The SARFAESI Act, 2002 enables the banks and other financial institutions to recover the loan amounts from the borrower who has failed to repay the debts. The procedures laid down in the SARFAESI Act,2002, as well as the Security Enforcement (Rules), 2002, are mandatory, and no divulgence from the same is permitted, as held in the ITC Limited v. Blue Coast Hotels Ltd. & Ors [CIVIL APPEAL Nos. 2928-2930 OF 2018] by the Hon’ble Supreme Court of India. The banks and other financial institutions can conduct a SARFAESI auction to sell the residential and commercial properties of the debtor to realise the loan amount. The procedures to be followed under the Act, 2002 are stated herein below.
We already know that by utilising the SARFAESI Act, the banks and other financial institutions recover their non-performing assets (NPAs) by selling them in public auction. But, to understand the SARFAESI auction meaning properlyyou must also know the procedures that secured creditors adopt to take physical possession of the secured assets and sell them in auction. For example, If the borrower defaults in repayment, under S. 13(2) a demand notice is to be sent by Secured Creditor to the borrower to discharge his liabilities. Such notice persists for 60 days. The demand notice shall contain details and amounts of the amount payable by the borrower. This demand notice can also be objected to by the borrower, which should be replied by the secured creditor within 15 days, and the reply should enumerate the reasons for non-acceptance of such objection. This position was clarified by the Hon’ble Supreme Court of India in the case of Mardia Chemicals Ltd. v. Union of India and later amended into the SARFAESI Act, as S. 13 (3A).
When the 60 day period concludes, without any discharge by the Borrower, actions can be taken by the Secured Creditor as enumerated under S. 13 (4)- wherein they can take possession of the secured assets, take over the management of the asset, appoint any person to manage the secured asset, require any person who has acquired any of the assets from the borrower to pay the secured creditor.
If you have received a notice for SBI auction SARFAESI? Well! Section 17 to 18 of the Sarfaesi Act states that the actions under S. 13 (4) are appealable. Therefore, as the borrower you can appeal the actions of the secured creditor in Debt Recovery Tribunal, DRAT, writ in High Court and SLP in Supreme Court.
The SARFAESI auction rules require the banks or the financial institutions to issue a Sale Notice is required in the case of auctioning off of the secured asset if inviting tenders from the public, or by way of public auction. This sale notice shall be published in 2 leading newspapers, on the website of the secured creditor, and as per the Directions of the Ministry of Finance directions, upload the tender notice on tender.gov.in.
The notice for possession or sale of property under SARFAESI Act should be effectively served, in English and regional language newspapers with a circulation in the area as provided for in the SECURITY INTEREST (ENFORCEMENT) RULES,2002.
More particularly, the procedure for an auction of immovable assets is given in Rule 8, Security Interest (Enforcement) Rules, 2002. The methods of sale of the immovable secured assets include:
Section 14 of the Act, 2002 provides a provision for the assistance of the Chief Metropolitan Magistrate and District Magistrate in taking possession of the property. According to the Hon’ble High Court of Madras [Kathikkal Tea Plantations v. State Bank of India MANU/TN/1926/2009] has held that this provision should be given a purposive interpretation in consonance with the Statement of Objects and Reasons of the SARFAESI Act,2002. It was held that the purpose of this provision is to aid the secured creditor of obtaining possession of the asset as soon as possible, and convert a Non-Performing Asset into a source of recovery for the amount due, and transfer the secured asset to a willing third party.
However, it is pertinent to mention that all the rights and interests of symbolic and/or physical possession guaranteed to the secured creditor under the Act,2002 extinguish after the sale to the third party is complete. From the date of the registration of the sale deed, the secured creditor does not have any remedy or course of action under S. 13 or S. 14 of the SARFAESI Act, 2002.
In instances where the secured creditor is unable to claim possession over the secured asset after the expiry of the period of the demand notice under S. 13(2) of the Act,2002 specifically due to tenancy rights that might exist over the said asset, the rent or any other amount which might become due on the said secured asset from the lessee to the borrower (if any) becomes due to the secured creditor. This position was enumerated in S. 13 (4) of the Act,2002, and was solidified by the Hon’ble Supreme Court in the case of Harshad Govardham Sondgar vs International Asset Reconstruction.
In case of the HDFC auction SARFAESI, the payment for the property purchased on auction must be strictly done according to the provisions of law. The first step is determining the Reserve Price which is the minimum fair market value of the immovable asset as stipulated by the authorized officer, followed by the relevant notice according to the obligations enumerated in Rule 8 (6). The bidding process for public auction shall be done in accordance with Rule 9, Security Interest Rules, 2002 wherein the bidder shall deposit:
Legal issues are always challenging, more so when it involves complex statutes like the SARFAESI Act. Consulting a legal professional will ensure best relief since it is not easy to navigate without counsel. So, take prompt action without any delay and get in touch with an expert legal professional.
Therefore, within the four walls of the Act, 2002, the secured creditor is well protected if the correct procedure is followed. The SARFAESI Act, 2002 is one such legislation that genuinely removes unnecessary and frivolous litigation from the courts, and provides safeguard against the initiation of such litigation at the option of both, the defaulting borrower as well as the secured creditor.
The insolvency and bankruptcy code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The insolvency and bankruptcy code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5th May, 2016 and by Rajya Sabha on 11th May, 2016. The code received the assent of the President of India on 28th May, 2016.
The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. Applicability and a brief description about the insolvency resolution process for corporate entities.
The IBC applies to the following:
An insolvency resolution process under the IBC can be initiated by any creditor in the event there is a minimum default of INR 1,00,00,000 (Rupees One Crores only) of such creditor’s debt by the debtor. Such an application can be filed by an operational creditor or a financial creditor before the National Company Law Tribunal (“NCLT”) of the relevant jurisdiction. The NCLT will consider the following elements before admitting such an application:
An appeal from any order or judgment of the NCLT, within the time specified therein, will lie with the National Company Law Appellate Tribunal (“NCLAT”). Further, appeals from the NCLAT will lie with the Supreme Court.
A creditor, for the purposes of the IBC may be an operational creditor or a financial creditor. A debtor is any entity or an individual who owes any liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. If the debtor is either a company or an LLP, then such a debtor is referred to as a corporate debtor.
Default is defined as non-payment of debt when whole or any part or installment of the amount of debt has become due and payable but has not been repaid by the debtor.
The IBC provides for 2 (two) main categories of creditors i.e.
Financial creditor; and Operation creditors.
Financial creditors may either be secured creditors or unsecured creditors. The main difference between secured and unsecured financial creditors is that in the event of liquidation and asset distribution proceedings, secured creditors are given a higher priority than unsecured creditors. Further, during the liquidation process, secured financial creditors are given the same priority of repayment as workmen and employee dues and are given a higher priority that other operational creditors, who are treated as unsecured creditors for the purposes of liquidation.
When compared to operational creditors, the procedure for financial creditors to initiate insolvency proceedings is a lot easier. The IBC allows financial creditors to make an application to the NCLT directly and such financial creditors will only need to show that there is a default. It is also important to note that only financial creditors constitute the committee of creditors, and no operational creditor can be part of this committee.
Operational debt has been defined in the IBC as a claim in respect of the provision of goods or services, including employment or debt in respect of the repayment of dues arising under any law for time being in force and payable to the Central Government, any State Government or any local authority.
The Supreme court, in the case of Mobilix Innovations Pvt. Ltd v. Kirusa Software Private Limited held that while determining if a dispute exists with the debtor with regards to the payment of any debt, the NCLT will be required to see only if there is a dispute and that the NCLT may not go into the merits of such dispute.
During this process, the financial creditors investigate the corporate debtor to determine whether it is viable to continue its business. The creditors also come up with a plan to restructure the corporate debtor. The various steps involved in a CIRP are:
The IBC has taken its first steps to regularize the insolvency process in India. However legislation has been ridden with controversies and speedy resolutions. It has also become a very important tool for banks to regularize multitudes of non-performing assets.
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