The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI ACT) was enacted by Government of India to enable banks and financial institutions to realise long-term assets, manage problems of liquidity, asset liability mismatches and improve by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

The important aspect of the act is given under Section 13 (1) of the SARFAESI ACT, 2002 which states:
Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.

Thus, the banks and financial institutions have the power to enforce their security interest on a secured asset without the intervention of the court. Then what is the statutory legal position of the bank or financial institution?

The Security Interest (Enforcement) Rules,2002 under section 2(a) states:
authorised officer means an officer not less than a chief manager of a public sector bank or equivalent, as specified by the Board of Directors or Board of Trustees of the secured creditor or any other person or authority exercising powers of superintendence, direction and control of the business or affairs of the secured creditors, as the case may be, to exercise the rights of a secured creditor under the act.

As per the aforesaid rule, the bank or financial institution as secured creditor has to appoint an Authorised Officer to exercise the rights of the secured creditor. In terms of the statement of objects and reasons of the SARFAESI ACT states:
The provisions of the Ordinance would enable the banks and financial institutions to realise long term assets, manage problems of liquidity, assets liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

In other words, the prime duty of the Authorised Officer is to adopt measures of recovery or reconstruction to recover the amounts advanced to borrowers whose account has been declared as NPA (Non-Performing Assets). Further as per the act, he is armed with enormous powers to enable him to recover the dues of non performing accounts or even go for the reconstruction of secured assets. But that does not clarify the legal position of the Authorised Officer.

Section 13(4) of SARFAESI ACT elaborates the recourse that the bank or the financial institution can take under sub section (a) to (d) of section 13(4) of the said Act which means that the Authorised Officer has the authority to take any one or more of the actions as envisaged under section 13(4) (a) to (d) of SARFAESI ACT. But, before enforcing the power vested with him, the Authorised Officer has to fulfill his obligation of considering the representation or objection made by the borrower as per section 13(3 A) of SARFAESI ACT and examine whether the same is acceptable or tenable and has to follow the rules as per section 3 A (a) (b) and (c) as the case may be of The Security Interest (Enforcement) Rules, 2002.

The Security Interest (Enforcement) Rules, 2002 stipulates under Rule 3A (a):
After issue of demand notice under sub-section (2) of section 13, if the borrower makes any representation or raises any objection to the notice, the Authorised Officer shall consider such representation or objection and examine whether the same is acceptable or tenable and Rule 3 A (b) stipulates If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within 15 days from the date of receipt of the representation or objection.

Again, as per Rule 3A (c), If on examining the representation made or objection raised, the Authorised officer comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within 15 days of receipt of such representation or objection, the reasons for non-acceptance of the representation or objection, to the borrower.

Section 13(3 A) of SARFAESI ACT says,:
If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within 15 days of such representation or objection the reasons for non acceptance of the representation or objection to the borrower: As per this section it is the secured creditor who has to give his reply whether the representation made or objections raised is tenable or unacceptable.

Hence there is a distinct ambiguity and distortion as to who is authorised to examine the representation made and objections raised by the borrower. Perhaps it is implied that the Authorised Officer has to consult the secured creditor before giving his reply to the borrower on the representation or objection submitted by the borrower.

Rule 3 A (b) of The Security Interest (Enforcement) Rules, 2002 stipulates:
If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within 15 days from the date of receipt of the representation or objection. In the absence of any definition as to what constitute such other suitable orders, can it be construed that it includes rehabilitation of the unit or restructuring of the debt or any other action to be initiated by the bank or financial institution to give relief to take the account out of its status as NPA?

The aggrieved borrower does not have any recourse to legal remedies till the issue of possession notice to the defaulted borrower. Under section 17 only he has a right to appeal to DRT as per the said Act. Till such time it is the power of the Authorised Officer that pervades since section 34 of the SARFAESI ACT states:
Civil court no to have jurisdiction. Taking into account the prevailing attitude of the banks and financial institutions acting ruthlessly and flouting many of the provisions of SARFAESI Act and RBI guidelines which are mandatory to recover their debt under SARFAESI ACT, Supreme Court of India observed during the delivery of their judgment in the matter of Mardia Chemicals case as follows:
71. Arguments have been advanced as to how far principles of lender's liability are applicable. Whatever be the position, however, it cannot be denied that the financial institutions namely, the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and the financing companies / institutions are not to ignore performance of their part of the obligation as a party to the contract.

They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American courts, in view of the facts and circumstances and the terms of the contract and other details relating to those matter, that may or may not strictly apply, nonetheless even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of concept of lender's liability.

It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defense deficiencies on the part of the banks and financial institutions.

But the truth coming out of the present practice of the Authorised Officers is that the aforesaid observations of Supreme Court of India is completely being overlooked and without extending any fair treatment they as a ritual reject the representations and objections submitted by the borrowers without any application of their minds rendering the borrowers remediless and wronged. This is because the legal position of the Authorised Officer is not defined anywhere in the SARAESI ACT.

The High Court of Madras in their judgment delivered on 10th August 2010 in the case of Sheeba Philominal Merlin vs. The Repco Bank Limited (W.P.No.15272 of 2009) observed, 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 authorised officer acts like a Civil Court with powers hitherto exercised by it. If it is so, then the Authorised Officer has to adjudicate on the notice issued by the secured creditor u/s 13(2) of SARFAESI ACT and representation and objections submitted by the borrower to the notice after hearing both the sides duly presenting their cases before him as is being followed in a court of law in which case DRT becomes the reviewing authority. But in practice, the authorised Officer being the employee of the bank and financial institution is adjudicating his own bank's or FI's case and without applying his mind on the representation and objections and without giving an opportunity to the borrower to present his case and to be heard, simply rejects his submission as matter of routine and as a ritual and thus contravening the Principles of Natural justice as stated under section 22 (1) of RDDB & FI Act, 1993.

Principles of Natural Justice available under Constitutional protection operate in areas not covered by any rule or law; they do not supplant the law but only supplement it. The following are the two important basic Principles of Natural Justice:

1. No one can be a judge in his own cause (‘Nemo debet essa judex in propria cause')
2. Hear the other side. (Audi Alteram Partem.).

Considering the aforesaid background, the factual position prevailing with regard to invoking SARFAESI ACT by bank and financial institution is that they blatantly violate the Principles of Natural Justice.

Fundamental justice is a legal term that signifies a dynamic concept of fairness underlying the administration of justice and its operation, whereas principles of fundamental justice are specific legal principles that command significant societal consensus as fundamental to the way in which the legal system ought fairly to operate. These principles may stipulate basic procedural rights afforded to anyone facing an adjudicative process or procedure that affects fundamental rights and freedoms, and certain substantive standards related to the rule of law that regulate the actions of the state.

The degree of protection dictated by these standards and procedural rights vary in accordance with the precise context, involving a contextual analysis of the affected person's interests. In other words, the more a person's rights or interests are adversely affected, the more procedural or substantive protections must be afforded to that person in order to respect the principles of fundamental justice. A legislative or administrative framework that respects the principles of fundamental justice, as such, must be fundamentally fair to the person affected, but does not necessarily have to strike the ‘right balance' between individual and societal interests in general.

In view of what has been stated above, unless the legal position and powers of Authorised Officer is clearly defined without any ambiguity and his responsibility and accountability are clearly established, he is bound to misuse and abuse his authority with impunity as is being practiced now. Besides, as long as he is an employee of the bank and financial institution, he is bound to be partial and the Principles of Natural Justice will be the casualty and the aggrieved borrower will never get justice from the Authorized Officer.

As it is, the representation and objections being submitted by the borrower to the Authorised Officer is nothing but a futile exercise and a ritual having no meaning and is a mere waste of time. Hence it is imperative that the Authorised Officer shall be a knowledgeable person well versed in law and practice of banking and a person without bias and neutral who shall be pragmatic and practical to find effective solutions to the problems faced by both the bank and financial institution and the borrower so that he can uphold justice, equity and good conscience. Otherwise, power without responsibility and accountability corrupts and absolute power corrupts absolutely.

Written By: T. R. Radhakrishnan - Banking & Management Consultant, NPA Resolution Consultant, H. R. Trainer: Corporates, Colleges & Schools, & Freelance Writer, No. 8, Morya Gardens, Kanadia Road, Indore - 452016 Ph no: (0)9229248048, E-mail: [email protected]
The author invites comments from readers and their views on the power of the Authorised Officer