MC Explains: The legal implication of Bank of Baroda’s notice to Sunny Deol

The bank had to invoke the 21-year SARFAESI Act since Deol had given his Juhu property as collateral.

Moneycontrol explains why the bank had to approach a magistrate, and what options would Deol have had, had the magistrate granted permission to take possession of the property.

SARFAESI Act

This Act was passed in 2002 with the intention of allowing banks and financial institutions to recover dues from defaulters by selling or auctioning the assets they had given as collateral, without the court’s intervention. The Act also provided the method which banks had to adopt for selling/auctioning a borrower’s property.

Any dispute under this Act would be adjudicated by the Debt Recovery Tribunal (DRT). There are 39 DRTs and five Debt Recovery Appellate Tribunal (DRATs) in the country.

Constituted 30 years ago, a DRT initially had the powers to adjudicate only on disputes between a bank and a borrower under the Recovery of Debts Due to Banks and Financial Institution Act (RDDBFI) 1993 (it is officially called Recovery of Debts and Bankruptcy Act 1993). Banks and financial institutions can move DRT to recover debts when it is over Rs 20 lakh.

Why did the bank move an application in the magistrate’s court?

According to Section 13 of the SARFAESI Act, when a borrower defaults and his loan account is classified as a non-performing asset (NPA), the bank or a financial institution is required to send a notice to the borrower asking him to pay his dues within 60 days from the date of notice. If the borrower fails to pay, the bank can start the process of securing the asset that has been given as collateral.

The bank will have to seek the permission of the Chief Judicial Magistrate or the District Magistrate of the area where the property is located, as per the provisions of Section 14 of the Act. If a borrower feels that a bank was unfairly auctioning his property, he could move a Securitisation Application (SA) under the Act at the DRT to stall the process.

Upon obtaining permission from a magistrate, the banks issue a notice inviting bids for the property after ascertaining a base price. They also notify the day on which the bids are opened. The property is then sold to the highest bidder. Banks have now largely moved to electronic auctions where the entire process is carried out online to increase transparency.

DRT and the controversy surrounding it

Despite being hailed as a go-to tribunal for banks and financial institutions, DRT has been criticised for being slow and ineffective. Even though the tribunal has powers under law, enforcing its orders has become increasingly difficult and archaic ever since the introduction of new legislations such as the Insolvency and Bankruptcy Code, 2016.

In fact, the pendency in the tribunals rose manifold in recent years owing to unfilled vacancies. Many DRT practitioners moved the Supreme Court, asking the government to fill up the vacancies at once as no work was happening at many benches of the tribunal. In late 2021, the Supreme Court requested the High Courts to hear SARFAESI and RDDBFI matters.

In late 2021 and early 2022, the apex court asked the then Attorney General KK Venugopal to apprise them of the situation in DRTs. Though the government has informed the SC that most of the vacancies in DRTs have been filled up, the tribunals continue to be plagued by pendency.

Banks and financial institutions now prefer approaching the National Company Law Tribunal (NCLT) under IBC rather than DRT under SARFAESI Act to protect their interest when a company defaults. For instance, when Kingfisher Airlines failed in 2012, banks had moved the DRT and DRAT to initiate recovery. However, when Jet Airways was grounded in 2019, banks chose to approach NCLT under the IBC.

Since IBC applies only to companies and not to individual and partnership firms, banks still file cases in DRT to initiate recovery. Sunny Deol, being an individual borrower, might have had to initiate a securitisation application at DRT to stall the auction of his property, had the bank not withdrawn the notice.