Chapter 16 SARFESI, 2002

Chapter 16 – SARFAESI Act, 2002 ©www.altclasses.
in
Compiled by: Pankaj Garg

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Chapter 16 – SARFAESI Act, 2002 ©www.altclasses.in
Chapter – 16
The Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act, 2002)
16.1 – Basics of SARFAESI Act, 2002
Broad The Act is divided into 7 chapters and 42 sections:

Structure of Chapters Title Sections
SARFAESI I Preliminary 1-2
II Regulation of securitisation and 3-12B
reconstruction of financial assets of
banks and financial institutions
III Enforcement of security interest 13-19
IV Central registry 20-26A
IVA Registration by secured creditors and 26B-26E
other creditors
V Offences and penalties 27-30D
VI Miscellaneous 31-42
Objectives of • to regulate securitisation and reconstruction of financial assets

SARFAESI and
• enforcement of security interest and for matters connected

therewith or incidental thereto,
Applicability • SARFAESI, 2002 extends to the whole of India.
– Sec. 1

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16.2 - Definitions
Asset Asset reconstruction means acquisition by any asset

reconstruction reconstruction company (RC) of any right or interest of any
– Sec. 2(b) bank or financial institution in any financial assistance for the
purpose of realisation of such financial assistance.
Points to remember
• Section 2(k) defines the term "financial assistance" as any

loan or advance granted or any debentures or bonds
subscribed or any guarantees given or letters of credit
established or any other credit facility extended by any
bank or financial institution including funds provided for
the purpose of acquisition of any tangible asset on hire or
financial lease or conditional sale or under any other
contract or obtaining assignment or licence of any
intangible asset or purchase of debt securities.
• Purpose of acquisition by asset reconstruction company
is to realise such assets and not to stay invested by
becoming the shareholders of the company. Amount so
realised should be held and applied towards redemption
of investments and payment of returns assured to the
QIBs. However, it has the right to take over the
management of the business, subject to RBI’s guidelines
from time to time.
Asset ARC means a company registered with RBI u/s 3 for the
reconstruction purposes of carrying on the business of asset reconstruction or
company (ARC) securitisation, or both.

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– Sec. 2(ba) Points to remember
An ARC is not a banking company although it is regulated by

RBI. Such company cannot carry out any other business
other than securitisation or reconstruction.
Borrower Borrower means any person
– Sec. 2(f) • who has been granted financial assistance by any bank or
financial institution or
• who has given any guarantee or created any mortgage or
pledge as security for the financial assistance granted by any
bank or financial institution
and
• includes a person who becomes borrower of an asset

reconstruction company consequent upon acquisition by it of
any rights or interest of any bank or financial institution in
relation to such financial assistance or who has raised funds
through issue of debt securities.
Debt Debt shall have the meaning assigned to it in Sec. 2(g) of the
– Sec. 2(ha) Recovery of Debts Due to Banks and Financial Institutions Act,
1993. and includes:
(a) unpaid portion of the purchase price of any tangible asset

given on hire or financial lease or conditional sale or under
any other contract;
(b) any right, title or interest on any intangible asset or licence
or assignment of such intangible asset, which secures the
obligation to pay any unpaid portion of the purchase price of

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such intangible asset or an obligation incurred or credit

otherwise extended to enable any borrower to acquire the
intangible asset or obtain licence of such asset;
Default Default means:
– Sec. 2(j) (a) non-payment of any debt or any other amount payable by
the borrower to any secured creditor consequent upon
which the account of such borrower is classified as NPA in
the books of the secured creditor; or
(b) non-payment of any debt or any other amount payable by
the borrower with respect to debt securities after notice of
90 days demanding payment of dues served upon such
borrower by the debenture trustee or any other authority in
whose favour security interest is created for the benefit of
holders of such debt securities.
Points to remember
• An unsecured creditor doesn’t have recourse to this act.

• A stressed asset which is yet to be classified as NPA
cannot be resolved through this act.
• For non-payment of debenture or bonds to be called
default, a notice of 90 days is a pre-requisite by the
debenture trustee or beneficiary of the security
Financial asset Financial asset means debt or receivables and includes—

– Sec. 2(l) (i) a claim to any debt or receivables or part thereof, whether
secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge
on, immovable property; or

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(iii) a mortgage, charge, hypothecation or pledge of movable

property; or
(iv) any right or interest in the security, whether full or part
underlying such debt or receivables; or
(v) any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such
interest is existing, future, accruing, conditional or
contingent; or
(vi) any beneficial right, title or interest in any tangible asset
given on hire or financial lease or conditional sale or under
any other contract which secures the obligation to pay any
unpaid portion of the purchase price of such asset or an
obligation incurred or credit otherwise provided to enable
the borrower to acquire such tangible asset; or
(vii) any right, title or interest on any intangible asset or licence
or assignment of such intangible asset, which secures the
obligation to pay any unpaid portion of the purchase price
of such intangible asset or an obligation incurred or credit
otherwise extended to enable the borrower to acquire such
intangible asset or obtain licence of the intangible asset; or
(viii)any financial assistance.
Non- NPA means an asset or account of a borrower, which has been

performing classified by a bank or financial institution as sub-standard,
asset (NPA) doubtful or loss asset,

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– Sec. 2(o) (a) in case such bank or financial institution is administered or

regulated by an authority or body established, constituted or
appointed by any law for the time being in force, in
accordance with the directions or guidelines relating to
assets classifications issued by such authority or body;
(b) in any other case, in accordance with the directions or
guidelines relating to assets classifications issued by the
Reserve Bank.
Property Property means
– Sec. 2(t) (i) immovable property;

(ii) movable property;
(iii) any debt or any right to receive payment of money, whether
secured or unsecured;
(iv) receivables, whether existing or future;
(v) intangible assets, being know-how, patent, copyright, trade
mark, licence, franchise or any other business or commercial
right of similar nature as may be prescribed by the Central
Government in consultation with Reserve Bank.
Qualified buyer Qualified buyer means

– Sec. 2(u) • a financial institution, insurance company, bank, state
financial corporation, state industrial development
corporation, trustee or asset reconstruction company which
has been granted a certificate of registration u/s 3 or
• any asset management company making investment on behalf

of mutual fund or pension fund or

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• a foreign institutional investor registered under the SEBI Act

or regulations made thereunder,
• any category of non-institutional investors as may be
specified by the RBI or
• any other body corporate as may be specified by the Board.
Securitisation Securitisation means acquisition of financial assets by any asset
– Sec. 2(z) reconstruction company from any originator, whether by raising

of funds by such asset reconstruction company from qualified
buyers or issue of security receipts representing undivided
interest in such financial assets or otherwise
Points to remember
The process of securitisation helps the ARC to acquire

financial assets like Loans from banks due to which the ARC
shall be deemed to be the lender and all the rights of such
bank or financial institution shall vest in such company in
relation to such financial assets.
Secured Secured creditor means-

creditor
(a) any bank or financial institution or any consortium or group
– Sec. 2(zd) of banks or financial institutions holding any right, title or
interest upon any tangible asset or intangible asset as
specified in clause (l);
(b) debenture trustee appointed by any bank or financial
institution; or

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(c) an asset reconstruction company whether acting as such or

managing a trust set up by such asset reconstruction
company for the securitisation or reconstruction, as the case
may be; or
(d) debenture trustee registered with the Board appointed by
any company for secured debt securities; or
(e) any other trustee holding securities on behalf of a bank or
financial institution,
in whose favour security interest is created by any borrower for
due repayment of any financial assistance
Security Security interest means right, title and interest of any kind,
interest other than those specified in Sec. 31, upon property created in
– Sec. 2(zf) favour of any secured creditor and includes—
(a) any mortgage, charge, hypothecation, assignment or any

right, title or interest of any kind, on tangible asset, retained
by the secured creditor as an owner of the property, given
on hire or financial lease or conditional sale or under any
other contract which secures the obligation to pay any
unpaid portion of the purchase price of the asset or an
obligation incurred or credit provided to enable the
borrower to acquire the tangible asset; or
(b) such right, title or interest in any intangible asset or
assignment or licence of such intangible asset which secures
the obligation to pay any unpaid portion of the purchase
price of the intangible asset or the obligation incurred or any
credit provided to enable the borrower to acquire the
intangible asset or licence of intangible asset.

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Important Questions
Q. No. 1: Explain Asset Reconstruction and Financial Assets under the

Securitization and Reconstruction of Financial Assets Enforcement
of Security and Interest Act 2002. [Nov. 10(4 Marks)]
HINT: Refer Sec. 2(b) and Sec. 2(l).
Q. No. 2: Explain briefly the concept of "Securitization" under the provisions

of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. [May 13 (4 Marks)]
HINT: Refer Sec. 2(z).
Q. No. 3: Explain the meaning of the terms “non-performing asset" and “asset
reconstruction” used in the SARFAESI Act, 2002. [May 14 (4 Marks)]
HINT: Refer Sec. 2(o) and Sec. 2(b).
Q. No. 4: ABC limited has issued listed bonds five years ago, which is due to
be redeemed in the current year worth 50 crore. Market analyst
feels that the projected cash flows and profitability seems
inadequate to repay the bond value. The single largest bond holder
BH Ltd. holds bonds worth 20 crore, and wants to explore its options
under SARFAESI law, in case ABC limited fails to repay the debt.
Please advise whether BH ltd. can have recourse to the SARFAESI Act.
HINT: Refer Sec. 2(zd). BH Ltd. can have recourse to SARFAESI Act as
debenture trustee registered with the Board appointed by any company
for secured debt securities are covered within the definition of secured
creditor.

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16.3 - Regulation of Securitisation and Reconstruction of Financial Assets of

Banks and Financial Institutions (Sec. 3 – 12D)
Registration of Conditions to No ARC shall commence or carry on the

ARCs commence business of securitisation or asset
- Sec. 3 business reconstruction without
(a) obtaining a certificate of registration

granted under this section; and
(b) having the owned fund of not less than
₹100 crores.
Conditions for • Every reconstruction company shall make

Registration an application for registration to the RBI in
such form and manner as it may specify.
• RBI may, for the purpose of considering to
grant its approval for the application for
registration of an ARC, require to be
satisfied, by an inspection of records or
books of such ARC, or otherwise, that the
following conditions are fulfilled, namely:
(a) that the ARC has not incurred losses in
any of the 3 preceding financial years;
(b) that such ARC has made adequate
arrangements for realisation of the
financial assets acquired for the purpose
of securitisation or asset reconstruction
and shall be able to pay periodical
returns and redeem on respective due

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dates on the investments made in the

company by the qualified buyers or
other persons;
(c) that the directors of ARC have adequate
professional experience in matters
related to finance, securitisation and
reconstruction;
(d) that any of its directors has not been
convicted of any offence involving moral
turpitude;
(e) that a sponsor of an ARC is a fit and
proper person in accordance with the
criteria as may be specified in the
guidelines issued by the Reserve Bank
for such persons;
(f) that ARC has complied with or is in a
position to comply with prudential
norms specified by the Reserve Bank.
(g) that ARC has complied with one or more
conditions specified in the guidelines
issued by the Reserve Bank for the said
purpose.
Points to remember
RBI may reject the application if it is
satisfied that the conditions so required
are not fulfilled after providing the
applicant a reasonable opportunity of
being heard.

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Issue of The Reserve Bank may, after being satisfied

certificate of that the specified conditions are fulfilled, grant
registration to a certificate of registration to ARC to
ARC commence or carry on business of
securitisation or asset reconstruction, subject
to such conditions, which it may consider, fit
to impose.
Requirement Every ARC, shall obtain prior approval of the

of prior RBI for any
approval of • substantial change in its management or
RBI
• change of location of its registered office or
• change in its name:
Points to remember
• The expression "substantial change in

management" means the change in the
management by way of transfer of shares
or amalgamation or transfer of the
business of the company.
• The decision of the Reserve Bank,
whether the change in management of an
ARC is a substantial change in its
management or not, shall be final and
binding.
Cancellation of Situations in RBI may cancel a certificate of registration

certificate of which granted to an ARC, if such company-

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registration certificate (a) ceases to carry on the business of
– Sec. 4 may be securitisation or asset reconstruction; or

cancelled (b) ceases to receive or hold any investment
from a qualified buyer; or
(c) has failed to comply with any conditions
subject to which the certificate of
registration has been granted to it; or
(d) at any time fails to fulfil any of the
conditions referred to in Sec. 3; or
(e) fails to-
(i) comply with any direction issued by
the RBI; or
(ii) maintain accounts in accordance with
the requirements of any law or any
direction or order issued by the RBI; or
(iii) submit or offer for inspection its books
of account or other relevant documents
when so demanded by the RBI; or
(iv) obtain prior approval of the Reserve
Bank in situations specified u/s 3 for
substantial change in management,
change of location and change of name.
Opportunity to Before cancelling a certificate of registration

comply with on the ground that the ARC
the conditions • has failed to comply with the provisions of
clause (c) or

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• has failed to fulfil any of the conditions
referred to in clause (d) or sub-clause (iv)
of clause (e),
the Reserve Bank, unless it is of the opinion
that the delay in cancelling the certificate of
registration shall be prejudicial to the public
interest or the interests of the investors or the
ARC, shall give an opportunity to such
company on such terms as the RBI may specify
• for taking necessary steps to comply with
such provisions or fulfillment of such
conditions.
Appeal against • An ARC aggrieved by the order

cancellation of cancellation of certificate of registration
order may prefer an appeal, within a period of 30
days from the date on which such order of
cancellation is communicated to it, to the
C.G (Secretary, Ministry of Finance, and
Government of India).
• It is provided that before rejecting an
appeal such company shall be given a
reasonable opportunity of being heard.

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Points to remember
An ARC, which is holding investments of qualified buyers

and whose application for grant of certificate of registration
has been rejected or certificate of registration has been
cancelled shall, notwithstanding such rejection or
cancellation be deemed to be an ARC until it repays the
entire investments held by it (together with interest, if any)
within such period as specified by the Reserve Bank may
direct.
Acquisition of Acquiring of Notwithstanding anything contained in any

rights or financial agreement or any other law for the time being
interest in assets of any in force, any ARC may acquire financial assets
financial assets bank or of any bank or financial institution-
– Sec. 5 financial
(a) by issuing a debenture or bond or any
institution
other security in the nature of debenture,
- Sec. 5(1)
for consideration agreed upon between
such company and the bank or financial
institution, incorporating therein such
terms and conditions as may be agreed
upon between them; or
(b) by entering into an agreement with such
bank or financial institution for the
transfer of such financial assets to such
company on such terms and conditions as
may be agreed upon between them.

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Points to remember
• Any document executed by any bank or

financial institution as mentioned above,
in favour of the ARC acquiring financial
assets shall be exempted from stamp
duty, provided acquisition is for the
purposes of reconstruction or
securitisation.
• Exemption is provided in order to
encourage banks or FIs to resolve non-
performing assets (NPA) issues by
offloading it to ARCs
Implications ARC deemed to be the lender - Sec. 5(2)

of such
• If the bank or financial institution is a lender
acquisition
in relation to any financial assets acquired
by the ARC, then such ARC shall, on such
acquisition, be deemed to be the lender and
all the rights of such bank or financial
institution shall vest in such company in
relation to the such financial assets.
• If the bank or financial institution is holding
any right, title or interest upon any tangible
asset or intangible asset to secure payment
of any unpaid portion of the purchase price
of such asset or an obligation incurred or
credit otherwise provided to enable the

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borrower to acquire the tangible asset or

assignment or licence of intangible asset,
such right, title or interest shall vest in the
ARC on acquisition of such assets.
Contracts remains to be in force and in

favour of ARC- Sec. 5(3)
• All contracts, deeds, bonds, agreements,

powers-of-attorney, permissions, approvals,
consents or no-objections under any law or
otherwise and other instruments of
whatever nature which relate to the said
financial asset
and
• which are subsisting or having effect

immediately before the acquisition of
financial asset
and
• to which the concerned bank or financial

institution is a party or which are in favour
of such bank or financial institution
shall, after the acquisition of the financial

assets, be of as full force and effect against or
in favour of the ARC, as the case may be.

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Suits, appeal and other proceedings to

continue- Sec. 5(4)
If, on the date of acquisition of financial asset,

any suit, appeal or other proceeding of
whatever nature relating to the said financial
asset is pending by or against the bank or
financial institution, the same shall not abate,
or be discontinued, but the suit, appeal or
other proceeding may be continued,
prosecuted and enforced by or against the
ARC.
Application to DRT or Appellate Tribunal
• On acquisition of financial assets, the ARC,

may with the consent of the originator, file
an application before the Debts Recovery
Tribunal or the Appellate Tribunal or any
court or other Authority for the purpose of
substitution of its name in any pending suit,
appeal or other proceedings.
• On receipt of such application, such DRT or
the Appellate Tribunal or court or Authority
shall pass orders for the substitution of the
ARC in such pending suit, appeal or other
proceedings.

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Transfer of Transfer of If any financial asset, of a borrower acquired

pending pending cases by an ARC, comprise of secured debts of more
applications to to single DRT than one bank or financial institution, and for
any one of recovery of which such banks or financial
Debts Recovery institutions has filed applications before two
Tribunals in
or more Debts Recovery Tribunals, the ARC
certain cases
may file an application to the Appellate
(Section 5A)
Tribunal having jurisdiction over any of such
Tribunals in which such applications are
pending, for transfer of all pending
applications to any one of the Debts Recovery
Tribunals as it deems fit.
Order for On receipt of such application for transfer of

transfer by all pending applications, the Appellate
appellate Tribunal may, after giving the parties to the
Tribunal application an opportunity of being heard,
pass an order for transfer of the pending
applications to any one of the Debts Recovery
Tribunals.
Binding of Any order passed by the Appellate Tribunal

order on all shall be binding on all the Debts Recovery
the DRT’s Tribunals as if such order had been passed by
the Appellate Tribunal having jurisdiction on
each such Debts Recovery Tribunal.

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Execution of Any recovery certificate, issued by the Debts

recovery Recovery Tribunal to which all the pending
certificate applications are transferred, shall be executed
in accordance with the provisions contained in
section 19(23) and other provisions of the
Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (51 of 1993) shall,
accordingly, apply to such execution.
Notice to • The bank or financial institution may, if it considers

obligor and appropriate, give a notice of acquisition of financial assets by
discharge of any ARC, to the concerned obligor and any other concerned
obligation of person and to the concerned registering authority (including
such obligor Registrar of Companies) in whose jurisdiction the mortgage,
– Sec. 6 charge, hypothecation, assignment or other interest created

on the financial assets had been registered.
• Where a notice of acquisition of financial asset is given by a
bank or financial institution, the obligor, on receipt of such
notice, shall make payment to the concerned ARC in discharge
of any of the obligations in relation to the financial asset
specified in the notice.
• Where no notice of acquisition of financial asset is given by
the bank or financial institution, any money or other
properties subsequently received by the bank or financial
institution, shall constitute monies or properties held in trust
for the benefit of and on behalf of the ARC.

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Measures for ARC may, for the purposes of asset reconstruction, having
assets regard to the guidelines framed by the RBI in this behalf, provide
reconstruction for any one or more of the following measures, namely:
– Sec. 9 (a) the proper management of the business of the borrower, by
change in, or takeover of, the management of the business of
the borrower;
(b) the sale or lease of a part or whole of the business of the
borrower;
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the
provisions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance with the
provisions of this Act;
(g) to convert any portion of debt into shares of a borrower
company:
Provided that conversion of any part of debt into shares of a
borrower company shall be deemed always to have been
valid, as if the provisions of this clause were in force at all
material times.
Directions • RBI shall, for the purposes as given above,

by RBI determine the policy and issue necessary
directions including the direction for regulation
of management of the business of the borrower
and fees to be charged.
• ARC shall take measures in accordance with
policies and directions of the RBI.

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Other functions Any ARC may-

of ARC (a) act as an agent for any bank or financial institution for the
purpose of recovering their dues from the borrower on
- Sec. 10
payment of such fees or charges as may be mutually agreed
upon between the parties;
(b) act as a manager referred to in Sec. 13(4)(c) on such fee as
may be mutually agreed upon between the parties;
(c) act as receiver if appointed by any court or tribunal:
Provided that no ARC shall act as a manager if acting as such
gives rise to any pecuniary liability.
Points to remember
No ARC which has been granted a certificate of registration,

shall commence or carry on, without prior approval of the
RBI, any business other than that of securitisation or asset
reconstruction.
Resolution of Where any dispute relating to securitisation or reconstruction or

disputes non-payment of any amount due including interest arises
– Sec. 11 amongst any of the parties, namely,
(a) the bank, or financial institution, or

(b) ARC or
(c) qualified buyer,
such dispute shall be settled by conciliation or arbitration as

provided in the Arbitration and Conciliation Act, 1996, as if the
parties to the dispute have consented in writing for
determination of such dispute by conciliation or arbitration and
the provisions of that Act shall apply accordingly.

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Power of RBI to • RBI may in public interest, determine the policy and give
determine directions to any ARC in matters relating to income
policy and issue recognition, accounting standards, making provisions for
directions bad and doubtful debts, capital adequacy based on risk
- Sec. 12 weights for assets and also relating to deployment of funds

by the ARC.
• Besides, the Reserve bank may give directions to any ARC in
particular as to:
(a) the type of financial asset of a bank or Financial
institution which can be acquired and procedure for
acquisition of such assets and valuation thereof;
(b) the aggregate value of financial assets which may be
acquired by any securitisation company or
reconstruction company.
(c) the fee and other charges which may be charged or
incurred for management of financial assets acquired by
any asset reconstruction company;
(d) transfer of security receipts issued to qualified buyers
Power of RBI to The Reserve Bank may direct ARC to furnish it within such time
Call for as may be specified by the Reserve Bank, with such statements
Statements and and information relating to the business or affairs of such
information securitisation company or reconstruction company (including
- Sec. 12A any business or affairs with which such company is concerned)
as the Reserve Bank may consider necessary or expedient to
obtain for the purpose of this Act.

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Power of RBI to • RBI may, for the purposes of this Act, carry out or caused to
carry out audit be carried out audit and inspection of an ARC from time to
and inspection time.
- Sec. 12 B • It shall be the duty of ARC and its officers to provide

assistance and cooperation to the Reserve Bank to carry out
audit or inspection.
• Where on audit or inspection or otherwise, the RBI is satisfied
that business of an ARC is being conducted in a manner
detrimental to public interest or to the interests of investors
in security receipts issued by such ARC, the RBI may, for
securing proper management of ARC, by an order—
(a) remove the Chairman or any director or appoint
additional directors on the board of directors of the ARC;
or
(b) appoint any of its officers as an observer to observe the
working of the board of directors of such ARC:
Provided that no order for removal of Chairman or
director under clause (a) shall be made except after giving
him an opportunity of being heard.
(c) It shall be the duty of every director or other officer or
employee of the ARC to produce before the person,
conducting an audit or inspection, all such books, accounts
and other documents in his custody or control and to
provide him such statements and information relating to
the affairs of the ARC as may be required by such person
within the stipulated time specified by him.

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Important Questions
Q. No. 5: RST Ltd. is a securitization and reconstruction company under

SRFAESI Act, 2002. The certificate of registration granted to it was
cancelled. State the authority which can cancel the registration and
the right of RST Ltd. against such cancellation.
[May 11 (4 Marks), MTP-Oct. 18]
HINT: Refer Sec. 4. RBI May cancel the certificate. RST may appeal to C.G.
Q. No. 6: Referring to the provisions of the Securitisation & Reconstruction of

Financial Assets & Enforcement of Security Interest Act, 2002 state
the circumstances under which the Reserve Bank of India may
cancel the certificate of registration granted to a Securitisation
Company. [Nov. 14 (4 Marks)]
Or
On what grounds the Reserve Bank of India can cancel a certificate

of registration granted to an Asset Reconstruction Company?
[RTP – May 19]
HINT: Refer Sec. 4.
Q. No. 7: Zebra Limited failed to repay the amount borrowed from Genuine
Bank, which is, holding a charge on all the assets of the Company.
Now, the Bank wants to acquire the Financial Assets of Zebra
Limited. Is the Bank bound to give notice of acquisition of financial
assets to the obligor? State the Provisions in this regard with
reference to the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act. 2002.
[Nov. 19 – Old Syllabus (3 Marks)]

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HINT: Refer Sec. 6. Bank is not bound to give notice, however, if bank or
financial institution may, if it considers appropriate, give a notice of
acquisition of financial assets by any ARC, to the concerned obligor.
Note: Answer given in suggested answer of ICAI is different. As per

the suggested answer, Genuine Bank is bound to give notice to the
Zebra limited.
16.4 - Enforcement of Security Interest (Sec. 13, 14)
Enforcement of Any security interest created in favour of any secured creditor

security interest may be enforced,
– Sec. 13(1) • without the intervention of the court or tribunal, by such

creditor in accordance with the provisions of this Act.
Issuing Notice to • Where any borrower, who is under a liability to a secured

borrower creditor under a security agreement, makes any default in
– Sec. 13(2) repayment of secured debt or any instalment thereof,
and
• his account in respect of such debt is classified by the

secured creditor as NPA,
then, the secured creditor may require the borrower by notice

in writing to discharge in full his liabilities to the secured
creditor within 60 days from the date of notice failing which
the secured creditor shall be entitled to exercise all or any of
the rights conferred by Sec. 13(4).

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Points to remember
Requirement of classification of secured debt as NPA shall

not apply to a borrower who has raised funds through
issue of debt securities and in the event of default, the
debenture trustee shall be entitled to enforce security
interest in the same manner as provided under this
section with such modifications as may be necessary and
in accordance with the terms and conditions of security
documents executed in favour of the debenture trustee.
Content of Notice shall give details of

Notice • the amount payable by the borrower and
– Sec. 13(3) • the secured assets intended to be enforced by the secured
creditor in the event of non-payment of secured debts by the
borrower.
Consideration of • If, on receipt of the notice, the borrower makes any

borrower representation or raises any objection, the secured creditor
representations shall consider such representation or objection
by secured and
creditors
• if the secured creditor comes to the conclusion that such
– Sec. 13(3A)
representation or objection is not acceptable or tenable,
he shall communicate within 15 days of receipt of such

representation or objection the reasons for non-acceptance of
the representation or objection to the borrower.

Page 28
Points to remember
The reasons so communicated or the likely action of the

secured creditor at the stage of communication of reasons
shall not confer any right upon the borrower to prefer an
application to
• the Debts recovery Tribunal u/s 17 or

• the Court of District Judge u/s 17A.
Secured If the borrower fails to discharge his liability in full within the
creditors right above specified period, the secured creditor may take recourse
to recover his to one or more of the following measures to recover his
secured debt secured debt:
– Sec. 13(4) (a) take possession of the secured assets of the borrower
including the right to transfer by way of lease, assignment
or sale for realising the secured asset;
(b) take over the management of the business of the
borrower including the right to transfer by way of lease,
assignment or sale for realising the secured asset:
Provided that the right to transfer by way of lease,
assignment or sale shall be exercised only where the
substantial part of the business of the borrower is held as
security for the debt.
Provided further that where the management of whole of
the business or part of the business is severable, the
secured creditor shall take over the management of such
business of the borrower which is relatable to the security
for the debt;

Page 29
(c) appoint any person (as manager), to manage the secured

assets the possession of which has been taken over by the
secured creditor;
(d) require at any time by notice in writing, any person who
has acquired any of the secured assets from the borrower
and from whom any money is due or may become due to
the borrower, to pay the secured creditor, so much of the
money as is sufficient to pay the secured debt.
Points to remember
Discharge of a person from liability [Sec. 13(5)]: Any

payment made by any person referred to in Sec. 13(4)(d) to the
secured creditor shall give such person a valid discharge as if
he has made payment to the borrower.
Right w.r.t. to • Where the sale of an immovable property, for which a

the immovable reserve price has been specified, has been postponed for
property want of a bid of an amount not less than such reserve price,
– Sec. 13(5A), it shall be lawful for any officer of the secured creditor, if so
13(5B) authorised by the secured creditor in this behalf, to bid for

the immovable property on behalf of the secured creditor at
any subsequent sale.
• Where the secured creditor, is declared to be the purchaser
of the immovable property at any subsequent sale, the
amount of the purchase price shall be adjusted towards the
amount of the claim of the secured creditor for which the
auction of enforcement of security interest is taken by the
secured creditor, u/s 13(4).

Page 30
Vesting of Rights Any transfer of secured asset after taking possession thereof or
in transferee takeover of management u/s 13(4) by the secured creditor or
- Sec. 13(6) by the manager on behalf of the secured creditor shall vest in
the transferee all rights in, or in relation to, the secured asset
transferred as if the transfer had been made by the owner of
such secured asset.
Recovery of Where any action has been taken against a borrower, all costs,
expenses from charges and expenses which, in the opinion of the secured
the borrower creditor, have been properly incurred by him or any expenses
and application incidental thereto, shall be recoverable from the borrower and
of money the money which is received by the secured creditor shall, in
received the absence of any contract to the contrary, be held by him in
– Sec. 13(7) trust, to be applied-
(a) firstly, in payment of such costs, charges and expenses
and
(b) secondly, in discharge of the dues of the secured creditor
and the residue of the money so received shall be paid to the

person entitled thereto in accordance with his rights and
interests.
Payment of dues Where the amount of dues of the secured creditor together
of the secured with all costs, charges and expenses incurred by him is
creditors before tendered to the secured creditor at any time before the date of
publication of publication of notice for public auction or inviting quotations
notice for public or tender from public or private treaty for transfer by way of
auction – Sec. lease, assignment or sale of the secured assets:

Page 31
13(8) (a) the secured assets shall not be transferred by way of lease
assignment or sale by the secured creditor; and
(b) in case, any step has been taken by the secured creditor for
transfer by way of lease or assignment or sale of the assets
before tendering of such amount under this subsection, no
further step shall be taken by such secured creditor for
transfer by way of lease or assignment or sale of such
secured assets.
Rights of Subject to the provisions of the Insolvency and Bankruptcy

secured Code, 2016, in the case of financing of a financial asset by more
creditors in case than one secured creditors or joint financing of a financial asset
of Joint by secured creditors, no secured creditor shall be entitled to
Financing exercise any or all of the rights conferred on him under or
– Sec. 13(9) pursuant to Sec. 13(4) unless exercise of such right is agreed
upon by the secured creditors representing not less than 60%
in value of the amount outstanding as on a record date and
such action shall be binding on all the secured creditors.
Points to remember
• In the case of a company in liquidation, the amount

realised from the sale of secured assets shall be
distributed in accordance with the provisions of
company law.
• In the case of a company being wound up on or after the
commencement of this Act, the secured creditor of such
company, who opts to realise his security instead of
relinquishing his security and proving his debt under

Page 32
the provisions of company law, may retain the sale

proceeds of his secured assets after depositing the
workmen's dues with the liquidator in accordance with
the provisions of company law.
• The liquidator shall intimate the secured creditor the
workmen's dues in accordance with the provisions of
company law (Sec. 326 of Companies Act, 2013) and in
case such workmen's dues cannot be ascertained, the
liquidator shall intimate the estimated amount of
workmen's dues to the secured creditor and in such case
the secured creditor may retain the sale proceeds of the
secured assets after depositing the amount of such
estimate dues with the liquidator.
• In case the secured creditor deposits the estimated
amount of workmen's dues, such creditor shall be liable
to pay the balance of the workmen's dues or entitled to
receive the excess amount, if any, deposited by the
secured creditor with the liquidator.
• The secured creditor shall furnish an undertaking to the
liquidator to pay the balance of the workmen's dues, if
any.
Filing of an Where dues of the secured creditor are not fully satisfied with
application with the sale proceeds of the secured assets, the secured creditor
DRT for balance may file an application in the form and manner as may be
amount – Sec. prescribed to the Debts Recovery Tribunal having jurisdiction
13(10) or a competent court, as the case may be, for recovery of the
balance amount from the borrower.

Page 33
Rights against Without prejudice to the rights conferred on the secured

guarantors - Sec. creditor under or by this section, secured creditor shall be
13(11) entitled to proceed against the guarantors or sell the pledged
assets without first taking any of the measured specifies in Sec.
13(4) in relation to the secured assets under this Act.
Person The rights of a secured creditor under this Act may be

authorised to exercised by one or more of his officers authorised in this
exercise the behalf in such manner as may be prescribed.
rights
– Sec. 13(12)
Restricting No borrower shall, after receipt of notice, transfer by way of

rights of sale, lease or otherwise (other than in the ordinary course of
borrower his business) any of his secured assets referred to in the notice,
– Sec. 13(13) without prior written consent of the secured creditor.
Chief • Where the possession of any secured asset is required to be

Metropolitan taken by the secured creditor or
Magistrate or • if any of the secured asset is required to be sold or
District transferred by the secured creditor under the provisions of
Magistrate to this Act,
assist secured
the secured creditor may, for the purpose of taking
creditor in
possession or control of secured asset, request, in writing,
taking
the Chief Metropolitan Magistrate or the District Magistrate
possession of
within whose jurisdiction any such secured asset or other
secured asset
documents relating thereto may be situated or found, to take
(Section 14)
possession thereof, and the Chief Metropolitan Magistrate

Page 34
or, as the case may be, the District Magistrate shall, on such
request being made to him—
(a) take possession of such asset and documents relating

thereto; and
(b) forward such asset and documents to the secured
creditor within a period of 30 days from the date of
application.
If no order is passed by the Chief Metropolitan Magistrate or

District Magistrate within the said period of 30 days for
reasons beyond his control, he may, after recording reasons in
writing for the same, pass the order within such further period
but not exceeding in aggregate 60 days.
Important Questions
Q. No. 8: A newly formed ARC has acquired secured interest on few assets in
steel sector. The sector is undergoing cyclical recession due to
global meltdown and increase in raw material price. The
management is now contemplating various options through which it
can realise its assets.
What are the measures with the ARC management under the
SARFAESI law?
HINT: Refer Sec. 9 and Sec. 13(4).
Q. No. 9: Explain briefly the procedure relating to enforcement of security

interest under SARFAESI Act, 2002. [Nov. 11 (4 Marks)]
HINT: Refer Sec. 13(1) to Sec. 13(4).

Page 35
Q. No. 10: Popular Limited defaulted in the repayment of term loan taken
from a Bank against security created as a first charge on some of
its assets. The bank issued notice pursuant to Sec. 13 of the
SARFAESI Act, 2002 to the Company to discharge its liabilities
within a period of 60 days from the date of the notice. The
company failed to discharge its liabilities within the time limit
specified.
Explain the measures to be taken by the Bank to enforce its

security interest under the said Act.
[May 17 (4 Marks), RTP-May 18]
HINT: Refer Sec. 13(4).
Q. No. 11: Beta Ltd. failed to repay the amount borrowed from KMP Bank Ltd.
in accordance with the terms of lending. The loan was granted
against the mortgage of its building. The Bank issued notice as
required u/s 13 of the SARFAESI Act, 2002. It was decided by the
bank to take possession of the building after getting necessary
assistance from the judicial authority. State the provisions
enumerated u/s 14 of the SARFAESI Act, 2002 in this regard.
[May 18 – New Syllabus (3 Marks)]
HINT: Refer Sec. 14
Q. No. 12: M/s AWP Limited defaulted in repayment of a term loan taken from
Nationalized Bank against the security created as first charge on
its Land & Buildings. The Bank classified the debt from M/S AWP
Limited as Non-Performing Asset. The Bank issued Notice pursuant
to Section 13 of the SARFAESI Act, 2002 to the Company to
discharge its liabilities in full within a period of 60 days from the

Page 36
date of Notice. The Company objected for full settlement and the
time limit for settlement. The Bank did not respond to the
objection of the Company. In the light of the provisions of the
SARFAESI Act, 2002 decide:
(i) Whether the objection of the Company is valid?
(ii) Whether the Bank has to respond to the objection of the

Company?
(iii) Whether the Bank has right to enforce the security interest
without the intervention of the Court?
[Nov. 19 – New Syllabus (6 Marks)]
HINT: Refer Sec. 13. (i) Not Valid (ii) Yes (iii) Yes
16.5 - Manner and effect of takeover of management (Sec. 15 – Sec. 16)
Right to When the management of business of a borrower is taken over

appoint by an ARC u/s 9(a) or, by a secured creditor u/s 13(4)(b) as the
directors / case may be, the secured creditor may, by publishing a notice in
Administrators
a newspaper published in English language and in a newspaper
– Sec 15(1)
published in an Indian language in circulation in the place where
the principal office of the borrower is situated, appoint as many
persons as it thinks fit:
(a) in a case in which the borrower is a company under the

Company law, to be the directors of that borrower in
accordance with the provisions of that Act; or

Page 37
(b) in any other case, to be the administrator of the business of

the borrower.
Effect of On publication of a notice u/s 15(1), following consequences

appointment of shall apply:
such directors
(a) Vacation of office by directors, managers etc.: All persons
or
holding office as directors of the company (if the borrower is
administrators
a company) and in any other case, all persons holding any
– Sec. 15(2)
office having power of superintendence, direction and
control of the business of the borrower immediately before
the publication of notice u/s 15(1), shall be deemed to have
vacated their offices.
(b) Termination of contracts with directors, managers etc.:
Any contract of management between the borrower and any
director or manager thereof holding office as such
immediately before publication of the above notice, shall be
deemed to be terminated.
(c) Taking custody of all property, effects, actionable claims
by newly appointed directors and administrators: The
directors or the administrators appointed under this section
shall take such steps as may be necessary to take into their
custody or under their control all the property, effects and
actionable claims to which the business of the borrower is,
or appears to be, entitled and all the property and effects of
the business of the borrower shall be deemed to be in the
custody of the directors or administrators, as the case may
be, as from the date of the publication of the above notice.

Page 38
(d) Directors or Administrators to exercise necessary

powers: All directors appointed shall, for all purposes, be
the directors of the company of the borrower and such
directors or the administrators shall only be entitled to
exercise all the powers of the directors or as the case may
be, of the persons exercising powers of superintendence,
direction and control, of the business of the borrower
whether such powers are derived from the memorandum or
articles of association of the company of the borrower or
from any other source.
Effect of Where the management of the business of a borrower, being a

takeover on company, is taken over by the secured creditor, then,
rights of notwithstanding anything contained in the company law or in
shareholders the memorandum or articles of association of such company:
– Sec. 15(3) (a) it shall not be lawful for the shareholders of such company
or any other person to nominate or appoint any person to be
a director of the company;
(b) no resolution passed at any meeting of the shareholders of
such company shall be given effect to unless approved by the
secured creditor;
(c) no proceeding for the winding up of such company or for the
appointment of a receiver in respect thereof shall lie in any
court, except with the consent of the secured creditor.
Obligation of • The secured creditor is under an obligation to restore the

secured management of the business of the borrower, on realisation
creditor to of his debt in full, in case of takeover of the management of
restore the the business of a borrower by such secured creditor.

Page 39
management • However, if any secured creditor jointly with other secured
– Sec. 15(4) creditors or any ARC or financial institution or any other

assignee has converted part of its debt into shares of a
borrower company and thereby acquired controlling interest
in the borrower company, such secured creditors shall not be
liable to restore the management of the business to such
borrower.
No • Notwithstanding anything to the contrary contained in any

compensation contract or in any other law for the time being in force, no
to directors for managing director or any other director or a manager or any
loss of office person in charge of management of the business of the
– Sec. 16 borrower shall be entitled to any compensation for the loss of

office or for the premature termination under this Act.
• However, rights of any such managing director or any other
director or manager or any such person in charge of
management to recover from the business of the borrower,
moneys recoverable otherwise than by way of such
compensation shall not be effected.
Important Questions
Q. No.13: Apex Limited failed to repay the amount borrowed from the
bankers, ACE Bank Limited, which is holding a charge on all the
assets of the company. The Bank took over management of the
company in accordance with the provisions of the Securitization
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 by appointing four persons as directors.

Page 40
The company is managed by a Managing Director, Mr. X. Referring

to the provisions of the said Act, examine whether Mr. X is entitled
to compensation for loss of office and also explain the effect of
such takeover on certain rights of the shareholders of the
company. [MTP-April 18, Oct. 19]
Or
Rockfort Limited failed to repay the loan borrowed from Nest

Bank, which is holding a charge on all the assets of the company.
The Bank took over management of the company in accordance
with the provisions of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 by
appointing four persons as directors. The company is managed by
Director Mr. Pawn, who has been now removed, referring to the
provisions of the said Act, examine whether Mr. Pawn is entitled
to compensation for loss of office.
[MTP-Aug. 18, Nov. 18-Old Syllabus (4 Marks)]
HINT: Refer Sec. 16, Sec. 15(3) and Sec. 15(4).
Q. No. 14: The management of Gangotri Ltd. was taken by LBV Bank Ltd.
(Secured Creditor) complying the provisions of SARFAESI Act,
2002 and appointed two directors. The Board of Director of
Gangotri Ltd. duly authorized by its Articles, appointed two
alternate directors and the majority of the directors made a
declaration required for voluntary liquidation proceedings. A
special resolution requiring the company to be liquidated
voluntarily by appointing an insolvency professional to act as the
liquidator was passed at the general meeting of the company. The
Board of Directors and the shareholders passed the resolutions

Page 41
without the approval/consent of Directors appointed by LBV

Bank Ltd. discuss the validity of the above resolutions under
SARFAESI Act, 2002. Does an unsecured Creditor have recourse to
this Act? [Nov. 18-New Syllabus (3 Marks)]
HINT: Refer Sec. 15. Resolutions passed by the Board of Directors and
the Shareholders are not valid. Recourse available to unsecured
creditor: Provisions of SARFAESI Act are not applicable to unsecured
creditors.
16.6 - Borrowers Rights in case of enforcement of security interest by secured

creditor (Sec. 17, 17A, 18, 18B and 19)
Application Filing of an Any person (including borrower), aggrieved by

against application any of the measures given in Sec. 13(4) taken by
measures to – Sec. 17(1) the secured creditor or his authorised officer, may
recover make an application along with prescribed fees to
secured the Debts Recovery Tribunal (DRT) having
debts jurisdiction in the matter within 45 days from the
- Sec. 17 date on which such measure had been taken.
Points to remember
For the removal of doubts, it is hereby

declared that the communication of the
reasons to the borrower by the secured
creditor for not having accepted his
representation or objection or the likely
action of the secured creditor at the stage of

Page 42
communication of reasons to the borrower

shall not entitle the person (including
borrower) to make an application to the Debts
Recovery Tribunal under this sub-section.
Procedure to • DRT shall consider whether any of the

be followed measures referred to in Sec. 13(4) taken by the
by DRT and secured creditor for enforcement of security
Orders to be are in accordance with the provisions of this
passed – Sec. Act and the rules made thereunder.
17(2), 17(3) • If, the DRT, after examining the facts and
& 17(4) circumstances of the case and evidence
produced by the parties, comes to the
conclusion that any of the measures referred to
in Sec. 13(4), taken by the secured creditor are
not in accordance with the provisions of this
Act and the rules made thereunder, and require
restoration of the management or restoration
of possession, of the secured assets to the
borrower or other aggrieved person, it may, by
order:
(a) declare the recourse to any one or more
measures referred to in Sec. 13(4) taken by
the secured creditor as invalid;
(b) restore the possession of secured assets or
management of secured assets to the
borrower or such other aggrieved person,
who has made an application u/s 17(1), as
the case may be; and

Page 43
(c) pass such other direction as it may consider

appropriate and necessary in relation to any
of the recourse taken by the secured
creditor u/s 13(4).
• If the DRT declares the recourse taken by a

secured creditor u/s 13(4) is in accordance
with the provisions of this Act and the rules
made thereunder, then, notwithstanding
anything contained in any other law for the
time being in force, the secured creditor shall
be entitled to take recourse to one or more of
the measures specified u/s 13(4) to recover his
secured debt.
Time limit Any application made u/s 17 (1) shall be dealt

for disposal with by the DRT as expeditiously as possible and
of an disposed of within 60 days from the date of such
application application.
– Sec. 17(5) However, DRT may, from time to time, extend the
said period for reasons to be recorded in writing,
so, however, that the total period of pendency of
the application with the DRT, shall not exceed 4
months from the date of making of such
application made u/s 17(1).

Page 44
Points to remember
If the application is not disposed of by the DRT

within the period of four months, any party to
the application may make an application, to
the Appellate Tribunal for directing the DRT
for expeditious disposal of the application
pending before the DRT and the Appellate
Tribunal may, on such application, make an
order for expeditious disposal of the pending
application by the Debts Recovery Tribunal.
Making of • In the case of a borrower residing in the State of J & K, the

application application u/s 17 shall be made to the Court of District Judge in
to Court of that State having jurisdiction over the borrower which shall
District Judge pass an order on such application.
in certain
• For the removal of doubts, it is hereby declared that the
cases
communication of the reasons to the borrower by the secured
– Sec. 17A creditor for not having accepted his representation or objection
or the likely action of the secured creditor at the stage of
communication of reasons shall not entitle the person
(including borrower) to make an application to the Court of
District Judge under this section.
Appeal to • Any person aggrieved, by any order made by the DRT u/s 17,
Appellate may prefer an appeal along with prescribed fees to the
Tribunal
Appellate Tribunal within 30 days from the date of receipt of the
– Sec. 18 order of DRT.

Page 45
• No appeal shall be entertained unless the borrower has

deposited with the Appellate Tribunal 50% of the amount of
debt due from him, as claimed by the secured creditors or
determined by the DRT, whichever is less. Appellate Tribunal
may, for the reasons to be recorded in writing, reduce the
amount to not less than 25% of debt.
• Save as otherwise provided in this Act, the DRT u/s 17 or the
Appellate Tribunal u/s 18 shall, as far as may be, dispose of the
appeal in accordance with the provisions of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 and
rules made there under.
Points to remember
Sec. 34 of the Act provides that no civil court shall have
jurisdiction to entertain any suit or proceeding in respect of
any matter which a DRT or the Appellate Tribunal is
empowered by or under this Act to determine
Appeal to • Any borrower residing in the State of J&K and aggrieved by any
High Court in order made by the Court of District Judge u/s 17Amay prefer an
certain cases appeal, to the High Court having jurisdiction over such Court,
- Sec. 18B within 30 days from the date of receipt of the order of the Court
of District Judge.
• No appeal shall be preferred unless the borrower has deposited,
with the J&K High Court, 50% of the amount of the debt due
from him as claimed by the secured creditor or determined by
the Court of District Judge, whichever is less. High Court may,
for the reasons to be recorded in writing, reduce the amount to
not less than 25% of the debt.

Page 46
Right to Filing of a Where an application or an appeal is expected

lodge a caveat to be made or has been made u/s 17(1) or 17A
caveat or 18(1) or 18B,
- Sec. 18C
• the secured creditor, or
• any person claiming a right to appear before
the Tribunal or the Court of District Judge or
the Appellate Tribunal or the High Court, as
the case may be, on the hearing of such
application or appeal,
may lodge a caveat in respect thereof.
Notice of caveat Where a caveat has been lodged:
• the secured creditor by whom the caveat has

been lodged (hereafter in this section
referred to as the caveator) shall serve notice
of the caveat by registered post,
acknowledgement due, on the person by
whom the application has been or is
expected to be made.
• any person by whom the caveat has been
lodged (hereafter in this section referred to
as the caveator) shall serve notice of the
caveat by registered post, acknowledgement
due, on the person by whom the application
has been or is expected to be made.

Page 47
Notice on the Where after a caveat has been lodged, any

caveator by application or appeal is filed before the
adjudicating Tribunal or the court of District Judge or the
authority Appellate Tribunal or the High Court, as the
case may be, the Tribunal or the District Judge
or the Appellate Tribunal or the High Court, as
the case may be, shall serve a notice of
application or appeal filed by the applicant or
the appellant on the caveator.
Furnishing of Where a notice of any caveat has been served
copy of on the applicant or the Appellant, he shall
application and periodically furnish the caveator with a copy of
documents the application or the appeal made by him and
also with copies of any paper or document
which has been or may be filed by him in
support of the application or the appeal.
Validity of Where a caveat has been lodged, such caveat
period of shall not remain in force after the expiry of the
caveat period of ninety days from the date on which it
was lodged unless the application or appeal has
been made before the expiry of the period.
Right of If the DRT or the Court of District Judge, on an application made

borrower to u/s 17 or u/s 17A or the Appellate Tribunal or the High Court on
receive an appeal preferred u/s 18 or u/s 18A,
compensatio • holds that the possession of secured assets by the secured
n and costs in creditor is not in accordance with the provisions of this Act and
certain cases rules made thereunder,

and

Page 48
– Sec. 19 • directs the secured creditors to return such secured assets to

concerned borrowers or any other aggrieved person, who has
filed the application u/s 17 or u/s 17A or appeal u/s 18 or u/s
18A, as the case may be,
the borrower or such other person shall be entitled to the payment
of such compensation and costs as may be determined by such
Tribunal or Court of District Judge or Appellate Tribunal or the
High Court referred to in Sec 18B.
Important Questions
Q. No. 15: Sharp Health Clinic Limited had availed the credit facilities from the
United Bank Limited. The company made repayment of loan to
some extent but not entirely and accordingly the Bank took
recourse under the provisions of Sec. 13(2) the SARFAESI Act, 2002.
Consequently, possession of the mortgaged property was taken up
and it was duly advertised. The company also filed an application
u/s 17(1) of the SARFAESI Act, 2002 before the Debts Recovery
Tribunal, which was dismissed by the impugned order. Being
aggrieved, the company approached court. Will the company
succeed in its petition referring to in the SARFAESI Act, 2002?
[Nov. 17 (4 Marks), RTP-Nov. 18]
HINT: Refer Sec. 18. Appeal may be filed with Appellate Tribunal u/s 18.
As per Sec. 34 no civil court shall have jurisdiction to entertain any suit
or proceeding in respect of any matter which a DRT or the Appellate
Tribunal is empowered by or under this Act to determine.

Page 49
16.7 - Miscellaneous
Provisions of The provisions of this Act shall not apply to:

this Act not
(a) a lien on any goods, money or security given by or under the
to apply in
Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any
certain cases
other law for the time being in force;
(Section 31)
(b) a pledge of movables within the meaning of section 172 of the
Indian Contract Act, 1872;
(c) creation of any security in any aircraft as defined in clause (1)
of section 2 of the Aircraft Act, 1934;
(d) creation of security interest in any vessel as defined in clause
(55) of section 3 of the Merchant Shipping Act, 1958;
(e) any conditional sale, hire-purchase or lease or any other
contract in which no security interest has been created*;
(f) any rights of unpaid seller under section 47 of the Sale of
Goods Act, 1930;
(g) any properties not liable to attachment (excluding the
properties specifically charged with the debt recoverable
under this Act) or sale under the first proviso to subsection (1)
of section 60 of the Code of Civil Procedure, 1908;
(h) any security interest for securing repayment of any financial
asset not exceeding one lakh rupees;
(i) any security interest created in agricultural land;

Page 50
(j) any case in which the amount due is less than 20% of the
principal amount and interest thereon.
*omitted by the Enforcement of Security Interest and Recovery of

Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
The The provisions of this Act shall have effect, notwithstanding

provisions of anything inconsistent therewith contained in any other law for the
this Act to time being in force or any instrument having effect by virtue of any
override such law.
other laws
(Section 35)
Limitation No secured creditor shall be entitled to take all or any of the

(Section 36 measures u/s 13(4), unless his claim in respect of the financial
asset is made within the period of limitation prescribed under the
Limitation Act, 1963.
Application The provisions of this Act or the rules made thereunder shall be in
of other laws addition to, and not in derogation of,
not barred • the Companies Act, 2013,
(Section 37) • the Securities Contracts (Regulation) Act, 1956
• the Securities Exchange Board of India Act, 1992,
• the Recovery of Debts Due to Banks and Financial Institutions

Act, 1993 or
• any other law for the time being in force.

Page 51
Important Questions
Q. No. 16: Under Section 31 of the Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002,
certain situations have been specified in which the provisions of
this Act are not applicable. You are required to mention any four
of such situations. [Nov. 15 (4 Marks)]
HINT: Refer Sec. 31.
Q. No. 17: Mr. AA, a farmer mortgaged his agriculture land and obtained a
term loan for cultivation purpose from a Nationalized Bank. Due
to continuous drought, Mr. AA could not honour the repayment
schedule. Identify whether the Bank can initiate action invoking
the provisions of the SARFAESI Act, 2002.
[May 18 – New Syllabus (2 Marks)]
HINT: Refer Sec. 31. security interest is created in agricultural land;

hence, bank cannot initiate action invoking the provisions of SARFAESI
Act, 2002.
Q. No. 18: A Bank issued a notice pursuant to Section 13 of the SARFAESI Act,
2002 to a company to discharge its loan which has already
become time barred under the Limitation Act, 1963. The company
did not settle the loan beyond the prescribed notice period. The
Bank took recourse under section 13(4) of the SARFAESI Act, 2002
to take possession of the building to enforce its security interest.
Discuss whether the Bank will succeed in its attempt. State
whether the provision of SARFAESI Act, 2002 can over ride any
other law? [Nov. 18-New Syllabus (2 Marks)]

Page 52
HINT: Refer Sec. 36. Bank will not succeed in its attempt as claim was
not made within the period of limitation. As per Sec.35 of SARFAESI
Act, 2002, the provisions of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the time
being in force or any instrument having effect by virtue of any such
law.
Miscellaneous Questions
Q. No. 19: ABC Bank has provided term loan of 10 crores to XYZ Ltd., a steel
manufacturing company at an interest rate of 10% p.a. and
principal amount is to be payable in equal quarterly instalments
within 5 years from the date of disbursement of loan. The loan is
fully secured against plant & machinery.
The company successfully repaid 4 instalments along with interest

during the first year. From the start of second year, the EBITDA of
the company fell drastically due to multiple factors including crash
in steel prices, rise of coal and iron ore prices, and plant shut down.
The company therefore couldn’t repay the 5th instalment but it
paid the interest amount as and when due.
After the end of 60 days from the due date of the 5th instalment the
credit manager of the bank decided to sell the loan to LMN ltd., an
asset reconstruction company, along with the overdue loan of 2
crore to another textile company, which was classified as NPA six
months ago, and a loan of ₹2 crore to a farmer Mr JKL, secured
against agriculture land.
Please analyse and advise the manager whether he can do so?

Page 53
HINT:
(a) Though loan to XYZ Ltd. is a financial asset and bank has security
interest, but security interest cannot be enforced as asset has not
yet classified as NPA. (NPA classification shall happen after 90
days).
(b) Facts about loan to textile company has not been provided, so it
cannot be decided whether or not such loan can be sold to ARC.
(c) Loan given to Mr. JKL being secured against agricultural land,
cannot be sold as the provisions of SARFAESI act is not applicable to
such assets (Sec. 31).
Q. No. 20: XYZ Finance ltd. is an NBFC company with total assets of 550 crore,
and an NPA of 50 crores in its balance sheet. The 50 crores loan
consists of 9 cases of 5 crore each and 10 cases of 50 lakhs each.
The management of the company wants to sell bad loans worth 50
crore to an ARC. Of the Rs. 50 crore, 45 crores is secured against
various properties, while one case of 5 crore is unsecured.
During detailed discussion with the in-house legal counsel, it came
to light that 5crores of the secured bad loan has not been
registered with the central registry CERSAI, however this was not
informed to the buyer in the preliminary discussion.
Please analyse and advise the CEO of XYZ finance ltd. how much
bad loan can he sell to the ARC. [MTP-March 18]
HINT: Provisions of SARFAESI Act are not applicable in case of
unsecured loans. As per Sec. 26D no secured creditor shall be entitled to
exercise the rights of enforcement of securities unless the security
interest created in its favour by the borrower has been registered with
the Central Registry. Remaining 8 cases of 5 crore each can be sold to
ARC subject to compliance of other conditions as stated in the law.

Page 54
Q. No. 21: A Nationalized Bank had provided a term loan of Rs. 20 crores to
All Well Pharma Limited at an interest rate of 12% p.a. and
principal amount is payable in equal half yearly installments of Rs.
2 crores in 5 years from the date of disbursement of loan. The loan
is fully secured against the plant and machinery of the company.
The company was regular in paying 3 half yearly installments
along with the interest during the first two years. Due to recession
in the market and increased competition from multinational
companies, the price of the goods manufactured by the company
had fallen down and consequently the company has to close down
the plant. Hence, the company failed to pay the 4th installment but
it paid the interest amount as and when due. After a period of 2
months (60 days) from the due date of the 4th installment, the Bank
decided to sell the loan to an Asset Reconstruction company. It has
also decided to sell a loan of Rs. 50 lakhs given to a farmer which is
secured against the agricultural lands. The Manager seeks your
advice on the above proposals in the light of the Provisions of the
SARFASEI Act, 2002. [May 19 – New Syllabus (6 Marks)]
HINT:
(a) Though loan to All Well Pharma Ltd. is a financial asset and bank has
security interest, but security interest cannot be enforced as asset
has not yet classified as NPA. (NPA classification shall happen after
90 days).
(b) Loan given to a farmer secured against agricultural land, cannot be
sold as the provisions of SARFAESI act is not applicable to such
assets (Sec. 31).

Page 55
Scanner of Past Exam Questions – New Syllabus
Attempt Q. No. Topic Suggested Answer Marks

/ Hints*
4(c) Practical Illustration on Sec. 31 Refer Q. No. 17 2

May 18
6(d) Theoretical Question on Sec. 14 Refer Q. No. 11 3
4(c) Practical Illustration on Sec. 36 Refer Q. No. 18 2
Nov. 18 and theory question on Sec. 35
6(d) Practical Illustration on Sec. 15 Refer Q. No. 14 3
May 19# 2(b) Practical Illustration on Sec. 31 Refer Q. No. 21 6
Nov. 19# 2(c) Practical Illustration on Sec. 13 Refer Q. No. 12 6
May 20
Nov. 20
May 21
Nov. 21
*detailed answers are given in Scanner.

#From May 2019 exam, questions are covered only for Descriptive Part of Paper.
-------------------------

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Page 58

Chapter 16 SARFESI, 2002

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Chapter 16 SARFESI, 2002

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Chapter 16 – SARFAESI Act, 2002 ©www.altclasses.

Compiled by: Pankaj Garg

The Securitization and Reconstruction of Financial

16.1 – Basics of SARFAESI Act, 2002

Broad The Act is divided into 7 chapters and 42 sections:

Objectives of • to regulate securitisation and reconstruction of financial assets

• enforcement of security interest and for matters connected

Applicability • SARFAESI, 2002 extends to the whole of India.

Compiled by: Pankaj Garg

Asset Asset reconstruction means acquisition by any asset

• Section 2(k) defines the term "financial assistance" as any

Compiled by: Pankaj Garg

– Sec. 2(ba) Points to remember

An ARC is not a banking company although it is regulated by

Borrower Borrower means any person

• includes a person who becomes borrower of an asset

(a) unpaid portion of the purchase price of any tangible asset

Compiled by: Pankaj Garg

such intangible asset or an obligation incurred or credit

Default Default means:

• An unsecured creditor doesn’t have recourse to this act.

Financial asset Financial asset means debt or receivables and includes—

Compiled by: Pankaj Garg

(iii) a mortgage, charge, hypothecation or pledge of movable

Non- NPA means an asset or account of a borrower, which has been

Compiled by: Pankaj Garg

– Sec. 2(o) (a) in case such bank or financial institution is administered or

Property Property means

– Sec. 2(t) (i) immovable property;

Qualified buyer Qualified buyer means

• any asset management company making investment on behalf

Compiled by: Pankaj Garg

• a foreign institutional investor registered under the SEBI Act

Securitisation Securitisation means acquisition of financial assets by any asset

– Sec. 2(z) reconstruction company from any originator, whether by raising

The process of securitisation helps the ARC to acquire

Secured Secured creditor means-

Compiled by: Pankaj Garg

(c) an asset reconstruction company whether acting as such or

– Sec. 2(zf) favour of any secured creditor and includes—

(a) any mortgage, charge, hypothecation, assignment or any

Compiled by: Pankaj Garg

Q. No. 1: Explain Asset Reconstruction and Financial Assets under the

HINT: Refer Sec. 2(b) and Sec. 2(l).

Q. No. 2: Explain briefly the concept of "Securitization" under the provisions

HINT: Refer Sec. 2(z).

HINT: Refer Sec. 2(o) and Sec. 2(b).

Compiled by: Pankaj Garg

16.3 - Regulation of Securitisation and Reconstruction of Financial Assets of

Registration of Conditions to No ARC shall commence or carry on the

- Sec. 3 business reconstruction without

(a) obtaining a certificate of registration

Conditions for • Every reconstruction company shall make

Compiled by: Pankaj Garg

dates on the investments made in the

Compiled by: Pankaj Garg

Issue of The Reserve Bank may, after being satisfied

Requirement Every ARC, shall obtain prior approval of the

• The expression "substantial change in

Cancellation of Situations in RBI may cancel a certificate of registration

Compiled by: Pankaj Garg

registration certificate (a) ceases to carry on the business of

– Sec. 4 may be securitisation or asset reconstruction; or

Opportunity to Before cancelling a certificate of registration