Introduction:
In a nutshell, the purpose of this act is to protect the bank or any financial institution from any wrongful loss by the borrower. The Securities and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) came in to force on 17th December 2002. The core of the objective is to empower the lending institution to recover all the debts under special provisions without getting stuck under the compliance of the law.
The SARFAESI Act specifically encourages the banks and financial institution to take appropriate instant action within a limited time frame by holding prominence to auction any such immovable property whether commercial, residential pledged with the lender to recover from borrowers. This act is meant for recovery dues so that banks or financial institution does not have to spend on legal expenses the things which belong rightfully to them. Before this Act took effect, financial institutions had to take recourse to civil suits in the courts to recover their dues, which is a lengthy and time-consuming process.
When borrowers[1] makes default or delay in any payment of dues where the lender can auction the collateral property held by them, bank after giving notice under section 13(2)[2] is at the discretion of getting due from the borrower accordingly. sweeping powers to recover its dues from the borrower. After giving a notice period of 60 days the lender can take possession of the pledged assets of the borrower with absolute rights over it and can appoint any such receiver or person to manage the premises/assets or under some circumstances, the appointed authority can collect the debt from the debtors of the borrower. The most fascinating aspect of this law is a speedy trial without wastage of time during the entire course of recovery, if the same situation has been brought before the civil code it might lead to disruption in the overall business.
This law focused on optimising the use of secured/collateral property to prevent Banks From creating NPA’s (Non-Performing Assets) count. In Layman’s term, NPA means any debt which has become irrecoverable or bad and the borrower is longer interested in repaying the debts. Now the question arises before this Law is whether what kind of debt can be enforced by the bank/Financial Institution? Essentially only secured debts can be enforced under SARFAESI Act it is considered one of the major drawbacks because unsecured creditors are beyond the reach and scope of this Law.
Initially, the definition of Banks included Nationalised banks and financial Institution except for Cooperative Banks. Later, the Hon’ble Court[3] stated that even though cooperative banks are within the MSCS Act with this regards Legislations has authority to implement any such notification as to when required[4], the court observed that cooperative banks also come under the Banking Regulation Act 1949 registered under the legislation of State[5], on 28.01.2003 vide notification issued and brought cooperative banks under section 2 (1) (c) of the Act.
The government include the cooperative banks vide amendment in the definition of banks entitled to enforce it in the year 2013. Petitions were filed before the Hon’ble Supreme Court questioning the authority and power to amend the SARFAESI Act by the Parliament, the supreme court ruled out invoking SARFAESI Act on Cooperative banks on 05.05.2020[6]. now the delay in recovery of dues was completely avoided in the field of Banking. The cooperative banks have a far wider approach to areas wherein no other banks have ever reached. Currently, there are 1544 cooperative banks in an urban area and 96248 in rural areas with the potential to maintain cash flow in the system. For a speedy recovery and smooth functioning of the bank with size being this huge, loans are critical.
The Act has tools of significant importance for the management of asset banks and Financial Institution namely 1. Securitization 2. Reconstruction 3. Security Interest Reinforcement.
Securitization: It refers to the process of converting loans and other assets into marketable securities to potential investors. In simple terms collateral assets of the borrower and empower to utilise for acquiring financial assets, fundraising etc.
Asset Reconstruction: When any NPA’s arise the process of converting them into performing asset is termed as Asset reconstruction. Such reconstruction must be made out in accordance with the RBI regulations and SARFAESI Act.
Security Interest Enforcement: When any borrower defaults in payment of the debt, bank or financial institution approached the surety, borrower later can enforce by issuing notice under the Act along with the recovery proceeding to recover the debt from the collateral.
Historical Background
Financial institutions have been working for a long time to provide financial aid to the people seeking financial assistance. The core purpose of banking was deposits and lending to its account holder in that particular bank. As the complexity in business grew bigger and broader, the banking system went with various schemes of their own as well. Even today the bank’s major source of income is considered to be borrowings.
Whenever a bank lends a sum of money to any person, collateral of the same value must be kept with the bank in the case where debt goes bad, the bank can sell off the collateral to recover their unpaid dues. However, the recovery of debt wasn’t that simple because having collateral does not give the absolute right to the banks to sell it off. Initially, there were no laws and bank used to act as per their desire, later on, laws came into existence protecting banks and customers both by the following due process of legal procedure. Few such laws which were used earlier are as follows:
1. Presidency Town Insolvency Act, 1909
The court was given the power to decide the insolvency proceedings with the object of taking cognizance against the defaulter within a time frame. The court within its insolvency jurisdiction may vary the order, rescinds or review appeals. This law had applicability only in the presidency town such a Calcutta, Bombay etc.
2. Code of Civil Procedure, 1908
The introduction of proper procedural code held the objective of uniformity throughout the country by following the one procedure in all the civil courts having civil jurisdiction in the country. Code act as the general law for the civil disputes and it does not contradict or involve with any special laws.
3. The Provincial Insolvency Act, 1920
This law is somewhat identical with Presidency insolvency code 1909, one of the essential differences was applicability to tr the suit. This Act is applicable through the entire county whereas the presidency act was applicable only in the presidency courts such as Bombay or madras.
4. Sick Industrial Companies Act, 1985 (Special Provision)
The purpose of this act was to check companies who are sick, any industry with net worth erosion and losses accumulated to its net worth would be considered as Sick the law was precise to define sick industries but it majorly focused on the erosion of wealth rather cash flow which in return caused serious issues as the company no longer serves the purpose of insolvency[7].
5. The Recovery of debts due to banks and financial Institution Act, 1993
Under this Act, Debt Recovery Tribunal and Debt Recovery Appellate Tribunal was established with the approval of Tiwari committee, it provided a better method of disposing of cases. Within the time-bound method, it still lacked few facete to deal with still lengthy procedure to cope up with. One of the drawbacks was, no recovery can be initiated below Ten lakhs Rupees. This act specifically empowered tribunal to arrest, appoint a receiver for managing the property and attachment of property for sale[8].
6. SARFAESI Act, 2002
After century-long methods of recovery, it was then a law a came into existence with speedy trial and recovery rates provided aided support in banking recovery rate with prompt debtors turnover.
Rights of Institution
Banks as an institution must always act in good faith, this act is a weapon to them which aid them in the time of need. Section 13 of the act gives the right to act upon the defaulter by sending notice and section 14 of the act empowers banks to acquire possession of the collateral property by the order of magistrate court.
Once the order to possession of the property is in force, banks can acquire that property with or without force by any means possible. Section 15 defines the control of management, there are times when the collateral needs maintenance at that instance lender is bestowed with the right to appoint a receiver to keep the property working and intact. In the case of a company, the right to appoint a director to wind up the company. Section 16 clearly prohibits the rights of the director to compensation for the loss of office.
Rights of Borrower
Rights of only secured borrower held validity under this act who can protect their interest. section 17 gives the right to the borrowers to go for appeal in case of being aggrieved by section 14 and section 13 (4) can file an appeal by making an application in Debt Recovery tribunal providing a valid reason for not initiating action against the borrower. In the case where the borrower is having jurisdiction in the state of Jammu and Kashmir then such person can file an appeal under section 17A to any district court.
Section 18 provides for the appeal to Appellate tribunal when either of the party is not satisfied with the order under section 17 and in case of 17A appeal can be brought before High court under section 18B. there are times when the bank goes out of the way which in turn causes damages or loss not in connection with debts or possession under section 19 borrower can claim compensation for the same. These are the few provisions under which borrowers are protected from any harsh decisions of the court.
Limitations
Like any other law, the SARFAESI Act lacks certain ground reality too. There are times when a borrower acquire property from such debt and now the bank holds that property with them as collateral, in this case, if the borrower leases or let out the property to a tenant, lessee then in such case any harsh action under 14 of the Act would cause grave issues to the third party residing in that property.
In one of the case, High Court of Bombay observed that borrower unable to pay the debt and he let out that property to someone on leave and license basis for a period of 5 years at a very heavy deposit, now the financial institution acquired right under section 14, being aggrieved by the notice the licensee approached the tribunal to seek recovery of its Security deposit as a secured creditor but it was not considered by the tribunal. Later on, through Writ petition, the petitioner on the ground of equity requested the court to make her one of the secured creditors as she holds the vested interest in that property. Court ordered that no such action must be taken against the licensee and in case of an auction, a specific point must be mentioned about the licensee in that property[9].
Defaulters
RBI vide its master circular defined who will be considered as “Wilful Defaulter”[10], proceedings without notice can be issued under the SARFAESI Act. A wilful defaulter is a borrower who intentionally and Deliberately defaults despite having sufficient funds and net worth. Any person who Misrepresents, falsifies accounts, the transaction of fraudulent in nature, wrongful disposal of assets, siphoning off funds or any such activity which leads debts becoming bad. Once the Banks classify the defaulter as wilful then in such case, they can surpass the provisions of the SARFAESI Act and initiate the recovery through auction.
In such circumstances, bank after valuation of the collateral must give notice of 30 days to clear all debts including interest if the borrower did not complete that in within time limit then the bank can Sell off collateral Property. However, in most cases the procedure must be followed, the exceptions are meant for exceptional circumstances when conditions are breached by the defaulter. It is clearly mentioned that 30 days’ notice is compulsorily required when the bank acts without following these guidelines the borrower can enforce compensation as well.
Tribunals
The establishment of Tribunals for adjudication and recovery of debts due to Banks and Financial Institutions, for the matters connected therewith or incidental thereto. The Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs) was established under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993 with the sole objective of providing adjudication and recovery of debts due to Banks and Financial Institution. Currently, there are 39 Debts Recovery Tribunals (DRTs) and 5 Debts Recovery Appellate Tribunals (DRATs) functioning across India.
Conclusion
There has been hardly any consistency in insolvency regime, mostly it rises or falls rarely providing something new to the law. With the option of One-Stop solution, it can appropriately say that the SARFAESI Act has played a great role in the recovery of debts in a country where laws are in Enigma. It followed speedy procedure with due diligence acting as supporting pillars to the Banks and Financial Institution in the existing era.
The Act more precisely is a piece of uniform machinery covering the bright side of the recovery and bad debts which used to end up in irrecoverable receivables. In the last century various came into existence but failed to maintains its spirit till the end and soon those flames were out, but this Act since the inception acted effectively with the positive outcome farsightedness of the provisions guided with an effective measure. Furthermore, all the previous laws tend to lose some connection and failed to maintain it. It shall hopefully bring much-needed regime reform.
References:
[1] Sec. 2(f)- any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance.
[2] Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under subsection (4).
[3] Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd., 2007 6 SCC 236;
Delhi Cloth & General Mills Co. Ltd. v. Union of India, 1983 4 SCC 166.
[4] Entry 45 of List I of the Seventh Schedule of the Constitution of India.
[5] Entry 32 of List II of the Seventh Schedule of the Constitution of India.
[6] Pandurang Ganpati Chaugale v. Vishwasrao Patil Murgud Sahakari Bank Ltd, 2020 SC 431.
[7] The quasi-judicial bodies under the SICA were the Board under Section 3(b) and 3(a) and Section 15 of the SICA provided for reference to the Board for Industrial and Financial Reconstruction.
[8] Modes of recovery as governed by Section 25 of the Act
[9] Rizwana Ibrahim sayyed v. Tata Capital Financial Services. Bom W.P (o)
[10] RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/14-15 dated 01.07.2015)
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