Considering ‘VALUE OF ASSET’ in SARFAESI matters?

It has become very easy in most of the cases for the Bank now to recover their dues under ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. Under the Act, the Bank classifies the loan account as ‘NPA’ as per the RBI guidelines, gives a demand notice under section 13 (2) of the Act asking the borrower/s to pay the entire outstanding, deal with the objections if any from the borrower/s under section 13 (3A), will take the symbolic possession of the property under section 13 (4), proceeds with taking the physical possession of the property with the police assistance etc. under section 14 if there is resistance in taking physical possession of the property and then, proceeds with auctioning the property in accordance with the provisions of SARFAESI Act, 2002 and connected rules. Unless the Bank is at fault at the time of sanctioning the loan and unless the Bank commits procedural irregularity, in most of the cases, Bank succeeds with its efforts to recover the dues under SARFAESI Act, 2002. There are several critical and complex issues under SARFAESI Act, 2002. There were many judgments of Courts interpreting the provisions of SARFAESI Act, 2002 and guiding the Banks in acting under the provisions of SARFAESI Act, 2002.  Despite providing a right to the borrower/s or aggrieved to approach Debt Recovery Tribunal under section 17 of the Act challenging the action initiated by the Bank under SARFAESI Act, 2002, many do feel that the remedy provided to the borrower/s under section 17 and also appeal provision to file an appeal to DRAT is not effective. There is still a big question mark at the effectiveness of the procedure being followed by the DRT and the powers of DRT. Powers of DRT are well settled now with the judgments of Supreme Court and these powers now extend to the extent of ordering re-possession and a power to look into the disputes pertaining to calculation of ‘outstanding’. While some seek for examination and cross-examination of Bank officers in a proceeding before DRT, it also to be considered that if that practice is usually followed, then, DRT can become another Civil Court. Another important fact is that there is tremendous work-pressure on the Presiding Officers (PO) of DRT & DRAT while the parties expect the Presiding Officers to listen to them in-detail. These are all real issues under SARFAESI Act, 2002.

It is settled now that the RBI guidelines governing the ‘classification of accounts’ and related treatment are mandatory.  Few basic things in the RBI guidelines related to NPA’s and its treatment as per the updated guidelines issued in RBI/2012/13/64 dated 2.7.2012 are as follows:

Identification of NPA’s:

“2.1.2 With a view to moving towards international best practices and to ensure greater transparency, '90 days' overdue” norms for identification of NPAs have been made applicable from the year ended March 31, 2004. As such, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance where:

(i)  Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan.

(ii) The account remains 'Out of order’ for a period of more than 90 days, in respect of an Overdraft / Cash Credit (OD/CC).

(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.

(iv)  In the case of direct agricultural advances as listed in Annex 1, the overdue norm specified at para 2.1.5 would be applicable. In respect of agricultural loans, other than those specified in Annex 1, identification of NPAs would be done on the same basis as non-agricultural advances.

(v) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.”

Treatment of NPA’s & record of recovery:

“2.2.1.(i) The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA.”

Few basic considerations for classification of Assets:

“3.3.1. (i) Broadly speaking, classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation of dues.

(ii) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security and existence of other factors such as, frauds committed by borrowers, it will not be prudent for the banks to classify them first as sub-standard and then as doubtful after expiry of 12 months from the date the account has become NPA. Such accounts should be straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.”

Important issues underlined in the RBI guidelines:

1.     RBI guidelines specifics as to the parameters to be applied with regard to classification of accounts and its treatment.

2.     If the record of recovery is good and if the risk of loss is less due to the value of security, then, the Bank should be cautious in classifying the account as ‘NPA’.

Apart from these guidelines, RBI issues guidelines through circulars to the Banks from time to time taking stock of many issues. Certain circulars or guidelines can be industry specific.

Consideration of ‘value of asset’:

Obviously, there can not be any risk of loss to the Bank if the value of security provided by the borrower/s is much more than the outstanding. If there are no serious complaints against a particular borrower and if he commits default and expresses his willingness to update the account and if the value of the security is intact and much more than the outstanding, then, Banks can certainly accommodate the requests from such borrowers. It is very frequently complained that the Bank is not accommodative to the borrowers even when the value of security is more and the Bank mechanically follows the RBI guidelines with regard to classification of account as ‘NPA’.   There can not be any justification as to why the Banks can not be accommodative to the temporary problems of the borrowers in remitting the dues as agreed where the value of security is much more than the outstanding.  Banks show more eagerness in disposing the asset than providing an opportunity to the borrower to regularize or to update his or her account.

Ascertainment and establishing the ‘value of asset’ can also be very difficult for the borrower.  Apart from the valuation report submitted by the borrower or obtained by the Bank while sanctioning the loan, it would be very difficult to establish the current market-value of the property while the Bank knows as to how to get the valuation reports and fix ‘reserve price’ and dispose of the property.  When the value of security provided by the borrower/s is much more than the outstanding due, then, definitely, Bank can go slow and accommodate the request of the borrower seeking time to update and regularize as ultimately Bank can realize the entire outstanding with interest, penal interest and also legal expenses.  But, when the Bank proceeds with its action under SARFAESI Act, 2002 and if the borrower challenges the action under section 17, can the DRT consider the ‘value of asset’ or ‘realisable value of asset’ for granting some relief to the borrower or the appellant is another important issue. According to me, DRT can certainly consider the ‘value of asset’ also apart from other considerations while granting or rejecting the relief sought by the borrower. It has become a practice in Debt Recovery Tribunals as many say that the Tribunals mandate the borrowers to make some deposit in order to get relief and there is a statutory provision of depositing 50% of the outstanding with the DRAT if the borrower chooses to prefer an appeal against the order of DRT. This procedure and practice makes it very clear that the object is to allow the Banks to recover their dues.  Consideration of ‘value of asset’ is more important for the borrowers as ultimately borrower suffers if the asset is sold in an ‘auction’ for a meager price. It is a known fact that there can be clear gap between the prevalent market-price of an asset and the price for which the property is sold in a ‘public auction’ conducted by the Bank under the provisions of SARFAESI Act, 2002. It is certainly the risk and responsibility of the borrowers to establish the price of property and to establish the difference between outstanding due and the market value of the property. It is infact difficult thing to do for the borrowers in many cases.

Courts now have made it very clear that even the ‘Auction Sale’ under the provisions of SARFAESI Act, 2002 can be a subject matter of an appeal under section 17 and the DRT or the High Court under Article 226 can set-aside the sale in appropriate cases. But, frequently getting the ‘Auction Sales’ set-aside under SARFAESI Act, 2002 is not a good trend and it can affect the credibility of the Bank auctions under the provisions of SARFAESI Act, 2002 and the bidders consider lot of risk factors while bidding for a property and it can result in a situation where the bidders are careful and careful in locking their deposits with the Bank. Very delicate balance is to be done on these issues while interfering with the ‘Auction Sales’ though it is also the responsibility of the bidders to do their own assessment of the issue by getting fullest possible information from the Banks and doing their own enquiries as the Bank sells the property with ‘as and where condition’.  How the DRT considers the value of asset while deciding the relief sought by the borrowers under section 17 and how the DRT or the Court looks into the objections with regard to valuation of the property is a matter for detail and no ‘hard and fast rule’ can be laid in this regard. However, keeping the interests of the borrowers and the public interest in consideration, the Act and rules provide detailed procedure to be followed in conducting ‘auctions’ and the procedure is summed-up by Madras High Court in a recent judgment of A. Varalakshmi Vs. The Chief Manager Punjab National Bank reported in CDJ 2012 MHC 3240 and the relevant portion of the judgment is as follows:

“18. Once the possession of the secured asset has been taken by virtue of the provisions of the SARFAESI Act, in terms of sub-rule (5) of Rule 8 of the Rules, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of the immovable secured asset by any of the following four methods viz., (a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or (b) by inviting tenders from the public; (c) by holding public auction; or (d) by private treaty. Sub-rule (5) of Rule 8 refers to effecting of sale of immovable property as contemplated in sub-rule (1) of Rule 9 of the Rules. Sub-rule (1) of Rule 9 provides that no sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower. Rule 9(1) refers to the proviso to sub-rule (6) of Rule 8, where it states that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers; one in vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall include (a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor; (b) the secured debt for recovery of which the property is to be sold; (c) reserve price, below which the property may not be sold; (d) time and place of public auction or the time after which sale by any other mode shall be completed; (e) depositing earnest money as may be stipulated by the secured creditor; (f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property.

19. A combined reading of the above provisions would show that in the event the authorised officer intends to sell the secured asset by inviting tenders from the public in terms of sub-rule (5)(b) of Rule 8 or by holding public auction in terms of sub-rule (5)(c) of Rule 8, he shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale as indicated earlier in terms of the proviso to sub-rule (6) of Rule 8. This provision is intended for the purpose that when the sale is to be effected by inviting tenders from the public by holding public auction, the public must be made aware of the description of the immovable property, the details of the encumbrances, the secured debt for recovery of which the property is to be sold, reserve price, time and place of public auction, deposit of earnest money and other conditions which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the secured asset. The said proviso to sub-rule (6) of Rule 8 is mandatory in the event the authorised officer intends to sell the secured asset by inviting tenders from the public by holding public auction. One more condition for such sale is that in terms of Rule 9(1), no sale of immovable property shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers by virtue of the proviso to sub-rule (6) or notice of sale is served to the borrower. To this extent, there is no dispute.

20. However, in the event the authorised officer intends to sell the secured asset by the above two methods by fixing the reserve price and if he fails to obtain a price higher than the reserve price, he shall effect the sale at such price which is consented by the borrower in terms of the second proviso to Rule 9(2) of the Rules. The authorised officer has two options. In the event the authorised officer fails to obtain a price higher than the reserve price and in the event the consent of the borrower is obtained, he can sell the secured asset at such price for which the borrower has consented by following the procedure enumerated in sub-rule (5)(b) and (c) as well as sub-rule (6) of Rule 8. The consequential question would be in the event the consent of the borrower could not be obtained, namely, when the borrower refuses to give consent, what would be the procedure to be adopted by the authorised officer? In the event no consent could be obtained, he cannot resort to sell the property either by obtaining quotations or by private treaty and has no other option except to resort to sale by public tenders or public auction. In this context, a reference also can be made to the first proviso to Rule 9(2) of the Rules providing that no sale under the rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of Rule 9. Only for that reason, the second proviso requiring the consent of the borrower has been made. This issue will be considered in point no.(3). As far as the first question is concerned, in the event the authorised officer fails to obtain a price higher than the reserve price, he cannot sell the secured asset for a lesser price than the reserve price without the consent of the borrower. The said issue came up for consideration before a Division Bench of this Court in K.Raamaselvamand others v. Indian Overseas Bank, Aminjikarai Branch and another, AIR 2010 Madras 93, where the Division Bench held as follows:-

"12....It is crystal clear from the present stand taken by the borrower that there is no consent for confirmation of such sale. As a matter of fact, the Authorised Officer has never bothered to find out from the borrower whether he was willing that the sale should be confirmed, despite the fact that the Authorised Officer had failed to obtain a price higher than the reserve price.

14. We do not think that in view of the clear language in the second proviso, such a contention can ever be countenanced. In fact, the first and second provisos contemplate the situation that if the bid amount is less than the reserve price, such a position is covered by the first proviso and if the bid amount is more than the reserve price, the situation is contemplated in the main provision. However, if the Authorized Officer fails to obtain the price higher than the reserve price, with the consent of the borrower, the sale may be confirmed only after the borrower and the secured creditor give their consent. By no stretch of imagination, it could be construed that even if the Authorised Officer fails to obtain price higher than the reserve price, he may, confirm the sale without obtaining any consent from the borrower or from the secured creditor."

What if the borrower fails to give consent?

21. Point No.(3): This question relates to a situation when the borrower refuses to give consent to the authorised officer to sell the secured asset for less than the reserve price and the authorised officer decides to sell the secured asset by private treaty. The power of the authorised officer to sell the secured asset by private treaty is beyond dispute, as it is one of the methods contemplated for sale of immovable property in terms of Rule 8(5) of the Rules. However, in the event the authorised officer decides to sell the secured asset by private treaty, such sale should be strictly in conformity with Rule 8(8) of the Rules. The said sub-rule states that “sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing”. When this rule mentions the sale by any methods other than public auction or public tender, it conveys two things, namely, in the event the sale is made through public auction or public tender in terms of Rule 8(5)(b) and (c), the provisions of sub-rules (6) and (7) of Rule 8 would be attracted. In the case of any other sale, the provisions of Rule 8(5)(a) & (d) would alone be attracted. As a consequence, a sale by private treaty must be on such terms as between the parties in writing. The word “parties” came up for consideration before a Division Bench of this Court-Madurai Bench in J.RajivSubramanian and another v. M/s Pandiyas and others, AIR 2012 Madras 12, where the Division Bench held as follows:-

“33. The first question for our consideration is as to what are the formalities to be adopted when invoking private treaty and effecting a sale on that basis. In this connection, it would be worthwhile to refer to Rule 8(5) of the Security Interest (Enforcement) Rules, 2000 which reads thus:

"5. Before effecting the sale of the immovable property referred to in sub-rule (1) of rule 9, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:

a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or

b) by inviting tenders from the public;

c) by holding public auction; or

d) by private treaty."

As per the private treaty, other than public auction or public tender, it can be settled between the parties invoking as per Rule 8(8) of the Security Interest (Enforcement) Rules, 2002. The sale of properties by private treaty is also permissible in law. The only condition is that it shall be on such terms as settled between all the parties in writing. From this, it is clear that the presence of debtor and his willingness in writing are essential.”

Note: the views expressed are my personal