SARFAESI ACT, 2002 and various complicated issues?

We all know the object of SARFAESI Act, 2002 and it is to assist the Banks in realization of their debt through proceeding against the “Secured Asset”. There are people and professionals supporting SARFAESI Act, 2002 on the ground that in the absence of such a stringent legislation, it is very difficult to deal with the defaulters and they, in the course, become habitual defaulters. On the other hand, purely based on the experience and difficulties, there are people and professionals criticizing the SARFAESI Act, 2002 as it will enable the Banks to harass the borrowers and defeat the interests of the borrowers by harping on technicalities. There are so many judgments on various issues and provisions of SARFAESI Act, 2002 from time to time. Still, in my opinion, there tend to be complicated issues while dealing with a “secured asset” using the provisions of SARFAESI Act, 2002. The process of realization of debt using the provisions of SARFAESI Act, 2002 appears to be simple as follows:
1. Based on the guidelines issued by the Reserve Bank of India, the Bank can classify an Account as NPA and once the account of the borrower becomes NPA, the Bank can proceed with taking action under the provisions of SARFAESI Act, 2002.
2. After classifying an account as NPA, the Bank issues a notice under section 13 (2) of the Act demanding the borrower to settle all the outstanding dues as mentioned in the notice.
3. The borrower can reply to the notice under section 13 (2) of the Act and place his objections to the demand. The Bank should deal with the objections of the borrower and can send a reply.

4. Once the Bank completes the process of issuance of notice under section 13 (2) and dealing with the objections, the Bank can proceed with taking possession of the “secured asset” under section 13 (4) of the Act.
5. As stated in the Act, the borrower can file an appeal challenging the notice issued under section 13 (4) of the Act and the DRT can pass interim orders and can ask the Bank not proceed further.
6. If there is no restraint from the DRT, then, the Bank can further proceed with taking physical possession of the property and can proceed with auctioning the property in accordance with the provisions of the Act an the rules thereunder.
7. If the Bank could auction the property in accordance with the rules, the Bank will first realize the outstanding dues of the borrower and the remaining amount will be given to the borrower. If the amount realized through auction is not sufficient to meet the outstanding dues, then, the Bank proceeds further against the borrower.

The various steps, in brief, as stated above may appear to be very simple, but, practically, there exist so many difficulties and it will be extremely difficult to make a balance between the object of the Act and the interests of the borrower thought the legislation itself is sought to make a good balance in this regard. The complicated issues, according to me, can be as follows:

1. Assuming a case that the borrower takes a stand that he never received a notice under section 13 (2) of the Act or any other subsequent notice, then, how to deal with the issues?
2. Assuming a case that the borrower seriously disputes the outstanding as claimed under section 13 (2) of the Act, then, can the DRT adjudicate the outstanding due and if it can, what is the procedure?
3. Is it acceptable or reasonable to say that the determination of outstanding due by the Bank after considering objections from borrower is final?
4. Assuming a case that the borrower could not find anything illegal when it comes to taking steps under section 13 (2) and section 13 (4) of the Act, then, will it stop the borrower in questioning the subsequent illegalities in taking physical possession of the property or conducting the action etc.?
5. Is it correct to support the powers of the Magistrate Court in providing assistance to the Bank in taking physical possession of the property without giving any notice to the borrower or without having any look into the entire case?
6. Assuming a case that the borrower challenges the notice issued by the Bank under section 13 (4) of the Act and the Bank proceeds with taking further steps, what is the procedure to be followed in taking note of further proceedings of the Bank or illegalities committed by the Bank?
7. Is it correct to say that the borrower should proceed to question the illegalities of the Bank if any at each and every state though his appeal challenging the Bank’s notice under section 13 (4) of the Act is pending?
8. What happens if the sale of the property gets concluded and the borrower wins his appeal finally under section 17 of the Act?
9. Is it logical to say that the borrower should deposit a minimum of 25 % of the outstanding due under any circumstance if he challenges an order of DRT before DRAT?

I have just highlighted few complicated issues and some complicated issues are now settled through various judgments of constitutional courts from time to time. Still, there exist complications. After reading discussions in various judgments, the object of the provisions of SARFAESI Act, 2002, the interests of the borrowers, the allegations on some Bank officials, according me, the settled issues under SARFAESI Act, 2002 are as follows:

a. It is difficult to lay propositions under SARFAESI Act, 2002 when it comes to the rights of the borrower and the powers of the Tribunal. It will depend upon the facts and circumstances of each and every case.
b. There is no doubt that the borrower can dispute the outstanding due and can raise all objections in his appeal to the DRT. However, the objections to the notice issued under section 13 (2) of the Act, the seriousness of the objections and the documentary proof will be looked into in this regard.
c. The borrower can approach the DRT at any stage under the provisions of SARFAESI Act, 2002, however, he has to explain as to why he has remained silent to the notice under section 13 (4) of the Act. While it is true that the borrower can approach the DRT challenging the action initiated by the Bank under section 13 of the Act at any stage, the DRT will look into all facts in detail and will decide the issue.
d. There is no need to file an appeal at each and every stage and in a pending appeal the borrower can bring the subsequent illegalities to the notice of the DRT and can obtain appropriate orders.
e. According to me, the borrower can even challenge the order of the Magistrate Court before the DRT and the DRT can stay the order of the Magistrate Court too. This proposition may go against the clear legal provision; however, the complications are to be addressed.
f. Technicalities will not come in the way of DRT granting interim orders and if the DRT is convinced, then, the borrower can get necessary restraint orders from the DRT.
g. The DRT can set-aside the sale of the property too even if it is concluded and the rights of the borrower over the property will remain intact as per law.

On the complicated issue of dealing with the sale of the property in auction and the rights of the auction purchaser under the provisions of SARFAESI Act, 2002, the Hon’ble High Court of Delhi, in a judgment dated 01-11-2010 in W.P. (C) Nos. 13152 of 2009 & 5317 of 2010 between M/S. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, was pleased to observe as follows:

“9. To this aspect we have no doubt in our minds that the provisions of the SARFAESI Act will apply because the said Act is a special Act dealing with respective rights and obligations with respect to proceedings to be taken thereunder. It is trite that a special legislation will prevail over a general legislation. We need not burden our judgment with case laws on this point and which indeed are legion. The provisions of the SARFAESI Act will therefore prevail in case of any conflict and inconsistency of any provision therein with any provisions of the Transfer of Property Act and the CPC. That being so, various judgments which have been cited on behalf of the petitioners under the provisions of the Transfer of Property Act and the CPC would not apply at all. We are, therefore, not referring to those judgments and distinguishing them individually.
10. We have already reproduced the provisions of Section 13(8) and Section 17 sub sections (2) to (4) above. Section 13 sub section (8) in plain language provides that no steps with regard to the transfer or sale of secured assets can take place if dues of the secured creditors together with cost charges and expenses incurred are tendered to the secured creditor at any time before the date fixed for sale/transfer. However, sub sections (2) to (4) of Section 17 provide that the DRT in the proceedings under Section 17 has the right to declare whether the action of the secured creditor taken under Section 13(4) is or is not in accordance with the provisions of the SARFAESI Act. In case, the DRT comes to the conclusion that the action taken by the secured creditor is not in accordance with the provisions of the SARFAESI Act and the rules framed thereunder, then, by virtue of sub section (3), DRT can declare the actions taken pursuant to Section 13(4) as invalid and pass necessary orders including of cancellation of the auction sale proceedings and restoring the possession of the secured asset to the borrower. Thus, a conjoint reading of the provisions of Section 13(8) on one hand and sub sections (2) to (4) of Section 17 on the other hand, bring out the position that although the right of redemption is to be ordinarily exercised before the date fixed for sale of transfer, however, even if the auction sale proceedings take place but in case the borrower succeeds in the S.A. under Section 17, the auction sale proceedings can be cancelled and since fresh auction sale may have to be conducted the right of redemption can again be exercised at that stage when a fresh date will be fixed for sale/transfer. There is a vital difference in this legal position and the legal position which emerges under the provisions of Order 21 of the CPC. Whereas under relevant rules and sub rules of Order 21 of CPC, and as interpreted by the Supreme Court, even if a decree is set aside a bonafide purchaser for value at an auction sale proceedings gets a complete title in case he purchases the property without any notice of any dispute or claims with respect to the auctioned property, however under the SARFAESI Act, the DRT has complete powers under the provisions of sub sections (2) to (4) of Section 17 to set aside the auction sale and restore back the possession of the secured asset to the borrower. Clearly, therefore, the auction sale proceedings are not final under the SARFAESI Act unless the S.A. of the borrower under Section 17 is decided. A purchaser at an auction sale cannot claim title merely because the auction sale proceedings for concluded in his favour and a necessary sale certificate issued as the same as per subsections (2) to (4) of Section 17 is subject to final decision on an S.A filed under Section 17.
17. In view of the above, we hold that the right of redemption claimed by the petitioners will depend upon success of the proceedings initiated by the petitioners under Section 17 of the SARFAESI Act. In case, the petitioners finally fail, then it will not have a right of redemption, however, in case the petitioners succeed in the proceedings under Section 17 and orders are passed for setting aside the auction sale in terms of sub-section (2) to (4) of Section 17, then in such a case, it will be open to the petitioners to claim right of redemption. The conclusion which emerges is this that in case the borrower succeeds in its petition under Section 17, then, the DRT can pass orders under sub-sections 3 and 4 of Section 17 canceling the auction sale proceedings. In case, the auction sale proceedings are cancelled because the action of the bank/financial institution is found to be violative of various provisions of the SARFAESI Act and the Rules framed there under, it is possible that a fresh auction may have to be conducted. In case a fresh auction of the mortgaged property has to be conducted then, a fresh date will be fixed for auction sale and it is at that stage that again Section 13 sub-section 8 will come into play and at which stage, the borrower can seek to exercise its right of redemption of the mortgaged property. Therefore, everything will turn upon the success or failure of the petitioners in the petition under Section 17 of the Act when the same reaches finality. Presently, the stage of the proceedings under Section 17 is that, and as already stated above, the same has been dismissed by the DRT and a statutory appeal under Section 18 is pending before the DRAT. Therefore, if the petitioners succeed in its appeal under Section 18 before the DRAT, the petitioners can exercise a right of redemption because fresh auction sale proceedings may have to be conducted and when so required to be conducted, once again a date will have to be fixed for sale/transfer/auction and before which date, the petitioners can seek to pay all the dues of the bank in terms of Section 13(8) of the SARFAESI Act.”

Note: the views expressed are my personal and I have dealtwith the issues in brief being aware of the complications in the subject.