Impediments in recovery of non-performing assets

By MR Umarji, Partner, Alliance Corporate Lawyers ET 2 July 2014

The apex court has reiterated the need to protect the interest of borrowers, and emphasized that the exercise of extraordinary powers of recovery. 

Recently, there have been some judicial pronouncements by the apex court determining the scope of powers of enforcement of securities without the intervention of the courts, by the banks and FIs under the SARFAESI Act. The apex court has reiterated the need to protect the interest of borrowers, and emphasized that the exercise of extraordinary powers of recovery, by banks and FIs must be in compliance with the provisions of the SARFAESI Act.

In the case of Harshad G Sondagal vs IARC, the SC has held that borrower/mortgagor can lease the property over which security interest is created and in such cases, the lessee is entitled to remain in possession of the property for the period of the lease which is registered and such lessee cannot be dispossessed by the district magistrate or chief metropolitan magistrate under Section 14 of SARFAESI Act.

Inspite of earlier judgments of the SC that the procedure under Section 14 of the SARFAESI Act before the DM/CMM for getting possession of secured assets is administrative proceeding, the apex court held that rights of lessee of mortgaged properties will be decided by the DM/CMM. Banks are already facing a problem of inordinate delays in the office of DMs/CMMs in the matter of repossessing secured assets and the SC judgment will result in delays in recovery or defaulted loans, on account of DM/CMM being required to conduct quasi-judicial proceedings for deciding rights of tenants and lessees of mortgaged properties.

In terms of rule 8 & 9 of the Security Interest (Enforcement) Rules, 2002, before selling a mortgaged property a public notice of 30 days has to be given. In the case of Vasu P Shetty v. Hotel Vandana Palace, the SC considered whether a public auction with notice of less than 30 days is valid, in view of earlier failed auction for which adequate notice of 30 days was given as also failed OTS proposal given by the borrower.

The SC held that delaying tactics adopted by the borrower would not amount to a waiver of requirement of notice of 30 days as well as other requirements of settling terms of sale by private treaty between the parties, notice of sale to be published in a vernacular language newspaper and obtaining fresh valuation prior to conducting the sale. The effect of this judgment is that even in cases where repeated auctions are required to be held on account of delaying tactics adopted by the defaulters, the requirements of minimum notice of 30 days and other formalities have to be complied with by banks/FIs.

In the case of J Rajiv Subramaniyan v. M/s Pandiyas, the SC considered the validity of sale of secured assets by private treaty without the consent of the borrower and in violation of rules 8(5) (valuation of property), 8(6) (notice of 30 days) and held that such sale is unconstitutional. The apex court pointed out that the provision contained in Section 13(8) of the SARFAESI Act, 2002 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.

Therefore, the secured creditor as a trustee of the secured assets can not deal with the same in any manner it likes and such an asset can be disposed of only in the manner prescribed in the SARFAESI Act, 2002. It is clear that compliance with directions issued by the apex court will result in delays in recovery actions and the finance ministry, therefore, needs to consider following amendments to the SARFAESI Act and the Rules, to facilitate speedy recovery of NPAs:

> Amend Section 17 of the Act empowering DRTs to decide rights of lessees or tenants or any other person claiming rights in the mortgaged properties and pass orders to protect their rights. The SARFAESI Act also needs to be amended to declare that notwithstanding anything contained in any other law, the borrower cannot sell, lease or deal with any property over which security interest is created without the consent of the secured creditor, except sale of its products or services.

> In cases of sale by private treaty a notice shall be given to the borrower to obtain a better offer within the time specified failing which the secured creditor can proceed to sell the property.

> In cases where the borrower has been given notice of 30 days for public auction of secured assets and such auction fails any subsequent auction can be held with shorter notice of 15 days instead of 30 days.

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