The assets which are generating a loss for the Bank the same are put into auction sale under SARFAESI Act. Through the implementation of the SARFAESI Act, 2002 the Banks and Financial intuitions now have the right to declare a financial asset as Non-Performing asset. These assets specified such because they are not earning any revenue as generally predicted by the Banks. Therefore, to overcome the loss in revenue the Banks for securing the payment create a security interest over the assets of the borrower, these generally done by an agreement of mortgage and hypothecation.
The law which aid and enforce the secured payment from the borrower is through the Securitization and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act) with which all financial liability can be enforced without the interventions of the Courts (exempt in some exemptions).
The law was a part of Banking Reforms which empowered the Financial Institutes to be better equipped in countering defaulting loans with the Bank. However, this power has been largely restricted and any illegality performed by the Financial Institute will lead to further hardship for the Bank while performing the sale of the secured asset.
The whole procedure is to read with the SARFAESI Act, 2002 and Securities Interest (Enforcement) Rules, 2002.
Also Read: A Comprehensive Guide About the SARFAESI Act
The Issuance of NPA Notice
The process of the auctioning of the asset commences with the issuance of a legal notice under Section 13(2) of the SARFAESI Act. The provision ensures certain obligation the lender has to perform or intimate to the borrower that non-payment will lead to bad financial consequences. The Bank or Financial Institute will ensure the following obligation:
Claim of Amount
The Bank or the Financial Institute will mention the amount in respect of which default has been made and the classification of the account as a non-performing asset. By such notice, the secured creditor will require the borrower to discharge his liabilities in full.
Action under Section 13(4) of the Act
The secured creditor will mention the security agreement whereby failing to discharge liability the secured creditor will take any recourse or measures to recover the secured debt.
Time limit to clear the dues
The borrower has to clear the dues within 60 days from the date of the notice. After the given period the secured creditor can take action under Section 13(4) of the Act to ensure payment of the liability.
Also Read: How much should be the amount of deposit for filing an Appeal before the Debt Recovery Appellate Tribunal?
Publication of Auction Proceeding
The secured creditor/ bank will publish the auction proceeding and communicate to the general public for the call for auction bidding.
Publication of the Notice
In case of the movable asset, in realising the secured asset as per Section 13(4) of the Act the secured creditor can take possession of the asset in presence of two witnesses after drawing the panchnama which will be signed by the witnesses. The Bank will serve the Panchanama to the borrower through notice intimating the possession of the secured asset.
In case of immovable property, a possession notice is prepared and served to the borrower and is affixed on the outer door or at any conspicuous place of the property.
Where the auction proceeding is published?
The publication of possession notice is a necessary requirement in case of taking over of immovable property wherein, the possession notice has to be published with two leading newspaper not later than seven days from taking over the possession. One newspaper has to be in the vernacular language which is the language of the locality.
Similarly, in case of the taking over of movable property, where the sale of the secured asset is through inviting tenders or by holding a public auction a public notice has to be published in two leading newspaper one in the vernacular language of the locality.
Generally, the publication of the possession notice is published in the 6th or 7th page of the newspaper which have wide circulation in a district. This included newspaper having its domain in financial news or local news.
Important Information of the Borrower
In case of movable property, the following information is required to be published with the newspaper:
- Details of the borrower and the secured creditor
- Description of the movable assets to be sold.
- The reserve price of the property.
- The time and the manner the payment has to be made.
- The time and place of auction or the manner by which the sale of the auction will be completed.
- Any earnest money required to be deposited with the secured creditor.
Similarly, in case of the auction sale of immovable property published with the newspaper the following information has to published:
- The full description of the immovable property and the details of the secured creditor.
- The secured debt for recovery out of the property to be sold.
- The reserve price of the property
- The time and place of the auction.
- Any earnest money required to be deposited with the secured creditor/ Bank.
How Auction Proceeding Fails?
The secured creditor has to strictly abide by the law and the of the Act and failing which the Debt Recovery Tribunal exercising its power under Section 17 of the Act can restore the possession of the borrower.
This has been observed in the case of The Authorized Officer/Chief Manager, Indian Bank vs The Tehsildar, Ramanuj Nagar, in which the Borrower had an imperfect title over the secured immovable property which was mortgaged with the Bank. The auction proceeding was conducted and the sale certificate was issued to the auction purchaser. However, the auction purchaser approached the learned Debts Recovery Appellate Tribunal (DRAT) which did not accepted the auction proceeding and held that borrower having an imperfect title makes the whole auction proceeding imperfect, and ordered the secured Creditor to transfer back 50% of the amount deposited by the Auction Purchaser.
This was challenged by the Bank in the Writ Petition before the Hon’ble Court which affirmed the order passed by the Learned DRAT. The Writ Court held that borrower did not have a perfect title on the mortgaged property and if having no perfect title the transfer is not bound to happen and the bank is bound to repay back.
The gross negligence of the Bank, the existence of a defect cannot be factored into a perfect sale. Therefore, any illegality on the part of the security agreement has to be ensured by the Bank.
In another case of Paras Jain vs Authorized Officer, Indian Overseas Bank where it was observed that where an auction sale was conducted by the Bank on 17.06.2011 but the Borrower by an order dated 16.06.2011 which stayed the operation of the auction sale. The appellant, however, made a bid in the auction sale and deposited 20% of the highest bid amount.
However, the auction process was not complete because of the stay. The DRT meanwhile through an order dated 18.06.2012 held the possession notice published by the Bank under Section 13(4) is illegal because the said notice was published only on one newspaper.
The appellant/ highest bidder approached Before the Writ Court to set aside the order dated 18.06.2012 on the ground that the auction was conducted by the Bank. However, the Hon’ble Court upheld the order passed by the Learned DRT pronouncing that, any illegal issuance of possession notice will make the whole auction process illegal. Although the Borrower interest was protected because the deposited 20% is protected as an FDR with the concerned Bank.
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