Bank Loan Matters
SARFAESI stands for Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. As the name suggests, it is legislation to regulate securitization, reconstruction of financial assets, and enforcement of security interest, including matters connected or incidental thereto.
Main objectives of the Act:
- Provide rapid recovery of non-performing assets (NPAs) of banks and financial institutions efficiently.
- Allow banks and financial institutions to auction secured assets when the borrower fails to repay outstanding dues.
Modes of Recovery
The Act provides three major methods for recovery of amounts due from Non-Performing Assets (NPAs):
1. Securitization
- Defined under Section 2(1)(z) of the Act.
- Means acquisition of financial assets from any bank or financial institution by any securitization company or reconstruction business.
- Required funds for such acquisition may be acquired from qualified institutional buyers by issuance of security receipts indicating an undivided interest in such financial assets or through other means.
2. Asset Reconstruction
- Defined under Section 2(1)(b).
- Means acquisition by a securitization or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization.
Methods of asset reconstruction include:
- Taking over the operations of the borrower’s business
- Restructuring the management of the borrower’s firm
- Selling or leasing a portion or all of the borrower’s business
- Rescheduling the debt payment schedule
- Enforcement of security interest
- Entering into a debt settlement agreement with the borrower
3. Enforcement of Security Interest
- Security interest refers to the right, title, and interest upon property created in favor of any secured creditor (banks or financial institutions), created via mortgage, charge, hypothecation, assignment, etc.
- Enforcement involves taking ownership of assets pledged as collateral for the loan.
- Section 13 provides a detailed procedure for seizing borrower’s security due to loan repayment failure.
4. Physical Possession of the Secured Asset
- If dues are not repaid for 90 days, banks classify the account as an NPA.
- A demand notice is issued under Section 13(2), detailing debt and security particulars. It is served upon borrowers and related parties as per Rule 3 of the Security Interest (Enforcement) Rules 2002.
- The borrower can raise objections within 60 days of receipt (Section 13(3)).
- The secured creditor must respond with reasons for non-acceptance within 15 days (Section 13(3A)).
If the demand notice amount is not paid:
Under Section 13(4), the authorized officer may: move an pplication
The secured creditor may, fir the purpose of taking possession or control of any such secured asset, request, in writing, the Chief metropolitan magistrate or the district magistrate within whose jurisdiction any such secured asset or other documents relating there to may be situated or found, to take possession thereof.
- Take possession of secured assets, including rights to lease, assign, or sell them.
- Take over the management of the borrower’s business.
- Appoint a person to manage the secured assets.
- Require any person who has acquired secured assets to pay the secured creditor sufficient funds to cover the debt.
5. Procedure of Auction and Sale
The Act provides a procedure to auction and sell both movable and immovable secured assets.
A. Sale of Immovable Secured Assets
- Governed by Rule 8 of the Security Interest (Enforcement) Rules 2002.
- After service of demand notice (Section 13(2)), the procedure is:
1. Possession notice under Section 13(4) served in format prescribed under Appendix IV, also affixed on the property.
2. Notice published in two leading newspapers, including one vernacular with wide local circulation.
3. After possession, property is kept in custody until sold or disposed of.
4. Valuation obtained under Rule 8(5) to fix reserve price. Methods of sale:
- Obtaining quotations from similar assets
- Approaching interested buyers
- Inviting public tenders
- Public auction
- Private treaty
5. Sale notice issued 30 days prior to sale (Rule 8(6)) and published in two newspapers. The notice must include:
- Description of property and encumbrances
- Secured debt
- Reserve price
- Time and place of auction
- Earnest money deposit details
- Other necessary details
6. Sale notice affixed on the property and may be published on the creditor’s official website (Rule 8(7))
B. Time of Sale, Sale Certificate, and Delivery of Possession
1. Sale confirmed in favor of highest bidder under Rule 9(2)
2. Purchaser pays 25% immediately, remaining 75% within 15 days (Rule 9(4)).
3. Creditor may extend time, not beyond 90 days. Failure leads to resale and forfeiture of initial deposit (Rule 9(5)).
4. Creditor issues sale certificate in favor of auction purchaser (Appendix-V) specifying the property is free from encumbrances (Rule 9(6)).
Remedy Available to the Borrower under the SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) empowers banks and financial institutions to recover their dues without court intervention.
However, the borrower is not left remediless. Even after possession or sale of secured assets, several legal remedies remain available.
1. Remedy after Notice under Section 13(2)
When a borrower receives a demand notice under Section 13(2) (usually 60 days), he may:
- File a representation or objection to the bank within the notice period, explaining reasons why the demand is invalid or exaggerated.
- The bank is bound under Section 13(3A) to consider and reply to such objection with proper reasoning.
2. Remedy after Measures under Section 13(4)
Once the bank takes action under Section 13(4) (for example, taking possession of property, management, or sale steps):
- The borrower can approach the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.
- The borrower can challenge the legality of the possession, valuation, and procedure adopted by the bank.
- The DRT has powers to set aside the bank’s action if found in violation of the Act or RBI guidelines, and restore possession.
3. Remedy after DM/CMM Order under Section 14
If the District Magistrate (DM) or Chief Metropolitan Magistrate (CMM) passes an order to assist the bank in taking physical possession:
- The borrower can still challenge the bank’s action (Including the DM/CMM’s order) before the DRT under Section 17, since the DM/CMM acts in an administrative capacity.
- Courts have held that the borrower’s right to appeal arises only after possession is actually taken, not merely on passing of the order.
4. Remedy after Auction or Sale
Even after the sale of the secured asset:
- The borrower can file an application before DRT under Section 17, if the sale procedure violated mandatory provisions—such as improper notice, undervaluation, or lack of publication.
- If the DRT finds irregularities, it can set aside the sale and order restoration of property or compensation.
5. Other Remedies
- Writ Petition: In exceptioenal cases involving violation of natural justice or fundamental rights, the borrower may approach the supreme court under article 32 and High Court under Article 226 of the Constitution.
- Settlement / OTS: The borrower can seek a One-Time Settlement (OTS) or restructure the loan through negotiation or mediation, even during SARFAESI proceedings.
Case Update: Bank’s Section 14 Application Dismissed under SARFAESI Act
Successful Representation by M/s Juris Pulse Law Services
The Bank had filed an application under Section 14 of the SARFAESI Act, 2002 before the District Magistrate (DM) seeking assistance in taking physical possession of the borrower’s secured property.
Our team appeared on behalf of the borrower and strongly contested the maintainability of the application by highlighting:
- Procedural lapses
- Non-compliance with mandatory provisions
- Violation of borrower’s statutory rights under Section 13(2), Section 13(3A) and Section 13(4) of the Act
After detailed submissions and scrutiny of the record, the Hon’ble DM was pleased to dismiss the Bank’s Section 14 application, protecting the borrower from unlawful possession proceedings.
We have plenty of cases wherein we are able to dismiss the application of bank.
Key Takeaways
- Even at the stage of Section 14, the borrower can effectively contest the bank’s move.
- Proper legal representation can expose procedural defects and safeguard possession.
- Dismissal of the Bank’s application prevents coercive action and protects borrower’s rights under SARFAESI law.
Bank’s Recovery Even After Property Sale – Complete Legal Synopsis
Even after auction or sale of mortgaged property under the SARFAESI Act, 2002, if the borrower’s outstanding dues are not fully recovered, the bank’s right to recover the remaining balance continues.
The sale of property does not discharge the borrower completely unless the entire debt amount is settled.
To recover the remaining amount, the bank can initiate multiple legal proceedings simultaneously until full recovery is achieved.
Parallel Legal Remedies Available to Banks
1. Original Application (OA) before DRT
The Bank may file an Original Application under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 before the Debt Recovery Tribunal (DRT) for recovery of the remaining dues after adjusting the sale proceeds of the secured asset.
2. Complaint under Payment and Settlement Systems Act, 2007
If any default involves dishonour of an electronic payment or mandate, the Bank can initiate proceedings under the Payment and Settlement Systems Act for penal action.
3. Arbitration Proceedings
If the loan agreement contains an arbitration clause, the Bank may file an application under the Arbitration and Conciliation Act, 1996 to recover its dues through arbitral proceedings.
4. Commercial Suit
The Bank may also file a Commercial Suit before the Commercial Court under the Commercial Courts Act, 2015, particularly for large-value or complex loan recoveries not covered under DRT jurisdiction.
5. Cheque Bounce Case (Section 138 NI Act)
If the borrower issued cheques that were dishonoured, the Bank can file a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881 for penal and compensatory relief.
6. Criminal Proceedings
In cases involving fraud, forgery, or misappropriation, the Bank may lodge a criminal complaint for offences under the Indian Penal Code and other applicable laws.
Key Legal Insight
Even after exercising powers under Section 13(4) of the SARFAESI Act and auctioning the property, banks retain the right to recover the balance amount through any available civil, criminal, or arbitration remedy until the entire debt is satisfied.
For Borrowers
If your property has been sold but the bank is still pursuing recovery, you should seek immediate legal advice to:
- Verify the correct calculation of outstanding amount
- Challenge unauthorized parallel proceedings
- Explore settlement or compromise options before DRT or Court
Legal Support
Our team at M/S JURIS PULSE LAW SERVICES assists borrowers and guarantors in:
- Defending DRT and SARFAESI matters
- Contesting parallel or multiple recovery actions
- Filing applications for settlement or relief under applicable laws
Contact Us
We would love to hear from you.
Feel free to reach out using the below details.
- Address: 433, Baghpat Gate, Meerut- 250002, National Capital Region Delhi, India Nearest metro station:- Meerut Central
- Hours: Mon-Fri 9:00AM - 5:00PM
- Phone: +91 8958000300
- Email: jurispulselawservices@gmail.com