The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002, also known as the SARFAESI Act, came into force in 2002. The main objective of this Act was to empower banks to recover NPA (Non-Performing Assets) without the intervention of courts. NPAs are loans or advances made by banks that earn the lender money because the borrower has not paid the principal and interest on the loan for at least 90 days.

The Narasimha Committee and the Andhyarujina Committee were the commissions set up by the central government to review and reform the banking sector in general. Those commissions proposed new legislation that would give financial institutions the right to seize securities and auction them in a timely fashion without court intervention. This recommendation was implemented under the SARFASI Act, of 2002.

What is the SARFAESI Act, of 2002

The SARFAESI Act is a law that allows financial institutions or banks in India to sell or auction assets of defaulters without court intervention. Under the SARFAESI Act, the Central Registry of Securitization Reconstruction and Security Interests, also known as CERSAI, is established as a comprehensive web-based Central Registry of Information Security Interests. CERSAI was created with the aim of monitoring financial fraud, where multiple loans are taken from different banks against the same asset.

Collection proceedings without court intervention

Under Section 13(1) of the SARFAESI Act, 2002, banks and other financial institutions (secured creditors) can ensure interest security and initiate recovery proceedings against borrowers without court intervention. Security interest means any type of mortgaged property. Section 13 of the Act also sets out the procedure to be followed by the creditor when claiming the security, which is as follows:

• If the borrower defaults on the secured debt or installment, the lender may classify the borrower's account as NPA in respect of such debt. The creditor then sends a notice to the borrower demanding payment of the debt within 60 sixty days from the date of such notice.
• The said notice must contain all the information about the overdue amount of the borrower. The notice must also include information about the secured assets that the creditor will take over if the borrower defaults.
• After receiving the claim notice, the borrower can send a note or objection to the creditor. After reviewing such a claim/objection, the creditor may accept it or consider it unacceptable.
• If the lender does not accept the borrower's statement/objection, the lender must inform the borrower of the reasons for non-acceptance within 15 days of receiving the borrower's objection/objection.
• It is also important to mention that after receiving the claim, the security asset mentioned in the notification cannot be transferred in any way without the prior consent of the creditor.
• If the borrower does not know the amount and cannot fulfill his obligation after the end of the contract, the lender can:
  1. The borrower takes possession of the collateral and has the right to transfer the collateral by renting, donating, or selling the asset.
  2. Takes over the business activities of the borrower, who has the right to transfer the guarantee for rent, transfer, or sale. Provided that the creditor can exercise this right of allocation only if a large part of the business is the security of the debt.
  3. Appoint an administrator to control the assets taken as collateral.
  4. Require the following persons to pay money to the lender on behalf of the borrower:
     1. me who received secured funds from borrowers.
     2. From whom all the money comes or can be paid to the borrower.

In the case of Bank of Baroda Vs. M/S Karwa Trading Company and Anr.[1]

The Hon'ble Supreme Court held that the borrower cannot be relieved of the entire compensation if the borrower is not ready to deposit/pay the entire amount including all costs and expenses to the secured creditor. In addition, the court found that the bank cannot be prohibited from selling the mortgaged property at public auction realizing the proceeds, and collecting the remaining debts as long as the borrower deposits/pays the entire debt and the insurance premium paid on the guarantee. creditor

• If the creditor's payments are not made even after the sale of the guarantee, the creditor can submit a request to the court for debt collection or to another competent court to get the rest back.
• The creditor can also directly sue the guarantor or sell the pawn to collect the debt.

Rights of borrowers under SARFAESI Acts, 2002

Under the SARFAESI Act, the powers given to secured creditors (banks and other financial institutions) are wide and they can exercise these powers arbitrarily against the borrower. To protect the interests of the borrowers, there are certain rights in the actions themselves

Right to Know: A borrower's account is classified as a non-performing asset (NPA) if repayment is delayed by 90 days. In such cases, the lender must first give a 60-day notice of default. If the borrower does not repay within the notice period, the bank can sell the property, but to sell, the bank must provide another 30-day public notice detailing the sale.

Right to residual income: Lenders must return the excess amount collected after payments are made. Borrowers need to make sure they get that money because it is rightfully theirs.

Right of Appeal: Under Section 13(4) of the SARFAESI Act, the borrower can appeal to the Debt Recovery Tribunal (DRT) within 45 days of the lender acting against the borrower. If a person is not satisfied with the decision of the DRT, he can appeal to the High Court within 30 days of receiving the order of the DRT. The borrower can recover his property by paying all outstanding payments before the end of the assignment.

Right to the fair value of the property: Before selling the property, the lender must provide a notice stating the fair value of the borrower's property and the starting price, date, and time of the auction. This value is determined by the bank's appraisers. If the borrower believes the property is undervalued, they can challenge the ongoing auction. In such cases, the borrower has the right to look for a new buyer and introduce him to the lender.

Right to compensation: If the secured property of the borrower in the possession of the lender does not comply with the SARFAESI Act and related rules, the borrower may be entitled to compensation and costs as determined by the Debt Recovery Tribunal or Appellate Tribunal. In such cases, the court can compel the creditor to return the security to the borrower, as well as the compensation and costs determined by the court.

Right of approach to DRT: To prevent misuse of such extensive powers and damage to the borrower due to mistakes by banks or financial institutions, certain checks and balances have been established under section 17 which enable a person, including the borrower, to be enforced by the secured creditor as per section 13(4) has violated the measure mentioned in the section, a statement must be submitted to the relevant DRT within 45 days regarding the initiatives implemented about the tax incentives specified in this Act. It's section 3.

Power to approach Court of Appeal: Article 226 empowers the Court of Appeal to issue orders for the enforcement of a fundamental right and any other purpose. Judicial jurisdiction is the exclusive jurisdiction of the Supreme Court under Articles 226 and 227 of the Constitution of India. Generally, Supreme Courts will not entertain a writ petition if there is an effective alternative remedy.

In the case of Sravan Dall Mill P. Limited v. Reserve Bank of India[2] the petitioner questioned the rationale behind the respondent banks classifying their accounts as NPA, which is a prerequisite for the creditor to act against the borrower. 13 laws. The Andhra Pradesh High Court heard the writ petition and directed the respondent to consider the objections raised by the petitioner and convey its reasoned decision to the petitioner. Since the respondent bank has not taken any action under § 13(4), no instructions will be issued in this regard until the bank has issued appropriate orders on the appellant's objections under § 13(2) of the SARFAESI Act.

Conclusion:
Although Sections 13 and 17 of the SARFAESI Act, 2002 have given us all the rights to protect the interests of creditors and borrowers, the Act still does not talk about protecting the interests of third parties.

Supreme Court in the case of Balkrishna Rama Tarle Deceased thr. L.Rs. and Ors. v. Phoenix ARC Private Limited and Ors.[3] held that CMM/DM (Chief Metropolitan Magistrate/District Magistrate) shall not settle disputes between the borrower and the secured creditor and/or any other third party and the secured creditor about the secured assets.

Banks should give 60 days' notice of eviction to the borrower and also third parties whose interests are related to the mortgaged property; DRT/Tribunal (Debt Recovery Tribunal) should be empowered to decide the case separately according to the interests of the third party.

If it turns out that third parties have a legitimate interest in the mortgaged property, the bank should not proceed with the auction until the property is finally paid for. An alternative action should be taken against the borrower. If third-party rights arise bank after the property has been mortgaged, the borrower must inform the bank about the third party, because the bank is in the same situation and the bank must be consulted when third-party rights arise.

End-Notes:

1. Bank of Baroda Vs. M/S Karwa Trading Company and Anr CIVIL APPEAL NO.363 OF 2022
2. Sravan Dall Mill P. Limited Vs. Reserve Bank of India Writ Petition No. 18089 of 2006.
3. Balkrishna Rama Tarle Deceased thr. L.Rs. and Ors. v. Phoenix ARC Private Limited and Ors. SLP No. 16013 of 2022