The Supreme Court on 05.05.2020 held in the case of Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari Bank Ltd. that cooperative banks come under a strict 2002 law which permits lenders to seize and sell defaulters’ assets, in a boost for these institutions that play a vital role in financial inclusion across large parts of India. Debt/asset securitisation is one of the latest techniques which financial markets have been witnessing. Under asset securitisation, a financial institution pools and packages individual loans and receivables, creates securities against them, and sells them to investors in a market. Securing assets is a process of stimulating assets into securities and the latter into liquidity on an ongoing basis, resulting in rising turnover of business and profits. It also provides for flexibility in yield, price determination, arrangement, size, risks and marketability of instruments. SARFAESI Act gives power to lenders to take control of assets of a borrower who fails to pay dues within 60 days of seeking payment. According to Sections 5(c) and 56(a) of the Banking Regulation Act, the concerted banks are engaged in banking activities. A 5-judge constitutional bench by Justices Arun Mishra, Indira Banerjee, Vineet Saran, M.R. Shah, Aniruddha Bose ruled that the SARFAESI Act, 2002 applies to cooperative banks as well. The bench upheld the Parliament’s legislative power for cooperative banks to be included under the Act. The bench upheld a notification issued on 28.01.2003 under the Banking Regulation Act, 1949, that brought cooperative banks within the sub-heading of “banks" under the Act. The unified judgement also stated that cooperative banks were to follow the 1949 Act and all the other legislation applicable to banks under the RBI Act. The Constitution bench decided on the issues after going through contradicting orders by earlier 2002, 2007 Supreme Court judgements. People approached the court to help decide the competence/locus standi of the Parliament to alter the definition clause to add multi-state cooperative banks under the Act.
SIGNIFICANCE OF THIS DEVELOPMENT
In 1970s USA, the first structured asset securitisation occurred in which securities were backed by a pool of mortgage loans. Then, these security pools were sold in the form of certificates to the investors by grouping similar securities together. From 1970 to 2000, the securities backed by assets apart from mortgage had increased to almost $60 billion. The 2008 recession took a toll on business all over the world, including India. Observations after the crisis showed insufficient understanding and risk pricing apparent in the process of risk transformation. This developed into the present situation in which India had to develop its own securitisation policy. Recovery of Debts was the previous legislation enacted for recovery of the default loans from the Banks and Financial Institutions Act, 1993. SARFAESI Act, 2002 was passed after the recommendations of the Narsimham Committee-1 that were submitted to the government. Forums were created under this Act such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for faster adjudication and disposal of disputes with respect to dues that were not recovered. There were several drawbacks in the Act which were misused by the borrowers and lawyers. This led to the government to inquire into the Act. For this, Mr. Andhyarujina was appointed to head another committee to examine banking sector reforms and consideration to changes in the legal system. In order to formalize the operations of the securitisation market in India and to ensure financial discipline and control in respect of the rights and obligation of the players, the legislature passed SARFAESI Act, 2002 which overruled Recovery of Debts. It is used as an effective tool by banks for bad loans and non-performing assets. Secured loans are preferred whereby banks can enforce underlying security and the only exception is agricultural land. Significance of this development of this Act is that it removes intervention by courts which makes the procedure efficient and speedy if the security is valid or not fraudulent.
SALIENT FEATURES OF THE ACT
Procedural Nature - It provides for the procedure to permit the remedy of security enforcement in secured assets without having to go to court, but instead directly through the secured creditor.
Retrospective Nature of Provisions - It purposefully wishes to cover up all the loan transactions which have already entered been entered into, subject to the limitation period, the defaulted repayments and the classification of debts into NPA and other future contingencies.
Constitutional Validity - The Supreme Court has upheld the constitutional validity of the Act. In one case, there was default on the part of the borrower in repaying his debt in full and the bank sent the notice for 60 days to the defaulter as required under the SARFAESI Act. Under section 13(4), after measures have been taken, we can then resort to the final step of the mechanism provided under Section 17 of the Act, which gives the borrower the option to approach Debt Recovery Tribunal. The constitutional validity of the Act and its subsequent provisions was upheld except Section 17(2) of Act, which was declared ultra-vires in consonance with Article 14 of Constitution.
The action during the pendency of Civil Suit - During the pendency of the bank’s civil suit, the bank can implement concurrent action under Section 13(4) of the Act.
Writ Jurisdiction - Remedy to avail appeal facility is available against actions relating to recoveries of dues of banks and financial institutions. Thus, we don’t need writ jurisdiction under Article 226 of the Constitution. Section 13(4)(d) gives power to a creditor to require the borrower to pay to the secured creditor a sum of money sufficient to discharge the secured debt such notice is given under Section 13(2). The future action which needs to be chosen can be seen under Section 13(4)(d) of the Act. The DRT’s order instructing bank to continue under the section during the pendency of the petition was upheld.
Whether Co-operative Banks can take action under the Act? - This Act’s provisions which allow co-operative banks to take help from the Act cannot be challenged on the ground that members of co-operative banks are governed by the by-laws which helps in suit filing in front of the nominee, which cannot be nullified by the provisions of the present Act. The validity of the Act with regards to inclusion of co-operative banks is concerned cannot be challenged on the ground that since provisions for recovery by a co-operative bank is already made under Gujarat Co-operative Societies Act and thus remedy under any other law is excluded.
OBJECTIVES AND PURPOSES
Speed in rehabilitation of NPAs of the banks and financial institutions.
Permits banks and FIs to auction off properties, whether commercial or residential, when borrower fail to repay their loans.
To regulate restructuring and restoration of monetary capital.
Enforcement of the security interest for matters connected to it.
It encompasses India as a whole.
Now, applicable to cooperative banks. (as of 05.05.2020)
The Act is not applicable to regional rural, nationalized (eg. SBI), and associate banks.
FORMATION OF SARFAESI ACT
Amendment to the 2002 Act was through the enforcement of the Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. Official Gazettes (Amendment) Act, 2016 included the Security Interest and Recovery of Debts Laws’ Enforcement. This Act effectively amends four laws:
SARFAESI Act, 2002
Indian Stamp Act, 1899
Depositories Act, 1996, and for matters connected to it.
1. CLASSIFICATION OF NPA & ISSUE SETTLEMENT RELATED TO NPA
Many borrowers feel that they are not defaulting on purpose and even if there is some kind of default, they are willing to correct the same and honour the commitments agreed upon. Bank Officials have the discretion to interpret guidelines reasonably or not, which gives rise to many customer complaints. The issue of classification of NPA is not dealt with by the tribunal or the courts, but they support the classification of any loan account as NPA if there is a default in payments, but the guidelines issued by the RBI in accordance with classification of assets are not one-sided. The RBI interprets those guidelines depending on the situation of a particular “loan account” or borrower.
2. DRT’S POWERS
Section 17 provides a right of appeal against the action initiated by the Bank under the provisions of the Act. Even though the DRT is supposed to only look into the procedural issues along with the interpretation by Courts, the scope of powers of DRT under section 17 has been significantly expanded though certain issues still requires consideration. If the DRT not proper or efficient in addressing all the issues raised by the borrower in his appeal, the borrower will be left with no remedy and he cannot also approach the Civil Court in view of section 34, which is a drawback. Even if the aggrieved approaches them, it is very difficult to convince and maintain a civil suit about a loan transaction where the Bank has already initiated the Act’s proceedings.
3. SALE OF ASSETS UNDER SARFAESI ACT
Complications are common in this procedure and it is very difficult for the borrowers at times to fight with the Banks and it has something to do with the issue of lack of proper understanding of procedures and law under the Act. The Bank exercises too much amount of discretion when many properties are available for auction and the disposal of a property chosen by the borrower clears the debt. If, between the sale consideration amount and actual bestowal of clear title, there is an increasing delay, the bidder or purchaser will only get a minimum interest over his investment if the sale is set aside at the end, and results in the bank repaying the consideration of sale to the auction purchaser.
4. JURISDICTION OF HIGH COURTS IN LEGAL PROCEEDINGS UNDER THE ACT
One thing the author appreciates is that High Courts have not proceeded in diluting the provisions and the Courts have strengthened the process in public interest and in the interests of the Bank. If there is clear unfairness or arbitrariness on the part of the Bank in invoking the provisions or in the process. According to the author, the High Court should provide relief to the borrower without laying much emphasis on the issue of availability of alternative remedy under section 17. Banks are not impacted in this situation as the High Courts are mainly focused on public interest as they will be disposing of the writ petitions in respect of such matters which have high priority.
5. JURISDICTION OF THE CIVIL COURT
There is a clear Bar under section 34 of the 2002 Act on civil courts in dealing with SARFAESI related issues. It is cumbersome and problematic to persuade a particular civil court to take up this case for the reason that it has jurisdiction to entertain a particular suit against the bank irrespective of referring to the provisions. However, if the powers of the DRT do not include the way to deal with certain issues raised by the borrower, he/she can certainly approach the court for settling the matter. When a borrower is entitled to approach the court because of the relevant facts of that particular case, it is not easy to convince a court that it has jurisdiction to entertain a particular suit against the bank when it has invoked the Act’s provisions.
The author’s observations are that though it is settled that the Bank is supposed to mandatorily follow the procedure prescribed for conduct of a public auction under SARFAESI Act, 2002, it depends from case to case and the issue that is of more priority is to the highest monetary value for the property. Many loan accounts can be resolved when it is classified itself as NPA if the bank allows regularization of the loan accounts if the value of the asset remains the same/does not reduce, and if the quality of asset mortgaged is assured. The author’s suggestion is to remove the disadvantages mentioned in the critical analysis above, and amend the 2002 Act to keep up-to-date with demonetization and cashless transactions.
Author - Anjali Baskar
Student of School of Law, Christ University.