Banking Article, Banking Finance 2021, Banking Finance October 2021

SIMPLIFYING ‘SARFAESIA,2002’

To expedite recoveries by the Banks, the law called as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest,2002, popularly called as SARFAESIA has been enacted. A secured creditor Bank can enforce its securities without intervention of courts and by following the procedure as prescribed under the said Act.  Similar power was given earlier to the State Financial Corporations, under Section 29A of the State Financial Corporations Act,1953.

“Without intervention of the courts” though appears to be simple but in actual practice, it is a challenge.  This article discusses the practical difficulties of enforcement of securities and the need for more simplification of the Act so that Banks can find it easy to enforce the securities.

Chapter III of the Act and “Enforcement of The Security Interest (Enforcement) Rules, 2002” deal with the procedure of Enforcement of Secured assets by the Secured Creditors.

Section 13(2) provides that to proceed under the Act, the account should have been classified as Non-performing Asset(NPA). What is a non-performing asset is explained by the RBI prudential norms.  As per the said guidelines, NPA is a loan or an advance where interest and/or installment of principal remain overdue for a period of more than 90 days in respect of term loans. Similarly the account remains out of order in respect of an overdraft/cash credit (OD/CC) if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power, there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period. Prior to 31.03.2004, more particularly from the year ending 31.03.1995 onwards a loan would be treated as NPA if interest remains ‘past due’ for two quarters. With a view of moving towards globally adopted best practices in the matter of identification of NPAs, the ’90 days overdue’ norm was made effective from 31.03.2004 in the matter of classification of account as a NPA.

Therefore, a Secured Creditor Bank should wait for a period of 90 days after the initial default to issue notice under Section 13(2) of the Act.  Section 13(2) provides that to initiate action, a notice, called as “Demand Notice” should be issued to the borrower calling upon him to pay up the dues within 60 days from the date of the notice. Therefore, before enforcement of security, Banks have to wait for 150 days.  If a suit has to be filed before the DRT or a Civil Court, the issue of NPA is not there and a bank can file suit before the DRT or Civil Court as soon as there is a default by the borrower.

Therefore, the SARFAESIA is required to be amended to enable the banks to issue demand notice, contemplated under Section 13(2), during the said period of 90 days itself and action of enforcement action could follow at the end of 90 days if the account turned NPA.  In fact, in this mechanism, the borrower would get time of 90 days to settle or regularize the account. If not, the notice period under Section 13(2) should be curtailed from 60 days to 30 days to avoid delay in recovery since the borrower is anyway gets time of 90 days before the account declared as NPA. As stated earlier, similar power has been given to the State Financial Corporations to enforce the securities in the event of default by an Industrial Concern.  However, no such issuing of notice has been envisaged therein before enforcement of security interest.  Similarly, at least in  the case of industrial/company properties, Banks should also be allowed to enforce the security interest immediately after the account turning NPA.  The elaborate procedure as to issue of notice for 60 days etc., may be made to be applicable only in respect of the personal properties and for personal loans like Home Loans, educational loans etc.,

DEMAND NOTICE:

The rules framed under the Act called Security Interest (Enforcement) Rules, 2002 provided various standard forms like Possession Notice, Panchnama, Sale Notice, Sale Certificate etc., But, the format of the “Demand Notice” which has to be issued under Section 13(2) has not been prescribed in the Act or the Rules.  The Secured Creditors have been issuing such notices by devising their own formats. Borrowers have been challenging the said notices on the ground that the notice issued to them is not in accordance with the Act. There are several instances where the courts had quashed the said notices issued by the Secured Creditors.  In the case of P.N.B.Housing Finance Ltd.Vs.M.C.Gupta, the DRT, Delhi had quashed the notice issued on the ground that the date of NPA was not mentioned.  In the case of Indiabulls Housing Finance Ltd. Vs.Mahendra K.Modi [MANU/DD/01777/2011], the DRAT, Delhi had quashed the notice on the ground that the demand notice under Section 13(2) of the SARFAESI Act did not mention the details of the amount, separate details regarding principal and interest. In the case of Kotak Mahindra Bank Vs.Marvel Industries Ltd. [MANU/DM/0004/2010], the DRT, Mumbai held that since the said Bank failed to provide facility wise details, the notice was quashed.

Section 13(3) of the Act provides that the demand notice must contain the details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.  Therefore, the notice must contain the details of the amount payable and assets intended to be enforced for realization of the debt.  The language of the section is plain and simple that the notice is required to let the borrower know the amount payable and the secured assets intended to be enforced. However, different principles are being laid down by different courts as to the contents of the notice.  Hence, there is a need for amending the rules to provide for a Standard Format of the “Demand Notice” to avoid litigation on this score. 

REPRESENTATION TO DEMAND NOTICE:

In the case of Mardia Chemicals Ltd. Vs.Union of India [(2004) 4 SCC 311], the Hon’ble Supreme Court had made it mandatory to reply to the objections, if any, raised by the borrower on receipt of the notice issued under Section 13(2) though there was no such provision under the statute.  Thereafter, Section 13(3A) was inserted by the Parliament, w.e.f.11.11.2004, requiring the banks to reply to the representation, if any, received from the borrower raising objections to the notice, within 7 days of the receipt of the said reply.  Subsequently, the said  time period for replying to the same has been enlarged to a period of 15 days, w.e.f.15.1.2013.  However, no time period has been fixed by the said provision for replying to the said notice by the borrower.    There are some instances where courts had quashed the action of the Banks even when the borrower had represented to the notice after 60 days of receipt of notice.   In the case of Prabir Chakraborty Vs.LIC Housing Finance Ltd., Calcutta High Court had held that such reply/representation shall be made within 60 days from the date of receipt of the notice. However, in the case of Alphine Pharmaceuticals Pvt. Ltd. and Ors. vs. Andhra Bank [2020(2)ALD391 ], it was held by the High Court for Telangana that there was no merit in the submission that the objection/representation of a debtor to the demand notice issued under sub-section (2) of Section 13 of the Act should be given before the expiry of 60 days from the date of receipt of notice under sub-section (2) of Section 13 of the Act and that in the absence of any such stipulation in the statute, such a stipulation cannot be inferred by the Court. Similar view was taken by the Mumbai High Court in its order dated 23.3.2016 M/s. Blue Coast Hotels Ltd. v. IFCI Limited. The Mumbai High Court held that there was no specific provision and/or mandate in Section 13(3-A) of the Act that the representation of the borrower to the demand notice under Section 13(2) of the Act should be filed within the period of sixty days from the date of the notice.

Since there is no time limit mentioned in the Act, some unscrupulous borrowers, to buy time, reply after the period of 60 days thereby causing delay in enforcement of securities by the Bank.  Therefore, the said Section 13(3A) should be amended to provide for representing to the notice by the borrower, say, within 15 days of receipt of the demand notice from the bank.  Further, instead of 15 days time for replying to the representation of the borrower, it may be provided that a Secured Creditor Bank cannot take further steps for enforcement of security without replying to the representation of the borrower as entire action is being set aside in case of any delay  by the Secured Creditor in replying to the representation beyond the said period of 15 days.

ASSISTANCE BY THE DISTIRCT MAGISTRATE/CHIEF METROPOLITAN MAGISTRATE

Taking physical possession of the property is key to enforcement of securities.  However, generally no borrower comes forward to hand over peaceful and vacant possession of the secured assets nor make payment of the amount.  To avoid law and order situation, the Act provided for availing of the assistance of the District Magistrate in non-metropolitan area and Chief Metropolitan Magistrate (CMM) in a Metropolitan area and when an application filed by a secured Creditor, the DM/CMM should pass orders for assistance within a maximum period of 60 days of filing of such application.  However, in practice, such orders for assistance would take  more than 60 days and this is where the intention of the legislature for speedy resolution of NPA is being defeated. Hence, effective mechanism needs to be evolved to assist the Authorised Officers to take physical possession of the secured assets without loss of time.

POSSESSION OF THE PROPERTY WHERE TENANCY IS CREATED:

Unscrupulous borrowers create sham tenancies to somehow wriggle out of the enforcement of security interest.  It was held by the Supreme Court in the cases of Harshad Govardhan Sondagar Vs. International Asset Reconstruction Company [(2014) 6 SCC 1], Vishal N.Kalsaria Vs.Bank of India, [AIR2016SC530] and Bajrang Shyamsunder Agarwal Vs.Central Bank of India [(2019)9SCC94] that SARFAESIA cannot override rent control legislations, the import of which is that a tenant can be evicted as per the rent control legislations alone which is time consuming and expensive. However, Parliament had not provided for determination of tenancy, whether created before or after creation of mortgage, on issuance of notice under Section 13(2) and it is because of such lacuna that the Supreme Court had held that SARFAESIA did not override rent control legislations. [refer to the decision of Harshad Govardhan Sondagar cited above]. Further, instead, Parliament amended SARFAESIA and inserted Section 17(4A) providing thereby that where a person claims tenancy may approach Debt Recovery Tribunal and the DRT has been empowered to verify as to whether the lease or tenancy (a) had expired or stood determined, (b) is contrary to Section 65-A of the Transfer of Property Act, 1882, (c) is contrary to the terms of mortgage or (d) is created after issuance of notice under Section 13(2) of the Act; and pass orders as it may deem fit.  Therefore, in cases where the issue of enforcement of security by Banks and lease/tenancy of lessees/tenants is involved, the jurisdiction of rent control courts is now vested in DRT instead of rent control/civil courts.  But, Section 17(4A) provides that the DRT has been empowered to examine about the genuineness or otherwise of the tenancy/lease of the tenants/lessees on filing of application before the DRT by any person who claims such rights upon the secured assets, i.e., tenants/lessees.  But, there is no provision in the Act for the Secured Creditor Banks to file application against a tenant or alleged tenant for determination of his tenancy rights.  If a tenant/lessee does not approach the DRT nor handover possession of the property, the secured creditor has no other remedy but to wait indefinitely for him to adopt such measures and since the jurisdiction about tenancy is now vested with the DRT, the CMM/DM or Civil courts cannot exercise jurisdiction to decide about tenancy wherever claim of tenancies are involved. This would indefinitely delay the proceedings.  Therefore, Section 17(4A) of SARFAESIA may be amended to enable a secured creditor also to move the DRT against the tenant/lessee for adjudicating their tenancy/lease rights.

 

SECURITY INTEREST (ENFORCEMENT) RULES,2002 :

In aid of the Act, elaborate rules have been framed detailing the procedure of enforcement of securities.  In the case of Mathew Varghese Vs.M.Amritha Kumar [2014 (2) SCALE 331], and GM Siddeshwara Cooperative Bank Ltd. Vs.Iqbal [2013(4)CDR989(SC)], Supreme Court held that compliance with these rules are mandatory in nature and violation of the same renders the enforcement action to be null and void.

These rules are very intricate and ambiguous.  It is interesting to note that the proviso to Rule 9(2) states that no sale shall be confirmed if the amount offered by sale price is lesser than the reserve price whereas the second proviso states that if the authorized officer fails to obtain a price higher than the Reserve Price, such sale can effected with the consent of the borrower and the Secured Creditor.  Hence, it is not clear whether a tender/bid received exactly matching the reserve price can be given effect to or not. In the case of K.Ramaselvam Vs. Indian Overseas Bank [AIR 2010 MAD 93] and in the case of A.Varalaxmi Vs.Punjab National Bank, it was held by the Madras High Court that in the event of acceptance of bid on exactly Reserve price, the consent of the borrower was necessary.  However, in the case of Varghese Ukken Vs.State Bank of India [AIR 2011 KER.41], Kerala High Court and in the case of K.Sundar Babu Vs. Union of India, Karnataka High Court had held that no such consent of the borrower was necessary.  The decision of the Karnataka and Kerala High Courts appears to be sound. It is very difficult to get bids for the secured assets and as such following Madras High Court’s decision would further stall and delay the recovery action of the Banks. Therefore, there is a case for amendment of the rule 9(2) to provide for that only when a bid is not equal to or higher than the Reserve Price that the consent of the borrower is necessary to sell the property at below the Reserve Price.

Rule 8 (6) provides for issuing of notice of sale informing the borrower of intended sale of the property. As per Rule 9(1), if such sale is first time, 30 days notice, and 15 days notice, where auction is required to be conducted again due to failure of first auction, is required to be given to the borrower.   Since Sub-rule (5) has been inserted in Rule 3 whereby attention of the borrower is invited to the Section 13(8) of the Act as to the time available to redeem the secured assets in the demand notice itself, the requirement as to issue of notice once again to the borrower may be superfluous.  (Section 13(8) restricts the right of redemption only till publication of sale notice). Further, the formats of Panchnama [Appendix I] and Possession Notice [Appendix IV] have also been amended w.e.f.4.11.2016 to provide a notice therein to the borrower as under:

“The borrower’s attention is invited to provisions of sub-section (8) of Section 13 of the Act, in respect of the time available, to redeem the secured assets”.

Since the borrower is aware of the impending action by way of demand notice and possession notice, there is no reason as to why such notice is required to be given to the borrower once again at the stage of sale as it would delay the recovery action of the banks.  Further, since these rules have been held to be mandatory, any lapse in observance of these pre-requisites would render the action of the banks invalid.

In the case of Canara Bank v. M. Amarender Reddy and Anr., [(2017) 4 SCC 735], Supreme Court held as under, by its order dated 01.11.2018, approving the action of the Bank to issue simultaneous notice to the Borrower and publication of the Sale notice in newspapers.

“14. The secured creditor, after it decides to proceed with the sale of secured asset consequent to taking over possession (symbolic or physical as the case may be), is no doubt required to give a notice of 30 days for sale of the immovable asset as per Sub-rule (6) of Rule 8. However, there is nothing in the Rules, either express or implied, to take the view that a public notice Under Sub-rule (6) of Rule 8 must be issued only after the expiry of 30 days from issuance of individual notice by the authorised officer to the borrower about the intention to sell the immovable secured asset. In other words, it is permissible to simultaneously issue notice to the borrower about the intention to sell the secured assets and also to issue a public notice for sale of such secured asset by inviting tenders from the public or by holding public auction. The only restriction is to give thirty days’ time gap between such notice and the date of sale of the immovable secured asset.”

Therefore, Banks could issue simultaneous notice to the borrower in compliance of Rule 8(6) and publishing of sale notice in newspapers for sale of the property.  Parliament had amended Section 13(8) of the Act, w.e.f.01.9.2016 to restrict the right of redemption only till publication of the sale notice as there have been instances where the borrowers had come forward to pay the  dues even after conclusion of sale and the courts have allowed them to redeem the secured asset even after issuance of sale certificate.  However, this amendment has caused confusion as Rule 8(6) of the Rules has not been amended.  A combined reading of amended Section 13(8) and Rule 8(6) appears to be that Bank has to issue 30 days notice before sale of the property and only after the said 30 days that the Bank could publish sale notice in newspapers for sale of the property nullifying the effect of the benefit of the above said Supreme Court. But, the Proviso to Rule 8(6) of the rules have been amended, w.e.f.18.10.2018, and inserted a format, Appendix IVA, for publication of sale notice (hitherto there was no standard format for the sale notice).  Therefore, any sale notice has to be published in the same format which reads as under:

“Notice is hereby given to the public in general and in particular to the borrowers and guarantors”

This is a sufficient notice to the borrower to redeem the secured assets and there is no need for a separate notice once again for 30 days or 15 days.  Therefore, it appears from the above said amendments, it appears that the Government intended to allow secured creditors to issue simultaneous notice.  But, the Rule 9(1) had also been amended providing for issuing of 30 days notice of sale to the borrower at the first instance of sale and in case of failure thereof, 15 days for any subsequent sale, which is again contradictory and ambiguous.

After amendment of Section 13(8) of the Act, in the case of Sri Sai Annadhatha Polymers Vs.Canara Bank [2018(5)ALT207], the High Court for the State of Telangana and Andhra Pradesh had held that the borrower should be issued clear 30 days notice separately before publishing the sale notice under Rule 9(1) and held as under:

“13. Therefore, even after the amendment of Section 13(8) of the SARFAESI Act, a secured creditor is bound to afford to the borrower a clear thirty day notice period under Rule 8(6) to enable him to exercise his right of redemption. In consequence, a notice under Rule 9(1) of the Rules of 2002 cannot be published prior to expiry of this thirty day period in the new scenario, post-amendment of Section 13(8) of the SARFAESI Act, as such right of redemption would stand terminated immediately upon publication of the sale notice under Rule 9(1) of the Rules of 2002. The judgment of the Supreme Court in CANARA BANK v. M.AMARENDER REDDY MANU/SC/0271/2017 : (2017) 4 SCC 735, which was rendered in the context of the unamended provisions, would therefore have no application to the post-amendment scenario in the light of the change brought about in Section 13(8). To sum up, the post-amendment scenario inevitably requires a clear thirty day notice period being maintained between issuance of the sale notice under Rule 8(6) of the Rules of 2002 and the publication of the sale notice under Rule 9(1) thereof, as the right of redemption available to the borrower in terms of Rule 8(6) of the Rules of 2002, as pointed out in MATHEW VARGHESE MANU/SC/0114/2014 : (2014) 5 SCC 610, stands extinguished upon publication of the sale notice under Rule 9(1).”

However, in the case of Adhya Industries Vs.Vijaya Bank [2020(2)ALD298], High Court for the State of Telangana held that the statute nowhere required that there should be a 30 days gap between service of notice on the borrower and the date fixed for sale of the immovable secured assets and that there need not be a clear 30 days notice period between issuance of notice under Rule 8(6) and issuance of notice under Rule 9(1) of the Rules and it would suffice if there is 30 days gap from the date of publication of public notice in newspapers of sale and the date of sale.   The Court further held that the contrary view taken in Sri Sai Annadatha Polymers, (cited supra), did not represent the correct legal position.

Therefore, these rules are contradictory to each other and ambiguous and there is a case for further amending Section 13(8) and the rules 8(6), 9(1) and 9(2) to provide for issuing of simultaneous notice to the borrower of the sale of the property and publication of sale notice for general public.

TIME TAKEN FOR ENFORCEMENT OF SECURITIES:

As stated above, the Secured Creditor Bank should wait for 90 days before issuing notice under Section 13(2).  When notice is issued, Bank has to allow 60 days time to see if the borrower makes payment or not.  Where a borrower, after completion of 60 days, neither makes payment of the money nor hands over physical possession of the property, a Bank has to apply to the District Magistrate/CMM for assistance who has to pass order for assistance to take possession within 60 days of filing of such application. The borrower has to be informed about the sale by issuing 30 days notice.  The sale has to be conducted 30 days after publishing sale notice in two leading newspapers.  The auction purchaser can deposit the sale consideration within 90 days.  Therefore, it takes a minimum of 360 days for enforcement of security which is 30 days more than the time taken under Insolvency and Bankruptcy Code,2016 for resolution of the insolvency of the Corporates.  This is assuming that the District Magistrate/Chief Metropolitan Magistrates issues orders within the mandated 60 days whereas in actual practice it takes more time.

CONCLUSION:

The SARFAESI Act is a very effective tool in the hands of Banks to recover the dues of the Banks speedily.  However, in view of ambiguity in various provisions of the Act as discussed above, the efficaciousness of the Act is being affected.  Therefore, there is a need for removing the bottlenecks without curtailing the rights of the borrowers by overhauling the Act and removing the ambiguity. The notice under Section 13(2) should be allowed to be issued immediately on default and enforcement action could follow only if the account turned NPA which could cut down two months time. The borrower should be allowed to file application before the DRT only on limited grounds to make it more effective for speeding up of recoveries of the Banks and to ensure that the purpose of enactment of SARFAESIA is not defeated.

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