Author: Abhigyan, IV Year of B.A.,LL.B, from Delhi Metropolitan Education, GGSIPU.
Introduction
India's banking industry has played a critical role in the country's attempt to achieve fast economic growth but the road to this was not really easy and smooth. The then existing legal framework relating to commercial transactions was not able to not keep up with evolving business practises and banking sector reforms. This resulted in a slow pace of recovery of defaulting loans which escalated the levels of non-performing assets of banks and financial institutions and were becoming a big hurdle to rapid development.
To overcome the problem of Non-performing assets and faster recovery of defaulting loans, Asset Securitisation and Reconstruction comes to the picture. We may now have a brief intro to what Asset Securitisation is.
Asset Securitisation and Reconstruction
Whenever a bank provides a secured loan be it a car, house or property loan or any type of loan, the banks keep with themselves some assets as mortgage in case that when there is a default in loan, the same mortgage can be used by the bank to recover their money given as loan. In such cases, the bank creates a pool of all such securities kept by the bank and coverts them into marketable bonds and debentures which can be easily liquefied to create fresh money. This is called Asset Securitisation. The first structured Asset Securitisation was done in USA in 1970.
The crisis of 2008 was also a result of bad mortgages kept by the bank as a security against which bonds were liquidised. As a consequence, the financial structure collapsed causing economic crisis.
SARFAESI ACT, 2002
In India, prior to the enactment of SARFAESI, the mode of recovery was governed by the Recovery of Debts due to Banks and Financial Institutions Act, however there were many loopholes in the act of which the lawyers and borrowers took advantage. In order to fill those gaps, the central government established the various committees such as Narasimham Committee I (1991) and Narasimham Committee II (1998), to examine banking sector reforms.
These committees assessed the necessity for changes in the legal framework and form new securitization law that allows banks and financial entities to take possession of securities and sell them without the need for court action. Finally, in 2002, SARFAESI ACT was passed.
Two main portals, i.e. the Debts Recovery Tribunal (DRT) and The Debts Recovery Appellate Tribunal (DRAT) were formed which allows for the speedier and procedural way of recovery.
Section 17; Remedies available with borrower or aggrieved person
Section 13 of the SARFAESI act provides for the secured creditor to enforce the security in case the account of borrower has been declared NPA. The secured creditor (FI/ bank) is required to send a 60-day notice to the borrower seeking repayment of the debt and outlining the assets over which the secured creditor intends to exercise its security interest. If the borrower fails to discharge its obligations to secured creditors by the end of the 60-day notice period, the secured creditor has the right to enforce security interest over secured assets under section 13(4).
Section 17 of SARFAESI provides remedies to the borrower or aggrieved person by any of the measures taken by the secured creditor referred in section 13(4). We will know have a detailed look into section 17.
Section 17 reads as:
“Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, 2[may make an application along with such fee, as may be prescribed,] to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken: Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.
Explanation. - For the removal of doubts, it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under this sub-section.
(1A) An application under sub-section (1) shall be filed before the Debts Recovery Tribunal within the local limits of whose jurisdiction--
(a) the cause of action, wholly or in part, arises;
(b) where the secured asset is located; or
(c) the branch or any other office of a bank or financial institution is maintaining an account in which debt claimed is outstanding for the time being.”
Clause (1) states that any person aggrieved from the measures taken by secured creditor under section 13(4) can make an application in the DRT within 45 days of the date when such measure has been taken. A proviso has been included stating that different fees may be for the application from the borrower itself and a person other than the borrower making the application.
The explanation under clause (1) states that the borrower cannot make an application for the non-acceptance of the representation or objection by the secured creditor.
Clause (1A) states that
Section 17 further reads as:
(2) “The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.
(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management or restoration of possession, of the secured assets to the borrower or other aggrieved person, it may, by order, -
(a) declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the secured creditor as invalid; and
(b) restore the possession of secured assets or management of secured assets to the borrower or such other aggrieved person, who has made an application under sub-section (1), as the case may be; and
(c) pass such other direction as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section 13.”
Clause (2) states that the DRT shall examine whether the measure taken by the secured creditor under section 13(4) is in accordance with the provisions of the rule and under clause (3), if the DRT on the basis of facts and circumstances of the case and evidences so produced comes to a conclusion that such measures are not in accordance with the provisions of act, shall by order either declare the measure taken invalid; or restore the management or possession of secured asset of aggrieved person; or pass any such direction as the DRT may consider appropriate.
Section 17 further reads as:
4. “If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub-section (4) of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub-section (4) of section 13 to recover his secured debt.
(4A) Where-
(i) any person, in an application under sub-section (1), claims any tenancy or leasehold rights upon the secured asset, the Debt Recovery Tribunal, after examining the facts of the case and evidence produced by the parties in relation to such claims shall, for the purposes of enforcement of security interest, have the jurisdiction to examine whether lease or tenancy
(a) has expired or stood determined; or
(b) is contrary to section 65A of the Transfer of Property Act, 1882 (4 of
1882); or
(c) is contrary to terms of mortgage; or
(d) is created after the issuance of notice of default and demand by the Bank
under subsection (2) of section 13 of the Act; and
(ii) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (i), then notwithstanding anything to the contrary contained in any other law for the time being in force, the Debt Recovery Tribunal may pass such order as it deems fit in accordance with the provisions of this Act.”
Clause (4) states that if DRT declares that measure taken by secured creditor under section 13(4) is in accordance with provision of act, the secured creditor can take recourse to one or more measure for enforcement of security.
Clause (4A) states that if any person claims any tenancy or leasehold rights over the secured asset, the DRT will examine such claim and determine is the tenancy or lease has expired; or is contrary to provisions of TPA; or is contrary to terms of mortgage; or is created after the creditor issued notice under section 13 and if the tenancy or lease rights falls in any such category the DRT may take appropriate action.
Section 17 further reads as:
(5) “Any application made under sub-section (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application:
(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as specified in sub-section (5), any part to the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.”
Clause (5) states that DRT should deal with any such application within 60 days of filing which can be extended to 4 months and if the application is not disposed of as specified, an application can be filed to DRAT to order the DRT for speedier disposal of application.
Conclusion
Thus, provisions of SARFAESI act not only empowers the bank but also gives fair trial to the borrowers by giving efficacious remedy so that they can take recourse under section 17 of challenging every action of the secured creditor.