SARFAESI Act
Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to empower banks and financial institutions to recover non-performing assets (NPAs) efficiently without court intervention. It allows lenders to seize and auction assets of defaulting borrowers to recover outstanding dues.
This act applies to all scheduled commercial banks, financial institutions, housing finance companies, and select NBFCs. However, it does not apply to agricultural land or loans below ?1 lakh.
Key Provisions of the SARFAESI Act
1. Securitisation of Financial Assets
- Banks can sell or transfer NPAs to Asset Reconstruction Companies (ARCs).
- ARCs buy bad loans and attempt recovery through settlements or auctions.
2. Enforcement of Security Interest (Section 13)
- If a borrower defaults on loan repayment, the lender can seize and auction the mortgaged property without court approval.
3. Takeover of Management (Section 15)
- In cases of high-value defaults, lenders can take control of a company’s management to protect creditors' interests.
4. Appeal Mechanism
- Borrowers can file appeals before:
- Debt Recovery Tribunal (DRT) under Section 17.
- Debt Recovery Appellate Tribunal (DRAT) under Section 18.
5. Role of Central Registry (CERSAI)
- All loans secured against property must be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) to prevent fraud.
Process of Recovery Under SARFAESI Act
Step 1: Issuing a Demand Notice
- If a borrower defaults, the lender issues a 60-day notice under Section 13(2) demanding payment.
Step 2: Borrower’s Response
- The borrower may clear dues, negotiate a settlement, or challenge the notice before DRT.
Step 3: Possession of Assets
- If no repayment is made, the lender can:
- Take possession of the secured asset.
- Appoint a manager to control the business (if applicable).
Step 4: Auction or Settlement
- The asset is sold through a public auction or settled through negotiations.
- If the sale proceeds exceed the outstanding amount, the excess is refunded to the borrower.
Important Case Laws on SARFAESI Act
1. Mardia Chemicals Ltd. v. Union of India (2004)
- Judgment: Upheld the constitutional validity of SARFAESI but allowed borrowers to appeal against arbitrary actions.
2. Transcore v. Union of India (2006)
- Judgment: Lenders can pursue recovery under both SARFAESI and DRT simultaneously.
3. Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India (2015)
- Judgment: Borrowers must approach DRT before going to higher courts for relief.
Real-Life SARFAESI Cases We Solved
1. Corporate Loan Default Recovery
- Case: A company defaulted on a ?150 crore loan.
- Outcome: Assets were seized and auctioned, ensuring full loan recovery.
2. Residential Property Seizure
- Case: A borrower failed to repay a ?5 crore home loan.
- Outcome: The property was auctioned, and the bank recovered 98% of the outstanding dues.
3. Fraudulent Loan Recovery
- Case: A business took a ?20 crore loan but siphoned funds elsewhere.
- Outcome: The company’s entire plant was seized, and dues were settled through asset liquidation.
Conclusion
The SARFAESI Act, 2002 is a powerful tool for lenders to recover bad loans quickly and efficiently. However, borrowers still have legal protections to prevent misuse. Proper legal guidance ensures fair implementation and resolution.
? Total Cases Solved: 35+
