SARFAESI Act- Where Principles of Natural Justice has gone?

“Fundamental justice is a legal term that signifies a dynamic concept of fairness underlying the administration of justice and its operation, whereas principles of fundamental justice are specific legal principles that command ‘significant societal consensus’ as ‘fundamental to the way in which the legal system ought fairly to operate.’ These principles may stipulate basic procedural rights afforded to anyone facing an adjudicative process or procedure that affects fundamental rights and freedoms, and certain substantive standards related to the rule of law that regulate the actions of the state. The degree of protection dictated by these standards and procedural rights vary in accordance with the precise context, involving a contextual analysis of the affected person's interests. In other words, the more a person's rights or interests are adversely affected, the more procedural or substantive protections must be afforded to that person in order to respect the principles of fundamental justice. A legislative or administrative framework that respects the principles of fundamental justice, as such, must be fundamentally fair to the person affected, but does not necessarily have to strike the ‘right balance’ between individual and societal interests in general.”

In the background of what has been stated above, how the Principles of Natural Justice which is based on the Fundamental Justice is being preached and practiced in our legal proceedings particularly with regard to SARFAESI ACT is to be seen to be believed. In this connection The Recovery of Debts Due to Banks and Financial Institutions Act, 1993  mentions about Principles of Natural Justice under section 22 of the said act and offers statutes under section 22 (2) (a to h) and (3). Besides, the said act also has provision for a counter claim under section 19 (8) (9) (10) and (11).  But SARFAESI ACT, 2002 or its amendments never directly mention anything about Principles of Natural Justice. However sub section (7) of section 17 under “Right to appeal” states, “Save otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the application in accordance with the provisions of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made there under”. But during the course of DRT proceedings when the aforesaid section of RDDB & FI Act is quoted, the Tribunal / Courts in most of the cases invokes the provision of section 35 of SARFAESI Act which states, “The provision of this act to override other laws.” Even though, however, under Section 37 of the SARFAESI Act under “Application of other laws not barred” it is stated, “The provision of this act or the rules made there under shall be in addition to, and not in derogation of” certain other acts   as mentioned in the said section which includes Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

The very nomenclature of Debts Recovery Tribunal (DRT) itself suggest that it is nothing but an institution created by an act of Parliament for the recovery of debts of bank and financial institutions acting like a recovery agent and not as a statutory authority having the powers of a civil court. Yet another important factor is that the very name Debts Recovery Tribunal induces a psychological phenomenon of Auto Suggestion which in medical terms means “self suggestion: the process by which a person induces himself an uncritical acceptance of an idea, belief, or opinion.” The name DRT indirectly and seemingly imposes its authority to induce the Presiding Officers to influence their decisions in favour of the banks and financial institutions. Above all the feeling that the banks and financial institutions are the custodian of public money renders further tilt to their right of recovery through their biased mental attitudes forgetting the fact that every right is derived out of a duty first to be performed and the duty being duty of care and concern for the honest customers with integrity and to prevent the account being classified as NPA. There certainly exists an implicit bias among the presiding officers of DRT against the borrowers. Even the Hon’ble judges in the courts also are not an exception to this implicit bias which is defined as “someone consciously rejects stereotypes and supports anti-discrimination efforts but also holds negative associations in his / her mind unconsciously.”

Yet another practice that is being observed is that even when the aggrieved borrower approaches the High Court even before the receipt of possession notice u/s 13(4) of SARFAESI Act under article 226 / 227 of the constitution, he is in most of the cases denied the opportunity on the ground of availability of alternate remedy in DRT in spite of many contradicting court judgments.  In case if any such appeal is upheld and the High Court allows such petitions, they in most of the cases impose a deposit clause to accord a stay of the proceedings even though there is no such rule in the SARFAESI Act to impose any deposit during trial period of the case. Thus it is obvious that Principles of Natural Justice is “Gone with the wind”.

The central government appointed Narasimhan Committee I and II and Andhyarujina committee for the purposes of examining banking reforms and to consider the need for changes in the legal system in respect of recovery of defaulting loans and mounting levels of non-performing assets. They recommended enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and sell them without the intervention of the court. This resulted in the enactment of SARFAESI ACT, 2002. In one stroke the enactment deprived the defaulted borrowers of remedy of any immediate legal intervention through the Court. The instant casualty is the Principles of Natural Justice.

The Security Interest (Enforcement) Rules, 2002 defines under section 2(a) “Authorised Officer”  “means an officer not less than a chief manager of a public sector bank or equivalent as specified by the Board of Directors or Board of Trustees of the secured creditor or any other person or authority exercising powers of superintendence, direction and control of the business or affairs of the secured creditors, as the case may be, to exercise the rights of a secured creditor under the [Act]”. Hence the first step under SARFAESI ACT, 2002 to recover debts by bank of financial institution without the intervention of the Court is the appointment of the Authorised Officer who is none other than an employee of the bank or financial institution holding a position not less than that of a Chief Manager. But the legal status or the legal duties and responsibilities of Authorised Officer is not given anywhere in the said act. However, the meaning of the Authorised Officer as given under section 2(a) of The Security Interest (Enforcement) Rules, 2002 specifically mentions as an officer “to exercise the rights of a secured creditor under the [Act].” Hence he can act the way he wants with impunity. Ironically the framers of the act conveniently overlooked the fact that every right is derived out of a duty first to be performed, the duty being the duty of care of their customers and prevention of account being classified as NPA by complying with RBI directives and government guidelines.  But the way the Authorised Officer exercises his rights is nothing but abuse of power and an infringement of the Principles of Natural Justice.

As per SARFAESI ACT, the aggrieved borrower is allowed recourse to legal means with DRT only when possession notice is received by him u/s 13(4) of SARFAESI Act and then only he can file an application u/s 17(1) of SARFAESI ACT, 2002 with DRT under whose jurisdiction his case comes. Till then it is the authority of the Authorised Officer that pervades everywhere. Appointment of Authorised Officer is in fact is a direct violation of the Principles of Natural Justice because the very first Principle of Natural Justice  is, “No one can be a judge in his own cause (‘Nemo debet essa judex in propria cause’).

Invoking SARFAESI ACT starts with classifying the defaulted account as NPA as per directives of Reserve Bank of India. Based on the norms, an account is declared as NPA on a particular date. The cutoff date is very important to make sure that the account has been classified as NPA as per the norms of RBI. But before declaring the account as NPA, is any action to be initiated by the secured creditor(s)?

RBI issued a master circular DBS.CO.OSMOS/ B.C. / 4 / 33.04.006 / 2002-2003 dated September 12, 2002 on Guidelines on preventing slippage of NPA accounts after the enactment of SARFAESI ACT, 2002.  The preamble of the said circular of RBI is “Study on preventing slippage of NPA accounts: A study at the behest of Board for Financial Supervision (BFS) was conducted by the Reserve Bank by scanning relevant information / data obtained from a select group of banks, as also by holding discussions with bank officials, who manage NPAs at the policy level as well as those who look after actual recovery, rehabilitation / revival, restructuring of accounts at the implementing level. On the basis of the study, we had suggested a framework of recommendations for preventing slippage of NPAs accounts from sub-standard to doubtful / loss category which had been circulated among banks for feedback and comments. Response from most banks to these recommendations has been positive and in addition, some useful suggestions too have been received, which have been taken into account at the time of finalisation of the recommendations. In view of suggestions from some of the banks, our guidelines for categorising assets under ‘special mention’ category may be taken as an indicative framework for internal control purpose, for assets with potential weaknesses which deserves close attention and which can be resolved through timely remedial action.

2. We shall be glad if these guidelines are placed before the Board of Directors of your bank in their next meeting. The objective underlying the exercise is to evolve a common minimum framework to tackle the problem of slippage of NPAs, and it is expected that banks will work out their strategic response in keeping with the broad thrust of these guidelines.”

A relevant portion of the said circular states, “Early alert system: The strategy for the management of NPAs may be governed by the circumstances connected to each individual case. Generally, NPA is more likely to be resolved in terms of recovery if the company is in operation. For this to be effective there must be a system of identifying the weaknesses in the accounts at an early stage. Banks may put in place an “Early Alert” system that captures early warning signals in respect of accounts showing first signs of weaknesses. This system may be an integral part of the risk management process of the bank. Internationally, there is a similar system of “Special Mention Accounts”. Depending on the identified weaknesses, one may go back (rather than with reference to current period) to a prior or earlier period in determining the rehabilitation response.” Considering the very concept of recovery of dues, the most important aspect is, “Generally, NPA is more likely to be resolved in terms of recovery if the company is in operation.” as said above. The emphasis is on the “Company is in operation”. But, rightly or wrongly, once the account is declared as NPA,  the first act of the bank or the financial institution is to see that the Company is not in operation because any credit that comes into the account is immediately adjusted towards the dues leaving the company in the lurch. Even though the RBI has clarified that it has not issued any circular prohibiting the bank and the financial institution from further funding, the mindset of the bank and the financial institutions in most of the cases are against further funding of the NPA accounts.

Thus it is very clear and without any ambiguity that the bank has to undertake such exercises as “Early Alert System” to bring such incipient sick accounts under “Special Mention Accounts” and to be followed up diligently and sincerely as per RBI guidelines to prevent the account from slipping into NPA. After exhausting all means of revival scheme as formulated by RBI, then only and as a last resort that bank can invoke SARFAESI ACT for recovery of debts.  But the experience is that banks rarely undertake such systems and procedures and simply overlook relevant RBI guidelines which are mandatory. Besides, neither the Authorised Officer of the Bank or Financial Institution ever looks into such directives nor the Presiding Officer at DRT takes into consideration such pleadings as to the non implementation of RBI guidelines.  The actions of the Authorised Officer and the Presiding Officer for not taking into consideration such representations and pleadings is yet another violation of the second Principles of Natural Justice which states, “Hear the other side.” (‘Audi Alteram Partem’). 

Reserve Bank of India issued yet another step to be taken by the Banks and Financial Institutions to vitalize the NPA vide their circular  DBOD.BP.BC.No.97/ 21.04.132 / 2013-14 dated February 26, 2014 addressed to All Scheduled Commercial Ban (excluding RRBs)  All-India Term-lending and Refinancing Institutions (Exim Bank, NABARD, NHB and SIDBI) on Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) in which the steps to be initiated to revitalize distressed assets and to prevent them from becoming NPA. Yet rarely the banks and financial institutions take such steps as envisaged by Reserve Bank of India but go all out to invoke SARFAESI Act. That is how the principles of natural justice work for the banks and financial institutions to prevent the account from becoming NPA.

SARFAESI Act shall be invoked by issuing notice u/s 13(2) of SARFAESI Act only on Classification of secured asset as NPA as per the norms set by Reserve Bank of India and the said notice is issued for the recovery of “Legally Recoverable Debt”. Hence it is imperative that the bank / financial institution should first prove that the RBI norms are being followed to declare the account as NPA and that the dues to be recovered are “Legally Recoverable Debt” as defined in the Act. . But the Authorised Officer, the Presiding Officer of DRT and even many of the judges of the legal courts ignore and overlook this aspect even when it is brought to their notices by the litigants in their legal submissions. Are their actions of ignoring this aspect not tantamount to violation of Principles of Natural Justice?  

The next step after declaring the account as NPA is the serving of notice u/s 13(2) of SARFAESI ACT to the defaulted borrower for the recovery of dues by the secured creditor or the Authorised Officer or the constituted attorney of the secured creditor. The important feature of the notice in writing by the secured creditor is, “the secured creditor may require the borrower by notice in writing to discharge his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).” This is the unkindest cut of all the rules made under the SARFAESI ACT, 2002. The liabilities may be running in to lakhs or crores.  How the borrower is expected to raise this amount in 60 days is not even thought of when imposing such a rule.  Had the borrower been in a position to raise such huge amounts within the stipulated time, then the question of the account being declared as NPA would not arise at all. Once the account has been declared as NPA, all the sources of raising funds are closed for the borrower. Is it not another instant violation of The Principles of Natural Justice?

After the receipt of the notice u/s 13(2) of SARFAESI ACT, the borrower has to submit his representation or objections u/s 13(3-A) of the said act and then as per the Act “secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week (presently 15 days) of receipt of such representation or objection the reasons for the non acceptance of the representation or objection to the borrower.”  However, The Security Interest (Enforcement) Rules, 2002 states u/s 3A. (b)  Reply to representation of the borrower, “If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make any changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within seven days (after the amendment of the ACT, it is 15 days) from the date of receipt of the representation or objection.” This particular section is meant for the secured creditor who can also “pass such other suitable orders as deemed necessary” which means that the bank or the financial institution can also accept the representation made and objections raised by the borrower. But do the banks pass such orders other than rejection of the representation made and objections raised by the borrower? Experience shows that the maximum the bank or the financial institution do in the rarest of rare cases is to amend their notice and issue fresh notice but never accepts their wrong doings including the violations of the RBI directives and the provision of the SARFAESI ACT that the dues to be recovered should be “Legally Recoverable Debt” in spite of clear evidences being submitted to them.

Sub section 3A(c) stipulates, “If on examining the representation made or objection raised by the Authorised Officer comes to the conclusion that  such representation or objection is not acceptable or tenable, he shall communicate within one week (now 15 days) of receipt of such representation or objection, the reasons for non-acceptance of the representation or objection, to the borrower.” This section is meant for Authorised Officer which mentions only non acceptance of the representation made and objections raised by the borrower and there is no mention of “pass such other suitable orders as deemed necessary” as stated in the case of secured creditor. This is yet another instant of violation of the Principles of Natural Justice.  Perhaps this might have prompted the Hon’ble Supreme Court to observe and make their remark in their judgment of Mardia Chemicals which states, “Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.”    

The Hon’ble Supreme Court further observes, “In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub -Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non- compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act.” Hence it is the imperative need that the Authorised Officer should  apply his mind and weigh all the facts that have been brought out and without showing any prejudice and have some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. But the experience shows that the Authorized Officer merely rejects the representation made and objections raised by the borrower as a ritual without application of his mind which amounts to a violation of Principles of Natural Justice.

Section 13(3A) further stipulates, “Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of district Judge under section 17-A.” Thus it is very clear that the borrower can approach DRT and that too only DRT to get his grievance redressed or to protect his rights only after the bank takes possession of his secured assets. At the same time the bank can take action under 13(4) and further go on to take further steps to secure their rights under section 13(5) to 13(13) and they can seek the help of Chief Metropolitan Magistrate or District magistrate to take possession of the secured assets. The secured creditor also can take over the management of the debtor as per section 15 of the SARFAESI ACT. Till such time the borrower will be a mere hapless and helpless spectator seeing and experiencing his own downfall and seeing him and his family members being thrown out in to the streets. That is Principles of Natural Justice in SARFAESI ACT.

Section 15 including sub sections and also section 16 give a fatal blow to those people who are managing the organization by depriving of their legitimate livelihood and compensation and their services stand terminated. These sections do not speak anything about the employees and other workers whose living is depending on the organization. But “the more a person's rights or interests are adversely affected, the more procedural or substantive protections must be afforded to that person in order to respect the principles of fundamental justice.” Does the SARFAESI ACT ensure such protections? On the contrary is it not an infringement into the human rights which state, “Article 3:- Everyone has the right to life, liberty and the security of person”, “Article 7:- All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this declaration and against any incitement to such discrimination”, and “Article 25:1. Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing, medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control” ? Fundamental Rights enshrined in the Constitution of India also envisages the same protection to the citizens of India.

The pertinent question is to whom the aggrieved borrower will approach in case the secured creditor / Authorised Officer do not comply with the aforesaid provisions of RBI directives and the relevant laws for the redressal of his grievance? The aggrieved borrower does not have any other option other than to approach the secured creditor or the Authorised Officer. The casualty is the principles of natural justice.

The hard fact and the unpleasant truth for the borrower is that even if he wants to challenge the order of the Presiding Officer of DRT in the DRAT, he has to deposit an amount of not less than 25% of the debt due from him, as claimed by the secured creditor/(s) or determined by the Debts Recovery Tribunal, whichever is less. Is it not an infringement into the Principles of Natural Justice if the judicial process does not give any relief to the honest borrower whose account has become stressed account due to circumstances beyond his control and classified as NPA and an opportunity to rehabilitate? In this connection the Supreme Court judgment in the matter of KSL and Industries Limited (“KSL”) v. M/s Arihant Threads Limited (Civil appeal No. 5225 of 2008) and others has held that rehabilitation of the industry takes precedence over recovery of debt.

As per the intent of RDDB & FI Act, 1993 and SARFAESI Act, 2002, DRT is expected to be the Trial Court and DRAT is to function as the Appellate Court keeping up the independence of the judiciary. But these two Tribunals are being managed by Ministry of Finance and Banking and hence under their complete control.  The control is still being continued in spite of the fact that the Supreme Court of India has ordered that the Tribunals should be transferred from the control of the parent ministries to the ministry of law. As per Article 141 of the Constitution of India, the law declared by Supreme Court shall be binding on all courts within the territory of India. Besides, Press Information Bureau, Government of India released a press briefing on June 06, 2012 about the meeting of the then Finance Minister with the Chairpersons of DRATs and Presiding Officers of DRTs asking them to suggest ways and means to expedite the unlocking of resource of various banks. So much is there for the Judicial Independence and Principles of Natural Justice.

It is thus clear and evident what could be the outcome of the subsequent proceedings in the DRT, DRAT, High Courts and even Supreme Court regarding the fate of the honest borrower with integrity who has become the victim of circumstances beyond his control who exclaims in agony “Where has the Principles of Natural Justice Gone?” The answer is “The Principles of Natural Justice is dead and gone” “Long Live the Principles of Natural Justice”.

The author can also be reached at trrk1941@gmail.com