SARFAESI ACT

The SARFAESI Act was passed on December 17, 2002, in order to lay down processes to help Indian lenders recover their dues quickly. The SARFAESI Act essentially empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers. Before this Act took effect, financial institutions had to take recourse to civil suits in the courts to recover their dues, which is a lengthy and time-consuming process.

ARCs or Asset Reconstruction Companies which buy out distressed assets are the alternative that banks use to offload doubtful debt, to ensure more focused and efficient resolution under sarfaesi act.

DEFINITIONS

Section 2(b) asset reconstruction

 means acquisition by any [asset reconstruction company]of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance.

(ba) “asset reconstruction company” 

means a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both.

f) Borrower

•  means any person who has been granted financial assistance by any bank or financial institution 
• who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution 
• and includes a person who becomes borrower of a [asset reconstruction company]consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance

(j) “default” means— 

• non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor
•  non-payment of any debt or any other amount payable by the borrower with respect to debt securities after notice of ninety days demanding payment of dues served upon such borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of such debt securities.

(k) “financial assistance” 

means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution.

(l) “financial asset” means debt or receivables and includes— 

• a claim to any debt or receivables or part thereof, whether secured or unsecured
•  any debt or receivables secured by, mortgage of, or charge on, immovable property; or 
•  a mortgage, charge, hypothecation or pledge of movable property
•  any right or interest in the security, whether full or part underlying such debt or receivables
•   any beneficial right, title or interest in any tangible asset 
•   any right, title or interest on any intangible asset
•  any financial assistance 
   

(n) “hypothecation” 

means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property; 

(o) “non-performing asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,— 

in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body

(u) “[qualified buyer]”

means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or asset reconstruction company which has been granted a certificate of registration under sub-section (4) of section 3 or any asset management company making investment on behalf of mutual fund] or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 

(z) “securitisation” means

 acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such asset reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise

(zd) “secured creditor” means

• any bank or financial institution holding any right, title or interest upon any tangible asset or intangible asset. 
• an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction.

3. Registration of asset reconstruction companies.
No asset reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without—

obtaining a certificate of registration.
having net owned fund of not less than 100 crore rupees.

Every Asset reconstruction company shall make an application for registration to the Reserve Bank.
conditions to be fulfilled -
1) that the ARC has not incurred losses in any of the three preceding financial years.
2) has made adequate arrangements
3)directors have professional experience and not convicted for moral turpitude.

The important aspects of SARFAESI ACT are

1. Furnish of Demand Notice after borrower’s account has been classified as Non-Performing Asset (NPA):

1.1 After classifying the borrower’s account as NPA, the secured creditor must furnish a written demand notice to the borrower to discharge its liabilities within sixty (60) days. The demand notice shall contain 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. (Section 13(2) and Section 13(3)].

1.2 The Borrower retains the right to borrower make any representation or raise any objection against the notice to the Secured Creditor within the sixty (60) days notice period. The Secured Creditor must consider this representation/objection and if such an objection is raised or representation is made, and the Secured Creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the same shall be communicated to the borrower within 15 days with written reasons for non-acceptance. [Section 13(3A)].

1.3 Rejection of the representation made by the borrower and the reasons communicated does not confer any right upon the borrower to file an application to the Debts Recovery Tribunal (DRT) or the Court of District Judge.

1.4 After receipt of the demand notice, the borrower can not transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without the prior written consent of the secured creditor. [Section 13(13)]

2. Recourse to remedies provided under Section 13(4) in case of failure to discharge debt:

2.2 Take the possession of the secured assets of the borrower. This includes the right to transfer by way of lease, assignment or sale for realising the secured asset.

2.3 Take over the management of the business of the borrower. This also includes the right to transfer by way of lease, assignment or sale for realising the secured asset. However, in case of taking over the management of the business, the right to transfer shall be exercised only where the substantial part of the business of the borrower is held as security for the debt. Additionally, in case the management of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt.

2.4 Appoint any person as the ‘Manager’ to manage the secured assets the possession of which has been taken over by the secured creditor.

2.5 Require 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 dues to the secured creditor. Such demand must be accompanied by written notice. The payment made by such person to the secured creditor shall give a valid discharge as if he has made payment to the borrower.

2.6 In case the dues of the secured creditor (including the costs, charges and expenses incurred) are tendered at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset. [Section 13(8)]

3. In case of Multiple Secured Creditors:

3.1 In the case of there is more than one secured creditor or if there is joint financing of the financial asset(s) by secured creditors, only such rights shall be exercised by the secured creditor under Section 13(4) which have been agreed upon by the secured creditors representing not less sixty per cent (60%) in value of the ‘amount outstanding’ as on a ‘record date’. [Section 13(9)]

3.2 ‘Amount outstanding’ shall include principal, interest and any other dues payable by the borrower in respect of secured asset as per the books of account of the secured creditor. ‘Record date’ means the date agreed upon by the secured creditors representing not less than sixty per cent (60%) in value of the amount outstanding on such date.

4. When Borrower is a Company and is under Liquidation:

4.1 In the case the Borrower Company is in liquidation, the amount realised from the sale of secured assets must be distributed in accordance with the provisions of section 529A of the Companies Act, 1956.

4.2 The secured creditor of such company, who opts to realise his security may retain the sale proceeds of his secured assets after depositing the workmen’s dues with the liquidator. The workmen’s dues (actual or estimated) are intimidated to the secured creditor by the Liquidator of the company.

5. Additional Rights of the Secured Creditor:

5.1 The Secured Creditor can take the assistance of the Chief Metropolitan Magistrate or District Magistrate (with competent jurisdiction) in taking possession or control over secured asset through a request in writing.

5.2 In case the dues of secured creditor are not fully satisfied with the sale proceeds of the secured assets and by the measures, as enumerated in Section 13(4) of the Act, the secured creditor retains the right to file an application to the Debts Recovery Tribunal (DRT) having jurisdiction or any court with appropriate jurisdiction for the recovery of the balance amount from the borrower.

5.3 The Secured Creditor has the right to proceed against the guarantors or sell the pledged assets without first taking any of the measured specified in Section 13(4) of the Act.

REMEDIES AVAILABLE WITH BORROWER OR AGGRIEVED PERSON:

6. Application to DRT within forty-five (45) Days:

6.1 If aggrieved by any action taken by the secured creditor under Section 13(4), an application can be brought to the Debts Recovery Tribunal within forty-five (45) days from the date on which such measure had been taken. [Section 17]

6.2 Such application can be filed before the DRT within the local limits of whose jurisdiction (I) the cause of action, wholly or in part, arose; (II) where the secured asset is located; or (III) where the branch or any office of a bank or FI is maintaining an account in which debt claimed is outstanding for the time being is present. [Section 17 (1A]

6.3 The DRT has the power to (I) declare the measures taken by the secured creditor as invalid; (II) order the restoration of the possession of secured assets or management of secured assets to the borrower or other aggrieved person; (III) or pass such other direction as it may consider appropriate. This includes an order to make compensation as enumerated in Section 19. [Section 17(3)]

6.4 The application filed with the DRT must be disposed within sixty days from the date of such application. However, the DRT may extend the said period for reasons to be recorded in writing up to a maximum of 4 months. [Section 17(5)]

6.5 However, if the application is not disposed within the period of four months, another application may be made to the DRAT for directing the DRT for expeditious disposal of the application.

7. Appeal to DRAT within thirty (30) Days:

7.1 A person aggrieved by any order made by the DRT under Section 17 may file an appeal to the DRAT within thirty (30) days from the date of receipt of the order of DRT.

7.2 The Aggrieved person must deposit with the DRAT a minimum of fifty per cent (50%) of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less. However, the DRAT has the power to reduce the amount to a minimum of twenty-five per cent (25%) of debt after recording reasons in writing.

Role of Chief Metropolitan Magistrate or District Magistrate

The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured creditor in taking possession of secured asset. These officers will make sure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto; and forward such assets and documents to the secured creditor.

Provisions of this Act not to apply in certain cases.

(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872

(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872

(c) creation of any security in any aircraft under Aircraft Act, 1934

(d) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930

(e) any security interest created in agricultural land.

(f) any case in which the amount due is less than twenty per cent. of the principal amount and interest thereon.