& Debts Recovery Law Manual
© Taxmann
Price : ` 1795
Law stated in this book is as amended upto 15th November, 2025
Published by : Taxmann Publications (P.) Ltd.
Sales & Marketing :
59/32, New Rohtak Road, New Delhi-110 005 India
Phone : +91-11-45562222
Website : www.taxmann.com
E-mail : sales@taxmann.com
Regd. Office :
21/35, West Punjabi Bagh, New Delhi-110 026 India
Printed at :
Tan Prints (India) Pvt. Ltd.
44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) India
E-mail : sales@tanprints.com
Disclaimer
Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom. It is suggested that to avoid any doubt the reader should cross-check all the facts, law and contents of the publication with original Government publication or notifications.
No part of this book may be reproduced or copied in any form or by any means [graphic, electronic or mechanical, including photocopying, recording, taping, or information retrieval systems] or reproduced on any disc, tape, perforated media or other information storage device, etc., without the written permission of the publishers. Breach of this condition is liable for legal action.
For binding mistake, misprints or for missing pages, etc., the publisher’s liability is limited to replacement within seven days of purchase by similar edition. All expenses in this connection are to be borne by the purchaser.
All disputes are subject to Delhi jurisdiction only.
Chapter-Heads
1.4-1
1.4-2
1.4-3
1.4-4
1.4-5
Cor por at e a ppli c a nt c a n fil e a ppli c ati o n f or i ns olve nc y r es ol uti o n e ve n i f Ba nks ar e c o nt e mpl ati ng i nv oki ng S A RFAESI
Pr ocee di ngs agai nst g uar a nt or under S A RFAESI e ve n i f CI RP pe ndi ng
RDB Act a nd S A RFAESI Act ar e c o mpli me nt ar y t o e ac h ot her
Par all el pr ocee di ngs under S A RFAESI / RDBA a nd I ns ol ve nc y Co de per m i ssi bl e 1.18
Acti o n c a n be t a ke n under S A RFAESI Act e ve n i f pr ocee di ngs pe ndi ng bef or e DRT
1.4-6 Ci vil s ui t nee d not be w i t hdr a wn
1.4-7
ocee di ngs under S A RFAESI ar e ‘ ci vil pr ocee di ngs ’
1.5 S A RFAESI Act overri des pr ovi si o ns of ot her l a ws a nd i
Sec ur e d cr e di t or c a n st ay o ut si de li q ui dati o n
ocess a nd e nf or ce hi s s ec uri t y under S A RFAESI
1.6 Mor at ori u m under I ns ol ve nc y Co de a ppli es t o acti o ns under
1.7 Ce nt r al Gover n me nt c a n gr a nt e xe mpti o ns or a ppl y pr ovi si o ns of Act
1.7-1 Appli c ati o n of S A RFAESI Act t o NBF C
1.7-2
Appli c ati o n of S A RFAESI Act t o ho usi ng fina nce c o mpa ni es
Asi a n De vel op me nt Ba nk i s Fi na nci al I nsti t uti o n
1.7-4 S A RFAESI Act e xt e nde d t o c o- oper ati ve ba nks a nd r e gi o nal r ur al ba nks
1.8 Pr ot ecti o n of Act s do ne i n g oo d f ai t h
ENFORCEMENT OF SECURITY INTEREST
2.1 Ba nk c a n r ec over l oa ns by e nf or ci ng s ec uri t y i nt er est
2.1-1 Whe n s ec uri t y c a n be e nf or ce d
2.1-2 Me a ni ng of ‘ de bt’
2.1-3 Fi na nci al l e as e
PROCEDURE FOR SALE OF ASSETS
3.1 Sal e of ass et di r ectl y or t o A RC
3.1-3
3.2
Di s pl ay of i nf or mati o n of ass et s t a ke n over o n we bsi t e of Ba nk/ FI
Pr oce d ur e i n r es pect of mova bl e s ec ur e d ass et
e of mova bl e s ec ur e d ass et s
3.2-3 Tr a nsf er of mort gage, hy pot hec ati o n or pl e dge of mova bl e pr opert y or ri g ht or i nt er est i n s ec uri t y
i de fle xi bili t y i n s al e of ass et s
3.2-4
oce d ur e i n r es pect of s al e of i mmova bl e s ec ur e d ass et
3.3-1
uati o n of i mmova bl e s ec ur e d ass et
APPLICATION, APPEALS AND PENALTY UNDER SARFAESI
pers o n c a n ma ke a ppli c ati o n under s ecti o n 17( 1)
c ati o n by l ess ee or t e na nt
a ut o mati c st ay i f a ppli c ati o n i s fil e d
uri s di cti o n of DRT wher e a ppli c ati o n t o be fil e d
4.2-1
4.2-2
nsi der ati o n of a ppli c ati o n by DRT
c a n c o nsi der a nd deci de t e na nc y or
e as e hol d ri g ht s
e- de posi t i f a ppe al bef or e DRAT
oce d ur e f or a ppe al
4.3-3 Sec ur e d cr e di t or or a ny pers o n cl ai m i ng ri g ht c a n fil e a c ave at
5.1
5.2-1
SECURITISATION
ASSET RECONSTRUCTION COMPANIES
7.1-3
7.2
I nt e gr ati o n of Ce nt r al Re gi st r y w i t h ot her
r e gi st eri ng a ut hori ti es
Re gi st r ati o n of agr ee me nt
7.2-1
Recti fic ati o n i n matt er of del ay or o m i ssi o n
r e gi st r ati o n, mo di fic ati o n a nd s ati sf acti o n
7.2-2 Re gi st r ati o n under Re gi st r ati o n Act r e q ui r e d i n
c as e of i mmova bl e pr opert y?
7.2-3 Sati sf acti o n or pay me nt of s ec uri t y i nt er est
7.2-4 I ns pecti o n of Ce nt r al Re gi st er
7.3 Re gi st r ati o n of s ec uri t y i nt er est by Sec ur e d a nd ot her cr e di t ors
DIVISION THREE RULES u
DIVISION
FOUR CIRCULARS/DIRECTIONS/NOTIFICATIONS/ORDERS
u Res er ve Ba nk of I ndi a ( Sec uri ti s ati o n of St a ndar d Ass et s)
u Ci r c ul ars & Noti fic ati o ns i ss ue d under Sec uri ti s ati o n a nd
4.174
DIVISION FIVE
DEBT RECOVERY TRIBUNAL
RECOVERY AFTER ORDER 5.1
5.3
POWERS
Recti fic ati o n of or der i f s ubs e q ue nt c o nt r ar y
deci si o ns of ot her Co urt s, parti c ul arl y S C or r et r os pecti ve a me nd me nt t o Act
ai nt y i n li ti gati o n ba d
7.1-1 Li m i t ati o n Act does not e xti ng ui s h ri g ht, i t o nl y e xti ng ui s hes r e me dy
7.1-2
Questi o n of li m i t ati o n must be c o nsi der e d e ve n i
m i t ati o n Act a ppli es o nl y t o Co urt s
Bar of li m i t ati o n i n fili ng a s ui t
7.2-2 Peri o d of fili ng a ppe al a nd a ppli c ati o n c a n be e xt e nde d f or s uf fici e nt r e as o ns, b ut not s ui t
q ui si ti o n of e as e me nt ri g ht s i f us e d c o nti n uo usl y f or
nal matt ers
RBI DIRECTIONS ON RESOLUTION OF STRESSED ASSETS
kgr o und
RBI Di r ecti o ns o n Pr ude nti al Fr a me wor k f or Res ol uti o n of St r ess e d Ass et s
a me wor k f or Res ol uti o n of St r ess e d Ass et s as di r ect e d by RBI
8.4 Pr ovi si o ni ng i n c as e of Del aye d I mpl e me nt ati o n of Res ol uti o n Pl a n 6.86
8.5 Pr ude nti al Nor ms 6.87
8.6 Super vi s or y Re vi e w by RBI 6.87
DIVISION SEVEN
RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993
u
De bt s Rec over y Tri b unal ( Fi na nci al a nd Ad m i ni st r ati ve Po wer) Rul es, 1997
u
es, 1998 8.27
u
De bt s Rec over y Tri b unal ( Pr oce d ur e f or I nvesti gati o n of M i s be havi o ur or I nc a paci t y of Pr esi di ng Of ficer) Rul es, 2010 8.33
u
De bt s Rec over y Appell at e Tri b unal ( Pr oce d ur e) Rul es, 1994 8.41
u
De bt s Rec over y Appell at e Tri b unal ( Pr oce d ur e f or Appoi ntme nt as Chai r pers o n of t he Appell at e Tri b unal ) Rul es, 1998 8.53
u
De bt s Rec over y Appell at e Tri b unal ( Fi na nci al a nd Ad m i ni st r ati ve Po wer) Rul es, 1997 8.59
u
De bt s Rec over y Tri b unal s ( Ref und of Co urt Fee) Rul es, 2013 8.63
u
De bt s Rec over y Tri b unal s & De bt s Rec over y Appell at e Tri b unal s El ect r o ni c Fili ng Rul es, 2020 8.67
DIVISION NINE
NOTIFICATIONS
u Noti fic ati o ns 9.3
DIVISION TEN CASE LAWS DIGEST UNDER RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993
Enforcement of Security Interest 2 CHAPTER
2.1 Bank can recover loans by enforcing security interest
Ba nk/ FI al most al ways gr a nt l oa ns /cr e di t f acili ti es o n basi s of s ec uri t y. The s ec uri t y may be i n f or mof mort gage, hy pot hec ati o n, pl e dge et c. I n a ddi ti o n, pers o nal g uar a nt ees of di r ect ors / part ners / gr o up c o mpa ni es ar e obt ai ne d . Thus, on paper, t hel e ndi ng by Ba nk/ FI a ppe ars t o be ver y s ec ur e d. Ho we ver, whe n t he ti me c o mes, i t i s f o und t hat t he s ec uri t y f or a dva nce /l oa n i s o nl y o n pa per a nd i s of no us e i n r ec overi ng t he ba d de bt s.
S A RFAESI Act will be us ef ul i n s uc h c as es.
2.1-1 When security can be enforced
Secti o n 13( 1) of S A RFAESI Act pr ovi des t hat not w i t hst a ndi ng a nyt hi ng c o nt ai ne d i n s ecti o n 69 or 69 A of Tr a nsf er of Pr opert y Act, a ny s ec uri t y i nt er est c a n be e nf or ce d by s ec ur e d cr e di t or w i t ho ut i nt er ve nti o n of Co urt or Tri b unal i n acc or da nce w i t h pr ovi si o ns of t he Act.
[ Under s ecti o ns 69 a nd 69 A of Tr a nsf er of Pr opert y Act, Ba nk c a n t a ke poss essi o n of mort gage d pr opert y w i t ho ut i nt er ve nti o n of Co urt o nl y i n c as e of Engli s h Mort gage. No w , under S A RFAESI Act, s uc h acti o n i s per m i ssi bl e i n a ny mort gage].
As per s ecti o n 13( 2) of S A RFAESI Act, s uc h acti o n c a n be t a ke n o nl y i f t her e i s def a ul t i n r e pay me nt of i nst al me nt of de bt a nd t he acc o unt i s cl assi fi e d as NPA ( No n- Perf or m i ng Ass et) by t he s ec ur e d cr e di t or.
I f f unds wer e r ai s e d t hr o ug h de bt s ec uri ti es, t he n acti o n c a n be i ni ti at e d e ve n i f s ec ur e d de bt was not cl assi fi e d as NPA –proviso (i ) t o s ecti o n 13( 2) of S A RFAESI Act.
No action in certain specified cases - No acti o n f or e nf or ce me nt of s ec uri t y i nt er est c a n be t a ke n i f ( a) Agri c ul t ur al l a nd ( b) whe n a mo unt d ue i s l ess t ha n Rs. o ne l a k h ( c) whe n a mo unt d ue i s l ess t ha n 20 % of t he pri nci pal a mo unt a nd i nt er est t her e o n, i.e. i f borr o wer has r e pai d mor e t ha n 80 % of t he pri nci pal a mo unt a nd i nt er est ( d) li e n under Act ( e) pl e dge of mova bl es ( f) s ec uri t y over ai r cr aft or vess el ( g) pr operti es whi c h c a nnot be att ac he d – s ecti o n
31 of S A RFAESI Act.
SARFAESI provisions not applicable to security interest in agricultural land – S A RFAESI Act pr ovi si o ns ar e not a ppli c a bl e i n r es pect of a ny s ec uri t y i nt er est cr e at e d i n agri c ul t ur al l a nd –
Narendra v. State of Madhya Pradesh ( 2020) 161 S CL 317 = 117 t ax ma nn. c o m91 ( MP HC DB) * Sundaram Home Finance v. Rahul Jayvantrao Kaulavkar ( 2021) 164 S CL 150 = 119 t ax ma nn. c o m427 ( Bo m HC).
Ho wever, pr operti es i n questi on will not be exe mpt fr o m SA RFAESI Act u/s 31(i ) mer el y bec a us e t he y ar e s ho wn as agri c ul t ur al l a nds i n r e ve n ue r ec or ds. The y will be s o e xe mpt o nl y i f t he y ar e act uall y us e d as agri c ul t ur al l a nds at t he ti me t he s ec uri t yi nt er est i s cr e at e d f or t he p ur pos e of att r acti ng e xe mpti o n u/s 31(i ). Wher e e xce pt t he r e ve n ue r ec or ds, t he borr o wers di d not fil e a ny e vi de nce t o s ho w t hat t he agri c ul t ur al wor k was bei ng do ne i n t he s ai d pr operti es, a nd ont he c ont r ar y, t he s ec ur e d cr e di t or pr oduce dt he phot ogr aphs t o s ho w t hat t her e was no agri c ul t ur al acti vi ti es bei ng do ne a nd no agri c ul t ur al acti vi t y was g oi ng o n, t he s c he d ul e d pr operti es i n q uesti o n will not be e xe mpt e d f r o mt he pr ovi si o ns of S A RFAESI Act i n vi e w of s ecti o n 31(i ) of t he S A RFAESI ActK. Sreedhar v. Raus Constructions (P.) Ltd. [ 2023] 146 t ax ma nn. c o m 123 ( S C).
No action if debt time barred - No acti o n c a n be t a ke n under S A RFAESI Act, i f t he de bt i s ti me barr e d under Li m i t ati o n Act. [ s ecti o n 36 of S A RFAESI Act].
Debenture trustees can initiate action for enforcement of security if there is default – De be nt ur e t r ust ees c a n i ni ti at e acti o n under s ecti o n 13( 2) of S A RFAESI Act t o e nf or ce s ec uri t y i nt er est i n t he s a me ma nner i n acc or da nce w i t h t er ms a nd c o ndi ti o ns of doc u me nt s e xec ut e d i n f av o ur of de be nt ur e t r ust eesproviso (ii ) t o s ecti o n 13( 2) of S A RFAESI Act i ns ert e d w . e. f. 1- 9- 2016.
2.1-2 Meaning of ‘debt’
As per s ecti o n 2( 1)(ha ) of S A RFAESI Act, ‘ de bt’ s hall have t he me a ni ng assi g ne d t oi t i n s ecti o n 2( g) of RDB Act, 1993 a nd includes (i ) unpai d porti o n of p ur c has e pri ce of a ny t a ngi bl e ass et gi ve n o n hi r e or fi na nci al l e as e or c o ndi ti o nal s al e or a ny ot her ma nner (ii ) a ny ri g ht, ti tl e or i nt er est o n a ny i nt a ngi bl e ass et or li ce nce or assi g n me nt of s uc h i nt a ngi bl e ass et, whi c h s ec ur es t he o bli gati o n t o pay a ny unpai d porti o n of t he p ur c has e pri ce of s uc h i nt a ngi bl e ass et or a n o bli gati o n i nc urr e d or cr e di t ot her w i s e e xt e nde d t o e na bl e a ny borr o wer t o ac q ui r e t he i nt a ngi bl e ass et or o bt ai n li ce nce of s uc h ass et .
2.1-3 Financial lease
“ Fi na nci al l e as e” me a ns a l e as e under a ny l e as e agr ee me nt of t a ngi bl e ass et, ot her t ha n ne g oti a bl e i nst r u me nt or ne g oti a bl e doc u me nt, f or t r a nsf er of l ess or ’ s ri g ht t her ei n t o t he l ess ee f or a cert ai n ti me i n c o nsi der ati o n of pay me nt of agr ee d a mo unt peri o di c all y a nd wher e t he l ess ee bec o mes t he o wner of t he s uc h ass et s at t he e x pi r y of t he t er m of l e as e or o n pay me nt of t he agr ee d r esi d ual a mo unt, as t he c as e may be – s ecti o n 2( 1)( ma ) of S A RFAESI Act.
Negotiable document –
“ Negoti a bl e doc u me nt” mea ns a doc u me nt, whi c h e mbo di es a ri g ht t o deli ver y of t a ngi bl e ass et s a nd s ati sfi es t he r e q ui r e me nt s f or ne g oti a bili t y under a nyl a wf or t he ti me bei ng i n f or ce i ncl udi ng war e ho us e r ecei pt a nd bill of l a di ng – s ecti o n 2( 1)( na ) of S A RFAESI Act.
2.2 Meaning of ‘security interest’
‘ Sec uri t y i nt er est’ me a ns ri g ht, ti tl e or i nt er est of a ny ki nd, ot her t ha n t hos e s peci fi e d i n s ecti o n 31 of S A RFAESI Act, upo n pr opert y cr e at e d i n f av o ur of a ny s ec ur e d cr e di t or a nd i ncl udes — (i) a ny mort gage, c har ge, hy pot hec ati o n, assi g n me nt or a ny ri g ht, ti tl e or i nt er est of a ny ki nd, o n t a ngi bl e ass et, r et ai ne d by t he s ec ur e d cr e di t or as a n o wner of t he pr opert y, gi ve n o n hi r e or fi na nci al l e as e or c o ndi ti o nal s al e or under a ny ot her c o nt r act whi c h s ec ur es t he o bli gati o n t o pay a ny unpai d porti o n of t he p ur c has e pri ce of t he ass et or a n o bli gati o n i nc urr e d or cr e di t pr ovi de d t o e na bl e
t he borr o wer t o ac q ui r e t he t a ngi bl e ass et; or (ii) s uc h ri g ht, ti tl e or i nt er est i n a ny i nt a ngi bl e ass et or assi g n me nt or li ce nce of s uc h i nt a ngi bl e ass et whi c h s ec ur es t he o bli gati o n t o pay a ny unpai d porti on of t he p ur c has e pri ce of t hei nt a ngi bl e ass et or t he obli gati on i nc urr e d or a ny cr e di t pr ovi de d t o e na bl e t he borr o wer t o ac q ui r e t he i nt a ngi bl e ass et or li ce nce of i nt a ngi bl e ass et – s ecti o n 2( 1)(zf ) of S A RFAESI Act.
Secti o n 31 of S A RFAESI Act pr ovi des t hat t he pr ovi si o n of t he Act s hall not a ppl y t o li e n of g oo ds, pl e dge of mova bl es, s ec uri t y i nt er est l ess t ha n Rs. o ne l a k h, a mo unt d ue i s l ess t ha n 20 % of pri nci pal a mo unt et c.
2.2-1 Meaning of ‘property’
‘ Pr opert y ’ me a ns (i ) I mmova bl e pr opert y (ii ) Mova bl e Pr opert y (iii ) Any de bt or a ny ri g ht t o r ecei ve pay me nt of mo ne y, whet her s ec ur e d or uns ec ur e d (i v) Recei va bl es, whet her e xi sti ng or f ut ur e ( v) I nt a ngi bl e ass et s, bei ng k no w- ho w , pat e nt, t r a de mar k, li ce nce, f r a nc hi s e or a ny ot her b usi ness or c o mmer ci al ri g ht of si mil ar nat ur e , as may be prescribed by Central Government in consultation with RBI . [ s ecti o n 2( 1)( t ) of S A RFAESI Act].
2.2-2 Hypothecation
‘ Hy pot hec ati o n ’ me a ns a c har ge i n or upo n a ny mova bl e pr opert y, e xi sti ng or f ut ur e, cr e at e d by a borr o wer i n f av o ur of a s ec ur e d cr e di t or w i t ho ut deli ver y of poss essi o n of t he mova bl e pr opert y t o s uc h cr e di t or, as a s ec uri t y f or fi na nci al assi st a nce, a nd i ncl udes fl oati ng c har ge a nd cr yst alli z ati o n of s uc h c har ge i nt o fi xe d c har ge o n mova bl e pr opert y [ s ecti o n 2( 1)( n ) of S A RFAESI Act].
Hy pot hec ati o n i s a s ub- s peci es of pl e dge a nd has s a me l e gal val ue –Infrastructure Leasing and Financial Services Ltd . v. BPL Ltd. ( 2015) 3 S CC 363 = 120 S CL 534 = 53 t ax ma nn. c o m 234 ( S C).
It c a n be s ee n t hat t he t er m‘ s ec uri t y i nt er est’ as defi ne d i n t he Act i s ver y w i de. It i ncl udes i nt er est of a ny ki nd not o nl yi n mova bl e a nd i mmova bl e ass et s, b ut al s o i n cl ai ms, de bt s, r ecei va bl es, be nefi ci al i nt er est et c. It al s o i ncl udes i nt er est i n i nt a ngi bl e ass et s. Suc h i nt er est i ncl udes mort gage, c har ge, hy pot hecati o n a nd assi g n me nt.
2.2-3 Exclusions from ‘security interest’
As per s ecti o n 31 of S A RFAESI Act, pr ovi si o ns of t he Act s hall not a ppl y t o t he f oll o w i ng –
( a ) A li e n o n a ny g oo ds, mo ne y or s ec uri t y gi ve n by or under t he I ndi a n Co nt r act Act, 1872 or t he Sal e of Goo ds Act, 1930 or a ny ot her l a w f or t he ti me bei ng i n f or ce.
(b ) A pl e dge of mova bl es w i t hi n t he me a ni ng of s ecti o n 172 of I ndi a n Co nt r act Act, 1972.
( c ) Cr e ati o n of a ny s ec uri t y i n a ny ai r cr aft as de fine d under s ecti o n 2( 1) of Ai r cr aft Act, 1934.
(d ) Cr e ati o n of s ec uri t yi nt er est i n a ny vess el as de fine di n s ecti o n 3( 35) of Mer c ha nt Shi ppi ng Act, 1958.
( e ) O m i tt e d w . e. f. 1- 9- 2016 [ Earli er, t he e nt r y was as f oll o ws - Any c o ndi ti o nal s al e, hi r e- p ur c has e or l e as e or a ny ot her c o nt r act i n whi c h no s ec uri t y i nt er est has bee n cr e at e d]
(f )
Any ri g ht of unpai d s ell er under s ecti o n 47 of Sal e of Goo ds Act, 1930.
( g ) Any pr operti es not li a bl e t o att ac h me nt or s al e ( e xcl udi ng t he pr operti es s peci fic all y c har ge d w i t h t he de bt r ec over a bl e under Sec uri ti s ati o n Act) or s al e under first pr ovi s o t o s ecti o n 60( 1) of Co de of Ci vil Pr oce d ur e, 1908.
(h ) Any s ec uri t y i nt er est f or s ec uri ng r e pay me nt of a ny fina nci al ass et not e xcee di ng o ne l a k h Rupees.
(i ) Any s ec uri t y i nt er est cr e at e d i n agri c ul t ur al l a nd.
(j ) Any c as e i n whi c h t he a mo unt d ue i s l ess t ha n 20 % of t he pri nci pal a mo unt a nd i nt er est t her e o n [i.e. wher e borr o wer has r e pai d mor e t ha n 80 % of pri nci pal a mo unt a nd i nt er est].
Residential property mortgaged can be attached - I n Joseph George v. Joint Registrar ( 2006) 65 S CL 239 ( Ker HC), i t was hel dt hat s ecti on 31( g ) s peci fi c all y e xcl udes pr operti es c har ge d w i t h de bt. He nce, a r esi de nti al pr opert y whi c h i s mort gage d as s ec uri t y f or de bt, i s not e xe mpt f r o m att ac h me nt or s al e under t he Sec uri ti s ati o n Act.
Lien under Contract Act – A bail ee has li e n o n g oo ds f or r e muner ati o n f or t he s er vi ces r e nder e d by hi mi n r es pect of g oo ds bail e d. [ s ecti o n 170 of Co nt r act Act]. Ba nks, f act ors, wharfi ngers, att or ne ys a nd poli c y br okers have ge ner al li e n o n g oo ds bail e d
t o hi mf or a ge ner al bal a nce of acc o unt. [ s ecti o n 171 of Co nt r act Act]. Th us, a li e n, i f cr e at e d l e gall y, will have pri ori t y over s ec uri t y i nt er est.
Pledge of movables
- Bail me nt of g oo ds as s ec uri t y f or pay me nt of de bt or perf or ma nce of a pr o m i s e i s c all e d ‘ pl e dge’. The bail or i n t hi s c as e i s c all e d ‘ pa wnor ’ . The bail ee i s c all e d ‘ pa wnee ’ . [ s ecti o n 172 of Co nt r act Act]. A pa wnee has ri g ht t o r et ai n g oo ds pl e dge d
t o hi m . [ s ecti o n 173 of Co nt r act Act]. I n s uc h c as e, s ec uri t y i nt er est c a nnot be e nf or ce d, as bail ee i.e. pa wnee al r e a dy has p hysi c al poss essi o n of g oo ds. Of c o urs e, bail ee c a n r et ai n g oo ds o nl y t o r ec over hi s de bt a nd not hi ng mor e.
Right of unpaid seller – Unpai d s ell er has li e n i n r es pect of g oo ds i n hi s poss essi o n a nd r et ai n t he g oo ds till pay me nt i s r ecei ve d. [ s ecti o n 47 of Sal e of Goo ds Act, 1930]. He c a n st op g oo ds i n t r a nsi t. [ s ecti o n 50 of Sal e of Goo ds Act].
Lease
- I n l e as e, pr opert y i n g oo ds r e mai ns w i t h o wner a nd he o nl y ‘ l e as es ’ t he g oo ds f or us e t o a not her f or cert ai n c har ges. Aft er t he l e as e peri o d i s over, t he o wner c a n t a ke bac k t he g oo ds.
Hire purchase - I n‘ hi r e p ur c has e ’ , poss essi o n of g oo ds i s deli ver e d by owner t o hirer o n c o ndi ti o n of pay me nt of agr ee d n u mber of i nst al me nt s. H i r er has opti o n t o p ur c has e t he g oo ds as per t er ms of agr ee me nt. ( us uall y, a no m i nal pay me nt i s pr ovi de d at t he e nd of hi r e peri o d). Pr opert y i n g oo ds i s pass e d o n t o t he hi r er aft er all t er ms of agr ee me nt ar e f ul fill e d. I f t he hi r er does not f ul fil t he c o ndi ti o ns of hi r e- p ur c has e ( e. g. does not pay i nst al me nt s o n d ue dat es) poss essi o n of g oo ds ca n be t a ke n bac k by o wner gi vi ng g oo ds o n hi r e p ur c has e. The hi r er i s not o wner of g oo ds. The fi na nci ng c o mpa ny c o nti n ues t o be o wner.
I n Charanjit Singh Chadha v. Sudhir Mehra
2001 AI R S C W 3487, i t was o bs er ve d, ‘ H i r e p ur c has e agr ee me nt s ar e e xec ut or y c o nt r act s under whi c h g oo ds ar e l et o n hi r e a nd hi r er has opti o n t o p ur c has e i n acc or da nce w i t h t er ms of t he agr ee me nt. - - Under hi r e p ur c has e agr ee me nt, t he hi r er i s si mpl y payi ng f or t he us e of g oo ds a nd f or opti o n t o p ur c has e t he m . - - I f t he hi r er ma kes def a ul t by not payi ng i nst al me nt s, t he o wner c a n t a ke poss essi o n of g oo ds, i f agr ee me nt pr ovi des f or s uc h r e- poss essi o n. Thi s c a nnot be c o nsi der e d as t heft by t he o wner. It c a n at t he most be a ci vil di s p ut e a nd not cri m i nal c as e ’ .
I n K L Johar v. Dy CTO
AI R1965 S C 1082 =( 1965) 2 S C R112 =( 1965) 16 S T C 213 ( S C), i t was hel d t hat i n hi r e p ur c has e agr ee me nt, ‘ s al e ’ t a kes pl ace o nl y whe n p ur c has er e xer ci s es t he opti o n of p ur c has e a nd f ul fil s t he t er ms of agr ee me nt. Till t he n, i t i s a ‘ bail me nt’. I n
Marikar Motors Ltd. v. STO 101 S T C 377 = ( 1996) 3 S CC 263 ( S C), i t has bee n hel d t hat i n c as e of hi r e p ur c has e, ‘ s al e ’ t a kes pl ace o nl y whe n t he p ur c has er e xer ci s es t he opti o n t o p ur c has e aft er f ull y payi ng t he agr ee d a mo unt. It does not a ut o mati c all y ( will y nill y) t a kes pl ace at t he e nd of peri o d me nti o ne d i n t he hi r e p ur c has e agr ee me nt. - si mil ar vi e ws i n
Damodar Valley Corpn. v. State of Bihar
AI R 1961 S C 440, wher e i t was hel d t hat mer e c o nt r act f or hi ri ng i s a c o nt r act of bail me nt, whi c h does not cr e at e a ti tl e i n t he bail ee.. - I f hi r er has r es er ve d ri g ht t o r et ur n t he g oo ds at a ny ti me d uri ng t he c o nt r act, t he n cl e arl y t her e i s no c o nt r act of s al e.
Exclusion of pledge etc. for all purposes ? – Secti on 31 of S A RFAESI
Act pr ovi des t hat t he pr ovi si o n of t he Act s hall not a ppl y t o li e n of g oo ds, pl e dge of mova bl es, s ec uri t y i nt er est l ess t ha n Rs. o ne l a k hs, a mo unt d ue i s l ess t ha n 20 % of pri nci pal a mo unt et c. Re all y, t hi s e xcl usi o n i s me a nt f or Cha pt er III i.e. e nf or ce me nt of s ec uri t y i nt er est o nl y. Ho we ver, as per pr es e nt wor di ng, t he pr ovi si o n will a ppl y e ve n i n r es pect of Sec uri ti s ati o n al s o.
Th us, s ec uri ti s ati o n of s uc h borr o w i ngs will not be possi bl e. Thi s does not s ee mt o be a nd c a nnot be t he i nt e nti o n a nd i t s ho ul d be cl ari fi e dt hat s ecti on 31 of S A RFAESI Act appli es onl y t o Chapt er III.
2.2-4
Meaning of ‘financial asset’
‘ Fi na nci al Ass et’ me a ns de bt or r ecei va bl es a nd i ncl udes – (i ) A cl ai mt o a ny de bt or r ecei va bl es or part t her e of, whet her s ec ur e d or uns ec ur e d or (ii ) a ny de bt or r ecei va bl es s ec ur e d by mort gage of or c har ge o n i mmova bl e pr opert y or (iii ) A mort gage, c har ge, hy pot hec ati o n or pl e dge of mova bl e pr opert y or (i v) a ny ri g ht or i nt er est i n t he s ec uri t y, whet her f ull or part underl yi ng s uc h de bt or r ecei va bl es or ( v) a ny be nefi ci al i nt er est i n pr opert y, whet her mova bl e or i mmova bl e, or i n s uc h de bt, r ecei va bl es, whet her s uc h i nt er est i s e xi sti ng, f ut ur e, c o ndi ti o nal or c o nti nge nt ( va)
any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or
credit otherwise provided to enable the borrower to acquire such tangible asset; or ( v b ) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or (vi ) a ny fi na nci al assi st a nce [ s ecti o n 2( 1)(l ) of S A RFAESI Act Wor ds i n i t ali cs have bee n i ns ert e d w . e. f. 1- 9- 2016].
2.2-5 Financial Assistance - Meaning
‘ Fi na nci al Assi st a nce ’ me a ns a ny l oa n or a dva nce gr a nt e d or a ny de be nt ur es or bo nds s ubs cri be d or a ny g uar a nt ee gi ve n or l ett er of cr e di t est a bli s he d or a ny ot her f acili t y e xt e nde d by a ny ba nk or fi na nci al i nsti t uti o n, including funds provided for the purpose of acquisition of any tangible asset on hire or financial lease or conditional sale or under any other contract or obtaining assignment or licence of any intangible asset or purchase of debt securities [ s ecti o n 2( 1)( k) of S A RFAESI Act. Wor ds i n i t ali cs have bee n a dde d w . e. f. 1- 9- 2016].
2.3 Who is ‘secured creditor’
“ Sec ur e d cr e di t or” me a ns
(i ) a ny ba nk or fina nci al i nsti t uti o n or a ny c o ns orti u mor gr o up of ba nks or fina nci al i nsti t uti o ns hol di ng a ny ri g ht, ti tl e or i nt er est upon a ny t a ngi bl e ass et or i nt a ngi bl e ass et as s peci fie d i n cl a us e (l );
(ii ) de be nt ur e t r ust ee a ppoi nt e d by a ny ba nk or fina nci al i nsti t uti o n; or
(iii ) a n ass et r ec o nst r ucti o n c o mpa ny whet her acti ng as s uc h or ma nagi ng a t r ust s et up by s uc h ass et r ec o nst r ucti o n c o mpa ny f or t he s ec uri ti s ati o n or r ec o nst r ucti o n, as t he c as e may be; or
(iv ) de be nt ur e t r ust ee r e gi st er e d w i t h t he Board and appointed f or s ec ur e d de bt s ec uri ti es; or [ dr afti ng m i st a ke c orr ect e d w . e. f. 1- 4- 2021]
( v ) a ny ot her t r ust ee hol di ng s ec uri ti es o n be hal f of a ba nk or fina nci al i nsti t uti o n,
i n whos e f av o ur s ec uri t y i nt er est i s cr e at e d by a ny borr o wer f or d ue r e pay me nt of a ny fina nci al assi st a nce – s ecti o n 2( 1)(zd ) of S A RFAESI Act r e pl ace d w . e. f. 1- 9- 2016.
Asset Reconstruction companyAss et Rec o nst r ucti o n Co mpa ny
( A RC) me a ns a c o mpa ny r e gi st er e d w i t h RBI f or p ur pos e of c arr yi ng o n b usi ness of ass et r ec o nst r ucti o n or s ec uri ti z ati o n or bot h – s ecti o n 2( 1)(ba ) of S A RFAESI Act i ns ert e d w . e. f. 1- 9- 2016.
2.3-1 Meaning of ‘bank’
‘ Ba nk’ me a ns ba nki ng c o mpa ny, c orr es po ndi ng ne w ba nk (i.e. nati o nali s e d ba nks), St at e Ba nk of I ndi a, s ubsi di ar y of S BI, Mul tiSt at e Cooper ati ve Ba nk or s uc h ot her Ba nk as may be noti fi e d by Ce nt r al Gover n me nt. [ s ecti o n 2( 1)( c ) of S A RFAESI Act].
‘ Ba nki ng Co mpa ny ’ has t he me a ni ng assi g ne d t o i t i n s ecti o n 5( c) of t he Ba nki ng Re g ul ati o n Act, 1949. [ s ecti o n 2( 1)(d ) of S A RFAESI Act].
As per t hi s s ecti o n, ‘ ba nki ng c o mpa ny ’ me a ns a ny c o mpa ny whi c h t r a ns act s t he b usi ness of ba nki ng i n I ndi a. As per s ecti o n 5(b ) of Ba nki ng Re g ul ati o n Act, ‘ ba nki ng ’ me a ns t he acce pti ng, f or t he p ur pos e of l e ndi ng or i nvest me nt, of de posi t s of mo ne y f r o mt he p ubli c, r e paya bl e o n de ma nd or ot her w i s e, a nd w i t hdr a wa bl e by c he q ue, dr aft, or der or ot her w i s e.
As per s ecti o n 5(d ) of Ba nki ng Re g ul ati o n Act, ‘ c o mpa ny ’ me a ns a ny c o mpa ny as defi ne d under s ecti o n 3 of Co mpa ni es Act, 1956 a nd i ncl udes a f or ei g n c o mpa ny w i t hi n me a ni ng of s ecti o n 591 of Co mpa ni es Act.
Si nce t he wor d us e d i s ‘ c o mpa ny ’ , i t i s o bvi o us t hat c ooper ati ve ba nks ar e not c over e di n t he defi ni ti o n, as t he y ar e not ‘ c o mpa ni es ’ .
SARFAESI Act applies to cooperative banks and regional rural banks - The S A RFAESI Act has bee n e xt e nde d t o c ooper ati ve ba nks vide Noti fi c ati o n No. S O 105( E) dat e d 28- 1- 2003. The S A RFAESI Act has bee n e xt e nde d t o Re gi o nal Rur al Ba nks vide Noti fi c ati o n No. S O 772( E) dat e d 17- 5- 2007.
Cooperative Banks eligible as secured creditor - Cooper ati ve
Ba nks a nd Mul ti - St at e Cooper ati ve Ba nks ar e c over e d under S A RFAESI Act –Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank ( 2020) 9 S CC 215 = 116 t ax ma nn. c o m 414 ( S C 5 me mber be nc h).
2.3-2 Financial Institution
‘ Fi na nci al I nsti t uti o n ’ me a ns * Publi c Fi na nci al I nsti t uti o n w i t hi n
me a ni ng of s ecti o n 4 A of Co mpa ni es Act ( no w s ecti o n 2( 72) of Co mpa ni es Act, 2013) * I nt er nati o nal Fi na nce Cor por ati o n * Any I nsti t uti o n noti fi e d under s ecti o n 2(h )(ii ) of Rec over y of De bt s a nd Ba nkr upt c y Act, 1993 * Debenture trustee registered with SEBI and appointed for secured debt securities * Asset Reconstruction Company whether acting as such or managing a trust for purpose of securitization or asset reconstruction * Any ot her i nsti t uti o n or
NBF C as defi ne d i n s ecti o n 45- I( f) of RBI Act, as may be noti fi e d by Ce nt r al Gover n me nt [ s ecti o n 2( 1)( m ) of S A RFAESI Act - wor ds i n i t ali cs i ns ert e d w . e. f. 1- 9- 2016].
Secured debt‘ Sec ur e d de bt’ me a ns a de bt whi c h i s s ec ur e d by a ny s ec uri t y i nt er est. [ s ecti o n 2( 1)( ze ) of S A RFAESI Act].
2.3-3 Public Financial Institution
“ P ubl i c fi na nci al i nsti t uti o n” me a ns (i ) t he Li f e I ns ur a nc e Cor por ati o n of I ndi a, est a bli s he d under s ecti o n 3 of t he Li f e I ns ur a nce Cor por ati o n Act, 1956 (ii ) t he I nf r ast r uct ur e De vel opme nt Fi nance Co mpany Li m i t e d , r ef err e d t o i n of s ecti on 4 A( 1)( vi) of t he 1956 Act ( whi c h i s r e pe al e d under s ecti o n 461 of t he 2013 Act) (iii ) s peci fi e d c o mpa ny r ef err e d t o i n t he Uni t Tr ust of I ndi a ( Tr a nsf er of Undert a ki ng a nd Re pe al ) Act, 2002 (i v) i nsti t uti o ns noti fi e d by t he Ce nt r al Gover n me nt under s ecti o n 4 A( 2) of t he 1956 Act ( whi c h i s no w r e pe al e d under s ecti o n 465 of t he 2013 Act) ( v) s uc h ot her i nsti t uti o n as may be noti fi e d by t he Ce nt r al Gover n me nt i n c o ns ul t ati o n w i t h t he Res er ve Ba nk of I ndi a [ s ecti o n 2( 72) of Co mpa ni es Act, 2013].
SFC can take action under the SARFAESI Act – St at e Fi na nci al Cor por ati o ns have r ec over y po wers under t he SF C Act, 1951. Ho we ver, t he y c a n al s o r es ort t o S A RFAESI Act, 2002 f or r ec over y acti o n, si nce pr ovi si o ns of 2002 Act ar e i n a ddi ti o n t o ot her Act s
–Golden Wvg. Mills v. Tamil Nadu Industrial Investment Corpn. Ltd. ( 2011) 105 S CL 172 ( Ma d HC DB).
2.4 When an action for enforcement of security can be initiated
As per s ecti o n 13( 2) of S A RFAESI Act, acti o n f or e nf or ce me nt of s ec uri t y i nt er est c a n be i ni ti at e d whe n a ny borr o wer, who i s
under a li a bili t y of s ec ur e d cr e di t or under a s ec uri t y agr ee me nt, ma kes a ny def a ul t i n r e pay me nt of s ec ur e d de bt or a ny i nst al me nt t her e of, a nd hi s acc o unt i s cl assi fi e d by t he s ec ur e d cr e di t or as no nperf or m i ng ass et, t he s ec ur e d cr e di t or may r e q ui r e t he borr o wer by noti ce i n wri ti ng t o di s c har ge t he li a bili ti es i n f ull w i t hi n 60 days f r o m dat e of noti ce, f aili ng whi c h t he s ec ur e d cr e di t or s hall be e nti tl e d t o e xer ci s e all or a ny of t he ri g ht s s peci fi e d i n s ecti o n 13( 4) of S A RFAESI Act.
Th us, acti o n c a n be i ni ti at e d o nl y whe n ( a) Borr o wer ( b) who i s under a li a bili t y of s ec ur e d cr e di t or ( c) under a s ec uri t y agr ee me nt ( d) ma kes def a ul t ( e) i n r e pay me nt of s ec ur e d de bt or i nst al me nt t her e of and ( f) hi s acc o unt i s cl assi fi e d as NPA by s ec ur e d cr e di t or. - Unl ess all t hes e c o ndi ti o ns ar e f ul fill e d, no acti o n c a n be i ni ti at e d.
2.4-1 Who is ‘Borrower’
‘ Borr o wer ’ ma ns a ny pers o n who, or a pooled investment vehicle as defined in section 2(da) of SCRA which has bee n gr a nt e d fi na nci al assi st a nce by a ny Ba nk/ FI or who has gi ve n a ny g uar a nt ee or cr e at e d a ny mort gage or pl e dge as s ec uri t y f or t he fi na nci al assi st a nce gr a nt e d by a ny Ba nk/ FI, a nd i ncl udes a pers o n who, or a pooled investment vehicle which bec o mes borr o wer of a n Ass et Rec o nst r ucti o n Co mpa ny c o ns e q ue nt upo n ac q ui si ti o n by i t of a ny ri g ht s or i nt er est of a ny Ba nk/ FI i n r el ati o n t o s uc h fi na nci al assi st a nce or who has r ai s e d f unds t hr o ug h i ss ue of de bt s ec uri ti es. [ s ecti o n 2( 1)(f ) of S A RFAESI Act]. The wor ds i n i t ali cs i ns ert e d w . e. f. 1- 4- 2021, vide Fi na nce Act, 2021.
2.4-2 Security agreement
‘ Sec uri t y agr ee me nt’ mea ns a n agr ee me nt, i nst r u me nt or a ny ot her doc u me nt or arr a nge me nt under whi c h t he s ec uri t y i nt er est i s cr e at e d i n f av o ur of t he s ec ur e d cr e di t or, i ncl udi ng t he cr e ati o n of mort gage by de posi t of ti tl e dee d w i t h t he s ec ur e d cr e di t or. [ s ecti o n 2( 1)(zb ) of S A RFAESI Act].
2.4-3 Meaning of ‘Default’
“ Def a ul t” mea ns (i ) non- pay me nt of a ny de bt or a ny ot her a mo unt paya bl e by t he borr o wer t o a ny s ec ur e d cr e di t or c o ns e q ue nt upo n whi c ht he acc o unt of s uc h borr o wer i s cl assi fi e d as non- perf or m i ng ass et i n t he books of acc o unt of t he s ec ur e d cr e di t or; or (ii ) no n-
pay me nt of a ny de bt or a ny ot her a mo unt paya bl e by t he borr o wer w i t h r es pect t o de bt s ec uri ti es aft er noti ce of 90 days de ma ndi ng pay me nt of d ues s er ve d upo n s uc h borr o wer by t he de be nt ur e t r ust ee or a ny ot her a ut hori t y i n whos e f av o ur s ec uri t y i nt er est i s cr e at e d f or t he be nefi t of hol ders of s uc h de bt s ec uri ti es – s ecti o n 2( 1)(j ) of S A RFAESI Act as a me nde d w . e. f. 1- 9- 2016.
2.4-4 Secured debt
‘ Sec ur e d de bt’ me a ns a de bt whi c h i s s ec ur e d by a ny s ec uri t y i nt er est. [ s ecti o n 2( 1)( ze ) of S A RFAESI Act].
2.4-5 Foreclosure of loan
Tho ug h t he S A RFAESI Act does not us e t he wor d ‘ f or ecl os ur e ’ , pr acti c all y, i t i s f or ecl os ur e. ‘ For ecl os e ’ me a ns st op ( a mort gage) f r o mbei ng r e dee ma bl e or ( a mort gager) f r o mr e dee m i ng, es peci all y as a r es ul t of def a ul t s i n pay me nt. [ Co nci s e Oxf or d Di cti o nar y]. -The t er mi s l oos el y a ppli e d t o a ny of vari o us met ho ds, st at ut or y or ot her w i s e, of e nf or ci ng pay me nt of de bt s ec ur e d by a mort gage, by t a ki ng a nd s elli ng t he mort gage d est at e. [ La w Le xi c o n – Wa dh wa & Co. ].
Once a s ec ur e d cr e di t or deci des t o f or ecl os e a l oa n, t he e nti r e a mo unt borr o we d al o ng w i t h i nt er est bec o mes d ue, i ncl udi ng i nst al me nt s whi c h ar e not d ue. Th us, noti ce s ho ul d be of t he e nti r e l oa n al o ng w i t hi nt er est paya bl e upt o dat e of noti ce a nd e ve n f ut ur e i nt er est till l oa n i s r e pai d.
2.4-6
Meaning of Non-Performing Asset
Acti o n f or e nf or ce me nt of s ec uri t y i nt er est c a n be i ni ti at e d o nl y i f t he s ec ur e d ass et i s cl assi fi e d as ‘ No n- Perf or m i ng Ass et’ ( NPA). ‘ No n- Perf or m i ng Ass et’ me a ns a n ass et or acc o unt of a borr o wer, whi c h has bee n cl assi fi e d by a ba nk or fi na nci al i nsti t uti o n as s ubst a ndar d , do ubtf ul or l oss ass et – ( a) I n cas e of ba nk, FI a d m i ni st er e d or r e g ul at e d by a ny a ut hori t y, i n acc or da nce w i t h di r ecti o ns or g ui deli nes of s uc h a ut hori t y a nd ( b) i n ot her c as es, i n acc or da nce w i t h t he di r ecti o ns or g ui deli nes r el ati ng t o ass et cl assi fi c ati o n i ss ue d by RBI. [ s ecti o n 2( 1)( o ) of S A RFAESI Act].
Suc h cl assi fi c ati o n bet wee n t wo t y pes of fi na nci al i nsti t uti o ns has bee n hel d vali d i n
Keshavlal Khemchand v. UOI ( 2015) 4 S CC 770 = 129 S CL 780 = 53 t ax ma nn. c o m 470 ( S C).
