ABSTRACT:

The Securitization and

Reconstruction of Financial Assets and Enforcement
of Security Interest (SARFAESI) Act, 2002 is a pivotal
legislation in India, empowering financial institutions
to recover non-performing assets efficiently. This act
grants lenders the authority to take possession of
collateral and sell it without court intervention,
expediting the resolution of bad loans. SARFAESI aims
to enhance the asset quality of banks, mitigate the
burden of non-performing assets, and foster a
healthier financial environment. The act provides a
streamlined mechanism for enforcing security
interests, facilitating timely resolution of financial
distress and promoting the stability of the financial
sector.
INTRODUCTION:
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002 (SARFAESI Act,2002) is
an Indian law. It allows banks and other financial institutions to
auction residential or commercial properties of defaulters to
recover loans.

Under this act secured creditors (banks or financial institutions)

have many rights for enforcement of security interest under
section 13 of SARFAESI Act, 2002. If borrower of financial
assistance defaults on repayment of a loan and their account is
classified as Non performing Asset by secured creditor, then
secured creditor may repossess the security asset before expiry of
period of limitation by written notice.

The SARFAESI act applies to the whole of India for the

securitisation, reconstruction of financial assets and enforcement
of the security interest.The act applies to all the financial
institutions established as securitisation companies or asset
reconstruction companies registered by the reserve bank of India.

In Mardia Chemicals Ltd. v. ICICI Bank, on 8 April 2004,

the Supreme Court of India declared the Sarfaesi Act to be
constitutionally valid. The Court said that a borrower may appeal
against the lender in the debt recovery tribunal, without having to
deposit 75% of the amount of the debt. If the tribunal does not
stay the order, the lender may sell the assets.
REPORT AND ANALYSIS[EVENTS 2020-
2023] :

 LATIF YUSUF MANIKKOTH VERSUS BANK OF

BARODA[2023 SCC onLine 1467]
The Petitioner filed a writ petition
under Article 226 of the Constitution of India, seeking relief from
the action taken by a bank to recover a loan taken by a borrower
company, to which the Petitioner was a guarantor. The Petitioner
claimed that the borrower company is an MSME (Micro, Small, and
Medium Enterprise) and should be protected under the MSMED
Act of 2006, prevailing over other recovery Acts like SARFAESI Act
and IBC.
The Petitioner sought various
reliefs, including declaring the actions of the bank as null and void,
restraining the bank from recovery proceedings, and challenging
the classification of the borrower's account as an NPA (Non-
Performing Asset). The Petitioner also questioned the
constitutionality of Section 14 of the SARFAESI Act and argued that
the MSME Act of 2006 took precedence over the SARFAESI Act,
RDB Act, and the IBC, providing a resolution mechanism for
financial stress.
The bank argued that the
Petitioner has already availed the benefits of Section 17, by
preferring an exhaustive application by way of Securitisation
Application no.92 of 2022 before the D.R.T and the matter was
closed for orders. Further, the Petitioner, since the initiation of the
proceedings under SARFAESI has neither objected to the Demand
Notice dated 25.04.2019 nor has he and or Borrower approached
the bank, with a proposal to restructure or for the settlement of
the due to the borrower.

 BALKRISHNA RAMA TARLE DEAD THR LRS AND

ANOTHER VS PHOENIX ARC PRIVATE LIMITED
(2022 SCC onLine SCC 1299)
The short question that arose for consideration by
the Hon’ble Supreme Court is whether while exercising the powers
under Section 14 of the SARFAESI Act, the District
Magistrate/designated authority could have passed such an order
that unless and until the secured creditor terminates the tenancy
rights of the third person by following due procedure of law and
further orders regarding possession of the mortgaged property
there and then only an application under Section 14 of the
SARFAESI Act will be decided? The Hon’ble Supreme Court
observed that given the scheme of the SARFAESI Act, more
particularly, Section 14 of the SARFAESI Act and the nature of the
powers to be exercised by learned Chief Metropolitan
Magistrate/learned District Magistrate, the High Court in the
impugned judgment and order has rightly observed and held that
the power vested in the learned Chief Metropolitan
Magistrate/learned District Magistrate is not by way of persona
designate. The powers exercisable by CMM/DM under Section 14
of the SARFAESI Act are ministerial steps and Section 14 does not
involve any adjudicatory process qua points raised by the
borrowers against the secured creditor taking possession of the
secured assets. In that view of the matter, once all the
requirements under Section 14 of the SARFAESI Act are complied
with/satisfied by the secured creditor, it is the duty cast upon the
CMM/DM to assist the secured creditor in obtaining the
possession as well as the documents related to the secured assets
even with the help of any officer subordinate to him and/or with
the help of an advocate appointed as Advocate Commissioner. At
that stage, the CMM/DM is not required to adjudicate the dispute
between the borrower and the secured creditor and/or between
any other third party and the secured creditor concerning the
secured assets and the aggrieved party to be relegated to raise
objections in proceedings under Section 17 of the SARFAESI Act,
before Debts Recovery Tribunal.

 HERO FINCORP LTD VS TECHNO TREXIN(I) PVT

LTD & ORS. (2022 SCC onLine DEL 3859)
The petitioner inter-alia sanctioned a Loan
Facility namely Loan against Property (hereinafter, LAP) for an
amount of ₹32. Crore (also known as Secured Term Loan) and
another loan namely Lease Rental Discounting Loan Facility
(hereinafter, LRD) for an amount of ₹55.00 Crore in favor of
Respondent No.1, vide Sanction Letters bearing Reference No.
2692023 and Reference No.2691828 dated December 20, 2017,
respectively. Two Master Facilities Agreements and two
Supplementary Agreements with regard to LAP and LRD were
executed between respondent No.1 as borrower and petitioner as
lender on December 26, 2017. Arb. P. 1105/2021 has been filed
with respect to LAP of ₹32 Crore and Arb. P. 1186/2021 has been
filed with respect to LRD of ₹55 Crore. Respondent Nos.2 to 4
agreed to guarantee the due repayment of the loans as well as to
adhere to the terms, conditions, and covenants envisaged in the
Agreements by Respondent No.1, in their personal and individual
capacity and Respondent Nos. 5 to 7 in their respective corporate
capacities. Respondent Nos.2 to 7 agreed to guarantee inter-alia
the repayment of the said loan facilities as well. Consequently,
Respondent Nos.2 to 7 executed separate Deeds of Guarantee; all
dated December 26, 2017, in favor of the petitioner, thereby
guaranteeing both the loan facilities. Thereafter, upon execution of
the Facilities Agreements, the said loans were disbursed by the
petitioner Company, vide Loan Account/Agreement No.
HCFDELLRD000002120728 and Loan Account/Agreement No.
HCFDELLRD00002120727, in favor of respondent No.1, with a
term/tenure of 180 months, and are accordingly, repayable by
Respondent No.1 by way of monthly installments, including a
principal moratorium period of 24 months. The monthly
installments were payable with effect from/upon the expiry of the
principal moratorium period of 24 months from the date of first
disbursement. The respondent failed to adhere to the terms of
repayment of the loan facilities and committed defaults, which
qualified as an Event of Default, which entitled the petitioner to
recall the loan facilities. The petitioner vide notice dated June 03,
2021, called upon the respondents to pay to the petitioner, jointly/
severally, the total outstanding dues of ₹35,75,84,376.20/- and
₹60,82,54,537.33/- as on May 31, 2021, in respect of the said loan
facilities. Thereafter the petitioner invoked the Arbitration Clauses
vide Notice dated June 22, 2021, sent to the respondents by the
petitioner as contemplated in Clause 12.10 of the Master Facilities
Agreements dated December 26, 2017, and in Clause 31 of the
Deeds of Guarantee also dated December 26, 2017.
The question that arose for consideration was whether the
petitioner is entitled to the appointment of an Arbitrator for
adjudicating the disputes arising with the respondents with regard
to non-payment of loan facilities advanced by the petitioner to
Respondent No.1, for which Respondent Nos. 2 to 7 stood as
guarantors.
The Court observed that “The reference to DRT in the submission
of the counsel for the respondent is with regard to the fact that
SARFAESI Act under Section 17 provides DRT as a Forum. However,
the mandate of the DRT under Section 17 of the SARFAESI Act is
limited to examining whether the action initiated by the petitioner
is in accordance with Section 13 (4) of the Act and nothing more.
So, in that sense, the proceedings are not under the RDB Act, but
under SARFAESI Act”. It was further held that any action under
Section 17 of the Act would not disqualify the initiation of
arbitration proceedings and the fact that the respondent has not
provided their assent on an arbitrator only adds to the ongoing
disputes. Accordingly, the court dismissed the petition and
appointed an Arbitrator to resolve the ongoing disputes.

 CITIZENS’ COOPERATIVE BANK REPORTS PROFIT

OF RS.2.86 LAK FOR 2020-2021

The bank, under the management of the

Board of Administrators, initiated action against the
defaulters under provisions of the SARFAESI Act and were
able to recover Rs 685.81 lakh in NPA accounts during
2020-21, out of which recovery of Rs 273.26 lakh was made
in March itself.

After three years of straight loss, Citizens' Cooperative Bank

has registered profit in 2020-21 on the back of effective
recoveries and lower non-performing assets. Citizens'
Cooperative Bank Limited (CCBL) Jammu has improved its
financial condition and booked an operating profit of Rs
2.86 lakh in 2020-21 as against an operating loss of Rs
108.56 lakh in the previous fiscal, an official spokesman
said.
The bank, under the management of the Board of
Administrators, initiated action against the defaulters
under provisions of the SARFAESI Act and were able to
recover Rs 685.81 lakh in NPA accounts during 2020-21,
out of which recovery of Rs 273.26 lakh was made in March
itself, he added. "In spite of COVID-19 restrictions, the bank
has improved its financial health and registered operating
profit for the year 2020-21. However, the bank is still
grappling with the issue of higher NPAs," the spokeman
said
.
 PROVISION OF SARFAESI ACT EMPOWERING DMs
TO ATTACH SECURED ASSESTS OF BORROWERS
DIRECTORY:[2020]
 Justice Gupta, writing the judgement, said the
SARFAESI Act was enacted to provide a machinery for empowering
banks and financial institutions, so that they may have the power
to take possession of secured assets and to sell them.

In a relief to banks and financial institutions (FIs), the Supreme

Court November 5 held that a provision of the SARFAESI Act
empowering District Magistrates to take possession of secured
assets of defaulting borrowers within 60 days period for handing
them over to the lending FIs was directory and not mandatory in
nature as banks cannot be made to suffer for the delay on the part
of the government officers

Section 14 of the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest (SARFAESI) Act
mandates District Magistrate to deliver possession of a secured
asset within 30 days, extendable to an aggregate of 60 days upon
reasons recorded in writing, to banks.
The top court was faced with the question whether the provision
was directory or mandatory in nature and if the banks or FIs can be
made to suffer if DMs fail to act within 60 days in taking over the
secured assets of defaulting borrowers and handing them back to
the banks or FIs.
A bench of Justices L Nageswara Rao, Hemant Gupta and Ajay
Rastogi upheld the Kerala High Court verdict which had said that
the secured creditor would be adversely affected if the provision is
construed as mandatory and not directory as it would also delay
the process of taking physical possession of assets.
CONCLUSION :
The SARFAESI Act of 2002, aimed at empowering
financial institutions to tackle non-performing assets, has proven
instrumental in expediting the recovery of defaulted loans. By
providing banks with the authority to enforce security interests
without court intervention, the Act streamlines the recovery
process, fostering a more robust financial system. However, it's
crucial to balance these powers with adequate safeguards to
protect borrowers' interests and ensure fair play in the
enforcement of security. Overall, the SARFAESI Act has significantly
contributed to the efficiency of the Indian financial sector in
managing distressed assets.

 SIGNIFICANCE
The SARFAESI Act, 2002 (Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act) is
significant as it empowers banks and financial institutions to take
measures for asset reconstruction and enforcement of security
interests without court intervention. This helps in quicker
resolution of non-performing assets (NPAs) and provides a legal
framework for the recovery of loans.
The key significance lies in its ability to facilitate the recovery
process by allowing creditors to take possession of secured assets,
sell them, and realize their dues. This streamlined approach aims
to reduce the burden of NPAs on financial institutions, fostering a
healthier lending environment. The act also establishes Debt
Recovery Tribunals (DRTs) to expeditiously adjudicate cases related
to the enforcement of security interests.
 In summary, SARFAESI Act plays a crucial role in empowering
financial institutions to manage and recover non-performing assets
efficiently, contributing to the stability of the financial system.

 MERITS :
1. Speedy Recovery: The act provides a quicker and more
efficient mechanism for banks and financial institutions to recover
non-performing assets by enabling them to take possession of and
sell the secured assets without court intervention.

2. Reduced NPAs: By expediting the recovery process, the act helps

in reducing the burden of non-performing assets on financial
institutions, contributing to the overall health of the banking sector.

3. Creation of DRTs:The establishment of Debt Recovery Tribunals

(DRTs) under the act facilitates a specialized forum for the
resolution of disputes related to the enforcement of security
interests, ensuring a focused and timely adjudication process.

4. Empowerment of Creditors: SARFAESI empowers creditors by

providing them with legal tools to enforce security interests,
making lending institutions more confident in extending credit.

 DEMERITS :
 1. Limited Scope for Borrowers: The act gives more power to
creditors, potentially leaving borrowers with limited recourse and
avenues for redressal, which may be seen as a disadvantage from
the borrower's perspective.

2. Possibility of Misuse: There have been concerns about the

potential misuse of the act by financial institutions, leading to
disputes and legal challenges. Critics argue that the act may
sometimes be used aggressively by creditors.

3. Asset Quality Concerns: While the act aims to address the issue
of NPAs, critics argue that it may not fully address the root causes
of bad loans, such as economic factors, industry-related challenges,
or management issues.

4. Impact on Small Borrowers: Small borrowers may face

challenges in protecting their interests, as the act primarily focuses
on large financial transactions, potentially affecting the balance in
borrower-creditor relationships.

In summary, while the SARFAESI Act has merits in terms of

expediting the recovery process and reducing NPAs, it also has
demerits related to borrower protection, potential misuse, and
concerns about addressing the root causes of bad loans.

BIBLIOGRAPHY :

C. (2022, FEBRAURY 07). National Monetisation Pipeline (NMP). Retrieved from CLEARIAS:
https://www.clearias.com/national-monetisation-pipeline/

N. (2022, APRIL 13). National Monetisation Pipeline (NMP). Retrieved from NEXT IAS:
https://www.nextias.com/current-affairs/13-04-2022/national-monetisation-pipeline-nmp/

A. ( 2022, MAY 05 ) . National Monetisation Pipeline (NMP). Retrieved from LIVELAW :

https://www.livelaw.in/tags/05-05-2022/sarfaesi-act
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