SARFAESI Act of 2002: Guide to Asset Recovery and Financial Security in 2024

The full form of the SARFAESI Act is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. SARFAESI was passed in 2002. This act manages how financial assets are turned into securities and rebuilt. It also ensures security interests are enforced and sets up a central database for security interests on property rights. It covers all related matters or incidental to such regulation and enforcement.

Under the SARFAESI Act of 2002, banks in India have been granted the authority to take possession of the security given by the borrower who doesn’t pay the loan and sell it to recover money without the need for intervention by a court of law. SARFAESI compliant means following the guidelines and regulations set forth by the SARFAESI Act of 2002. 

SARFAESI Auction Meaning

SARFAESI auction refers to the process of selling assets that have been seized by banks or financial institutions under the SARFAESI Act, 2002. This act allows banks to recover non-performing assets without the intervention of courts by taking possession of the secured assets and auctioning them to recover the outstanding loan amounts.

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History of The SARFAESI Act, 2002

The SARFAESI Act, 2002, was passed by the government in 2002 to provide financial institutions with a safety net in the event of failure. Among other things, the legislation gives banks the ability to seize ownership of and auction off the security against a loan in the event of a failure by the borrower.

The SARFAESI Act, 2002, is defined as "an act to regulate the securitization and reconstruction of financial assets, as well as the enforcement of security interests, and to establish a central database of security interests created on property rights, as well as matters connected with or incidental to it." The SARFAESI Act 2002, which went into effect on June 22, 2002, was later expanded to include the whole nation.

Sarfaesi Act: Applicability

The SARFAESI Act primarily allows for legal redress in the following areas of law:

• Companies engaged in asset reconstruction must be registered.
• A financial asset is acquired via the acquisition of rights or interests.
• Therefore, measures should be taken to rebuild assets.
• Disputes are resolved fairly and impartially.

What is SARFAESI-compliant property?

The SARFAESI Act applies to any asset, moveable or immovable, delivered as security through hypothecation, mortgage, or the creation of a security interest in any other manner, except those excluded under Section 31 of the Act.

What are the assets not covered under SARFAESI Act?

The SARFAESI Act applicability does not apply under the following circumstances-

• NPA loan accounts that amount to under 20% of the principal and interest. 
• Any hire-purchase, sale, lease, or other conditional agreement in which a security interest has not yet been created.
• Any real estate covered by Section 60 of the Code of Civil Procedure from 1908 that is not subject to attachment or sale.
• Any seller's unpaid-seller rights under Section 47 of the 1930 Sale of Goods Act.
• Security or money issues under the Indian Contract Act or Sale of Goods Act of 1930.

Procedures Under the SARFAESI Act

Banks must follow procedures before taking possession of a property and using it to recover their debts. They work under the SARFAESI Act procedure, a federally mandated method.

A borrower who cannot repay their loan (including house loans) for six months has the legal right to request that the bank send them a notice informing them of the need to settle the debt within 60 days for the sarfaesi act procedure. If the borrower cannot satisfy this obligation, the financial institution has the authority to sell the property to collect the outstanding debt.

If a person in default feels that the bank's order has violated their rights, they may file an appeal with the appellate body established by law within 30 days of the order being issued.

Once the bank owns the property, it can sell it or lease it to another party. It may also transfer ownership of the property to a third party if it chooses. The sales earnings are used to pay down the bank's existing debts, which are the first to be satisfied. If there is any money left over after all of this, it is given to the defaulting borrower.

What If You Are Buying a Bank Auction Property?

Even though the bank auctions the property, the bank may not be the legal owner of the property. This implies that the buyer will be required to complete significant paperwork. Furthermore, the bank is not responsible for ensuring the property is abandoned for the Sarfaesi Act RBI. As a result, even after you have purchased the home, the prior owners may continue occupying the premises.

Role of SARFAESI Act, 2002

The SARFAESI Act of 2002 is a law in India. It helps banks recover their money when people or businesses don’t pay their loans. Here is how it works: 

1. Loan Trouble: When someone doesn’t pay their loan, the bank can take their property. 
2. Warning: The bank gives a warning to pay the loan back.
3. Taking Property: The bank can take the property if the loan is unpaid.
4. Selling Property: The bank can sell the property to return the money. 

Objectives of SARFAESI Act, 2002

Here are the objectives of the SARFAESI Act 2002:

1. The main goal is to help banks recover their money quickly when someone doesn’t repay a loan. This way, banks can sell things like houses or cars that were promised as a guarantee to get the money. 
2. The act helps banks save time and money. Banks can get their money back faster instead of waiting for a long time and spending lots of money in court. 
3. The act tries to be fair to banks and people who borrow money. It allows banks to take back things if loans aren’t paid, but it also offers borrowers some rights to challenge it if they think it’s unfair. 
4. Helping banks recover their money quickly keeps banks healthy and robust. 
5. The act encourages people to pay back their loans on time. If they know the bank can quickly take back things if they don’t pay, they are more likely to be responsible with their payments. 

How Does the SARFAESI Act of 2002 Work?

Here’s how the SARFAESI Act of 2002 works:

1. When someone stops paying back their loan, the bank gets worried. If they miss payments for a while, the loan is called a Non-Performing Asset(NPA).
2. The bank sends a letter to the person who took the loan. The letter says how much money they owe and tells them they have 60 days to pay it back. It also explains what might happen if they don’t play.
3. The person who took the loan has three choices:
   • Pay back the loan
   • Talk to the bank
   • Disagree with the bank
4. If the person doesn’t pay back the money or make a new plan with the bank within 60 days, the bank can take action. The bank doesn’t need to go to court to do this. They can take and sell the borrower’s property to get their money back.

Formation of SARFAESI Act, 2002

The SARFAESI Act of 2002 was made to help banks and financial companies in India:

1. Take care of loans and money problems. 
2. Make rules for getting back money when people don’t pay their loans.
3. Handle other related matters. 

This law applies to all of India. In 2016, the law was updated to make it better. It also changed four other laws to help with these rules:

1. SARFAESI Act, 2002: Helps banks get back their money. 
2. Recovery of Debts Act, 1993: Helps banks collect money people owe them. 
3. Indian Stamp Act, 1899: Deals with stamps needed for legal documents. 
4. Depositories Act, 1996: Manages how shares and securities are stored.  

Key Amendments To The SARFAESI Act, 2002

The SARFAESI Act 2002 has been changed to improve it and help banks get their money back faster. Here are some key amendments made in 2016:

1. Banks can now clearly take the promised property if the loan is not paid back. This makes the rules clear and easy to follow. 
2. Banks can turn some of the money they owe into shares of the borrower’s company. This means the bank can become a part-owner of the company. This can help companies that are having money problems. 
3. Before, banks couldn’t buy the property they were selling to get their money back. Now, if no one else wants to buy, banks can buy the property themselves. This helps banks get a fair price and lose less money. 
4. There were not enough judges in the special courts to handle these cases, which slowed things down. The new rules let judges from other courts help, so cases get solved faster. 

Borrwer's Right Under SARFAESI Act, 2002

The SARFAESI Act of 2002 helps banks get their money back and gives necessary rights to people who borrowed money. Here are some rights of borrowers under the SARFAESI Act 2002:

1. Right to Notice: Borrowers must get a written letter from the bank before the bank takes any action. The notice tells them how much money they owe and what will happen if they don’t pay. 
2. Right to Repay: Borrowers can pay back all the money they owe within the time given in the letter to stop the bank from taking action. 
3. Right to Negotiate: Borrowers can talk to the bank to make a new plan to pay back the money or settle the debt immediately. This can help them avoid losing their property.
4. Right to Challenge the Notice: If borrowers think the bank made a mistake, they can tell a special court called the Debt Recovery Tribunal(DRT). They can do this if they believe the bank’s numbers are wrong or there are other problems.
5. Right to Fair Value: Borrowers have the right to ensure their property is valued before the bank sells it. If they think the value is too low, they can say so. 

Recovery Method Under SARFAESI Act, 2002

Here are the methods of recovery under SARFAESI Act 2002:

1. Securitisation: Banks can change loans into things they can sell to other people. They make a group of loans and sell them to get cash quickly. This helps the bank get money right away and lend more to others. 
2. Asset Reconstruction: Special companies can take over the borrower’s business. They can sell the business, buy it, or change how the borrower pays back the loan. This helps recover some money from unpaid loans. 

Enforcement of Security: If someone doesn’t pay their loan, the bank sends them a letter asking them to pay within 60 days. If they still don’t pay, the bank can take their property, like a house or car. The bank sells the property to get back the money they lent.

Notice Time Under The SARFAESI Act

According to the Supreme Court, if a borrower interferes with a property sale under the SARFAESI Act, a new 30-day notice is not required.

Supreme Court Ruling on 30-Day Notice Under SARFAESI Act

The 25th of September in the year 2021: A new 30-day notice to the owner is not required if the sale of a mortgaged property under the SARFAESI Act is hampered by the borrower's actions during the 30-day notice period, the Supreme Court held in its decision in the S Karthik versus N Subhash Chand Jain case, which was heard on March 6, 2018.

Borrower's Legal Remedies Cannot Halt SARFAESI Act Proceedings

While dismissing a special leave petition filed by the borrower for a stay order against Sarfaesi Act, the Supreme Court held that a litigant could not be granted permission to halt the proceedings under the SARFAESI Act if he was pursuing a variety of legal remedies to thwart the ongoing proceedings and defeat the very purpose of the law in the first instance.

S Karthik vs. N Subhash Chand Jain: Loan Guarantors and Bank's Action

In the case of S Karthik against N Subhash Chand Jain, the appellants were the guarantors for a loan the borrower had obtained from a bank, and the court upheld their position. However, when the borrower could not repay the loan, the bank began selling the mortgaged property to reclaim the money owed.

Debt Recovery Tribunal’s Halt and Bank’s Sale of Mortgaged Property

The Chennai Debt Recovery Tribunal, on the other hand, ordered a halt to the proceedings. The bank sold the property after receiving a second notice of sale. The appellants argued in their petition that the notice issued by the bank for sale was in violation of Rules 8 and 9 of the SARFAESI Act and that it should not have been issued.

Violation of SARFAESI Act Rules 8 and 9 in Sale Notice

As a refresher, under Rule 9(1) of the SARFAESI Act pdf, the sale of immovable property may not be completed until the expiration of 30 days from the day on which a public notice for sale has been published in the media or a notice of sale has been served on the borrower. According to Rule 8, paragraph (6), the borrower must be issued a notice of 30 days before selling any immovable secured property.

SARFAESI Act: 30-Day Notice Rule and Borrower Rights

The bank has only provided the borrower ten days' notice in its selling notice, which is quite short for the sale of the mortgaged property under the Sarfaesi Act. In their appeal to the Madras High Court, the petitioners argued that the transaction was null and invalid and should be thrown out since the second sale notice could not be deemed a new notice but rather a continuation of the original one and, hence, should be thrown out. The HC eventually rejected the appeal.

Supreme Court Decision: No Need to Repeat 30-Day Notice

As part of its decision in the case, the Supreme Court stated that "because the first sale notice could not be held due to reasons that could only be attributed to the guarantors, there was no need to repeat the same procedure of providing a 30 days' clear notice," as the court explained in its order.

Purpose of SARFAESI Act: Enabling Banks to Repossess and Sell Assets

"The Sarfaesi act bare act was adopted to facilitate securitisation and permit banks and financial institutions to take custody of securities and sell them without judicial involvement. "If we examine the circumstances of the instant case, it becomes clear that every effort has been taken to frustrate the aim of the SARFAESI Act," the Supreme Court said in its decision.

Punjab and Haryana High Court Allows Property Recovery Under SARFAESI Act

The Punjab and Haryana High Court ruled on August 25, 2021, that banks can recover property under the SARFAESI Act. According to the court's ruling, financial institutions currently facing large-scale loan defaults due to the financial stress caused by the Coronavirus pandemic are permitted to repossess properties under various sections of the SARFAESI Act.

No Stay on SARFAESI Act Procedures for Loan Recovery Amid Pandemic

A stay on the procedures to be conducted by banks/financial institutions under Sections 13 and 14 of the SARFAESI Act has not been granted by this court." In addition, the court said that "no kind of temporary stay has been given in respect of the procedures to be taken by banks/financial institutions to collect the sum owed on account of auto loans and gold loan," the court stated.

Interim Injunction on Auction of Residential Properties During COVID-19

The High Court issued an interim ruling on April 28, 2021, which said that 'no bank or financial institution shall pursue action for auction in respect of any property of any citizen, person, party, or corporate entity until June 30, 2021.' But the court has now stated that the 'goal and purpose of issuing the interim injunction was only to pause the auction processes in respect of residential accommodations,' according to the statement.

Temporary Scope of SARFAESI Act Orders and Court Clarifications

"Despite the tough circumstances in which the people and the nation are finding themselves, the inhabitants of the domestic/residential units were not left homeless or subjected to greater hardship." As previously stated, the demand notice format under the Sarfaesi Act temporary order has a restricted scope of application and activities. In addition, in the interim order itself, this court has provided the authorities with the authority to approach this court with specific cases for any clarifications if any hardship has been or is being created due to the temporary arrangement," the court said.

SARFAESI Act Amendments: Assets Covered and Excluded Provisions

The sarfaesi act amendment applies to any asset, whether mobile or immovable, that is offered as security by means of hypothecation, mortgage, or the establishment of a security interest in any other manner, except for those assets that are specifically excluded under Section 31 of the Act. If you are seeking expert legal help, you will surely get the best assistance at NoBroker. Please leave a comment below this article, our executive will be in touch with you soon. 

Frequently Asked Questions About SARFAESI Act

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