SARFAESI and Banking Recovery, Indore

The chambers act for banks and financial institutions in the enforcement of security interest, and in recovery proceedings before the Debts Recovery Tribunal and the civil courts.

How enforcement under SARFAESI works

The SARFAESI Act 2002 allows a secured creditor to realise its security without first obtaining a decree. The sequence is prescribed and each step has its own consequences.

1. Classification as a non performing asset. Enforcement under the Act is available only once the account has been classified as an NPA in accordance with the directions of the Reserve Bank of India.
2. Demand notice, Section 13(2). A notice is issued to the borrower calling upon them to discharge the liability in full within sixty days, setting out the amount and the secured assets intended to be enforced.
3. Representation and reply, Section 13(3A). The borrower may make a representation. The secured creditor must consider it and, if it is not accepted, communicate reasons within fifteen days. A failure to deal with the representation is one of the more common grounds on which enforcement is challenged.
4. Possession, Section 13(4). On default after sixty days the secured creditor may take possession of the secured assets, take over management, or appoint a manager.
5. Assistance of the Magistrate, Section 14. Where physical possession requires assistance, an application lies to the District Magistrate or Chief Metropolitan Magistrate, supported by an affidavit in the form the section prescribes.
6. Sale. Valuation, notice and sale follow the Security Interest (Enforcement) Rules 2002. The notice periods in the rules are strict and a sale conducted in breach of them is open to challenge.

The borrower's remedy

A person aggrieved by a measure taken under Section 13(4) may apply to the Debts Recovery Tribunal under Section 17, within forty five days of the measure. An appeal from the Tribunal lies to the Debts Recovery Appellate Tribunal under Section 18, which ordinarily requires a pre deposit.

Two points arise constantly in practice. First, the civil court's jurisdiction is barred by Section 34 in respect of matters the Tribunal is empowered to determine, so a suit filed instead of a Section 17 application is usually met with a plea of bar. Second, the forty five day period runs from the measure complained of, not from the date the borrower learns of its consequences.

Recovery before the Debts Recovery Tribunal

Separately from SARFAESI, a bank may file an original application under the Recovery of Debts and Bankruptcy Act 1993 for recovery of debts above the prescribed threshold. The two routes are not mutually exclusive and are frequently pursued together, with the Section 13 measures proceeding while the original application is pending.

Interaction with insolvency

Where the borrower is a corporate debtor and the Insolvency and Bankruptcy Code 2016 is invoked, the moratorium under Section 14 halts enforcement against the assets of the corporate debtor once the corporate insolvency resolution process is admitted. Timing therefore matters a great deal, and the position of a personal guarantor is separate from that of the principal borrower.

Where these matters are heard

Applications under Sections 17 and 18 go before the Debts Recovery Tribunal and the Appellate Tribunal. Applications under Section 14 go before the District Magistrate. Writ petitions challenging the process go before the High Court of Madhya Pradesh at Indore. Suits and execution proceedings continue before the civil courts at Indore.

Frequently asked questions

How long does a borrower have to challenge a SARFAESI action?

Forty five days from the date of the measure complained of, by an application under Section 17 of the SARFAESI Act to the Debts Recovery Tribunal. The Tribunal may consider an application filed beyond that period only where sufficient cause for the delay is shown, so the date of the measure should be noted carefully at the outset.

Can a civil suit be filed against a SARFAESI notice?

Ordinarily not. Section 34 of the Act bars the jurisdiction of the civil court in respect of any matter which the Debts Recovery Tribunal is empowered to determine. The remedy is an application under Section 17. A civil suit may lie in narrow circumstances, for example where the action is alleged to be wholly outside the Act, but that is the exception rather than the route.

What is the sixty day notice under Section 13(2)?

It is the demand notice with which enforcement begins. It calls upon the borrower to discharge the full liability within sixty days and identifies the secured assets the creditor intends to enforce against. If the borrower makes a representation, the creditor must consider it and give reasons for non acceptance within fifteen days under Section 13(3A).

Does a guarantor have separate rights in SARFAESI proceedings?

A guarantor's liability under the contract of guarantee is ordinarily co extensive with that of the principal debtor, and enforcement can proceed against a guarantor's secured assets. However, the guarantor's position in insolvency is distinct from that of the corporate debtor, and a moratorium in respect of the corporate debtor does not by itself protect the guarantor.

What happens to a SARFAESI action if insolvency proceedings begin?

Once a corporate insolvency resolution process is admitted in respect of the corporate debtor, the moratorium under Section 14 of the Insolvency and Bankruptcy Code 2016 prohibits enforcement of security interest against the assets of the corporate debtor for its duration. Measures already completed before admission stand on a different footing from those still in progress.