ICFAI Foundation for Higher Education, Hyderabad

(Declared as Deemed-to-be university u/s 3 of the UGC Act 1956)

LEGAL INTERNSHIP PROGRAMME

FINAL REPORT

TOPIC: Securitization and Reconstruction of Financial Assets and enforcement of security

interest act- 2002 (SAEFESI ACT)

A report submitted in partial fulfillment of the requirement of BBA-LLB (Hons.)

Program of ICFAI Law School, Hyderabad.

SUBMITTED BY:
Name – N. SUMETH REDDY

Enrolment No. – 21FLICHH010069

Course – BBA LLB (Hons.)

Section - A

Faculty Guide – Dr. DAMODAR REDDY

Project Guide – N. RAM MOHAN REDDY

 DECLARATION
I here by declare that the project titled formation of the valid
contract in the society is an original piece of research work under the
guidance and supervision of N.RAMMOHAN REDDY. The information
has been collected from genuine sources.
 ACKNOWLEDGMENT

I wish to express my sincere gratitude and profound thanks to my

project guide N.RAM MOHAN REDDY for the constant guidance and
tremendous help and by providing me the necessary information which are
very helpful in completing my project report and encouragement given to
the period of the study.

My sincere and hearty thanks to Mr. A.V. Narasimha Rao, Director,

Faculty of Law, IFHE for giving me such a great opportunity. This Legal
Internship Program is the best helping hand for enhancing knowledge in
the practical field for our future.

I would like to provide gratitude towards my mentor S. DAMODAR,

Faculty of Law, IFHE for guiding me throughout my summer internship
program and for providing necessary information regarding the project.

I would like to express my gratitude towards my parents and other

panel advocates and employees for kind cooperation and
encouragement. Finally, I would like to thank all the people who have
helped throughout my internship program to complete my project
report.
 TABLE OF CONTENTS

1. ABSTRACT ................................................................................... 6
2. INTRODUCTION……………,… ....................................................... 7
3. MAIN TEXT
3.1.. DEFINITION ................................................................... 8
3.2..Act Retrospective Nature ..................................................9
3.3.. Classification of Assets as Non-performing Assets ........... 10

4. Role of Section 13… .................................................................... 11

1. Notice Of Demand........................................................... 11
2. Invocation… ................................................................... 11

5. Initiation of Proceedings ............................................................ 12

6. Remedies .................................................................................. 12

7. Non-Applicability of the Act ........................................................14

8. Bar to Jurisdiction of Civil Courts .............................................. 15

9. Related cases ............................................................................. 22

10.Conclusion….................................................................................
 ABSTARCT

The Securitization and reconstruction of financial assets and enforcement

of security Interest act – 2002 (SARFESI ACT) is a crucial legislation
that enables banks and Financial institutions to recover loans efficiently
without court intervention. It provides a legal framework for the recovery of
loans through the enforcement of security interests in legal framework for the
recovery of loans through the enforcement of security interests in movable and
immovable property given as collateral by borrowers. The act establishes asset
reconstruction companies (ARC’S) to acquire NPA’S from banks and assist
their recovery and resolution. Additionally, it outlines procedures for issuing
demand notice to defaulting borrowers, the sale of secured assets by banks,
and the rights and responsibility of all parties involved in the process. The
act covers aspects such as securitization transactions, enforcement of security
interests, management of NPA’s, and appeal mechanisms, ensuring a fair
process for all parties.
 INTRODUCTION

Only secured loan cases are subject to the SARFAESI Act, 2002, where banks
are permitted to enforce underlying securities—such as mortgages, pledges,
hypothecations, and the like —without a judge's approval, barring fraud or
invalidity. In the event that the bank had unsecured assets, it would have to
sue the defaulters in civil court. The purpose of the Act is to control the
reconstruction and securitization of financial assets,as well as the enforcement
of security interests and things related or incidental to them.The Enforcement
of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions
(Amendment) Act, 2016 is one of the revisions that have been made to it, and it
covers the entirety of India. Enabling effective and timely recovery of non-
performing assets is the goal of the SARFAESI Act, 2002.
 MAIN TEXT:

Definitions
Definitions: I) In this Act
"Appellate Tribunal" means a Debts Recovery Appellate Tribunal established under
sub- section (1) of Section 8 of the Recovery of Debts Due to Banks and Financial Institution

"asset reconstruction" means acquisition by any securitisation company or reconstruction

company of any right of any bank or financial institution in any financial assistance for the
purpose of realization of such financial assistance;

"bank" means -
i) a banking company; or ii) a corresponding new bank; or (iii) the State Bank of India; or
a subsidiary bank; or
' (iv-a) a multi-State Co-operative Bank; or]
such other bank which the Central Government may, by notification, specify for the
purposes of this Act;

“banking company” shall have the meaning assigned to it in clause(C) of Section 5 of

the Banking Regulation Act, 1949 (10 of 1949);

“Board” means the Securities and Exchange Board of India established under Section 3
of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“borrower” means any person who has been granted financial assistance by any bank
or financial institution or who has given any guarantee or created any mortgage or pledge
assecurity for the financial assistance granted by any bank or financial institution
and includes a person who becomes borrower of a securitisation company or reconstruction
company consequent upon acquisition by it of any rights or interest of any bank
orfinancial institution in relation to such financial assistance;

“financial asset” means debt or receivables and includes -

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or
any debt or receivables secured by, mortgage of, or charge on, immovable property; or
(i) a mortgage, charge, hypothecation or pledge of movable property; or
any right or interest in the security, whether full or pat underlying such debt or
receivables; or
any beneficial interest in property, whether movable or immovable, or in such debt,
receivables, whether such interest is existing

“Reconstruction company” means a company formed under and registered underthe

companies act-2013 for the purpose of asset management.

“default” means non-payment of any principal debt or interest thereon or any other
amount payable by a borrower to any secured creditor consequent upon which the
account of such borrower is classified as non-pertorming asset in the books of account
of the secured creditor.
 ACT RETROSPECTIVE IN NATURE.

The retrospective nature of the Securitization and Reconstruction of Financial Assets

and Enforcement of Security Interest Act (SARFAESI Act). The Act provides a procedural
remedy for secured creditors to enforce their security interests, and the court is holding
that it is retrospective in nature. Act is a procedural remedial measure provided to a certain
class of secured creditors for enforcement of security interest - It cannot be read as
having effect only qua the actions and the transactions of loan after the Act came into force
As such the Act intends to cover all transactions of loan already entered into prior the
Act came into force subject to the provisions of limitation and the defaults in making
repayment and the debts already classified as non-performing assets and such future
contingencies too - It is clear, therefore, that in view of the provisions of the Act the
transactions of loan already entered into prior to the Act would also be covered in the
present Act - As such no person can be allowed to contend that since the procedure is
changed of facing the consequences of default, may be through the intervention of the
Court initially or afterwards, such procedural law should be read as prospective only and it
would not apply to the defaults which have arcady become due when the Act came into
force.
Case Law: Apex Electricals Ltd v. ICICI Bank Ltd (2003).
 Classification of Assets and Non-performing Assets:

The Reserve bank of India (RBI) has laid down a policy by providing guidelines in matter for
declaring an asset to be a Non-performing Asset in “RBI’s Prudential norms on income
recognition assets classification and provisioning - pertaining to advances”.
The RBI has made it clear to the financial institutions has no authority to declare any asset
as NPA by its own unless as mentioned in RBI’s Norms.

Non-Performing Assets (NPA):

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank. A 'non-performing asset' (NPA) was defined as a credit facility in
respect of which the interest and/or installment of principal has remained 'past due for
a specified period of time. An amount due under any credit facility is treated as "past due"
when it has not been paid within 30 days from the due date.

Due to the improvements in the payment and settlement systems, recovery climate,
up- gradation of technology in the banking system, etc., it was decided to dispense
with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date,
a Non- performing Asset (NPA) shall be an advance where—

Interest and/or installment of principal remain overdue for a period of more than 180 days
in-respect of a Term Loan.

The account remains 'out of order' for a period of more than 180 days, in respect of an
Overdraft/Cash Credit (OD/CC).

The bill remains overdue for a period of more than 180 days in the case of bills purchased
and discounted.

Interest and/or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purposes.

Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.
 SECTION-13

Section 13 of the Act enables the power to Banks and Financial Institutions or NBFC’s
which are registered under Section-3 of the Act and obtained the certificateas asset
reconstruction company to enforce the purpose of realizing money due to them without
intervention of court for initiating proceedings is a default in respect of an account as a
non-performing assets (NPA) in books of account of secured creditor.

Notice of demand

The borrower makes any default payment in respect to secured creditor, in repayment of
secured debt and it satisfies the conditions to declare an asset as non- performing asset by
secured creditor then secured creditor may issue a notice to borrower upon his liabilities.
The notice is merely not a show-cause notice but Notice On Demand, the notice of demand
is based on the liability of debtor which issub-standard, doubtful or loss. Classification of
account under NPA according with guidelines of RBI constitutes an action which secured
creditor shall be entitled to exercise all his rights under Section 13(4) of the act. The notice
of demand providesan opportunity to the debtor to make his representation before creditor.

In Case Badugu Vijayalakshmi vs Authorized officer and chief manager SBI, AIR,2010 As
stated that- “On delivery of the notice of demand under section 13(2) borrower has cleared
substantial portion of debt as demanded in notice, then the contemplated measures taken
under section 13(4) is impermissible”

Invocation

Once the conditions are fulfilled, the next step for banks or financial institutions is entitled
to take possession of the asset or to take over management of business ofthe asset or to
appoint any person on behalf of the company to manage the secured assets. The section
13(4) proceeds on the basis that borrower who is under liability has failed to discharge
it within the period under section 13(2), which enables secured creditor under section13(4)
to take appropriate measures.
Right of borrower to redeem the sale of asset is vested under two contingencies where
borrower has to tender his due before the sale by secured creditor with all costs and dues,
if borrower failed to tender dues before the date of sale such authorized officer will Proceed
further in the matter of sale- However, right of borrower to redeem property thereafter still
not extinguished, he still right to redeemthe property any time before the date fixed for
transfer of such property - So as longas sale is not confirmed by secured creditor as
required under Security Interest (Enforcement) Rules-2002. Under Second contingency the
Right is not taken away as long as sale is confirmed by the secured creditor under the rules.

Under Rule 9(6) of the Security Interest (Enforcement) Rules-2002 - Till the sale is not
confirmed by the ‘secured creditor’ as provided under provided under rules, it cannot be
said that there is a valid transfer of property within the meaning under section 13 of the act.

Initiation of Proceedings:

When the borrower fails the requirements under section 13, the secured creditor can take
the possession of the asset under section 13 the secured creditor should make an
application to either Chief Metropolitan Magistrate or District Magistrate under whose
jurisdiction the asset is falling will make an authorized officer to take possession of such
assets and documents and to forward such assets and documents to the secured creditor
or to make a sale of the asset. Section 14 of act not required to give notice either to
borrower or to third party, the court has to verify only from bank or financial institution
whether notice under Section 13(2) of act is given ornot and whether secured assets fall
within the jurisdiction of the court. If theconditions were not fulfilled that Chief
Metropolitan Magistrate or District Magistrate can refuse to pass an order under section14.

Remedies:

Right to appeal under section-17 of the act is an effect for initial action, on measureshaving
been taken under sub-section (4) of section 13 and before the date of sale/ auction of the
property, it would be open for borrower /aggrieved person to file an appeal under section 17
before debt recovery tribunal.
 Any aggrieved borrower in relation to Section 13(4) may make an application to DRT within
45days from date of such measures taken.
The respective DRT must dispose of such grievance within 60days from the date of
application.

If the application not addressed within 4 months then he may apply to DRAT (Debt
Recovery Appellate Tribunal) for expeditious disposal of the case. Normal Appeal can
also be made to DRAT within 30days from the date of decision given by DRT (Debt Recovery
Tribunal). Provided further that no appeal shall be entertained unless the borrower has
deposited at first-hand with the Appellate Tribunal 50% of the amount ofdebt claimed by
the secured creditors or determined by DRT whichever is less.

Section 17A says that in case of borrower residing in J&K, application to be made to
court of district judge in that state.
To summarize the entire structure of courts in relation to address the grievances of the
parties involved in ascending order:-
Debt Recovery Tribunal (DRT)
Debt Recovery Appellate Tribunal (DRAT)
High Court via writ petition.
Supreme court via Special Leave Petition.

Non Applicability of the Act:

Provisions of the act has dis-application to enumerated classes set out in Section 31, the
enforcement of provisions is inapplicable to excluded classes specified in the clauses
(a) to (j):

i)A lien, created legally will have priority over security interest under the contract act-
1872.

ii)Pledge of Movables within the meaning of Section 172 of the Indian contract act 1872.

iii)Agriculture land is excluded from the provisions of the act. Where secured creditor
cannot take the possession over the property in non-payment.

Land on which factory is situated cannot be treated as agriculture land and not
exempted under the act ( GAJULA EXIM (P) LTD Vs Authorized Officer, Andhra Bank)
AIR2008 AP 184 :2008 (4) ALD 385)
 i)Section 31 (j) are threshold conditions for valid initiation of process under the act for
enforcement of secured interest. The provision clearly states where there is a substantial
repayment (20 percent of principal amount) cannot enforce the security interest or
proceedings over the borrower for taken possession over the assets under section 13 of the
act.
( Azam Food Products Pvt.Ltd v Debt Recovery Tribunal (4) ALD 424, 2010 )

ACT OVERRIDING EFFECTS:

Section 13 of the act overrides the provisions of Section 69 of the Transfer of

property Act.

Section 69 of the Transfer of Property Act reads as under-

69. Power of sale when valid.—

A mortgagee, or any person acting on his behalf, shall, subject to the provisions this
section have power to sell or concur in selling the mortgaged property or any part thereof
in default of payment of the mortgage-money, without the intervention of the court, in the
following cases and in no others, namely:—

(a). where the mortgage is an English mortgage, and neither the mortgagor nor the
mortgagee is a Hindu, Muhammadan or Buddhist or a member of any other race, sex, tribe
or class from time to time specified in this behalf by the State Government, in the Official
Gazette;

(b) where a power of sale without the intervention of the court is expressly conferred on the
mortgagee by the mortgage-deed and the mortgagee is the Government;

(c) where a power of sale without the intervention of the court is expressly conferred on the
mortgagee by the mortgage-deed and the mortgaged property or any part thereof was, on
the date of the execution of the mortgage-deed, situate within the towns of Calcutta,
Madras, Bombay, or in any other town11 or area which the State Government may, by
notification in the Official Gazette, specify in this behalf.

It as said that mortgaged property cannot be sold without intervention of the Court except

in three conditions as enumerated in clauses (a), (b) and (c) of sub-section (1) of Section
69. Since the non-obstante clause under Section 13(1) of the NPA Act provides that
notwithstanding anything contained in Section 69 a secured interest can be enforced
without intervention of the Court, it is clear that it overrides the provision as contained
under Section 69 where it is said that in no cases,
other than those as enumerated in clauses (a), (b) and (c), a mortgage shall be enforced
without intervention of the Court. Once the said condition, as noted above, in Section 69
of the Transfer of Property Act, the general law on the subject, has been overridden by
thespecial enactment namely, the NPA Act, irrespective of the kind of the mortgage the
secured interest is liable to be enforced without intervention of the Court as per the
provision contained under Section 13 of Act. Section 35 of the said Act.
It has been thought necessary to provide non-obstante clause in sub-section (1) ofsection
13 of the act. It is clear that while recommending steps for recovery of the debts such
provisions may curtail the delays.

Bar to Jurisdiction of Civil Courts:

Section 34 of the act bars jurisdiction of Civil courts to entertain any suit or proceedings in
respect of any matter which a Debt Recovery Tribunal (DRT) or the Appellate Tribunal is
empowered by the act to determine and no injunction shall be granted by any court or any
authority in respect of any action taken or to be taken in pursuance of any power conferred
by or under this act. The act barred the jurisdiction of the civil court in matter which shall
be determined by the tribunal.
 Constitutional Validity of the Act:

The validity of the Securitization and Reconstruction of financial assets and

enforcement of security interest Act -2002 (SARFESI ACT) was challenged in ‘Marisa
Chmeicals Ltd Vs Union of India’ 2004 SCC 311 ALD 50 as follows-

The petitioner challenged the act under constitutional validity of section13,15,17 and 34 as
arbitrary and unjustified. The IDBI bank issued notice under section 13(2) demand notice
after issue of the act as the petitioner defaulted in payment to the bank.
The Petitioner argued that while drafting the act sections like 13 have given all rights to
the banks and financial institutions and ignored rights of defaulter which is arbitrary in
nature.

The Supreme Court observed that:-

The court found section 13 as constitutionally valid and stated that- the secured creditor
only exercising his entitlement because the default that led to the section 13 measure
might be considered as second default as its given 60 days extra time to repay by
following demand notice under section 13(2).

The court also struck down the Sub-section 2 of section 17 as ultra vires. As the sub-section
provides deposit of 75% of the amount claimed by the secured creditor before entertaining
the Appeal before Debt recovery tribunal (DRT) under Section 17, the court held as the sub-
section imposes an oppressive and arbitrary condition against the reasonableness
 CASES RELATED TO SARFAESI ACT,

ITS RULINGS AND JUDGEMENT

In respect to the SARFAESI act is in lines.

CASE 1: Canara Bank Ashram Road vs. Collector of Stamps C/SCA/2113/2012,

Gujarat High Court
CASE FACTS: The petitioner is a nationalized bank. A company named M/s. Dairyden
Limited ("Borrower") had availed of financial facilities from the petitioner bank to the tune of
Rs.11.55 Crore sometime in the year 2003. At the time of availing of the financial facilities
Borrower created a mortgage in favor of the petitioner bank by deposit of title deeds in respect
of the land Borrower defaulted in repayment of the credit facility availed of and accordingly
the account of Borrower Limited was classified as a non performing asset. The petitioner
bank thought fit to proceed against Borrower under the provisions of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. A notice
under Section 13, Clause (2) of the SARFAESI Act was served upon Borrower and pursuant
to the same the symbolic possession of the secured asset was taken over by the petitioner
bank under Section 13, Clause (4) of the Act in the year 2007. Thereafter, the petitioner
bank filed an application with the District Magistrate, under Section 14 of the SARFAESI Act
praying for that police protection for purpose of taking over the actual possession of the
secured asset from the Borrower. The said application of the Petitioner was allowed.
Pursuant to the order passed by the District Magistrate, the physical possession of the
secured asset was taken over by the petitioner bank on 18th December 2009 by drawing a
panchnama. The petitioner bank thereafter placed the property in question for auction,
where M/s. Palco Recycle Industries Limited ("Bidder") being the highest bidder got the
property and 'Sale Certificate' was issued by the petitioner bank. In support of said sale, the
necessary stamp duty was paid by the bidder. Consequently, authorities under the Gujarat
Stamp Act, 1958 took the view that no stamp duty was paid by the petitioner bank where it
acquired the possession of the mortgaged property in question from the Borrower, the
petitioner bank was liable to pay the deficit stamp duty.

Judgment:
Whether action of taking possession pursuant to the provisions of the SARFAESI Act would
constitute a conveyance and is liable for stamp duty? The court held that any panchnama
drawn at the time of taking over of the physical possession of the secured asset under
provisions of Section 13 or pursuant to the order of the District Magistrate under Section 14
of the SARFAESI Act could not be termed as an instrument creating anyright or liability in
favor of the bank so as to bring it within the ambit of conveyance.
Whether debtor is entitled to get back the secured property even if the creditor has taken
possession of the same?
On conjoint reading of all sub-sections of Section 13 indicates that after taking
Possession of the assets the secured creditor gets a right to sell the property
for realization of its dues if the sale has been made by the secured creditor
himself. Sub-section (8) clearly indicates that if the dues of the secured creditor
together with all costs, charges and expenses incurred by him are tendered to
the secured creditor at any time before the date fixed for sale or transfer, the
secured asset shall not be sold or transferred by the secured creditor and no
further steps shall be taken by him for transfer or sale of that secured asset.
Therefore, even after taking possession, if before sale of the property, a debtor
pays the amount as mentioned in sub-section (8) to the secured creditor, in
that event no further steps should be taken by the secured creditor and the
debtor will be entitled to get back the possession.
CASE 2: Poonam Garg vs. Chief Manager, SBI WP (C) 527/2012, High Court of Delhi CASE
FACTS: The question that arose in this particular writ petition is that Whether the Debts
Recovery Appellate Tribunal has jurisdiction to condone the delay under Section 5 of the
Limitation Act, 1963 in filing of an appeal under Section 18 of the SARFAESI Act, 2002?

Judgment: While section 18 of the Securitization Act prescribes a period of limitation of

30 days for filing of an appeal before the Tribunal from an order passed under Section 17
By the Debts Recovery Tribunal, Section 20 of the RDDBFI Act stipulates a period of 45
days for filing of an appeal to the Appellate Tribunal from an order passed by the DRT.
Another significant and material difference between the provisions of Section 18 of the
Securitization Act and Section 20 of the RDDBFI Act is that while the proviso to Section
20(3) of the RDDBFI Act enables the Appellate Tribunal to entertain an appeal even after the
expiry of the prescribed period of 45 days, if it is satisfied that there was sufficient cause for
not filing the appeal within the prescribed period, there is no such stipulation or provision
contained in Section 18 of the Securitization Act. When the legislature enacted the
Securitization Act, it was certainly aware of the provisions of appeal to an Appellate Tribunal
under the RDDBFI Act. Being aware of the provisions, it specifically provided for
a different period of limitation of 30days for an appeal under the Securitization Act
and also consciously excluded a provisionsimilar to the proviso to Section 20(3) of the
RDDBFI Act. The only conclusion that can bedrawn from this is that the legislative intent
was clear, in that the delay in filing an appeal under Section 18 of the Securitization Act
could not be condoned. it is clear that the DebtsRecovery Appellate Tribunal does not have
the power to condone the delay in the filing of an appeal under Section 18 of the
Securitization Act.
 CONCLUSION

The recovery of non-performing assets (NPAs) in India has been transformed by

the historic SARFAESI Act, 2002. The Act has enabled banks and other
financial institutions to take proactive steps to collect their debts by giving
a framework for the enforcement of security interests. This has lessened the
impact of non-performing assets (NPAs) on the financial system.

The country's credit culture has greatly improved as a result of the Act;
borrowers are now more reluctant to fail on their loans because they are aware
that the lender may take immediate legal action to recoup their money. The Act
has also contributed to the recovery process's increased effectiveness and
efficiency by cutting down on costs and time.

Although the Act has encountered some obstacles and critiques, the Numerous
concerns have been addressed and its provisions have been reinforced by
the revisions enacted throughout time. In addition to helping to foster a culture
of credit discipline throughout the nation, the SARFAESI Act has been crucial
in preserving the stability of the financial system.

All things considered, the SARFAESI Act, 2002 is an essential piece of

Legislation that has greatly aided in the expansion and advancement of the
Indian economy while also serving to safeguard the interests of lenders.
Its provisions have been crucial in fostering a sound credit environment,
and they will continue to have a significant impact on the financial landscape
of the nation.
 References

Books:
. The Securitization and reconstruction of financial asset act – 2002 By
R. Swaroop

Act
. SARFESI ACT-2002

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