In this blogpost, Sonal Srivastava, Student, Amity Law School, Lucknow, writes about the SARFEASI Act, 2002, what is the procedure for enforcement of security interest and what is the procedure after the notice is issued.

SARFEASI Act or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 as it goes was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected thereto. The main purpose for the enforcement of the act was to enable the bank and financial institutions to realize long-term assets, manage problems of liquidity, asset liability mismatch and improve recovery by exercising powers to take possession of securities, sell them and reduce non- performing assets for adopting measures for recovery and reconstruction. So let us have a look at various recovery provisions under the Act.

Enforcement of Security Interest

• Notwithstanding anything contained in section 69 and 69 A of Transfer of Property act, 1882, any security interest created in favour of any secured creditor may be enforced even without the intervention of the court or the tribunal.
• A notice under section 13(2) of the SARFEASI ACT, 2002 has to be served upon the borrower as soon as his account turns to be NPA (Non- performing asset) known as Demand Notice.
• After serving a notice in writing under section 13(2), then the borrower shall discharge in full his liabilities to the secured creditor within 60 days from the date of notice in case he has made default in payment to the secured creditor.
• In case, the borrower does not dispense of wit his liability then the secured creditor has right to take necessary measures as mentioned in section 13(4).
• Where a demand notice has been served, and any objection is raised by the borrower, then the secured creditor should reply to the objection within 15 days else he cannot proceed further in reference to this notice.
• In case the borrower fails to discharge his liability within sixty days of serving of notice, then the secured creditor can move on with any of the following measures as laid down in section 13(4) of the Act-

1. Take possession of the secured assets
2. Take management of the business of the borrower.
3. Appoint any person, to manage the secured assets, the possession of which has been taken over by the secured creditor.

• The Chief Metropolitan Magistrate or District Magistrate’s assistance can be taken by the secured creditor in taking possession of secured debt. [Section 14].
• On takeover of management of the business of a borrower by a securitization company by a secured creditor under section 13(4) (b)the secured creditor shall publish a notice in any two leading newspapers, one to be in the vernacular[section 15].
• On being aggrieved by any of the measures of the secured creditor under section 13(4), the aggrieved party can move to the Debts Recovery Tribunal within 45 days from the date on which such measures had been taken

Procedure after Issue of Notice

Rule 4 of the Security Interest (Enforcement) Rules, 2002 states-

When the borrower fails to acknowledge the amount even after the serving of notice, then the bank or any other financial institution shall move to take any steps under section 13(4), for taking possession of the movable property, namely-

Where the secured asset is in possession of the borrower [movable property], the possession shall be taken in the presence of two witnesses after a Panchnama is drawn and signed by the witnesses as nearly as possible. After taking the possession, the Authorized Officer shall make or cause to be made an inventory of the property as nearly as possible, and a copy of such inventory shall be given to the borrower.

The authorized person shall keep the property whose possession has been taken either in his own custody or in the custody of any person authorized and who shall take care of the property as diligently as a man of ordinary prudence would under the similar circumstances.

In case the secured asset is-

1. Debt, then the authorized officer shall direct the borrower not to recover that Instead he shall ask the debtor to pay the debt to the secured creditor.
2. A share in a body corporate, then in such case the authorized officer shall direct the borrower to transfer the same to the secured creditor and shall also direct the body corporate from not transferring the share in favour of any other person.
3. Other movable property not in possession of the borrower, then the authorized officer shall direct such other person to transfer the property to secured creditor by serving demand notice

In Transcore v. Union of India[1], the issues were-

• Whether the banks or financial institutions having elected to seek their remedy in terms of DRT Act, 1993 can still invoke the SARFEASI Act for realizing the secured assets without withdrawing or abandoning the OA filed before the DRT under the DRT Act.
• Whether recourse to take possession of the secured assets of the borrower in terms of section 13(4) of the SARFEASI Act comprehends the power to take actual possession of the immovable property.

The Supreme Court held that withdrawal of application pending before DRT is not a pre- condition for taking action under SARFEASI Act.  It is for the bank or Financial Institution to exercise its discretion as to cases in which it may apply for leave and in cases where they may not apply for leave to withdraw.

The authorized officer is like a court receiver under Order XL Rule 1 CPC, 1908. He can take either symbolic possession and in appropriate cases, he can take actual possession also. There is no dichotomy between symbolic possession and physical possession.

Conclusion

Thus, SARFEASI Act was enacted with a view to recovering bad debts easily and to an extent, it has solved the purpose also. The recovery actions under SARFEASI Act need to be dealt with utmost carefulness and sincerity by the banks, and the rules and procedures are to be strictly followed else a small mistake in regard to the manner of issuance of notice, etc can be a strong defense for the other party.

[1] (2007) 135 Company Cases