The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted with the object to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights, and for matters connected therewith or incidental thereto. The Hon’ble Apex Court in the case of NKGSB Cooperative Bank Limited Vs Subir Chakravarty and others (2022) 10 SCC 286 has interpreted the objective of the legislation and held that the intention of the lawmakers was to empower the financial institutions.
Chapter III of the Act provides for the enforcement of security interest. Section 13 provides for a special procedure of enforcement of security interest for secured creditors without the intervention of a court or tribunal.
Section 13(2) of the Act provides for the inception of the procedure qua a “Notice”, and it is as follows:
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
[Provided that—
(i) the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and
(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee.]
The Notice under Section 13(2) of the SARFAESI Act, 2002 must contain details of amount payable by the borrower and the secured assets intended to be enforced.
Section 13(3A) of the Act provides for representation or objection on the part of the borrower upon receipt of the notice under section 13(2) of the Act. The Secured creditor is obligated to decide the said representation and if decided in the negative, the same must be communicated to the borrower within 15 days or receipt of the representation or objection of the borrower.
Section 13(4) provides for recourse available to the secured creditor upon failure of the borrower to discharge the liability within the prescribed period of receipt of notice. These recourses are as follows:
- take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset
- take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset
- appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor
- require by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
To take possession of the secured assets, the secured creditor must move an application under Section 14 of the SARFAESI Act, 2002. For the purposes of appreciation of this topic, Section 14 is relevant to peruse, which is as under:
14. Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset.—(1) Where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured assets is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured assets, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him—
(a) take possession of such asset and documents relating thereto; and
(b) forward such asset and documents to the secured creditor:
Provided that any application by the secured creditor shall be accompanied by an affidavit duly affirmed by the authorised officer of the secured creditor, declaring that—
- the aggregate amount of financial assistance granted and the total claim of the Bank as on the date of filing the application;
- the borrower has created security interest over various properties and that the Bank or Financial Institution is holding a valid and subsisting security interest over such properties and the claim of the Bank or Financial Institution is within the limitation period;
- the borrower has created security interest over various properties giving the details of properties referred to in sub-clause (ii)above;
- the borrower has committed default in repayment of the financial assistance granted aggregating the specified amount;
- consequent upon such default in repayment of the financial assistance the account of the borrower has been classified as a non-performing asset;
- affirming that the period of sixty days notice as required by the provisions of sub-section (2) of section 13, demanding payment of the defaulted financial assistance has been served on the borrower;
- the objection or representation in reply to the notice received from the borrower has been considered by the secured creditor and reasons for non-acceptance of such objection or representation had been communicated to the borrower;
- the borrower has not made any repayment of the financial assistance in spite of the above notice and the Authorised Officer is, therefore, entitled to take possession of the secured assets under the provisions of sub-section (4) of section 13 read with section 14 of the principal Act;
- that the provisions of this Act and the rules made thereunder had been complied with:
Provided further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of the secured assets within a period of thirty days from the date of application:
Provided also that if no order is passed by the Chief Metropolitan Magistrate or District Magistrate within the said period of thirty days for reasons beyond his control, he may, after recording reasons in writing for the same, pass the order within such further period but not exceeding in aggregate sixty days.
Provided also that the requirement of filing affidavit stated in the first proviso shall not apply to proceeding pending before any District Magistrate or the Chief Metropolitan Magistrate, as the case may be, on the date of commencement of this Act.
(1A) The District Magistrate or the Chief Metropolitan Magistrate may authorise any officer subordinate to him,—
- to take possession of such assets and documents relating thereto; and
- to forward such assets and documents to the secured creditor.]
(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.
(3) No act of the Chief Metropolitan Magistrate or the District Magistrate any officer authorised by the Chief Metropolitan Magistrate or District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.
From the aforesaid, the application under Section 14 of the Act is liable to be decided within a maximum period of 60 days. However, the Hon’ble Supreme Court has interpreted the timeline provided in Section 14 of the SARFAESI Act 2002 and it has held that the time frame is of directory nature in C. Bright Vs District Collector and others (2021) 2 SCC 392 while dealing with the maximum limit provided under Section 14 of SARFAESI Act 2002.
The Hon’ble Allahabad High Court in a recent judgment of M/S Hinduja Housing Finance Ltd. vs. State Of U.P. And 3 Others, has dealt with the inordinate delay in dealing with the applications under Section 14 of the SARFAESI Act, 2002 and held as follows:
Where a statute not only creates a duty but also prescribes the timeframe for its discharge, the obligation assumes higher degree of responsibility and give it a mandatory colour. Delay in such circumstances amounts to failure to exercise jurisdiction vested by law. Prolonged pendency of applications under Section 14 undermines the very purpose of the SARFAESI Act. Secured assets are time-sensitive in nature and are susceptible to deterioration and erosion of value. Delay in enforcement directly impacts recoverability and adversely affects the financial system.
The Hon’ble Allahabad High Court further held that once the secured creditor has complied with the provisions of Section 26D of the Act, then to deny him the benefits of statutory provisions, will amount to injustice.
Section 26D of the Act is as follows:
26D. Right of enforcement of securities.—Notwithstanding anything contained in any other law for the time being in force, from the date of commencement of the provisions of this Chapter, no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry.
The Hon’ble Allahabad High Court further held that a case for interference is made out when there is inordinate delay on the part of the magistrate, and the secured creditor has followed the procedure and the mandate of the statutory provisions under Section 26D of the Act.
Hence, in case your application under Section 14 of the Act is pending for a long time without any justification, and the compliance of Section 26D of the Act is fulfilled on your end, then a writ petition may be filed before the Hon’ble Allahabad High Court praying for expeditious disposal of the application within a reasonable time frame, preferably within a period of say, 30 days, or as the Court may deem fit.