NPA & SARFAESI: NPA due to Bank’s mistake – remedies available to the Borrower – SARFAESI Act - a Case Study?

It appears to me that the SARFAESI Act, 2002 was enacted on the assumption that the Bank will commit no mistake in the course of its business relations with the borrowers. It is understandable as to why the Banks need a special legislation like SARFAESI Act, 2002, but, there can not be any justification for not providing an effective remedy to the borrowers in case they have a genuine grievance. The Bank will sanction loans to the borrowers on specific terms and conditions. There can be variety of credit facilities. In the course of adhering to the terms and conditions; like borrowers, the Banks too can commit mistakes and there can not be any doubt in this regard. Looking at the provisions of the SARFAESI Act, 2002, the rules, the practice and few precedents; borrowers and also professionals alike are doubtful in getting relief from the specially constituted Debt Recovery Tribunal which entertains appeals from the borrowers under section 17 of the Act. I have heard many borrowers saying that the Debt Recovery Tribunals will support the Banks and their actions, and will not effectively listen to the grievances of the borrowers. Such an assumption on the functioning of Debt Recovery Tribunals and Appellate Tribunals may not be correct though the system needs to look within. The Courts too have understood the difficulties in approaching the Civil Courts in recovering the outstanding dues and the Courts have upheld the provisions of SARFAESI Act, 2002 with few suggestions in the Course. The SARFAESI proceeding and litigation, as many feel, goes as follows:

1. The Bank will classify a loan account as NPA (Non-performing Asset) as per the RBI guidelines on Asset Classification etc. It is debatable as to whether it is right to apply the guidelines issued by the RBI mechanically or not. There may be cases where the Bank or the concerned officials believe in the credentials and credit worthiness of a borrower due to past record. Even in these cases, the Bank normally classifies the account as NPA if the borrower fails to meet the agreed commitments and the Bank will rely on the guidelines issued by the Reserve Bank of India. There can be two views on this. If the discretion is given to the Bank in classifying an Account as NPA, will it really benefit thebonafide borrowers?. As such, the law in this regard is that the Bank should follow the RBI guidelines in classifying an Account as NPA and RBI guidelines are mandatory. The classification of an Account as NPA is the preliminary thing before proceeding further in recovering the dues under the provisions of SARFAESI Act, 2002.

2. After classifying an account as NPA, the Bank or the authorized officer of the Bank will issue a demand notice to the borrower under section 13 (2) of the Act demanding the borrower to pay the entire outstanding due as on date.

3. The borrower can raise his objections if any to the demand being made by the Bank under section 13 (2). It is to be noted that if the borrower is silent to the demand notice, the same will be noted when the borrower files an appeal before the Debt Recovery Tribunal under section 17 of the Act.

4. If the borrower raises any written objections to the Bank’s demand notice under section 13 (2), then, the Bank should reply to the objections. The reply is mandatory. The courts have emphasized the need on the part of the Bank to apply its mind properly to the objections raised by the borrower. Borrowers contend that the Bank will not listen to the objections and mechanically reject those. If the Bank finds merit in the objections raised by the borrower, then, the Bank can correct itself and proceed accordingly.

5. If the Banks rejects the objections raised by the borrower under section 13 (3A), then, the Bank will issue a possession notice under section 13 (4) of the Act. It is called symbolic possession.

6. The possession notice issued by the Bank under section 13 (4) of the Act provides a right to the borrower to approach the Debt Recovery Tribunal and file an Appeal if he feels aggrieved.

7. The borrower should pay the prescribed fee while filing an appeal under section 17 and normally the borrower prays for a stay of SARFAESI proceedings. Many borrowers feel that the Debt Recovery Tribunal will ask the borrower to deposit some amount while granting stay if the DRT comes to a conclusion to grant a stay. I feel that the borrower need not make a deposit always and the DRT will grant a stay directly without asking for any deposit in some cases based on facts. If the DRT is not inclined to grant a stay and if the DRT dismisses the application seeking stay, then, the borrower is entitled to file an appeal to the DRAT (Debt Recovery Appellate Tribunal).

8. In case where the borrower did not approach the Tribunal and in case where the borrower fails to meet the demand made by the Bank, the Bank will take such steps in taking physical possession of the property under section 14 and can sell the secured asset in public auction etc.

Though the procedure under SARFAESI Act, 2002 appear to be simple, there were many complications in the course. It is presumed that the DRT will only look into the procedural lapses and other disputes pertaining to maintenance of account, violation of terms and conditions etc., can not be looked into by the DRT. Then, where is the remedy to the borrower for his genuine grievance?. Is it proper to ask the borrower to approach Civil Court against the Bank paying Court fee and asking for damages etc.? The Civil Court may not be entitled to grant a stay of SARFAESI proceeding in view of Section 34 of the Act. If the borrower approaches the High Court, the High Court may say that the alternative remedy is available before the DRT and as such a Writ under Article 226 is not maintainable. In these circumstances, where is the effective remedy available to the borrower unless the DRT looks into all the genuine objections of the borrower keeping the technicalities apart? It may be contended that if the Bank commits any mistake, then, the DRT can award cost and compensation to the borrower as enshrined under section 19 of the Act. But, the careful perusal of the Section 19 makes it very clear that the DRT can award costs and compensation only when it is provided that the procedure followed by the Bank in proceeding against the secured asset is incorrect. We may not have many precedents where the DRT award compensation to the borrowers. These are the various complications in fighting against the mistake committed by the Bank while classifying an account as NPA and while seeking relief against the SARFAESI proceeding. As such, the entire process to be clear and the DRT should effectively function and grant relief to the borrowers if there is a merit in the borrowers’ contention. If the specially constituted Tribunals supported by Courts fail to function, then, there can not be any meaning in constituting the Tribunals and the High Courts would be flooded with petitions under Article 226 of Constitution of India and petitions under Article 227 of Constitution of India.Dealing with the issue of functioning of Tribunals in India, the Hon’ble High Court of Calcutta in Chanda Engineers (India) Ltd Vs. U.C.O. Bank 2005 AIR(Cal) 28, 2005 (125) CC 708, was pleased to observe as follows:

“(2.) So far as the power of Article 227 is concerned, in earlier, High Courts hardly got any opportunity to apply the power of superintendence under it over the Lower Courts and Tribunals. Number of litigations was much less. Lower Courts had enough opportunity to go through procedural propriety. There was no mushroom growing of Tribunals. Only few traditional Tribunals were existing. Provision was normally applied where there was neither any scope of appeal nor any scope of usual revision. But since when various Tribunals either by way of Constitutional amendment or under the respective statutes are formed and also revisional jurisdictions are curtailed by way of amendment of the Code of Civil Procedure particularly in respect of the interlocutory matters, number of applications under Article 227 of the Constitution of India have been increased. Therefore, if the totality of the scenario is projected it will be seen that from when several jurisdictions of the High Courts are curtailed number of making applications under Article 227 of the Constitution of India have been increased. If this is the trend then formation of Tribunals for the sake of people is a big question for the legislature. It is high time to think whether the installation of various Tribunals is really minimizing number of disputes or increasing the number of disputes.”

Thus, the borrower will have to face lot of difficulties once the account is classified as NPA. In cases where the outstanding is only few lakhs and the borrower do not run a big business concern, then, it would really be difficult to face the Banks under the provisions of SARFAESI Act, 2002. There is an issue of work pressure with Tribunals and getting a competent counsel engaged is also a costly thing when the amount outstanding is not much. The borrowers may not really understand the whole procedure and the implications under SARFAESI Act, 2002 and as such there is a need to ignore technicalities and keep the law constant. There were contradictory views on certain issues under SARFAESI Act, 2002. Thus, a wrong classification of an account as NPA will have disastrous consequences though one may say that the law is clear and the SARFAESI Act, 2002 provides a remedy to the borrower to file an Appeal under section 17. I would like to share a case study in this regard and the facts are as follows.

Facts of the Case:

A Bank has issued a notice to the borrower under section 13 (2) of the Act demanding the payment of outstanding being 25 lakhs. The borrower’s contention is that there was a fire accident in the Factory admittedly. The Bank was supposed to process the insurance thing and it is part of terms and conditions of credit facility. However, the insurance claim was delayed to due to the mistake by the Bank in informing the changed address of the borrower to the Insurance Company though the borrower has duly informed about the change of address and other relevant issues from time to time. As the borrower in this particular case is not a willful defaulter, has approached the Bank seeking waiver of interest and penal interest etc. as that was resulted due to the Bank’s mistake. The borrower contention is that he has to suffer a loss of 12 lakhs due to the Bank’s mistake and the Bank continues to charge interest and penal interest against the outstanding though the Insurance Claim was delayed due to the mistake of the Bank. Even after the issuance of notice, the borrower has paid a sum of 4 lakhs initially and 8 lakhs thereafter. The borrower’s query is as to how to get effective relief in this case as he was subjected to heavy loss?. The borrower’s contention is that his account was classified as NPA due to charging of interest and penal interest without looking at the mistake committed by the Bank.

Analysis:

In the case referred to above, it may be easy to say that the borrower can send his objections under section 13 (3A) and can file an appeal challenging the notice under section 13 (4) of the Act. It is also easy to say that the borrower can get compensation under section 19. Practically, the issue is different and technicalities are also there. Some may say that the borrower can only approach the Civil Court claiming damages and the DRT will only look into the procedural lapses in issuing notice under section 13 (2), reply under section 13 (3A), notice under section 13 (4) of the Act etc. This is abonafide case and why should the borrower approach different forums involving lot of costs. Why can’t the DRT look into the issues of mistakes committed by the Bank in arriving at the outstanding due etc. Despite having a clear case, the borrower is made to suffer and many issues under SARFAESI Act, 2002 as such requires clarity and technicalities are to be ignored.

Note: the views expressed are my personal and a view point and am aware of various other complicated issues under SARFAESI Act, 2002.