The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI Act) is a cornerstone of Indian financial policy that addresses the crucial issue of non-performing assets (NPAs).
Section 13 of the Act is particularly essential since it outlines the process for secured creditors to enforce security interests.
Direct enforcement by secured creditors
Section 13(1) enables secured creditors to assert their security interests without going through a court or tribunal. This law supersedes Sections 69 and 69A of the Transfer of Property Act, 1882, which previously handled mortgage enforcement.
Default in Payment
When a borrower fails to repay a secured debt or any instalment, and the account is categorized as a non-performing asset (NPA), the secured creditor may issue a notice to the borrower. This notice requires the borrower to discharge their liabilities in full within 60 days. If the borrower fails to comply, the secured creditor may use the rights set forth in Section 13(4).
Exemptions and Special Cases
Borrowers who raised cash through debt instruments are exempt from the requirement to classify the debt as nonperforming assets. In certain cases, the debenture trustee can enforce the security interest in accordance with the conditions of the security papers, with any required amendments.
Notice Details
The notice must indicate the borrower’s payment obligation as well as the secured assets that will be enforced if the borrower fails to pay. The Security Interests (Enforcement) Rules outline the steps for serving the notice.
Borrower’s Objections
Upon receiving the notice, the borrower may make representations or raise objections. The secured creditor must consider these objections and, if they are deemed unjustified, communicate the reasons for rejection within 15 days. This communication does not grant the borrower the right to appeal to the Debts Recovery Tribunal (DRT) or the Court of District Judge under Sections 17 or 17A.
Discharge from Payment
Any payment made by a person to a secured creditor, as defined in Section 5(4)(d), shall result in a valid discharge, just as if the payment had been made to the borrower.
Rights regarding immovable property
If the sale of an immovable property is postponed due to a lack of offers satisfying the reserve price, a secured creditor’s officer, if approved, may bid on the creditor’s behalf at a later sale. If the creditor wins the auction, the purchase price is deducted from the claim amount. The provisions of Section 9 of the Banking Regulation Act of 1949 apply to such properties.
Transfer of Secured Asset
Any transfer of a secured asset by the secured creditor after gaining control or management vests all rights in the transferee as if the asset’s owner made the transfer himself.
Recovery of Expenses
All costs, charges, and expenditures incurred by the secured creditor in resolving the obligation are recoverable from the borrower. Funds obtained through such a recovery are first applied to reimburse these charges, then to the secured obligation, with any excess returned to the rightful owner.
Payment of Dues
The secured assets will not be transferred if the borrower pays the entire amount owed, including costs and expenses, prior to the publication of the notice for a private or public auction. If steps for the transfer have already been taken, no further action will be conducted.
Combined Funding
When joint financing is involved, the exercise of rights under Section 13(4) requires the approval of creditors who hold at least 60% of the outstanding debt. Proceeds from the sale of secured assets in the case of a company’s liquidation are allocated in accordance with Section 529A of the Companies Act.
Secured Debtors Keeping Proceeds of Sale
After paying the workmen’s compensation to the liquidator, a secured creditor of a company going through bankruptcy may keep the money from the sale. In the event that the amount owed is approximated, the creditor deposits the projected amount and then corrects any errors.
Secured Creditors’ Rights
In addition, secured creditors are not required to follow the procedures outlined in Section
13(4) before initiating action against guarantors or selling pledged assets.
No Borrower Transfer
The borrower cannot transfer secured assets after receiving the notice without the creditor’s written approval.
Conclusion
Section 13 of the SARFAESI Act provides secured creditors with a streamlined debt recovery approach that avoids protracted judicial proceedings. The provision makes it easier to reclaim nonperforming assets quickly, which improves lending institutions’ financial stability. Understanding these procedures is critical for both creditors and borrowers in managing their rights and obligations properly.
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