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. A duty is cast on the lender also to realize the
money lent with interest. In spite of the fact that the lending institution
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 direction or guidelines relating to asset
classification 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 Debts Due to Banks and Financial instructions Act 1993 popularly
known as DRT Act. The DRT Act had some deficiencies inasmuch as it did not
provide for assignment of debt 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 SRFAESIA Act is not in
derogation of The DRT Act. The purpose of 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, asset management companies etc. by removing all fetters on
the rights of the secured creditor, he is given 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 exestuation sections. It is
made specific in the preamble that the Act undertakes to regulate (1)
securitization: (2) reconstruction of financial assets and (iii) enforcement of
security interest all these three concepts are independent of each other.
Enforcement of Security Interest:
As
far as the general public is concerned, Chapter III Enforcement of Security
Interest contained in Sections 13 to 19 is very important. The following are
the requirement for initiating action for enforcement of security 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 therefore 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 borrowers 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 creditors are 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 may be served by7 delivering or transmitting at a place 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, are any other means of message
or electronic mail service. If it is found that the borrower is avoiding and the
service of notice 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.
Under
section 13(3A) If on receipt of the
notice under sub-sec. (2) the borrower makes any representation or raises
objection and if the secured creditor come 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 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 sec17 or sec17 A 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
creditors to return such secured assets to the concerned borrowers, such
borrower shall be entitle to the payment of such compensation and cost 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
in necessary.If dues are paid only partly and the borrower/guarantor seeks further time, the authority may decide further time, the authority action with
due consideration of law of limitation and the borrower or guarantor intimated
accordingly. It 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 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 that
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 sale. He may appoint any person as
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 to pay 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
be also 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 amount of dept, reserve price, time and place of public
auction earnest money to be deposited etc. The notice shall be affixed on the
conspicuous part be put on website. Sale by any other modes than auction/tender
shall be on terms settled between the parties.After confirmation and
completion of sale process, the authorized 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. 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 are 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 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 sec13(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.
Transaction 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 Actor 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 payment of any financial asset not exceeding
rupees 1lakh;
Limitation:
The
provisions of the Limitation Act 1963 are application to the Act Therefore
taking possession of the property or appointing a management of the securities
are to be carried out within the period stipulated in the Limitation Act 1963
The housing loan borrower may note that if they default in payment of dues to
banks and the loan account become NPA the banks can initiate action under the
SRFAESI Act issue notice to the borrowers, take possession of the building and
proceed to realize the dues by sale of the mortgaged property therefore it is
suggested that the housing loan borrowers may repay the housing loan as per
schedule to protect their property.
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