Introduction:
The Securitization and the Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act), was enacted by the Parliament for speedy recovery of thousands of crores to the banks. The Act was first promulgated as an ordinance and was later converted into Act on June 21, 2002. This Act allows the creditors, that is, banks and financial institutions to release long-term assets, manage problems of liquidity, asset liability mis-match and to recover debts by taking possession of securities of the debtor, sell them and thereby reducing the non-performing assets (NPA) by adapting and reconstruction. This paper gives an outline of SARFAESI Act, how it is brought about, loopholes and problems in it, the effect of IBC on it, the current situation and factors to be kept in mind for betterment of the Act.
SARFAESI Act, 2002:
Historically, the judicial process was very rigid, there were bureaucratic delays and it used to take a long time for creditors to use or access the collateral. In case if there is a default, the creditor had to file a civil suit in the civil court, which had lots of proceedings and guidelines to follow, which eventually delayed the entire process a lot. The result of such delay was the loss occurred to the creditors or lenders, as all the non-performing assets values would get depreciated by the time. To remove such delays and to secure banks or other financial institutions which lend money, the Parliament enacted this SARFAESI Act. This act not only bypasses the lengthy court process, but also seizes the assets of the defaulters. This Act applies retrospectively also, that is, it applies on both old as well as new contracts, but the nature of loan should be secured. Before the SARFAESI Act, the creditors did not have any solution apart from claiming the seizure of an asset in the court room. They had to wait till the lengthy proceedings completed. It would usually take about 10 to 15 years and by that time the property would get devalued. In India, it was a pro-debtor regime before the SARFAESI Act, as the security of creditors was minimal due to the lengthy recovery process. After the SARFAESI ACT, there was a transition from pro-debtor regime to pro-creditor regime, as the rights of creditor have increased and they could take the possession of the assets and sell them off as soon as the debtor fails to repay the loan amount or interest therein. The rights of the creditors have become so strong that even if there is any tenancy created by the mortgagor after the mortgage in contravention of section 65A of the Transfer of Property Act, 1872 , would not be binding on the banks or financial institutions and such tenancy is terminated once the bank initiates an action under section 13(4) of the SARFAESI Act, 2002 . So, basically, provision of SARFAESI Act overrides the provision of Transfer of Property Act.
Loopholes of SARFAESI Act:
Though there were key amendments, such as, widening the scope of borrowers and creditors, introduction of debt securities, integration of records of security interests with the Central Registry, there are still few areas which have not been addressed. One of such issues is Notice as per section 13(2) of the SARFAESI Act, 2002 . There are two problems with this section. First one is that the debtor in order to defraud the creditor can start disposing of his assets in the sixty days time-frame mentioned in the section. The second problem is regarding the value of property getting reduced or de-valued. The threat of underlying security getting wasted still haunts the creditors. Section 13(13) of the SARFAESI Act, 2002, gives a way to defaulters to get away with a fine and/or imprisonment as per the Act and might affect the main substance of the Act, that is, the creditors recovering the amounts by selling or possessing the assets of the debtors. SARFAESI Act is chosen as a first resort by the banks or financial institutions, as the recovery is faster. There was a RBI master circular which stated that if the banks make any debtor a willful defaulter, then they need not give notice to the debtor according to section 13(2) of the SARFAESI Act, 2002. This empowers the creditors to seize the assets just by proving that the debtor is a willful defaulter. This gives the power to the creditors to escape from the due process of the Act and directly possess the securities.
Problems with SARFAESI Act:
There are different problems with the SARFAESI Act as there are parallel laws such as IBC, tenancy laws, etc.
One problem is that the Act gives power to the creditors to evict the debtors, to possess the securities or assets, attached to the loan. After completion of sixty days after giving notice under section 13(2) of the Act, the creditors can remove the defaulters from their homes and make them homeless, which is an inhumane act and is detrimental to the rights of citizens in a democratic country. Similarly, it is the same with industries, where hundreds or thousands of workers go unemployed. For such acts, there must be ample time provided by the legislation itself, so that it will be more clear and the parties need not depend on tribunal order such as DRT (Debt Recovery Tribunal).
Another problem with respect to this Act is the dichotomy of laws and forums. The confusion with respect to the financial institutions such as NBFCs (Non-banking financial companies), where they have applicability under the SARFAESI Act through notification, but, have not been notified with respect to the DRT Act. What happens to financial institutions which are unable to sell the secured assets of the borrower company? Do they have any remedy? Confusions like these are not covered under the Act. DRT is the Debt Recovery Tribunal, which acts as an appellate tribunal in case there are any discrepancies or disputes between the parties under SARFAESI Act.
Another problem is with respect to section 35 of the SARFAESI Act, 2002, which says that SARFAESI Act prevails over other Acts. But there are judgements which favor other Acts or laws over SARFAESI Act. The Madras High court in its judgement on the case of Indian Bank vs. M/S Nippon Enterprises South , set aside the order of DRT and held that the tenant cannot be evicted from the possession and also held that tenancy law of Tamil Nadu will overrule the SARFAESI Act. Similarly, the Bombay High court in its recent judgement on J.M. Financial Asset Reconstruction & ors. Vs. Board of Trusts of the Port , gave out its judgement that, no provisions of the SARFAESI Act overrides the Public Premises Act.
IBC and its effect on SARFAESI Act:
The Insolvency and Bankruptcy code (IBC) came into existence on May 28, 2016. This code seeks to replace all the existing laws related to the bankruptcy resolution. Its considered to be a vital transformation from the present system, where there are number of laws regulating the insolvency and bankruptcy mechanisms. Section 14(1)(c) of IBC states that, on commencement of the insolvency resolution process (IRP), the adjudicating authority must declare a moratorium period by an order and upon such order, all the recovery proceedings get stayed including the enforcement of securities under SARFAESI Act. The NCLT decides the period of resolution process and until and unless that period ends, the banks or financial institutions cannot enforce their securities under SARFAESI Act . Section 238 of the IBC , also overrides the effect of other laws. Usually, IBC works in favor of the corporate creditors as they are the ones who invest in the companies and after they are satisfied, the securities under SARFAESI Act may be enforced. People, who take loans from banks or financial institutions for their companies, usually, involve corporate creditors, so that their rights are considered first compared to that of banks or financial institutions. This is one of the ways in which debtors can free themselves by taking back the securities from the banks/FI’s. In the recent judgement of NCLAT, in the case of Canara Bank vs. Sri Chandramoulishvar Spg. Mills (P) Ltd., the tribunal has held that IBC prevails over SARFAESI act. This particular order is the latest one on the SARFAESI Act, dated 3rd August 2018.
Conclusion:
We have considered various aspects on SARFAESI Act. We have seen the transition of the SARFAESI Act, from pro-debtor regime to pro-creditor regime and again back to pro-debtor regime in this paper. The situation is still dicey, as all the corporate insolvency will be referred to NCLT, according to the IBC, and all the individual recovery cases will be referred to DRT. The existence of multiple laws and forums will always lead to an ambiguous situation. There should be a middle ground, where the SARFAESI Act has its own holding, reducing the confusion between different provisions. There is no doubt that the pith and substance of the Act is to ensure security of the creditors as fast as possible and increase the economy of the country, but such recovery should not deprive fundamental rights of an individual. There should be some balance between the security of the creditors and safety of the debtors. This paper hopes that the legislature will consider the said loopholes and problems and will try amending the Act for a better future of both, the banks or financial institutions and debtors.