Overview of the SARFAESI Act 2002 and Note on the process of Enforcement of Security Interest under Section 13.


Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (hereinafter referred as “SARFAESI Act”) was enacted with the intent to provide banks or financial institutions (FIs) to recover on NPAs without intervention by the court. These financial institutions are those who have a presence in India and are notified by the Government of India. The Act provides for 2 broad methods for recovery of NPAs. This includes either taking the possession of the secured assets of the borrower (with the right to lease, assign or sell the secured assets) or taking over the management or business of the borrowers until the NPA is recovered. The SARFAESI Act also provides for the sale of financial assets by banks and financial institutions to Asset Reconstruction Companies (ARCs). The financial assets can be sold to ARCs in accordance with the guidelines and directions issued by the RBI.

The right of the secured creditor to enforce the security interest under the SARFAESI Act does not arise unless the account of the borrower has been classified as an NPA in the books of account of the secured creditor (banks or financial institutions) in accordance with the guidelines issued by the Reserve Bank of India (RBI). The secured creditor must serve a 60-days-notice on the borrower demanding repayment of the amount due and specifying the borrower’s assets over which the secured creditor proposes to enforce its security interest.

If on the expiry of the 60-day notice period, the borrower fails to discharge its liability towards the secured creditors, the secured creditor can enforce security interest over secured assets by (I) take possession of the secured assets; (II) take over the management of the secured assets along with the right to transfer by way of lease, assignment or sale of the secured assets; (III) appoint any person to manage the secured assets; and (IV) require any person who has acquired any of the secured assets from the borrower to pay amounts necessary to satisfy the debt.

In case the secured creditor is unable to recover the entire sum due by the enforcement of security interest over the assets secured, such secured creditor may approach the Debts Recovery Tribunal (DRT) or the relevant court for the recovery of the balance amounts. A secured creditor may also simultaneously pursue its remedies under the SARFAESI Act as well as the DRT.

For the application of the SARFAESI Act, the account of the borrower must be classified as Non-Performing Asset by the secured creditor and must have an outstanding balance of INR 100,000 or above. Additionally, the provisions of the act are not applicable in certain situations as enumerated in Section 31 of the SARFAESI Act, including an account where the remaining debt is below 20% of the original principal amount and interest.


1. Furnish of Demand Notice after borrower’s account has been classified as Non-Performing Asset (NPA):

1.1 After classifying the borrower’s account as NPA, the secured creditor must furnish a written demand notice to the borrower to discharge its liabilities within sixty (60) days. The demand notice shall contain details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment. (Section 13(2) and Section 13(3)].

1.2 The Borrower retains the right to borrower make any representation or raise any objection against the notice to the Secured Creditor within the sixty (60) days notice period. The Secured Creditor must consider this representation/objection and if such an objection is raised or representation is made, and the Secured Creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the same shall be communicated to the borrower within 15 days with written reasons for non-acceptance. [Section 13(3A)].

1.3 Rejection of the representation made by the borrower and the reasons communicated does not confer any right upon the borrower to file an application to the Debts Recovery Tribunal (DRT) or the Court of District Judge.

1.4 After receipt of the demand notice, the borrower can not transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without the prior written consent of the secured creditor. [Section 13(13)]

2. Recourse to remedies provided under Section 13(4) in case of failure to discharge debt:

2.1 In case the secured debt is not discharged within the notice period (sixty days), the Secured Creditor can enforce security interest and take one or more of the actions as enumerated in the Section13 (4) of the act. These include the right to:

2.2 Take the possession of the secured assets of the borrower. This includes the right to transfer by way of lease, assignment or sale for realising the secured asset.

2.3 Take over the management of the business of the borrower. This also includes the right to transfer by way of lease, assignment or sale for realising the secured asset. However, in case of taking over the management of the business, the right to transfer shall be exercised only where the substantial part of the business of the borrower is held as security for the debt. Additionally, in case the management of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt.

2.4 Appoint any person as the ‘Manager’ to manage the secured assets the possession of which has been taken over by the secured creditor.

2.5 Require any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the dues to the secured creditor. Such demand must be accompanied by written notice. The payment made by such person to the secured creditor shall give a valid discharge as if he has made payment to the borrower.

2.6 In case the dues of the secured creditor (including the costs, charges and expenses incurred) are tendered at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset. [Section 13(8)]

3. In case of Multiple Secured Creditors:

3.1 In the case of there is more than one secured creditor or if there is joint financing of the financial asset(s) by secured creditors, only such rights shall be exercised by the secured creditor under Section 13(4) which have been agreed upon by the secured creditors representing not less sixty per cent (60%) in value of the ‘amount outstanding’ as on a ‘record date’. [Section 13(9)]

3.2 ‘Amount outstanding’ shall include principal, interest and any other dues payable by the borrower in respect of secured asset as per the books of account of the secured creditor. ‘Record date’ means the date agreed upon by the secured creditors representing not less than sixty per cent (60%) in value of the amount outstanding on such date.

4. When Borrower is a Company and is under Liquidation:

4.1 In the case the Borrower Company is in liquidation, the amount realised from the sale of secured assets must be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (Section 327 of Companies Act, 2013).

4.2 The secured creditor of such company, who opts to realise his security may retain the sale proceeds of his secured assets after depositing the workmen’s dues with the liquidator. The workmen’s dues (actual or estimated) are intimidated to the secured creditor by the Liquidator of the company.

5. Additional Rights of the Secured Creditor:

5.1 The Secured Creditor can take the assistance of the Chief Metropolitan Magistrate or District Magistrate (with competent jurisdiction) in taking possession or control over secured asset through a request in writing.

5.2 In case the dues of secured creditor are not fully satisfied with the sale proceeds of the secured assets and by the measures, as enumerated in Section 13(4) of the Act, the secured creditor retains the right to file an application to the Debts Recovery Tribunal (DRT) having jurisdiction or any court with appropriate jurisdiction for the recovery of the balance amount from the borrower.

5.3 The Secured Creditor has the right to proceed against the guarantors or sell the pledged assets without first taking any of the measured specified in Section 13(4) of the Act.


6. Application to DRT within forty-five (45) Days:

6.1 If aggrieved by any action taken by the secured creditor under Section 13(4), an application can be brought to the Debts Recovery Tribunal within forty-five (45) days from the date on which such measure had been taken. [Section 17]

6.2 Such application can be filed before the DRT within the local limits of whose jurisdiction (I) the cause of action, wholly or in part, arose; (II) where the secured asset is located; or (III) where the branch or any office of a bank or FI is maintaining an account in which debt claimed is outstanding for the time being is present. [Section 17 (1A]

6.3 The DRT has the power to (I) declare the measures taken by the secured creditor as invalid; (II) order the restoration of the possession of secured assets or management of secured assets to the borrower or other aggrieved person; (III) or pass such other direction as it may consider appropriate. This includes an order to make compensation as enumerated in Section 19. [Section 17(3)]

6.4 The application filed with the DRT must be disposed within sixty days from the date of such application. However, the DRT may extend the said period for reasons to be recorded in writing up to a maximum of 4 months. [Section 17(5)]

6.5 However, if the application is not disposed within the period of four months, another application may be made to the DRAT for directing the DRT for expeditious disposal of the application.

7. Appeal to DRAT within thirty (30) Days:

7.1 A person aggrieved by any order made by the DRT under Section 17 may file an appeal to the DRAT within thirty (30) days from the date of receipt of the order of DRT.

7.2 The Aggrieved person must deposit with the DRAT a minimum of fifty per cent (50%) of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less. However, the DRAT has the power to reduce the amount to a minimum of twenty-five per cent (25%) of debt after recording reasons in writing.

SARFAESI Act, 2002- Brief Flow Chart

sarfaesi act 2002

Author: Mohak Thukral, Penultimate year student, Jindal Global Law School, O.P. Jindal Global University.

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