Enforcement of Security Interest :
The ‘Enforcement of security interest’ is important for recovery of the bank’s bad loans. The special feature of the Act is that the security interest can be enforced without intervention of the courts, subject to certain procedures to be followed, like 60 days notice has to be served by the bank on the borrower with a request to discharge the loan liability. In case If borrower fails to discharge the liability, secured creditor can take possession of secured asset or other actions as per the provisions of the Act.
Security Interest:
Any right, title and interest of any kind of the property created in favour of any secured creditor is called as security interest. It includes any secured creditor and is called as security interest. Whenever any lender takes any security from the borrower the lender gets interest in that security.
While taking possession of the asset various precautions are required to be taken and if required the help of the Chief Metropolitan Magistrate or District Magistrate can be taken.
Special features:
Under certain circumstances properties cannot be attached, such as, (i) any security interest securing repayment of any financial assistance not exceeding `1 lakh. (ii) Security interest not registered under this Act. (iii) Any security interest created in agricultural land.(iv) A pledge of movables as per Section 172 of the Indian Contract Act.
No civil court has any jurisdiction under this Act. The Indian Limitation Act, 1963 is applicable to this Act.
Central Registry
The Central registry is set up for registration of securitization and reconstruction transaction and creation of security interest. Registration under other Acts are like;
(a) Registration Act, 1908 (b) Companies Act, 2013 (c) Patents Act, 1970 (d) Motor Vehicles Act, 1988. The registration under the SARFAESI Act is in addition to the respective registrations required in the above mentioned acts and/or any other Act.
The following items require registration under the SARFAESI Act:
1. Securitization of financial assets
2. Reconstruction of financial assets
3. Creation of security interests
The central registry record can be kept fully or partly on electronic form
Filing of details of securitization, reconstruction, creation of security interests is to be filed with the central registrar. The details in the prescribed form should be filed within thirty days after the date of transaction or the creation of security, by the securitization company, or the reconstruction company or the secured creditor. The prescribed fees are applicable for registration. The delay if any can be condoned by the central registrar for a period of next thirty days after the first thirty days prescribed subject to payment of fees as required. In case of modification of details registered with the central registrar, the modification also needs to be filed before the central registrar by the securitization company, or the reconstruction company or the secured creditor. The time period for modification is also like that of registration, i.e., the modification will have to be filed within thirty days in the prescribed forms with prescribed fees. The delay if any can be condoned by the central registrar for a period of next thirty days after the first thirty days prescribed subject to payment of fees as required.
The security interest registered with the central registrar is required to be satisfied on the payment of full amount by the borrower. The securitization company, or the reconstruction company or the secured creditor as the case may should report the satisfaction, within thirty days of payment in full or satisfaction of the charge. On receipt of the satisfaction charge the central registrar is required to cause a notice to be issued to the securitization company, or the reconstruction company or the secured creditor, calling upon to show cause within a period of fourteen days as to why the payment or satisfaction should not be recorded as intimated. If no cause is shown as required then the central registrar has to order that the memorandum of satisfaction should be entered in the central register. If any cause is shown accordingly a noting is recorded in the central register and should inform to the borrower accordingly.
Taking possession of property mortgaged / hypothecated to banks
In a recent case Supreme Court has observed that we are governed by rule of law in the country and the recovery of loans or seizure of vehicles could be done only through legal means. In this connection it may be mentioned that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002 framed there under have laid down well defined procedures not only for enforcing security interest but also for auctioning the movable and immovable property after enforcing the security interest. It is, therefore, desirable that banks rely only on legal remedies available under the relevant statutes which allow the banks to enforce the security interest without intervention of the Courts.
Where banks have incorporated a re-possession clause in the contract with the borrower and rely on such repossession clause for enforcing their rights, they should ensure that such repossession clause is legally valid, is clearly brought to the notice of the borrower at the time of execution of the contract, and the contract contains terms and conditions regarding (a) notice period to be given to the customers before taking possession (b) the procedure which the bank would follow for taking possession of the property and (c) the procedure which the bank would follow for sale / auction of property. This is expected to ensure that there is adequate upfront transparency and the bank is effectively addressing its legal and reputation risks.
Section 31 deals with provisions of this Act not to apply in certain cases. It provides that the provisions of this Act shall not apply to –
(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 (9 of 1872; or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 (9 of 1872);
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934 (24 of 1934);
(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958);
(e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;
(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930);
(g) any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5 of 1908);
(h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
(i) any security interest created in agricultural land;
(j) any case in which the amount due is less than twenty per cent of the principal amount and interest thereon.