Note: This blog only provides the views on the complicated issues under the Recovery Laws in India and no part of publication be reproduced or used without the expression persmission from the author and the views can not be taken as authoritative.

1/6/11

SARFAESI Act, 2002/Debt Recovery Tribunal - important points to be noted?

The object of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto and the Act came into force on 17-12-2002. The Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of Non-performing Assets of banks and financial institutions. The Act has been passed based on the recommendations of Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms and to consider the need for changes in the legal system in respect of these areas. The provisions of the Act would enable the banks and financial institutions to realise long-term assets, manage problems of liquidity and asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

For getting a decree in usual course before a Civil Court, litigant including Banks have to file the suit before a Civil Court. After service of notice, written statement and trial, the suit would be decided by passing a decree. The decree would possibly be challenged by way of appeal up to Supreme Court and it would take about 5 to 15 years to attain finality. There would be possibility of dismissal of suit on various grounds. After the decree is passed by the competent civil court, the same would be put to execution by filing E.P. The Execution Court after service of notice would bring the property of the debtor/guarantor for sale through auction. To reach this stage, lot of money, especially very long time has to be spent. The above process is dispensed with by the Special Act "SARFAESI ACT" which is meant only for the financial institutions. As per the Act, the first step would be to issue notice U/s. 13(2) by the authorised officer who is deemed to be armed with a money decree which attained finality. By the statute, the authorised officer is clothed with powers of Trial Court and Execution Court and the Code of Civil Procedure which governs the civil proceedings is no more necessary. To put it otherwise, by the Special Act, the authorized officer acts like a Civil Court clothed with powers hitherto exercised by it.

Though the provisions of the Act and the object appears to be clear, even after many judgments of Constitutional Courts from time to time, there still exist complications. The issue is about the availability of speedy and efficacious redressel to the borrower and the rights of the Bank to recover the loan amount under SARFAESI Act, 2002 are well protected till today. While no one can say that they will take loan and cheat the Bank, borrowers are really concerned at certain issues and they want an efficacious remedy to address their grievances. The various important and complicated issues are as follows:

  1. The action of the Bank under the SARFAESI Act, 2002 starts with classifying an account of the borrower as ‘NPA’ as per the guidelines issued by the Reserve Bank of India. The Courts have repeatedly held that RBI guidelines are mandatory and every Bank/Secured Creditor should follow the RBI guidelines when it comes to classifying an account of the borrower as “Non-performing Asset” (NPA). I personally feel that the Bank need not technically apply the guidelines issued by the Reserve Bank of India while classifying an account as ‘NPA’. Despite the guidelines, through an internal mechanism, if the Bank feels that the borrower can regularize the Account or the borrower is not a willful defaulter or if the Bank feels they will in no way get prejudiced by being liberal to the borrower to some extent, then, the Bank/Secured Creditor can adopt a reasonable approach in classifying an Account as ‘NPA’. Because, the object is to recover the outstanding loan amount and not to apply the guidelines technically. But, when it comes borrower, the borrower can question the action of the Bank in classifying his account as ‘NPA” if the classification is opposed to the guidelines issued by the Reserve Bank of India in this regard. The entire action of the Bank/Secured Creditor under the provisions of SARFAESI Act will get vitiated if the classification of account as ‘NPA” is illegal. When the classification as referred to is illegal, then, the borrower has two options to challenge the illegality. The borrower can approach the High Court under Article 226 of Constitution of India and the High Court can also entertain a Writ Petition from the borrower if the borrower could establish his case clearly. I don’t think that the High Court may insist on the principle of ‘Alternative Remedy’ at this state. Even otherwise, the borrower can file an Appeal to the Debt Recovery Tribunal under Section 17 of SARFAESI Act, 2002 questioning the measures initiated by the Bank under section 13 (4) of the Act and the borrower can expose as to how the Bank has not followed the RBI guidelines when it comes to classifying the Account as ‘NPA’.
  1. Once the Account is classified as ‘NPA’, then, in accordance with the procedure prescribed, the Bank will proceed to make a demand under Section13 (2) informing the borrower about the outstanding amount in the loan account and also the consequences. There is a general format to give a notice to the borrower under section 13 (2). The notice under section 13 (2) should substantially comply with the requirements and if the borrower raises a technical objection, those are not appreciated normally going by the precedents so far. Normally, borrowers may choose to remain silent after receiving a demand notice under section 13 (2), though, they can send their objections to the Bank/Secured Creditor. If the borrower sends any objections to the notice under section 13 (2) of the Act, then, the Bank should carefully consider those objections and should be fair in looking and replying to the objections. There should be a reply to the objections raised by the borrower under section 13 (3A). If the Bank chooses to ignore section 13 (3A), then, the entire action of the Bank under section 13 of the Act gets vitiated. If the Bank failed to reply to the objections raised by the borrower, then, the borrower can raise the same before the Debt Recovery Tribunal in an appeal under section 17 of the Act. This is the adjudication part and the Bank is supposed to act fairly at this stage considering the object of the special legislation ‘SARFAESI Act, 2002’.
  1. After the adjudication part is over, then, the Bank proceeds to issue a possession notice under section 13 (4) of the Act informing the borrower that they have taken symbolic possession of the property. This is not actual possession of the ‘secured asset’ or property of the borrower. The borrower gets a right to question the notice under section 13 (4) and all subsequent measures initiated by the Bank under section 17 of SARFAESI Act, 2002. In view of the clear provision in the Act about the time limit to file an appeal under section 17, the borrower is normally advised to file an appeal under section 13 (4) within the prescribed period. However, the subsequent and many judgments make it clear that all measures of the Bank under section 13 (4) of the Act can be questioned under Section 17 of the Act and as such, the cause of action to file an appeal under section 17 of the Act starts with the notice under section 13 (4) and it continues. That is why, even a challenge to the Sale Notice is entertained though the borrower is silent after receiving the notice under section 13 (4). As the object of the legislation is to help the Banks to recover the outstanding dues speedily, the Tribunals should be liberal when it comes to entertaining Appeals from the borrower under section 17 and substance can be appreciated at any stage.
  1. After the possession notice under section 13 (4) and if there is no stay of further proceedings, the Bank will proceed to take physical possession of the property under Section 14 of the Act through District Magistrate or Chief Metropolitan Magistrate etc. Before the Magistrate under Section 14 of the Act, there will not be any kind of adjudication and notice need not be given to the borrower at this stage. The Magistrate is required to look at the statutory compliance of Section 13 and if the is satisfied, he will assist the Bank in taking physical possession of the property. Normally, the Magistrate Court appoints an Advocate Commissioner to take physical possession of the property and the Bank officials too accompany him. The Magistrate Court can even grant police assistance to take physical possession of the property. If the property is under lock and key, then, the Magistrate Court permits to break-open the lock and thus, physical possession of the property is taken. If the borrower intends to question the order of the Magistrate under section 14 of the Act, he can approach the Debt Recovery Tribunal. Though it is very often seen where the borrower approaches the High Court challenging the action under section 14, the High Court may ask the borrower to approach Debt Recovery Tribunal. There are two conflicting views in this regard. On view supports that only High Court can look into the challenge to an order of the Magistrate under section 14 in view of the specific bar on other courts. Another view is that, as all measures under section 13 can be questioned under section 17 before the Tribunal, the borrower can certainly question the order of the Magistrate or the action under section 14 before the Debt Recovery Tribunal itself. It is to be noted that if there is a clear case, then the Debt Recovery Tribunal can restore the possession back to the borrowers even after taking physical possession.
  1. After taking physical possession of the property under section 14, if there is no impediment to proceed further through an order from the Tribunal or the High Court, the Bank will proceed to sell the property/secured interest and the Bank is supposed strictly comply with the provisions of the Act and the SARFAESI Rules in this regard. If the Bank violates the SARFAESI Rules while proceeding to auction the property, then, the entire auction can be set-aside on that ground alone. Even after the confirmation of sale in a public auction conducted by the Bank, the auction can be set-aside if the Debt Recovery Tribunal decides infavour of the borrower in his appeal under section 17 of the Act. From and out of the sale proceedings, the residue is to be returned to the borrower.

Though the procedure and process under SARFAESI Act, 2002 is clear and unambiguous, there is a general feeling among borrowers that the Debt Recovery Tribunal is not fair in many cases and the borrowers feel that the remedy before the Debt Recovery Tribunal is not speedy and effective. Despite the stringent provisions under SARFAESI Act, 2002, no one can undermine the rights of the borrower and his right to property. The observation of Supreme Court in this regard in Karnataka State Financial Corporation Vs. N.Narasimahaiah (2008 (5) SCC 176) is as follows:-

"40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation."

"In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round."

On the issue of functioning of Tribunals in India, the Hon’ble High Court of Calcutta, in Chanda Engineers (India) Ltd Versus U.C.O. Bank (2005 AIR(Cal) 28, 2005 (125) CC 708, was pleased to observe as follows:

“(2.) So far as the power of Article 227 is concerned, in earlier, High Courts hardly got any opportunity to apply the power of superintendence under it over the Lower Courts and Tribunals. Numbers of litigations were much less. Lower Courts had enough opportunity to go through procedural propriety. There was no mushroom growing of Tribunals. Only few traditional Tribunals were existing. Provision was normally applied where there was neither any scope of appeal nor any scope of usual revision. But since when various Tribunals either by way of Constitutional amendment or under the respective statutes are formed and also revisional jurisdictions are curtailed by way of amendment of the Code of Civil Procedure particularly in respect of the interlocutory matters, number of applications under Article 227 of the Constitution of India have been increased. Therefore, if the totality of the scenario is projected it will be seen that from when several jurisdictions of the High Courts are curtailed number of making applications under Article 227 of the Constitution of India have been increased. If this is the trend then formation of Tribunals for the sake of people is a big question for the legislature. It is high time to think whether the installation of various Tribunals is really minimizing number of disputes or increasing the number of disputes. This discussion is not academic.”

Note: the views are in brief, are my personal and a view point.

45 comments:

  1. BANK CAN CHARGE INTEREST ON NPA LOAN AND CAN CONTINUE CHARGE INTEREST AS PER EARLIER WHEN INTEREST RATE WAS HIGH. BUT WHEN LATER RBI DECLARED LOWER INTEREST FOR ANY LOAN, BANK CAN IGNORE THE LATEST DIRECTION OF RBI ON INTEREST ON NPA ACCOUNT?
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    ReplyDelete
    Replies
    1. RoI as per Demand Notice will prevail . RBI changes in ROI applies to standard Loan accounts and in case of NPA accounts ROI as per demand notice u/s 13 (2 ) prevails

      Delete
  2. sir mene bank of india se sarfaesi act 2002 ke tehet ek property li thi.kiya us property par hum business loan nahi le sakte hai...

    ReplyDelete
    Replies
    1. Yes , you can apply for LAP or business and offer this property as security provided you have got sale deed executed in your favour and applicable stamp duty is paid for the transfer deed

      Delete
  3. SIR WE ARE IN THE BUSINESS OF TRADING OF MACHINERY. WE HAD APPROACHED THE BANK WITH A REQUEST FOR OD/CC FACILITY WHEREIN LOOKING AT OUR MACHINERY BUSINESS WE HAVE CLEARLY STATED THAT THE PURPOSE WAS BUYING AND SELLING. THE BANK OFFICIALS GOT THE DOCUMENTS SIGNED BY US WITHOUT EXPLAINING CLEARLY THAT WE WILL NOT BE ABLE TO SELL MACHINES. ALSO THEY NEVER TOOK ANY INVOICE OF THE MACHINES AT THE TIME OF CREATING THE FACILITY. HOWEVER THE BANK CAME UP WITH DOCUMENTS GRANTING US THE CC FACILITY AND HAVE HYPHOTICATED THE STOCK AND THE IMMOVABLE PROPERTY GIVEN AS SECURITY AND HAVE NOW BEING ASKING US THAT WE CANNOT SELL THE MACHINES IN OUR STOCK AS THEY ARE HYPOTHYCATED WHICH RESULT IN STOPPING OF OUR BUSINESS AND INEVITABLE CLOSURE OF OUR BUSINESS AND RESULTS IN NO EARNING. CAN WE SUE THE BANK FOR THIS AND UNDER WHAT GROUNDS WE CAN DO AND RECOVER OUR DAMAGES

    ReplyDelete
    Replies
    1. It is rightly quoted, however it depends upon the merits of the case which could help you in filing the suit. Moreover machineries utilized as stock requires documentary evidence to fight the case. Go through the sanction letter, terms n conditions thereon and then revert. Adv Amit Mahajan 9839742173

      Delete
    2. banks sanction terms never stops you doing business. you could have continued trading business ensuring that sale proceeds are credited in the account . even book debts are also hypothecated provided you mention bank account number in your invoice directing buyer to credit bank cc a/c

      Delete
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  12. Hi,

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  13. my father is co borrower in loan which is secured loan and colletreal givenby 3rd person my father has no income .pls advise what bank DRT will do case is with DRT

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  16. SIR OUR ACCOUNT AFYTER TURNING NPA AND ISSUANCE OF 13(4) THE BANK HAS TAKEN PHYSICAL POSSESSION WITHOUT ANY COURT ORDERS UNDER SECTION 14 CAN THEY DO IT HOW CAN IT BE REVOKED

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  18. Sir,
    Is there here any provision in thd act to settle the loan by borrower after confirmation of sale by the bank?.
    Thank Yog

    ReplyDelete
  19. Sir,
    Is there here any provision in thd act to settle the loan by borrower after confirmation of sale by the bank?.
    Thank Yog

    ReplyDelete
  20. SIR,
    Can we chalenge of drt order ? and chalenge the order so we shall deposite of 10%amount of drt order ? is that right so pls..reply

    ReplyDelete
  21. Good evening Sir I am Yogendra Vishwas Kalyankar from Maharashtra Ratnagiri Ganapatipule
    Dear sir,
    I wanted to know that if the bank has right to take charg on hypothicted vehicle and sell it under SARFAESI Act 2002. Please reply

    ReplyDelete
  22. Good evening Sir I am Yogendra Vishwas Kalyankar from Maharashtra Ratnagiri Ganapatipule
    Dear sir,
    I wanted to know that if the bank has right to take charg on hypothicted vehicle and sell it under SARFAESI Act 2002. Please reply

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  23. Hello Sir,

    I have a loan in ICICI Bank. Actually I have transferred loan Bank of India to ICICI Bank and took Top up loan in 2014. In this case, the loan divided in two section.1. Bank Transfer Loan and 2. Top up loan. I pay EMI of two loan but not on date of EMI. It's unregular based. I pay as my adjustment of payment. Even sometime I missed to pay two or three months of EMI. Sometimes Bank threats me to take symbolic possession. I have read somewhere that Bank can take symbolic possession if repayment is due more than six months. I know, my home is unsafe now. I just want to know that When bank take symbolic possession and what should I do for saving my home?

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  25. Hello Sir,

    We are a set of 40 owners in an apartment. Recently we got to know that the our Land has been mortaged by the Land owner 4 years back. And in the Land EC the land is appearing in the name of the bank. 3 flats were already registered before the date of registering the land in the name of the Bank. We also got to know that he has even renewed his loan in 2015 after all flats were registered. We spoke to land owner and he says our builder has done and JDA and GPA to build the flats, but he still owes him a huge amount and he will not release the papers from the bank until he gets his full payment from the builder. The builder on the other hand is not responding to us and also facing a lot of income tax raids and has temporarily shut down his office. We are now worried that if the Land owner stops payment, the bank may approach the DRT and then we may end up losing our homes. We all have loans with reputed banks. My questions are:

    1) Will we get a notice from the bank if they approach DRT since are third party in this case?

    2) And if they do approach DRT, will we have to just vacate our flats or do we have a choice to clear off the land owner's dues?

    3) How can we take action against the builder and Land owner in this case?

    4) Will the Bank that provided the land owner the loan be at fault since the land was mortgaged after the registration of flats began?

    5) Since we have all documents like Sale deed, khata etc in our name do we not possess absolute right over the UDS of the land?

    ReplyDelete
  26. You may visit website directorspersonalguarantee.com for more details related to Debts Recovery Tribunal. This page contains information related to Debts Recovery Tribunal, Bank Recovery public policy and the full choice of legal issues.

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  27. Sir
    We have a loan with Tata capital.its a mortgage of a joint property(me and my dad).Bcoz of financial constraints we are nt able to pay EMI.w want to sell property and close the loan.We hv identified purchaser as well.
    But my Daddy is missing since last 6 months we hv registered fir as well.Now that bank is applying undue pressure on us how can we register the property without my dad??kindly suggest

    ReplyDelete
  28. What if acm is not cooperating in the physical possession of the property since 6 months,as informed Bank.

    ReplyDelete
  29. how to calculate interest to file suit in DRT

    ReplyDelete
  30. Sir
    Notice was issued to me under section 13(2) and is it mandatory to issue 13(4) also to take action against the borrower ?

    ReplyDelete
  31. This comment has been removed by the author.

    ReplyDelete

  32. Dear Sir/ Madam,

    Please help as stuck in tangle and if not found proper channel than would be homeless by 26/12/2017

    Old builder : From 2006 till 2015
    Purchased Flat : Flat no 1403 and registered on 2014
    Joint Venture : Alta Sadguru construction 2013-2015
    Flat no 103 : Given to us thru in person notary document for staying till my 1403 is ready in 2012
    Flat no 103 : registered by Bharat Joshi / Mrs Joshi thru power of attorney on his son in law / daughter stayin in USA in 2014
    Loan : Took loan from DHFL and now with Federal Bank and bank saying to take possession as they have defaulted.

    New Builder : Alta Construction 2016 (prop Mukesh Shah )
    (RERA registered –P51800010872)

    Society : Sham Nirmal Chs , narsing lane, malad west

    • We are family of 6 (senior citizen parents 70 + 2 daughters)
    • We had purchased 3BHK on Jan 2008 & all my savings had been channelised.
    • I had paid 72.20 lakhs in 2008 of which he gave me registration of flat worth 38.45 and balance 33.75 is pending since 2008 and I paid full payment,(Jan 2008 till Feb 2008).
    • He had promised me possession in two years & after 5 years of no moments i approached him and writing letters to take legal actions.
    • He settled with me 3bhk in same under construction building and thru one deed gave in writing than me and my family will stay here till my 14th floor is ready or will provide alternate accommodation in same building.
    • After too many meets I got my flat no 1404 registered.
    • In 2014 he got 103 flat registered on his son in law (Mr. Srujal Jayantibhai Patel residing USA & his daughter Rakhi Bharat Joshi residing USA) he registered this document thru power of attorney on name of his wife.
    • New builder came as joint venture with old builder tried to redevelop society somewhere in 2014-2015 and in 2016 old builder was removed and new builder entered into society as sole developer in 2016.
    • Society has re-entered Development agreement in 2016 and stated my flat index two page is there in there document.
    • We are leaving in 104 flat since 2012 (alternate accommodation given in lieu of my 14th floor flat) In 2014 he created loan on this flat and on 27/11/2017 Federal bank came to my premises and said he is defaulter (not paying bank installments) and you have to vacate flat in 30 days under sarferasi act.
    • Society has been removed from development rights
    • New builder in 2016 entered into agreement with society to build further.
    • We would be homeless and running after legal consultants and am confused where do I run and how do I save my family from this issue.
    • I am takeing legal opinions and some suggested
    • Approach DRT as I am in posession since 2012 and bank loan is created on 2014.
    • Approach High court for Stay on this DRT order.
    • Approach consumer court to claim late posession and damages.
    • Approach RERA to get juistice.
    • How do I approach RERA as new builder says its old builders obligation but in society Devlopment Agreement registered in 2016 society and new builder has acknowledge my Index II
    • Approach criminal court to proceed 420 and cheating case against old builder and claim damages.
    • Approach new builder to recognise me and my flat.
    • My Need to protect my family of 6 from being homeless
    • Who will provide me alternate posession ?
    • Who will give me late posession charges ?
    • Do I need to file police complain / NC / FIR ?
    • Will bank wait till my contract is over or given me 14th floor and than I will hand over posession to bank?
    • Old builder in nexus with new builder playing game with me ?
    • Again I have to shell out
    • Legal Charges range how much ?
    • Again for high court 2/3 lakh courfees + adv fees
    • Sleepless nights for assuming that if I am homeless or might be system prey
    Please help and give opportunity to connect to person at your end and highlight this story of mine and want justice and not sympathy. I will produce all necessary documents on email or once you give opportunity to meet.


    Law abiding citizen

    Kokila Ajit Dalal , 70 years
    Viral Ajit Dalal , 44 years
    9820166717
    dalalviral@yahoo.com

    ReplyDelete
  33. Good day, I gave my flat back to the bank in 2008 due to loss of income and I could not cover the Home Loan anymore. As far as I know the house was sold on auction, done and dusted. Never heard anything from the bank again. 2012 I received an email from a debt collection company claiming to collect the Home Loan residue. I just ignored it because as far as I was concerned my home loan did not exist anymore. Yesterday a very aggressive person form 'n DC company contacted me at work and said I still had a Home Loan with the bank. I tried to speak to him but he was very rude. What do I do now? Do I just keep on ignoring them? I do not have judgement against my name. South Africa

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  37. यदि बैंक मैनेजर ग्राहक के साथ धोखा धड़ी किया हो सरकारी आवास योजना की राशि को गमन कर लिया हो तो सर्व प्रथम ग्राहक को सिकायत कहां करना चहिये।
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  39. The information you provided is really interesting and helpful. Really useful to know about Debt Recovery Tribunal. As the global market is evolving rapidly and businesses are growing, so is the debt. To resolve this issue, you must outsource receivables to a debt collection agency in India in order to have proper solutions for the recovery of debt and increase cash flow in their business.

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