Sarfaesi Demand Notice and Possession Notice | Sarfaesi 13(2) and 13(4) Notice

Sarfaesi Demand Notice and Possession Notice | Sarfaesi 13(2) and 13(4) Notice

A Sarfaesi Demand Notice under Section 13(2) of the SARFAESI Act is an official legal notice issued by a secured creditor (such as a bank or financial institution) to a borrower who has defaulted on loan repayment. This notice demands that the borrower repay the outstanding dues within 60 days. It includes details like the amount owed, the reason for default, and the secured assets at risk of repossession. The issuance of this notice marks the start of the enforcement process under the SARFAESI Act to recover the loan without court intervention.

If the borrower fails to repay the debt within the 60-day period of the Demand Notice, the creditor can take further action under Section 13(4). This section empowers the creditor to take possession of the secured assets, manage them, and sell or lease them to recover the dues. The possession taken can be symbolic or physical and must follow legal procedures to ensure fairness.

Section 13(2) Demand Notice: A formal demand to repay dues within 60 days.

Section 13(4) Possession Notice: If dues are not paid, the creditor can take possession of the secured assets.

The borrower has the right to raise objections to the Demand Notice within 60 days under Section 13(3), and the creditor must respond to these objections.

This legal process helps banks and financial institutions recover unpaid loans efficiently while providing some protection to borrowers through specified procedures and appeal rights at the Debt Recovery Tribunal (DRT).

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) empowers banks and financial institutions to recover non-performing assets (NPAs) without court intervention.

Section 13(2) – Demand Notice

This is the first legal step under the SARFAESI Act.
The lender (bank or financial institution) sends a Demand Notice to the borrower.

To demand repayment of outstanding dues within 60 days.

Contents of Notice:

• Outstanding amount due

• Description of the secured asset

• Consequences of non-payment (i.e., action under 13(4))

• A demand to repay within 60 days

Legal Effect:

• Gives the borrower a chance to repay or raise objections.

• Borrower can file a representation/objection.

• The bank must reply to objections within 15 days.

Section 13(4) – Possession Notice

If the borrower fails to repay within 60 days of the Demand Notice, the lender can enforce the security interest.

Actions the lender can take:

1. Take possession of the secured asset (e.g., property, machinery)

2. Take management of the secured business

3. Appoint a manager for the secured asset

4. Require payment from third parties (e.g., debtors of the borrower)

Possession Notice:

• Published in two newspapers (one in vernacular)

• Affixed on the property

• Clearly describes:

  • The asset taken possession of

  • The borrower’s name

  • The loan account details

Borrower’s Remedy:

After a 13(4) notice:

• The borrower can file an application under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal (DRT) to challenge the possession action.

The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) provides a legal framework for secured creditors (like banks and financial institutions) to enforce their security interests and recover dues from defaulting borrowers without the intervention of a court. The process is initiated through two key notices: the Demand Notice under Section 13(2) and the Possession Notice under Section 13(4).

SARFAESI Demand Notice (Section 13(2))

• Purpose: This is the first and foundational step in the SARFAESI recovery process. It is a formal communication from the secured creditor to the borrower, demanding the repayment of the outstanding loan amount.
• Trigger: The notice is issued when a borrower’s account is classified as a “Non-Performing Asset” (NPA) and they have defaulted on the repayment of their secured debt or an installment.
• Content: The notice must specify the total amount of the secured debt payable by the borrower and provide details of the secured assets that the creditor intends to enforce in case of non-payment.
• Timeframe: The borrower is given a mandatory 60-day period from the date of the notice to clear all their outstanding dues.
• Borrower’s Rights: Upon receiving the notice, the borrower has the right to make a representation or raise objections to the secured creditor. If the creditor deems the objections untenable, they must communicate the reasons for non-acceptance to the borrower within 15 days, as per Section 13(3A).

SARFAESI Possession Notice (Section 13(4))

• Purpose: This notice is the second major step, signifying that the secured creditor is now taking concrete action to enforce its security interest.
• Trigger: This notice can only be issued if the borrower fails to discharge their liability in full within the 60-day period specified in the Section 13(2) notice.
• Actions by Creditor: Section 13(4) empowers the secured creditor to take one or more of the following measures to recover the secured debt:
  • Take possession of the secured assets (this can be symbolic or physical possession).
  • Take over the management of the borrower’s business.
  • Appoint a person to manage the secured assets.
  • Require any person who has acquired the secured assets to pay the secured creditor directly.
• Consequences for the Borrower: A Section 13(4) notice indicates that the creditor is now in control of the secured asset and can proceed with its sale, lease, or assignment to recover the outstanding debt.
• Borrower’s Recourse: If a borrower is aggrieved by the measures taken by the secured creditor under Section 13(4), they have the right to file an application with the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.

The Section 13(2) notice is a warning and a final opportunity for the borrower to settle their debt, while the Section 13(4) notice is the execution of the bank’s power to seize the secured asset for recovery.

SARFAESI Demand Notice and Possession Notice

1. Demand Notice under Section 13(2)

• Purpose: Issued when a borrower defaults on a secured loan (e.g., home loan, loan against property) and the account is classified as a Non-Performing Asset (NPA) per RBI guidelines. The secured creditor (bank or financial institution) demands repayment.

• Content:

  • Outstanding loan amount (principal, interest, and other charges).

  • Demand for repayment within 60 days from the date of the notice.

  • Details of the secured asset (collateral) that may be enforced if the borrower fails to repay.

• Borrower’s Rights:

  • Submit representations or objections within the 60-day period, per Section 13(3A). The creditor must respond within 15 days, providing reasons if objections are rejected (mandatory, as per ITC Limited v. Blue Coast Hotels Ltd., 2018).

  • Repay dues within 60 days to avoid further action.

• Delivery: Served via registered post, speed post, courier, or other means (e.g., email, fax). If avoided, it can be affixed to the property and published in two newspapers (one in the vernacular language).

• Legal Implications:

  • Non-compliance allows the creditor to proceed under Section 13(4).

  • Courts have upheld the constitutionality of Section 13(2), emphasizing procedural fairness.

2. Possession Notice under Section 13(4)

• Purpose: Issued if the borrower fails to repay within the 60-day period, allowing the creditor to take possession of the secured asset.

• Actions Permitted:

  • Take possession (physical or symbolic).

  • Transfer the asset by lease, assignment, or sale.

  • Take over the management of the borrower’s business (if the business is the security).

  • Appoint a manager for the secured asset.

  • Demand payment from third parties owing money to the borrower related to the asset.

• Procedure:

  • Prepared per Rule 8(1) of the Security Interest (Enforcement) Rules, 2002, affixed to the property, and published in two newspapers (one in the vernacular language) within 7 days of possession.

  • Possession can be symbolic (e.g., affixing the notice) or physical. Per M/s Hindon Forge Pvt. Ltd. v. State of Uttar Pradesh (2018), borrowers can challenge symbolic possession via the Debt Recovery Tribunal (DRT) under Section 17.

• Borrower’s Rights:

  • Challenge the notice by filing with the DRT under Section 17 within 45 days.

  • Prevent possession by repaying full dues, including costs, before the asset is auctioned.

• Post-Possession:

  • The creditor can sell or lease the asset via public auction, ensuring fair valuation.

  • Surplus from the sale, after recovering dues, is returned to the borrower.

Key Implications

• For Lenders:

  • Streamlined, non-judicial recovery mechanism, reducing time and cost.

  • Efficient management of NPAs, ensuring financial stability.

• For Borrowers:

  • Default can lead to loss of the secured asset and credit score damage.

  • Safeguards include the right to make representations, appeal to the DRT, and demand fair valuation.

• Special Cases:

  • Agricultural Land: Cannot be enforced unless used for non-agricultural purposes.

  • Second Demand Notice: A fresh notice can be issued if the original is withdrawn or set aside.

Preventing Possession

• Timely Repayment: Clear dues within the 60-day period.

• Negotiation/Restructuring: Engage with the lender for loan restructuring or refinancing.

• Legal Recourse: Approach the DRT for procedural irregularities or file a writ petition in a High Court under Article 226 (rare).

Judicial Clarifications

• Mardia Chemicals Case (2004): Mandated Section 13(3A) for borrower representations.

• Transcore v. Union of India (2008): No distinction between symbolic and actual possession for enforcement.

• Adi Jogesh Radia v. State of West Bengal (2009): 60-day period applies only to Section 13(4) measures.

Practical Notes

• Time Limits:

  • Demand Notice: 60 days for repayment.

  • Response to Representation: 15 days.

  • Possession Notice Publication: Within 7 days.

  • DRT Appeal: Within 45 days.

• Documentation: Borrowers should retain communication records for DRT appeals.

• Fair Valuation: Creditors must ensure transparency in auctions.