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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) marked a transformative shift in India’s legal framework for the recovery of non-performing assets (NPAs). It empowers secured creditors, particularly banks and financial institutions, to enforce security interests without the need for court intervention. However, with great power comes necessary checks and balances. This article provides a comprehensive overview of the dispute resolution mechanisms, litigation process, execution proceedings, and possible challenges under the SARFAESI Act.

 The SARFAESI Framework: Key Provisions

1. Section 13(2): Initiation of recovery proceedings by issuing a demand notice to the borrower.
2. Section 13(4): Empowering the creditor to take possession of the secured asset upon default.
3. Section 17: Right of the borrower or aggrieved person to appeal to the Debt Recovery Tribunal (DRT).
4. Section 18: Right to appeal to the Debt Recovery Appellate Tribunal (DRAT).
5. Section 34: Bar on the jurisdiction of civil courts.

 The Borrower’s Right to Challenge

Upon receiving a demand notice under Section 13(2), the borrower has 60 days to repay the dues. If the creditor proceeds under Section 13(4), the borrower or any aggrieved person may file an application under Section 17 before the DRT, challenging the creditor’s action.

Procedure Before the Debt Recovery Tribunal (DRT)

1. Filing Application:
   1. Application under Section 17 to be filed within 45 days of the creditor’s action.
   2. Must be in the prescribed format with supporting documents.
2. Scrutiny and Admission:
   1. Registry checks for compliance; once admitted, the case is listed for hearing.
3. Notice and Reply:
   1. Notice is issued to the creditor to file a reply. The applicant may file a rejoinder thereafter.
4. Interim Relief:
   1. Interim protection (e.g., stay on possession or auction) may be sought. Granting of such relief is discretionary.
5. Hearing and Final Order:
   1. DRT conducts hearings and passes a reasoned order.
6. Timeline:
   1. The Act envisages disposal within 60 days, extendable to 4 months.

Post-Order Scenario: Appeal and Execution

1. Appeal to DRAT (Section 18):

1. Aggrieved parties may appeal within 30 days.
2. Borrowers must deposit 50% of the debt due (reducible to 25% at DRAT’s discretion).

2. Execution of DRT Orders:

1. The successful party may file an execution application under Section 19(22) of the RDB Act.
2. Recovery Officer executes the order through:
   • Possession of assets
   • Auction
   • Attachment of bank accounts or properties

Challenging Execution Proceedings

Affected parties can challenge execution in the following ways:

1. Objection to Recovery Officer:
   • Grounds: Non-compliance with rules, wrong identification of property, procedural lapses.
2. Appeal to DRT (Rule 11, Second Schedule of IT Act):
   • Objections rejected by the Recovery Officer can be appealed before the DRT.
3. Appeal to DRAT:
   • Orders passed during execution proceedings by DRT can be appealed to DRAT within 30 days.
4. Writ Jurisdiction:
   • High Courts may be approached in rare cases involving jurisdictional errors or gross violations of natural justice.

 Role of Civil Courts

Section 34 of the SARFAESI Act bars civil court jurisdiction in matters where DRT/DRAT is empowered to adjudicate. This ensures a streamlined recovery process but restricts broader equitable remedies.

Emerging Trends and Legal Insights

1. Natural Justice: Courts emphasize fair hearing and procedural compliance.
2. NPA Classification Challenges: Courts usually avoid interference unless there’s clear illegality.
3. Third-Party Interests: Increasing disputes involving tenants and bona fide purchasers.

 Strategic Takeaways

1. For Creditors: Ensure due process and documentation to withstand legal scrutiny.
2. For Borrowers: Act within statutory time limits and consult legal counsel promptly.
3. For Buyers in Auction: Conduct thorough due diligence before purchase.

Conclusion

While the SARFAESI Act provides a creditor-friendly mechanism for asset recovery, it also embeds checks to protect borrower rights. Understanding the litigation lifecycle—from initial creditor action to DRT proceedings, execution, and post-order remedies—is critical for all stakeholders involved in financial and recovery litigation.

By appreciating the detailed procedure and rights at each stage, litigants and advisors can navigate SARFAESI-related disputes with greater clarity and strategic foresight.

1. A minor is a person below the age of 18 years. The Reserve Bank of India, on May 6, 2014, issued a notification regarding the opening and operating minors’ accounts.

2. A minor of any age can open a savings/fixed/recurring bank deposit account through his/her natural or legally appointed guardian.

3. Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently, if they so desire. Banks may, however, fix limits in terms of age and amount up to which minors may be allowed to operate the deposit accounts independently.

4. Banks can also decide, in their own discretion, as to what minimum documents are required for opening of accounts by minors. Usually Pan Card details of the parent/ guardian are required. Also, the parent/guardian should have an account in the bank where they wish to open the minor’s account.

5. On attaining majority, the minor should confirm the balance in his/her account and if the account is operated by the natural guardian/legal guardian, fresh operating instructions and specimen signature of the erstwhile minor should be obtained and kept on record for all operational purposes.

6. Banks are free to offer additional banking facilities, such as, internet banking, ATM/debit card, cheque book facility etc., subject to the safeguards that minor accounts are not allowed to be overdrawn and that these always remain in credit.

7. The interest earned on the amount saved in minor bank accounts is taxable. Usually, the interest from a minor account is clubbed with the parent/guardian’s income and is considered taxable. Any income that accrues or is paid to a minor is added to the parent’s income under section 64(1A) and the parent will be taxed just like if it were their own income. However, if the interest earned is less than Rs. 1,500, then a tax exemption equal to the amount of interest earned is granted. If both the mother and father are earning, the income of the minor is added to the income of that parent whose income is greater.

Due to the over 60-day lockdown demanded by the Covid-19 pandemic, several businesses, especially the MSMEs, have suffered humongous monetary loss. In a developing country like ours, a res integra situation of the like, will only hamper and dampen the growing economy, leading to various disturbances amongst the people. Therefore, with a view to revive and strengthen the MSMEs, which are often regarded as huge contributors to the Indian economy, the President of India, promulgated The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2020, on the 5th day of June, 2020. Prior to the instant Ordinance, the Union Finance Minister, Ms. Nirmala Sitharaman, announced an economic package of 20,000 crores for the MSMEs and also a breather by the way of suspending Sections 7, 9 and 10 of The Insolvency and Bankruptcy Code, 2016. In furtherance of the same, the instant ordinance was promulgated by the President of India.
The instant Ordinance adds to The Insolvency and Bankruptcy Code, 2016, a new section, viz. Section 10A. This section states that no application can be made or preferred to initiate corporate insolvency resolution process against a corporate debtor, for a default which arises on or post the 25th day of March, 2020, for a term of six months or more, but not exceeding one year. It also states that corporate insolvency resolution process can never be initiated against a corporate debtor for his default which occurred during the said period. It insulates the corporate debtors, completely. This Ordinance does not apply to defaults or corporate debtors which arose prior to the 25th day of March, 2020. Therefore, financial and operational creditors can file applications thereby initiating corporate insolvency resolution process against the corporate debtor, only if the default arose before the said date.
Also, vide the instant Ordinance, a sub-section has been added, viz sub-section (3) of Section 66 of The Insolvency and Bankruptcy Code, 2016. This provision states that a resolution professional cannot file an application with respect to the default that arose after the 25th day of March, 2020.

Authored by:
Vishnu P.V
Advocate

In an economy wherein, transactions between suppliers and buyers are several and numerous, an instance might occur wherein the buyer of the goods or services, does not pay the agreed upon consideration or value of the goods or services availed by him, to the supplier. To insulate such a supplier, and also reprimand the buyer defaulting with his payments, an authority, namely, the “Micro and Small Enterprises Facilitation Council” was brought in by the Micro, Small and Medium Enterprises Development Act, 2006.

According to Section 15 of this Act, when a supplier, who is registered as a micro or a small enterprise, supplies any goods or renders any services to a buyer, the buyer must make the payment for the said goods or services, as the case maybe, on or before the date which is agreed to in writing by the parties, or if there is no such agreement, then before the appointed day, which is within 15 days from the day of acceptance or the day of deemed acceptance of the goods or services, as the case may be. Such period agreed to by the parties in writing, must not exceed 45 days from the day of acceptance or the day of deemed acceptance.

Section 16 of the Act states that, if the buyer fails to make payment of the amount to the supplier, as mandated under Section 15 of the Act, the buyer shall, irrespective of what is contained in any agreement between the supplier and the buyer, or in any law, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day, or as the case may be, from the date immediately following the date agreed to, at three times the bank rate notified by the Reserve Bank of India.

Section 18 of the Act states that, any party to a dispute can make a reference to the Micro and Small Enterprises Facilitation Council. The mode of settlement to be employed by the Facilitation Council shall be conciliation, an amicable method of Alternative Dispute Resolution. The Facilitation Council can either conclude the conciliation by itself or refer it to a suitable institution for the same. If the process of conciliation goes in vain, the Facilitation Council, shall then employ arbitration as the method of settlement of the dispute in hand. The arbitration proceedings can either be concluded by the Facilitation Council itself or referred to a suitable institution for the same. Such references of disputes by parties to the Facilitation Council, shall be adjudicated and decided within 90 days from the date of making such references.

Section 19 of the Act states that, if an order or decree, delivered in a dispute, by the Facilitation Council, either by way of conciliation or arbitration, is challenged by the aggrieved party (not being the supplier) by making an application to the Court, he must first deposit with it 75% of the amount decided by the Facilitation Council, in its order or decree. The Court shall order a percentage of such amount to be paid to the decree-holder, which shall depend on the facts and circumstances of the case.

Sub-rule (iv) of Rule 3 of the Karnataka State Micro and Small Enterprises Facilitation Council Rules, 2018, states that, the State Government may specify any fee and for processing charges paid while filing application.

Sub-rule (i) of Rule 7 of the Rules, provides that, an aggrieved Micro or Small Enterprise unit can move a reference to the Facilitation Council which has jurisdiction of the area, in the format provided as Schedule-1 of these Rules. The said reference must contain the Udyog Aadhar Memorandum (UAM) number, mobile number and e-mail address of the aggrieved Micro or Small Enterprise unit as provided in Schedule-1.

The Micro and Small Enterprises Facilitation Council is of much relief to the micro and small enterprises in our country, as it helps them to avoid the long delays and huge Court fees, in case they had to approach an ordinary Court of law, for the recovery of money.

Authored by:
Adv VISHNU P.V
Associate,
MENTO ASSOCIATES

Non-Performing Asset or NPA, is a term which is used to refer to a situation when the banks or financial institutions are unable to retrieve the principal or interest from the advances or loans made by them to the borrowers. The term was used extensively in the case of Dr. Vijay Mallya, as he could neither pay back the principal amount nor the interest accrued on the same, to the banks and financial institutions, which he had borrowed from. Let us now study the concept of a Non-Performing Asset (NPA) in brief.

Non-Performing Asset (NPA) is a kind of a loan wherein the principal amount or the interest amounts are paid late or have not been paid by the borrower to the lender. In other words, if the customers do not repay the principal amount and the interest amount, for a certain period of time, then such loans are considered as Non-Performing Assets (NPAs). Non-Performing Assets (NPAs) are Non-Performing Loans. For an asset to be classified as a Non-Performing Asset (NPA), it takes a period of 90 days for the banks to do so, in India. Until 2004, the stipulated period for classifying a regular or standard account as a Non-Performing Asset, was 180 days. The said period was modified from 180 days to 90 days, keeping in mind the international norms and rules on the concept of classifying a regular account as a Non-Performing Asset (NPA).

Non-Performing Assets (NPAs) are classified into four types, depending on the possibility and probability of their recovery, namely,
1) Standard Assets: These are a kind of performing assets which create continuous income and repayments as and when they become due. They carry a normal risk and are not Non-Performing Assets (NPAs) in the real sense. No special provisions are needed for standard assets.
2) Sub-Standard Assets: These are loans which are in the nature of Non-Performing Assets (NPAs) for a period of 12 months.
3) Doubtful Assets: Assets which are non-performing for a period of over 12 months, fall under this category.
4) Loss Assets: Assets which are incapable of being recovered by the lending institutions, fall under this category.

When the defaulter or borrower pays to the bank the sums due from his end, whether it is the interest accrued on the advance or the principal amount itself, the bank will modify or convert such a Non-Performing Asset (NPA) back to a regular or standard account. Therefore, for a Non-Performing Asset (NPA) to become good or a regular account, all the dues must be paid by the borrower to the bank. This concept of regularisation is an incentive, since it encourages the borrowers to clear their dues with the banks, and restore their advances as regular accounts.

Authored by:

Advocate VISHNU PV

Associate

The Reserve Bank of India on 7-5-14 gave a directive to banks not to levy any penalty for pre-paying floating loans. The floating loans include housing, corporate, vehicle and personal loans.

Prize chit means any transaction under which a person collects monies in one lump sum or in installments by way of contributions or subscriptions in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:-
(i) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in hand, whether or not the recipient of the prize or gift is under a liability to make any further payment in respect  of such scheme or arrangement ;
(ii) refunding to the subscribers or such of them as have not won any prize or gift, the whole part of the subscriptions, contributions or other monies collected, with or without any bonus, premium interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit.

The act bans prize chits and money circulation schemes or enrolment as members or participation therein. If any body indulges in such activities they shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both.

If an offence under this Act is committed by a Company, every person who, at the time the offence was committed was in charge of and was responsible to the  company for conduct of business of company as well as the company shall be liable for prosecution. The offences punishable under this act shall not be tried by a court inferior to that of a Chief Metropolitan Magistrate. All offences punishable under this act are cognizable offences

A police officer not below the rank of an officer in charge of a Police Station has the power to enter any premises connected with the promotion / conduct of any price chit or money circulation scheme, in contravention of provisions of this act. The Police Officer has also the power to search the said premises and the persons present there. He has the power to take into custody persons found in such premises and produce them before judicial magistrate. The Police Officer has also power to seize things used for such price chits or money circulation schemes.

If a newspaper contains any material connected with any price chit or money circulation scheme, the State Government has the power to forfeit the same.

Nothing contained in this act applies to price chits or money circulation schemes promoted by the Central Government, Company owned by a State Government, Banking Company and Charitable or Educational Institutions notified in this behalf by the State Government.

The provincial Insolvency Act, 1920, deals with the matters pertaining to insolvency in areas outside the presidency towns. As per this Act, the District courts have jurisdiction in matters pertaining to insolvency.

A debtor is said to have committed an act of insolvency in the following cases:

a. If he makes a transfer of all or substantially all his property to a third person, for the benefit of his creditors generally;

b. If he makes a transfer of his property to defeat or delay his creditors.

c. If he makes any transfer of his property, which would be void as fraudulent if he were adjudged as an insolvent.

d. If he departs or remains out of India with an intent to defeat or delay his creditors.

e. If he departs from his dwelling house or usual place of business or otherwise absents himself with intent to defeat or delay his creditors.

f. If he secludes himself so as to deprive his creditors of the means of communicating with him with intent to defeat or delay his creditors.

g. If any of his property has been sold in execution of the decree of any court for the payment of money.

h. If he petitions to be adjudged as an insolvent.

i. If he gives notice to any of his creditors that he has suspended payment of his debts.

j. If he is imprisoned in execution of the decree of any court for the payment of money.

k) If a creditor who has obtained a decree or order against a debtor for the payment of money, has served on him a notice, and the debtor has not complied with that notice within the period specified therein.

If a debtor commits an act of insolvency, an insolvency petition may be presented either by the creditor or by the debtor and the court may adjudge the debtor to be an insolvent.

A debtor is entitled to present an insolvency petition only if he satisfies the following conditions:
a. He should be unable to pay his debts and
b. His debts amounts to minimum five hundred rupees or
c. He is under arrest or imprisonment in execution of the decree of any court for the payment of any money or
d. an order of attachment in execution of such a decree has been made and is subsisting against his property.

After filing and admission of an insolvency petition, the court will issue notice to the respondents. The court while admitting an insolvency petition has the power to appoint an interim receiver for the property of the debtor or any part thereof and the interim receiver may take immediate possession of the property or part of the same.
 
The Court has the power to make interim proceedings against a debtor at the time of admitting an insolvency petition. These include:-
1) Ordering the debtor to give security for this appearance.
2) Order attachment of property in possession or under control of debtor.
3) Order a warrant for the arrest of debtor.

     The debtor shall on the admission of petition produce all books of  accounts, inventories of his property, list of creditors and debtors as may be required by the court.

In case of an insolvency petition presented either by the Creditor or the debtor, the court may dismiss the petition, if it finds suitable grounds for the same.If the court does not dismiss the petition, it shall make an order of adjudication and also shall specify in such order, the period within which the debtor shall apply for his discharge.

On the making of order of adjudication, the insolvent shall help in the realization of his property & distribution of proceeds among his creditors. The whole of the property of insolvent shall become divisible among creditors. An order of adjudication will be effective from the date of presentation of petition on which it is made.

DISADVANTAGES OF INSOLVENCY:
a.Social stigma to an insolvent.
b.Cannot become partner of a firm or director of a company.
c.Cannot enter into legal contracts.
d.The insolvent may not get credit until he is discharged.
e.Cannot contest elections or hold public offices.

In recent years many financial establishments not covered by the RBI Act 1934, have cropped up in various parts of India and especially Karnataka. Many of them received deposits from the public on the promise of high rates of interest and easy gains. Most of them have defaulted to return the deposits on maturity and thus cheated the public. Against this background the state of Karnataka enacted this piece of legislation.As per this act the government or the district Magistrate are empowered to attach properties of financial establishments on default of return of deposits. The district magistrate suo moto or on receipt of any complaint may cause investigation on fraudulent transaction done by a financial establishment.

The government may attach money or property acquired by a financial establishment or personnel assets of the promoters, partners, directors, managers etc of the said financial establishment if the government is satisfied that
a. the financial establishment has failed to return the deposit after maturity or on demand by depositors or
b.to pay interest or other assured benefits or
c. if the government is satisfied that such financial establishment is not likely to return deposits or to pay interest to the depositors.

After the attachment, such properties shall vest in the competent authority appointed by the government, who shall be an officer not below the rank of an assistant commissioner, pending further order from the special court. The competent authority shall within 30 days from the date of receipt of order apply to the special court for further order of attachment to make it absolute. The competent authority has vast powers in dealing with the assets under its custody.The Competent authority can even sell the movable and immovable properties of the Financial Establishment by Public auction or with the prior approval of the Special Court by private arrangements. Within 30 days from the date of its appointment, the Competent Authority shall assess the deposit liabilities and assets of the Financial Establishment and submit a report thereof to the special Court. It shall also issue notice to secured creditors and depositors to submit their claims with proper proof. The secured creditors and depositors shall submit their claim before the Competent Authority within 30 days from the date of notice. The Competent Authority shall thereafter make an application to the Special Court seeking permission to make payments to the depositors from out of the money realized.

If any Financial establishment fraudulently defaults any repayment of deposit on maturity along with any benefit, or fails to render service assured, every person responsible for the management of the business of such Financial establishment, shall on conviction be punished with imprisonment for a term which may extend to 6 years and with fine which may extend to one lakh of rupees and such Financial Establishment is also liable for a fine.For the purposes of this Act, the government may constitute one or more special courts. The Special court has vast powers regarding realization of assets and payment to the depositors. The acts of the competent authority are supervised and guided by the Special court. The special court has the powers to attach property malafidely transferred by the Financial Establishment.Any person, including the competent authority, if aggrieved by an order of the Special court may appeal to the high court within 30 days form the date of the order.

This is an interesting piece of legislation about which the general public does not have much awareness. The Act has a noble intention of prohibiting the charging of exorbitant interest by financiers and money lenders. An exorbitant interest is an interest at a rate more than what is fixed under section 28 of the Karnataka money lenders Act 1961. This amount to 15 % in case of secured loans and 18% in case of unsecured loans. Hence anybody charging interest more than the above rate is said to charging exorbitant interest.

As per the Act whoever charges exorbitant interest on any loan advanced by him shall be punishable with imprisonment for a term of which may extend to 3 years and also with a fine which may extend to Rupees 30,000/- .
A debtor may deposit the money due in respect of a loan received by him  from any person together with interest thereon into the court along with the petition to record that amount deposited is in full or part satisfaction of the loan including the interest thereon. The Court may after inquiry, pass order recording the satisfaction of the loan and interest therefore in full or in part as the case may be. The Court may, on a petition filed by the debtor for settlement of loan including the interest therefor, pass an order for the adjustment of the interest, if any, paid by the debtor, over and above the rate of interest fixed by the State Government towards the loan.

Where a debtor or any member of his family commits suicide and if it is shown that immediately prior to such suicide the debtor or any member of his family was subjected to molestation by any person, the person who has advanced loan shall, unless the contrary is proved, be deemed to have abetted the commission of such suicide