The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
🔹 Background
Before the enactment of this Act, financial institutions and banks faced difficulty in recovering their non-performing assets (NPAs) due to lengthy court procedures.
Recovery of dues from defaulting borrowers was time-consuming, cumbersome, and inefficient.
To address this, the SARFAESI Act was enacted in 2002 to provide banks and financial institutions with effective tools for recovery of debts.
The Act empowers them to seize and sell secured assets without the intervention of courts in many cases.
🔹 Objectives of the SARFAESI Act
To enable banks and financial institutions to recover their dues efficiently.
To regulate securitisation and reconstruction of financial assets.
To empower secured creditors to enforce security interests without the involvement of the courts.
To reduce NPAs by allowing the creation of Asset Reconstruction Companies (ARCs).
To provide a legal framework for securitisation and asset reconstruction.
🔹 Key Concepts
Securitisation: Process by which banks/financial institutions transfer their NPAs to another entity (usually an Asset Reconstruction Company) by converting these loans into marketable securities.
Reconstruction: Restructuring or revival of NPAs to recover dues.
Security Interest: Interest created in favor of a creditor over the assets of a borrower to secure repayment of loan.
Secured Creditor: A bank or financial institution having security interest over the borrower’s assets.
🔹 Key Provisions
1. Enforcement of Security Interest (Section 13)
If a borrower defaults in repayment, the secured creditor can issue a notice demanding payment within 60 days.
If the borrower fails to pay within 60 days, the secured creditor can:
Take possession of the secured assets,
Take over the management of the business of the borrower,
Appoint a receiver to manage the secured assets,
Sell or lease the assets by public auction or private contract.
This process does not require court intervention.
2. Securitisation and Asset Reconstruction Companies (Section 3, 4, and 5)
Banks can sell their NPAs to ARCs.
ARCs can reconstruct or manage these assets for recovery.
ARCs can also enforce security interests in their name.
3. Application to Financial Institutions and Banks (Section 2)
The Act applies to banks, financial institutions, and ARCs registered under the Act.
4. Exclusions (Section 2(1)(m))
Agricultural land, residential property with area less than 200 sq meters, or with mortgage value less than ₹20 lakhs are generally excluded from enforcement action under the Act.
5. Appeals (Section 17)
Any person aggrieved by actions under the Act can file an appeal to the Debts Recovery Tribunal (DRT) within 45 days.
Appeal against DRT’s decision lies with the Debt Recovery Appellate Tribunal (DRAT) and further to the High Court.
🔹 Significance of the SARFAESI Act
Reduces dependence on lengthy civil court processes.
Encourages timely recovery of loans.
Helps maintain banking sector health by reducing NPAs.
Empowers creditors to take possession and dispose of assets swiftly.
🔹 Important Case Laws
1. Mardia Chemicals Ltd. v. Union of India (2004)
The Supreme Court upheld the constitutional validity of the SARFAESI Act.
It confirmed that the Act does not violate the right to property under Article 300A.
The Court recognized the necessity of such legislation to address the problem of NPAs.
2. Transcore vs. Union of India (2008)
The Supreme Court clarified that the provisions of the SARFAESI Act override other laws that may obstruct the recovery of secured debts.
The Court emphasized that enforcement of security interest without court intervention is permissible.
3. ICICI Bank Ltd. v. Official Liquidator (2008)
The Supreme Court ruled that the SARFAESI Act does not apply once the company is ordered to be wound up by the Court.
This means secured creditors lose the right to enforce security interests under SARFAESI once liquidation starts.
4. K. Mahadeva v. Life Insurance Corporation of India (2009)
The Court held that the sale of secured assets under SARFAESI Act must be fair and transparent.
The borrower’s right to a fair hearing and due process is protected even though court intervention is not required.
🔹 Process Flow Under SARFAESI Act
Default by borrower.
Secured creditor issues 60 days notice demanding payment.
If no payment, creditor can:
Take possession,
Manage assets,
Sell assets.
Borrower can approach DRT within 45 days.
Appeal to DRAT and then High Court.
🔹 Summary Table
| Feature | Details |
|---|---|
| Enacted | 2002 |
| Purpose | Recovery of NPAs, securitisation, asset reconstruction |
| Who can enforce? | Banks, financial institutions, ARCs |
| Procedure | 60-day notice → possession → sale (without courts) |
| Exclusions | Agricultural land, small residential properties |
| Appeals | Debts Recovery Tribunal → Appellate Tribunal → High Court |
| Penalties | No specific penalty provisions; recovery focus |
| Important Cases | Mardia Chemicals, Transcore, ICICI Bank Ltd., K. Mahadeva |
🔹 Conclusion
The SARFAESI Act, 2002 is a powerful tool for financial institutions to recover their dues quickly and efficiently without being bogged down by lengthy litigation. It balances the rights of borrowers and creditors by allowing secured creditors to enforce their security interests directly while providing borrowers the right to appeal to special tribunals.
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