Chintan Mehuriya (Left) & Jaya Sharma-Singhania (Right)
Highlights on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi)
INTRODUCTION AND DEFINITION:
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law .It allows banks and other financial institution to auction residential or commercial properties to recover loans.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allow banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets by adopting measures for recovery or reconstruction.
Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court. SARFAESI is effective only for secured loans where bank can enforce the underlying security e.g. hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters.
BACKGROUND OF THE ACT:
The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and Financial institutions Act, 1993. This act was passed after the recommendations of the Narsimham Committee – I, was submitted to the government. This act had created the forums such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever increasing non-recovered dues.
However, there were several loopholes in the act and these loopholes were mis-used by the borrowers as well as the lawyers. This led to the government introspect the act and this another committee under Mr. Andhyarujina was appointed to examine banking sector reforms and consideration to changes in the legal system.
HOW IT WORKS?
The SARFAESI Act, 2002 gives powers of ‘seize’ to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:
- Take possession of the security for the loan;
- Sale or lease or assign the right over the security;
- Manage the same or appoint any person to manage the same.
The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies regulated by RBI to acquire assets from banks and financial institutions.
RIGHTS OF BORROWERS:
The above observations make it clear that the SAFAESI act was able to provide the effective measures to the secured creditors to recover their long standing dues from the Non-performing assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the law.
- The borrowers can at any time before the sale is concluded, remit the dues and avoid losing the security;
- In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal consequences;
- The borrowers will be entitled to get compensation for such acts;
- For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively.
The Act stipulates four conditions for enforcing the rights by a creditor.
- The debt is secured;
- The debt has been classified as an NPA by the banks ;
- The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest there on;
- The security to be enforced is not an Agricultural land.
METHODS OF RECOVERY:
According to this act, the registration and regulation of securitization companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default. This act makes provisions for two main methods of recovery of the NPAs as follows:
- Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
- Asset Reconstruction:Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.
Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is no need of registration unless and otherwise it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is required in the following cases:
- There is a transfer of receipt;
- The security receipt is creating, declaring, assigning, limiting, and extinguishing any right title or interest in an immovable property.
POWERS OF DEBT RECOVERY TRIBUNAL:
The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.
ROLE OF HIGH COURT:
PROPOSED AMENDMENTS TO THE ACT:
The government had approved bill to amend the act. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — SARFAESI Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these amendments:
- Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.
- The amendments also allow banks to bid for any immovable property they have put out for auction themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.
- Banks can then sell this property to a new bidder at a later date to clear off the debt completely.
DIFFERENT FORMS UNDER THE ACT:
The Central Government has issued the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 and prescribed the Forms to be used for the purpose of filing information for registration in respect of transactions of securitisation, asset reconstruction of financial assets and security interest over property. The Forms prescribed by the Central Government for registration are as under:
|Form I||For Creation and modification of Charge.|
|Form II||For particulars of Satisfaction of Charge.|
|FormIII||For Securitisation or Reconstruction of Financial Assets.|
|FormIV||For Satisfaction of Securitisation or Reconstruction of Financial Assets.|
It may be observed from Form I relating to creation and modification of charge that it is restricted to charge on immovable property by way of mortgage by deposit of title deeds. At present, the Government has not prescribed any forms for other categories of charges on immovable properties and movable properties. The Registration System will therefore initially operate for registration of mortgage by deposit of title deeds as also for transactions of securitisation and asset reconstruction under the provisions of the SARFAESI Act.
The fees for registration of Security Interest are prescribed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 read with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) (Amendment) Rules, 2013 (Collectively referred as ‘Rules’.
Following is the table of fees prescribed under the said Rules.
|Sr. No.||Nature of transaction to be Registered||FORM No.||Amount of fee payable|
|1.||Particulars of creation or modification of Security Interest in favor of secured creditors||Form I||Rs.100 for creation and for any subsequent modification of Security interest in favour of a secured creditor for a loan above Rs.5 lakh. For a loan upto Rs.5 lakh, the fee would be Rs.50 for both creation and modification of security interest.|
|2.||Satisfaction of any existing Security Interest||Form II||NIL|
|3.||Particulars of securitisation or reconstruction of financial assets||Form III||Rs.500|
|4.||Particulars of satisfaction of securitisation or reconstruction transactions||Form IV||Rs.50|
|5.||Any application for information recorded / maintained in the Register by any person||—||Rs.10|
|6.||Any application for condonation of delay up to 30 days||—||Not exceeding 10 times of the basic fee, as applicable.|
Note: Service Tax shall be applicable over and above the fees mentioned above.
The fees for registration of Factoring Transaction are prescribed under the Registration of Assignment of Receivables Rules, 2012
Following is the table of fees prescribed under the said Rules.
|Sr. No||Nature of transaction to be Registered||FORM No.||Amount of fee payable|
|1.||Particulars of Assignment of Receivables||FORM I||Rs. 500 for assignment of receivables|
|2.||Satisfaction of registration on realisation of the receivables||FORM II||Rs. 250|
|3.||Any application for information recorded or maintained in the Register by any person||—||Rs. 50|
|4.||Any application for condonation of delay up to 30 days||—||Rs. 2500|
SOME RECENT CASES ON SARFAESI ACT:
- M/s. Dr. P.B’s Health & Glow Clinic Ltd. & Ors vs. Oriental Bank Of Commerce, In the High Court at Calcutta Civil Revisional Jurisdiction:
FACTS OF THE CASE:
The Petitioners are the debtors and had availed the credit facilities from the Respondents. Petitioners made repayment of loan to some extent but not entirely, and accordingly the Respondent took recourse under the provisions of Section 13(2) of the SARFAESI Act, 2002. Consequently, possession of the mortgaged property was taken up and it was duly advertised. Petitioners also filed an application under Section 17(1) of the SARFAESI Act, 2002 before the Debts Recovery Tribunal, which was dismissed by the impugned order. Being aggrieved, the Petitioners approached this court.
The Petitioners contended that the Reserve Bank of India has provided guidelines for one time settlement of the loan and accordingly, one time settlement should have been duly considered by the Respondent. The Respondent without following that settlement formula had taken possession of the property. The Respondent provided the statement of accounts to show the quantum of dues from the Petitioner to the Respondent. Also, in reply to the notice under Section 13(2) of the SARFAESI Act, 2002, the Petitioners had sent a letter dated December 18, 2012 requesting the bank to permit them to repay the dues in small weekly installments and had also deposited 10 cheques amounting to Rs.25.50 lakhs. The Petitioners did not point out any irregularities against the steps under Section 13(2) of the 2002 Act.
The court held that notice issued under Section 13(2) of the 2002 Act was duly tendered to the Petitioners. When the persons under occupation of the premises/property refused the notice, the same was affixed on the conspicuous part of the said premises. Therefore, the notice was duly served in presence of the occupiers of the secured assets. With regard to settlement of loans, the court held that some post-dated cheques were issued but, all the cheques were not honored and some of them had been bounced for non-availability of the fund.
The loan amount had been described as NPA on June 30, 2012 and as such, steps had been taken for recovery of the loan under the provisions of the SARFAESI Act, 2002. According to the provisions of Section 18 of 2002 Act, an appeal lies to the Appellate Tribunal, within the specified time, form the date of receipt of the order of the Debts Recovery Tribunal under certain terms and conditions. Accordingly, the court found the application devoid of merits and thus dismissed the same
- Deepthi Trading Company vs. The Authorised Officer in the High Court of Madras:
FACTS OF THE CASE:
The first petitioner is the borrower. The second and third petitioners are husband and wife. The second petitioner is running the business of the first petitioner/trading company. The third petitioner is doing some other business. According to the first respondent/bank, the amount that has been borrowed from the bank was declared as a non-performing asset and consequent to the same notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was issued calling upon the petitioners to pay certain amount and since the said notice has not been properly responded and no amount was paid, possession notice under Section 13(4) of the SARFAESI Act was issued and that was challenged by the petitioners before the Debts Recovery Tribunal-III, Chennai. Thereafter, the SARFAESI Application was taken up for final disposal and following issues was formulated for consideration:
(i) Whether the applicant in the above SARFAESI Application is entitled to get the relief as prayed for?
(ii) Relief and costs?
The Tribunal came to the conclusion that it had no jurisdiction over the subject matter of the case placing reliance on decision of the Delhi High Court in Amish Jain and another v. ICICI Bank Limited, 2012 (6) CTC 369, wherein it was held that where Tribunal has no jurisdiction over a case, it is legally bound to dismiss the application. The Tribunal also in paragraph (7) of the order decided on merits of the case and came to the conclusion on the validity of the notice issued under Section 13(4) of the SARFAESI Act.
The court held that once the Tribunal found that it had no jurisdiction to entertain the SARFAESI Application, it is bound to return the papers and as such is not empowered to pass any order touching upon the merits of the case. The court placed reliance on decision of the Supreme Court in Sri Athmanathaswami Devasthanam v. K.Gopalaswami Aiyangar, AIR 1965 SC 338 and held that when the Tribunal had no jurisdiction over the subject matter of the suit it cannot decide any question on merits. It can simply decide on the question of jurisdiction and once concluded that it has no jurisdiction over the matter has to return the plaint.
Thus, in view of the above, the law on the issue can be summarized to the effect that if the court where the suit is instituted, is of the view that it has no jurisdiction, the plaint is to be returned in view of the provisions of Order VII Rule 10 CPC and the plaintiff can present it before the court having competent jurisdiction.
In light of the same the court further held that the period during which the case was Before the Tribunal having no jurisdiction shall be excluded in view of Section 14 of the Limitation Act and also the Petitioner may seek adjustment of court fee paid in that Tribunal.
APPLICABILITY OF THE ACT:
The SARFAESI Act is not applicable to:
I. Regional Rural Banks
II. Nationalized Banks
III. Co-operative Banks
IV. State Bank of India and their Associate banks
Though the enactment of SARFAESI Act sought to mobilise blocked funds of the banks in the non-performing assets, the various provisions of the acts have created deep sorrows for the genuine buyers. The various provisions meant to balance the requirements of the borrowers and the banks, have their balance of favour tilted towards the banks. These powers are, at majority of the times, mis-utilised by the banks to appropriate their interests against the interests of the buyers. In such a situation it is pertinent for the civil courts to assume a more social responsibility for the larger interest of the borrowers on one hand and to share the responsibilities of the banks to mobilise their funds from the numerous non-performing assets.
Commendably, the Ruling has attempted to preserve the right to property of the borrower by ensuring that a borrower is not disposed without due process of law, the underlying premise being that secured creditors are not allowed to abuse the wide powers provided to them under the SARFAESI Act. However, this Ruling has certainly changed in favor of the borrowers.
The SARFAESI Act was enacted with a distinct purpose to facilitate banks and financial institutions to recover dues in a speedy manner by enforcement of security interest without intervention of the court. The object of the debt recovery laws is to reduce non-performing assets and increase liquidity in the market.