Section 13 of Sarfaesi Act: Advocates & Lawyers
Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a key provision that empowers secured creditors, such as banks and financial institutions, to enforce their security interests and recover dues from defaulting borrowers without the need for court intervention.
Issuance of Demand Notice (Section 13(2)):
When a borrower defaults, the secured creditor issues a demand notice to the borrower, specifying the outstanding dues and granting a 60-day period to repay.
The notice must detail the amount owed, the reason for default, and the secured assets at risk of repossession.
Borrower’s Restrictions (Section 13(3A), 13(3), 13(13)):
After receiving the notice, the borrower cannot transfer the secured asset (by sale, lease, etc.) except in the ordinary course of business.
Enforcement Actions (Section 13(4)):
If the borrower fails to comply within 60 days, the creditor can take possession of the secured assets, manage them, or transfer them by sale, lease, or assignment to recover the dues.
The creditor can also take over the management of the borrower’s business or appoint a manager for the secured assets.
Right to Appeal:
Borrowers have the right to appeal actions taken under Section 13(4) to the Debt Recovery Tribunal (DRT), providing a check on the creditor’s powers.
Redemption of Property (Section 13(8)):
The borrower retains the right to redeem the secured asset by paying all dues before the publication of the sale notice.
After the sale notice is published, this right is extinguished, as clarified by the Supreme Court.
Practical Implications
For Lenders:
Enables efficient and time-bound recovery of non-performing assets (NPAs), reducing reliance on lengthy court procedures.
Strengthens financial stability by empowering lenders to enforce security interests directly.
For Borrowers:
Creates a disciplined repayment culture, as the threat of asset repossession acts as a deterrent against default.
Emphasizes the importance of understanding loan terms and timely repayment, especially for secured loans like home loans.
Section 13 Process
| Step | Action by Lender | Borrower’s Rights/Obligations |
|---|---|---|
| Issue of Notice | Demand notice (60 days) | Repay or respond within 60 days |
| Post-Notice Default | Take possession/manage assets | Cannot transfer asset, may appeal to DRT |
| Sale of Asset | Auction or sale to recover dues | Right to redeem before sale notice |
Section 13 of the SARFAESI Act is a pivotal tool for lenders, providing a structured, court-free mechanism for the enforcement of security interests and recovery of dues, while also safeguarding certain rights for borrowers through notice and appeal provisions.
