NPA Laden Financial Institution – A Critical Analysis of the Procedure under SARFAESI Act, 2002 and Security Interest (Enforcement) Rules, 2002

Niraj Singh | November 2017

The liquidity of finance and easy cash flow are the backbone of a healthy and growth oriented economy. One of the major challenges faced by the Financial Institutions is the issue of Non-Performing Assets (NPA), which is not only affecting the financial mobility but also the profitability of the Financial Institutions. The overgrowing NPA is crippling the viability of financing of the Financial Institutions and ultimately affecting the growth of economy.

Looking into the menace of NPA and the problem faced by the Financial Institutions Narasimham Committee-I and II and Andhyarujina Committee constituted by the Central Government for the purpose to carry out the reforms. The Committee suggested for enactment of legislation for securitization and empowering Banks/Financial Institution to take possession of the securities and to sell them without intervention of the Court. Acting on the suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 which come into force with effect from 17th December, 2002.

In order to keep pace with the requirement of the Financial Institutions/Bank and to streamline the recovery process, the said Act was further amended by the Enforcement of Security Interest and Recovery of Debts Laws and Misc. Provisions (Amdt) Act, 2016.

The provisions of the SARFAESI Act and Rules made therein enable banks and Financial Institutions to realise long term assets, manage problem of liquidity, asset liability mismatches and improve recovery of debt by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery of reconstruction without intervention of Court. The object of the Act is recovery of debts by nonadjudicatory process. The Hon’ble Supreme Court of India in the case of Mardia Chemicals Ltd. and Ors. vs. Union of India and Ors. reported as 2004 (4) SSC 311 upheld the validity of the Act.

The SARFAESI Act provides three alternative methods for recovery of NPAs, namely Securitization, Asset Reconstruction and Enforcement of Security Interest. Section 13 of SARFAESI Act empower Financial Institutions to enforce the security interest once the liability of the borrower has accrued and on account of the default in repayment and in the books of the Financial Institutions the account of the borrower is NPA.

Procedure for enforcement of right over immovable property on which the security interest is created-

CLASSIFICATION OF ACCOUNT AS NPA

SECTION 13(12) READ WITH RULE 2(A)

Authorization to the officer concerned

SECTION 13 (2) READ WITH RULE 2(B) & 3

Demand notice by Regd. A.D./Speed Post / Courier /Fax to borrower for enforcement of Security interest and calling upon the borrower to make the payment within 60 days.

PROVISO RULE 3 (1)

If the borrower is avoiding service than the service by affixation and also by publishing the notice in two leading newspapers one in vernacular having wide circulations.

RULE 3(4)

Where there are more than one borrower than the demand notice shall be served on each borrower.

Note: 60 days commence from the date of service of notice/publication as the case may be.

Note: In case of death of the borrower the authorized officer must ascertain the details of the legal heirs and send notice to them.

SECTION 13(3A)

If any representation is made by the borrower, the Financial Institution shall suitably adjudicate the same within 15 days.

SECTION 13(4)

Notice for taking possession of Secured Asset.

Symbolic possession of Secured Asset (Not required under law)

SECTION 14(1)

Application before the Chief Metropolitan Magistrate or District Magistrate for taking actual possession of the Secured Assets.

SECTION 14(2)

Compliance of the order by taking assistance of the Court Receiver, Police or other authorities.

RULE 8(1)

Notice in terms of Appendix IV to the Borrower and also by affixation.

Note: Possession notice should mention correct dues.

RULE 8(2)

The said notice also to be published in two leading newspapers one in vernacular language within 7 days from the date of taking possession.

RULE 8(4)

All steps to be taken for preservation and protection of the property including insurance cover.

RULE 8(5)

Valuation of property before effecting sale by an approved valuer registered under Section 34AB of Wealth Tax and approved by the Board of Director of the secured creditor.

RULE 8(6)

Serve on the borrower a notice of 30 days for sale of the immovable secured assets.

If the sale is by inviting tender or through auction a public notice is required to be published in two leading newspaper one in vernacular.

RULE 9 (1)

If no sale take place within 30 days from the date of public notice than the Financial Institution is required to serve, affix and issue public notice of sale of not less than 15 days to the borrower.

RULE 8(5)

Inviting tender/obtaining quotations/holding public auctions/private agreement for sale of immovable secured assets.

RULE 8(7)

Notice of sale and Publications to be affixed on conspicuous part of the property and put on the website of the Financial Institution.

RULE 8(8)

Sale other than public auction/tender to be on terms settled between the Secured Creditor/ Financial Institution and purposed purchaser in writing.

RULE 9(2)

Sale to be confirmed in favour of highest bidder.

No sale to be confirmed on less than reserve process. However sale at less than Reserve price can be made with the consent of Borrower

RULE 9(3) and (4)

25% of the sale price to be deposited forthwith and balance within 15 days.

RULE 9(5)

If balance is not deposited the deposit would be forfeited and the property be resold.

RULE 9(6)

Bank/FI shall issue a certificate of sale in favour of the purchaser in the form given in Appendix -V.

Despite of the speedier recovery process prescribed under the SARFAESI Act to recover the dues, the Financial Institutions are still facing lot of difficulties in exercising their right over the immovable property on which security interest in created. In the case of M.D. Frozen Foods Exports Pvt. Ltd. Vs. Hero Fincop being Civil Appeal No.15147/2017 wherein Hon’ble Supreme Court held that SARFAESI proceedings and arbitration proceedings can proceed simultaneously, Hon’ble Justice Sanjay Kishan Kaul observed in the opening paragraph of the judgment “Borrowers want to see the colour of their money in haste. The problem arises when loans have to be repaid. All kinds of techniques were and are deployed, to prolong the legal endeavours to recover the debts by lending institutions. Thus, the procedure became cumbersome and time consuming, affecting the lending activity.”

The Hon’ble Supreme Court in the case of United Bank of India Vs. Satyawati Tandon reported as (2010) 8 SCC 110 held that writ petition is not maintainable if the statutory remedy is available under the SARFAESI Act. Despite of that High Courts are still interfering in the proceedings under the Act by entertaining Writs filed by the borrower.

The DRTs are entertaining appeal under Section 17 (1) of the SARFAESI Act even before the dispossession of the borrower from the secured assets (mortgaged property). In the case of Standard Chartered Bank Vs. Noble Kumar & Ors. reported as (2013) 9 SCC 620 the Hon’ble Supreme Court observed that the borrower is always entitle to prefer “appeal” under Section 17 after the possession of the secured asset is handed over to the secured creditor. The Hon’ble DRAT, Delhi in the case of Vikaram Bakshi & Co. Vs. HDFC Ltd. & Ors. decided on 20.03.2017 also observed that the appeal under Section 17 of the Act is maintainable once the borrower lost possession of the mortgaged property. The said order of DRAT is under challenge before the Hon’ble Delhi High Court by way of Writ Petition being W.P. (C) No.2966/2017.

Section 17 of the SARFAESI Act provides for the disposal of the appeal in within 60 days (with maximum period of 4 months), the Tribunals are unable to dispose of the appeal on account of various reasons, which is encouraging the defaulter to approach the Tribunal to get the interim protection and once the interim protection is granted the defaulter are deliberately delaying the proceeding causing great prejudice to the Financial Institutions.

Very recently it has been noticed that in order to install the proceeding under SARFAESI Act, the borrower are misusing the IBC Law by activating the operational creditor (As observed by NCLT in the matter of Unigreen Global and Leo Duct Engineers).

About Author

Niraj Singh

Niraj Singh is a Partner of RNS Associates with extensive experience in litigations mainly in commercial arbitration, insurance, consumer, banking & finance and corporate fraud.