shishir sharma (Chartered Accountant) 30 August 2014

Scope of sarfaesi under cgtmse scheme

Hi members,

I am getting contradictory views on this matter so I thought to bring the issue on this board to have opinion of our enlightened members.

Issue - Scope of SARFAESI act under CGTMSE scheme

Facts - A Proprietor has taken cash credit of 40 lacs for his business around 5 years back on CGTMSE scheme. Naturally there was no collateral or guarantee except the inventories and debtors have been hypothecated for cash credit. Unfortunately, the business went into turmoil and the proprietor suffered a loss. Now the business owner wants to discontinue his business and settle the loan with bank in a one time settlement (OTS).

But before going into negotiations for one time settlement, (OTS), the owner wants to know the extent to which bank could go. Could the bank enforce SARFAESI act on the business / residential property of the owner or its power is limited to the realization of debtors and stock.

Opinion - My opinion is that since the SARFAESI act is only applicable to secured assets i.e. properties which are hypothecated with bank, the bankers would not be able to enforce the act in this case as the properties were not hypothecated with bankers. The banker's right to enforce SARFAESI act will be limited to Debtors and inventories (primary assets) of the business.

What is the opinion of other members on this? Pls. feel free to respond and suggest.

Thanks,

Shishir

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8 Replies

MANOJ HARIT (LAWYER) 31 August 2014

Dear Shishir,

U r right. The Banker cannot take recourse to measures under Sarfaesi Act for recovery. But other avenues are available to him through which he can proceed against personal property of the Borrower.

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shishir sharma (Chartered Accountant) 31 August 2014

Thanks Manoj for your opinion. By other avenues I presume you refer to civil suits which bankers are not very much keen to go into and instead would prefer for a OTS in favor of my client.

Is my reasoning fine?

K.K.Ganguly (Advocate) 31 August 2014

1. Civil Suit if the outstanding is for less than Rs.10 lakhs.The Bank willfile Original Application (O.A.) before the DRT under Section 19 of Recovery of Debts Due to Banks and financialInstitutions Act, if the outstanding is for more than Rs.10 Lakhs, 2. Ths O.A. is for attachment of all the properties of the Borrower &/or Guarantor, 3. After filing the said O.A. the Bank may pray for a direction for attachment of property(ies) of any of the above before judgement with the direction upon the police to assist the Authorised Officer/Receiver in takingmaking such attachment, 4. This order from DRT is easy to get and on receipt of the said order, the Bank may go with police to attach the ordered property, 5. Better to negotiate with the Bank and propose OTS.

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shishir sharma (Chartered Accountant) 31 August 2014

Thank you Mr. Ganguly for a detailed response.

Another query - this one is a bit abstract & hypothetical - How much should the client aim for OTS in the said case if the outstanding amount is around 40 lacs and the client's aim is to go for maximum relief as he will be retiring and will sustain on remaining assets. (Sorry for a bit ambiguous question but I want to use members' expertise to get an idea of starting point and reasonable level of negotiation)

K.K.Ganguly (Advocate) 01 September 2014

As per RBI guidelines, PSU Banks can not aettle for any amount less than the ledger balance. Hence, do not propose for anything less than the ledger balance which can not be accepted by the Bank. Moreover, you shall have to settle the amount within 3 months from the date of the proposal and shall have to pay 10% of your proposed amount alongwith your OTS proposal.

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Biswanath Roy (Advocate) 02 September 2014

Rightly opined by Learned friend Mr. K.K. Ganguly. Nothing to add.

RAJU O.F., (Advocate) 02 September 2014

Bank cannot initiate SARFAESI proceedings against unsecured properties of borrowers. They can sell the stock hypothecated with them. However they can file suit or O in DRT and can get the personal properties of the borrowers (including guarantors) attached through court/DRT.

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T. Kalaiselvan, Advocate (Advocate) 04 September 2014

As rightly opined by experts and lawyers, the bankers may not be able to proceed for recovery through Sarfesi act, but through civil court in the suit for recovery, attachment before judgment of the properties lying in the name of the borrower, his guarantors can be made. alternately OA before DRT can be filed.For OTS, the bankers may not come down to an agreement below ledger balance, hence as suggested, you may start negotiations on the basis of ledger balance basis itself. This may indicate a healthy negotiation. You may advise your client accordingly.

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