Remedies Available to Borrowers under SARFAESI Act 2002

The provisions of SARFAESI Act apply to outstanding loans (above Rs. 1 lakh), which are classified as Non-Performing Assets(NPA). NPA loan accounts amounting to less than 20% of the principal and interest are not covered under this Act. The most Important section of SARFAESI Act is section 13(2), which provides that if a borrower who is under a liability to a secured creditor, makes any default in repayment of secured debt and his account in respect of such debt is classified as non-performing asset, then secured creditor may require the borrower by notice in writing to discharge his liability within sixty days from the date of notice with an indication that if he fails to do so, the secured creditor shall be entitled to exercise all or any of its rights in terms of section 13(4) of the Act.

The first opportunity of being heard is provided to the borrower by section 13(3-A) which lays down that the borrower may make a representation in response to the notice issued under section 13(2) and challenge the classification of his account as an NPA as also the quantum of amount specified in the notice. If the banks or FIs come to the conclusion that the representation/objection of the borrower is not acceptable, then the reasons for non-acceptance are required to be communicated within 1 week. It is worth noting that a proviso Is added to section 13(3-A) which states that reason so communicated shall not confer any right upon the borrower to file an application to the Debt Recovery Tribunal (DRT) u/s. 17 of Act.

Section 13(13) states that, no borrower shall after receipt of notice u/s. 13(2) transfer by way of sale, lease or otherwise any of his secured asset referred to in the notice, without prior written consent of the secured creditor. Thus, section 13(13) shows that the notice u/s. 13(2) in effect operates as an attachment/ injunction restraining the borrower from disposing of the secure asset. 

Writ petition challenging notice under section 13(2)

The borrower can challenge the notice u/s. 13(2) of Act in the Civil Court as well as in the High Courts by way of writ jurisdiction to defend his case. However, that is hardly sustainable. The notice u/s 13(2) of the Act by itself does not affect any right or liability of the borrower. Hence, challenge to the notice u/s. 13(2) of the Act is premature, since it is possible that the secured creditor may be satisfied with the reply of the borrower to the aforesaid notice and may drop proceedings.

 Hence, all the wit petitions challenging the notice of u/s. 13(2) of the Act are dismissed on the ground that writ petitions are premature and the petitioners have an alternative remedy of raising all the points which they are raising in these writ petitions in their reply to notice u/s. 13(2) of the Act. It is-clear that borrower cannot approach the court or any other forum at the interlocutory stage of the proceedings that is from the issue of notice u/s. 13(2) till the final action taken u/s. 13(4) of the Act.

Borrowers’ Right of Appeal

If the borrower or any other person who had any tangible grievance against the notice issued u/s. 13(4) or action taken u/s. 14, then he/she could have availed remedy by filing an application u/s. 17(1) within 45 days from the date on which such measures were taken. The expression ‘any person’ used in section 17(1) is of wide import. It takes within its fold, not only the borrower but also the guarantor or any other person who may be affected by the action taken u/s. 13(4) or u/s. 14. Both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders u/s. 17 and 18 and are required to decide matters within fixed time schedule.

Appeal to DRT

On receipt of possession notice u/s. 13(4) the borrower can prefer appeal before DRT u/s. 17, seeking stay of proceedings and to set aside the action initiated.

The Appellate powers of DRT u/s 17 of the Act  

The DRT has elaborate powers and it can even restore the possession back to the borrower, in the event it finds the actions by the bank are illegal or incorrect. The Supreme Court has clearly held in the case of Mardia Chemical Ltd. that the proceeding u/s. 17 is in the nature of original proceeding and that even the amount which is claimed to be due to a bank as stated in the notice u/s. 13(2) can be challenged by the borrower.

Appeal to Debt Recovery Appellate Tribunal 

If a person is aggrieved by the order of the DRT,ha can file an appeal to the Appellate Tribunal within 30 day from the date of the receipt of DRT order. If the DRT or Appellate Tribunal holds that possession of asset by the secured creditor was wrongful and directs the secured creditors to return the assets to the borrower, the borrower shall be entitled to the compensation and costs as may be determined by the DRT or Appellate Tribunal. The Tribunal can also direct the return of the assets If the secured creditor had already sold or transferred the asset to a third party.

Interim stay order

The Jurisdictions of Civil Court has bean clearly barred under section 34 of the Act, stating that no Injunction shall be granted by any court or other authority In respect of any action taken or to be taken under Sarfaesi Act or the DRT Act.

Filing of Writ petition under Article 226 of Constitution 

Writ jurisdiction is an extraordinary jurisdiction of the High Court under Article 226 and 227 of the Constitution of India. There is consistency in the decisions that the High Court normally hesitates to entertain writ petition in the matter of SARFAESI action by banks. This is in view of clear cut alternative remedy provided u/s. 17 and 18 of the SARFAESI Act. The remedy of appeal to DRT and DRAT is available u/s. 17 and 18 of the Act, against notice for possession and enforcement of security interest. It is settled legal preposition that a writ petition under Article 226 of the constitution is not maintainable, where there is an efficacious alternative remedy. It is generally pleaded that though alternative remedy is available, it is not efficacious. The writ petition is however preferred by the borrower for the following reasons:-

  • Writ petition is not a costly affair, as no court fee is payable, whereas court fee has to be paid in case of appeal to DRT depending upon amount involved.
  • Writ petition once admitted takes lot of time in consideration for decision and the petitioner gets the desired breather. In comparison the matter is time bound exercise under DRT.
  • Borrowers feel that the action under the Sarfaesi Act will be automatically restrained if writ is admitted.

Classification of NPA can be questioned through writ 

Where the Bank is not correct in classifying the account as NPA, which is preliminary to initiate proceeding under the provisions of SARFAESI Act, the High Court does interfere with the action initiated by the bank. Further interim relief may be granted to the borrower to regularise the account by continuing making payments.

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