DHARMASHASTRA NATIONAL LAW UNIVERSITY,

JABALPUR, MP

Academic Session (2020-2021)

PROJECT TOPIC - HISTORICAL DEVELOPMENT OF

SARFAESI ACT, 2002

SUBMITTED TO: SUBMITTED

BY:

Dr. Veena Roshan Jose NITIN SONI

(ASSISTANT PROFESSOR OF LAW) BAL/061/18

B.A.LLB(HONS.)

1
ACKNOWLEDGEMENT

The success and outcome of this project required a lot of guidance and assistance from many
people and I am extremely privileged to have got this all along the completion of my project.
All that I have done is only due to such supervision and assistance and I would not forget to
thank them. I am greatly indebted to DHARMASHASTRA NATIONAL LAW
UNIVERSITY for providing me necessary requirements to successfully carry out this
project work. I would like to thank our honourable Vice-Chancellor Prof. Balraj Chauhan
and our Head of Department Dr. Shilpa Jain and for giving me this golden opportunity. I
respect and thank Dr. Veena Roshan Jose (Assistant Professor of Law) for providing me
an opportunity to do this project and giving me support and guidance which made me
complete the project duly. I am extremely thankful to him for providing such a nice support
and guidance. I extend my gratitude thanking my parents and my friends for giving me the
support and strength to complete this wonderful project.

WITH REGARDS
NITIN SONI

BAL/061/18

2
Table of Contents
ACKNOWLEDGEMENT.......................................................................................................2
RESEARCH METHODOLOGY...........................................................................................4
Objectives..................................................................................................................................4
Research questions...............................................................................................................4
Hypothesis..........................................................................................................................4
INTRODUCTION....................................................................................................................5
GENERAL OVERVIEW OF THE ACT...........................................................................6
The Act provides three alternative methods for recovery of NPAs.....................................8
The Act also empowers the bank/financial institutions to:...............................................9
HISTORICAL DEVELOPMENT OF SARFAESI ACT, 2002.......................................10
IMPORTANT CASE LAWS................................................................................................16
MARDIA CHEMICALS LTD V. UNION OF INDIA (2004) 4 SCC 311.....................16
SIGNALS APPARELS PVT.LTD. V. CANARA BANK 2010(5) CTC373.................17
MAHAVIR PLANTATIONS P. LTD. AND K.K. STEEL ENTERPRISES V.
ICICI  BANK LTD. AND ORS. [2005]127 COMPCAS 456......................................18
CONCLUSION.......................................................................................................................19
BIBLIOGRAPHY..................................................................................................................20

3
RESEARCH METHODOLOGY

Objectives

1. To know the history behind the enactment of SARFAESI

Act, 2002.
2. To know what is the object and scope of the Act. 
3. To understand the mechanism how the act operates and
helps in reducing NPA’s.

Research questions

1. What led to the development of SARFAESI Act, 2002? 

2. What are the objective of the SARFAESI Act, 2002?

Research methodology

The research methodology adopted by the researcher is a doctrinal research. However

the  researcher with a view to compliment and substantiate his research paper
corroborated his study  with other forms of legal research such as case studies. The
researcher went to the library and  gone through various texts and commentaries written
by eminent jurists and authors. The work  also throws light on the list of study materials
and data and their sources, procured by the  researcher as the instrument to conduct the
research.  

Hypothesis

The researcher is of the opinion that public money which are lent out by the Banks and
Financial Institutions eventually were not recovered successfully as a result of which
not only public but economic structure as a whole suffered a lot. NPA’s increased day
by day, and the researcher finds that the SARFAESI ACT, 2002 did bring some power
in the hands of the  Banks and Financial institutions in relation to recovery of dues but
proper and strict  implementation of the act is necessary and some judicial activism
should play a pivotal role in  solving the problem of NPA’s.

4
INTRODUCTION

Before starting with the detailed discussion of the Act, we should know what is main
purpose or object of this Act and why it is considered to be an important legislation in
respect of banking and financial sector. As we all know the financial sector is essential
to the growth of a nation and this sector has been one of the keys to the India’s efforts to
achieve success in rapidly developing its economy. The banking sector has been striving
to achieve international standards and is progressively complying with the international
prudential norms and standards. Despite all this we have various areas where we don’t
enjoy level playing fields with the international banks and one of them has been the
Menace of NPAs i.e. Non-performing assets.  

Before the year 2002 there was no provision for facilitating securitisation of financial
assets and the power to take possession of securitised assets and selling them off. This
act i.e. The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 has come as a boon for the Indian banking industry and at a
time when the industry was grappling with bad loans. 

The very Act has been enacted with an intention to strengthen the Creditors rights
through foreclosure and enforcement of securities by the banks and financial institutions
by conferring on the creditors the right to seize the secured asset and sell of the same in
order to recover dues promptly bypassing the costly and very time-consuming legal
process through courts. The Act empowers the banks and Financial Institutions to move
on its own against a borrower whose assets are secured, and who has made some kind of
default in repayment of the same. 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.  

Thereby after complying with the statutory provisions in the said act the banks and
Financial Institutions have following powers i.e. 

5
• Take possession of the secured assets of the borrower which includes the right to
transfer by way of lease, assignment or sale of the same for realization of the
secured debt or, 

• Take over the management of the secured asset including the right to transfer by way
of lease, assignment or sale of the same for realization of the secured debt or, 

• Appoint any person to manage the secured asset.

GENERAL OVERVIEW OF THE ACT

he Securitisation Act consists of 41 sections in 6 Chapters and a Schedule. Chapter 1

contains 2 sections dealing with the applicability of the Securitisation Act and
definitions of various terms. Chapter 2 contains 10 sections providing for regulation of
securitisation and reconstruction of financial assets of banks and financial institutions,
setting up of securitisation and reconstruction companies and matters related thereto.
Chapter 3 contains 9 sections providing for the enforcement of security interest and
allied and incidental matters. Chapter 4 contains 7 sections providing for the
establishment of a Central Registry, registration of securitisation, reconstruction and
security interest transactions and matters related thereto. Chapter 5 contains 4 sections
providing for offences, penalties and punishments. Chapter 6 contains 10 sections
providing for routine legal issues.1

The Act deals with three aspects:

 Enforcement of Security Interest by secured creditor (banks/financial

institutions)
 Transfer of non-performing assets to Asset Reconstruction Company, which
subsequently handles disposing of those assets and realisation of the proceeds
 Providing a legal framework for securitisation of assets.

The Act stipulates four conditions to be met prior to enforcement of rights by a creditor:

1
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

6
  The debt is secured.
 The debt has been classified as an NPA by the banks 8. 7.
 The outstanding dues are INR 1,00,000 (one lakh) and above and more than
20% of the principal loan amount and interest there on.
 The security to be enforced is not an agricultural land.

The Securitisation Act proposes securitisation and reconstruction of financial

assets through Securitisation Companies (SCO) and Reconstruction Companies
(RCO) which ought to be incorporated under the Companies Act, 1956 having
securitisation and asset reconstruction respectively as main object.2

The Securitisation Act requires compulsory registration of SCO and RCO under the
Securitisation Act before commencing its business. Further a minimum financial
stability requirement is also provided by requiring SCO and RCO to possess owned fund
(Owned Fund is aggregate of paid up capital, paid up preference capital, reserves and
surplus excluding revaluation reserve, as reduced by debit balance on P&L account,
miscellaneous expenditure (to the extent not written off), intangible assets, diminution in
value of investments/short provisions against NPA and further reduced by shares
acquired in SCO/RCO and deductions due to auditor qualifications) of INR 20 million or
up to 15% of the total financial assets acquired or to be acquired. The RBI has the power
to specify the rate of owned fund from time to time with the provision of different rates
for different classes of SCO and RCO.3

The Act provides three alternative methods for recovery of NPAs

 Securitization: Issue of security for raising of receipts or funds by SCOs/RCOs

from the Qualified Institutional Buyers (QIB) by forming schemes for acquiring
financial assets. The SCO/RCO shall keep and maintain separate and distinct
accounts in respect of each such scheme for every financial asset acquired and
ensure that realizations of such financial assets are held and applied towards
redemption of investments and payment of returns assured on such investments
under the relevant scheme.

2
Economic Systems 32 (2008) 177–196 - "Does lending behaviour of banks in emerging economies vary by
ownership? Evidence from the Indian banking sector" by Sumon Kumar Bhaumik and Jenifer Piesse.
3
Ibid.

7
  Asset Reconstruction: It implies acquisition by any SCO/RCO of any right or
interest of any bank or financial institution in any financial assistance for the
purpose of realization of such financial assistance. The SCO/RCO, for the
purpose of asset reconstruction, should provide for any one or more of the
following measures:

1. Proper management of the business of the borrower, by

change in, or takeover of the management of the business of
the borrower
2. Sale or lease of a part or whole of the business of the
borrower
3. Rescheduling of payment of debts payable by the borrower
4. Enforcement of security interest by taking possession of
secured assets in accordance with the provisions of this Act.

 Enforcement of Security: The banks/financial institutions can issue demand

notice to the defaulting borrower and guarantor, calling upon them to discharge
their dues in full within 60 days from the date of the notice. If the borrower fails
to comply with the notice, the bank may take recourse to one or more of the
following measures without intervention of the court:

1. Take possession of the security

2. Sale or lease or assign the right over the security.
3. Manage the same or appoint any person to manage the same.

The Act also empowers the bank/financial institutions to:

1. To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank

2. To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower 3. Any Security Interest created over agricultural land cannot be proceeded
upon and only those properties given as security can be proceeded upon but not the
guarantors' personal property

8
4. If on receipt of demand notice, the borrower makes any representation or raises any
objection, Authorised Officer shall consider such representation or objection carefully
and if he comes to the conclusion that such representation or objection is not acceptable
or tenable, he shall communicate the reasons for non-acceptance within 15 days of
receipt of such representation or objection.4

Setting up of Central Registry (CR): The Government of India, Ministry of Finance

notified to set up the CR, to prevent frauds in loan cases involving multiple lending
from different banks on the same immovable property. This Registry has become
operational on March 31, 2011. CR is a Government Company licensed under Section
25 of the Companies Act 1956 and has been incorporated with the name of "Central
Registry of Securitization Asset Reconstruction and Security Interest of India" (CIN
No: U67100DL2011NPL215270) having its registered office at New Delhi for the
purpose of operating and maintaining the Central Registry under the provisions of the
SARFAESI. A register called the Central Register maintained both in electronic and
non-electronic form will be kept at the head office of the Central Registry for entering
the particulars of the transactions including creation of security/satisfaction or payment
on any security interest relating to securitization and reconstruction of financial assets
and shall be open for inspection by any person during the business hours on payment of
prescribed fee.5

HISTORICAL DEVELOPMENT OF SARFAESI ACT, 2002

After nationalisation of banks in 1969 and 1980 the menace of private lenders came
down since the banks achieved phenomenal geographical growth. Even though, it was
impressive quantitative achievement, the banks suffered financial losses year after year
due to low efficiency, productivity, bad portfolio performance and eroded profitability.
The public sector banks faced several constraints for survival in the map of the banking
industries.

Statutory Liquidity Ratio (SLR) {as per Sec.24(2A) of Banking Regulation Act} and
Cash Reserve Ratio (CRR) {as per Sec.42 (1) of RBI Act} were required to be

4
Seminar on Corporate Rescue and Insolvency, “SARFAESI Act, 2002 & Role of Asset Reconstruction”, 10th
September 2010 6. Indian Company Law: Critical issues under SARFAESI Act, 2002?
5
V. Sekar and Dr. V. Balachandran "Implementation of SARFAESI Act - some issues", IJMSSR Volume 2, No.
1, January 2013.

9
maintained at higher percentages i.e. SLR @ 38.5% and CRR @ 3 to 15%. Due to
higher percentages of SLR and CRR the operational freedom of the banks was
curtailed. The SLR, which was 25% in 1964-65 was increased to 38.5% and the CRR,
which was 3.5% in 1962-63 was increased to 15% in 1989-90 and in 1990-91.
Compliance of SLR & CRR requirements is mandatory. The banks were depending
upon ‘brokers in the share market’ for arranging call money deposits to meet the above
statutory requirements. In turn the brokers were availing favour from the banks for
overdraft facilities or for collection of high value instruments pertaining to securities
transactions with other banks (including private/foreign banks). Scam in securities
surfaced in 1990-91 and unearthed the secret of sham transactions, where, in fact, no
physical transfer of securities took place. Special Courts have been established for tying
these security scam cases. Many public sector banks were involved in these claims
merely because they have either collected high value cheques presented by the brokers
or issued high value banker’s cheques/pay orders at the request of the brokers by
debiting their accounts maintained in PSBs.6

Statutory Liquidity Ratio (SLR) {as per Sec.24(2A) of Banking Regulation Act} and
Cash Reserve Ratio (CRR) {as per Sec.42 (1) of RBI Act} were required to be
maintained at higher percentages i.e. SLR @ 38.5% and CRR @ 3 to 15%. Due to
higher percentages of SLR and CRR the operational freedom of the banks was
curtailed. The SLR, which was 25% in 1964-65 was increased to 38.5% and the CRR,
which was 3.5% in 1962-63 was increased to 15% in 1989-90 and in 1990-91.
Compliance of SLR & CRR requirements is mandatory. The banks were depending
upon ‘brokers in the share market’ for arranging call money deposits to meet the above
statutory requirements. In turn the brokers were availing favour from the banks for
overdraft facilities or for collection of high value instruments pertaining to securities
transactions with other banks (including private/foreign banks). Scam in securities
surfaced in 1990-91 and unearthed the secret of sham transactions, where, in fact, no
physical transfer of securities took place. Special Courts have been established for tying
these security scam cases. Many public sector banks were involved in these claims
merely because they have either collected high value cheques presented by the brokers

6
C. P. S. Ramachary , Legal history before passing SARFAESI,
(http://www.lawyersclubindia.com/articles/Legal-history-before-passing- SARFAESI-Act-4688.asp#.U-
fPn_mSwVt)

10
or issued high value banker’s cheques/pay orders at the request of the brokers by
debiting their accounts maintained in PSBs.

In 1990-91 when the scam in securities surfaced, Government of India constituted

Narasimham Committee (headed by Sri. M. Narasimham former Governor of Reserve
Bank of India (RBI), to review and suggest the aspects relating to structure,
organisation procedures for functioning of the financial system. Narasimham
Committee laid down a foundation to reform the Indian banking sector. Therefore this
committee is also called as Banking Sector Reforms (BSR) Committee. The BSR
committee pointed out that, lack of competitiveness, vis-à-vis global standards, low
technological level in operations, overstaffing, high NPAs and low level motivations,
higher rate of SLR & CRR, directed credit programmes, political and administrative
interference, subsidising credit, mounting expenditure of banks were some of the causes
which have shackled the performance of banking sector in the country. The committee
vide its report made in 1992 recommended for reduction of rates of SLR & CRR,
phasing out of directed credit programmes and introduction of priority sector;
stipulation of minimum Capital Adequacy Ratio (CAR) by March 1996; adopting
uniform accounting practices with regard to income recognition, asset classification and
provisioning against bad and doubtful debts; setting up of special tribunals for speedy
recovery of debts, setting up of ‘Asset Reconstruction Funds’ for takeover of bad and
doubtful debts; abolition of branch licensing; allowing foreign banks to open their
offices in India; autonomy to banks to recruit officers; revised procedure for selecting
Chief Executives and Board of directors in public sector banks; speedy realisation of
capital markets; enactment of separate law for mutual funds including laying down of
prudential norms for mutual funds. 

Based on the Committee’s recommendations, RBI introduced prudential norms relating

to income recognition, asset classification and provisioning in advances portfolio with
effect from 31.03.1993. Prior to this, the banks were following the “Health Codes” for
advances. With the introduction of the RBI’s prudential norms, the Health Code system
and all the related reporting requirements, etc. under the Health Code system ceased to
be a subject of supervisory interest.

11
Performance in terms of profitability has become the benchmark for the banking
industry like any business enterprise. In particular, the problem of non-performing asset
(NPA) was not considered seriously in India in the post nationalization (of banks)
period. However, with the financial sector liberalization drive, this issue has been taken
up seriously by introducing various prudential norms relating to income recognition,
asset classification, provisioning for bad assets and assigning risks to various kinds of
assets of a bank.7

In 1993 Parliament passed Recovery of Debts Due to Banks & Financial Institutions
Act and the claims of the banks and financial institutions involving ten lakhs and above
came to be separated and brought within the fold of the said RDDB & FI Act 1993 for
adjudication by the Debts Recovery Tribunals established across the country. But there
was no speedy recovery of debts by the Banks and Financial Institutions through the
tribunals as adjudication process was consuming time and this situation had crippled the
viability of strength the banks and financial institutions. However, the performance of
DRTs was shackled because of various impediments. One of such impediments was
automatic operation of stay under Sec 22 of Sick Industrial Companies (Special
Provisions) Act (SICA) on making reference to ‘Board for Industrial and Financial
Reconstruction’ (BIFR) created under article 4 of SICA by the borrower’s industrial
entity. Consent was required from the BIFR, for the process of recovery. Leave of
BIFR was not an easy task for banks once reference is registered with it. Banks found it
extremely difficult to sue such borrowers (industrial entities) for recovery of money
against an industrial entity registered as "sick" under SICA. Thus performance of PSBs
continued to be adversely affected, partly as a result of pending references with BIFR,
partly because of the adjudication process which was consuming substantial time to
reach execution stage, partly because of the delicate political economic structure of
India, partly because of competition from foreign banks, and partly because of inherent
structural deficiencies. Government of India, again requested Narasimham Committee,
to review progress of banking and financial sector reforms to strengthen financial
system and suggest methods to make it internationally competitive.

The Banking Sector Reforms (BSR) Committee submitted another report in 1998. The
important recommendations of the BSR Committee are:

7
RBI’s own guidelines may hamper Raghuram Rajan’s NPA drive, By Sangita Mehta, ET Bureau | 21 Jan, 2014

12
  1). A minimum target of 9% Capital Risk-Adequacy Ratio (CRAR) to be achieved by
the year 2000. The ratio should be raised to 10% for the year 2002;

2). A risk weight of 5% for market risk for government-approved securities should be
attached;

3). An asset to be classified as doubtful if it is in the category of 18 months in the first

instance and eventually for 12 months and loss if it has been so identified but not
written off;

4). Income recognition, asset classification should apply to government advances;

5). The minimum shareholding by government/RBI in the equity of nationalised banks

and SBI should be brought down from 51% to 33%;

6). Inter alia the BSR Committee recommended bank mergers;

7). The urgent need to bring reforms in the existing legal system for speedy recovery of
the debts of the banks and financial institutions;

8). Rehabilitation of weak Public Sector Banks (PSBs) with high percentage of NPAs
(20% NPAs of total loan assets);

9). Establishment of small local banks (at rural and district and State level) to cater to
the needs of customers in the country;

10). Experiment with concept of narrow banking for placing funds in less risky assets;

11). Creation of global sized banks;

12). Review and updating of laws relating to banking;

13). Raising of capital adequacy ratio to improve inherent strength of banks

14). Professionalising and depoliticising of bank boards;

13
15). Automation of Public Sector Banks for review of recruitment, training etc. are
some more important recommendations of the Committee. The recommendations of the
BSR Committee have been implemented in a phased manner.

To achieve these objectives various reform measures were initiated. Reduction in

statutory pre-emption so as to release greater funds for commercial lending, interest rate
deregulation to enable price discovery, greater operational autonomy to banks and
liberalisation of the entry norms for financial intermediaries including reduction in SLR
and CRR (which are mainly used to finance the fiscal deficit of the government and as
tools of credit control and also to protect the depositors). Before 1991, interest rates,
both on deposits and loans were controlled by RBI. With effect from October 1997
interest rates on all time deposits have been freed. Only interest rates on saving deposits
remain controlled by the RBI. Similarly the lending rates were also freed in a series of
steps. The RBI now directly controls only interest rates charged on exports. The
rationale for liberalising interest rate in the banking system was to allow banks a greater
flexibility and encourage competition. Banks have been given more autonomy by
reducing government's stake in it as restoration of health of the banking system was
recognised. Competition has been infused by allowing new private sector banks and
more liberal entry of foreign banks (at the end of march 2001, there were 8 new private
sector banks, 23 old private sector banks and 42 foreign banks as against 23 foreign
banks in 1991). Various prudential norms relating to capital adequacy and risk
weighted assets, income recognition, asset classification and provisioning for bad assets
(NPAs) were introduced. The capital adequacy ratio was increased from 8% to 9%
following the BSR Committee’s recommendation. Banks were allowed to close down
loss making units and merging with other banks. Flexibility is introduced in resource
mobilisation. Financial institutions are not required to seek RBI's approval for raising
resources by way of bond / debentures (by public / private placement). In order to have
a coordinated approach in the recovery of large NPA accounts, as also for
institutionalising an arrangement for a systematic exchange of information in respect of
large borrowers (including defaulters  and NPAs) common to banks and Financial

14
institutions, a Standing Committee was constituted in August 1999 under the aegis of
Industrial Development Bank of India (IDBI).8

One of the important issues that drew attention of policy makers and researchers is the
Non-Performing Assets of Commercial banks. High level of Non Performing Assets
(NPAs) was a concern to everyone. As credit is very essential for economic growth and
NPAs affect the smooth flow of credit, reforms in legal framework, particularly for
speedy recovery of debts of banks and financial institutions was suggested as a matter
of urgent need.

Therefore in 2000 Andhyarjuna Committee (headed by Mr. T.R. Andhyarjuna Former

Solicitor General Of India) was constituted by Government of India to suggest changes
in the existing legal system. The Committee vindicated the need for enacting laws for
speedy recovery of the debts due to the banks and financial institutions in line with
State Finance Corporations Act 1951 for enforcement of security interest without
interference of courts / tribunals so that the time consumed in the adjudication process
could be curtailed. It recommended for enacting law conferring powers to banks and
financial institutions as have been conferred upon ‘land development banks’ and ‘state
financial corporations’ for taking possession and sale (private sale) of securities both
movable and immovable) without the intervention of court for speedy recovery with
proper safeguards. Such a special law would also define a charge by way of
hypothecation, floating charge and crystallisation of the floating charge into the rights
and obligations of the hypothecator and hypothecatee with power of sale without the
intervention of the court to banks and financial institutions. The law should provide for
the setting up of a new registry jointly by the banks and financial institutions for
registration of mortgages and hypothecation charges in place of the present obsolete
and dilatory office of sub-registrar of assurance which are presently keeping records of
transfers.

Umerjee Committee ( headed by the former retired Executive Director of RBI ) framed
the three in one Act and accordingly Parliament enacted SARFAESI Act 2002. This
Act is very often called as Securitization Act whereas the third part of the Act (i.e.
Enforcement of Security Interest Act) is never spelt out which is powerful tool for

8
CBI probes IDBI Bank loan to Kingfisher Airlines, livemint, Sat, Aug 09 2014

15
banks and financial institutions for quick and permanent elimination of NPAs from the
books of accounts.

IMPORTANT CASE LAWS

MARDIA CHEMICALS LTD V. UNION OF INDIA (2004) 4 SCC 3119

In a notice dated July 24, 2002 to Mardia Chemicals Ltd., the Industrial Development
Bank of  India (for short `the IDBI') under Section 13 of the Ordinance, then in force,
required it to pay  the amount of arrears indicated in the notice within 60 days, failing
which the IDBI as a secured  creditor would be entitled to enforce the security interest
without intervention of the court or  Tribunal, taking recourse to all or any of the
measures contained in sub-section (4) of Section  13 namely, by taking over possession
and/or management of the secured assets. The petitioner  was also required not to
transfer by way of sale, lease or otherwise any of the secured assets.  Similar notices
were issued by other financial institutions and banks under the provisions of  Section 13
of the Ordinance/Act to different parties who filed petitions in different High Courts. 

Issues of the case:- 

1. Whether it is open to challenge the statute on the ground that it was not necessary to 
enact it in the prevailing background particularly when another statute was already
in  operation? 
2. Whether the terms or existing rights under the contract entered into by two private 
parties could be amended by the provisions of law providing certain powers in one 
sided manner in favour of one of the parties to the contract? 
3. Whether Section 13 of the Act ultra vires of the Constitution? 

4. Whether the requirement of 75% of the amount due before appeal to the DRT is
onerous  and therefore Section 17 of the Act is ultra vires to the Constitution? 

The Court upheld section 13. So it can be argued that the main structure of the
statute has survived. Thereby in other words the SARFAESI Act, 2002 gained
constitutional validity.

9
Mardia Chemicals Ltd V. Union Of India, (2004) 4 SCC 311

16
SIGNALS APPARELS PVT.LTD. V. CANARA BANK 2010(5) CTC37310
The writ petitioners are the companies doing business in manufacture and export of
readymade  garments. M/s.Signal Apparels Pvt. Ltd., commenced its production in the
year 2002 and started availing credit facilities from Canara Bank, Tiruppur, the first
respondent. According  to the petitioner, it has good track record of banking with the
first respondent-bank from 2002  till May, 2009. To the surprise of the petitioner, the
respondent-bank, by its recall notice dated 31st Dec, 2009, informed the petitioner that
the liability mentioned therein in their accounts were outstanding without any progress
and therefore, the company was advised to clear the liabilities  in full with up-to-date
interest within fifteen days from the date of the said notice. The petitioner was further
informed that in the event it failed to clear the liabilities on or before 15.01.2010,  the
respondent-bank would initiate appropriate steps for recovery including legal measures.
Even before the time for payment, viz., 15.01.2010, was expired, the respondent-bank
issued  notice dated 04.01.2010 under Section 13(2) of the Securitisation and
Reconstruction of  Financial Assets and Enforcement of Security Interest Act, 2002,
which is being challenged in  this writ petition. 

It was held in this case that Guidelines issued by RBI in relation to classifying NPA
should be followed by the bank before issuing notice under Section 13(2) of
SARFAESI Act, 2002.11

MAHAVIR PLANTATIONS P. LTD. AND K.K. STEEL ENTERPRISES V. ICICI  

BANK LTD. AND ORS. [2005]127 COMPCAS 456 12

The first respondent-bank, namely, ICICI Bank, granted financial assistance to the
second respondent for which the appellant herein had executed corporate guarantee in
favour of the first respondent-bank. As the second respondent has not fulfilled its
obligation, the first  respondent issued a notice to the second respondent on November
20, 2002, under Section  13(2) of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security  Interest Act, 2002 (hereinafter referred to as "the

10
Signal Apparels PVT.LTD. V. Canara Bank 2010(5) CTC373
11
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
12
Mahavir Plantations PVT. LTD. AND K.K. Steel Enterprise V. ICICI Bank LTD. AND ORS. [2005]127
COMPCAS 456

17
Act"), calling upon the second respondent to  pay the amount due within 60 days from
the date of the notice failing which the bank is at  liberty to take recourse in accordance
with law and the said action was challenged by the second  respondent before the DRT-
II, Chennai, in Securitisation Appeal No. 19 of 2004, and DRT by  its order dated
January 19, 2005, held that the second respondent is liable to pay a sum of
Rs. 7,32,19,141.28 as mentioned in the notice issued under Section 13(2) of the Act,
along with  interest and other expenses within 30 days from the date of the judgement
failing which the  bank is entitled to and at liberty to proceed with under the SARFAESI
Act to recover the  amount imposing certain conditions.  

It was held that Demand Notice via Rule 3 of the Security Interest (Enforcement) Rules,
200213 to borrower under SARFAESI Act is mandatory. Proceedings without such
notice will be vitiated. 

CONCLUSION

Securitisation is expected to become more popular in the near future in the banking
sector.  Although the enactment of SARFAESI Act sought to mobilise blocked funds of
the banks in  the non-performing assets, the various provisions of the acts have created
deep sorrows for the genuine buyers. The various provisions meant to balance the
requirements of the borrowers  and the banks, but it is seen that in real scenario the
balance of favour is tilted towards the  banks. These powers are, at majority being
misused by the banks to appropriate their interests  against the interests of the buyers or
investors.  

In the interest off the industrial growth of the country, it is pertinent that the powers, in
this act even if are held to be constitutional should not be acted in an arbitrary manner
13
Supra at 11.

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or in haste. The  courts and the legal fraternity should step up to strike a balance
between the industrial growth  in consonance with the policy formulated by the
financial institution and State policy on one  hand and recovery of public money on the
other. An educated and diligent approach can help  in achieving the object of the Act to
make the intention of the legislators a success. 

Hence it can be said that it will be very much pertinent for the civil courts to assume a
more social responsibility for the larger interest of the borrowers on one hand and to
share the responsibilities of the banks to mobilise their funds from the numerous non-
performing assets.

BIBLIOGRAPHY
1. Anand Chakravarthi(ed.), Securitisation Concepts and Country
Experiences, Published by ICFAI University Press, Edition 1st (2005). 
2. Justice B.P. Banerjee, Guide to Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest, Published by Wadhwa & Co. Nagpur, Edition 
2003. 

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3. K. Panduranga Rao, Law Relating to SARFAESI ACT, Published by Asia Law House,
Hyderabad, Edition 3rd (2007)
4. P.K.Mallick, Securitisation of financial assets, Status, problems and prospects,
Published by Regal Publications, New Delhi. Edition 2008.  

5. Vinod Kothari, Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002, Published by Wadhwa, Nagpur. Edition 2nd
(2007).

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