The Indian Banking Industry having a valuation of 1.565 trillion dollars (11,000 crore Rupees) of market size and has the highest amount of employment-generating industry having a workforce of high standards for generating significant output in the economy.
The major contribution it generates through advancing credit into the economic system and entities that require working capital or investment for running a business. This advancing capital and investment into businesses come with a dire risk of recovery and the safety of interest of the Lending entities such as Banks.
The Banks while advancing loans, takes security in the form of assets or guarantee agreements from the borrower which acts as a surety for the repayment of the loan. The Parliament seeing the nature of the action taken by the Bank to recovery has enacted special enactments for a speedy recovery of money lend by the Banks. The Recovery of Debts and Bankruptcy Act, 1992 (RDB Act) and the Secularization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) are the major legislation that helps in speedy recovery of debts.
The two enactments give the power to the Bank in the recovery of bad debts or loans. The RDB Act is a quasi Judicial proceeding whereby a recovery application is a file by the Bank. Whereas, the sarfaesi act 2002 gives much power to the bank in executing a sale of an asset without the intervention of the Court but with limited caveats being placed against such power.
- When Cause of Action Arise?
- What can the Bank do after issuance of Possession Notice?
- How to prove the actions taken by the Bank is wrong?
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A cause of action means a particular event which surmises with the initiation of legal action to be taken by the Bank against the Borrower. The Borrower has to be aware of the event or of any legal action by the Bank to initiate a recovery action.
The cause of action is presumably be taken by issuing a Notice to the Borrower.
The borrower will receive a legal notice also known as demand notice from the Bank for the default of payment of dues and will demand the full payment of money towards the debt account and will also mention the consequences will attain to the borrower if the debt is not paid. The notice is issued under Section 13(2) of the sarfaesi act 2002 by the Bank.
The following information will be availed from the demand notice:
- The loan account of the Bank and for which purpose the loan was availed by the Borrower.
- The amount of debt due upon the borrower, the principal amount of debt and the interest over the debt with the information about the last instalment made into the account.
- The consequences of the borrower if the debt is not paid in time. As per the SARFAESI Act, the bank has to give 60 days from the service of summons to the borrower for the submission of the claim amount. If unpaid the account is declared as NPA (Non-Performing Asset), which enable the Bank to take stringent action towards the borrower for recovery.
- Other recourse the Borrower can take in opposition to the allegations made in the demand notice.
The borrower should be aware and be ready with necessary legal defuses against the demand notice issued by the Bank.
The borrower should know that a recovery action in the RDB Act and SARFAESI Act 2002 can only be applied if the borrower, has a default not exceeding Rs. 20 Lakhs, then only jurisdiction of taking recovery action by the Bank before the Debt Recovery Tribunal can take place.
The borrower can in opposition to the demand notice under Section 13(2) send an objection to the Bank, which is his legal right to do and it is very necessary to establish its defense against an illegal allegation produced by the Bank.
This was similarly opined in the landmark case of Mardia Chemicals Limited and others vs. Union of India , that ‘the purpose of serving the notice under Section 13(2) of the SARFAESI Act upon the borrowers is that they may submit a reply explaining the reasons as to why measures may, or may not, be taken under sub-section 4 of Section 13, in case of the non-compliance of the notice within 60 days. It is submitted that the Supreme Court has held, that the creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections.’
Thus, it’s necessary for the borrower to raise an objection as part of first-line of defnese against the Bank for carrying with a stringent action under Section 13(4). The Borrower has to make the communication of its objections within 15 days from the date of receipt of the demand notice.
Though, there is a caveat in making an objection because it is upon the Bank or creditor to accept or to rely upon the objections raised by the Borrower and the Bank still will have the continuous legal power to initiate recovery action against the Borrower after completion of 60 days.
The other recourse, the Borrower can go for a negotiation with the Bank or a One Time Settlement Scheme (OTS). Negotiations and OTS are like win-win situations for both parties in dispute.
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The Bank after the completion of 60 days in the demand notice will issue a possession notice under Section 13(4) of the SARFAESI Act 2002. The possession notice will give the power to the Bank to take declaratory possession over the assets of the borrower which were given as security.
The possession notice can be published at any time after the competition of the 60 days of the demand notice by the Bank. The possession notice is published in two newspapers generally in an English Newspaper and a Local language newspaper of the District where the asset is situated.
The possession notice calls for the bid in the auction of the secured asset of the borrower. Other details like the date of the auction of the secured asset, which is generally conducted after 30 days from the date of the issuance of the possession notice.
The possession notice also provides the base price of a secured asset for calling potential bidders in the e-auction, it is also noted that the borrower himself can also take part in the auction process.
The Bank can through executive action by an affidavit to the District Magistrate (DM) or Chief Metropolitan Magistrate (CMM) and can take the physical possession of the secured asset if the asset is an immovable property by force, as per the Section 14 of the SARFAESI Act 2002.
The Borrower in such situation cannot file an objection before the DM or CMM and by the executive order, the Bank can take the physical possession by force. The only objection the Borrower can make is through an application under Section 17 of the SARFAESI Act 2002 before the Debt Recovery Tribunal (DRT).
The borrower can still try to attain the secured asset either it being a movable or immovable property by a private treaty. This can also be termed as negotiations in part of the Borrower for avoiding public auction of the property. The Borrower has to make sure that the secured asset does not devolve into an auction. Though the borrower still has the remedy if illegality in part of the Bank or Creditor occurs.
The actions taken by the Bank can be proved wrong by filing an application before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act 2002. As per the said section, if the Tribunal found any illegality in part of the Borrower in taking possession of the secured asset then has the power to:
- declare anyone or more measures described in Section 13(4) taken by the secured creditor as invalid for not following the provisions laid down by the law and the rules made thereunder.
- It can restore the possession of the secured assets or management of the secure asset back to the borrower.
- It can make necessary order for or direction in relation to any of the recourse taken by the secured creditor under Section 13(4).
Though, following the above recourse is the best possible method ensuring the protection of interest of the Borrower and the borrower should proceed it at early as possible because to avail this benefit it has to approach before the Tribunal within 45 days from the date of issuance of possession notice by the Bank or any of the measures taken by the Bank under Section 13(4).
The Borrower has to be early in approaching the Debt Recovery Tribunal because there is a period of limitation of 45 days in approaching before the Tribunal and the delay cannot be condoned because the Limitation Act is not applicable.
In the judgment of the High Court of Calcutta in Akshat Commercials Private Ltd. Vs Kalpana Chakroborty where it was held that, confirm the previous judgments of the Supreme Court that the limitation Act is not applicable in securitization application registered under Section 17 of the SARFAESI Act 2002 because the nature of the application under Section 17 is of an application rather than a petition. Thus, the borrower has to be quick enough to raise the grievances and hardship caused by the actions of the Bank.
The Bank or the creditor has to so certain in establishing that the legal action is taken under the SARFAESI Act 2002, that the DRT can nullify the whole proceeding if any discrepancy is observed in the part of the Borrower.
As seen in the case of Parleen Chopra vs Shri Honey Bhagat and Ors of the High Court of Delhi, where a successful auction was conducted by the Bank and the Auction Purchaser has deposited full consideration amount of the auction to the Bank, though no sale certificate of the auction was issued to the auction purchaser. The DRT held, that the whole auction proceeding was illegal because the Bank did not issue possession notice in two newspaper. This made the whole auction proceeding illegal and the Borrower was able to retain its possession of the secured asset.
Therefore, the Borrower has to aware and stringent in taking quick action in approaching the legal discrepancies taken by the Bank for using excessive power under the SARFAESI Act.
The lending business operates with proper regulation and mechanism to the betterment of the lenders. Thus, lending also amounts to a risk of losing the investment of the secured creditors. The loss can be secured through a legal framework. Therefore, Debt Recovery Tribunal is for protecting the interest of the Banking Companies. Though it may not be simple characterize it has the saviour for the Banking Companies. The law enumerated in the SARFAESI Act has managed a twin benefit, i.e. for the recovery of the bad debts as well as protecting the interest of the borrower that such imminent power to the Bank does not violate or act against the interest of the whole industry.
 2004 (4) SCC 311