a property which is lying unattended, but where the immovable property is in actual
physical possession of any person, the person in possession cannot be dispossessed by virtue of a
notice appended as Appendix IV in terms of Rule 8(1) of the Security Interest (Enforcement)
Rules, 2002. Actual physical possession is to be delivered in terms of Rule 9(6) read with
Appendix V appended to such rules. The authorised officer is to deliver the property to the
purchaser free from encumbrances in terms of Sub-rule (9) of Rule 9 of Security Interest
(Enforcement) Rules, 2002.

43). Therefore, we have no hesitation in holding that the borrower or any other person in
possession of the immovable property cannot be physically dispossessed at the time of issuing
notice Under Section 13(4) of the Act so as to defeat the adjudication of his representation or
objection by the Debts Recovery Tribunal. The physical possession can be taken by the bank or
the financial institution by following the procedure laid down in Section 14 of the Act or after
the sale is confirmed in terms of Rule 9, particularly Sub-rule (9) of Rule 9 of Security Interest
(Enforcement) Rules, 2002.

Kathikkal Tea Plantations vs. State Bank of India6

Kathikkal Tea Plantations, represented by its Managing Director, availed loan. There was
default. Symbolic possession was taken under Section 13(4) on 11.12.2006. Bank sold the
property by a private treaty on 09.04.2007 and issued a sale certificate. Property was not
physically dispossessed and continued to hold on de facto possession, even after without
issuance of sale certificate. Therefore, bank, filed an application under Sections 14(1)(2) of the
SARFAESI Act, before the learned Chief Judicial Magistrate, Udhagamandalam, on 13.11.2008,
seeking an order take possession of the petitioner's property with the help of police aid and hand
over the same to the bank. Permission was granted. Writ petition was filed to challenging the
order of the learned Chief Judicial Magistrate, Udhagamandalam contending inter alia that once
sale certificate was issued in favour of the auction purchaser of the property, there is no secured
6
(2009) 7 MLJ 24,

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debt and that the bank loses the character of the secured creditor. Contention has been made that
the question of taking actual physical possession does not arise after the issuance of sale
certificate. After considering Transcore vs. Union of India repoted in (2008) 1 SCC 125, that
banks are entitled to take actual possession of the property in terms of Section 13 of the
SARFAESI Act, 2002 and other decisions, in Kathikkal Tea Plantations' case, a Hon'ble Division
Bench of this court, at paragraph 16 observed thus:

"The third party, who comes forward to purchase the secured asset, must have a confidence that
he would get the property at the earliest. If the transferring of the property by way of title is
going to be delayed endlessly, then the object of the Act which is meant for speedy recovery,
would be defeated in whole."7

Observations of this Court is appropriate to the case on hand, where the respondent bank has
only reiterated its right to sell the secured assets 'as is where is' or 'as is what is' condition and
made a clear declaratory statement that there was no commitment to hand over physical
possession of the property. Sale of property even before taking actual physical possession, has
been sustained in Kathikkal's case, at paragraph 21, a Hon'ble Division bench held as follows:

"21....in the absence of any specific stipulation in Section 13, the properties could be sold only
after taking physical possession and also the combined reading of Sections 13 and 14 with the
background of the object would show that it cannot be said that the secured creditor cannot take
actual physical possession after issuing sale certificates merely for the reason that the language
found in Section 14refers to the secured creditor and secured asset."

7
https://indiankanoon.org/doc/24904044/ para 49-51

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