The SARFAESI Act, 2002 was Parliament's response to the long-standing demand for a non-judicial route by which secured creditors could enforce their security interests without first having to approach a civil court. More than two decades on, the working contest in SARFAESI proceedings has shifted almost entirely to one section: Section 17.

Section 13(4) is the operative enforcement provision. Once a borrower's account has been classified as a Non-Performing Asset and the borrower has failed to discharge the dues within sixty days of a notice under Section 13(2), the secured creditor may take possession of the secured asset, manage it, transfer it by lease or sale, or appoint any person to manage it.

Where the contest now lives is Section 17, the borrower's right to apply to the Debt Recovery Tribunal challenging the measures taken under Section 13(4). Practically every contested SARFAESI matter we see at DRT, Delhi turns on a Section 17 application. Below, briefly, are the borrower defences our team encounters most often — and the shape the bench has been taking when responding to them.

01Defects in NPA classification

The first line of attack — and frequently the most consequential — is the very foundation of the bank's action: that the classification of the account as a Non-Performing Asset was contrary to RBI's prudential norms.

Where the bank's documentation is in order, this challenge tends not to detain the bench long. Where it is not, it can derail the entire enforcement. Counsel for the lender should be prepared with:

  • The loan account statement and the precise dates of default.
  • Communications between the borrower and the bank concerning regularisation.
  • The internal NPA-classification record (with appropriate care for confidentiality, but the broad classification logic must be presentable).

02Section 13(2) notice irregularities

The 60-day demand notice under Section 13(2) is the gateway to every subsequent measure. Borrowers commonly attack:

  • Defects in service — insufficient address, returned-undelivered notice, no proof of substituted service.
  • Errors in the description of the secured asset.
  • Errors in the dues figure.
  • Failure to specify the consequences of non-payment within sixty days.

The Delhi and Bombay High Courts have repeatedly held that minor descriptive errors that do not in fact mislead the borrower are not fatal. But material errors, or service which the bank cannot prove, will lead to the proceedings being set aside. The 13(2) notice is the cheapest place to lose a case — and the most common.

03Failure to consider the Section 13(3A) representation

After the Supreme Court's intervention in Mardia Chemicals (2004) and the consequent insertion of Section 13(3A), if the borrower makes a representation or raises an objection to the demand notice, the secured creditor must consider it and communicate the reasons for non-acceptance within fifteen days.

A non-speaking, mechanical communication — or worse, no communication at all — has been found by the bench, again and again, to be a procedural defect that vitiates the enforcement. The fix is straightforward and inexpensive for the bank, and yet the firm continues to see this point raised, sustained and used as the basis for setting aside possession measures.

The cases where banks lose on procedure rather than merits are almost always avoidable with attentive practice at the front end.

04Auction-related challenges

Where the bank has progressed to auction, fresh challenges open up:

  • Reserve-price determination and the underlying valuation.
  • Inadequate publication and advertisement under Rule 8 of the Security Interest (Enforcement) Rules, 2002.
  • Inspection rights and intending-bidder communications.
  • Confirmation of sale and the issuance of sale certificate under Rule 9.

The auction process is procedurally heavy and the bench applies the rules with discipline. Pricing the asset is partly subjective; service and publication are not.

Practical takeaways for the lender's counsel

Four working principles the firm follows when advising banks and financial institutions in SARFAESI matters:

  1. Pay attention to the Section 13(2) drafting. Description, dues figure, service trail. It is the cheapest place to lose, and the most common.
  2. Treat every borrower representation as a substantive document. Reply on the merits, in writing, with clear reasoning. Avoid form replies.
  3. Maintain a complete service file. Acknowledged-due delivery is the gold standard; substituted service must be defensible.
  4. Document the auction process meticulously. Reserve-price working, publication tearsheets, intending-bidder communications, inspection records — all of it.

The SARFAESI machinery is built to favour the secured creditor. It is, however, unforgiving of procedural sloppiness. The cases where banks lose on procedure rather than on merits are almost always avoidable with attentive practice at the front end.

Advocate Arpit Jain
Founding Partner

Arpit Jain is a founding partner of Case Law with over 10 years of practice in litigation, banking recovery, SARFAESI enforcement and DRT/DRAT matters. He regularly appears before District Courts, High Courts, the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal at Delhi.