Know About Section 17 SARFAESI Application

A Section 17 proceeding is also referred to as a securitisation application. It allows an aggrieved person to ask the DRT to review whether the secured creditor has complied with SARFAESI Act and Rules when taking an enforcement measure.

Typically, before taking enforcement action, a secured creditor will issue a demand notice under Section 13(2). This requires the borrower to discharge the stated secured debt within the prescribed period. The borrower can represent or object against the demand. Any objection raised by the borrower must be considered by the secured creditor under Section 13(3A).

If the borrower fails to discharge the liability secured by a mortgage or charge then the secured creditor can take one or more measures under Section 13(4). Such measures can include symbolic or actual possession of a secured asset and initiation of further proceedings for its sale.

A communication rejecting borrower’s objections at the Section 13(3A) stage will not itself usually give rise to the right to file a Section 17 application. The statutory remedy under Section 17 arises when the secured creditor takes an enforcement measure specified under Section 13(4). The particular measure and date must therefore be identified carefully at the outset.

Who Can Apply Under Section 17?

The remedy under Section 17 is not limited to the borrower only. Section 17 applies to any person who is aggrieved by a measure taken under Section 13(4) of the SARFAESI Act. However, such person will also have to prove that they have a genuine legal grievance.

Clients/Application may include:

• Individual borrowers.
• Joint borrowers.
• Guarantors
• Mortgagors
• MSME Owners.
• Partnership firms/partners.
• Companies and Corporate borrowers.
• Directors of Companies who have given personal guarantee/security.
• Co-owners of the secured asset.
• Tenants/Lessees
• Legal heirs/ successors.
• Occupiers claiming rightful possession.
• Purchasers with claimed interest in the property.
• Or any other person whose legal rights would be affected.

Anyone claiming an independent interest in the property would need to prove their claim with credible documents. Simply making an allegation of ownership, tenancy or possession will usually not be enough to get relief from the Tribunal.

Limitation Period to File Section 17 Application

Thorough Review of Loan and Security Documents

A good Section 17 Application starts with reviewing the complete loan record and notices/actions taken by secured creditor for enforcement. Legal Foster’s network of advocates will review the loan transaction, account history, security documents, notices and conduct of the secured creditor.

Documents which are usually reviewed include:

• Loan agreement
• Loan sanction letter.
• Loan repayment schedule.
• Account statements
• Payment receipts.
• Interest and penal charges levied.
• Loan restructuring or rescheduling
• Mortgage deed.
• Memorandum of deposit of title deeds.
• Guarantee deed if any.
• Title documents of the property.
• Valuation report of the property.
• Notice under Section 13(2).
• Proof of service of statutory notices.
• Objections submitted by the borrower.
• Reply issued by the bank under Section 13(3A)
• Notice of possession issued under Section 13(4).
• Publication of Notice of Possession.
• Application and order for possession under Section 14.
• Auction/sale notice.
• Records of valuation and fixing of reserve-price.
• OTS or settlement request/complaints submitted to the bank.
• Any correspondence with the bank.
• Any previous Court orders/Tribunal orders.

Lawyers will also compare the figures and property description mentioned in various documents. If there are mismatch between the outstanding amount, account number, security interest created, title, boundaries, measurements or description of asset then it will be investigated further.

Reviewing Demand Notice Under Section 13(2)

The Demand notice is an important document in the enforcement record. Lawyers will also analyse whether it has correctly mentioned the borrower, guarantor, secured debt, financial facility, outstanding amount due and property against which enforcement is sought.

The computation of principal, contractual interest, penal interest, legal charges and other expenses levied can also be analysed. If the borrower claims that the payments are not credited or account has been wrongly entered then bank statements and payment evidence can be collected.

Method and Proof of service is also relevant. If the borrower has submitted an objection/representation then lawyers will verify whether the creditor considered their objection and issued a reply under Section 13(3A).

Every defect will not invalidate the process of enforcement. The Tribunal will determine the nature and significance of non-compliance with reference to statute and evidence.

Challenging Possession

A secured creditor can first take symbolic possession of an immovable secured asset by serving and publishing a possession notice. It can then go on to take physical possession including by instituting proceedings under Section 14 before the District Magistrate or Chief Metropolitan Magistrate.

An application under Section 17 can challenge a possession action on any legal ground available to the applicant. This can relate to:

• Non-compliance with statutory notices
• Non-compliance with SARFAESI Enforcement Rules, 2002
• Defects in security interest created
• Erroneous description of the property
• Unauthorized action by concerned bank officer or
• Taking possession of property not covered by mortgage.

If physical possession has already been taken then the person aggrieved by such action can still ask for relief under Section 17. If the Tribunal is satisfied that the measures taken by the secured creditor were not in accordance with Act and Rules and that restoration is justified then it can order restoration of possession or management.

Restoration will not be automatic merely on filing a Section 17 Application. The Tribunal will analyse the facts and evidence and listen to submissions of all parties involved before ordering restoration.

Challenging Auction/Possession by Sale

Once the secured creditor takes possession of the mortgaged property they may proceed towards selling of the property as per SARFAESI Act and Security Interest (Enforcement) Rules.

The proposed or completed auction could give rise to issues such as:

• Service of sale notice.
• Publication of auction notice.
• Was the time-limit prescribed under Rules adhered to?
• Whether valuation of secured asset was proper?
• Whether reserve-price was fixed properly.
• Description of property.
• Disclosure of any material encumbrances on title, if any.
• Terms and conditions of auction/sale.
• Receipt and consideration of bids
• Deposit and payment to be made by bidders
• Confirmation of sale
• Issuance of sale certificate
• Overall fairness of sale process.

The impact of any defect will depend on the provision violated, stage of auction and resulting loss suffered by the applicant. A borrower who intends to challenge an auction must act quickly. Rights of bidders or auction purchasers may be affected and delay could make the matter complicated.

Drafting the Section 17 Application

We connect our clients to lawyers experienced in drafting securitisation applications. The application has to identify the applicant, secured creditor, loan account, secured asset and the specific measure complained of.

Drafting the application will include:

• Preparing a detailed chronology of events
• Identifying the measure complained of and its date.
• Identifying the Jurisdictional DRT
• Determining the limitation period
• Stating the material facts
• Identifying the statutory /procedural violations
• Preparation of sustainable legal grounds
• Organising the documentary evidence
• Drafting interim and final prayers
• Preparing Affidavits in support
• Filing of application with required documents and fee
• Responding to any objections raised by the secured creditor.

Legal grounds must be tailored to the enforcement record. Making generic statements that bank has not acted in a fair manner will not be sufficient. Each ground of objection must be backed by reference to a document, statute, applicable rule or legal principle.

Interim Applications for Urgent Relief

Representation Before DRT

After filing, the secured creditor and other respondents are required to file their replies. The bank will normally place before the Tribunal loan documents, account statements, notices issued, proof of service of notices, possession records, auction related documents, valuation report etc.

The applicant may be required to file a rejoinder, affidavit or reply to documents produced by the bank. Depending on the developments in the case, the lawyer may have to file applications for amendments, production of records, impleadment of parties or other procedural relief.

Lawyers will represent clients during interim hearings, examination of documents and evidence, arguments and final hearings. The legal strategy adopted will also depend on how the matter progresses. For instance, a case filed to challenge symbolic possession may need to be amended if the bank later obtains physical possession or issues an auction notice.

Reliefs Available Under Section 17

DRAT examines whether the secured creditor has acted in accordance with the provisions of SARFAESI Act and Rules. If the Tribunal finds that the measures complained of are not in accordance with law, then it can declare such measures void and grant any relief that is allowed to it by statute.

Relief can include:

• Declare the measure invalid.
• Setting aside an unlawful possession action
• Interfere with a sale or auction measure taken in violation of SARFAESI Act and Rules.
• Order restoration of possession where legally justified.
• Order restoration of management where applicable.
• Pass any other consequential or appropriate directions.

The applicant will have to prove the facts and law regarding the relief sought. Merely because a borrower is facing financial hardship does not mean that the secured creditor’s actions were illegal. Similarly, if there is a procedural defect the Tribunal will examine the legal significance of such defect and resulting impact.

Tenants, Co-owners and Third Parties

Tenants, co-owners, legal heirs and other third parties can also challenge SARFAESI measures if such enforcement action affects their legal rights. But such claims have to be backed by proper documentation.

A tenant will have to prove the date, duration, authenticity and legality of the tenancy. Documents which can help prove tenant rights include:

• Registered lease/deed of lease.
• Rent agreement along with rent receipts.
• Utility bills in tenant’s name.
• Taxation records indicating payment of taxes by tenant
• Business registration records, if any.
• Any correspondence with the owner.
• Evidence of continuous occupation since the period claimed.

A co-owner or legal heir will usually rely on title deeds, partition/death/ inheritance records, revenue entries, mutation records or family settlement agreement.

The Tribunal will examine whether the claimed interest existed prior to mortgage, whether the transaction is genuine and whether the property against which action is proposed is the same property which was mortgaged in favour of the secured creditor.

Agricultural Property and Other Legal Points to Consider

There are certain exclusions and special provisions under the SARFAESI Act which may arise for specific cases. This includes provisions relating to security interests created on agricultural land. However, description of land in revenue records will not be conclusive in itself.

The intended use, character, occupation and surrounding facts will need to be reviewed. Just because a property is described as agricultural land does not mean that it is outside the purview SARFAESI enforcement. Title documents, revenue records, land-use certificates, photographs, cultivation records are some of the other evidence which may need to be examined.

Same care is required for considering other statutory exclusions, validity of security interest and jurisdictional challenges. Such issues must be raised only after reviewing the statute and evidence.

Settlement after filing Section 17 Application

Filing a Section 17 Application does not stop the parties from negotiating a settlement. Borrowers can still send a One-Time Settlement proposal, request for loan restructuring, repayment proposal or request for a consensual sale to the bank.

Things to include in a settlement proposal:

• Reasons for default in repayment.
• Current financial situation.
• Total amount already paid to bank.
• Total amount you want to pay in settlement.
• Source of where you’ll get the settlement amount.
• Expected payment schedule.
• Request for reduction or waiver of interests / penal charges.
• What should happen to the pending proceedings.
• Release of security after payment.
• Return of original documents.
• Request for No-dues certificate or closure letter.

Discussions between the parties do not automatically stop possession or auction proceedings. Any interim relief should be recorded in writing or confirmed in an order passed by the Tribunal.

Before accepting a settlement, a borrower should be aware of implications of delayed payment, continued interest accrual, revival of original claim, treatment of personal guarantees and conditions for releasing the security asset.

Appeals After DRT Order

Any person aggrieved by an order of the Debt Recovery Tribunal can file an appeal before the Debt Recovery Appellate Tribunal (“DRAT”) under Section 18 of SARFAESI Act. This is subject to certain conditions, limitation requirements and deposit of prescribed amount with DRAT.

The decision to file an appeal should be taken only after reviewing DRT order, evidence on record, findings made by Tribunal and financial aspects related to DRAT appeal. Filing an appeal will not automatically grant you interim relief.

An advocate can advise you whether the matter discloses a sustainable ground of appeal and what immediate measures need to be taken to protect your interests.

Representation for All Categories of Clients

Legal Foster assists clients from all categories looking for representation in matters related to housing loans, loans against property, commercial loans, MSME loans, working-capital loans, cash credit limits, loans for purchase of machinery, industrial finance, project finance, consortium arrangements and corporate loans.

An individual borrower may be looking to protect their residential home. An MSME may need urgent protection of their factory, machinery, inventory and continuing business. A corporate borrower may be contending with multiple lenders, properties which are cross-collateralised, promoter personal guarantees and parallel insolvency/proceedings.

The legal strategy must take into consideration the client’s commercial realities as well as the legal issues involved. In appropriate cases, Section 17 proceeding may have to be consolidated with settlement negotiations, insolvency proceedings, recovery proceedings, arbitration proceedings or related property disputes.

Documents to Be Ready With

Clients consulting us for help must have and keep ready:

• All loan and security documents
• Notices received from the bank.
• Envelopes and proof of notices with date of service.
• Account statements and payment receipts.
• Objections filed previously.
• Replies received from the bank.
• Possession and auction publication notices
• Order and communications received for executing Order u/s 14.
• Settlement correspondence.
• Documents showing title to the property.
• Photographs of property.
• Tenancy/occupancy documents if any.
• Previous Court, DRT or DRAT orders passed.

Having a complete record will enable your lawyer to advise you on limitation, identify the measure complained of and draft an informed legal response.

Get Help from Lawyers Experienced in Section 17 SARFAESI Applications

SARFAESI enforcement action can progress quickly from sending a demand notice to taking possession and publishing auction notices. Consulting a lawyer quickly can help an affected person understand the remedy available to him, comply with statutory limitation periods and place all the relevant facts before Debt Recovery Tribunal.

At Legal Foster, we connect borrowers, guarantors, businesses and affected third parties to lawyers who specialise in banking law and SARFAESI across India. Assistance includes document review, legal opinion, preparation of Securitisation applications, interim applications, representation before Debt Recovery Tribunal, settlement negotiations and advice on appellate options.

If you have received a possession notice, auction notice or any other communication intimating that a secured creditor has taken or intends to take an enforcement measure then gather all records and consult a lawyer immediately.