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Remedies available to Borrowers under SARFAESI Act-2002

1. Representation/objection to notice u/s 13(2) before banks

Page Contents

              I.          Representation/objection to notice u/s 13(2) before banks

             II.          Writ petition challenging notice under section 13(2)

            III.          Borrowers’ right of appeal

           IV.          Appeal to DRT

            V.          The Appellate powers of DRT u/s 17 of the Act  

           VI.          Appeal to Debt Recovery Appellate Tribunal 

          VII.          Interim stay order

         VIII.          Filing of Writ petition under Article 226 of Constitution 

           IX.          Classification of NPA can be questioned through writ 

The most Important section of Sarfaesi Act is section 13(2), which provides that if a borrower who is under a liability to a secured creditor, makes any default in repayment of secured debt and his account in respect of such debt is classified as non-performing asset, then secured creditor may require the borrower by notice in writing to discharge his liability within sixty days from the date of notice with an indication that if he fails to do so, the secured creditor shall be entitled to exercise all or any of its rights in terms of section 13(4) of the Act.

The first opportunity of being heard is provided to the borrower by section 13(3-A) which lays down that the borrower may make a representation in response to the notice issued under section 13(2) and challenge the classification of his account as an NPA as also the quantum of amount specified in the notice. If the banks or FIs come to the conclusion that the representation/objection of the borrower is not acceptable, then the reasons for non-acceptance are required to be communicated within 1 week.

It is worth noting that a proviso Is added to section 13(3-A) which states that reason so communicated shall not confer any right upon the borrower to file an application to the Debt Recovery Tribunal (DRT) u/s. 17 of Act.

Section 13(13) states that, no borrower shall after receipt of notice u/s. 13(2) transfer by way of sale, lease or otherwise any of his secured asset referred to in the notice, without prior written consent of the secured creditor. Thus, section 13(13) shows that the notice u/s. 13(2) in effect operates as an attachment/ injunction restraining the borrower from disposing of the secure asset. 

2. Writ petition challenging notice under section 13(2)

The borrower can challenge the notice u/s. 13(2) of Act in the Civil Court as well as in the High Courts by way of writ jurisdiction to defend his case. However, that is hardly sustainable.

In the case of D. Ravichandran V/s Indian Overseas Bank  it was held that the notice u/s. 13(2) of Act is really a show cause notice and ordinarily this court does not interfere with show cause notice.

The notice u/s 13(2) of the Act by itself does not affect any right or liability of the borrower. Hence, challenge to the notice u/s. 13(2) of the Act is premature, since it is possible that the secured creditor may be satisfied with the reply of the borrower to the aforesaid notice and may drop proceedings.

 Hence, all the wit petitions challenging the notice of u/s. 13(2) of the Act are dismissed on the ground that writ petitions are premature and the petitioners have an alternative remedy of raising all the points which they are raising in these writ petitions in their reply to notice u/s. 13(2) of the Act. It is-clear that borrower cannot approach the court or any other forum at the interlocutory stage of the proceedings that is from the issue of notice u/s. 13(2) till the final action taken u/s. 13(4) of the Act.

3. Borrowers’ right of appeal

If the borrower or any other person who had any tangible grievance against the notice issued u/s. 13(4) or action taken u/s. 14, then he/she could have availed remedy by filing an application u/s. 17(1) within 45 days from the date on which such measures were taken.

The expression ‘any person’ used in section 17(1) is of wide import. It takes within its fold, not only the borrower but also the guarantor or any other person who may be affected by the action taken u/s. 13(4) or u/s. 14. Both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders u/s. 17 and 18 and are required to decide matters within fixed time schedule.

4. Appeal to DRT

On receipt of possession notice u/s. 13(4) the borrower can prefer appeal before DRT u/s. 17, seeking stay of proceedings and to set aside the action initiated. Does the borrower lose right to file appeal if the limitation period of 45 days from the date of the receipt of the notice u/s. 13(4) expires? No, the following cause of actions can be pleaded-

I. The borrower can question all steps initiated by the bank pursuant to section 13(4).

II. Borrower can question sale proceeding.

III.   Can challenge order passed by the CMM/DM u/s. 14 of the Act.

IV. The legal preposition is well settled that court protects the rights of the borrower also. 

5. The Appellate powers of DRT u/s 17 of the Act  

The DRT has elaborate powers and it can even restore the possession back to the borrower, in the event it finds the actions by the bank are illegal or incorrect. The Supreme Court has clearly held in the case of Mardia Chemical Ltd. that the proceeding u/s. 17 is in the nature of original proceeding and that even the amount which is claimed to be due to a bank as stated in the notice u/s. 13(2) can be challenged by the borrower. In an important decision on appellate power of DRT the High Court of Madras has held in the case of M/s Lakshmi Mills Private Ltd. v/s Indian Bank  as under :-

I. The right of the bank is not automatically suspended upon filing an application by the borrower u/s. 17 of the Act and secured creditor can proceed further in the matter, where no stay is granted by the Tribunal.

II. The Tribunal has power to impose the condition relating to deposit for grant of stay of auction

III. The Tribunal has no power to pass any Interim mandatory order relating to restoration of possession before finalization of the proceeding u/s. 17 of the Act.

IV. All the grounds, which rendered the action of the bank as illegal, can be raised In the proceeding u/s. 17 at the Act before the DRT.It is for the DRT to decide in each case whether the action of the bank was in accordance with the provisions of the said Act and legally sustainable.

5. Appeal to Debt Recovery Appellate Tribunal 

If a person is aggrieved by the order of the DRT,ha can file an appeal to the Appellate Tribunal within 30 day from the date of the receipt of DRT order. If the DRT or Appellate Tribunal holds that possession of asset by the secured creditor was wrongful and directs the secured creditors to return the assets to the borrower, the borrower shall be entitled to the compensation and costs as may be determined by the DRT or Appellate Tribunal. The Tribunal can also direct the return of the assets If the secured creditor had already sold or transferred the asset to a third party.

6. Interim stay order

The Jurisdictions of Civil Court has bean clearly barred under section 34 of the Act, stating that no Injunction shall be granted by any court or other authority In respect of any action taken or to be taken under Sarfaesi Act or the DRT Act.

The decision of the Supreme Court In the case of United Bank of India v/s Satyawati Tandon is a landmark Judgment on the issue of stay orders. It was held that normally the Supreme Court does not Interfere with the discretion exercised by the High Court to pass an interim order In a pending matter but, having carefully examined the matter, an exception have been made, because the order under challenge has the effect of defeating the very object of legislation enacted by the Parliament for ensuring that there are no unwarranted impediments in the recovery of debts due to banks.

The following observations are worth noting:-

I. The Nigh Court will ordinarily not entertain a petition under Article 226 of the Constitution, If an affective alternate remedy is available to the aggrieved person and that this rule applies with greater vigour in matters involving recovery of taxes, cess, fees, other type of public money and dues of the banks and financial institutions.

II. The High Court must insist that before availing remedy under Article 226 of the Constitution a person must exhaust the remedies available under the relevant statutes.

III. It is true that the rule of exhaustion of alternate remedy is rule of discretion and not one of compulsion, but it is difficult to fathom any reason why High Court should entertain a petition under Article 226 and pass interim order ignoring the fact that petitioner can avail effective alternative remedy by filing application, appeal, revision etc. and the particular legislations contain a detailed mechanism of redressal of his grievance.

7. Filing of Writ petition under Article 226 of Constitution 

Writ jurisdiction is an extraordinary jurisdiction of the High Court under Article 226 and 227 of the Constitution of India. There is consistency in the decisions that the High Court normally hesitates to entertain writ petition in the matter of Sarfaesi action by banks. This is in view of clear cut alternative remedy provided u/s. 17 and 18 of the Sarfaesi Act. The remedy of appeal to DRTand DRAT is available u/s. 17 and 18 of the Act, against notice for possession and enforcement of security interest.

It is settled legal preposition that a writ petition under Article 226 of the constitution is not maintainable, where there is an efficacious alternative remedy. It is generally pleaded that though alternative remedy is available, it is not efficacious.

The writ petition is however preferred by the borrower for the following reasons:-

a. Writ petition is not a costly affair, as no court fee is payable, whereas court fee has to be paid in case of appeal to DRT depending upon amount involved.

b. Writ petition once admitted takes lot of time in consideration for decision and the petitioner gets the desired breather. In comparison the matter is time bound exercise under DRT.

c. Borrowers feel that the action under the Sarfaesi Act will be automatically restrained if writ is admitted.

8. Classification of NPA can be questioned through writ 

Where the Bank is not correct in classifying the account as NPA, which is preliminary to initiate proceeding under the provisions of Sarfaesi Act, the High Court does interfere with the action initiated by the bank as held in Sravan Dal Mill Pvt. Ltd. v/s Central Bank of India1. Further interim relief may be granted to the borrower to regularise the account by continuing making payments.

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