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c.p.s. ramachary (1500)     28 April 2013

Position of guarantor under sarfaesi act

 

Position of guarantor under sarfaesi act

 

Deed of guarantee does not create any security interest. Sec.31(e) of the Act makes it further clear from the following words:

 

 “any other contract in which no security interest has been created”.

 

SARFAESI Act deals with secured assets and not with the covenants in the contracts. This is because the guarantee deed needs adjudication for determination of guarantor’s liability. But adjudication process is avoided in SARFAESI Act in view of the recommendations of Andhyarujina Committee Report (which has discovered that adjudication process consumes more delay in recovery of bad debts). Therefore DRT is conferred with power of scrutinizing (u/s.17(2) of the Act) the action of secured creditor taken under the Act and not adjudication of claim amount. There is difference between scrutiny and adjudication. Scrutiny is nothing but legal audit of the action of the secured creditor under the Act. Adjudication is process of determination of claim or liability of borrower or guarantor. When DRT has no power to adjudicate on the quantum of the claim of secured creditor under the Act (FB :Madras High Court: in Laksmi Sankar Mills (P) Ltd. Vs. Authorised Officer, Indian Bank (2008(2)CTC 529), the question of adjudicating the guarantor’s liability does not arise under SARFAESI Act. However it is open to the borrower and or guarantor to challenge various issues such as legality of the action, illegal or excess loading of interest, compounding of penal interest, illegitimate charges etc.in the loan account, except seeking relief of determination of  quantum of claim/liability.

 

Guarantor is entitled to service of all the statutory notices even if he has not created any security interest. This is clearly provided in Sub-Rule (4) of Rule 3 of Security Interest (Enforcement) Rules 2002 which reads thus:

 

“(4) Where there are more than one borrower, the demand notice shall be served on each borrower”.

 

Further, guarantor comes within the fold of the definition “borrower” under Sec.2(f) of SARFAESI Act which reads thus:

 

‘(f) "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance’

 

Thus guarantor is also taken within the fold of definition of ‘borrower’ under Sec. 2(f) of SARFAESI Act. Therefore any action taken under the Act without serving statutory notices to guarantor (existing if any in loan transaction) is not known to law and the same shall stand vitiated.

Sub-Sec (2) of Sec. 2 of SARFAESI Act makes it further clear thus:

 

“(2) Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts”.

 

Therefore, even if the guarantor is defined in the SARFAESI Act as ‘borrower’ for the purpose of the Act, instead of calling him as ‘guarantor’ the position defined and expressed in Indian Contract Act, shall have the same meanings assigned. Guarantor can pay the entire debt demanded in which event he has right to fall back on the securities on paying the debt of the principal borrower and exercise his rights under Sec.141 and 145 of Indian Contract Act. For this reason also the guarantor is entitled to service of all the statutory notices even if he has not created security interest to support the loan of the principal borrower.

 

All the statutory notices under the Act have to be served to guarantor in the same manner as is evident from Sub-Rule 3 of Rule 3 of Security Interest (Enforcement) Rules 2002 which reads thus:

 

“(3) Any other notice in writing to be served on the borrower or his agent by authorised officer, shall be served in the same manner as provided in this rule”.

 

In cases where the guarantor has also has created security interest and if the secured creditor intends to enforce the security interest created by a guarantor first, before enforcing the security interest created by the principal borrower, it can do so and the guarantor cannot direct or dictate the secured creditor as to which security interest is to be enforced first.

 

The Hon’ble Supreme Court in Ahok Mahajan Vs. State of U.P.& Ors: 2007(2) D.R.T.C.696 (SC) held that action against guarantor cannot be taken until property of principal borrower is sold off in view of S-4(2)(b) of U.P. Public Moneys (Recovery of Dues) Act.

 

Distinguishing with the above judgment of Supreme Court, A.P. High Court in Ahok Sharada Vs. Small Industries Development Bank of India: 2007 (2) D.R.T.C 707(AP) held that, RDDB & FI Act and SARFAESI Act do not contain any provision analogous to S-4(2)(b) of U.P. Moneys (Recovery of Dues) Act 1972. Hence no such priority or preference can be given to guarantor's direction to secured creditor for taking action under the SARFAESI Act. It is secured creditors option to choose which security interest can be enforced first.

 Any one please clarify if the above view is correct or not, giving  reasons.



Learning

 17 Replies

Anjuru Chandra Sekhar (Advocate )     28 April 2013

  1. Whether the secured creditor is entitled to proceed against guarantor without taking recourse to any of the measures under Section 13 (4)?

Section 13(11) of the NPA Act inter alia states that, without prejudice to the rights conferred on the secured creditor under Section 13, the secured creditor shall be entitled to proceed against the guarantor/pledgor; that the secured creditor shall be entitled to sell the pledged assets without taking recourse under Section 13(4) against the principal borrower in relation to the secured assets under the NPA Act.

        …….         M/s. Transcore Vs. Union of India & Anr.  (Supreme Court of India)

The guarantor could be sued without the principal debtor being sued. The very object of the guarantee would be defeated if the creditor is asked to postpone his remedies against the surety until he has exhausted remedies against the principal debtor.  The liability of guarantor is co-extensive with that of the principal debtor.  Various DRTs have delivered judgments to this effect.  Demand notice under section 13 (2) may be issued to guarantor if he is third party mortgagor.  But in such case, the question arises, as the asset is a secured asset, the procedure under Section 13 (4), Rule 8 must be followed?

Some professionals argue, Section 13 (11) does not distinguish between the guarantor who is a third party mortgagor and the guarantor who is not a mortgagor.  Hence, going by law, a presumption can be drawn that it is not necessary to follow procedure under Section 13 (4) to proceed against guarantor, even if he is a third party mortgagor.  In other words, the guarantor’s property can be sold out like a pledged asset without taking recourse to measures under Section 13 (4).    

 

Some professionals are of the view, that DRT Act provides the DRT with powers to attach even the unsecured assets of the borrower.  The securitization act deals only with secured assets of the borrower, it gives no power to the secured creditors to take action in respect of unsecured assets of the principal debtor. That is the reason why if there is any shortfall in recoveries after sale of secured assets, the secured creditor can move an appeal before DRT under Section 13 (10) of the SARFAESI Act to recover the shortfall.  Then the DRT follows the procedure under DRT Act, to attach unsecured assets of the principal debtor. If the intention behind Section 13 (11) is to give greater authority to secured creditor over the guarantor’s properties than the principal debtor’s properties, then it has no meaning the secured creditor not having similar rights under securitization act over the unsecured assets of the principal debtor.  If the scheme of Section 13 (10) and Section 13 (11) is understood in proper perspective, one should get the impression that it is easier to proceed against guarantor than the principal debtor which in turn becomes a basis for presumption that the SARFAESI Act had made the guarantor more liable than principal debtor, because it is easier for the secured creditor to proceed against guarantor, irrespective of whether his properties are secured assets or unsecured assets, than against principal debtor.  By no stretch of imagination one can presume that the law has made the guarantor more liable to the secured creditor than the principal debtor. 

 

 

More so, it would be a peculiar case if the secured creditor serves a demand notice under Section 13 (2) to the guarantor and thereafter, sells off his property without taking recourse to measures under Section 13 (4) under the authority given by Section 13 (11), because the scheme of Section 17 of SARFAESI is such that unless measures are initiated under Section 13 (4), no one can file an appeal before DRT.  Which means that the principal debtor can defend his properties even though they are secured assets, but the guarantor cannot defend his properties, even if they are unsecured, because unless the measures are initiated under Section 13 (4) the guarantor cannot file appeal in DRT under Section 17 and hence as there is no obligation under Section 13 (11) for the secured creditor to initiate measures under 13 (4) against guarantor, the guarantor naturally loses his right to appeal under Section 17 of SARFAESI Act.  This is in total violation of Article 14 of Constitution of India.

 

Hence it goes without saying that even for proceeding against guarantor’s properties, the same procedure must be followed as it is followed for the properties of principal debtor. 

 

 

Even if some DRTs, DRATs have given judgments in favor of secured creditors saying guarantor’s rights are co-extensive with that of principal debtors and hence there is no necessity to extinguish the remedies against principal debtor in order to proceed against guarantor, there should not be any bar for the aggrieved guarantors whose properties are sold by secured creditors to realize the debt, to file a suit in Civil court against the principal debtors whose secured assets are not extinguished by the secured creditors for realization of debt.

 

Hope this will address some of your issues.

 

Regards,

.........

Nadeem Qureshi (Advocate/ nadeemqureshi1@gmail.com)     28 April 2013

Really nice information Sir

MANOJ HARIT (LAWYER)     01 May 2013

Posts like this by CPS Sir & Chandrashekhar Sir, enrich this forum.

Thank you Gentlemen. 

c.p.s. ramachary (1500)     07 May 2013

 

 

Dear Mr.Chandrasekhar,

Thank you for your views on the topic “position of guarantor under SARFAESI Act”

I have in the said topic discussed about service of statutory notices to guarantors also whether any security interest is created by them or not as they are entitled to challenge the tenability of the action. In my topic, I have not dealt with “pledge” which is not coming within the purview of Sec.13 for enforcement of security interest.

I did not discuss anything on Sec.13(11) of the Act which speaks about secured creditor’s entitlement to proceed against guarantors or sell pledged assets without invoking sub sec (a) to (d) of Sec.13(4) which is entirely a separate topic. I have dealt with mortgaged immovable properties of guarantor and not the pledged movables.

Therefore, your view that, going  by law, a presumption can be drawn that it is not necessary to follow procedure under Section 13 (4) to proceed against guarantor, even if he is a third party mortgagor”. In other words, the guarantor’s property can be sold out like a pledged asset without taking recourse to measures under Section 13 (4)”   may not be correct.

The other points expressed in your views are also entirely on different subject not discussed in my above topic and has no relevancy. It is not the point as to who is more liable whether principal debtor or guarantor? My query is as to whether a secured creditor can initiate action under SARFAESI Act without serving any statutory notices to guarantor (whether he created any security interest or not) in the loan account which slipped to NPA.

With warm regards

Anjuru Chandra Sekhar (Advocate )     07 May 2013

Dear Sh. Ramachary Garu,

 

Broadly speaking there can be three types of Guarantors :

 

1. Borrower who himself stand as Guarantor to his loan

2. Third party mortgagor/Guarantor who creates third party mortgage to loan availed by some borrower

3. Guarantor who does not mortgage any of his properties but stands as guarantor to the borrower who mortgages his own assets

 

The third category guarantor is irrelevant as far as SARFAESI Act is concerned because SARFEASI Act deals with Enforcement of Security Interest only.  The guarantee given by this third category guarantor is useful or relevant for the purposes of Recovery of Debts Due to Banks and Financial Institutions Act, 1993.  There we have many judgments saying, even if the borrower's liability is not extinguished borrower can be proceeded against through filing of OA in DRT.  The applicant gives the list of properties belonging to the guarantor (which are not mortgaged) and they can be attached by the DRT and if those properties can be sold off before selling off the borrower's properties there is no bar for DRT to prevent action.  In that sense those judgments are relevant in saying there is no condition that borrower's properties should be extinguished first and then only guarantor's properties should be proceeded against.

 

Whereas under SARFAESI Act, only the properties offered as mortgage can be enforced.  That is the main difference between RDDBFI Act and SARFAESI Act.  Under RDDBFI Act, DRT has powers to attach even the properties which are not mortgaged and sell off.  Under SARFAESI Act only the mortgaged properties can be sold by the secured creditor and if there is any shortfall then Section 11 of Security interest (Enforcement) Rules makes provision for secured creditor to move application before DRT to proceed against other properties of borrower which are not mortgaged.  Then DRT follows the procedure under RDDBFI Act to attach those properties and sell off to realize the debt.  If the shortfall is below 10 lacs, DRT cannot take further action, the Civil court is the option.

 

Now coming back to the first and second categories of guarantors, there is no contention with regard to the guarontors who themselves are borrowers (first category).  The statutory notices of Security Interest (Enforcement) Rules will be served to borrower and it is deemed that they are served to guarantor also because he is guarantor himself. 

 

With regard to the second category guarantors who are third party mortgagors, the statutory notices must be served as if they are borrowers. 

 

Hence the only condition in which the secured creditor do not have to serve statutory notices to guarantor is when he falls in the third category. In other words, the guarantor has not created any security interest.  As the rules made under SARFAESI Act are called Security Interest (Enforcement) Rules, they are applicable to such borrowers/guarantors who have created any Security Interest not otherwise.  Though in practise, to avoid litigation, notices are served to guarantors also it serves no purpose if guarantor is served with notices other than Demand notice if he had not created any Security Interest. And for the question whether the proceedings under Security Interest Enforcement Rules stand vitiated if Guarantor (who had not created security interest) is not served with notices, the answer is NO because his position as guarantor is irrelevant as far as SARFAESI Act is concerned.  If he had created security interest it goes without saying, notices will be served to him.

 

With regard to the judgment of Apex Court in Ahok Mahajan Vs. State of U.P.& Ors: 2007(2) D.R.T.C.696 (SC), I would like to say I have not read the judgment but my preliminary understanding is it should stand the test of Article 254 of Constitution because U.P. Public Money (Recovery of Dues) Act is made in 1972 and SARFAESI Act is made in 2002 and hence the Clause 2 of Article 254 does not attract.  And hence, the Supreme Court may have erred in its judgment. Rest of the queries, I hope I have answered.

 

Rgrds,

Chandrasekhar

c.p.s. ramachary (1500)     08 May 2013

No further comments. Thanks and regards.


(Guest)

Dear Sir,

Thought would discuss this interesting case with you.

There is an Ancestral property - Father & 3 children, who are major at the time of mortgage.

Father mortgages the ancestral property and acts as a guarantor. Bank takes no action on Borrower and then serves Sale Notice under SARFAESI act. Father has hidden this fact from the children.


The alleged purchaser of the property informs the son that the property has been sold.

There have been infirmity with the total liabilities amount that is being displayed in the Sale Notice and the Statement of Accounts.A case has been filed with the DRT questioning the sanctity of the mortgage and the infirmity issues.

Your comments please.

Manish (Accounts)     04 September 2013

Dear sir,

Five year ago my father helped his friend to get business prps loan from govt bank and in this loan my father is a guarantor and also mortgage property papers of our house, now the loan declared as NPA. From the same bank my father friend (borrower) is having one more loan some vehicle loan in which my father is not a guarantor.now borrower is not willing to pay for both the accounts and bank is saying they will auction the mortgage property if the loan amount will not be paid.

Now my question is if  we(guarantor) settle the loan in which my father is guarantor and our property papers are mortgaged in that case bank will close the case or bank can attach guarantor property for the some loan of the borrower where we are not even the guarantor.

My father is ready to settle the loan please suggest the way to settle this matter.

Meha Harish (Proprietor)     24 August 2014

There is another type of guarantor - ECGC - in case of most export advances by banks. Besides banks, the exporter also has ECGC's post shipment guarantee cover on his buyers. In case of delay or default in payment by the buyer, the bank classifies his accounts as NPA and immediately issues 13(2) Sarfaesi act demand notice, even before ECGC declines / approves claim filed by the exporter after 6 / 12 months of processing time. Demand notice is served even before bank files claim with ECGC under its own policies.

 

Is the bank correct in classifying the exporters account as NPA at all before ECGC declines / approves exporters claim?? IF yes, is it not ruining the exporters business and third party guarantors mortgaged securities. What is the point in having ECGC's cover at all??

 

Is the bank correct in classifying the exporters account as NPA at all before the bank files its claims with ECGC under their policies and also before ECGC declines / approves their claims??

 

In this sitiuation, should bank issue issue Sarfaesi act 13(2) notice on ECGC also along with  other guarantors??

 

Can the bank proceed to take possession of third party mortgager's securities for recovery of ECGC's claim paid amounts on grounds that Borrower & guarantors are no different.

 

Third party mortgage providors are also guarantors and therefore is their liability not reduced to the extent of ECGC's claim received by bank under both - the exporters policies as well as bank's policies??

 

ECGC's annual report states that it gives cover to bank's to reduce their NPA's. Therefore, after the banks receives ECGC claims, does the exporters account remain classified as NPA.

 

Can the exporter  / his guarantors make ECGC a party in their counterclaim at DRT?? Will DRT / DRAT allow this.

 

Will DRT / DRAT adjudicate issues related to banks claim on exporter for recovery of ECGC's claim paid amounts. Is it a 'debt' ??

Saray assh (qaw)     04 April 2015

I am going through Divorce case, I had filed 3 years back. I could not pay bank loan for a year. House is in my name and loan too. I had taken home loan in 2004 and took a top up loan in 2007. my wife was second applicant in top up loan.

in 2013 bank has sent the SARFAIC..notice, wife had moved to DRT. court ordered her to pay outstanding 4.5 lakhs, she paid on both loan accounts 50%-50%.

again after a year, because of no payments, she moved an application to court to restructure loan.

I have few questions:

1. is case still valid and live? she moved to DRT against sarfaesi act, >> court orders to pay, >> she paid, no action was taken by bank as per court's orders then.

2. if case is live and open and valid, Being a third party to main home loan, can she ask to restructure home loan?

3. can anyone or any third party pay for loan outstanding, to bank, in DRT court?

4. Can DRT order to handover house papers to her, if she pays full outstanding and asks for papers.

Help and guidance is must for me please.

Regards,

Anjuru Chandra Sekhar (Advocate )     08 April 2015

Whether the case is valid and live depends on the Loan account slipping into NPA (non performing assets) category.  As she paid some amounts, it appears the outstanding loan amount reduced and the loan was reclassified as Standard asset as per RBI's prudential norms on Asset classification.  But loan account is like a fat child growing.  The interest keeps accumulating and if you do not pay the instalments it will once again slip into the NPA category.  Then the bank starts the action under SARFAESI afresh.  So, till the account is closed completely you cannot rest assured that action under SARFAESI does not resume.  Once it falls back into NPA category the banker gets the legal authority to initiate proceedings under SARFAESI Act.

 

If the property is in your name there is nothing she can get by paying the loan amounts unless the debt is legally assigned in her favor under Contract Act.  She will be eligible for her share in the property to the extent of property you may have acquired through top up loan.  However it cannot be said that bank makes distinction between "your payments" and "her payments" because it is a joint account and also that bank has any authority to transfer any property mortgaged in her name because she paid half the amounts.  It is of no concern for the bank whether you repaid the loan amount or she repaid, what is of its concern is there is payment.  It is not legally possible for a bank to distinguish between a "husband's payments" and "wife's payments" and also it has no right to divide properties on proportion to the ratio of payments made by husband and wife....that is not the business of any bank at all.

 

I do not know why your wife is paying all those amounts but my understanding is it is all loss for her.  On the other hand it is for you to clear the rest of the amounts and claim the documents from the bank before the account becomes a Non performing asset in the books of bank.

Anjuru Chandra Sekhar (Advocate )     08 April 2015

If she stood as guarantor for the loan account then, after paying the loan amounts she steps into the shoes of creditor and can exercise all rights that a secured creditor can exercise over you, including demanding the bank to handover documents to her.  However, you have not mentioned that she is a guarantor, you have only mentioned that she is joint account holder that too only for top up loan.  So you know your position better and based on this feedback you can have your answers matching these inputs with your facts.

chandan   12 April 2015

Experts, i really need your advise here...in advance sorry for the long story but thought to make it clear...

My uncle took a business loan (4 lac) for his grocery store some 6-8 years back and as security, bank had

1) Shop store material- finished goods

2) a land(house) property paper- having two equal owner my father and my uncle

3) FD/LIC amounting to 70-80 thousand

My uncle died few years back and his son (my cousin) continued the loan. the loan account was working very well (stayed approx 4 lac) until last few months when my cousin stopped business, closed his shop and is missing without paying bank loan..

The property which was kept as security is a join property of my father and uncle. Given the good relations we shared in past my father signed on bank paper for property mortgage to have the loan passed.

Given the good relation  no one ever  thought to divide the property legally.

Family property separation was done some 15-20 years back(not legally), our both family have adjacent house with common wall(in same property kept as secuirty to bank), have separate business and kitchen. But for the said property in legal terms everything stayed together - mutation, tax,..everything..

Bank has now issued a notice to my father and uncle(who is no more, his son is missing) to deposit the outstanding loan amount within 60 days (which is approx 3.3 lac - after bank seized the initial FD/LIC deposited to them) failing which they will take action as per section 13(4) - auction? seizing the property?

My father now find its difficult to handle this, never thought a signature some 6-8 years back will turn out like this....what are our options? any advise is highly appreciated.

A month back we filed a case in civil court for our property separation. But the bank notice already says any transfer or part with possession of asset is not allowed.

many many thanks in advance!!!

PS

-> Shop is closed for 4-6 month so i think any material inside is valueless being grocery.

-> bak manager said they will first take the asset item which is more easily cash able to them.

please please advise.

RAJU O.F., (Advocate)     15 April 2015

As the said property is mortgaged to the bank, they can proceed under SARFAESI Act and can sell the property by public auction. Now Demand Notice under Sec. 13(2) of the said Act is issued. You raise your objections and representations within 60 days from date of such Notice. Bank has to reply such objections within 15 days. If they decide they can issue Possession NOtice u/S 13(4) of the Act and subsequently put the property for sales. After issue of Possession Notice you can prefer Securitisation Application before jurisdiction Debts Recovery Tribunal to agitate your issues seeking remedy. Any suit in Civil court will not help. If possible, settle the matter by amicable compromise with the bank.


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