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Q 17: At the time of taking physical possession, there would be some movable properties lying in the building, which are not hypothecated to the bank?  How to deal with such movables?  Has the bank got a right to sell such movables.

Answer: 1). Conduct panchanama in the presence of two witnesses similar to Appendix

2). Record inventory similar to Appendix –II.

3). Handover the same to the (Secured Creditor’s Board) approved re-possessors them under lock and key and post security guard if the movables are more valuables than the expenditure of preservation and security.

4). Serve 15 days notice to the borrower advising them to collect the same from the premises of the re-possessors and in default to do so inform them that the same may be sold under quotation method.      

5). After defraying the expenditure for such steps including the service charges of the re-possessors, the surplus may be held in trust by the secured creditor to pay the borrower under indemnity bond.

Q 18: Very often the bank proceeds for sale on 'as is where is basis' of plant and machinery along with the building without taking possession of either the plant and machinery or the building where it is fixed?  Can such procedure be adopted?  Is there a concept of symbolic possession for movables.  What would happen if the borrower removes the plant and machinery after sale in auction by the bank?

Answer: Taking symbolic possession of movable secured assets is not known to law. According to Supreme Court, if movable machinery is temporarily fixed to the earth it is not immovable property (See Sirpur Paper Mills Ltd. Vs. Collector Of Central Excise, Hyderabad (AIR 1998 SC 1489). If movable machinery is fastened to earth permanently, it is immovable property (See Duncans Industries Ltd. Vs. State Of U.P. & Ors. (AIR 2000 SC 355).

Q 19: Sometimes the orders of the Magistrate / CMM fix a date before which the bank is directed to execute the order.  In many cases, the orders would not be executed for various reasons within the date fixed.  When the branch approaches the police after the date mentioned in the order, they point out that the date has expired, hence they cannot execute the order.  What is the course of action to be adopted in such cases?  

Answer: A petition may be moved afresh before the Magistrate disclosing the reasons for non execution of the order within the time specified. Enclose a copy of the earlier order as a ready reference. All the documents, affidavit etc. filed earlier need not be filed again.

Q 20: In many cases, the action under Section 13 (4), is taken after expiry of a long period, (may be years) after date of service of demand notice). Whether such long gap in initiating further action is proper and permissible in law.

Answer: After service of 13 (2) notice, the Secured creditor has not taken action under Sec. 13(4) for 5 years. As there is no provision in the Act within which time action under Sec. 13(4) should be taken. Hence doctrine of waiver has no application for such delayed action (See IFCI vs. Parekh Platinum Ltd.: AIR 2010 Guj.35).

Q 21: The orders given by the District Magistrate / CMM normally fix a date before which the bank is directed to execute the order.  In many cases, the orders would not be executed for various reasons within the date fixed.  When the branch approaches the police after the date mentioned in the order, they point out that the date has expired.  What is the course of action to be adopted in such cases? 

The Police may not agree to execute the warrant in which time specified has expired. Approaching the Magistrate with sufficient cause and seeking for fresh orders for extending time given earlier would be appropriate solution.

Q 22: What are the consequences of a sale held based on the ”as is where is and what is basis”

ANSWER: 1. Secured creditor has to tread very carefully before holding public auction and take all necessary steps to ascertain and furnish the information relating to encumbrance/attachment on the property to the intending purchaser. The ignorance of the secured creditor regarding the encumbrance on the property is no longer an acceptable argument in light of the decisions of court rejecting the plea of "as is where is". It is evident that the immunity claimed by the Bank/FI on the pretext "as is where is and as is what is basis" is dying a slow death and the Bank/FI being secured creditor, have to make due diligence/make thorough search of the property before proposing for sale.

2. A plain reading of the SARFAESI Act/Rules would cast duty upon the Bank/FI to furnish those encumbrances which are known to them on the property which are sold by them. However, Rule 8(6)(f) mandates additional duty on the authorised officer to make known to the bidders before auction any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. The borrowers are creating multiple registration of the same property subsequent to execution of mortgage with the Bank/FI and these frauds are rampant in the market. These frauds may not be known to the secured creditor in the normal course and if the property is sold "as is where is basis" without the knowledge of the subsequent encumbrances, there is apprehension that the auction proceedings could be stalled by the purchaser through the judicial intervention on the ground of non-furnishing of the material information relating to encumbrance.

3. Rule 8(6) of Security Interest (Enforcement) Rule, 2002 lays down that, the Bank/Financial Institution is imposed with the accountability to conduct due diligence/make thorough search on the assets before the sale. The plea of ignorance of the knowledge of encumbrance on the assets sold on the pretext of "as is where is" is no longer an acceptable argument in the light of the judicial interpretation.

a). M/s Sree Lakshmi Products v. State Bank of India MANU/TN/7533/2007.

b). M/s Chemstar Chemicals & Intermediates (P) Ltd. v. The Commercial Tax Officer, Chennai and State Bank of Mysore MANU/TN/2967/2010.

c). Haryana Financial Corporation & Another v. Rajesh Gupta MANU/TN/1892/2009. d). Krishna Lifestyle Technologies Ltd. v. Union of India MANU/MH/0103/2008.

Q:23: Whether there should be description in the sale certificate issued by the authorised officer about the encumbrances?


No. It is sufficient if known encumbrances to the secured asset are disclosed in the sale notice and the details of the dues are furnished to the purchaser to enable him to make decision to purchase the property along with encumbrances or not. Authorised Officer has to make thorough search of the records in the office of the of sub-Registrar office to ascertain the encumbrances if any in strict compliance of Rule 8(6)(f) of S.I.(E) Rules. Hence sale under “as is what is and where is basis” is a slow dying death rule. It does not absolve the secured creditor to answer the purchaser if the encumbrances (whether known or not known to the secured creditor) are not disclosed. If the purchaser knows the encumbrances, before purchasing the secured asset, he is estopped from repelling to purchase the same.

Q:24: If any encumbrance is known to the authorised officer, how should he proceed for sale?  Whether the Authorised Officer can take shelter that as the sale is made on 'as is where is basis', it is for the purchaser to enquire about all encumbrances on the property? Please quote case laws, if any, where the sale has been set aside for non-disclosure of encumbrances.

Answer: Rule 8(6)(b) of SI(E) Rules imposes statutory duty on AO to ascertain the full details of such encumbrances (such as land revenue, Municipal taxes, sale tax etc.) which may come to his knowledge or born out of records of the secured creditor if any. Equally the purchaser also has a duty to ascertain the encumbrances disclosed in the sale notice before participating to purchase the secured asset and execution of sale certificate in his favour.

Q:25: Whether there should be description in the sale certificate issued by the authorised officer about the encumbrances?

Answer: There should not be any mention of encumbrances in the sale certificate. Encumbrances if any be finalized before issue of the sale certificate.

Q:26: Can the expenses incurred by the secured creditor for engaging the enforcement agents by paying their commission, publication expenses incurred for serving demand notice, possession notice, sale notice.

Answer: According to Sub Sec. (7) of Sec. 13 of SARFAESI Act, where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary be applied, firstly, in payment of such costs, charges and expenses. Properly means correctly, satisfactorily i.e. legally incurred. The bank can charge all the expenses legally incurred from the borrower and adjusted out of the sale proceeds realised out of the secured asset. However charges paid to Recovery agents cannot be treated as legally incurred expenditure

Q:27: If the possession notice or sale notice is/are set aside in SA filed by the borrower, how to deal with such expenses incurred ?

Answer: If the possession notice or sale notice is (are) set aside as it (they) is (are) not as per the S.I.(E) Rules, the DRT may, while setting aside the action, state in the order that, the secured creditor cannot debit the loan (NPA) account of the borrower, with such expenses and if they are debited, then to reverse the relevant entry in the account and if not debited

Q: 28: Can any objection or representation be made by borrower after expiry of 60 days of service of demand notice. In such case if the Authorised Officer is bound to reply to such objection / representation?

Answer: Yes, borrower can raise any objection or representation but before possession (symbolic or actual) of the secured asset is taken or possession notice is served whichever earlier.

Q:29: Whether DRT or DRAT or High Court has power to quash / set aside the demand notice issued under Sec.13(2) ?

Answer: DRT or DRAT or High Court has no power to quash or set aside the demand notice issued under Sec. 13(2) as such power is not contemplated in the SARFAESI Act. The DRT or DRAT or High Court can only set aside / quash  ‘Possession Notice’ or ‘sale notice’.

Q:30: Whether presence of Authorised Officer is required at every stage of the action under Chapter III of the Act ?

Answer: Presence of Authorised Officer is required at every stage of the action under the SARFAESI Act start from the date of personal delivery or transmission of the demand notice. If the borrower or his agent avoids service of notice, he has to form his view for a decision to serve the notice by affixture and publication in two leading newspapers as provided under Rule 3(1) of S.I. (E) Rules. He has to make a written request to the Metropolitan / Dist. Magistrate u/s 14 of SARFAESI Act along with his affidavit disclosing the particulars (i) to (ix) as per the latest amendment (See paragraph 6 of the Gazette Notification dated 03.01.2013 published on 4th January 2013) and his presence may be required before the Magistrate. His presence is required at the time of affixture of the statutory notices as he has to draw the panchanama in the presence of two witnesses and sign it. As he himself is delegate of statutory power, he cannot deligate his power to any one to perform the action. Even a Court Commissioner appointed by the Magistrate u/s 14 of the Act cannot step into his shoes and record Appendixes-I & II. The Court Commissioner or subordinate of the Magistrate at most can render police assistance to facilitate the Authorised Officer to perform the action according to law.

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