Can the bank issue a SARFAESI notice without giving prior warning?

Under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), banks and financial institutions cannot directly issue a SARFAESI notice under Section 13(2) without following certain conditions. The law mandates specific procedures and requirements to ensure that the borrower is given sufficient opportunity to remedy the default before enforcement actions are taken. Below is a detailed explanation of the circumstances under which a SARFAESI notice can or cannot be issued and the borrower's rights in such situations.

Prerequisites for Issuing a SARFAESI Notice

1 Loan Classification as a Non-Performing Asset (NPA)

• Before issuing a notice under Section 13(2), the loan account of the borrower must be classified as a Non-Performing Asset (NPA) in accordance with the Reserve Bank of India (RBI) guidelines.
• A loan is typically classified as an NPA when the borrower fails to repay principal or interest for 90 days or more.

2.Demand for Payment (Optional Step)

• While not mandatory under the SARFAESI Act, banks often issue reminder letters, phone calls, or a demand notice to the borrower before initiating SARFAESI proceedings.
• This step is commonly followed to encourage repayment and avoid escalation to SARFAESI proceedings.

3. Notice Under Section 13(2)

• Once the loan is classified as an NPA, the bank can issue a 60-day notice under Section 13(2).
• The notice serves as an official communication to the borrower, demanding repayment of the outstanding dues within the specified period.

Mandatory Contents of the SARFAESI Notice

The notice under Section 13(2) must include the following details:

• Total amount outstanding, including interest and penalties.
• Details of the loan agreement and the secured assets (e.g., property or collateral).
• The action the bank intends to take under the SARFAESI Act if the borrower fails to repay within the stipulated period.

Can a Bank Skip the Warning and Issue a SARFAESI Notice Directly?

No, a bank cannot arbitrarily issue a SARFAESI notice under Section 13(2) without meeting the prerequisites:

1. Loan Must Be an NPA: The account must be classified as an NPA. Issuing a SARFAESI notice for a standard or performing loan account violates RBI norms and the borrower's rights.
2. Obligation to Follow Fair Process: The SARFAESI Act emphasizes due process. Directly initiating recovery proceedings without a proper notice period deprives the borrower of an opportunity to rectify the default, which can be challenged in legal forums.
3. Court Rulings Against Arbitrary Notices: Judicial precedents have consistently held that banks must adhere to procedural fairness and cannot bypass the mandatory notice requirements of Section 13(2).

Borrower's Recourse if a SARFAESI Notice is Issued Without Warning

If a borrower believes that the SARFAESI notice has been issued arbitrarily or without following due process, the following steps can be taken:

1. Raise Objections under Section 13(3A): The borrower can file a written objection within the 60-day notice period, detailing procedural lapses or errors in the notice. The bank is obligated to reply to the objections within 15 days.
2. Approach the Debt Recovery Tribunal (DRT): Under Section 17 of the SARFAESI Act, borrowers can file an appeal with the DRT to challenge the validity of the notice or the classification of the account as NPA.
3. File a Complaint with the RBI or Ombudsman: If the notice violates RBI guidelines or lacks justification, the borrower can lodge a formal complaint with the Reserve Bank of India or the Banking Ombudsman.
4. Seek Judicial Intervention: In rare cases of gross procedural violations, borrowers can approach the High Court under Article 226 of the Constitution to seek relief.

Judicial Precedents on Arbitrary SARFAESI Notices

1. Mardia Chemicals Ltd. v. Union of India (2004): The Supreme Court held that banks must act fairly and in compliance with procedural safeguards under the SARFAESI Act. Notices issued without proper justification can be challenged.
2. Transcore v. Union of India (2006): The court clarified that the SARFAESI process must align with natural justice principles, giving borrowers adequate time to respond or rectify defaults.
3. L&T Housing Finance Ltd. v. Trishul Developers (2020): The court reiterated that any action under SARFAESI must adhere to the statutory requirements, and procedural lapses can invalidate the notice.

Conclusion

A bank cannot issue a SARFAESI notice arbitrarily or without fulfilling mandatory conditions like classifying the loan as an NPA and issuing a proper 60-day notice under Section 13(2). Borrowers have the right to raise objections, challenge procedural lapses, and seek legal recourse if the notice is issued improperly. By ensuring due process, the SARFAESI Act balances the lender's recovery rights with the borrower's right to fair treatment. Acting promptly and seeking professional advice can help borrowers safeguard their interests and address the issue effectively.

Disclaimer: This information is intended for general guidance only and does not constitute legal advice. Please consult with a qualified lawyer for personalized advice specific to your situation.

Adcocate J.S. Rohilla (Civil & Criminal Lawyer in Indore)

Contact: 88271 22304

www.jsrohilla.in