Everything You Need to Know About SARFAESI Act

What is the SARFAESI Act?

The SARFAESI Act 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 for matters connected with or incidental to such regulation and enforcement,” according to the official website.

SARFAESI Full Form 

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 banks in India have been granted the authority to take possession of the security provided by the defaulting borrower against the loan and sell it to recover losses, without the need for intervention by a court of law.

This provides banks with a mechanism to significantly reduce their non-performing assets (NPAs). The statute is referred to by its abbreviated title, the SARFAESI Act, or simply SARFAESI.

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 thereto.” The SARFAESI Act 2002, which went into effect on June 22, 2002, was later expanded to include the whole nation.
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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 in a fair and impartial manner.

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, with the exception of 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 are required to follow a set of 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 day on which the order was issued.
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Once the bank has taken ownership of the property, it can sell it or lease it out to another party. It may also transfer ownership of the property to a third party if it chooses. The earnings from the sale 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 a significant amount of paperwork. Furthermore, the bank is not responsible for ensuring that the property is abandoned for sarfaesi act RBI. As a result, even after you have purchased the home, the prior owners may continue occupying the premises.

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.

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 pursuant to 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.
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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.

In the case of S Karthik against N Subhash Chand Jain, the appellants were the guarantors for a loan that the borrower had obtained from a bank, and the court upheld their position. However, when the borrower was unable to pay back the loan, the bank began selling the mortgaged property to reclaim the money owed.

The Chennai Debt Recovery Tribunal, on the other hand, ordered a halt to the proceedings. On the other hand, 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 the notice should not have been issued.
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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.

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 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.

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.

“The sarfaesi act bare act was adopted with the intent of facilitating securitization and permitting banks and financial institutions to take custody of securities and sell them without the need for 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.

The Punjab and Haryana High Court ruled on August 25, 2021, that banks can recover property under the SARFAESI Act. The Punjab and Haryana High Court has ruled that 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, according to the court’s ruling.

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.

The High Court had 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.

“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 sarfaesi act temporary order has a restricted scope of application and activities. In addition, this court, in the interim order itself, has provided the authority to the authorities involved to approach this court with specific cases for any clarifications, if any hardship has been or is being created as a result of the temporary arrangement” the court said.

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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