Understanding the SARFAESI Act: Key Provisions for Recovering Non-Performing Assets

Understanding the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI)

The Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI) offers banks and financial institutions various strategies to handle non-performing assets (NPAs). This legislation enables lenders to enforce security interests and recover dues effectively, thereby helping to reduce the volume of NPAs.

Key Provisions of the SARFAESI Act

The SARFAESI Act grants banks and financial institutions the authority to recover dues through the enforcement of security interests without the need for court or tribunal intervention. The Act encompasses several critical aspects:

• Enforcement of Security Interests: Secured creditors can initiate actions to enforce security interests on both movable assets (e.g., vehicles and machinery) and immovable properties, excluding agricultural land.

• Transfer of Non-Performing Assets: The act permits the transfer of NPAs to Asset Reconstruction Companies (ARCs), specialized agencies established under the Act, on a cash or security receipt basis.

• Legal Framework for Securitisation: It provides a robust legal structure for the securitisation of financial assets.

• Management Takeover: Banks have the option to assume management of the borrowing unit and appoint a manager to oversee operations aimed at recovering NPAs.

• Creditor Priority: Secured creditors are given priority over other creditors, including government dues.

• Exclusivity of Provisions: The Act stipulates that other laws will not apply to actions taken by secured creditors to the extent of any inconsistencies.

Conditions for Enforcement of Security Interest

To enforce a security interest under the SARFAESI Act, the following criteria must be met:

• The outstanding contractual dues must exceed Rs. 1 lakh.
• The account must qualify as a non-performing asset per Reserve Bank of India (RBI) guidelines.
• The security interest must be clearly defined, tangible, and legally enforceable against the borrower if repayment is not made.
• The bank must either be the sole lender or, in case of consortium lending, obtain consent from secured lenders holding at least 60% of the outstanding amount.
• In scenarios involving multiple banking, if the security is exclusively charged to one bank, it may act as if it is the sole lender.

Process Flow for SARFAESI Actions

1. Demand Notice: Within three days of an account becoming an NPA, the bank must issue a demand notice under Section 13(2) of the SARFAESI Act.

   • Ensure delivery of the notice to all borrowers and guarantors, preserving proof of delivery.

2. Substituted Service: If delivery fails, the bank may serve notice by:

   • Affixing the notice where the borrower resides or conducts business, and
   • Publishing the contents in two newspapers, including one in the vernacular language.
   • All parties should receive 60 days to clear dues.

3. Borrower Representation: During the 60-day period, if the bank receives any representations from the borrowers/guarantors under Section 13(3A), the Authorized Officer must respond within 15 days.

4. Verification: During the 60 days, the bank shall:

   • Verify title deeds, mortgage documents, and insurance validity.
   • Conduct a site visit to confirm the mortgaged assets' status, maintaining records in the official file.

5. Possession: Upon expiry of the 60-day period, the bank can:

   • Take symbolic possession if physical possession is resisted, or
   • Secure physical possession of the asset.
   • Publish a possession notice and file applications with the Chief Judicial Magistrate (CJM) if necessary.

6. Auction Process:

   • A valuation report from an approved valuer should be obtained, and a reserve price set.
   • Publish a 30-day sale notice in two newspapers, including one in the vernacular, and list it on the eBkray portal.
   • Undertake maximum publicity for the auction through property brokers and online platforms.

7. Action Post-Order of Possession: If obtaining a CJM/CMM/DM order:

   • Coordinate with relevant authorities to execute physical possession within seven days.

8. Auction Execution:

   • Collect 25% of the bid amount on the auction day, with payment confirmation within one working day.
   • Ensure the remaining 75% is received within 15 days, extendable up to three months if agreed upon.
   • Upon receipt, issue a sale certificate to the successful bidder.

9. Legal Challenges: If there are challenges (e.g., Securitisation Application or Writ Petition), ensure immediate engagement of legal counsel to facilitate prompt resolution.

DRT Suit Considerations

• Banks may pursue DRT/Civil suits alongside SARFAESI actions, especially when the security value is less than the outstanding dues.
• Mandatory interim applications should include:
  • Disclosure of all defendant assets.
  • Appointment of a commissioner for inventory.
  • Court receiver appointment for possession.
  • Injunctions against selling uncharged properties.
  • Garnishee orders against debtors.
  • Attachment before judgment against personal properties.
  • Directions for defendants to submit tax-related documentation.

Conclusion

Navigating the SARFAESI Act requires a structured approach to recover dues effectively while adhering to legal standards. Banks must ensure compliance with prescribed processes and maintain thorough documentation to protect their interests throughout any recovery action.