Introduction
The Act was introduced to grant banks and financial institutions the authority to recover their promised funds in cases of non-performing assets without involving the courts. It stemmed from recommendations made by the Narasimham and Andhyarujina committees, appointed by the central government, aiming to curtail the prevalent defaulting in payments and subsequent losses faced by lending institutions. It facilitates the issuance of security receipts and the securitization of financial assets, ensuring comprehensive record-keeping of all securities. It empowers secured creditors to enforce their security interests without court intervention in the event of loan repayment default. Additionally, it seeks to enable institutions to auction off properties to recoup funds from the sale, with any excess amount returned to the debtor. Banks and financial institutions can exercise these rights by sending a notice to the debtor for the repayment of defaulted payments within a limited 60-day timeframe. If the repayment remains outstanding, the banks can proceed with the sale after taking possession of the property. Furthermore, the Act was revised in 2013 to include cooperative banks within its purview, expanding the category of institutions benefiting from its provisions.
Is It Applicable To The Enforcement Of The Pledge?
A pledge is a process wherein an individual entrusts the possession of their property to an institution as collateral for a loan that is to be granted. However, when it comes to enforcing security in the case of a pledge, the provisions of the SARFAESI Act do not apply.
- Section 31 of the act explicitly states that the enforcement of pledge of movable assets is not covered by its provisions. The SARFAESI Act is specifically designed to enforce security interests over movable or immovable properties, particularly in relation to mortgages and hypothecation.
- The primary requirement for enforcing security under the SARFAESI Act is to first take possession of the property to sell in the event of non-performance of assets. In the case of a pledge, the grantor of the loan is already in possession of the property, and their right of sale is governed by the Indian Contract Act of 1872. Therefore, the applicability of the SARFAESI Act’s provisions is not needed when it comes to pledges of securities.
In the case of Royal Lawns and Others v. Nainital Bank Ltd., it was observed that when the borrower failed to repay the loan, the respondent bank attempted to invoke the provisions of the SARFAESI Act, 2002 through a writ petition. However, the court ruled that certain categories of assets described under Section 31 of the act are not subject to the applicability of the SARFAESI Act. The excluded categories are as follows:
- Lien on goods as described in the Indian Contract Act, 1872.
- Security creation concerning aircraft.
- Security interest created in any kind of vessel as described under the Merchant Shipping Act.
- Situations where no interest has been created, such as cash sales. In cash sales, the buyer pays the full purchase price upfront in cash, and no credit or loan terms are involved.
- Any security interest exceeding the value of the assets of 1 lakh rupees.
- Security that is created on agricultural land.
- Cases where the due amount is less than 20% of the overall principal amount, including interest.
Conclusion
In essence, the act plays a major role in promoting financial discipline and having a systematic credit system all over India, it also safeguards the interests of borrowers by incorporating provisions for an opportunity to be heard and raising objections before the enforcement process, ensuring a fair and transparent procedure. This balance between creditor rights and debtor protection lends credibility to the SARFAESI Act, fostering a conducive environment for investment and lending activities in the financial market.
This article is written and submitted by Divya Golay during her course of internship at B&B Associates LLP. Divya is a BBA.LLB 3rd Year student at National Law University, Shimla.
