REMEDIES UNDER SARFAESI

Enforcement of Security Without Court Intervention Any security interest created in favour of any secured creditor may be enforced without intervention of the court or tribunal by a secured creditor in accordance with the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (SARFAESI). This mechanism overrides sections 69 and 69A of the Transfer of Property Act, 1882, and implies that for the purpose of enforcing the rights of a mortgagee for recovery of its dues, secured by mortgage of immovable property; the mortgagee or secured creditor need not file a suit for foreclosure or sale of the mortgaged property. The mortgage can be enforced by following the procedure prescribed under SARFAESI.

• Procedure For Enforcement Of Security Without Court Intervention

SARFAESI lays down an exhaustive procedure defining the manner in which a bank or financial institution may exercise its rights against the delinquent borrower in order to enforce the security interest in the asset.

• Invocation of SARFAESI for enforcement of security is triggered by classification of the account as NPA by the banks or financial institutions, referred to as the ‘secured creditors’. As per extant Reserve Bank of India (RBI) guidelines, any amount which is due and payable by the borrower but has not been paid for more than 90 days can be classified as NPA.
• Upon classification as an NPA, the secured creditor can issue notice to borrower including the mortgagors or guarantors calling upon them to pay the entire due amount within a period of 60 days.
• If the payment is not made by the borrower in full within the stipulated 60 days time period, the secured creditor has right to take possession of the secured asset, which includes the right to transfer by way of lease, assignment or sale for releasing the secured asset. Moreover, the secured creditor can take over the management of the business of borrower where substantial part of the business of the borrower is held as security for the debt. If any financial asset has been financed by more than one secured creditor, the notice can be issued only with the consent of secured assets representing not less than three-fourth in value of the amount outstanding.

If upon issuance of notice, the borrower makes any representation against the proposed action of the secured creditor; the authorised officer of the secured creditor is required to examine the representations. Unless this exercise is done and the borrower has been suitably replied, secured creditors cannot take possession of the secured asset and management of business of the borrower.

• Any person aggrieved on account of taking over the possession of the secured asset or business of the borrower, may file an application under section 17 of SARFAESI before the concerned Debt Recovery Tribunal seeking declaration that the recourse taken by secured creditor is invalid and for restoration of possession of secured asset to the borrower.

As is evident from above, there are strong checks and balances in place to ensure that there is no abuse of powers vested in the banks or lenders.

• Effect of SARFAESI on the Banking Sector Pursuant to the availability of dual remedy, i.e., remedy under the SARFAESI in addition to the Recovery of Debts Due to Banks and Financial Institutions Act 1993 (DRT Act), the banks and other financial institutions have been able to substantially resolve their NPAs. SARFAESI has provided the banking sector with stimulus in the form of legal provisions which empower banks with more teeth to recover the assets blocked in NPAs. The statistics are revealing. As per the information furnished by the Reserve Bank of India, the net NPA which stood at 7.63 per cent in the year 1998 was reduced to 1.12 per cent by March, 2009. Further, on account of initiation of action under the SARFAESI, the banks have been able to recover a sum of Rs. 19396 crore besides recovering Rs.11249 crore through compromised proposals.