Section 13(2) and 13(4) of SARFAESI Act

Section 13(2) and 13(4) of SARFAESI Act

Section 13(2) and 13(4) of the SARFAESI Act deal with the enforcement of security interests by secured creditors in cases of borrower default on secured loans.

Section 13(2) empowers the secured creditor to issue a demand notice to the borrower upon default. This notice requires the borrower to repay the entire outstanding amount within 60 days. The notice specifies the amount payable and the secured assets involved and is delivered via registered post or email. The borrower can respond or raise objections within this period, which the creditor must consider and reply to.

If the borrower fails to repay the dues within 60 days after receiving the Section 13(2) notice, Section 13(4) permits the creditor to take possession of the secured assets—either symbolic or physical. The creditor can also appoint a manager for the asset or assume control over the borrower’s business assets. Following possession, the creditor may sell the assets publicly to recover the dues.

Borrowers retain the right to redeem the assets by paying the full dues before the sale is confirmed by the authorized officer or the Debt Recovery Tribunal (DRT). They may also challenge the creditor’s actions or notices under the SARFAESI Act through the DRT if proper procedures are not followed.

Section 13(2) and 13(4) of SARFAESI Act

If the borrower fails to repay or respond satisfactorily within the 60-day period, Section 13(4) empowers the secured creditor to issue a possession notice. This notice authorizes the creditor to take possession of the secured asset (usually the collateral for the loan). The possession notice includes details of the default, the outstanding amount, and the creditor’s intent to take possession, possibly specifying the possession date. Upon taking possession, the creditor can also appoint a manager to manage the asset or proceed to sell it through a public auction as per the Act’s provisions.

Borrowers have the right under Section 13(4) to make representations against the possession notice to the secured creditor within 45 days. The creditor must consider these representations and respond within 15 days. If the representations are rejected or not responded to, the borrower can seek relief from the Debt Recovery Tribunal (DRT) within 45 days.

Both Sections allow the creditor to enforce the security interest without court intervention, enabling faster recovery of dues. However, borrowers retain the right to redeem the property until the sale is confirmed by the authorized officer or the DRT.

Section 13(2) is about issuing a demand notice with a 60-day repayment period, warning the borrower of default consequences, while Section 13(4) deals with possession of the secured asset post default and failure to repay after the demand notice. Both sections together ensure a streamlined process for creditors to recover dues while providing procedural safeguards for borrowers to challenge enforcement actions and seek judicial relief if necessary.

SARFAESI Act: Section-13 Enforcement of security interest

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002)

Chapter-III Enforcement of Security Interest

Section 13: Enforcement of security interest.

13. (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

1[Provided that—

(i) the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and

(ii) 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.]

(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.

2[(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate 3[within fifteen days] of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower:

Provided that 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 under section 17 9[***].]

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:—

(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;

4[(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;]

(c) appoint any person (hereafter referred to as the 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.

(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

5[(5A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of the secured creditor, if so authorised by the secured creditor in this behalf, to bid for the immovable property on behalf of the secured creditor at any subsequent sale.

(5B) Where the secured creditor, referred to in sub-section (5A), 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, under sub-section (4) of section 13.

(5C) The provisions of section 9 of the Banking Regulation Act, 1949 (10 of 1949) shall, as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5A).]

(6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or 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.

(7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and 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.

6[(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets,—

(i) the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and

(ii) 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 sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.]

(9) 7[Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than 8[sixty per cent.] in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that 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 section 529A of the Companies Act, 1956 (1 of 1956):

Provided further that 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 proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen’s dues with the liquidator in accordance with the provisions of section 529A of that Act:

Provided also that liquidator referred to in the second proviso shall intimate the secured creditor the workmen’s dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen’s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen’s dues under that section 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:

Provided also that 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:

Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen’s dues, if any.

Explanation.—For the purposes of this sub-section,—

(a) “record date” means the date agreed upon by the secured creditors representing not less than 8[sixty per cent.] in value of the amount outstanding on such date;

(b) “amount outstanding” shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

(11) Without prejudice to the rights conferred on the secured creditor under or by this section, secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measured specifies in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act.

(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.

Reference

1. Inserted by Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, (w.e.f. 01.09.2016 vide N. No. S.O. 2831(E) dated 01.09.2016).

2. Inserted by Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, (w.e.f. 11.11.2004).

3. Substituted by Enforcement of Security Interest and Recovery of Debts Law (Amendment) Act, 2012 (w.e.f. 15.1.2013 vide N. No. S.O. 171(E) dated 15.01.2013), for the words “within one week”.

4. Substituted by Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, (w.e.f. 11.11.2004).

5. Inserted by Enforcement of Security Interest and Recovery of Debts Law (Amendment) Act, 2012 (w.e.f. 15.1.2013 vide N. No. S.O. 171(E) dated 15.01.2013).

6. Substituted by Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, (w.e.f. 1-9-2016), for the sub-section:

“(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.”

7. Substituted by the Insolvency and Bankruptcy Code, 2016, Sec. 251 and the Seventh Schedule (w.e.f. 15.11.2016), for the words “In the case of”.

8. Substituted by Enforcement of Security Interest and Recovery of Debts Law (Amendment) Act, 2012 (w.e.f. 15.1.2013 vide N. No. S.O. 171(E) dated 15.01.2013), for  the word “three-fourth”.

9. Omitted by Jammu and Kashmir Reorganisation Act, 2019, the words “or the Court of District Judge under section 17A“.