Purpose of enactment of SARFAESI Act, 2002.
To create deterrence and sense of financial discipline. (Example of Electricity/Telephone
etc.). Similarly, Banks were given power to take possession and sale of the charged
assets.
Other process viz. Civil Suit and DRT were taking time taking process for recovery of
Banks dues so this Act came into existence.
The highlight of the Act is that intervention of Courts is not required for recovery of Banks
dues.
Constitutional Validity:
Right to Property is a Constitutional Right, though not a fundamental right.
Fundamental Rights are: i) Right to Equality ii) Right to Freedom iii) Right against
Exploitation iv) Right to Freedom of Religion v) Cultural and Educational Rights vi) Right
to Constitutional Remedies.
Article 300A. of The Constitution of India says that: Persons not to be deprived of
property save by authority of law.— No person shall be deprived of his property save by
authority of law.
As the Authroised Officers of the Banks have been given powers under SARFAESI Act to
take possession of the secured assets,the Constitutional validity of the SARFAESI Act
was challenged before various Courts stating that this Act violated their Constitutional
Right.
Finally, SC upheld the constitutional validity of the SARFAESI Act, 2002 in its landmark
judgement of Mardia Chemicals V/s Union of India.
Since vide powers have been given to Authorised Officer under SARFAESI Act, RBI
expects that the Authorised Officers/Bank would act fairly and transparently.
As a part of the move towards greater transparency, RBI directed that all the Regulated
Entities (REs) of the Reserve Bank which are secured creditors as per the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002, shall display information in respect of the borrowers whose
secured assets have been taken into possession by the REs under the Act.
RE is the entity which is subject to the regulations and oversight of the RBI.
Loan Classification and Enforceability Verification (Pre Requisite for issuing 13(2)
Notice):
Loan A/c should be classified as NPA as per the IRAC Norms.
The debt should be secured i.e. Security Interest should have been created in respect of
asset intended to be enforced under SARFAESI proceedings.
Charge should have been recorded in CERSAI. (Sec 26B(3)). Sec 26E gives priority of
payment of dues of Secured Creditor over other creditors and even government dues
Security Creation – Mortgage Type and Validity (Security Interest):
A mortgage is the transfer of an interest in specific immoveable property for the purpose
of securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which may give rise to a
pecuniary liability.
Types of Mortgage:
i) Simple Mortgage: (Registered Mortgage- Mortgagor binds personally)
ii) Mortgage by conditional sale: (Condition that sale become absolute or void or
retransfer)
iii) Usufructuary mortgage: (Where the mortgagor delivers possession and authorises
mortgagee to retain such possession until payment of the mortgage-money, and to
receive the rents and profits accruing from the property).
iv) English mortgage: (Mortgagor binds personally and transfers property with proviso
to retransfer on payment of mortgage money on certain date).
Difference between conditional and Englis mortgage: Binds personally and Repayment
on certain date).
v) Mortgage by deposit of title-deeds: Deposit of title to immoveable property in
notified town with intent to create a security thereon.
vi) Anomalous mortgage.
Compliance of state laws related to creation of equitable mortgage viz. noting of charge
etc.
Title due diligence and defects in ownership:
The Authorised Officer is under obligation to disclose any known defects in the property
being put on auction and also regarding encumbrances on the property viz. any o/s dues
or attachment by GST, IT, ED etc.
Further, if mortgage property is auctioned without due diligence and later it is discovered
that the title of the property is defective (third party rights created) or there are any
encumbrances viz. attachment of GST, IT etc., the bank would enter into unwarranted
dispute / litigation with auction purchaser.
As per Banks guidelines: On classifying an account as NPA, verification of the primary
and collateral securities is to be done to ensure that the same are not diluted/disposed
off/alienated by the obligants.
Important Judgements:
In Transcore V/s Union of India, SC clarified that Secured Creditor can proceed
simultaneously under SARFAESI Act as well as RDDB Act.
The Supreme Court in State Bank Of India v. V. Ramakrishnan held that the approval of a
resolution plan under section 31(1) of the Code does not automatically result in the
discharge of the guarantor. Instead, it may allow the creditors to continue their efforts to
recover any remaining gap or shortfall in the amount owed to them from the corporate
debtor by pursuing the guarantor.
Purpose of training
Pre Requisite for issuing 13(2) Notice:
A/c should be classified as NPA as per the IRAC Norms.
The debt should be secured i.e. Security Interest should have been created in respect of
asset intended to be enforced under SARFAESI proceedings.
Charge should have been recorded in CERSAI. (Sec 26B(3)). Sec 26E gives priority of
payment of dues of Secured Creditor over other creditors and even government dues
The a/c is not exempted u/s 31viz. o/s less than Rs. 1 Lakh, Amt due is less than 20% of
loan amount.
Security should not be exempted u/s 31 viz. Agricultural Land, Security Interest in any
Aircraft, Vessel, Pledge, Lien, Property Not Liable to be attached.
The SARFAESI action should be within limitation period. (Article 62- 12 years from when
money becomes due).
Points to be taken care while issuing 13(2) notice:
As per section 13(3) the notice u/s 13(2) should give details of the amount payable by
borrower and the secured asset to be intended to be enforced by the secured creditor in
the event of non payment of secured debts.
The total amount to be bifurcated into (i) principal amount (ii) interest amount with
applicable rate of interest and total dues as on _________. (Our SI-4 format is not
giving these bifurcations and hence needs to be modified to avoid stay in future).
The amount which is not due i.e. unexpired BG which is still not invoked, LC amount
which is yet to be paid, Bill Discounting amount due for payment etc should not be
included in outstanding amount.
The amount of agricultural loan dues or dues secured by way of pledge or lien should not
be included in the 13(2) notice.
The Date of NPA should be invariably mentioned.
As per Rule 3(1) of Security Interest (Enforcement) Rules 2002, the 13(2) notice should
be addressed to all the obligors viz. borrower, guarantors and mortgagors and should be
delivered / transmitted at the place where they reside, carry on business or work for gain
by Registered / Speed Post, Courier, Hand Delivery or by transmitting through Email,
Fax. (Rule 3(2) - Where borrower is Company the notice u/s 13(2) should be served
at its Registered Office or its Branch Office.
The proof of service should be properly held on records as onus to prove service is on
Bank. The best practice is to digitalize the records SAMARTH Portal.
If notice is not served upon any / all the obligors than it is to be served by way of pasting
on the conspicuous part of the premises where they reside, carry on business or work for
gain and also by publishing in two leading newspapers, one in vernacular and having
sufficient circulation in that society.
The Delhi High Court in Tata Sons Ltd & Ors. Vs. John Doe(s) & Ors., allowed the
Plaintiff to serve the summons on one of the Defendants through WhatsApp, text
message, and email, and to file an affidavit of service.
Common mistakes:
Notice issued to deceased person:
Before issuing notice to individuals, it should be ensured that all the obligors are alive
and available in India. (If any person is abroad then he can be served through his close
relatives or through email).
If any obligor is deceased then notice to be issued to his legal heir and in case any legal
heir is minor than through his guardian.
Notice issued to person in Jail:
If any individual is in jail than notice is to be served through Superintendent of Jail.
Notices to several obligors at same address:
Notice to each obligor should be sent separately.
Multiple 13(2) notices issued:
If 13(2) is being issued again, it should be mentioned in the notice that previous 13(2)
notice stands withdrawn.
Notice published in newspaper in vernacular language but in English.
If any representation is received u/s 13(3) (A) it has to be replied within 15 days. All the
important contentions should be dealt with and properly replied. Each and every vague
point / issues need not be replied pointwise / issue wise and general denial is sufficient.
The reply to 13(3) (A) should also be sent through same mode as 13(2) and proof of
service of reply should be held on record.
Important Judgements:
In ITC V/s Blue Coast, SC held that (1) reply by Bank to 13(3)(A) representation is
mandatory (2) Bank can initiate action under SARFAESI Act is respect of Agricultural
land if its actually not used for agriculture purpose (3) Bank is Secured Creditor even
after sale of charged assets till actual and physical possession is handed over to auction
purchaser and hence can file application u/s 14 even after sale of asset.
Whether SARFAESI action should be initiated in case where loan is given to poultry and
agricultural land is not being used for cultivation?
