Ozg Sarfaesi / DRT Lawyer
Ozg Business Resource Center
Ahmedabad | Pune | Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone # 09811415831-37-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Recovery of its due has been a hectic exercise for the Banks in the absence of a special legislation. ‘Non-performing Assets’ were growing and a need was felt to reduce the ‘Non-performing Assets’ of the Banks drastically. As the recovery through Courts was a difficult exercise for the Banks, initially, a special legislation called ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’ was enacted creating a Special Tribunal called ‘Debt Recovery Tribunal’. Under the Act, the Banks are entitled to approach the Tribunal by filing an ‘Original Application’ which is similar to filing a suit in Civil Court proceedings. However, unlike the ‘Civil Court’ which is supposed to follow the ‘Civil Procedure Code’, a special and simple procedure has been prescribed under ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’. At the end of adjudication, the Tribunal is supposed to grant a certificate called ‘Recovery Certificate’ infavour of the Bank crystallizing the amount to be recovered from the borrower and it is like a ‘Decree’ granted by a Civil Court. There was a mechanism attached to the Debt Recovery Tribunal to conduct execution proceedings pursuant to the grant of ‘Recovery Certificate’. Thus, with ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’, the Banks were enabled to recover their dues speedily through the proceedings before the Special Tribunal called ‘Debt Recovery Tribunal’.
However,
the object of reducing ‘Non-performing Assets’ could not be achieved
even after enacting ‘Recovery of Debts due to Banks and Financial
Institutions Act, 1993’ and as a result, another legislation on the
similar field was enacted and it is ‘The Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (Called ‘SARFAESI Act’ in short)’. Under SARFAESI Act, 2002,
the Bank can determine the outstanding due after noting the objections
from the borrower/guarantor if any and can proceed against the ‘secured
asset’ by taking physical possession of the same and initiating auction
proceedings in accordance with the provisions and the SARFAESI rules.
Under SARFAESI Act, the Bank need not approach the Courts for getting
the due crystallized as it will do everything on its own and the only
occasion for the Bank to approach Court is under Section 14 of the Act
seeking police assistance etc. while taking physical possession of the
‘Secured Asset’. The borrower or any person aggrieved is provided with a
right to question the action of the Bank under SARFAESI Act, 2002 by
filing an appeal to the Debt Recovery Tribunal under Section 17 of the
Act. On different provisions of SARFAESI Act, 2002, the Courts have
passed some land-mark judgments making good balance between the object
of SARFAESI Act, 2002 and the interests of the borrower.
Few brief points, pursuant to the judgments of Constitutional Courts on SARFAESI Act, 2002, are as follows:
- While upholding the constitutional validity of ‘SARFAESI Act, 2002’, Courts have made it very clear that the Bank is supposed apply its mind to the objections raised by the Bank and the reply to the Borrower has been made as ‘mandatory’ and subsequent to the intervention of direction from the Court, section 13 (3A) was inserted.
Criticism: While
appreciating the concern of the Courts in the interests of the
borrowers, many also continuously criticize as to how the Banks follow
the directions or implement the provisions. There are critics arguing
that the it is very difficult to know as to whether the Bank has applied
its mind or not while replying the objections raised by the borrower
under section 13 (3). There is also a criticism that the reply from the
Bank may not have any value, though the object is good theoretically.
Because, the reply from the Bank to the borrower, will not enable the
borrower to question the same in any Court unless the Bank issues a
notice to the borrower under Section 13 (4) which is normally referred
as ‘Possession Notice’.
- The Courts have made it very clear that the borrower can raise all his objections before the Debt Recovery Tribunal in an appeal under section 17 of the Act. The scope of enquiry has literally been expanded by the Courts and the ‘Debt Recovery Tribunal’ can not confine its enquiry only to the procedural issue as to whether the Bank is right in following the procedure. Consequent to the expansion of scope of enquiry, the scope of powers of ‘Debt Recovery Tribunal’ were also expanded to some extent.
- Courts have come very heavily, from time to time, on procedural irregularities committed by the Bank as each provision was backed with certain object. This is very laudable.
- Initially, it is understood that the Borrower can only question the possession notice issued by the Bank under Section 13 (4) of the Act. However, the Courts have consistently held that all measures taken by the Bank under Section 13 (4) of the Act are appeallable before the Tribunal. This is very important issue and Bank is in no way gets prejudiced if the borrower is given a right to question all measures taken by the Bank. In the absence of such a provision pursuant to Court’s intervention, the borrower is left with no remedy when his property worth 1 crore is sold for a meager sum of 10 lakhs by the Bank. In no stretch of imagination, it can be said that the Bank always acts fairly as it is a Public Sector Undertaking and which may not have any motives.
The
most important thing to be discussed is as to whether the Bank can act
unfairly or illegally in the course its recovery of money. It may be
true in some cases where the borrower tries to trouble the Bank in
getting or recovering the outstanding due. No action of the borrower
can trouble the Bank if it holds a right over ‘Secured Asset’ and if
there is ‘Secured Asset’. Banks are provided with a special legislative
set-up, though drastic, to recover its dues. Banks can not complain at
the special legislation enabling it to recover its due and the borrower
keep complaining at this special legislation and they keep calling it as
‘draconian’.
With
this back-ground, the Banks are not entitled to act unfairly or
illegally in the course of recovery of money. The delay tactics, at
times, adopted by the borrower is no excuse for the Banks as to why it
has not acted fairly as every Public Sector Bank is supposed to act
fairly and strictly in accordance with law.
I
would like to give an example as to how the Banks too can trouble the
borrowers using the stringent provisions of SARFAESI Act, 2002 and it is
as follows:
Facts:
A
borrower avails various loan facilities including an agricultural loan
from a Bank and the various loan facilities are extended to many family
members. Only one member of the family oversees all these credit
facilities from the Bank. It was a ‘secured loan’. The sole
member/borrower who has maintained all the loan accounts from the Bank
has expired and other family members are not aware of the loan
facilities granted by the Bank fully. However, the family members came
to know about the existence of loans with the Bank. The Bank has also
sent demand notices under section 13 (2) while main borrower was alive.
The family has also realized that the ‘secured asset’ was already
transferred or sold without any knowledge to the Bank. The family
members have conveyed all facts to the Bank and wanted to settle all
‘loan accounts’ and they have requested the Bank for a ‘One-Time
Settlement’. The Bank has agreed for a ‘One-Time Settlement’ and
receives the full amount under OTS. After the receipt of money from the
borrowers, the Bank sends a communication to the borrowers saying that
the ‘OTS acceptance’ is cancelled as the OTS was not in accordance with
the regulations.
After
canceling the OTS, the Bank issues notices under section 13 (4) of the
Act clubbing all loan facilities, however, splitting all loan
facilities, into two sets.
The
family members of the borrowers are literally shocked. Now, the Bank
proceeds under section 13 (4) without referring anything as to what has
happened in-between and balance outstanding is claimed under section 13
(4).
Analysis:
1. Bank
is supposed to take every-care while accepting the OTS and it can not
cancel the OTS after receipt of money substantial money from the
borrower. Its an unfair practice unless the facts are such that the OTS
cancellation is justified.
2.
Bank will be clubbing all loan facilities, but issue notices as it
likes. Sometimes, there can be one notice and there can be separate
notices also despite the fact that the ‘Secured Asset’ is one and the
same. When it issues ‘separate notices’, the borrower will be finding it
extremely difficult while approaching the Courts or the Tribunal and
they may be asking the borrower to file different Appeals or Cases
though the entire transaction is same in substance.
3. The
object of giving demand notice and seeking objections from the borrower
is in line with the principles of natural justice and fair play. If
much water is flown in between the notice under section 13 (2) and
section 13 (4), the Bank is supposed to start the proceedings again
under section 13 (2) and so that the borrower can raise his objections.
But, this remains a complicated issue again.
4. The
Borrower is entitled to ask for a ‘Specific Performance’ of OTS terms,
however, it can be done in Civil Courts. DRT can say that it is not
concerned with the OTS issues and even the High Court may ask the
borrower to approach the Tribunal under section 17.
