Nisman Parpia
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is also known as the SARFAESI Act in the Indian law. It allows banks and other financial institutions to auction residential or commercial properties in order to recover loans.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, passed on December 17, 2002, allows banks and financial institutions to auction properties whether residential or commercial in situations where borrowers fail to repay their loans. It permits banks to subsidise their non-performing assets with the help of adoption of measures for recovery or reconstruction.
Upon loan default, banks can seize the securities without the court’s interference . (exception agricultural land) SARFAESI is effective only for secured loans as there, banks can enforce the underlying security including hypothecation, pledge and mortgages and in these cases, court intervention is not mandatory, unless and until the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would need to move the court to file a civil case against the defaulters.
Purpose and importance of the act
This act was enacted in order to lay down procedures to help Indian lenders recover their dues quickly. It gives power to banks and other financial institutions to directly auction residential or commercial properties that are pledged with them for the recovery of loans from borrowers. Before this Act took effect, financial institutions had to require a recourse to civil suits within the courts for the recovery of their dues, which became a lengthy, weary and time-consuming process.
As per the SARFAESI Act, if a borrower defaults on a loan financed by a bank against collateral, then the bank gets sweeping powers to recover its dues from that borrower. After giving a notice period of 60 days, the lender can take possession of the pledged assets of the borrower and also take over the management of such assets.
He also can choose any person to manage them or ask debtors of the borrower to pay their dues too, with reference to the asset. This recovery procedure saves banks and financial institutions a lot of time and effort which otherwise would be long drawn out due to the intervention of courts.
For the application of the SARFAESI Act, the account of the borrower must be distinguished as a Non-Performing Asset by the secured creditor with an outstanding balance of INR 100,000 or above. Additionally, the provisions of the act do not apply 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.
One of the major flaws of this Act is that it is not applicable to unsecured creditors. This, alongside other drawbacks in the recovery mechanisms were plugged within the Insolvency and Bankruptcy Code, 2016. Asset Reconstruction Companies which take over the distressed assets are the other alternative that banks use to offload doubtful debt, to make sure a more focussed and efficient resolution.
Objectives of SARFAESI Act, 2002
- Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
- Allowing banks and financial institutions to auction properties (commercial/residential) when borrowers are not able to repay their loans.
What is Section 34?
Section 34 in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 talks about Civil court not having the jurisdiction. It states that No civil court shall have jurisdiction to entertain any suit or proceeding in accordance to any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be given by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).
Wresting the jurisdiction of Civil Courts in Securitisation matters
The question in relation to the scope of power of the Debts Recovery Tribunal (DRT) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) assumes significance in the light of a recent judgment of the Supreme Court in Authorised Officer v. Allwyn Alloys Pvt Ltd[1] also known as Allwyn Alloys case.
The Supreme Court held that in respect of mortgaged property where action is taken under the Securitisation Act, it is only the DRT which is empowered to adjudicate all issues regarding the right, title and interest in relation to the said property. This finding seems rather broad, vague and difficult to just simply accept, although in the Allwyn Alloys case, a possible conclusion on facts could be drawn.
In the Allwyn Alloys case, an apartment was sold by certain persons (Original Owners) under a registered sale deed to the mortgagors. When the bank took action in terms of the SARFAESI Act, an equivalent was resisted by the previous or the Original Owners before the DRT, which held that the Original Owners didnot established their right in respect of the mortgaged property. It was concluded that the property was properly mortgaged in favour of the bank. This was affirmed by the Appellate Authority (DRAT) also..
The Division Bench of the Bombay High Court, however, concluded that there were several disputed questions of fact that needed an adjudication in a full-fledged trial. Liberty was granted to approach the appropriate forum to adjudicate the rights of the Original Owners who were indisputably in possession of the mortgaged property. This liberty so granted was set aside by the Supreme Court on the premise that Section 34 bars in any such suit.
Jurisdiction of civil court under Sarfaesi act when fraud is alleged
Punjab and Haryana High Court: In this case, two revision petitions were disposed of together by a Single Judge Bench which comprised Anil Kshetarpal, J. where issues were similar.
This revision petition was filed against an order in which an application for rejection of the plaint had been dismissed. The Plaintiffs were alleged with not signing the documents of guarantee. The plaintiff had approached the Civil Court in the matter related to SARFAESI Act, 2002 where according to Section 17 of the Act any individual affected is obliged to file an application before the Debt Recovery Tribunal (DRT). In pursuance of Section 34 of the Act that bars Civil Court’s jurisdiction in matters covered under SARFAESI Act, defendant i.e. Nationalized Bank pleaded that the Civil Court did not have any jurisdiction.
The Trial Court referring to the case of Mardia Chemicals Ltd. v. Union of India,[2] where it was held that in cases of fraud, the Civil Court does have a jurisdiction.
This Court observed that the pleadings of the plaintiff suggests that the word fraud had been purposely used so as to oust the jurisdiction of Debt Recovery Tribunal and in a decision of Madras High Court V.Thulasi v. Indian Overseas Bank,[3] it was held that where it is known that the word fraud has been deliberately used as a clever drafting in order to bring the suit before Civil Court, where such efforts will be repelled by the Court.
The High Court enabled the DRT with the help of provisions of SARFAESI Act, 2002 so that it could deal with the issue of whether the plaintiffs had stood guarantee to the loan received by the borrowers or not. Therefore, both the revision petitions were allowed and the matter would be taken up by the DRT. [State Bank of Patiala v. Satya Jyoti Rice Mills.[4]]
Maintainability of court injunction (Sarfaesi Act)
The Supreme Court in Sree Anandhakumar Mills Vs. Indian Overseas Bank[5] has recapitulated that a civil suit would not be maintainable when proceedings under the SARFAESI Act, 2002, have already been initiated. Section 34 of the SARFAESI Act, 2002 states bars institutions of any suit in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered under the Act.
A bench of Justice Ranjan Gogoi and Justice R Banumathi was taking into consideration an appeal against a Madras High Court judgment of 2010 that held that the civil court’s jurisdiction is not totally ousted by Section 34 of the SARFAESI Act and the capacity to grant interim injunction in such suits which are maintainable is also not taken away by Section 34 of the SARFAESI Act.
It also held that the civil court jurisdiction is barred only in regard to the applications filed by a bank or any financial institutions for recovering debts and that a partition suit filed which has been filed by a person who is not a borrower or guarantor is maintainable in a civil court. Thus In this case, the High Court took the view that as the said suit was for partition, Section 34 of the SARFAESI Act, 2002 would not bar the same.
Bench’s Verdict
In view of the facts and circumstances of the case, the Two-Judge bench of the Supreme Court referred to the case of Jagdish Singh vs. Heeralal [6]and others to hold that the suit which is filed by the second respondent is not maintainable.
In Jagdish Singh case, the Apex Court had held that a suit for partition would not be maintainable in a circumstance where proceedings under the SARFAESI Act had been initiated.
It was also held that the remedy of any person aggrieved by the initiation of proceedings under the SARFAESI Act curtails under Section 17 of SARFAESI Act providing an efficacious and adequate remedy to a party aggrieved. In view of the aforesaid, the Supreme Court in the case at hand had set aside High Court’s order.
Conclusion
Co-operative banks were initially not included under the definition of banks for which the SARFAESI Act was applicable. In 2003, a notification was issued (without an amendment to the law) to bring co-operative banks within the scope and class of banks that are entitled to use SARFAESI. In 2013, the government amended the Act to include co-operative banks formally under the definition of banks eligible to use it.
However, petitions were filed which questioned the authority of the notification and the power of Parliament to amend the SARFAESI Act. On May 5, 2020, the Supreme Court resolved this issue by ruling in favour of co-operative banks which invoked the SARFAESI Act.This helped co-operative banks to avoid inordinate delays in the recovery of their bad loans due to the involvement of civil courts and other cooperative tribunals.
The Indian banking system includes 1,544 urban co-operative banks (UCBs) along with 96,248 rural co-operative banks, with substantial deposits from retail investors. Considering their size, for the smooth and hassle free functioning of these co-operative banks, speedy recovery of defaulting loans is critical.
- Civil Appeal No. 5248 of 2018 (Arising out of SLP (C) No. 32031/2016) ↑
- (2004) 4 SCC 311 ↑
- (2011) 3 CTC 801, 05-05-2011 ↑
- State Bank of Patiala v. Satya Jyoti Rice Mills, 2017 SCC OnLine P&H 4657, 02-11-2017 ↑
- M/S Sree Anandhakumar Mills Ltd. Vs. M/S Indian Overseas Bank & Ors.Civil Appeal No(S).7214-7216 Of 2012 ↑
- 2014 (1) SCC 479 ↑