SARFAESI Act, 2002

Objective

• SARFAESI Act empower banks and financial institutions to recover their non-performing assets (NPAs) efficiently.
• Allows them to enforce the security interest without judicial intervention.
• Examples: SBI auction sarfaesi​ , BoB auction sarfaesi​, etc

Key Features

1. Scope:
   • Applies to secured loans where security is charged to the bank (e.g., hypothecation, mortgage).
   • Not applicable to unsecured loans or agricultural land.
2. Powers under SARFAESI:
   • Securitization: Converting loans into tradable securities.
   • Asset Reconstruction: Acquiring NPAs and restructuring them for recovery.
   • Enforcement of Security Interest: Taking possession of assets and selling them to recover dues.
3. Eligibility for Action:
   • Account must be classified as NPA under RBI norms.
   • Outstanding loan amount should be More than Rs. 1 Lakh (or as per the Act’s latest guidelines).
   • Dues must be Greater than 20% of the principal loan and interest.

Process of Recovery under SARFAESI Act

1. Demand Notice:
   • Bank issues a 60-day demand notice to the borrower to repay dues.
2. Borrower’s Rights:
   • Borrower can respond to the notice or raise objections within the notice period.
3. Possession of Assets:
   • If dues are not settled, the bank takes possession of the secured assets.
4. Auction or Sale:
   • Bank auctions or sells the assets to recover dues after proper public notice.

Key Entities under SARFAESI

1. ARC (Asset Reconstruction Companies):
   • Specialized institutions to acquire and manage NPAs from banks.
   • Regulated by RBI.
2. Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI):
   • Established to prevent multiple loans against the same property.
   • Maintains a registry of all security interests created by banks.

Advantages of SARFAESI

• Speeds up the recovery process without going through courts.
• Reduces NPAs, improving financial stability of banks.
• Provides legal tools for asset reconstruction.

Limitations of SARFAESI

• Not applicable for unsecured loans or smaller loan amounts.
• Borrowers may challenge the process in Debt Recovery Tribunals (DRT), causing delays.
• Requires strict adherence to procedural norms, else actions may be declared invalid.

1. National Company Law Tribunal (NCLT)

Purpose:

• Handles matters related to company law and corporate insolvency resolution under the Insolvency and Bankruptcy Code (IBC), 2016.

Key Functions:

• Deals with insolvency cases for companies and limited liability partnerships (LLPs).
• Facilitates restructuring, mergers, and amalgamations.
• Resolves disputes between shareholders and companies.

Process in NCLT:

• A company or creditor files an application for insolvency resolution.
• NCLT appoints an Interim Resolution Professional (IRP).
• The IRP works with creditors to resolve the issue, or the company goes into liquidation.

Advantages:

• Faster resolution of disputes compared to traditional courts.
• Focused approach to insolvency and company-related issues.

2. Debt Recovery Tribunal (DRT)

Purpose:

• Special tribunal to recover debts owed to banks and financial institutions by individuals or entities.

Jurisdiction:

• Handles cases where the debt exceeds Rs. 20 Lakhs.
• Works under the Recovery of Debts and Bankruptcy Act (RDBA), 1993.

Key Features:

• Focuses on recovery of secured and unsecured loans.
• Does not allow counterclaims unless directly related to the recovery.
• Provides quicker recovery mechanisms for financial institutions.

Process in DRT:

• Bank or financial institution files an application for recovery.
• Tribunal hears the case and issues recovery certificates.
• The recovery officer enforces the tribunal’s order to recover dues.

Advantages:

• Streamlined process compared to civil suits for debt recovery.
• Less expensive and time-consuming for banks and financial institutions.

3. Civil Suit

Purpose:

• Legal proceedings initiated in a civil court to resolve disputes between individuals, companies, or organizations.

Scope:

• Covers a wide range of disputes, including contracts, property, family matters, and recoveries not falling under specialized laws like SARFAESI or IBC.

Key Features:

• Can be filed for both small and large claims.
• Allows counterclaims and broader remedies like compensation or injunctions.
• Time-consuming due to procedural formalities.

Process in a Civil Suit:

• Plaintiff files a suit in a competent civil court.
• Defendant is notified and given an opportunity to respond.
• Case proceeds with evidence and hearings.
• Judgment is passed, which can be appealed if necessary.

Disadvantages:

• Comparatively slower than NCLT or DRT.
• High litigation costs over time.

Comparison Table

When to Use

• NCLT: For insolvency resolution or corporate disputes involving companies/LLPs.
• DRT: For recovering large debts owed to banks or financial institutions.
• Civil Suit: For broader disputes not covered under specialized laws like IBC or SARFAESI.

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