The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI ACT) was enacted by Government of India to
enable banks and financial institutions to realise long-term assets, manage
problems of liquidity, asset liability mismatches and improve by exercising
powers to take possession of securities, sell them and reduce non-performing
assets by adopting measures for recovery or reconstruction.
aspect of the act is given under Section 13 (1) of the SARFAESI ACT, 2002 which
Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer
of Property Act, 1882 (4 of 1882), any security interest created in favour of
any secured creditor may be enforced, without the intervention of court or
tribunal, by such creditor in accordance with the provisions of this Act.
Thus, the banks and financial institutions have the power to enforce their
security interest on a secured asset without the intervention of the court.
Then what is the statutory legal position of the bank or financial institution?
The Security Interest (Enforcement) Rules,2002 under section 2(a) states:
means an officer not less than a chief manager of a
public sector bank or equivalent, as specified by the Board of Directors or
Board of Trustees of the secured creditor or any other person or authority
exercising powers of superintendence, direction and control of the business or
affairs of the secured creditors, as the case may be, to exercise the rights of
a secured creditor under the act.
As per the aforesaid rule, the bank or financial
institution as secured creditor has to appoint an Authorised Officer to
exercise the rights of the secured creditor. In terms of the statement of
objects and reasons of the SARFAESI ACT states:
The provisions of the Ordinance
would enable the banks and financial institutions to realise long term assets,
manage problems of liquidity, assets liability mismatches and improve recovery
by exercising powers to take possession of securities, sell them and reduce
non-performing assets by adopting measures for recovery or reconstruction.
other words, the prime duty of the Authorised Officer is to adopt measures of
recovery or reconstruction to recover the amounts advanced to borrowers whose
account has been declared as NPA (Non-Performing Assets). Further as per the
act, he is armed with enormous powers to enable him to recover the dues of non
performing accounts or even go for the reconstruction of secured assets. But
that does not clarify the legal position of the Authorised Officer.
Section 13(4) of SARFAESI ACT elaborates the recourse that the bank or the
financial institution can take under sub section (a) to (d) of section 13(4) of
the said Act which means that the Authorised Officer has the authority to take
any one or more of the actions as envisaged under section 13(4) (a) to (d) of
SARFAESI ACT. But, before enforcing the power vested with him, the Authorised
Officer has to fulfill his obligation of considering the representation or
objection made by the borrower as per section 13(3 A) of SARFAESI ACT and
examine whether the same is acceptable or tenable and has to follow the rules as
per section 3 A (a) (b) and (c) as the case may be of The Security Interest
(Enforcement) Rules, 2002.
The Security Interest (Enforcement) Rules, 2002 stipulates under Rule 3A (a):
After issue of demand notice under sub-section (2) of section 13, if the
borrower makes any representation or raises any objection to the notice, the Authorised
Officer shall consider such representation or objection and examine whether the
same is acceptable or tenable and Rule 3 A (b) stipulates If on examining the
representation made or objection raised by the borrower, the secured creditor is
satisfied that there is a need to make changes or modifications in the demand
notice, he shall modify the notice accordingly and serve a revised notice or
pass such other suitable orders as deemed necessary, within 15 days from the
date of receipt of the representation or objection.
Again, as per Rule 3A (c),
If on examining the representation made or objection raised, the Authorised
officer comes to the conclusion that such representation or objection is not
acceptable or tenable, he shall communicate within 15 days of receipt of such
representation or objection, the reasons for non-acceptance of the
representation or objection, to the borrower.
Section 13(3 A) of SARFAESI ACT says,:
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 of
such representation or objection the reasons for non acceptance of the
representation or objection to the borrower: As per this section it is the
secured creditor who has to give his reply whether the representation made or
objections raised is tenable or unacceptable.
Hence there is a distinct
ambiguity and distortion as to who is authorised to examine the representation
made and objections raised by the borrower. Perhaps it is implied that the
Authorised Officer has to consult the secured creditor before giving his reply
to the borrower on the representation or objection submitted by the borrower.
Rule 3 A (b) of The Security Interest (Enforcement) Rules, 2002 stipulates:
on examining the representation made or objection raised by the borrower,
the secured creditor is satisfied that there is a need to make changes or
modifications in the demand notice, he shall modify the notice accordingly and
serve a revised notice or pass such other suitable orders as deemed
necessary, within 15 days from the date of receipt of the representation or
objection. In the absence of any definition as to what constitute such other
suitable orders, can it be construed that it includes rehabilitation of the
unit or restructuring of the debt or any other action to be initiated by the
bank or financial institution to give relief to take the account out of its
status as NPA?
The aggrieved borrower does not have any recourse to legal remedies till the
issue of possession notice to the defaulted borrower. Under section 17 only he
has a right to appeal to DRT as per the said Act. Till such time it is the power
of the Authorised Officer that pervades since section 34 of the SARFAESI ACT
Civil court no to have jurisdiction
. Taking into account the
prevailing attitude of the banks and financial institutions acting ruthlessly
and flouting many of the provisions of SARFAESI Act and RBI guidelines which are
mandatory to recover their debt under SARFAESI ACT, Supreme Court of India
observed during the delivery of their judgment in the matter of Mardia Chemicals
case as follows:
71. Arguments have been advanced as to how far principles of
lender's liability are applicable. Whatever be the position, however, it cannot
be denied that the financial institutions namely, the lenders owe a duty to act
fairly and in good faith. There has to be a fair dealing between the parties and
the financing companies / institutions are not to ignore performance of their
part of the obligation as a party to the contract.
They cannot be free from it.
Irrespective of the fact as to whatever may have been held in decisions of some
American courts, in view of the facts and circumstances and the terms of the
contract and other details relating to those matter, that may or may not
strictly apply, nonetheless even in absence of any such decisions or
legislation, it is incumbent upon such financial institutions to act fairly and
in good faith complying with their part of obligations under the contract. This
is also the basic principle of concept of lender's liability.
It cannot be a
one-sided affair shutting out all possible and reasonable remedies to the other
party, namely borrowers and assume all drastic powers for speedier recovery of NPAs.
Possessing more drastic powers calls for exercise of higher degree of good faith
and fair play. The borrowers cannot be left remediless in case they have been
wronged against or subjected to unfair treatment violating the terms and
conditions of the contract. They can always plead in defense deficiencies on the
part of the banks and financial institutions.
But the truth coming out of
the present practice of the Authorised Officers is that the aforesaid
observations of Supreme Court of India is completely being overlooked and
without extending any fair treatment they as a ritual reject the representations
and objections submitted by the borrowers without any application of their minds
rendering the borrowers remediless and wronged. This is because the legal
position of the Authorised Officer is not defined anywhere in the SARAESI ACT.
The High Court of Madras in their judgment delivered on 10th August 2010 in the
case of Sheeba Philominal Merlin vs. The Repco Bank Limited
2009) observed, As per the Act, the first step would be to issue notice U/s.
13(2) by the authorised officer who is deemed to be armed with a money decree
which attained finality. By the statute the authorised officer, is clothed with
powers of trial court and execution court and the code of Civil Procedure which
governs the civil proceedings is no more necessary.
To put it otherwise, by the
Special Act, the authorised officer acts like a Civil Court with powers hitherto
exercised by it. If it is so, then the Authorised Officer has to adjudicate
on the notice issued by the secured creditor u/s 13(2) of SARFAESI ACT and
representation and objections submitted by the borrower to the notice after
hearing both the sides duly presenting their cases before him as is being
followed in a court of law in which case DRT becomes the reviewing authority.
But in practice, the authorised Officer being the employee of the bank and
financial institution is adjudicating his own bank's or FI's case and without
applying his mind on the representation and objections and without giving an
opportunity to the borrower to present his case and to be heard, simply rejects
his submission as matter of routine and as a ritual and thus contravening the
Principles of Natural justice as stated under section 22 (1) of RDDB & FI Act,
Principles of Natural Justice available under Constitutional protection operate
in areas not covered by any rule or law; they do not supplant the law but only
supplement it. The following are the two important basic Principles of Natural
- No one can be a judge in his own cause (‘Nemo debet essa judex in
- Hear the other side. (Audi Alteram Partem.).
Considering the aforesaid background, the factual position prevailing with
regard to invoking SARFAESI ACT by bank and financial institution is that they
blatantly violate the Principles of Natural Justice.
Fundamental justice is a legal term that signifies a dynamic concept of fairness
underlying the administration of justice and its operation, whereas principles
of fundamental justice are specific legal principles that command significant societal consensus
as fundamental to the way in which the
legal system ought fairly to operate
. These principles may stipulate basic
procedural rights afforded to anyone facing an adjudicative process or procedure
that affects fundamental rights and freedoms, and certain substantive standards
related to the rule of law that regulate the actions of the state.
The degree of protection dictated by these standards and procedural rights vary
in accordance with the precise context, involving a contextual analysis of the
affected person's interests. In other words, the more a person's rights or
interests are adversely affected, the more procedural or substantive protections
must be afforded to that person in order to respect the principles of
fundamental justice. A legislative or administrative framework that respects the
principles of fundamental justice, as such, must be fundamentally fair to the
person affected, but does not necessarily have to strike the ‘right balance'
between individual and societal interests in general.
In view of what has been stated above, unless the legal position and powers of
Authorised Officer is clearly defined without any ambiguity and his
responsibility and accountability are clearly established, he is bound to misuse
and abuse his authority with impunity as is being practiced now. Besides, as
long as he is an employee of the bank and financial institution, he is bound to
be partial and the Principles of Natural Justice will be the casualty and the
aggrieved borrower will never get justice from the Authorized Officer.
As it is,
the representation and objections being submitted by the borrower to the Authorised Officer is nothing but a futile exercise and a ritual having no
meaning and is a mere waste of time. Hence it is imperative that the Authorised
Officer shall be a knowledgeable person well versed in law and practice of
banking and a person without bias and neutral who shall be pragmatic and
practical to find effective solutions to the problems faced by both the bank and
financial institution and the borrower so that he can uphold justice, equity and
good conscience. Otherwise, power without responsibility and accountability
corrupts and absolute power corrupts absolutely.
Written By: T. R. Radhakrishnan
- Banking & Management Consultant, NPA
Resolution Consultant, H. R. Trainer: Corporates, Colleges & Schools, &
Freelance Writer, No. 8, Morya Gardens, Kanadia Road, Indore - 452016 Ph no:
(0)9229248048, E-mail: [email protected]
The author invites comments from readers and their views on the power of the