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The enforcement of the charge created by a borrower or a guarantor has become relatively easier after the passing of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This Act is referred to in common parlance as SARFAESI.

The scheme of the Act facilitates a speedier enforcement of the security and therefore sale of the property concerned.

The definition of a borrower includes a guarantor also. Practically, any type of property will be covered by the definition. In this discussion, we are restricting the scope to immovable properties.

Earlier, in order that a property could be sold without the intervention of the court, it was necessary that there was to be a mortgage deed. The power of sale without court intervention was to be specifically conferred under the mortgage deed. The location of the property was also critical. Before exercising this power, the mortgagee was to issue a notice as required by law. The amount outstanding should at least be Rs. 500. A mortgagee having the right of power of sale was also entitled to appoint a receiver in respect of the property. The receiver was like an agent of the mortgagor. The receiver had the power to demand and recover income from the properties and undertake certain actions in respect of the property as specifically authorised by law.

After passing of the SARFAESI Act, the position changed substantially and a bank or a financial institution is in a position to sell the property even though there is no mortgage deed and other requirements as required earlier were not fulfilled. In other words, the position of various types of charges, in most of the cases was equated with that of a registered mortgage deed and the security could be enforced without the intervention of the court or tribunal.

The conditions for enforcement of the security interest are also set out in the Act. The bank or financial institution should be a secured creditor. A secured creditor means a creditor in whose favour a security interest is created by the borrower for due repayment of a financial assistance.

A security interest means a right, title and interest of any kind whatsoever in respect of a property created in favour of the bank or financial institution. A security agreement means an agreement, instrument or a document or an arrangement under which the “security interest” is created in favour of the “secured creditor”.

The definition of “security agreement” includes a mortgage created by deposit of title deeds.

The borrower should have committed a default. A default means non-payment of principal debt or interest or any other amount payable by a “borrower” to a “secured creditor”. The “secured creditor” has to give a statutory notice giving the “borrower” a minimum prescribed time for repayment. The notice should contain details of the amount payable by the “borrower” and also the “secured assets” intended to be enforced by the “secured creditor” in the event of non payment of such amount.

If the “borrower” fails to make payment after receipt of the notice, then the “secured creditor” has the rights to take recourse to various types of action. The “secured credit” can, in such cases, take possession of the “secured assets” including the right to transfer by way of lease, assignment or sale to realize the “secured asset”. The “secured creditor” can take over the management of the “secured asset” including the right to transfer by way of lease, assignment or sale to realize the “secured asset”. The “secured creditor” can appoint a Manager to manage the “secured assets” so taken over. The rights also include the right to recover money from those who acquired “secured assets” of such amounts as may be due to the “borrower” by such persons.

The “secured creditor” can transfer the “secured asset” after taking possession of the same or after taking over the management of the same. The transferee in such cases, will get all rights as relating to the ‘secured asset”, as if it is transferred by the owner.

Certain expenses for enforcing the transfer can be debited to the account of the “borrower”. If the “borrower” pays the amount due at any time before the sale or transfer, then the “secured creditor” cannot take any further steps for sale or transfer of the “secured asset” and the “secured asset” cannot be sold or transferred. If more than one “secured creditor” are there, the power of sale or transfer can be enforced only if three fourth of the “secured creditors” consent to the same. The “secured creditor” can also sell the “secured asset” of a guarantor without proceeding against the “borrower”.

A “borrower” after receiving the notice of demand, is prohibited from selling, leasing or otherwise transferring the “secured assets”. In the event that the “borrower” obstructs the “secured creditor” from taking possession and for certain other matters, the “secured creditor” can obtain suitable directions from the Chief Metropolitan Magistrate or the District Magistrate. The orders of the Chief Metropolitan Magistrate or the District Magistrate are normally final and binding.

Every authority is given to the Bank or Financial Institution for enforcing the sale or transfer of the property concerned in a fair manner. Opportunity is also given to the “borrower” to cure the default. Adverting to certain other issues which may arise, it is to be noted that the benefit of detailed tracing of title is not usually available to the “borrower” as normally, only a Sale Certificate which is in a simple and a prescribed form, is available. Further, the sale will not override any defect or deficiency in the title of the “borrower” to the property concerned.

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