SARFAESI Act 2002 – Issues

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 empower Banks/Financial Institution to recover their non performing assets without intervention of the court.

• SARFAESI Act 2002 is not Applicable in J & K .
• Court Verdict This Act is State Concern.
• Supreme Court verdict SARFAESI Act cannot override Rent Control Law.
• Process of Selling Properties and Calculation of Pricing.
• Misuse of This Act by Banks /Financial Institution.
• Classification of NPAs
• Debt Recovery Tribunal – Effective Measures

Supreme Court verdict SARFAESI Act cannot override Rent Control Law -

SARFAESI Act cannot override Rent Control Laws; Tenants cannot be evicted using provisions of SARFAESI Act: Supreme Court

A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act as that would amount to stultifying the statutory rights of protection given to the tenant. A non obstante clause (Section 35 of the SARFAESI Act) cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act, the Court said.

In a significant ruling, Supreme Court of India has held that the provisions of the SARFAESI Act cannot override the provisions of the Rent Control Act. Apex Court Bench comprising of Justices V. Gopala Gowda and Amitava Roy, in Vishal N. Kalsaria vs. Bank of India, said that non obstante clause as in section 35 of the SARFAESI Act cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act. Context The Appellants were the tenants occupying the property mortgaged in the Bank. Since the landlord defaulted payment of dues, the Bank proceeded under SARFAESI Act, and the Magistrate allowed the application of the bank seeking possession of the mortgaged properties which are in actual possession of the Appellant.

The Appellants approached Small causes court and the court passed an interim injunction against obstructing the possession of the appellant over the suit premises during the pendency of the suit. The Appellants, as interveners, then filed an application as an intervener to stay the execution of the order of Magistrate which was refused. Relying on ‘Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd.’, the Magistrate held that when the secured creditor takes action under Section 13 or 14 of the SARFAESI Act to recover the possession of the secured interest and recover the loan amount by selling the same in public auction, then it is not open for the Court to grant an injunction under Section 33 of the Rent Control Act. The Magistrate also held that order passed in Rent suit cannot be said to be binding upon bank. The tenants approached Supreme Court. SARFESI Act cannot override Rent Control Laws

The Apex Court held that a landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Control Act, more so when the two legislations, that is the SARFAESI Act and the Rent Control Act operate in completely different fields. Rejecting the contention of the Bank that the SARFESI Act override provisions of Rent Control Act, the Court said that if it were to be accepted, it would render the entire scheme of all Rent Control Acts operating in the country as useless and nugatory since tenants would be left wholly to the mercy of their landlords and in the fear that the landlord may use the tenanted premises as a security interest while taking a loan from a bank and subsequently default on it. A landlord would simply have to give up the tenanted premises as a security interest to the creditor banks while he is still getting rent for the same. In case of default of the loan, the maximum brunt will be borne by the unsuspecting tenant, who would be evicted from the possession of the tenanted property by the Bank under the provisions of the SARFAESI Act.

 Under no circumstances can this be permitted, the Bench said. Harshad Govardhan Sondagar case misinterpreted The Court also said that decision in Harshad Govardhan Sondagar case cannot be understood to have held that the provisions of the SARFAESI Act override the provisions of the Rent Control Act, and that the Banks are at liberty to evict the tenants residing in the tenanted premises which have been offered as collateral securities for loans on which default has been done by the debtor/landlord. The Court said ‘Random sentences have been picked up from the judgment and used, without any attempt to understand the true purport of the judgment in its entirety’ In Harshad Govardhan Sondagar case, the Apex Court had held that where, however, the lawful possession of the secured asset is not with the borrower, but with the lessee under a valid lease, the secured creditor cannot take over possession of the secured asset until the lawful possession of the lessee gets determined. Tenant can only be evicted under Rent Control Laws.

 The Court also observed that tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act. A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act as that would amount to stultifying the statutory rights of protection given to the tenant, the Bench said. The Court also said that in view of the Rent Control Act, the onus to get such a deed registered is on the landlord and hence neither the landlord nor the banks can be permitted to exploit the fact of non-registration of the tenancy deed against the tenant. Section 35 SARFESI Act only extends to Laws operating in same field. A non obstante clause (Section 35 of the SARFAESI Act) cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act. The expression ‘any other law for the time being in force’ as appearing in Section 35 of the SARFAESI Act cannot mean to extend to each and every law enacted by the Central and State legislatures and It can only extend to the laws operating in the same field, the Court held.

SARFAESI Act 2002 is not Applicable in J & K -

State Bank of India- has filed a Special Leave Petition in the Supreme Court challenging a judgment of the J&K High Court on Sarfaesi Act 2002. The J&K High Court had ruled that the Parliament-enacted Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002 was not applicable to Jammu and Kashmir.

"The HC erred in holding that Sarfaesi Act adversely impacts the inherent natural and constitutional right of the state subjects. There cannot be any inherent natural and constitutional right to take a loan from a bank and decline to repay the same," the SBI pleads in its petition.

 According to the bank the purpose behind Sarfaesi Act was to “empower secured creditors to take measures for recovery of their dues without the intervention of courts or tribunals and help reduce their non-performing assets (NPAs).”

"Parliament has the power to enact this special provision, that is Sarfaesi Act, because recovery of dues is an essential function of any banking institution and in exercise of its legislative powers the Parliament can provide a mechanism by which loans can be recovered," the bank pleads in its petition.

 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the Sarfaesi Act) is an Act of the Parliament of India. It allows banks and other financial institution to auction residential or commercial properties to recover loans.

 A senior SBI official informed Greater Kashmir that the bank filed the petition seeking revision of JK High Court order as the Parliament had enacted Sarfaesi Act to enable the banking industry tackle delay in recovery of loans.

 “The Act allows banks to recover debts by taking possession of secured assets and sell them without intervention of tribunals or courts in other parts of the country. However, in Jammu and Kashmir, the banks are finding it difficult to recover loan amounts due to non-applicability of the securitization Act,” he said.

 “Parliament had specifically provided that all transfer of properties under the Sarfaesi Act would be appealable before the District Judge or the high court to protect state subjects' interests in their properties,” SBI pleaded before the Supreme Court.

 Interestingly banks- both private and public sector - have been pressing for applicability of SAFAESI Act in the state.

 However, the Jammu and Kashmir HC ordered in the petition filed earlier before it that SARFAESI Act cannot be extended to state.

 A division bench of the High Court comprising Justice M H Attar and A M Magrey had held in the 76-page judgment earlier this year that any law made by the Parliament which affects the laws made by State legislature cannot be extended and applied to J&K.

 "The State of J&K would be at liberty to enact law similar to that of SARFAESI Act for securing the interests of the banks and financial Institutions," it observed.

"Article 35(A) of the Constitution of India, which has been applied to the State of J&K clarifies the already existing constitutional and legal position and does not extend something new to state of J&K," the bench held, observing that Article 35-A was only a clarificatory provision to clear the issue of constitutional position obtaining in rest of country in contrast to J&K.

 "This provision clears the constitutional relationship between people of rest of country with people of J&K. It is in essence an information to the citizens of rest of country that on constitutional and legal plank they in all respects do not constitute a class with citizens of J&K," the court had said and held that the J&K citizens have their own constitution and their sovereign character which cannot be challenged, altered or abridged.

 Meanwhile, a bench of Justices J S Khehar and R Banumathi issued notice to the writ petitioners, mainly traders from Jammu and Kathua, who had successfully challenged the application of Sarfaesi Act to the residents of J&K.

 Conclusion -   Govt Must scrutinize this Act. Banks & Borrowers both in hot cup.

By Ajay Kumar