Critical issues under SARFAESI Act, 2002?

It is always welcome to enable the Banks to recover their dues using the provisions of SARFAESI Act, 2002. It is known that it is very difficult for the Banks to approach Civil Court asking for a decree and getting that decree executed. With the intention of enabling the Banks to reduce their NPAs through faster recovery of dues, ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ was enacted. Despite constituting ‘Debt Recovery Tribunals’ under the RDDBI Act, 1993 and providing special procedure to be followed before the Tribunal, Banks could not reduce their NPAs as expected and it has led the legislature to enact ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’. It is all appreciable as the Banks deal with the public money and public interest is obviously involved in reducing the Banks’ NPA Accounts.

However, no one in this country should be denied of an effective remedy and the criticism is that the provisions of SARFAESI Act, 2002 are being misused by the Banks at times and it is draconian. The issue went to Supreme Court and the constitutional validity of SARFAESI Act, 2002 was upheld, however, the judiciary was very much cautious of the interests of the borrowers and providing them an effective remedy.  From then, judiciary in this country has made every effort to ensure that the object of the SARFAESI Act, 2002 is not diluted and at the same time, the interests of the borrowers are also protected. Lot of confusion was there initially as to how certain provisions of SARFAESI Act, 2002 are to be interpreted; however, many issues are settled now with judiciary taking consistent stand on many issues.

We can not simply brush aside the concerns of the borrowers and the interest of the borrowers in the property mortgaged with the Bank. Though right to property is not a fundamental right, the Supreme Court has highlighted the significance of right to property as it is a Constitutional Right and the relevant observation of the Supreme Court in Karnataka State Financial Corporation Vs. N.Narasimahaiah  (2008 (5) SCC 176), is as follows:-

"40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation."

"In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round."

In-spite of the clarifications and the efforts of the judiciary in providing guidance as to how the provisions of SARFAESI Act, 2002 are to be interpreted and followed, many still believe that certain issues are still to be addressed under SARFAESI Act, 2002. Some of the critical issues under SARFAESI Act, 2002 are dealt-with hereunder.

1: NPA classification & settlement of issues at an early stage itself

Many borrowers feel that they are being harassed by the Bank officials unreasonably and using the provisions of SARFAESI Act, 2002. They claim that they are not ‘willful defaulters’ and even if there is some kind of default, they are willing to correct the same and honour the commitments agreed upon.  While in some cases, the Bank Officials rightly show some kind of interest in helping the borrowers within the legal frame-work, in some cases, the Bank Officials act unreasonably and invoke the provisions of SARFAESI Act, 2002 by classifying the account as ‘Non-performing Asset’ even if there is a possibility of regularizing the loan account. Obviously, the Bank should follow the guidelines issued by the Reserve Bank of India in classifying any loan account as ‘Non-performing Asset’. But, it is a question of interpretation largely and as to how the Bank Officials want to use the guidelines. Normally, the issue of classification of account as ‘Non-performing Asset’ is not dealt with by the Tribunal or the Courts and they tend to support the classification of any loan account as NPA if there is a default in payments as agreed. But, the guidelines issued by the Reserve Bank of India with regard to Asset Classification are not one-sided and it all depends upon interpretation of those guidelines in respect of a particular ‘loan account’ or borrower.

Dealing with the subject, the High Court of Andhra Pradesh in M/s. Sri Srinivasa Rice and Floor Mill Vs. State Bank of India (2007 (4) ALT 317: 2007 (4) ALD 649: 2007 AIR(AP) 252) was pleased to observe as follows:

“There is, as considered earlier in the judgment, no statutory format, express or by necessary implication, that requires the respondent bank to follow a particular or formal procedure or requires a formal declaration as a condition precedent to classification of debt as NPA. From the scheme of the Act in general and the provisions of Sec.13 (2) in particular the conclusion is compelling that the legislature has consecrated the power, authority and discretion (to classify a debt as a NPA) to the secured creditor within the generic guidelines to be ascertained from the definition of a non performing asset [Sec.2(o)].

A wide margin of discretion is available to the respondent bank as the secured creditor, within the legislative presents of the Act, to assess and classify a debt but within the legislative framework. This Court is not constituted an appellate authority over the bank’s exercise of discretion in this area. The respondent bank, as legislatively recognized is an institution having the requisite expertise to form a commercial judgment on known principles of banking practices and procedures fertilized by R.B.I directions and guidelines to assess and classify a debt as NPA. From the wealth of material pleaded in the counter-affidavit the bank had assessed the debt as non-performing asset. On facts, the petitioners have miserably failed to establish that such assessment by the bank is perverse or irrational to a degree warranting oversight and correction in judicial review.”

My view:

Many loan accounts infact can be settled at the stage of classifying the account as NPA if the Bank is accommodative and willing to regularize the loan accounts if the value of the asset has not gone down and if there is no problem with the quality of asset mortgaged. It is known that it is not mandatory for the Bank to intimate the borrowers informing about the classification of account as NPA and the consequences. It is also not correct to say that the borrower is unaware of the consequences of default.  In some cases, the Bank Officials do follow an amicable route and get their accounts regularized upholding the need of good relations with the borrower. But, it is not so in some cases and the movement the Bank issues a demand notice under section 13 (2) of the Act, they tend to take the proceedings further, though at any stage, the Bank can consider the proposal for regularization of accounts if there are no other disputes between the Bank and the borrower in relation to that particular loan transaction or transactions.

2: Powers of DRT

Section 17 of SARFAESI Act, 2002 provides a right of appeal against the action initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrower or any one aggrieved can challenge the possession notice issued under section 13 (4) of SARFAESI Act, 2002 and there is a time-limit prescribed for preferring an appeal. However, as the Courts have rightly made it clear that the borrower is entitled to question all measures initiated by the Bank pursuant to the possession notice under section 13 (4) and with this interpretation, there is no much relevance to the time-limit prescribed to prefer an appeal though it will be in the interests of the borrower to prefer an appeal as early as possible if there is a genuine grievance with the Bank.

While the rights of the borrowers or the persons aggrieved to prefer an appeal under section 17 of SARFAESI Act, 2002 is almost settled, the issue of powers of Debt Recovery Tribunal under section 17 of the Act are still debated. From the stage of maintaining that ‘the DRT is supposed to only look into the procedural issues’, with the interpretation of Courts, the scope of powers of DRT under section 17 of SARFAESI Act, 2002 is significantly expanded though  certain issues still requires consideration.

Emphasizing that the Debt Recovery Tribunal is empowered to set-aside a sale conducted under the provisions of the SARFAESI Act, 2002, the Hon’ble Supreme Court of India in CIVIL APPEAL NO. 4429 OF 2009 (2009 (8) SCC 366, 2009 (8) MLJ 897; 2009 (8) SCJ 979) was pleased to observe as follows:

“23. The intention of the legislature is, therefore, clear that while the Banks and Financial Institutions have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting the DRT with authority after conducting an adjudication into the matter to declare any such action invalid and also to restore possession even though possession may have been made over to the transferee. The consequences of the authority vested in DRT under Sub-Section (3) of Section 17 necessarily implies that the DRT is entitled to question the action taken by the secured creditor and the transactions entered into by virtue of Section 13(4) of the Act. The Legislature by including Sub-Section (3) in Section 17 has gone to the extent of vesting the DRT with authority to even set aside a transaction including sale and to restore possession to the borrower in appropriate cases.”

Emphasizing that the Debt Recovery Tribunal can look into the issue of claims and counter-claims under section 17, the Madras High Court in Misons Leather Ltd. Vs. Canara Bank (2007 (4) MLJ 245), was pleased to observe as follows:

“In a given case, the claim of the Bank/Financial Institutions may be barred by limitation or there may be cases, where the adjustment of the amount paid is not reflected in the notice or the calculation of interest may not be in accordance with the contract between the parties. Needless to say that all such grounds, which render the action of the Bank/Financial Institutions illegal can be raised in the proceedings under Section 17 of the Act before the Debt Recovery Tribunal.”

Dealing with the issue straight away, the Hon’ble Calcutta High Court earlier in Star Textiles and Industries Ltd Vs. Union of India  (2008 (3) WBLR 385), was pleased to observe as follows:

“(14.) THE legislature having conferred power on the Debts Recovery tribunal to decide as to whether measure (s) taken by the secured creditor in terms of Section 13 (4) of the Act is/are in accordance with the provisions of the Act or not, it necessarily has to decide whether pre-conditions for issuance of notice under Section 13 (2) existed or not. That would involve a determination as to whether there has been default on the part of the borrower to repay the secured debt or not and further, as to whether classification of the account as non-performing asset has been made in accordance with the directions or guidelines as referred to in Section 2 (o) of the Act or not. If the Debts Recovery tribunal is satisfied that recourse has been taken to measures specified in section 13 (4) of the Act not in accordance with the provisions contained in sections 13 (2) read with 2 (o) of the Act, it has the authority to declare the action of the secured creditor as invalid. At the same time, the Debts Recovery tribunal may in a given situation find no fault and uphold the action of the secured creditor. Also, in the exercise of power conferred by Section 17 of the act, the Debts Recovery Tribunal may uphold partially the action of the secured creditor by pronouncing that amount "x" is not the correct computation of liability, but it is "x - y" which is the liability. That would amount to determination of the exact amount of debt due and payable by the borrower.”

My view:

Though the Debt Recovery Tribunal is empowered to deal with the issues of quantum of debt and the related claims under section 17 of SARFAESI Act, 2002, there is a criticism that the Debt Recovery Tribunal avoids adjudication on certain issues and helps the Bank by allowing the Appeal filed by the borrowers under section 17 on technical grounds and enabling the Banks to further deal with the borrower. If this is the case, the borrower is forced to approach Tribunal many times and he is made to run from pillar to post. Logically, the borrower can insist the Debt Recovery Tribunal to deal with the issues raised by him in his appeal and if there is an observation in the order against the Bank and for the borrower, then, that is like a decree unless reversed and the observations do matter and have binding nature on Banks. This is what is supposed to happen if the borrower has a really good case with regard to the quantum of amount demanded by the Bank, but, it is very rare to see issues proceeding this way as many allege. If the DRT is hesitant or not effective in addressing all the issues raised by the borrower in his appeal under section 17, then, the borrower will be left with no remedy and he can not also approach the Civil Court in view of section 34 and even if he approaches the Civil Court, it is very difficult to convince and maintain a Civil Suit in respect of a loan transaction where the Bank has initiated SARFAESI proceedings.

3: Sale of Assets under SARFAESI Act

Sale of Assets by the Bank under the provisions of SARFAESI Act, 2002 is often criticized by the borrowers. In some cases, the auction process is hurriedly completed and it would be extremely difficult for the borrowers to get the transaction set-aside though the DRT is empowered to do so under section 17. It is the responsibility of the Bank to ensure that they get the maximum possible price for the property in Public Auction as they are the trustees of the property and as the balance sale consideration, after adjustments, goes to the borrower. There is lot of complication in this process and it is very difficult for the borrowers at times to fight with the Banks and it has something to do with the issue of lack of proper understanding of procedures and law under SARFAESI Act, 2002. Not only while auctioning the properties under SARFAESI Act, 2002, the Bank exercise enormous amount of discretion when many properties are available for auction and the disposal of a property chosen by the borrower clears the debt.  Even from the point of view of the bidder or purchaser, there can be issues. There may be cases where the bidder or the purchaser paid the entire sale consideration and litigation coming to Courts leading to non-conferment of complete ownership right. If the delay between the payment of sale consideration and actual conferment of clear title is more, the bidder or purchaser is also in trouble as he will only get a minimum interest over his investment if the Sale is finally set-aside and the Bank is asked to repay the Sale Consideration to the auction-purchaser.

Dealing with the rights of the borrower in getting maximum possible price to the property in a public auction conducted by the Bank and the vis a vis responsibility of the Banks, the Hon’ble Madras High Court in  K. Raamaselvam & Others Vs. Indian Overseas Bank, 2009 (5) CTC 385, 2009 (5) LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, was pleased to observe as follows:

“For example, if the secured creditor, on the basis of the relevant materials, comes to a conclusion that the highest bid offered, even though higher than the reserve price, does not reflect the true market value and there has been any collusion among the bidders, the secured creditor in its discretion may refuse to confirm such highest bid notwithstanding the fact that the highest bid is more than the upset price. This is because the secured creditor is not only interested to realise its debt, but also expected to act as a trustee on behalf of the borrower so that the highest possible amount can be generated and surplus if any can be refunded to the borrower. The first proviso in no uncertain terms makes it clear that no sale can be confirmed by the authorised officer, if the amount offered is less than the reserve price specified under the Rule 8(5). However, the subsequent proviso gives discretion to the authorised officer to confirm such sale even if the bid is less than the reserve price, provided the borrower and the secured creditor agree that the sale may be effected at such price which is not above the reserve price. This is obviously so because the property belongs to the borrower and as security for the secured creditor and both of them would be obviously interested to see that the property is sold at a price higher than the reserve price. However, if both of them agree that the property can be sold, even it has not fetched a price more than the reserve price; the authorised officer in its discretion may confirm such auction.”

My view:

Though it is settled that the Bank is supposed to mandatorily follow the procedure prescribed for conduct of a public auction under SARFAESI Act, 2002, it all depends upon the facts and circumstances of the case and the underlying issue is getting the maximum possible price for the property.

4. High Court’s Jurisdiction in a proceeding under SARFAESI Act, 2002

Though High Courts used to entertain writ petitions under Article 226 of Constitution of India challenging the notice under section 13 (2) of SARFAESI Act even initially, there was a considerable amount of restraint and the emphasis was always to ensure that the borrower raises all his issues under section 17 of the Act by preferring an Appeal.  The jurisdiction under Article 226, 227 and Article 32 of Constitution of India are untouchable and the Courts can only take a decision as to when to exercise such a jurisdiction or not. It is laudable that the High Courts have not proceeded in diluting the provisions of SARFAESI Act, 2002 and the Courts have strengthened the process in public interest and in the interests of the Bank.

However, considering the effectiveness of remedy available before the Debt Recovery Tribunal and clear arbitrariness in dealing with the borrowers under SARFAESI Act, 2002, many feel that there is no wrong if the High Court entertains Writ Petitions under Article 226 and as the High Court will also pass reasoned order as, now a days, it is not taking much time to get a Writ Petition disposed of. Again, the Courts understand the need of early disposal of Writ Petitions in SARFAESI matters and great caution is exercised in this regard as I feel.  Many believe that the borrowers are unnecessary made to approach the Debt Recovery Tribunal where the process is slow for the borrowers and where the borrowers are made to deposit substantial amount of outstanding due for getting any interim stay. Once the borrower approaches the Debt Recovery Tribunal and if he is aggrieved of the proceedings of the DRT or any order, the next remedy available for him is to file an appeal before the DRAT which is again a very slow process and not effective.  Again, if it is a challenge against the final order in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to deposit substantial amount and it can even be 75%. Thus, the borrower is made to deposit the entire money or forget his property even when his grievance is not adjudicated.

Emphasizing that ordinarily the borrower is not allowed to knock the jurisdiction of High Court under Article 226 in SARFAESI matters, the Calcutta High Court, in Annapurna Vs. State of West Bengal, 2009 (4) CalLT 557, 2009 AIR(Cal) 236, was pleased to observe as follows:

“25. The overriding provision in Section 35 of the Act and the intent thereof apparent from Section 37 thereof that provides that the Act is in addition to, and not in derogation of, certain other regulatory and general statutes, conceives of a single window redress before the Debts Recovery Tribunal. The jurisdiction under Article 226 of the Constitution cannot be taken away by such a statute but a grievance capable of being redressed by the tribunal under the said Act should ordinarily not be allowed to proceed in the High Court.”

On the same lines and in support of exercise of extraordinary jurisdiction under Article 226 even in matters where SARFAESI Act is invoked and dealing with the argument of availability of alternative remedy, the Hon’ble Madras High Court in Sheeba Philominal Merlin & Another Vs. The Repatriates Co-op Finance & Development Bank Ltd., Chennai & Others, 2010 (4) LW 497, 2010 (5) CTC 449, 2010 (7) MLJ 882, was pleased to observe as follows:

“35. With regard to alternative remedy, it is seen that there is a statutory violation by not issuing notice under Section 13(2) and 13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002. There is contravention of statute and violation of principles of natural justice and also violation of constitutional right to hold property as per Article 300A of the Constitution of India. It has been held by the Honourable Supreme Court in Vimala Ben Ajith Bhai Patel -Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right to property can be taken away only as per law and right to hold the property has been glorified as "Human Right".

36. That apart, it is well settled law that availability of an alternative remedy is not an absolute bar for exercising the writ jurisdiction and it is only a self-imposed restraint on its power. This has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs- Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of availability of alternate remedy miserably fails. The petitioners cannot approach the Tribunal, as the measures taken by the Bank were belatedly known to the petitioners and by that time the time prescribed under the Act was over. The Judgement in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact, justifies the contention of the petitioners. As per the judgement, Courts cannot extend the time limit prescribed by the Statute. As such the only remedy for the petitioners is to file a writ petition which has been rightly done by them. 

37. The Tribunal is not competent to look into violation of fundamental rights and constitutional rights and this Court being a custodian of Constitutional rights is entitled to examine the matter. A Constitution Bench of the Honourable Supreme Court in its judgment in State of West Bengal and others -Vs- The Committee For Protection of Democratic Rights, West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of the Constitution of India can be exercised for enforcing any legal right conferred by a statute and it is further held that under Article 226 of the Constitution of India, the High Court has got more wider power than the Honourable Supreme Court. In Secretary Cannanore Muslim Educational Association, Kanpur vs. State of Kerala reported in 2010 (5) SCALE 184, the Apex Court held that the High Court is conferred with wide power to " reach injustice whenever it is found". Therefore as injustice is writ large and glaring, necessarily the judicial arm of this court has to reach there and it cannot be prevented by plea of availability of alternative remedy.”

My view:

If there is clear unfairness or arbitrariness on the part of the Bank in invoking the provisions of SARFAESI Act or in the process, in my view, the High Court should provide relief to the borrower without laying much emphasis on the issue of availability of alternative remedy under section 17 of SARFAESI Act, 2002. Banks are in no way impacted with this as the High Courts are always concerned with the public interest and as they will be disposing of the Writ Petitions under Article 226 so early, on request, in respect of SARFAESI matters.

5. Civil Court’s jurisdiction:

There is a clear Bar under section 34 of SARFAESI Act, 2002 on Civil Courts in dealing with SARFAESI related issues. It is also very difficult to convince a particular Civil Court that it has jurisdiction to entertain a particular suit against the Bank irrespective of Bank referring to the provisions of SARFAESI Act.  Civil Court’s jurisdiction is not completely barred and infact can not be barred even in cases where the Bank has invoked the provisions of SARFAESI Act, 2002. If the DRT is not clearly empowered to deal with certain issues raised by the borrower or to be raised by the borrower or the aggrieved person, the borrower or the aggrieved can certainly approach Civil Court and it is settled. But, when a borrower is entitled to approach the Civil Court depending upon the facts of that particular case, then, it is certain that it is not easy to convince a Civil Court that it has jurisdiction to entertain a particular suit against the Bank when the Bank has invoked the provisions of SARFAESI Act, 2002. If the Civil Court is convinced of entertaining a particular suit against the Bank, then, obviously, there can be an injunction against the Bank in proceeding under the provisions of SARFAESI Act and there is nothing to worry on this as only very few negligible cases qualify to be maintained before a Civil Court. There is nothing to worry for the Banks too with regard to Civil Court’s jurisdiction and they are entitled to immediately seek redressel under Article 227 if they feel that the Civil Court is exercising the jurisdiction which is not vested.

There can really be genuine cases which can be and should be decided by the Civil Court. However, with some borrowers trying to stall the SARFAESI proceedings by filing a suit in Civil Court and High Courts coming heavily, it is often felt that the borrower has no remedy before a Civil Court if the Bank invokes the provisions of SARFAESI Act once.  It is a misconception and a Civil Suit before a Civil Court against the Bank is maintainable in appropriate cases irrespective of whether the Bank has invoked the provisions of SARFAESI Act or not.

Note: the views expressed are my personal.