1. Representation/objection to notice u/s 13(2) before banks

The most Important section of Sarfaesi Act is section 13(2), which provides that if a borrower who is under a liability to a secured creditor, makes any default in repayment of secured debt and his account in respect of such debt is classified as non-performing asset, then secured creditor may require the borrower by notice in writing to discharge his liability within sixty days from the date of notice with an indication that if he fails to do so, the secured creditor shall be entitled to exercise all or any of its rights in terms of section 13(4) of the Act.

The first opportunity of being heard is provided to the borrower by section 13(3-A) which lays down that the borrower may make a representation in response to the notice issued under section 13(2) and challenge the classification of his account as an NPA as also the quantum of amount specified in the notice. If the banks or FIs come to the conclusion that the representation/objection of the borrower is not acceptable, then the reasons for non-acceptance are required to be communicated within 1 week.

It is worth noting that a proviso Is added to section 13(3-A) which states that reason so communicated shall not confer any right upon the borrower to file an application to the Debt Recovery Tribunal (DRT) u/s. 17 of Act.

Section 13(13) states that, no borrower shall after receipt of notice u/s. 13(2) transfer by way of sale, lease or otherwise any of his secured asset referred to in the notice, without prior written consent of the secured creditor. Thus, section 13(13) shows that the notice u/s. 13(2) in effect operates as an attachment/ injunction restraining the borrower from disposing of the secure asset. 

2. Writ petition challenging notice under section 13(2)

The borrower can challenge the notice u/s. 13(2) of Act in the Civil Court as well as in the High Courts by way of writ jurisdiction to defend his case. However, that is hardly sustainable.

In the case of D. Ravichandran V/s Indian Overseas Bank  it was held that the notice u/s. 13(2) of Act is really a show cause notice and ordinarily this court does not interfere with show cause notice.

The notice u/s 13(2) of the Act by itself does not affect any right or liability of the borrower. Hence, challenge to the notice u/s. 13(2) of the Act is premature, since it is possible that the secured creditor may be satisfied with the reply of the borrower to the aforesaid notice and may drop proceedings.

 Hence, all the wit petitions challenging the notice of u/s. 13(2) of the Act are dismissed on the ground that writ petitions are premature and the petitioners have an alternative remedy of raising all the points which they are raising in these writ petitions in their reply to notice u/s. 13(2) of the Act. It is-clear that borrower cannot approach the court or any other forum at the interlocutory stage of the proceedings that is from the issue of notice u/s. 13(2) till the final action taken u/s. 13(4) of the Act.

3. Borrowers’ right of appeal

If the borrower or any other person who had any tangible grievance against the notice issued u/s. 13(4) or action taken u/s. 14, then he/she could have availed remedy by filing an application u/s. 17(1) within 45 days from the date on which such measures were taken.

The expression ‘any person’ used in section 17(1) is of wide import. It takes within its fold, not only the borrower but also the guarantor or any other person who may be affected by the action taken u/s. 13(4) or u/s. 14. Both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders u/s. 17 and 18 and are required to decide matters within fixed time schedule.

4. Appeal to DRT

On receipt of possession notice u/s. 13(4) the borrower can prefer appeal before DRT u/s. 17, seeking stay of proceedings and to set aside the action initiated. Does the borrower lose right to file appeal if the limitation period of 45 days from the date of the receipt of the notice u/s. 13(4) expires? No, the following cause of actions can be pleaded-

I. The borrower can question all steps initiated by the bank pursuant to section 13(4).

II. Borrower can question sale proceeding.

III.   Can challenge order passed by the CMM/DM u/s. 14 of the Act.

IV. The legal preposition is well settled that court protects the rights of the borrower also.

5. The Appellate powers of DRT u/s 17 of the Act  

The DRT has elaborate powers and it can even restore the possession back to the borrower, in the event it finds the actions by the bank are illegal or incorrect. The Supreme Court has clearly held in the case of Mardia Chemical Ltd. that the proceeding u/s. 17 is in the nature of original proceeding and that even the amount which is claimed to be due to a bank as stated in the notice u/s. 13(2) can be challenged by the borrower. In an important decision on appellate power of DRT the High Court of Madras has held in the case of M/s Lakshmi Mills Private Ltd. v/s Indian Bank  as under :-

I. The right of the bank is not automatically suspended upon filing an application by the borrower u/s. 17 of the Act and secured creditor can proceed further in the matter, where no stay is granted by the Tribunal.

II. The Tribunal has power to impose the condition relating to deposit for grant of stay of auction

III. The Tribunal has no power to pass any Interim mandatory order relating to restoration of possession before finalization of the proceeding u/s. 17 of the Act.

IV. All the grounds, which rendered the action of the bank as illegal, can be raised In the proceeding u/s. 17 at the Act before the DRT.It is for the DRT to decide in each case whether the action of the bank was in accordance with the provisions of the said Act and legally sustainable.

5. Appeal to Debt Recovery Appellate Tribunal 

If a person is aggrieved by the order of the DRT,ha can file an appeal to the Appellate Tribunal within 30 day from the date of the receipt of DRT order. If the DRT or Appellate Tribunal holds that possession of asset by the secured creditor was wrongful and directs the secured creditors to return the assets to the borrower, the borrower shall be entitled to the compensation and costs as may be determined by the DRT or Appellate Tribunal. The Tribunal can also direct the return of the assets If the secured creditor had already sold or transferred the asset to a third party.

6. Interim stay order

The Jurisdictions of Civil Court has bean clearly barred under section 34 of the Act, stating that no Injunction shall be granted by any court or other authority In respect of any action taken or to be taken under Sarfaesi Act or the DRT Act.

The decision of the Supreme Court In the case of United Bank of India v/s Satyawati Tandon is a landmark Judgment on the issue of stay orders. It was held that normally the Supreme Court does not Interfere with the discretion exercised by the High Court to pass an interim order In a pending matter but, having carefully examined the matter, an exception have been made, because the order under challenge has the effect of defeating the very object of legislation enacted by the Parliament for ensuring that there are no unwarranted impediments in the recovery of debts due to banks.

The following observations are worth noting:-

I. The Nigh Court will ordinarily not entertain a petition under Article 226 of the Constitution, If an affective alternate remedy is available to the aggrieved person and that this rule applies with greater vigour in matters involving recovery of taxes, cess, fees, other type of public money and dues of the banks and financial institutions.

II. The High Court must insist that before availing remedy under Article 226 of the Constitution a person must exhaust the remedies available under the relevant statutes.

III. It is true that the rule of exhaustion of alternate remedy is rule of discretion and not one of compulsion, but it is difficult to fathom any reason why High Court should entertain a petition under Article 226 and pass interim order ignoring the fact that petitioner can avail effective alternative remedy by filing application, appeal, revision etc. and the particular legislations contain a detailed mechanism of redressal of his grievance.

7. Filing of Writ petition under Article 226 of Constitution 

Writ jurisdiction is an extraordinary jurisdiction of the High Court under Article 226 and 227 of the Constitution of India. There is consistency in the decisions that the High Court normally hesitates to entertain writ petition in the matter of Sarfaesi action by banks. This is in view of clear cut alternative remedy provided u/s. 17 and 18 of the Sarfaesi Act. The remedy of appeal to DRTand DRAT is available u/s. 17 and 18 of the Act, against notice for possession and enforcement of security interest.

It is settled legal preposition that a writ petition under Article 226 of the constitution is not maintainable, where there is an efficacious alternative remedy. It is generally pleaded that though alternative remedy is available, it is not efficacious.

The writ petition is however preferred by the borrower for the following reasons:-

a. Writ petition is not a costly affair, as no court fee is payable, whereas court fee has to be paid in case of appeal to DRT depending upon amount involved.

b. Writ petition once admitted takes lot of time in consideration for decision and the petitioner gets the desired breather. In comparison the matter is time bound exercise under DRT.

c. Borrowers feel that the action under the Sarfaesi Act will be automatically restrained if writ is admitted.

8. Classification of NPA can be questioned through writ 

Where the Bank is not correct in classifying the account as NPA, which is preliminary to initiate proceeding under the provisions of Sarfaesi Act, the High Court does interfere with the action initiated by the bank as held in Sravan Dal Mill Pvt. Ltd. v/s Central Bank of India1. Further interim relief may be granted to the borrower to regularise the account by continuing making payments.

By CA Surendra Agrawal – [email protected]

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24 Comments

  1. Rohit Jain says:

    The Kerala HC in case of Sunitha Roy v. Canara Bank held that the borrower can challenge the demand notice issued under section 13(2) of SARFAESI Act, 2002.

  2. Sarfaesi KL says:

    Hello Sirs,
    I am from Kerala, I stood as guarantor(unknowingly) for a loan taken by a fraudster nexus. This happened in 2009 at the time of my daughter’s marriage. I was in dare need of money and told this to one of my well wishers and neighbors. My house is situated in a land on which a 220KV transmission line is passing through, and the banks in hometown refused to accept it as mortgage and grant me loan. He told me that, he can manage to get hold with a business man(more than 100Km away from my house) and arrange a loan of 10L from IOB, Willingdon Island branch where that business man has all his transactions. Next day my well wisher neighbor, business man and another person came to my home and advised to go with them to the bank. Prior deed of my property was pledged as a mortgage long back(before the 220KV line came in to existence) for a business loan as a collateral security. They told, it’s not a big deal, the manager of IOB Willingdon is his close ally and he wont need much proof to sanction a loan. They asked me sign a notarized affidavit which described clearly that I am mortgaging my property to obtain a loan. We gone together to the Bank, but the Manager was on leave, they called him over phone and he arrived immediately at the bank. He told me that there will be a delay of 2-3 weeks to complete the processing and disburse of money. On my way back to home, that business man handed over 4Lrupees and told me that the remainder amount will be given after loan get approved. After this incident they didn’t contact me at all, I got busy with my daughter’s marriage and various functions there after. I tried to contact them many times to know the status of my loan, but from time to time they replied that the loan is not yet approved.After an year, I got registered letter from Bank saying that the loan taken by M/s SAS Tradelinks is defaulted and my property on which I am residing will be auctioned if the amount of 85L is not paid immediately. I felt dizzy and almost unconscious in reading the notice, next morning I went to the bank to see the manager. But to my surprise, old manager was not there and the new manager told me that I signed the documents for guaranteeing the already availed credit facility of M/s SAS Tradelinks. I was trying to get in touch with those people involved in this but all my attempts went in vain.They asked me not to file case against them in police station as it may further delay the repayment. Then I got registered notice from DRTC, up on getting this I filed petition against them in JFMC as well as DRTC. Both cases are going on, shall I have a chance to win this case? Prior deed of property is still with me, I signed the affidavit for obtaining loan not as guarantor, I have proof(News paper cuttings, FIRs) against this nexus in similar cases.

  3. Prasad says:

    Dear Sir,
    My brother had taken a loan on June 2017 about 65Lk from a Cholamandalam finance institution.. he passed away on Dec 2018 but we continue to pay the EMI for 7 months later we couldn’t my mother is the co-borrower and im the other son who is leaving separate since 2010 so we requested the bank to reduce the Interest rate and restructure the loan but the bank didn’t help and we have kept our property to sell in the market due to covid no one has come and they have served Notice 13(2) and published the notice in the newspaper last week.. do we have any chance to get a breather do we have any chance to appeal? kindly help

  4. Avishek Dey says:

    If a company is a sub-standard or npa account and new promoters/management takes over the company through share transfer and then the new management asks bank for funding the unit including clearing major part of the outstanding secured/bank dues,will the new bank be able to fund considering the company was reported npa?is the bank funding npa account and can bank fund npa account?

  5. Jayanta Chakrabarti says:

    Dear Sir,
    Greetings.
    Learnt your article in the forum of Taxguru.
    I bought an apt in April 2012 under a subvention scheme here in Bengaluru.
    The cost of the pat is close to 1Cr.
    I paid 20%; around 19.22955 Lac Rs.Rest I got sanctioned from a bank as a loan.
    Bank has so far disbursed around 63Lac till Oct 2016.
    The developer delayed the project way beyond the scheduled delivery date of June2015.
    Last year, in May they wanted to hand over the apt in an incomplete state with a lot of flaws. I did not agree to take over such apt having waited for seven years.
    I went to RERA in July 2019. RERA has passed an order in Jan2020 in my favour directing the developer to discharge the loan amount along with interest and also the EMI,statutory charges etc accrued.
    I stopped paying the interest amount to the bank. It is almost 10 Months now that bank has not been paid interest by me nor by developer.
    Bank is pestering me and initiating loan recovery action against me when the asset itself is not in my name.
    Bank will possibly issue notice and follow up with asset take over and sale etc.
    I am just wondering how the bank can pay the dues to the developer to take over the property which is incomplete and then sell the same.for recovering it’s dues. Obviously the asset will not fetch a fair value because it is crippled and incomplete.
    In these circumstances what should i do after i receive the notice from the bank under sarfaesi Act. Can I preempt any action initiated by bank proactively or make reactive
    moves as and when I get notice from the bank.
    I Would be grateful for your advice.
    Thanking you.

  6. Saurabh says:

    Hi sir,
    We had purchased a property from a reputed builder also we are availing a home loan. After three years of stay we got notice from some financial Institution addressing to our builder and guranter that they(builder) have not paid their outstanding loan . The notice is reflecting our property as underlying asset.but we have paid all the cost pertaining to property to builder already.
    The notice says that under sarfrae Act they will posses the property.
    When we talked about this to builder he gave deaf ears on the same .
    How we can protect our property out of this mess. Please guide us on the same.

  7. Shubhankar Raj says:

    An application under section 17 is dismissed then the borrower has again filed on SA challenging same order of DM on some new ground. My question is that can a party again challenge?
    Please Elaborate

  8. suresh says:

    Sir, I got Interim stay order against Surface Act on my property against my NPA Account in a Nationalized bank with a condition of paying sum of amount in two installments, which falls on 25/04/2020 & 26/05/2020 at the DRT
    Because of this shut down i am facing problem in running my current business and not even able to mortgage my jewel in the bank. I request you to share a remedy for my problem

  9. Suresh says:

    Sir I got order to pay my instalment in two segments on 25 april n 26 of may of this year against my property sale by a bank against my npa account .I went det n got interim order of stay. .Bcoz of this shut down i m facing difficulty .Can i get ant remedy for this

  10. Kumar anish says:

    In a NPA loan demand notice under section 13(2) was served by secured creditor. Loan was for both investment & Cash credit purpose. In demand notice under sec 13(2) only IP that is land and residential building mortgagged with bank was mentioned and plant & machinery & stocks out of bank loan was not mentioned by mistake. Secured creditor have taken symbolic possession in the account but auction & sale is not done yet. What can be done now. Please quote with facts/Judgement supporting it.

  11. Umesh Patil says:

    Sir i have taken aloan from co operative bank but the property is on my father name my father die due to heart attack now the bank give me dm order but i say them i want time to pay loan but they are not giving me time what should I do

  12. Purushottam says:

    Dear sir I have Tata capital housing loan ..becz some financial crisis’I was nt able to pay the emi regularly.total till 9 June 6 emi r pending..they seal my property and pasting serfeci demanad notice ..I had send them request letter to allow give some time for paying the due s..but they r not cooperating with my problem so what will be solution for that plz suggest me

  13. siddharth says:

    Sir,

    We have taken mortgage loan from NBFC and didn’t able to give 3 EMIs ( Jan, Feb , Mar 2019) and 90 days will be completed on 31st March , my funds are blocked and only be released by April end , how I can convince bank to hold NPA procedure by next month.

    Regards

  14. CA.NR.PANIGRAHY says:

    Dear Mr, Surendra,
    The article has been beautifully presented ,precisely addressing al possible circumstances a borrower may enconuter under SARFAESI and remedies as well.

    Awesome. . Pls share your contact no.
    Thanks
    CA. N.R.Panigrahy

  15. Sudesh says:

    हमने बैंक में से cgtms schem से लोन लिया था मगर घाटा होने की वजह से बैंक को लेटर लिखकर machinery goods etc ले जाने के लिए कहा थमगर उन्होंने drt अहमदाबाद।के केस दाखिल किया था,हमारे एडवोकेट ने धयान नही दिया इसकी वजह से एक तरफा judgment आया थ और अभी Demand Notice भी दे गए है,तो अब क्या होगा? प्लीज् guide me

  16. Bhaskar Moitra says:

    DRT case sec 13(4) under SARFAESI act , Dismiss due to non appearance of Borrower Lawyer.in Sept’2016.
    Bank has not take any action till the date.
    What step can take the Borrower or how to proceed against Bank.

  17. S R Maniyar says:

    we have purchased property through Auction by DRT
    now sale certificate issued by DRT and bank has executed sale deed and city survey recorded our name but bank has not given possession nor DRT has given What to do now ?how we will get possession ? please guide

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