(Advocates, Property advocates in Bangalore, Property lawyers in Bangalore)
It is not very easy to defraud the
banks and financial institutions by the defaulting borrowers since various
statutory protections are provided to the lending banks and financial institutions.The activities of borrowing and lending are inseparable activities and there is
a change from Savings based economy to credit based economy not only in
individual's budget but also in the budget of a country.
When a person borrows money, a duty
is cast on him not only to repay the money borrowed but also to pay interest in
time at the agreed rate on the amount borrowed.Therefore, so long as the
amount due is not repaid, there remains a liability on the borrower and this
liability in other words is called the Debt of the borrower.Duty is cast on
the lender as well to realize the money lent with interest. In spite of the
fact that the lending institutions take precautions and take sufficient
security for the money lent, some debts become bad and irrecoverable in the
ordinary course of business. Bad debt or non-performing asset would mean 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 guidelines relating to asset classifications issued by the
Reserve Bank of India.
DRT
Act, 1993 and SRFAESI Act, 2002
Recovery of debts has become a very
difficult task for the banks and financial institutions and their bad debts or
non-performing assets are on the rise. The process of realization or recovery
of non-performing assets (NPA) through the normal process is time consuming. To
hasten or speed up the recovery process and keeping in view the alarming
increase in NPAs, the Government of India has enacted the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 popularly known as DRT Act. The
DRT Act had some deficiencies inasmuch as it did not provide for assignment of
debts to securitization companies and the secured assets could not be
liquidated in time. Therefore, the Union Government has brought in a
legislation called the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002 to remedy the deficiency. It is
generally referred to as SRFAESI Act. The SRFAESI Act is not in derogation of
the DRT Act. The object of the DRT Act as well as SRFAESI Act is recovery of
debt through non-adjudicatory process and to provide cumulative remedies to the
secured creditors.
The SRFAESI Act provides for setting
up of asset reconstruction companies, special purpose vehicles, and asset
management companies etc. By removing all fetters on the rights of the secured
creditor, he is given a right to choose one or more of the cumulative remedies.
To give more teeth to the Act, the
SRFAESI Act, 2002, has been amended in the year 2004 under The Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, where under
certain changes have been introduced in the Act by insertion of amendment or
addition to the existing sections. It is
made specific in the preamble that the Act undertakes to regulate (1) securitization
;(2) reconstruction of financial assets and (3) enforcement of security
interest. All these three concepts are independent of each other.
Enforcement
of Security Interest
As far as the general public are
concerned, Chapter III, Enforcement of Security Interest contained in Sections
13 to 19 are very important.The
following are the requirements for initiating action for enforcement of
security interest under SRFAESI Act:
[1] The account of the borrower
should have been classified as Non-performing Asset, strictly in accordance
with the guidelines of the Reserve Bank of India and such other authority;
[2] Assets should not be those which have been accepted under sec.31 of the SRFAESI Act and security interest can be
enforced only in respect of assets which are specifically charged;
[3] The action should be initiated
well within the limitation period. If the limitation is due to expire shortly, and
then it will be proper to institute a suit in a civil court or DRT as per
pecuniary limit applicable for such suits.
[4] Action can be initiated only
where the N.P.A.is Rs.1lakh and above.
Notice
Section 13 of the Act empowers the
secured creditor to enforce the security interest in case the borrower defaults
in repayment of secured debts and whose accounts categorized as non-performing
asset without the intervention of the court or tribunal. The secured creditor
is required to give notice under sec.13 (2) of the Act to the borrower to
discharge all his liabilities in full, within 60 days from the date of notice.The notice should be comprehensive furnishing full details of the amount due
and secured assets intended to be enforced. Upon receipt of the notice under sec.13
(2) of the Act, no borrower shall transfer by way of sale, lease or otherwise
any of his secured assets referred in the notice without prior written consent
of the secured creditor. The notice may be served by delivering, or
transmitting at a place where borrower or his agent is empowered to accept the
notice or documents on behalf of the borrower.
It may also be delivered or
transmitted where the borrower actually or voluntarily resides or carries on
business or personally works for gain.The notice may be sent by registered
post acknowledgment due, by speed post, by courier, or any other means of
transmission of documents like fax message or electronic mail service. If it is
found that the borrower is avoiding the service of the notice, or the demand
notice, or the service cannot be made, a copy of the demand notice may be
affixed on the outer door or some other conspicuous part of the house or
building of the borrower or his authorized agent.The demand notice may also be
published in two leading newspapers having good circulation in the area, out of
which one shall be in local language.
If the borrower is a corporate body,
the demand notice shall be served on the registered office or any of the
branches.In case of more than one borrower, the notice has to be served on
each of the borrowers.The notice has to be served on guarantors and on persons
who have given security for due repayment of the loan Under Section 13(3A), if, on receipt
of the notice under sub-sec.(2), the borrower makes any representation or
raises 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 one week of receipt of such representation or objection the reasons for
non-acceptance of the representation or objection to the borrower, provided
that the reasons so communicated or the likely action of the secured creditor
at the stage of communication of reasons shall not confer any right upon the
borrower to prefer an application to the Debt Recovery Tribunal under sec.17 or
the Court of District Judge under sec.17A.
Similarly,
Sec.19 of the principal Act has been substituted with the following:
19. Right of borrower to receive
compensation and costs in certain cases: If the Debt Recovery Tribunal or the
Court of District Judge, on an application made under sec.17 or sec.17A or the
Appellate Tribunal or the High Court on an appeal preferred under sec.18 or
sec.18A, holds that the possession of secured assets by the secured creditor is
not in accordance with the provisions of the Act and rules and directs the
secured creditor to return such secured assets to the concerned borrowers, such
borrower shall be entitled to the payment of such compensation and costs as may
be determined by such Tribunal or Court of District Judge or Appellate Tribunal
or High Court referred to in sec.18B.
If the borrower/guarantor pays the
dues in full, no further action under the Act is necessary. If dues are paid only partly and the
borrower/guarantor seeks further time, the authority may decide further action
with due consideration of law of limitation and the borrower or guarantor
intimated accordingly. If the borrower/guarantor fails to meet their
liabilities in full within 60 days from the date of the notice, the bank/financial
institution can initiate action to enforce the security rights conferred on it by
the Act.
Possession
and Sale
The secured creditor or his
authorized officer may take recourse to one or more of the measures provided in
sec.13(4) of the Act to recover his secured debt who has the following options:
He may take possession of the secured assets of the borrower including the
rights to transfer by way of lease, assignment or sale. He may take over the
management of the secured assets of the borrower, including the right of
transfer of lease, assignment, and sale. He may appoint any person as the
manager to manage the secured assets, the possession of which has been taken over.The secured creditor may require by notice any person who has acquired any
secured assets from the borrower and
from whom any money is due or may become
due to the borrower to pay to the secured creditor so much of the money as is
sufficient to cover the secured debt.
Both in the case of movable and
immovable properties, it is obligatory to serve a notice of thirty days to the
borrower about the sale. The notice of sale shall also be published in two
leading widely circulated newspapers, of which one shall be of the local
language.The public notice shall contain important details of the property,
the debt, reserve price, time and place of public auction, earnest money to be
deposited etc.The notice shall be affixed on the conspicuous part of the
immovable property and may also be put on Website.Sale by any other modes than
public auction/tender shall be on terms settled between the parties. After
confirmation and completion of sale process, the authorized officer shall issue
a sale certificate in favor of the purchaser in the prescribed format.
If the secured assets are movable
properties, the authorized officer shall take the possession in the presence of
two witnesses and ensure that panchanama is drawn and signed by the said two
witnesses. The panchanama shall conform to the prescribed format.After taking
possession, the authorized officer, shall prepare an inventory of the property as per the format prescribed and shall deliver a copy of such inventory to the
borrower or his authorized agent.
If the property is subject to speedy
or natural decay or expenses for keeping such property is likely to exceed the
value of the property the authorized officer may sell it at once. It is the
duty of the authorized officer to take proper care and take steps for
preservation and protection of the assets. If necessary, the assets may be
insured until they are sold or disposed of.
While taking possession or sale of
the secured asset, the secured creditor may request the help of Chief
Metropolitan Magistrate or District Magistrate in whose jurisdictions the
secured assets fall.
Right
of appeal
Under sec.17 of the Act, the person
aggrieved by the actions of the secured creditor, as provided in sec.13(4) may
make an application to the Debt Recovery Tribunal, having jurisdiction within
45 days from the date on which action has been taken.Similarly, any person
aggrieved by the order made by DRT under section 17 may prefer an appeal to the Appellate Tribunal within 30 days from the date of the order. The party
preferring appeal shall deposit 50% of the amount of debt, with a discretion
given to the Appellate Tribunal to reduce the amount to not less than 25% of
the debt.
Transactions
not covered under the Act
The
following transactions are excluded from the provisions of the SRFAESI Act:
a] A lien on any goods, money or
security given by or under the Indian Contract Act, Sale of Goods Act or any
other law for the time being in force;
b] Pledge of movables within the
meaning of sec.172 of the Indian Contract Act,
c] Any conditional sale, hire
purchase or lease or any other contract in which no security interest has been
created;
d] Any property not liable to
attachment;
e] Any security interest created in
agricultural land;
f] Any security interest for
securing repayment of any financial asset not exceeding rupees one lakh;
g] Any case in which the amount due
is less than twenty per cent of the principal amount and interest thereon;
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