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

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

The SARFAESI Act, 2002 provides stringent procedures for banks and financial institutions to recover dues from defaulting borrowers by enforcing security interests without court intervention. However, the Act requires banks to adhere strictly to the prescribed procedures to ensure fairness and protect borrowers' rights. If the bank deviates from the due process, the borrower can challenge the actions in various legal forums, and the bank may face legal and procedural consequences. Below is a comprehensive explanation of what happens when the bank fails to follow due process under SARFAESI.

Key Aspects of Due Process Under SARFAESI

Before understanding the consequences of non-compliance, it’s crucial to know the steps banks must follow under SARFAESI:

1. Issue a Demand Notice (Section 13(2)):

- The bank must issue a 60-day notice demanding payment of the outstanding amount.

2. Consider Borrower’s Objections (Section 13(3A)):

- If the borrower raises objections to the demand notice, the bank must respond within 15 days with valid reasons for accepting or rejecting the objections.

3. Take Possession of Secured Asset (Section 13(4)):

- If the borrower fails to repay, the bank can take symbolic or physical possession of the secured asset, following prescribed procedures.

4. Publish Possession Notice:

- Possession notices must be published in two leading newspapers, one of which must be in the vernacular language.

5. Auction of the Secured Asset (Rule 8 & Rule 9 of SARFAESI Rules):

- Before auctioning the property, the bank must:

- Obtain a proper valuation of the asset.

- Issue a sale notice with a 30-day notice period.

- Conduct the sale transparently and publicly.

Consequences of Non-Compliance by the Bank

1. Challenge Under Section 17 of SARFAESI Act

If the bank fails to follow due process, the borrower can file an appeal before the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.

- Grounds for Appeal:

- The bank did not serve a proper demand notice.

- Borrower’s objections were not addressed.

- Possession was taken without adequate notice or compliance with rules.

- Sale notice was not published or did not meet statutory requirements.

- Auction procedures were not transparent or fair.

- DRT’s Powers:

- The DRT can set aside the bank’s actions if due process was violated.

- It may order the restoration of possession to the borrower.

2. Interim Relief Against Enforcement Actions

Borrowers can seek a stay on possession or auction proceedings from the DRT while the appeal is being adjudicated.

- Impact on Bank:

- The stay delays the recovery process.

- The bank may incur additional legal costs and face reputational damage.

3. Filing a Writ Petition in the High Court

If procedural lapses are severe or if constitutional rights are violated, the borrower can approach the High Court under Article 226 of the Constitution.

- Example Scenarios:

- The bank bypassed mandatory notices.

- There was a breach of natural justice or arbitrary action.

- High Court’s Powers:

- Grant a stay on further proceedings.

- Declare the bank’s actions void for non-compliance with SARFAESI provisions.

4. Damages and Compensation for Borrowers

If the borrower suffers financial or reputational loss due to the bank’s improper actions, they can claim damages by filing a civil suit.

5. Auction Declared Void

If the bank conducts an auction without adhering to the prescribed rules, the borrower can challenge the auction in the DRT or High Court.

- Consequences for the Bank:

- The auction may be declared void.

- The bank may be ordered to conduct a fresh auction, delaying recovery.

Judicial Precedents on Procedural Lapses by Banks

1. Mardia Chemicals Ltd. v. Union of India (2004):

- The Supreme Court held that borrowers have the right to challenge arbitrary or illegal actions under SARFAESI and that procedural fairness must be upheld.

2. Mathew Varghese v. M. Amritha Kumar (2014):

- The court emphasized that the 30-day notice period before auction is mandatory, and failure to comply renders the auction invalid.

3. ITC Ltd. v. Blue Coast Hotels Ltd. (2018):

- The Supreme Court ruled that procedural lapses by the bank, such as issuing possession notices without justification, can invalidate recovery actions.

Legal Protections for Borrowers

1. Natural Justice:

- Borrowers are entitled to a fair opportunity to raise objections and receive a reasoned reply before enforcement.

2. Transparency in Recovery Actions:

- Banks must ensure transparency and fairness in possession and auction proceedings.

3. Right to Challenge Arbitrary Actions:

- Borrowers can seek relief if the bank fails to adhere to statutory procedures.

Steps for Borrowers to Take

1. Document the Lapse:

- Collect evidence of the bank’s procedural lapses, such as non-receipt of notices, lack of response, or unfair practices.

2. File an Objection or Appeal:

- Raise an objection with the bank or file an appeal before the DRT.

3. Engage a Lawyer:

- Seek legal advice to challenge the bank’s actions effectively.

4. Request Interim Relief:

- Apply for a stay on possession or auction proceedings to prevent further escalation.

FAQs

1. Can the bank take possession without serving a notice under Section 13(2)?

No, the bank must issue a 60-day demand notice under Section 13(2). Failure to do so makes the possession invalid.

2. What can I do if my objections to the demand notice are ignored?

You can file an appeal before the DRT under Section 17, citing a violation of Section 13(3A).

3. Is a sale notice valid if it is not published in newspapers?

No, Rule 8 of the SARFAESI Rules mandates publication of the sale notice in two newspapers, including one in the vernacular language.

4. Can I reverse an auction if the bank violated rules?

Yes, you can challenge the auction in the DRT or High Court. Courts have invalidated auctions in cases of procedural lapses.

5. Can I claim compensation if the bank’s actions cause me losses?

Yes, you can file a civil suit for damages if you suffer financial or reputational harm due to the bank’s procedural violations.

Conclusion

When banks fail to follow due process under the SARFAESI Act, borrowers have several legal remedies to challenge such actions. Procedural fairness is central to the SARFAESI framework, and violations can lead to enforcement actions being invalidated or delayed. Borrowers should act promptly, gather evidence of procedural lapses, and approach legal forums like the DRT or High Court to protect their rights. Engaging experienced legal counsel can further strengthen the borrower’s position and ensure a fair resolution.

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