Rights of a borrower in default under SARFAESI proceedings

Rights of a Borrower in Default under SARFAESI Proceedings

The SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) provides a legal framework for banks and financial institutions to recover defaulted loans. While it empowers lenders to recover dues, borrowers also have several rights to ensure fair treatment and legal remedies during SARFAESI proceedings. Here’s a detailed explanation of the rights of borrowers, followed by FAQs for better understanding.

1. Right to Notice under Section 13(2)

A borrower must receive a written 60-day notice from the bank before any enforcement action is taken. This notice should include:

- The details of the loan default.

- The total outstanding amount.

- Details of the secured asset (mortgaged property or collateral).

- The bank’s intention to enforce its security interest if the borrower fails to act within 60 days.

2. Right to Representation or Objection under Section 13(3A)

A borrower has the right to raise objections or representations within the 60-day notice period. If the borrower disputes the claim or points out errors (e.g., wrong calculations or prior payments), the bank must:

- Respond to the objections within 15 days.

- Provide reasons if it rejects the borrower’s representation.

3. Right to Seek Loan Restructuring or Settlement

Before the bank proceeds with enforcement actions, borrowers have the right to negotiate for:

- One-time settlement (OTS): Agreeing on a reduced lump-sum payment.

- Loan restructuring: Extending the repayment period or adjusting the interest rate.

Banks often entertain such requests if the borrower demonstrates genuine intent and financial difficulty.

4. Right to Fair Valuation of Assets

Before selling the secured asset, the bank is required to:

- Conduct a fair valuation of the property.

- Provide a copy of the valuation report to the borrower upon request.

The borrower has the right to contest the valuation if it appears to be unfair or significantly undervalued.

5. Right to Appeal Against Enforcement Actions

If the bank takes possession of the secured asset (symbolic or physical possession) or issues a sale notice under Section 13(4), the borrower can:

- File an appeal with the Debt Recovery Tribunal (DRT) under Section 17 of the Act within 45 days.

- Challenge the validity of the enforcement action, including any procedural lapses.

6. Right to Reclaim the Secured Asset before Sale

The borrower can reclaim the secured asset by clearing the outstanding dues along with reasonable costs incurred by the bank before the asset is sold or auctioned.

7. Right to Receive Balance Amount after Sale

If the bank sells the secured asset for a higher amount than the outstanding dues, the borrower is entitled to receive the surplus amount after the bank deducts its dues and expenses.

8. Right Against Arbitrary Actions by the Bank

The borrower can challenge any arbitrary or unfair action taken by the bank, such as:

- Misuse of powers under SARFAESI.

- Failure to comply with the due process of law.

- Harassment or coercion.

9. Right to Humanitarian Considerations

In case the secured asset is the borrower’s primary residence, the borrower may approach the DRT for relief on humanitarian grounds. Courts often consider such factors when passing orders.

10. Right to Legal Remedies Against Auction

Borrowers can file a suit or appeal if the auction is conducted in violation of the SARFAESI Rules, such as:

- Not publishing the sale notice in newspapers.

- Incorrect reserve price setting.

- Collusive bidding.

Frequently Asked Questions (FAQs)

Q1: Can the bank issue a SARFAESI notice without giving prior warning?

No, under Section 13(2) of the SARFAESI Act, the bank must issue a 60-day notice to the borrower before initiating any enforcement actions.

Q2: What should I do if the amount mentioned in the notice is incorrect?

You have the right to file an objection under Section 13(3A) within the 60-day notice period, detailing the discrepancies. The bank must reply within 15 days of receiving your representation.

Q3: Can I stop the auction of my property?

Yes, you can prevent the auction by:

- Clearing the dues before the auction date.

- Filing an appeal with the DRT under Section 17, challenging the possession or sale notice.

Q4: What happens if the property is sold for more than the outstanding loan amount?

The surplus amount after deducting the loan amount and recovery costs must be returned to you by the bank.

Q5: Can I claim relief if my home is the secured asset?

Yes, you can approach the DRT to request a stay on enforcement actions, especially if the secured asset is your only residence. Humanitarian grounds are often considered.

Q6: What happens if the bank doesn’t follow due process under SARFAESI?

You can challenge the bank’s actions in the DRT. For example, if the bank doesn’t respond to your objections or conducts an unfair auction, the DRT can stay the proceedings.

Q7: Can I negotiate with the bank after receiving a possession notice?

Yes, you can still negotiate with the bank for a settlement or restructuring of the loan even after the possession notice has been issued.

Q8: Is there a time limit for filing an appeal with the DRT?

Yes, the borrower must file an appeal within 45 days of receiving the possession notice under Section 13(4).

Q9: What legal options are available if the DRT rejects my appeal?

If the DRT rejects your appeal, you can file a second appeal with the Debt Recovery Appellate Tribunal (DRAT) within 30 days.

Q10: Can I challenge the SARFAESI notice in a civil court?

No, civil courts do not have jurisdiction over matters under the SARFAESI Act. You can only approach the DRT or DRAT for relief.

Conclusion

The SARFAESI Act ensures both lenders and borrowers are treated fairly. Borrowers must act promptly, exercise their rights, and seek legal remedies where necessary to protect their interests.

The SARFAESI Act, 2002, empowers banks and financial institutions to recover dues efficiently, but it also safeguards the rights of borrowers to ensure fair treatment and due process. As a borrower, understanding your rights and taking timely action can help mitigate the impact of default and protect your assets. Key rights include receiving proper notice, raising objections, seeking restructuring or settlement, challenging unfair actions, and reclaiming assets before they are sold. If enforcement actions are initiated, borrowers have legal recourse through the Debt Recovery Tribunal and Appellate Tribunal. It is crucial to act promptly, communicate with the bank, and seek professional legal assistance when necessary. Exercising your rights strategically can prevent severe consequences, preserve your financial stability, and ensure that the recovery process is conducted transparently and justly.

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