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The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002
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BACKGROUND
What is Securitisation Act?
Originally lenders used to lend moneys against securities
in the form of immoveable/moveable assets. In case of default, the lenders
would approach the civil court for recovery of its dues including the
enforcement of underlying securities. However, the matters would get prolonged
whereby the debtor would in the meantime render the asset beyond a realizable
stage. For example, by creating tenancies, leasehold interest, wear and tear
of movable machineries etc. Thus, the creditor, though armed with an order in
his favour, would be helpless in realizing the said securities.
The biggest class of sufferers in the entire process were
commercial banks and financial institutions (FI’s). Large amounts of moneys
were blocked with no recovery in sight. The borrower was conveniently using
the assets given as security to the banks/FI’s while the lending bank/FI’s
would wait for years in the civil courts to realise/enforce the said
securities.
To overcome the said difficulty, the RDDB & FI Act
(Recovery of Debts Due to Banks & Financial Institutions Act) was enacted and
special tribunals were set up to deal exclusively with Bank/Financial
Institutions matters which involved lending of moneys or advancement of credit
facilities by banks/FIs.
Some of the exclusive features of the Debt Recovery
Tribunal (DRT) are
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It is a
specialized tribunal dealing exclusively with matters pertaining to
advancement of credit facilities by banks and financial institutions.
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It is meant
exclusively for Banks/Financial Institutions.
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It is available
to public sector banks, private banks, foreign banks and notified Financial
Institutions but not to co-operative banks who have to file proceedings u/s.
101 of the Co-operative Societies Act.
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It pertains to
matters involving recovery of advances/disbursal of credit facilities and in
respect whereof default has occurred.
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Private
parties/borrowers cannot initiate proceedings in the DRT, but can file
counterclaim in the proceedings initiated by the banks/FIs.
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It can only
entertain claims over and above Rs. 10 lakhs.
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It is a summary
procedure wherein most pleadings are by way of sworn affidavits whereby the
need for oral evidence is by-passed and large amount of time is saved.
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Claims are
adjudicated by the Presiding Officer who in case of allowing the claim,
issues a Recovery Certificate
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The execution
of the Recovery Certificate is done by the Recovery Officer.
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Orders of the
Recovery Officer are appealable before the Presiding Officer (DRT) whose
orders are appealable before the Chairperson, Debt Recovery Appellate
Tribunal (DRAT). Orders of the DRAT are not appealable, but can be
challenged in the High Court as and by way of Writ Petition.
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Execution
involves recovery through attachment/sale of secured/personal assets and can
also involve penal punishment of imprisonment in case of intentional non
payment.
However, the DRT though having cut down a large part of
time was yet unable to result in expedited hearing of matters. Therefore the
SARFAESI Act (Securitisation and Reconstruction of Financial Assets and
enforcement of Security Interest Act ) came to be formulated.
As the title itself suggests, the act has been formulated
with a view to enforce/realise the secured assets in the shortest possible
time either by way of sale, lease , reconstruction etc. as may be possible
whereby the lender is able to recover its moneys against the secured asset in
the shortest time frame possible.
The said Act however applies only in respect of assets
whereof there is a specific security interest created.
For example, X bank has lent Rs 2 crores to Y company
against Y company mortgaging its factory and its director mortgaging his
residential house and furnishing his personal guarantee. Upon default, X bank
can only initiate action under SARFAESI in respect of the factory and flat. It
can appropriate whatever moneys may be realised from the sale of the
factory/flat, but in case of any shortfall in recovery of outstanding amount
or any balance being recoverable it will have to file regular proceedings in
the DRT to recover the balance amount including enforcement of the guarantee.
BROAD OVERVIEW
Some of the features of the SARFAESI Act are
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It provides a
faster and quicker remedy as compared to any other act/regulations.
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It is a
mechanism meant to by pass the courts assistance in enforcement of the
security by the creditor.
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It is available
to all banks/FIs including co-operative banks.
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It provides for
a limited remedy to the borrower/aggrieved party who has to file application
u/s 17 of the SARFAESI Act to show that the action initiated by the creditor
is wrong, illegal or mala fide.
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U/s 17 of the
SARFAESI Act, it is the Debt Recovery Tribunal which is the forum which will
hear the application under the said section.
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There is no
provision to challenge the notice u/s 13(2), but only the action u/s 13(4)
can be challenged.
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The burden lies
on the borrower/aggrieved party to show that the action initiated under
SARFAESI is bad, illegal or mala fide and deserves to be set aside.
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All
applications filed u/s. 17 of the SARFAESI Act attract the prescribed court
fees as per the prescribed schedule which varies according to the amount
demanded. This has been done to discourage frivolous and mala fide
litigation/proceedings.
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There are
different court fees prescribed for third parties, which are on the lower
side.
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S 17(5) of the
Act provides for a two month period for disposal of any such application by
the borrower/aggrieved person extendable to four months.
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Appeal from the
DRT order lies to the DRAT. The said appeal can only be entertained upon
deposit of 50% of the notice amount which can be waived to 25%, but not
below that.
IMPORTANT PROVISIONS Of SARFAESI ACT
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S. 3, 4 and 10
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Deal with formation and business of securitisation
and reconstruction companies |
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S. 7 |
Deals
with the raising of funds by securitisation companies by way of issuance
of security receipts to qualified institutional buyers |
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S.12 A
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Permits the RBI to lay down policies pertaining to the business of
securitisation companies and arms it with powers to regulate the
securitisation companies. |
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S. 13 |
Deals
with the issuance of demand notice to the borrower and subsequent measures
regarding possession and sale. One of the pre requisites for issuance of a
demand notice is classification of the borrowers account as a Non
Performing Asset. |
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S. 14 |
Deals
with the orders that are passed by the Chief Metropolitan Magistrate or
the District Magistrate/Collector for enforcement of orders and rendering
help in taking possession of the secured assets.
No notice is required to be given
to the borrower in case of application made u/s 14 nor is he required to
be heard prior to passing of order u/s. 14. The order passed by the Chief
Metropolitan Magistrate or the District Magistrate/Collector cannot be
challenged in any court of law.
The borrower’s cause of action to
challenge can arise only upon action being taken. In simpler terms,
the notice u/s 13(2) does not give a cause of action but it is the action
under 13(4) that creates the cause of action. |
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S. 17 |
Deals with the remedy
available to the aggrieved person (including the borrower) in case of
action being taken u/s 13(4) for non compliance with the demand in the
notice u/s 13(2). The section takes into account that aggrieved person may
include someone other than a borrower, guarantor or mortgagor. For
example: tenant/s, occupier, licensee, bonafide third party purchaser,
third party supplier whose goods may be lying in the borrowers premises
etc. |
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S. 18 |
Provides for appeal
to the Debt Recovery Appellate Tribunal from orders u/s 17. |
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S. 19 |
Provides for
compensation to the borrower in case the Tribunal or Appellate Tribunal
holds that the action of the creditor is wrong or directs return of the
secured asset to the borrower. |
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S. 31 |
Lays down when the
Act would not be applicable. Some instances include
(a) pledge of movables
(b) security interest in
agricultural land
(c) cases where amount due is less
than twenty per cent of the principal amount and interest thereon
(d) security backed loans not
exceeding Rs.1 lakh |
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S. 34 |
Bars civil courts
jurisdiction in respect of matters covered by SARFAESI or RDDB & FI Act |
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S. 35 |
Provides for the
overriding effect of the SARFAESI Act. |
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S. 36 |
Provides that
Limitation Act shall apply in case of action under the SARFAESI Act. |
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S. 37 |
Lays down the applicability of
other Acts vis-a-vis the SARFAESI Act. |
PROCEDURAL ASPECT
The Security Interest (Enforcement) Rules 2002 lay down the
procedure for enforcement of the secured assets.
Once the account is classified as a NPA (NPA means an
account wherein the interest has not been serviced for a period of 90 days or
more) the authorized officer designated by the secured creditor issues a
demand notice u/s. 13(2) of the SARFAESI Act for repayment of the outstanding
dues as set out in the demand notice within 60 days.
The borrower may raise objections to the said notice in
writing within the 60 days and the secured creditor has to consider and reply
to the said objections u/s. 13(3A).
In case of non payment within the statutory period of 60
days, the authorised officer shall thereafter be entitled to take possession
of the secured assets u/s. 13(4). Possession may be physical or symbolic. The
authorised officer shall make a panchnama and publish the possession notice.
He shall be required to carry out valuation of the secured asset and then
proceed to sell the secured asset by public auction. However, the secured
asset can also be sold by private treaty if the parties agree. Upon sale, the
authorised officer shall issue the sale certificate.
Any person aggrieved by the action taken u/s. 13(4) can
file an application u/s. 17 to the Debt Recovery Tribunal setting out the
grounds or reasons on which the action is claimed to be wrong. The Debt
Recovery Tribunal shall pass an order on the said application preferably
within four months. Either party can appeal against the order of Debt Recovery
Tribunal to the Debt Recovery Appellate Tribunal u/s 18 of the Act. No further
appeal is provided therefrom, but one can prefer a writ petition to the High
Court and Special Leave Petition to the Supreme Court.
FAQ’s
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Can an NPA
account be regularized?
Yes, provided the outstanding amount as on the date of issuance of notice
u/s 13(2) is paid within time.
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Who is an
Authorised Officer ?
The secured creditor may appoint any officer not less than the chief
manager of a public sector bank or equivalent or any other person or authority
as specified by the Board of Directors/Trustees as the case may be.
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What assets are
covered under SARFAESI?
Any asset, movable or immovable, given as security whether by way of
mortgage, hypothecation or creation of a security interest in any other form
except those excluded u/s. 31 of the Act.
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Are co-operative
banks also entitled to initiate proceeding under the SARFAESI Act ?
The Division bench of the Bombay High Court Presiding at Nagpur and Bombay
have held in the matter of Rama Steel vs. Greater Bombay Co-op. Bank
held the SARFAESI Act to be available to co-operative banks. The said matter
has been carried by way of a Special Leave Petition to the Supreme Court and
the same is pending. The Karnataka High Court in a judgment of a single judge
has however held that the SARFAESI Act is not available to co-operative banks.
Thus there seems to be a difference of opinion and the decision in the matter
pending before the Supreme Court is awaited.
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Can the
guarantors personal property be proceeded against under SARFAESI?
Only those property given as security can be proceeded under the
provisions of SARFAESI Act.
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Can the rights of
a third party such as a tenant be affected in case of action taken under
SARFAESI?
Any rights created in favour of any third party before the creation of
security interest in the asset will not be affected.
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Are residential
houses exempt from under SARFAESI Act?
No, there is no provision for exemption for any property secured to the
bank/financial institution including mortgaged residential house save and
except those specified u/s. 31 of the Act.
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What is the
remedy available to the borrower upon receipt of notice u/s. 13(2) ?
The borrower can raise objections/representations, if any in writing to
the secured creditor who has to deal with the same and reply back in writing.
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Can the borrower
or mortgagor transfer the asset after receipt of a notice u/s. 13(2)
No, S. 13(13) prohibits the borrower from transferring the asset after
receipt of the notice u/s. 13(2) save and except in the usual course of
business.
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What is the order
u/s. 14 passed by the CMM or the District Magistrate? Is such an order
mandatory?
The CMM or the District Magistrate may, on an application in writing being
made by the secured creditor, pass an order for taking possession through its
office by taking such steps, including force as may in his opinion be
necessary. However such an order is not mandatory except where an obstruction
may be apprehended.
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When can the
creditor take possession of the assets? Is taking of physical possession
compulsory?
In case the outstanding demanded in the notice u/s 13(2) is not paid
within 60 days, the creditor can take possession u/s. 13(4). The creditor has
the option of taking either symbolic or physical possession.
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Can the creditor
take possession of a running unit?
There is no bar under the SARFAESI Act which prohibits the secured
creditor from taking possession of a running unit.
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Can the secure
creditor also take action under SARFAESI against a company in liquidation?
Yes, the secured creditor can take action against a company in liquidation
in respect of its dues secured by the assets of the company. However, the
secured creditor shall keep the Official Liquidator informed/updated about the
steps being taken by it for liquidating the assets.
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Can the secured
creditor take action against a sick company which is registered with BIFR?
Yes, SARFAESI action can be initiated against any sick company registered
with the BIFR provided 75% of the secured creditors agree. Upon 75% of the
creditors agreeing, the proceedings before BIFR abate.
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Is the borrower
entitled to any prior notice at the time of taking possession u/s. 13(4) ?
No, the SARFAESI Act does not contemplate any such notice prior to action
being taken u/s. 13(4).
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What is the
remedy available to the borrower upon possession being taken? Within what time
frame?
The borrower or any aggrieved person can make an application u/s. 17 of
the Act to the Debt Recovery Tribunal to challenge the action within 45 days
from the action being taken u/s. 13(4).
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Can the party
apply for waiver of court fees in an application u/s. 17 of the Act?
No, there is no provision for waiver of any court fees except for an
indigent person or a pauper.
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What about the
recovery of balance amount of liability after assets sold under SARFAESI Act ?
The secured creditor can initiate proceedings under the RDDB & FI Act for
recovery of balance amount due after sale of the secured assets.
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What is the
difference between RDDB & FI ACT and SARFAESI Act ?
The RDDB & FI Act allows filing of proceedings for recovery of the entire
defaulted amount including enforcement of the secured assets and recovery from
the personal properties of the debtors whereas the SARFAESI Act confers power
of enforcement only in respect of the secured asset/s.
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Can the
bank/financial institution proceed simultaneously under RDDB&FI Act and
SARFAESI Act ?
Yes, in view of the judgement dated 29-11-2006 of the Supreme Court in the
matter of Re : Transcore Electricals vs UoI the secured creditor
can proceed simultaneously under the RDDB & FI ACT and SARFAESI Act.
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Can the secured
creditor sell the secured asset immediately upon possession being taken?
Upon possession being taken, the secured creditor has to give a mandatory
30 days notice to the borrower prior to the date of sale.
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Is the secured
creditor compulsorily required to sell the secured asset?
No, he may lease out or assign the secured asset as provided u/s 13(4).
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Is the property
purchased under SARAESI action clear and free from encumbrances?
Any asset sold under SARFAESI action is sold on an ‘as is where is’
and ‘as is what is’ basis unless specified otherwise. Sale under
SARFAESI is governed by the terms and conditions of sale forming part of the
sale process.
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What would happen
to the excess amount in case of surplus after sale of the secured asset?
The owner of the secured asset shall be entitled to the surplus amount.
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Is the sale
certificate required to be registered ?
Yes.
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