SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (ALSO KNOWN AS SARFAESI ACT) IS AN INDIAN LAW.

1. The law has allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their Non-Performing Assets (NPAs)  
2. It allows banks and other financial institution to auction residential or commercial properties (of defaulter) to recover loans.  
3. The Act allow banks and other financial institutions to recuperate their NPAs or bad loans without the intervention of the Court.
4. The Act provides three alternative methods for recovery for non-performing assets –
   • Enforcement of Security Interest under Section 13 of SARFAESI Act,
   • 2002 without the intervention of the Court.
   • Securitization Asset Reconstruction (Reconstruction & Financial)
5. The law does not apply to unsecured loans, loans below Rs. 20, 00,000/- or where remaining debt is below 20% of the original principal.
6. The Act was brought for recovering the amount in speedy manners in taking possession of the properties and in realizing the money.
7. The third party who comes forward to purchase the secured asset, must have a confidence that he would get the title to the property at the earliest.

THE PROCEDURE FOR ENFORCEMENT OF SECURITY INTEREST IS LAID DOWN UNDER SECTION. 13 –

1. Any borrower, who makes any default in repayment of secured debt and his account in respect of such debt is classified by the secured creditor as nonperforming asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 (sixty) days from the date of notice.  
2. If, on receipt of the notice, the borrower makes any representation, the secured creditor shall consider such representation and if the secured creditor comes to the conclusion that such representation is not tenable, he shall communicate within 1 (one) week of receipt of such representation the reasons for non-acceptance to the borrower:
3. In case the borrower fails to discharge his liability in full within the specified period, the secured creditor may take recourse to one or more of the following measures to recover his secured debt:
   • Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
   • Take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
   • Appoint any person, to manage the secured assets the possession of which has been taken over by the secured creditor;
   • Require 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 is due or may become due to the borrower, to pay the secured creditor
4. Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may also file an application to the Debts Recovery Tribunal or a competent court, as the case may be.
5. The secured creditor shall be further entitled to proceed against the guarantors or sell the pledged assets without first taking any of the aforementioned measures.

SECTION 14 REQUIRES CHIEF METROPOLITAN MAGISTRATE OR DISTRICT MAGISTRATE TO ASSIST SECURED CREDITOR IN TAKING POSSESSION OF SECURED ASSET.

Section 14 states that it enable the secured creditors to take the assistants of the chief Metropolitan Magistrate or District Magistrate in taking possession of secured assets.

It also states that where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured assets is required to be sold or transferred by the secured creditor, the secured creditor may, for the purpose of taking possession or control of any such secured assets, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or as the case may be, the District Magistrate shall, on such request being made to him possession of the such Assets and documents relating thereto and forward such assets and documents to the secured creditor

This section states that the Chief Metropolitan Magistrate or the District Magistrate may take or cause to the taken such a steps and use, or caused to be used, such force, as may, in his opinion, be necessary for the purpose of securing assets of secured creditors. No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.

CAN THE BANK / FINANCIAL INSTITUTION FILE THE AFFIDAVIT WITH DM / CMM FOR TAKING POSSESSION OF THE SECURED ASSETS DURING THE PENDENCY OF ANY WRIT PETITION ?

Amendment to SARFAESI Act introduced in the year 2013 brought out certain changes in the Act. Wherein, under section 14 compulsory filing of an Affidavit by the secured creditor through their authorized officer with the District Magistrate Chief Metropolitan Magistrate, so the case may to take possession of the secured asset in introduced.

If any writ petition is pending in high court and if any possession notice has been served during the pendency of the writ petition, then the act of issuing a possession notice by the Authorized Officer is an illegal act and such possession notice cannot be maintained under the law.

CAN DISTRICT MAGISTRATE / METROPOLITAN MAGISTRATE CAN PASS ANY ORDER REGARDING THE COMPLIANCE OF THE PROVISIONS OF SARFAESI ACT AS ENUMERATED U/S 14 OF THE SAID ACT SETTING ASIDE THE REQUEST OF THE AUTHORISED OFFICER FOR TAKING POSSESSION OF THE ALLEGED SECURED ASSETS?

Section 14 (1) of SARFAESI Act states “Provided further that on receipt of the affidavit from the Authorized Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of he secured asset.”  The usage of the word “SHALL” in the provisions of the Act makes it mandatory to follow the provisions of the Act strictly without any dilution. Hence, the District Magistrate / chief Metropolitan Magistrate as the case may be, can reject the affidavit filed by the Authorized Officer if he is not satisfied with the contents of the affidavit by giving reasons for his rejection and instruct the Authorized Officer to resubmit the affidavit by duly making necessary and required corrections in the affidavit as per the observation of the District Magistrate / Metropolitan Magistrate.

Since the compliance of section 13 (2), 13 (4) and Rule 8 are mandatory for the secured creditor to implement them, any order of the District Magistrate / Chief Metropolitan Magistrate without reference to the compliance of the aforesaid sections of SARFAESI Act, it must be presumed that no materials are placed before the District Magistrate / Chief Judicial Magistrate by the secured creditor in respect of the compliance. Further, the affidavit filed by the authorized officer should not only include the statements supported by various evidences in favor of having complied with the provisions of section 14 which includes section 13 (2), section 13 (4) and Rule 8 of the Act but also substantiated by the relevant RBI circulars and legal citations. The compliance, If not proved without any reasonable doubt, then the proceedings are unsustainable in the eye of law, as it would amount to arbitrary exercise of the powers conferred under section

CAN THE ORDER OF DISTRICT MAGISTRATE / METROPOLITAN MAGISTRATE BE CHALLENGED?

There is no dispute that any person, including a borrower, aggrieved by any of the measures referred to in sub-section (4) of section 13  of the  SARFAESI Act  has a right to prefer an appeal under section 17 before the Debt Recovery Tribunal.

It is a settled proposition of law that alternative remedy is no bar from filing a writ petition in cases where there has been  denial of natural justice  or if an action is without jurisdiction or there is a challenge to the vires of any statute.”

It is imperative that as per the Act on receipt of the affidavit from the Authorized Officer, the District Magistrate or the Chief Metropolitan Magistrate shall have to be satisfied with regard to the contents of the affidavit and thereafter shall pass orders and however, if same is totally absent in the order under challenge “there is no reason whatsoever in support of the order. It is cryptic.”  If the order does not spell out the reasons for making such an order, it amounts to the violation of the principles of natural justice.