Basic Rights of Borrowers: SARFAESI Act of 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act of 2002 was enacted to fight the menace of Non-Performing Assets (NPA), on the basis of the recommendations made by the Andhyarujina Committee. But many experts were of the belief that the act is draconian and completely favours the Banks, Financial Institution and other Non-Banking Financial Institutions (NBFCs) and hence, it is against the principle of equity and natural justice. The constitutionality of the SARFAESI Act of 2002 had been put to question in the landmark case of Mardia Chemicals v Union of India AIR 2004 SC 2371, wherein the Act was challenged on the grounds of giving arbitrary and onerous powers to Banks and Financial Institutions to fulfill their claims, however, the Hon’ble Supreme Court upheld the constitutional validity of the SARFAESI Act of 2002 and observed that it provides ample opportunity to the borrower to redress their issues before the Debt Recovery Tribunal (DRT) and that no arbitrary powers have been conferred on the Banks, Financial Institution and other Non-Banking Financial Institutions (NBFCs) respectively.
Further, in the case of Kanaiyalal Lalchand Sachdev v. State of Maharashtra (2011) 2 SCC 782, the Hon’ble Supreme Court has laid down that though the very objective of the Legislature is to provide Banks, Financial Institution and other Non-Banking Financial Institutions (NBFCs) with stringent powers to recover debts, however, reasonable safeguards have been provided to ensure fair use of the powers and to rectify any errors by conferring power to the Debt Recovery Tribunal (DRT) to adjudicate over such matters and declare such actions that are beyond the Financial Institution’s power or done under misuse of the powers, as invalid.
Following are the Rights of the Borrower or the Safeguards given to the Borrower of credit and/or loans under the SARFAESI Act of 2002 i.e.
Reasonable Classification of Debt as a Non-Performing Asset (NPA): The first important thing that has be decided is whether the Bank or Financial Institutions has classified the Debt as a Non-Performing Asset (NPA) in a reasonable manner and as per the guidelines laid down by the Reserve Bank of India (RBI). In case the Debt Recovery Tribunal (DRT) is of the opinion that the classification of the debt as NPA was not reasonable, any step taken under section 13(4) of the SARFAESI Act in lieu of such debt would be deemed void.
Receive Notice: As per section 13(2) of the SARFAESI Act, it is mandatory for a Financial Institution to send a notice giving a period of 60 days to the borrower to repay the debt. In Mathew Varghese vs. M. Amritha Kumar, (2014)5 SCC 610, the Hon’ble Supreme Court held that notice under section 13(2) is a mandatory pre-condition for the Financial Institutions to take any action under section 13(4) of the act. Further, in the case Vasu P. Shetty v. Hotel Vandana Palace and Ors, (2014) 5 SCC 660 the Apex Court went one set ahead to lay down that notice is necessary even when the borrower resorts to dilatory tactics.
Filing Objections to Notice: According to section 13(3A) of the act, the borrower has the right to file a reply to the notice received from Financial Institutions and raise any objections or make any representation to prevent the Financial Institutions from taking any action under section 13(4) of the SARFAESI Act of 2002.
Right to Communication in case the Objections is/are Denied: In accordance with section 13(3A) of the of the SARFAESI Act, all the Banks and Financial Institutions are under an obligation to consider the objections sent by borrower in a reasonable manner and in case they are not accepted, the same has to be communicated to the borrower along with the reason for non-acceptance. In Sunanda Kumari vs Standard Chartered Bank, 2007 135 CompCas 604 Kar., the Hon’ble Karnataka High Court while reiterating the same held that, in case Financial Institutions fails to communicate the reasons of not accepting the objections, the borrower can presume that the objections were tenable and are accepted by the Financial Institution. Further, any action taken under section 13(4) of the Act without such communication shall be deemed illegal and invalid.
Appeal: The next right conferred on a borrower within the framework of the Act is the right to file an appeal to DRT under section 17 of the act in case the borrower feels aggrieved by any action of the Bank or Financial Institution. Prior to M/s Hindon Forge Pvt. Ltd. & Anr. v State of Uttar Pradesh (Civil Appeal No 10873-10874 of 2018), an appeal under section 17 could only be preferred to DRT after measures under section 13(4) has already been taken by the Financial Institution. However, the Hon’ble Supreme Court in the case laid down that, an appeal can be filed to DRT at the stage of receiving the possession notice under Rule 8 Security Interest (Enforcement) Rules, 2002 and no physical possession of the property is necessary. Furthermore, appeal from the Debt Recovery Tribunal (DRT) can be filed to the Debt Recovery Appellate Tribunal (DRAT).
Approaching the High Court: The borrower also has the right to challenge a notice under section 13(2) of the Act through a writ petition to defend his case. However, it is usually not sustainable as the notice is just a show cause notice and court don’t generally interfere with show cause notices as laid down in the case of D. Ravichandran V/s Indian Overseas Bank, W.P. No. 250 of 2006.
Therefore, the SARFAESI Act of 2002 while conferring powers to the Banks, Financial Institution and other Non-Banking Financial Institutions (NBFCs) to recover their money without the long drawn Court procedure, it has maintained a balance by laying down various safeguards that are available to a borrower thus, ensuring that the principles of natural justice, fairness and equity are followed.
Authored By: Adv. Anant Sharma & Ananya Jain