This article is written Navya Chopra,BA LL.B Student at Vivekananda Institute of Professional Studies during her internship at LeDroit India
Keywords: enforcement of security interest, SARFAESI Act, asset recovery, recovery and reconstruction
ABSTRACT
Debt or asset securitization is one of the latest techniques which financial markets have been witnessing. With a view to formalize the operations of the securitization market in India and to ensure financial discipline and control in respect of the rights and obligation of the players, the legislature passed SARFAESI Act, 2002 (Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act) which overrides previous Recovery of Debts due to Banks and Financial Institution Act, 1993, which is used as an effective tool by banks for bad loans and NPAs (non-performing assets). It aims to regulate securitization and reconstruction of financial assets and enforcement of security interest. Security Interest includes any charge, pledge, or other security interest, including, but not limited to, anything similar to any of the aforementioned under the laws of any jurisdiction. The transfer of possession, ownership, or title in accordance with a security interest is the enforcement of a security interest, as explained under Section 13 of the SARFAESI Act.
INTRODUCTION
One of the key factors influencing economic growth is the credit cycle process. This procedure suffers from non-loan recovery, which results in non-performing assets. One of the contributing reasons in this respect is the lengthy and onerous legal process involved in debt collection. It was thus proposed that creditors, banks, and financial institutions be granted the authority to collect debts through the sale of securities. A committee headed by Shri T.R. Andhyarujina was established by the Indian government in this respect. In order to regulate the securitization and reconstruction of financial assets, the enforcement of security interests, and other related matters, an ordinance was enacted on June 21, 2002, in accordance with the recommendations made by the Narsimham Committee and the Andhyarujina Committee. The Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest (SARFAESI) Act, 2002, was thereby passed on December 17, 2002.
The statute allows for the security factor to be enforced without turning to civil lawsuits. The act also gave banks and other financial institutions the option of using asset reconstruction firms to quickly recover unpaid debt from defaulters and lower their non-performing assets (NPAs). The SARFAESI Act’s sections 13 and 14 give the authorised official of the financial institution the authority to sell the debtors’ property. On July 13, 2005, the RBI also released rules that would be used by banks, financial institutions (FIs), and non-banking financial companies (NBFCs) when they buy or sell non-performing financial assets from or to other banks, FIs, or NBFCs (with the exception of securitization firms and reconstruction businesses).
ENFORCEMENT OF SECURITY INTEREST
Section 13 of the SARFAESI Act talks about the enforcement of security interest. It allows any secured creditor to enforce any security interest that has been formed in their favour without the need for a court or other authority to step in, despite any provisions of Section 69 or Section 69(A) of the Transfer of Property Act of 1882.
As per Section 13 (2) of the SARFAESI Act, when a borrower who is obligated to a secured creditor under a security under a security agreement defaults on paying back a secured debt or an instalment of it, and the secured creditor classifies the borrower’s account related to that debt as a non-performing asset, the secured creditor may demand the borrower by written notice to fully discharge his obligations to the secured creditor within 60 days of the date of the notice failing.
The secured creditor may resort to one or more of the following actions to collect his secured debt if the borrower fails to fully discharge his obligation within the time frame specified in sub-section (2): by seizing the borrower’s secured assets, including the right to transfer by way of lease, assignment, or sale for the purpose of releasing the secured asset or; by assuming control of the borrower’s assets, including the authority to transfer by way of lease, assignment, or sale in exchange for releasing the secured asset or; by designating someone to oversee the secured assets whose custody the secured creditor has assumed or; by requiring at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money any money is due or may become due to the borrower, to pay the secured creditor o much of the money as is sufficient to pay the secured debt.
JUDICIAL PRONOUNCEMENTS
The case of Mardia Chemicals v. Union of India challenged the constitutionality of the SARFAESI Act and Sections 13, 15, 17, and 34 in particular were criticised for being arbitrary and unreasonable. The petitioners contended that the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (hereinafter, the RDB Act) was adequate to handle the issue brought on by NPAs and that the present act was unnecessary.
The Supreme Court highlighted that the Parliament should be given priority when evaluating whether a legislation is necessary, and it rejected any comparisons made between the RDB Act and the SARFAESI Act because the latter solely addresses the extremely particular issue of NPAs (among other differences such as the latter dealing only with secured creditors). The Court determined that Section 13 was constitutionally valid. In fact, the only reason the secured creditor is exercising his entitlement is because more time was allowed to repay after notification and the default that led to the Section 13 action may be considered a “second default.” The Supreme Court, therefore, affirmed the constitutionality of the Act notwithstanding a challenge to its constitutionality in the case of Mardia Chemicals v. Union of India, with a few minor amendments to a few clauses for the sake of the principles of equity, justice and good conscience and natural justice.
As a result of this judgement, a new section 13(3A) was added in the year 2004 that states that, if the borrower makes any representations or raises any objections after receiving the notice under sub-section (2), the secured creditor shall consider such representations or objections and, if the secured creditor determines that they are not acceptable or tenable, he shall communicate within 15 days (previously was one we). The proviso appended to section 13 (3A) prohibits the borrower from filing a claim under section 17 of the act before the Debt Recovery Tribunal based on the justification or communication made by the secured creditor, which is the important distinction.
However, as stated in M/s Transcore vs Union Of India & Anr., a secured creditor cannot use force when exercising his powers under section 13(4). Therefore, the only recourse available to a secured creditor is to apply to the Chief Metropolitan Magistrate (CMM) or the District Magistrate (DM) for assistance in taking possession of secured assets under Section 14 of the Act if the borrower refuses to allow an authorised bank officer to take possession of the property. As a result, section 14 can only be used after the secured creditor has exhausted all other options (4). Keep in mind that Section 14 does not require CMM or DM to provide the borrower a chance to speak during a hearing by giving him notice. Their responsibility is to help the secured creditor take possession of the secured asset because, in order to fulfil the intent behind the SARFESI Act, CMM or DM must first give the borrower an opportunity to leave before helping the secured creditor exercise his authority under Section 13(4) by ordering police to do so.
Prior to the Mardia Chemicals case, the act was deemed to violate the principle of Natural Justice (Audi Alteram Partem) because it did not provide a forum for the borrower to voice his objection. The case of E.P. Royappa v. State of Tamil Nadu held that the essence of natural justice is fair play in action, which is why it has gained the most recognition throughout the democratic world. It is well-established that the obligation to provide a reasonable opportunity to be heard will be implied from the nature of the function to be performed by the authority that has the authority to take punitive or damaging action, even where there is no specific provision in a statute or rules made thereunder for showing cause against action proposed to be taken against an individual, which affects that individual’s rights.
The right to an administrative hearing is a necessary condition of fundamental justice in the United States, the Court stated in the case of State of Orissa v. Dr. (Miss) Binapani Dei. The Court added that it has been established in England that fair play in action requires that a person be given the chance to be heard before any unfavourable or prejudiced action is taken against him. Therefore, the principle of natural justice is relevant to both quasi-judicial and administrative functions, and unless a legislation directly or impliedly forecloses the application of natural justice, the state’s duty to do so must be interpreted. It is true that there is a presumption in favour of an enactment’s validity and that a law cannot be declared unconstitutional, especially when it comes to fiscal and economic policies used for the benefit of the public, but before using such legislation, it would be necessary to ensure that the people who are harmed receive a fair deal from those who have been given the authority to impose drastic measures to make recovery.
According to Mardia Chemicals, M/s Transcore, and other decisions, the SARFAESI Act is designed to facilitate quick recovery of secured debts without giving a borrower the opportunity to be heard and without judicial or quasi-judicial intervention until the secured creditor takes possession of the secured asset after serving the necessary notices and responding to any objections or representations that may be made (3A).
In this regard, it is pertinent to make reference to another recent ruling by the Supreme Court in United Bank of India v. Satyawati Tondon, where the Supreme Court held that an application under Section 17(1) of the SARFAESI Act may be filed both in opposition to the possession notice issued under Section 13(4) of the SARFAESI Act and the order issued under Section 14 of the SARFAESI Act.
STEPS OF ENFORCEMENT OF SECURITY INTEREST
In accordance with Section 13(2), a notice must be sent to the borrower, co-borrowers, guarantors, or surety allowing 60 days for establishing the debt and notifying them that the secured creditor intends to act in accordance with Section 13(4) by seizing the assets. If the balance owed is not paid by the end of the 60-day grace period, the bank may seize the property and sell it to recoup the debt. Further, the borrower is free to ask any questions, and the bank is required by law to respond within seven days of receiving the request.
As a result, the Act offers a debtor the chance to request whatever information he needs from the creditor, preventing the creditors from making an arbitrary choice on the amount owing, interest claimed, etc. The creditor may send a new notification if the first one contains errors or irregularities. However, the borrower shall not have any right to prefer an application to the DRT based on the reasons thus disclosed or the secured creditor’s probable course of action at the time of disclosure of reasons.
To be noted is that only a “Authorised Officer” of the bank, who must be a Scale IV or above official, is authorised to issue a notification under the Act. For the public’s awareness, the bank is required to post a possession notice after taking possession in two publications. This publication must be published seven days after obtaining control of the property. Within 45 days of the bank gaining possession, the borrower or mortgagee may file a complaint with DRT. Any party who is unhappy with the DRT’s judgement may appeal it to the DRAT once more within the allotted 30-day period.
Finally, the property whose possession has been taken may only be sold following appraisal by a Government-approved valuer and publication of the sale notice in two newspapers—one of which must be in the vernacular—giving 30 days’ notice. So, with extensive advertising, the property may be sold for the highest price. The secured creditor may seek the DRT to reclaim the remaining debt if any excess cash generated is insufficient to pay the obligations.
CONCLUSION
Most people believe that the SARFAESI Act makes asset recovery and rebuilding easier. Since independence, the government has taken a number of ad hoc actions to combat illness in the financial sector, most notably by nationalizing banks and implementing relief programmes. The Government has implemented a number of methods throughout time to purge the banking system of the NPA threat and revive a thriving financial and banking industry. Under the authority granted by the SARFAESI Act, 2002, the Reserve Bank of India provided guidelines and directives relating to registration, measures of ARCs, functions of the firm, prudential standards, purchase of financial assets, and associated things.
