The Parliament had enacted SARFAESI Act, 2002 to speed up recoveries of the banks with special powers to enforce secured assets without the intervention of the courts. The Act envisages issuing of various notices in the process of enforcement of security interest which are as under:

1) Demand Notice
2) Possession Notice
3) Notice of Sale
4) Sale Notice

The Act envisages compliance of various provisions as to the issuance of the above said notices and the violation of which would render the action initiated by the banks to be illegal. Hence, the significance of compliance with the various provisions governing the issuance of the said notices is discussed in this article.

  1. Demand notice

Issuance of a demand notice is the first step in the process of enforcement of secured assets. Without first issuing the said demand notice, no further action to exercise the right of enforcement could be initiated. The entire action of enforcement of security interest, therefore, hinges on the demand notice.

Section 13(2) of the Act mandated issuance of a notice to a borrower to discharge in 'full' his liabilities within sixty days from the date of notice as a precondition to exercising all or any of the rights under
Section 13(4) of the Act. 

Section 13 (2) of the Act provides for the issuance of notice if the following two conditions are satisfied:

  1. A borrower, who is under liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof.
  2. His account in respect of such debt is classified by the secured creditor as Non-Performing Asset (NPA).

It is clear from the above that the notice contemplated under Section 13(2) could be issued only after classifying the account as NPA due to default in repayment of secured debt or any instalment thereof. As per the Prudential Norms issued by the RBI, an account needs to be classified as NPA even for technical reasons like non-submission of stock statements etc.  Hence, it appears that only default in repayment of the debt, ie, 'financial default', is covered by this Section for issuance of notice under Section 13(2) and not where an account turned NPA for any technical reasons. 

It is referred to as 'Notice' in Section 13(2) of the Act, whereas it is referred to as 'Demand Notice' in the Security Interest (Enforcement) Rules, 2002. The word 'Notice' has not been defined in the Act, whereas the expression 'Demand Notice' has been defined by Rule 2(b) of the said Rules as under:

'Demand Notice’ means the notice in writing issued by a secured creditor or authorised officer, as the case may be, to any borrower pursuant to Sub-Section (2) of Section 13 of the Act.'

Should the borrower be given an opportunity of hearing before the issuance of demand notice?

When this Act was enacted, the constitutional validity of the same was challenged before the Supreme Court, in the case of Mardia Chemicals Limited vs ICICI Bank, on the grounds, inter alia, that the Act did not provide an opportunity of hearing to a borrower before issuing notice under Section 13(2) of the Act. The Supreme Court held that no hearing was required and observed as under:

'76. In regard to the submission made by the parties as indicated in the preceding paragraphs, we would like to make it clear that issue of a notice to the debtor by the creditor does not attract the application of principles of natural justice. It is always open to tell the debtor what he owes to repay. No hearing can be demanded from the creditor at this stage.'

Therefore, there is no requirement of providing any opportunity of hearing to a borrower before issuing notice under Section 13(2) of the Act.

To read more, please subscribe.