corporate law
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI Act) plays a crucial role in Indian financial legislation by effectively addressing the challenges associated with non-performing assets (NPAs).
Section 13 of the SARFAESI Act is essential for outlining the procedures that allow secured creditors to enforce their rights.
According to Section 13(1), secured creditors have the authority to enforce their rights directly, thus bypassing the need for courts or tribunals. This provision overrides Sections 69 and 69A of the Transfer of Property Act, 1882, which previously governed mortgage enforcement.
In the event of a borrower defaulting on their secured debt or any installment, leading to the account being classified as an NPA, the secured creditor may issue a formal notice. This notice obligates the borrower to clear their dues within 60 days. If compliance is not met, the creditor may exercise rights under Section 13(4).
Borrowers obtaining capital through debt instruments are exempt from classifying such debts as NPAs. In certain circumstances, debenture trustees are permitted to enforce security interests according to the terms specified in the security documents.
Notices must specify:
The Security Interests (Enforcement) Rules lay down the procedures for issuing these notices.
Upon receiving the notice, borrowers have the right to submit objections or representations. Secured creditors must assess these objections and respond to the borrower within 15 days. Nevertheless, this process does not allow for appeals to be made to the Debts Recovery Tribunal (DRT) or the District Court under Sections 17 or 17A.
For appeals, borrowers are required to deposit 25% (DRT) or 50% (DRAT) of the outstanding debt, as stipulated in Section 18 of the 2016 Amendment.
As per Section 5(4)(d), any payment made by a third party to a secured creditor is considered a valid discharge, just as if the borrower made the payment directly.
If the sale of immovable property is postponed due to insufficient bids that fail to meet the reserve price, an authorized officer of the secured creditor may bid on their behalf in subsequent auctions. Any successful bids will reduce the claim amount by the purchase price, in accordance with Section 9 of the Banking Regulation Act of 1949.
Any transfer of a secured asset by the creditor after assuming control or management grants the transferee all rights as if the original owner had executed the transfer.
Secured creditors have the right to recover expenses incurred while fulfilling their obligations from the borrower. The funds recovered will first address costs, followed by the application's remainder to the secured debt, with any surplus returned to the rightful owner.
The transfer of secured assets will be halted if the borrower pays the total owed amount, including costs and expenses, prior to any auction notice publication. If transfer processes have already begun, no further actions will occur.
In the case of joint financing, exercising rights under Section 13(4) requires approval from creditors holding at least 60% of the outstanding debt. This requirement applies only to consortium lending and not to multiple independent creditors. Proceeds from the sale of secured assets during a company's liquidation will be distributed according to Section 529A of the Companies Act.
In bankruptcy situations, after handling claims from workers, a secured creditor is permitted to retain proceeds from asset sales. If there are disputes regarding the owed amount, the creditor must deposit an estimated figure and address any inaccuracies.
Secured creditors are not obligated to follow the procedures outlined in Section 13(4) before taking action against guarantors or liquidating pledged assets.
Upon receiving notice, borrowers are prohibited from transferring secured assets without the explicit written consent of the creditor.
Section 13 of the SARFAESI Act streamlines the debt recovery process for secured creditors, minimizing prolonged legal disputes. By facilitating the swift recovery of non-performing assets, the Act contributes to the financial stability of lending institutions. A thorough understanding of these processes is vital for both creditors and borrowers to navigate their rights and responsibilities effectively.