The Banks are the life and blood of the economy, their business to provide and infuse credit into the market promote growth which in consequence bring prosperity into the economy. But this form of business of lending may also lead to credit defaulters in the market which consequently damages the credit business. The Banks which are life and blood of credit in our economy hit hard in case of a large number of financial defaulters starts occurring into the Banking system which may lead to piling up recovery litigations before Courts and ending up paying more time in making the loss a good. In this article, we will be discussing how this process of recovery takes place, what are the relevant laws applicable to take recovery action in case of a secured asset with a bank and what actions a borrower can take to safeguard its interest.
In which situation Banks can initiate recovery actions.
The borrower receives a loan as per a lending agreement between the Bank and the Borrower. As per the agreement or by oral inquiry with the Bank a method of a re-payment scheme is provided, following which the borrower is to repay the debt in a scheduled manner. It is not mandatory for the Borrower to follow such a scheme provided that the intention of the Borrower is not to defraud.
The Law has provided general rules adherently to be followed by the Banks in describing an account as a Non-Performing Asset and the holder of such debt as a ‘defaulter’. To understand a defaulter we need to examine the definition of the word ‘default’, which has been defined under the SARFAESI Act, 2002 as:
- non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as a non-performing asset in the books of account of the secured creditor.
- non-payment of any debt or any other amount payable by the borrower with respect to debt securities after notice of ninety days demanding payment of dues served upon such borrower by the debenture trustee or any other authority in whose favor a security interest is created for the benefit of holders of such debt securities.
The above definition contemplates to the requirement for a person to qualify as a defaulter. In this strict sense, a larger definition for a defaulter can be provided as per the Master Circular on wilful defaulters of the RBI dated 1 July 2015, the clause pronounce:
A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:
The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honor the said obligations.
The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.
The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorized as wilful must be intentional, deliberate and calculated.
Types of Recovery Actions As Per Law
By various statutory provisions, the Bank can initiate action for making a recovery. The Bank has been specially empowered by various laws to initiate recovery. Following are the actions the Bank can initiate for recovery:
- A Recovery Suit At Debt Recovery Tribunal
A Bank or a Financial Institution can file a recovery petition before the Debt Recovery Tribunal (DRT). The law applicable to initiate a recovery action is provided under the Recovery of Debt and Bankruptcy Act, 1993. The sole purpose of the Tribunal to settle or recover debt cases and restoration of the unpaid amount from NPAs as declared by the banks under the RBI guidelines. The Tribunal has all the powers vested as of a District Court to carry on such procedures.
To file an application before the DRT, the debt amount due should be more than Rs.20 lakh. The Bank or the defaulter should be within the jurisdiction of the DRT. There are in total 39 DRTs established in India. Only the State of Jammu & Kashmir does not have the applicability of this Act.
- By Initiating a SARFAESI action.
The Banks or the Financial Institute can also take action as per the SARFAESI Act by initiating an action for enforcement of security interest. The law gives extensive power to the Banks under which it can take possession of the secured property which is provided by the Borrower as per the loan agreement and can initiate the auction of such property.
To understand what actions the Bank can initiate, Section 13(4) enumerates the following:
In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-
- take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset;
- take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realize the secured asset;
- appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
- require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
That, the provision under Section 13(4) provided above are the sole action which the Banks are bound to be taken.
In case of debt amount being less than 20 lakhs, a civil suit is preferred to recover such debt. The provision of such recovery in case of a secured debt the law under the Transfer of Property Act, 1882, to know more about foreclosure rights of a mortgagee check out this article.
How The Borrower Should Safeguard Its Interest?
The SARFAESI initially after being enacted considered as arbitrary law and was challenged before the Supreme Court in the leading case Mardia Chemical Limited v/s Union of India (2004)4 SCC 311, under which the constitutionality of the Act was challenged on the grounds that the provision will not protect the borrower, considering the following issue in case of enforcement of security interest, it was held that such right of protection has been provided under the act, which are as follows:
- The borrower has the right to raise any object or place any facts for consideration to the secured creditor/Bank in a reply to the notice., the Bank upon such notice under Section.13(2) is incumbent to serve 60 days notice before proceeding to take any measures under Section.13(4) of the Act. This became mandatory for the Secured creditor to communicate with the borrower of reasons for not accepting the objections of him.
- If any measures were taken under Section.13(4) and before the sale/auction of the property it would be open for the borrower to file an appeal (or as per the amended provision an application along with such fees ) under Section 17 before the DRT. Thus, the Tribunal may exercise its ancillary power under such jurisdiction to pass any stay/interim order subject to the condition at it may deem fir and proper to impose.
- The Court nullified the requirement of deposit of 75% of the amount claimed before entertaining an appeal (or application) under Section 17 of the Act is an oppressive, onerous and arbitrary condition against tall cannons of reasonableness. Though it was later amended by Act 30 of 2004.
The Court further pronounced that;
‘we hold that the borrowers would get a reasonably fair deal and opportunity to get the matter adjudicated upon before the Debt Recovery Tribunal. The effect of some of the provisions may be a bit harsh for some of the borrowers but on that ground the impugned provisions of the Act cannot be said to be unconstitutional in view of the fact that the object of the Act is to achieve speedier recovery of the dues declared as NPAs’
The law very well protects the right of the borrower in case of acquisition of the secured asset and the secured creditor has to maintain a strict obligation of the laws and rules made thereunder in the SARFAESI.
Again before the Supreme Court in the case of Vasu P. Shetty vs M/S Hotel Vandana Palace & Ors has discussed the nature of the protection given to the borrower/defaulter and expanded the meaning provided under Section 13(8) of the Act. The Court specifically mentioned that Section 13(8) is specifically for the protection of the borrowers in as much as, ownership of the secured assets is a constitutional right vested in the borrowers and protected under Article 300A of the Constitution of India. It also emphasized that the secured creditor has obliged to the duty in informing through a notice and date and time by which either the sale or transfer will be effected in order to provide ample opportunity to the borrower to take all possible steps for retrieving his property.
The Supreme Court again in the case of Mathew Varghese v. M. Amritha Kumar & others (2014) 5 SCC 610, the Hon’ble Court noted that the publication of the sale notice under Rule 9(1) of the Security Interest Rules of the SARFAESI Act, 2002, wherein a gap of 30 days before the date of the stipulated sale was not maintained. It re-iterated that in any event, the sale cannot take place before the expiry of the 30 days notices period in terms of Rule 8(6). Therefore contend that any sale or transfer of secured asset under SARFAESI Action and a violation of the mandatory requirements of law and rules framed thereunder is bound to be treated as invalid. It is argued that the respondent bank (secured creditor) did not challenged the impugned orders whereby, the petitioner, a third party which had stepped into the property consequently upon such sale, has been held to be effected pursuant to invalid proceedings cannot be allowed to continue to hold onto it to the detriment of the right, title or interest of the original owner
The Defaulter can also take part in the scheme of One-time settlement with the bank. The Scheme is being openly promoted by the RBI, in favour of the banks which are loaded with huge values of NPA. To know further about the scheme refer to this article One-Time Settlement for Recovering NPAs in Banks. For further information on this scheme what the government has stated to the Banks see this Press Note of Ministry of Finance dated 16th March 2018.
The whole action by the Banks should not be taken with the view that their actions pertaining to a forceful possession of the property and auctioning the property is not good. Generally, a bank has to adhere to more legal checks on its actions in taking over the secured asset that, in any scenario, a law, rule or regulation have been not complied with, while taking such action, the whole procedure taken by the Bank is nullified by the DRT.
Our country has a serious threat of rising NPA’s because it raises such doubt upon the business capabilities of our Banking system, the RBI and the government in solving such rising issues. So for protecting the interest of the Banking Industry, the Banks shall not fail with the rising debts in the form of NPA and such laws should not be blamed as arbitrary, as it is framed with the intention that, a speedy recovery is possible and the Banks are saved from collapsing on its own assets.
Subs by. Act 30 of 2004, sec10(a)(i), for “may prefer an appeal”(w.e.r.f 21-6-2002).