Introduction
In order to protect the interest of the bank and financial institutions through easy recovery of Non- Performing Assets (hereinafter NPAs) SARFAEI Act, 2002[1] (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Assets and Enforcement of Security Interests Act) was introduced. It is an act through which the bank can itself initiate the proceedings related to recovery of money without the intervention of court/ tribunal[2], which makes the role of Bank and Financial Institutions significant in itself.
Under the SARFAESI Act bank can recover under two methods, either by taking possession over the secured assets (with the right to lease, assign or sell the secured assets)or by taking over the management or business of the borrowers until the entire dues is recovered.
Section 13 of the Act[3] provides for “Enforcement of Security Interest”without the intervention of the court or tribunal and in light of the same, Section 13(2) of the Act provides that “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 installment thereof, and his account in respect of such debt is classified by the secured creditor as on- 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).”
Now the question which arose here is that “what is the recourse available to Bank in case the borrower dies without repaying the loan and before SARFAESI proceedings could be completed?”
Recourse available to banks when the borrower/guarantor dies in between the SARFAESI Proceedings
When the issue with respect to the demise of the borrower after notice was served under Section 13(2) of the SARFAESI Act was raised in Madras High Court it was then observed in the case of S. SuhainaBanu and Ors. Vs. Indian Bank ARM Branch and Ors.[4] that “proceedings initiated against a person while he was alive would automatically stand abated immediately after his death and the only course open to the Bank was to initiate proceedings by issuance of a fresh notice to the legal heirs of the borrower/guarantor, as the case may be, as such legal heirs would then have an opportunity to discharge the liability in sixty days.”
The main intent behind the same is to enable the defaulter or the legal heirs of the defaulter to have an opportunity to redeem the mortgage by depositing the amount due under the mortgage.
Similarly in the case of Emmey Jose V. Indian Bank[5]Kerala High Court observed that“the sale held without notice to the legal heirs of the deceased defaulter/ mortgager, is invalid in the eye of law and is liable to be declared void.”
But the ratio behind both the above cases is not that vibrant as it seems, there are also cases in which even after the death of the borrower fresh notice was not issued to the legal heirs and decision was awarded in the favor of the Bank.
No Need to serve a new notice to legal heirs if they were already apprised
When similar question was raised in the High Court of Judicature at Hyderabad, Divisional Bench in the case of Hotel Pearl City, Hyderabad V. Debts Recovery Tribunal, Hyderabad and Ors,[6]contrasted with the above two cases and observed that the idea behind serving notice is to implead the legal heir on the basis that the borrower is no longer able to pay debt due to his/ her demise and also upon the very fact to apprise the legal heir about the borrowings so that the further proceedings (taking possession of the secured assets) could be avoided and reasonable opportunity is provided to the legal heirs of the borrower/ guarantor as the case may be.
In the present case,[7] legal heirs were already apprised of the fact that the borrower is no longer able to pay the debt due to his demise and they even sent a letter requesting the bank to accept their proposal for a one time settlement whereby they would pay 25% of the outstanding amount within 12 weeks from the date of approval and the balance amount within one year then also they approached the Hon’ble court pleading that the proceedings should be halted based on the fact that the notice was not served to the legal heir which was then dismissed by the High Court of Judicature at Hyderabad on the basis that it is devoid of merit and petitioner approached through unclean hands which is itself bad in law.
Conclusion
SARFAESI is an Act passed in order to vibrant the recovery process of NPAs without approaching the court of law so that speedy recovery can be exercised by virtue of providing sufficient time to repay the loan to the borrower/ guarantor as the case may be. But there arises certain situations where the borrower dies without repaying the loan and after notice being served to him/ her, in those scenarios it has been observed by various High Courts through drawing different- different inferences and the epilogue which can be perceived from that is to initiate fresh proceedings after the demise of the borrower by issuing a fresh notice to the legal heirs with the time span of 60 days starting from the date of notice but the same cannot be done unvaryingly every time as bona fide intention is also a vital factor in deciding the same as held in the case of Hotel Pearl City V. DRT, Hyderabad[8].
END NOTES
[1]Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Act No. 54 of 2002 (India) (17th Dec 2002). [2]Recovery Under SARFAESI Act, Press Information Bureau, Government of India, Ministry of Finance (15 July 2019) [3]Ibid at 2. [4]S.SuhainaBanu and Ors. Vs. Indian Bank ARM Branch and Ors., MANU/TN/3149/2010 [5]Emmey Jose Vs. Indian Bank, MANU/KE/1881/2014. [6]Hotel Pearl City, Hyderabad V. Debts Recovery Tribunal, Hyderabad and Ors, MANU/AP/0798/2017. [7]Supra. [8]Ibid at 4.
THE AUTHOR OF THIS BLOG IS A 4TH YEAR LAW STUDENT AT NATIONAL LAW UNIVERSITY, JABALPUR AND IS A PROMISING LEGAL INTERN AT SURANGE AND COMPANY
What happened if the bank does not know the names of legal heirs or rather there are no legal heirs than whether the bank can take the recourse under SARFAESI ACT
Very Good Morning my father has taken a mortgage loan from bank under sarfaesi act 2002 but he dies due to the cause of road accident & after this the account comes in NPA. & the bank has given me the proposal for OTS but then also I don't have that much of money which I can clear under 6months (30Lac) so should I go to the DRDO for help or what please guide me.
MMM