INTERNATIONAL JOURNAL OF RESEARCH AND 2017

ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185

ENFORCEMENT OF SECURITY INTEREST UNDER SARFESI ACT

* VIJAY SHEKHAR JHA1

1.Requirement of Chapter iii of the SARFESI Act2

Failure of Civil Courts led to the promulgation of Recovery of Debts Due to Banks and
Financial Institutions Act (RDDBFI Act) 1993.RDDBFI Act contemplated summary
procedure for ascertainment of dues and certainly brought down the time span for
adjudication of dues. It, however, failed to execute the decree/Certificate in an effective way.

Banks and financial institutions are the sentinels of public money and there was a need to
rotate money for the public good. Non Performing Assets (NPA) is a loss to the economy.
Thus, an ordinance was promulgated pursuant to the recommendations given by Narsimham
Committee II and Andhyarujina Committee on 21st June, 2002 to regulate securitization and
reconstruction of financial assets and enforcement of security interest and for matters
connected therewith or incidental thereto3.

2.Non Performing Assets

"Non Performing Asset" (hereinafter called NPA) has been defined in clause(o) of Section 2
of SARFESI Act 2002 which means :

"non-performing asset" means an asset or account of a borrower, which has been classified
by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with
the directions or under guidelines relating to asset classifications issued by the Reserve Bank"

And, Master Circular given by RBI in 2015 further gives information on NPA. In the Para 4.1
of the circular RBI has categorised the NPAs as following:-

Banks are required to classify non -performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:

1
4th Year, Amity Law School Delhi(GGSIPU)

2
Statement Of Objects And Reasons of the SARFESI Act 2002.
3
http://www.gktoday.in/sarfaesi-act-2002/

293

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
1. Substandard Assets

2. Doubtful Assets

3. Loss Assets

(1) Substandard Assets

With effect from March 31, 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 months. Such an asset will have well defined credit
weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.

(2) Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained
in the substandard category for a period of 12 months. A loan classified as doubtful has all
the weaknesses inherent in assets that were classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, – on the basis of
currently known facts, conditions and values – highly questionable and improbable.

(3) Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly. In other words, such an
asset is considered uncollectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.

Moreover, RBI on 13th July 2005 has also issued guidelines which will be applicable to
banks, FIs and NBFCs purchasing/ selling non -performing financial assets, from/ to other
banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies).

3. Mandatory Notice which is to be sent u/s 13(2)

Section 13(2) makes it mandatory on the Secured Creditor before initiating any proceedings
u/s 13(4) against the borrower under this act to serve 60 days notice to the borrower after
owing to any default by the borrower in repayment of secured debt or any instalment thereof
his account in respect of such debt is classified by the secured creditor as non-performing

294

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
asset in accordance with the directions or guidelines relating to asset classifications issued by
the Reserve Bank of India.

As per Sec. 13(3) of the SARFESI Act notice referred in Sec.13(2) must have the details of
the amount payable by the borrower and the secured assets intended to be enforced by the
security creditor in the event of non-payment of secured debts by the borrower.

4. Mardia Chemicals case and Sec.13(2)

Before Supreme Court’s decision in the landmark case of Mardia Chemicals vs Union Of
India (2004)4SCC311 the act did not provide any forum to the borrower to raise his
objection thus it was considered against the principle of Natural Justice (Audi Alteram
Partem) because as held in case E.P.Royappa vs State Of Tamil Nadu (AIR 1974 SC 555 )
that the soul of natural justice is fairplay in action and that is why it has received the widest
recognition throughout the democratic world. It is well established that even where there is
no specific provision in a statute or rules made thereunder for showing cause against action
proposed to be taken against an individual, which affects the rights of that individual, the
duty to give reasonable opportunity to be heard will be implied from the nature of the
function to be performed by the authority which has the power to take punitive or damaging
action.

In the case State of Orissa v. Dr (Miss) Binapani Dei (AIR 1967). the court said “In United
States, the right to an administrative hearing is regarded as essential requirement of
fundamental fairness. And in England too it has been held that fair play in action demands
that before any prejudicial or adverse action is taken against a person, he must be given an
opportunity to be heard. Thus, Principle of Natural Justice is applicable both in Quasi-
Judicial Function and Administrative function and unless a statute expressly or by necessary
implication excludes the application of natural justice, the requirement to follow natural
justice must be read in the statute. True, presumption is in favour of validity of an enactment
and a legislation may not be declared unconstitutional, more so, in the matters relating to
fiscal and economic policies resorted to in the public interest, but while resorting to such
legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands
of those who have been vested with the powers to enforce drastic steps to make recovery.”

295

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
Pursuant to this case (Mardia Chemicals(supra)) a new section 13(3A) was added in the in the
year 2004 which provides that ,if, on receipt of the notice under sub-section (2), the borrower
makes any representation or raises any objection, the secured creditor shall consider such
representation or objection and if the secured creditor comes to the conclusion that such
representation or objection is not acceptable or tenable, he shall communicate within 15
days ( earlier was one week) of receipt of such representation or objection the reasons for
non-acceptance of the representation or objection to the borrower.

But, the notable point is that proviso attached to section 13 (3A) bars the borrower from
making an application u/ 17 of the act in Debt Recovery Tribunal based on such reason given
/communication made by the secured creditor.

5. Section 13(4) in the light of Sec.13(2)

Section 13(4) states following:

In case the borrower fails to discharge his liability in full within the period specified in sub-
section (2), the secured creditor may take recourse to one or more of the following measures
to recover his secured debt, namely:-

(a) 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;

(b) 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:

PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised
only where the substantial part of the business of the borrower is held as security for the debt:

PROVIDED FURTHER that where the management of whole of the business or part of the
business is severable, the secured creditor shall take over the management of such business of
the borrower which is relatable to the security for the debt.

(c) 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;

296

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
(d) require at any time 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.

But, as held in the case M/s Transcore vs Union Of India & Anr. ,AIR 2007 SC 712 secured
creditor when exercising his powers given in sec. 13(4) cannot use force. Thus, if the
borrower does not let authorised officer of the bank to get the possession of the property then
the only remedy secured creditor has is to make an application u/s 14 of the act to Chief
Metropolitan Magistrate (CMM) or the District Magistrate (DM) to assist him in taking
Possession of Secured Assets. Thus, sec.14 can be resorted to only when secured creditor has
exhausted the option of sec.13(4).Furthermore, it must be kept into the mind that sec.14 does
not ask CMM or DM to give hearing opportunity to Borrower by issuing him notice. Their
job is just to assist the secured creditor in taking possession of the secured asset because the
whole purpose for which SARFESI Act was created would fail if CMM or DM allows or is
obliged to give opportunity to the Borrower before assisting the Secured Creditor in
exercising his power u/s 13(4) by directing police to remove the borrower by using force.
Thus, in the case Sri Jawahar Singh vs United Bank of India & Ors.;25/08/2014 Calcutta
High Court said “ the Authority who is called upon to act under Section 14 of the
Securitisation Act can only assist, nay, is bound to assist the secured creditor in taking
possession of the secured asset. Any dispute between the parties regarding the secured asset
raised before the Authority cannot be gone into by the Authority but to the tribunal u/s 17.”

Moreover, since the hearing opportunity is absent for borrowers at the stage of sec.14,this
section mandates the secured officer of the bank to submit an affidavit authorised by the
secured officer entailing all nine points given in the proviso to sub-section (1) of Sec.14
,which are given below:

i) The aggregate amount of financial assistance granted and the total claim of the Bank as on
the date of filing the application;

(ii) 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;
(iii) The borrower has created security interest over various properties giving the details of
properties referred to in sub-clause (ii) above;

297

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
(iv) The borrower has committed default in repayment of the financial assistance granted
aggregating the specified amount;
v) Consequent upon such default in repayment of the financial assistance the account of the
borrower has been classified as a nonperforming asset;
(vi) Affirming that the period of sixty days notice as required by the provisions of subsection
(2) of section 13, demanding payment of the defaulted financial assistance has been served on
the borrower;
(vii) 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;
(viii) 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 subsection (4) of section 13 read with section 14 of the
principal Act;
(ix) That the provisions of this Act and the rules made thereunder had been complied with.

Moreover, in order to deter submission of false affidavit Calcutta High Court in the Case of
Sri Jawahar Singh Vs United Bank of India &Ors;25/08/2014 clearly said that if at any
subsequent stage after passing of an order under section 14 the authorised officer is found to
have filed a false affidavit, he may be exposed to prosecution under section 340, Criminal
Procedure Code.

The scheme of the SARFAESI Act, as explained in Mardia Chemicals (supra), M/s
Transcore (supra) and other decisions, is that it is intended to facilitate quick recovery of
secured debts without extending any opportunity of hearing to a borrower and without
judicial/quasi judicial intervention till such time possession of the secured asset is taken by
the secured creditor after serving the requisite notices and responding to the
objection/representation that may be lodged/preferred by the borrower under section 13(3A).

In this regard, it is relevant to refer to another latest judgment of the Supreme Court in United
Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, wherein the Supreme Court has held
that it is not only against the possession notice under Section 13(4) of the SARFAESI Act but
also against the order passed under Section 14 of the SARFAESI Act an application can be
filed under 17(1) of the SARFAESI Act.

298

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
Supreme Court on the question whether Civil Courts including High Courts can be moved
against the administrative order made by CMM or DM u/s 14 of the act especially when there
is specific bar to do so under the act under its section 34 of the act, in the case of Mardia
Chemicals vs Union of India (2004)4SCC311 held that, to a very limited extent jurisdiction
of the civil court can also be invoked, where for example, the action of the secured creditor is
alleged to be fraudulent or his claim may be so absurd and untenable which may not require
any probe whatsoever or to say precisely to the extent the scope is permissible to bring an
action in the civil court in the cases of English mortgages.

6. Application of section 13(4) in relation to lessee/tenant

With Secured Creditors getting plenary powers u/s 13(4) of the act its application showed this
section has a gargantuan adverse fallout on the innocent tenant/lessee who got the possession
of the property from the borrower who had /had no intention to defer the possession of the
property by the secured creditor due to default in payment following the procedure given in
the sec.13,sec 14 and rules provided in Security Interest Enforcement Rules,2002.

Sometimes, resistance by Tenants would force the Banks to cause the sale of secured assets
without taking possession and conveying the property to purchasers with such Tenants, which
in turn would impede the ability of the Borrower to sell the secured asset to prospective
purchasers and lead to a significant depreciation in the price obtained in the sale from
prospective purchasers who are willing to buy the property with such risks. In Sri Jawahar
Singh vs The United Bank Of India & Ors,25/08/2014 Calcutta High Court held that if
lessee/tenant resists the attempt of the secured creditor to take possession, the authorised
officer cannot evict the lessee by force but has to file an application before the Chief
Metropolitan Magistrate or the District Magistrate under Section 14 of the SARFAESI Act
and state in the affidavit accompanying the application, the name and address of the person
claiming to be the lessee. When such an application is filed, the Chief Metropolitan
Magistrate or the District Magistrate will have to give a notice and give an opportunity of
hearing to the person claiming to be the lessee as well as to the secured creditor, which will
be consistent with the principles of natural justice, and then take a decision.

Moreover, due to this ambiguity tenant used to approach DRT, this in turn increased the
backlog of cases in the DRT thus faltering the basis of SARFESI Act. Consequently,
Supreme Court in the case of a Harsh Govardhan Sondagar v. International Assets
Reconstruction Company Ltd (2014). 6 SCC 1 held following :-

299

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
To understand the implications of the judgment it would be appropriate to classify the
Tenants of secured assets into three types/categories.

1. A Tenant who was inducted into the property before it was mortgaged to the Bank.

2. A Tenant who was inducted into the property after it was mortgaged to the Bank but before
the Bank issues notice of default and demands payment under Section 13(2) of the
SARFAESI Act.

3. A Tenant who was inducted into the property after the Bank has issued a notice of default
and made a demand for payment under Section 13(2) of the SARFAESI Act.

Category 1: In this category lease/tenancy would be binding on the Bank, that the rights of
the Secured Creditor (Banks) under the SARFAESI Act cannot override the rights of the
Tenants under the Transfer of Property Act, and if the lease/tenancy is valid and subsisting
and has not expired or been terminated as under sec. 111 of Transfer Of Property Act,1882
at the time when the Bank seeks to take possession, then such Tenants cannot be dispossessed
from the property/secured asset till their lease/tenancy rights expire or stand terminated as per
law.

Category 2: As regards the 2nd category, i.e., a Tenant inducted after the mortgage, here
again, one could classify this lease/tenancy into three sub- categories:

i. A lease/tenancy which is in accordance with the provisions of Section 65A of the TP Act
and not contrary to the terms of the mortgage;

ii. A lease/tenancy which is contrary to the provisions of Section 65A of the TP Act;

iii. A lease/tenancy contrary to the terms of the mortgage prohibiting the mortgagor/borrower
from creating any tenancy or leasing of the property.

As regards sub-category (i) above, i.e., Tenants inducted after the mortgage whose tenancy is
not contrary to the terms of the mortgage or the provisions of S.65-A of the TP Act, the
Supreme Court has held that these Tenants cannot be dispossessed from the property by the
Banks unless their leases have expired or have got terminated as per the terms of the lease
and if the Bank wishes to sell the property, it will obviously have to do so with Tenants in
possession and subject to the lease/tenancy.

300

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
As regards sub-category (ii) such a lease/tenancy has been held by the Supreme Court to be
invalid and hence in such a case, the Bank would be entitled to directly recover vacant
possession by approaching the Magistrate.

As regards the Sub-category (iii), i.e., of Tenants inducted after the mortgage i.e., those
inducted even though the terms of the mortgage prohibits tenancy or lease of property, yet
again the Secured Creditor (Banks) need not have the Tenants vacated by filing suits in the
Civil Court but could have them evicted by approaching the Magistrate u/s 14 to seek
recovery by dispossessing the alleged Tenants as their tenancies would also be invalid.

Category 3

Tenants i.e., those sought to be inducted by the landlord after the Bank has already issued
notice under the SARFAESI Act demanding payment of dues and indicating that it would be
enforcing on security under the provisions of SARFAESI Act, obviously such
leases/tenancies would be invalid as the SARFAESI Act itself under Section 13(13) which
prohibits any creation of encumbrance without prior consent after such notice by the Bank.

If the tenant/lessee feels aggrieved by the dispossession caused by Magistrate he/she can
move to DRT u/s 17 of the act and as held by Supreme Court in the case of United Bank of
India v. Satyawati Tondon, (2010) 8 SCC 110, that DRT can cause the re-possession
(reinstatement) of the tenant if the dispossession caused was not legal.

Thus, To negate the cases of leases/tenancies created after the mortgage taking shelter under
the provisions of any Rent Control Statute, the most advisable course for Banks is to ensure
that the terms of the mortgage contract prohibit the creation of any such lease/tenancy(u/s
65A(3) of TPA).

7.Section 13(2),Section 13(4) read with The Security Interest Enforcement

Rules,2002

Demand Notice sent u/s 13(2) of the SARFESI Act 2002 has to comply with Rule 3 of
Security Interest Enforcement Rules 2002 (hereinafter called as “SIER 2002”).

Rule 4 gives out the Procedure to be followed after demand notice has been served and no
payment has been made by the tenant in the time mentioned in the notice. Then the secured

301

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
Creditor may under the power given to him u/s 13(4) of the act and if necessary taking the
assistance of CMM/DM u/s 14 take recourse to one or more measures to recover his secured
debt provided u/s 13(4) of the act and while exercising the power given u/13(4) he has to
follow the procedural rules given in Rule 4 of SIER 2002.

Rule 5 & 6 states if the property is movable property then how its valuation is to be done and
if deemed necessary by the secured creditor in how it is to be sold giving public notice. And,
Rule 7 mandates authorised officer of the Secured Creditor to issue Certificate of Sale to the
purchaser.

Rule 8 states how sale of the immovable property is to be done after giving possession notice
to the borrower and affixing the notice on the conspicuous part of the property publishing
possession notice in two leading newspapers of which one must be in vernacular language.
And then cause valuation of the property and give public notice and ass per Rule 9 will not
cause its sale till the expiration of 30 days since publishing of public notice; thus, borrower
can retrieve the possession of the property after making payment before the expiration of 30
days .Thus, Rule 8 &9 deals with Procedure of sale of the immovable property, Issue of Sale
Certificate to the Purchaser and delivery of the possession etc.

8.Liability of Guarantor under chapter iii of the SARFESI Act:-

Section 2(f) of the SARFESI Act 2002 “borrower” means any person who has been granted
financial assistance by any bank or financial institution or who has given any guarantee or
created any mortgage or pledge as security for the financial assistance granted by any bank or
financial institution.

Thus, it can be said that the liability of the Guarantor is conterminous with the Principal
Debtor. This view has been substantiated by the Supreme Court in the case Standard
Chartered Bank v. V. Noble Kumar, (2013) 9 SCC 620 , in its 21st Para it said “Consequent
upon the said decision, Parliament introduced sub-section 3A[11] by Act 30 of 2004, which
now provides for consideration of the objections, if any raised by the borrower. By
definition under section 2(f) of the Act a borrower includes the guarantor of the debt.”

Even RBI has vindicated this view in its "Mortgage Guarantee Companies (Reserve Bank)
Guidelines, 2008" published on 1st July 2014 especially in its 24th Para which states “On any

302

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
day after a trigger event, the creditor institution, which has obtained a mortgage guarantee
from a mortgage guarantee company, shall be entitled to invoke the guarantee against the
mortgage guarantee company”.(Though the said guidelines mainly deal with guarantee given
by mortgage guarantee company as per mortgage guarantee contract on house loans.)

Problem arises when Banks/Financial Institutions resort to section 13(11) of the SARFESI
Act which says “Without prejudice to the rights conferred on the secured creditor under or
by this section, secured creditor shall be entitled to proceed against the guarantors or sell the
pledged assets without first taking any of the measured specifies in clause (a) to (d) of sub-
section (4) in relation to the secured assets under this Act.” If a person reads this section
mechanically he would get the impression that it is easier to proceed against guarantor than
the principal debtor which in turn becomes a basis for presumption that the SARFAESI Act
had made the guarantor more liable than principal debtor, because it is easier for the secured
creditor to proceed against guarantor, irrespective of whether his properties are secured assets
or unsecured assets, than against principal debtor. By no stretch of imagination one can
presume that the law has made the guarantor more liable to the secured creditor than the
principal debtor4.

More so, it would be a peculiar case if the secured creditor serves a demand notice under
Section 13 (2) to the guarantor and thereafter, sells off his property without taking recourse to
measures under Section 13 (4) under the authority given by Section 13 (11), because the
scheme of Section 17 of SARFAESI is such that unless measures are initiated under Section
13 (4), no one can file an appeal before DRT. Which means that the principal debtor can
defend his properties even though they are secured assets, but the guarantor cannot defend his
properties, even if they are unsecured, because unless the measures are initiated under
Section 13 (4) the guarantor cannot file appeal in DRT under Section 17 and hence as there is
no obligation under Section 13 (11) for the secured creditor to initiate measures under 13 (4)
against guarantor, the guarantor naturally loses his right to appeal under Section 17 of
SARFAESI Act. This is in total violation of Article 14 of Constitution of India5.

Thus it is submitted that even for proceeding against guarantor’s properties, the same
procedure must be followed as it is followed for the properties of principal debtor.

4
http://www.lawyersclubindia.com/forum/Position-of-guarantor-under-sarfaesi-act-79703.asp
5
http://www.lawyersclubindia.com/forum/Position-of-guarantor-under-sarfaesi-act-79703.asp

303

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185

9.Limitation Period u/36 of the Act6:-

Section 36 of the Act says: “No secured creditor shall be entitled to take all or any of the
measures under subsection (4) of section 13, unless his claim in respect of the financial asset
is made within the period of limitation prescribed under the Limitation Act, 1963”.

Thus Article 62 of the Limitation Act 1963 is applied to ascertain the limitation period within
power u/s 13(4) must be exercised by the secured creditor which is 12 years and is calculated
from the date when the money actually becomes due as per the provisions of Limitation Act.

Debt under the Act has been defined u/s 2(ha) of the act which says “ "debt" shall have the
meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993”.

And as per Section 2 (g) of the Recovery of Outstanding Dues of Bank and Financial
Institutions Act, 1993 "debt" means any liability (inclusive of interest) which is claimed as
due from any person by a bank or a financial institution or by a consortium of banks or
financial institutions during the course of any business activity undertaken by the bank or the
financial institution or the consortium under any law for the time being in force, in cash or
otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or
order of any civil Court or any arbitration award or otherwise or under a mortgage and
subsisting on, and legally recoverable on, the date of the application.

View to this effect has been taken by Madras High Court in M/S Consolidated Consortium
vs. Indian Bank, AIR (Mad) 685. In which court said following:

“Article 62 deals with institution of suit, to enforce payment of money accrued, within twelve
years, when the money sued for becomes due. Similarly, Article 136 provides for limitation;
for execution of any decree, and the limitation provided therein is also once again twelve
years, from the point of time when the decree becomes enforceable or where decree or any
subsequent order directs any payment of money or the delivery of any property to be made at
a certain date or at recurring periods when default in making payment or delivery in respect

6
http://elegalix.allahabadhighcourt.in/elegalix/WebShowJudgment.do

304

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
of which execution is sought. Twelve years' period has to be reckoned, keeping in view the
peculiar facts of the case as well as character of the case, and for this purpose, twelve years'
period can be reckoned from the date of decree; in cases where decree has been put for
execution before the competent forum before twelve years from the date of decree, it has to
be accepted as live claim, till it culminates into issuance of Recovery Certificate by Tribunal;
twelve years' period from the date of issuance of Recovery Certificate. Live claims under the
provisions of 1993 Act, cannot be treated as time barred claims under the provisions of
SARFAESI Act.”

10. Some Statutes that may be read with ch.iii of the Act.

As per section 34 all laws not inconsistent with provisions of the SARFESI Act can be
compiled but any law not consistent with it cannot override it .And, same has been
substantiated by Supreme Court in the case of M/s Transcore vs Union Of India &Ors.
(2008) 1 SCC 125;

Following are some of the statutes that can be relied on while going through the avenue
provided by SARFESI Act (only their those provisions which are found in conformity with
the SARFESI Act):-

1.Indian Contract Act 1872.

2.Rent related laws.(e.g. Delhi Rent Control Act,1958)

3.Limitation Act,1963

4.Specific Relief Act,1963.

5.Transfer Of Property Act,1882. etc.

11.Some general suggestions to improve the efficacy of Ch iii of the Act

Notice Period u/s 13(2) i.e. of 60 days should be reduced to 30 days because as soon
as the account is categorised as NPA the borrower will get to know.

305

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
1. One week time period
in which Banks (secured creditor)has been mandated by the act u/s 13(3A) to respond
to borrower’s objection is too short and it must be increased to at least three weeks.
2. District Magistrate u/s
14 should be omitted as District Magistrates have a very hectic schedule thus cases
have been found pending for a long time.
3. In order to deter the
frivolous litigation before DRT, provision for the payment of actual cost of litigation
should be appended.
4. Making wilful default
in payment should be made a more serious crime, as owing to loophole and laxity of
administration people have been often found defaulting deliberately for trivial
reasons. The Standing Committee of Finance, in February 2016, observed that 21% of
the total NPAs of banks were from wilful defaulters.
5. Presently bidding
system for the sale of the asset of the defaulting borrower is a little haphazard as every
bank has to conduct and convene its own auction which takes plenty time; therefore a
centralised body should be constituted which will be in contact with the bank while
conducting the auction thus every bank will not have to toil for conducting auction.
6. Claim of the different
government authority must be superseded by secured creditors’ claim before the sale
of the asset of defaulting borrower actually takes place. But after the sale of the asset
the claims of Authorities must be fulfilled before banks keep up the money; as it will
surely expedite the whole process of auction and sale of the asset.
7. To negate the cases of
leases/tenancies created after the mortgage taking shelter under the provisions of any
Rent Control Statute, provision should be added in the act which makes it compulsory
on the Banks/F.I. to ensure that the terms of the mortgage contract prohibit the
creation of any such lease/tenancy.

306

Electronic copy available at: https://ssrn.com/abstract=3461217

INTERNATIONAL JOURNAL OF RESEARCH AND 2017
ANALYSIS VOLUME 4 ISSUE 4 ISSN 2347-3185
11.Conclusion

Recently, Parliament was informed that Public Sector Banks had written off Rs 1.06 lakh
crore in the last 5 years this clearly manifests the underlying loopholes in the working of
SARFESI Act 2002 that certainly needs to be plugged because presently when India is
endeavouring to propel herself among the developed nations ,this ongoing situation which is
getting precarious day after day cannot be tolerated just for the benefits of defaulters( esp.
Business Entities) which is certainly causing loss of faith in Indian Economy among
Multinational Banks/Companies who though want to invest in India are very wary and even
fear investing owing to present situation.

307

Electronic copy available at: https://ssrn.com/abstract=3461217