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’.

2. 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’.

3. 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.

4. 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.

5. 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.

SARFAESI Act, 2002 - order of District Magistrate under section 14 – taking physical possession of Secured Asset - complications?

As everybody knows, separate procedure is laid-down under the provisions of SARFAESI Act, 2002 enabling the Bank to deal with the objections from the borrower with regard to the demand of outstanding due and also taking physical possession of the secured asset preceding the auctioning of the property. There are many complicated and interesting areas under the provisions of SARFAESI Act, 2002 and the Debt Recovery Tribunal may have to deal with the disputes in the light of the precedents laid down by the Constitutional Courts from time to time and also by laying specific emphasis on the allegations leveled by the borrower against the Bank. The legislative intention as can be perceived from various provisions and the procedure prescribed under SARFAESI Act, 2002 can clearly be understood. From the stage of making demand, determination of the amount after considering the objections from the borrower, even the execution of the order of the Bank (logically) is simplified. The demand from the Bank under section 13 (2) of the Act or the reply sent by the Bank to the borrower in reply to the objections can be seen as a decree of a Civil Court. If it is an order of a Civil Court or a decree, then, the Civil Procedure Code prescribes a specific procedure for execution of orders or the decree. In the ordinary course, even at the stage of execution of the order or decree, the Court lays so much emphasis on the order or the decree sought to be executed and even notice is ordered to opposite party and their objections also normally heard. But, when it comes to the execution of the order of the Bank under section 13 (2) of the Act, the procedure prescribed for taking physical possession of the Secured Asset is very simple and the Bank can very easily get the assistance from the police etc. through the Metropolitan Magistrate Court or the District Court. Even without ordering notice and upon looking at the simple averments in the application by the Bank under section 14 of the SARFAESI Act, 2002, the Metropolitan Magistrate Court or the District Court will provide the needed assistance to the Bank for taking physical possession of the property. The law is very clear that the order of the Metropolitan Magistrate Court or the District Court is not appeallable and final. The borrowers are at dilemma in many cases as to how to challenge the order of the Magistrate Court and which is the proper forum to get the order of Magistrate Court set-aside when there is a bonafide dispute or a genuine grievance?

What normally happens is that when the borrower fails to get an order of stay of proceedings by the Bank under the provisions of SARFAESI Act, 2002 under section 17 or where there is no restraint from the competent forum, the Bank will proceed with taking physical possession of the property and then proceed with auctioning the same in accordance with the provisions of the Act or the rules made there-under. As such, there can be an argument that the question of approaching the DRT again challenging the order of the Magistrate Court is illogical though the DRT is vested with the powers of restoring the possession back under the provisions of SARFAESI Act, 2002. Though the provisions, the precedents and theory are very clear, there exist practical difficulties even for the genuine borrowers and who has a genuine case against the Bank. As wide powers are conferred under Article 226 and Article 227 of the Constitution of India and though nothing prevents the High Court to entertain a Writ Petition or a Revision Petition against the order passed by the Magistrate Court when the order is erroneous, the High Court normally may dispose of the Petition saying that alternative remedy is available with the DRT under section 17 of the Act. But, logically, what the DRT can do when the order of the Magistrate Court is challenged again before it where already an appeal by the borrower is pending? Again, as there can not be any procedural defect normally with the order passed by the Magistrate Court under section 14, how can the DRT set-aside that order or can the DRT say that the physical possession can not be taken or possession be restored? These are very complicated issues under the provisions of SARFAESI Act, 2002 and the adjudication and redressel to the borrower will depend upon the facts of the case. I would like to explain some two incidents in this regard as follows:

1. In a proceeding under SARFAESI Act, 2002, the Bank has approached the Chief Metropolitan Magistrate and the Court has appointed a Commissioner to inspect the property and file the report. The commissioner appointed by the Court has filed a report saying that he has inspected the property and it was under lock and key. Pursuant to the report by the Commissioner appointed by the Court, the Court has allowed the Bank to take police assistance to break-open the lock and take the physical possession of the property in accordance with law. The Police have come and the Bank Officials have forcibly thrown the residents there out and taken the physical possession of the property and the property was sealed. In this case, the grievance of the borrower is that he is residing at the property continually and at no point of time, the property was locked and he has all clear evidence to substantiate his case. The borrower/resident has approached the High Court highlighting at the entire episode and as to how he was thrown out and the case was pending before the High Court for some time and finally the Writ Petition was disposed of saying that alternative remedy is available before the DRT under section 17. When the borrower approached the DRT again pursuant to the order, the DRT is silent and the appeal is pending. The borrower was forced to run from pillar to post without any redressel or speedy redressel mechanism and in the course, he may loose his case, but, he was kept under dark with the unknown procedures etc. I have seen this issue personally and it exposes the need to get clarity on section 14 of SARFAESI Act, 2002.

2. In another case, the stay granted by the DRT was vacated and the order is challenged before the DRAT. Due to administrative reasons and work pressure and due to the procedure, the DRAT could not look at the Appeal speedily. In the mean time, the Bank has proceeded to approach the Magistrate Court under section 14 to take physical possession of the Secured Asset or the residential property. In the case referred, the borrower’s contention is that he is not the defaulter at all and he is willing to pay to the Bank as agreed. Under these circumstances, what if the Bank takes the physical possession of the property with police assistance? Had there been a procedure to give notice to the borrower under section 14 of the Act, the borrower could have explained his case to the Magistrate Court and the Magistrate Court could have acted accordingly. This is what the normal procedure for execution before the Civil Court. Even if assuming that the detailed procedure under C.P.C is time consuming, a simple procedure could have laid-down under section 14, so that, the precious rights of the borrower could have been protected.

I have just explained few complications when it comes to allowing the Bank to take physical possession of the Bank under section 14 without any notice to the borrower. These are all practical difficulties for the borrower and there can be genuine grievances though a litigant borrower should not be allowed to plead technicalities with ulterior motive.

Note: the views expressed are my personal and a view point.