SARFAESI Act & sorrows of Borrower?

There is every need for the Government to enable/assist the Banks in reducing their NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well assisted/equipped through the legal frame-work in recovering their dues. The provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002), judicial pronouncements from time to time and amendments to the SARFAESI Act, 2002 enable the Banks to recover their dues speedily. While there should be emphasis on the need and urgency of the Banks in reducing their NPAs, the rights of the borrower can never be ignored. It is to be commended that the judiciary has maintained a great balance between the rights of the Banks on the one hand and rights of the borrowers on the other hand while interpreting the provisions of SARFAESI Act, 2002. The Act talks of a right of appeal available to the borrower/guarantor/aggrieved person against the possession notice issued by the Bank under section 13 (4) of the Act. Time limit is prescribed to prefer an appeal. If the appeal provision is interpreted in stricto senso, then, the borrower has to confine himself to the issue of demand notice issued by the Bank under section 13 (2), the issue of classification of an Account as NPA based on RBI guidelines, the issue of objections raised by the Borrower, the reply given by the Bank if any etc. issues and nothing more than that. If the provisions are seen strictly, then, the Bank may not even be questioned when it fixes the reserve price and sells the property for a very low price affecting the borrower and also the Bank at times. Addressing these concerns, the judiciary has maintained that all actions initiated by the Bank under the provisions of SARFAESI Act, 2002 can be challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002. Technically, if the borrower is silent in questioning the possession notice issued by the Bank under section 13 (4) of the Act and chooses to question the Sale Notice, then, the borrower has to confine himself to the procedure followed by the Bank after the issuance of notice under section 13 (4) and the issues pertaining to Sale of Secured Asset. When the borrower questions the sale notice and did not question the notice under section 13 (4) within the prescribed period, the borrower has to explain as to why he has failed to question the notice under section 13 (4) within the prescribed period. In the absence of satisfactory explanation as to why the borrower has failed to question the possession notice under section 13 (4), his position to raise all kinds of objections to the Bank’s demand becomes untenable.

However, the system has become liberal and courts have also liberally interpreted the provisions dealing with the ‘right of appeal’ provided to the borrower and the borrower can question every action initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrower or any person aggrieved can approach the Civil Court in a very limited situation where actually there is fraud or serious dispute with regard to the title of the ‘secured asset’/property mortgaged. Though there can be no bar on the jurisdiction of High Courts under Article 226 in dealing with the grievances of the borrower against the Bank when the Bank initiates action, the High Courts do desist in being alternative to the remedy available before the DRT normally. As such, there is enough support to the Banks through legal-framework in recovering their dues from the borrowers. It is true that in the absence of a special legislation like SARFAESI Act, 2002, it would have been very difficult for the Banks in recovering their dues and reducing their NPAs. From the borrowers’ point of view, the borrowers allege that they do not have an effective remedy against the illegal action being initiated by the Bank using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT can look into all allegations while entertaining an appeal under section 17 of the Act and it includes the issue of disputes pertaining to the actual ‘debt’. Then, it is also settled that the DRT can order re-possession of the ‘secured asset’ when it is found that the Bank has illegally taken the possession of the ‘secured asset’. It is very important to look into various stages and issues when the borrower prefers an appeal under section 17 of the SARFAESI Act, 2002 and those are as follows:

1. When the borrower prefers an Appeal under section 17 against the Bank, the DRT can grant ex-parte stay of proceedings against the Bank if there is sufficient ground to that affect from the averments in the ‘Grounds of Appeal’ and also the documents produced. If there is a caveat, then, the procedure differs. Normally, the DRT orders notice to the Bank irrespective of the fact as to whether it grants stay or not in-favour of the borrower.  The DRT can also ask the borrower to make some deposit while granting stay and it is also reasonable as the borrower has to make the payments towards installments to the Bank in any case and there can be some time lapse between the demand notice issued by the Bank under section 13 (2) and the appeal.

2. The Bank files its reply pursuant to the notice ordered by the DRT and they normally justify their action and say that the action initiated by the Bank is legal and the Appeal is liable to be dismissed. The Bank also can ask for vacating the interim order and can pray for allowing the Bank to continue with the further proceedings like Sale.

3. If there is no interim order against the Bank while the Appeal is pending and the Bank is allowed to proceed with the sale proceedings, the issue gets complicated. The borrower should be allowed to raise any point and additional grounds by way of additional affidavit in the pending Appeal and there is nothing wrong in it and technicalities are to be ignored. For example, the borrower might have chosen to challenge the possession notice issued by the Bank under section 13 (4) and during the pendency of Appeal, if the Bank initiates the Sale Proceedings, the borrower should be allowed to question the Sale Proceedings in the same Appeal instead of bringing technicalities and asking the borrower to challenge the Sale proceedings separately.

4. Obviously, during the pendency of SARFAESI Appeal, if the Bank proceeds with the sale of ‘Secured Asset’, it is likely that the property may not fetch the actual market value as the bidder discounts all the possible risks associated with the bidding. If the Bank is able to raise the money and can get the entire debt recovered through the sale consideration, then, the Bank is safe and appeal under section 17 literally becomes meaningless though it is usual to see an order where DRT says that ‘sale confirmation is subject to the final disposal of Appeal’. Or DRT can allow the Bank to proceed with the sale of Secured Asset and can say that the ‘sale confirmation’ is to be stayed until further orders. Instead of doing this, the DRT can dispose of the SARFAESI Appeal itself as it can ascertain the facts so fast based on the averments in the SARFAESI Appeal, the documents filed and the reply presented by the Bank.  Once the SARFAESI Appeal is finally disposed off then, it is not easy to prefer an appeal against the final order of DRT as the borrower will have to make pre-deposit with the DRAT which can vary from 50% to 75% depending upon the discretion of the DRAT. Now, with the provision enabling the Banks/secured creditors to bid for the property when the sale is post-phoned for want of bidders, it has become much easy for the Banks to deal with the ‘secured asset’ and claim recovery.

5. The proceedings before DRT can not be compared to the proceedings before Civil Court and adjudication process before the DRT is simple and can be fast. However, it is also true that DRT requires time to look into the facts and read the documents apart from hearing the oral submissions from the Bank. Additional DRTs and DRATs can be constituted if required rather allowing the borrower to suffer and feel that the remedy before the DRT and DRAT is not effective.

6. Again, the DRT can either allow the Appeal filed by the borrower under section 17 or dismiss the same finally. If the DRT allows the Appeal filed by the borrower under section 17, then, it can order re-possession of the ‘secured asset’ if the physical possession of the ‘secured asset’ is already taken. The Appeal can be allowed or dismissed either with costs or without costs. More than this, I don’t think that the DRT can do anything else or can give any direction to the Bank. For example, the borrower may be entitled for getting his loan restructured at the given point of time pursuant to some notification from the ministry of finance or RBI and the Bank must have ignored it. Even then, the DRT can not direct the Bank to restructure the loan of the borrower while disposing off the appeal. This is where the borrower feels remediless at times. If the Bank is to be asked to do something as per law, where can the borrower go?. The borrower can give a representation to the Bank officials, can write to the superior authorities and may approach the High Court under Article 226 of Constitution of India seeking direction. However, even the High Court may direct the Banks to consider the representation and with all the might and luxury, the Bank can make the borrower to run from pillar to post. This happens in many cases though the factor of habitual litigants can not be ignored.

7. Very rarely, the Appeal filed by the borrower gets allowed and even then, the Bank will again be initiating the proceedings correcting the lacunae. For example, during the pendency of Appeal under section 17, the borrower may say that he is willing to regularize his account and abide by the loan terms and the market value of the ‘secured asset’ can be intact. In such cases, the Bank is in no way gets effected by regularizing the loan as it collects the interest and also the legal expenses for initiating the proceedings. However, the DRT can not give such a direction to the Bank though it can orally ask the Banks to consider the proposal of the borrower. Now with the recent amendments, the Secured Creditor is enabled with the right of filing ‘Caveat’ and it presents many difficulties to the borrower and it becomes now literally impossible to get an ‘ex-parte stay order’ against the Bank. And also, it has become very easy for the Banks to sell the ‘secured asset’ as there is no need of following separate procedure of Sale if the ‘Sale’ is postponed for want of bidders etc.

It is quite possible to ensure a system or practice under the provisions of SARFAESI Act, 2002 which is fair and also effective. If the ‘secured asset’ is valuable, then, there can not be any worry to the Bank at all as it can recover the dues with interest and expenses. If the ‘secured asset’ is not valuable in comparison to the dues recoverable, then, the officials of the Bank are to be blamed as to how they have sanctioned the loan in the first place.

Emphasis is always laid as to how to enable the Banks to speed-up their recovery, but, little emphasis is laid as to how the borrower feels remediless in some cases. Even while providing the best possible legal-framework enabling the Banks to recover their dues, the concerns of the borrower can certainly be addressed and it is very much possible. From the borrowers’ point of view, the following issues need to be considered.

a.     The Appeal mechanism under the provisions of SARFAESI Act, 2002 can be liberal and the borrower should be allowed to question every action initiated by the Bank under SARFAESI Act, 2002 without raising any technicalities like condonation of delay etc.

b.     It should be mandatory on the part of the Banks to mention marketability and market price/price of the ‘secured asset’ in its reply to the appeal of the borrower under section 17 among other things.

c.      There should be time-limit for the Banks in filing their reply in an appeal under section 17 of the Act and in the absence of filing the reply within the specific period, the proceedings of the Bank under SARFAESI Act against the borrower should automatically be stayed.

d.     Though there is a time-limit for disposing the Appeals under section 17 in the Act, the disposal normally takes time. If work-load in the DRTs and DRATs is the main cause for the delay, then, additional DRTs and DRATs can be constituted and so that, Appeals under section 17 and under section 18 of the Act can be disposed of as quickly as possible.

e.     The scope of powers of the presiding officer of DRT under section 17 should be expanded further and it should include giving suitable directions to the Bank from time to time keeping the need of ‘recovery of dues’ in mind.  

With the system aimed at speedy recovery and balanced heavily towards the Bank, genuine borrowers who are not willful or habitual defaulters also get affected. The borrowers feel remediless now and even if the remedy is provided, most of the borrowers feel that the remedy provided is ineffective. 

While it is important to improve the financial health of the Banks/Financial Institutions, there is no justification for a completely one-sided draconian legal system where the borrower is harassed like anything. Bank officials exercise great discretion and the Bank officials must be extremely happy with the legal provisions now governing the recovery of ‘secured loans’ under SARFAESI Act, 2002. It has become totally one-sided affair now and ordinary citizens & small businesses may feel it better to approach the private money leaders for their financial needs rather approaching Banks and Financial Institutions in this country.

I expect constitutional courts to entertain certain important issues under SARFAESI Act, 2002 in public interest rather supporting every view of the government.

Note: the views expressed are my personal.