Demand Notice under Section 13(2) of SARFAESI Act, 2002

A Comprehensive Legal Analysis of the Demand Notice under Section 13(2) of the SARFAESI Act, 2002

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to provide a swift and efficient mechanism for banks and financial institutions to recover their non-performing assets (NPAs) without extensive court intervention.[1] A cornerstone of this enforcement mechanism is the demand notice issued under Section 13(2) of the Act. This notice serves as the initial statutory step taken by a secured creditor to enforce its security interest upon a borrower's default.[2] This article provides a comprehensive analysis of the legal framework, procedural requirements, judicial interpretation, and implications of the demand notice under Section 13(2) of the SARFAESI Act, drawing upon statutory provisions and key judicial pronouncements from Indian courts.

The Statutory Framework of Section 13(2)

Legislative Text and Purpose

Section 13(2) of the SARFAESI Act stipulates:

"Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full 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)."[3]

The Security Interest (Enforcement) Rules, 2002 (hereinafter "the Rules"), under Rule 2(b), define "demand notice" as "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."[4] The primary purpose of this notice is to provide the borrower with an opportunity to discharge their full liability within a sixty-day period, thereby avoiding coercive measures by the secured creditor under Section 13(4).[5] It is, in essence, a formal demand for repayment before the creditor proceeds with enforcement actions.[6]

Pre-requisites for Issuance

The issuance of a demand notice under Section 13(2) is contingent upon the fulfillment of two critical conditions:

  1. Default in Repayment: The borrower must have defaulted in the repayment of the secured debt or any instalment thereof, as per the terms of the security agreement.[7]
  2. Classification as Non-Performing Asset (NPA): The borrower's account concerning such debt must be classified by the secured creditor as an NPA.[7] This classification must be in accordance with the directions or guidelines issued by the Reserve Bank of India (RBI) or other relevant regulatory authority.[7] The authority of the secured creditor to classify the debt as an NPA, following RBI guidelines, is well-established.[8]

Only when these twin conditions are met can the secured creditor validly issue a notice under Section 13(2).[9]

Contents and Service of the Demand Notice

Mandatory Details (Section 13(3))

Section 13(3) of the SARFAESI Act mandates the content of the demand notice issued under Section 13(2). It states:

"The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower."[10]

The Debts Recovery Tribunal (DRT) in A J Alluminium Pvt Ltd v. Bhangiya Gramin Vikas Bank noted arguments that a notice was defective for not giving complete description of limits, rate of interest, and dates of default.[11] The Gujarat High Court in Punjab National Bank v. Mithilanchal Industries Pvt. Ltd. upheld a DRT order setting aside a Section 13(2) notice because it did not contain the correct details of the amount due and the secured assets.[12] The failure to adhere to these requirements can render the notice, and consequently all subsequent actions, invalid. This principle, "sublato fundamento cadit opus" (if the foundation is removed, the superstructure falls), was reiterated by the DRT, Ahmedabad in Gehlot Enterprise Shree Umang Laxmi v. UCO Bank, emphasizing that if the demand notice is not in consonance with law, subsequent proceedings would not sanctify it.[13]

Service of Notice (Rule 3, Security Interest (Enforcement) Rules, 2002)

Rule 3 of the Security Interest (Enforcement) Rules, 2002, prescribes the modes of service for the demand notice. These include delivery by hand, registered post with acknowledgement due, speed post, courier, or electronic mail to the borrower or their agent. Proper service of the demand notice is crucial. In PUNJAB NATIONAL BANK v. MR B VIDYARANYA, the DRAT dealt with a case where the DRT had set aside a possession notice under Section 13(4) due to the alleged failure to serve the Section 13(2) demand notice.[14] The DRT in Chaudhary Ventures Pvt Ltd v. Cholamandalam Investment and Finance Co Ltd considered arguments that the demand notice was never delivered to the applicants.[15] Conversely, in MS Giriraj Enterprises v. Bank of Baroda, the DRT held that service of the demand notice at the address of the firm was sufficient service upon its sole proprietor, finding no violation of Rule 3.[16]

The Borrower's Response and the Creditor's Duty (Section 13(3A))

Right to Make Representation

Upon receipt of the notice under Section 13(2), the borrower has the right to make a representation or raise objections to the notice. Section 13(3A) was introduced by an amendment following the Supreme Court's observations in Mardia Chemicals Ltd. And Others v. Union Of India And Others, which highlighted the need for a mechanism for the borrower to be heard before drastic measures are taken.[17]

Creditor's Obligation to Consider and Respond

Section 13(3A) mandates:

"If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the 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 fifteen days] of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower..."[18]

The Supreme Court in ITC Limited v. Blue Coast Hotels Limited And Others affirmed the mandatory nature of Section 13(3A), emphasizing that the creditor "shall" consider the debtor's representations and communicate reasons for non-acceptance.[19] This provision ensures a degree of procedural fairness by requiring the creditor to apply its mind to the borrower's contentions. However, the proviso to Section 13(3A) clarifies that the communication of reasons or the likely action of the creditor at this stage does not confer any right upon the borrower to approach the DRT under Section 17.[18]

Legal Implications and Judicial Scrutiny of the Demand Notice

Foundation for Further Action under Section 13(4)

The demand notice under Section 13(2) is the jurisdictional prerequisite for the secured creditor to exercise its rights under Section 13(4).[5][9][13][10] If the borrower fails to discharge their liabilities in full within the sixty-day period specified in the notice, the secured creditor becomes entitled to take recourse to one or more measures outlined in Section 13(4), such as taking possession of the secured assets, taking over the management of the business of the borrower, etc.[10]

Defective Notice and its Consequences

As discussed, a demand notice that does not comply with the requirements of Section 13(2) and 13(3), or is not properly served, can be challenged and may lead to the quashing of all subsequent enforcement actions.[12][13] The courts and tribunals have consistently held that the provisions of the SARFAESI Act, being stringent, must be strictly complied with. The principle "sublato fundamento cadit opus" underscores that a flawed demand notice vitiates the entire recovery process initiated thereafter.[13]

Issuance of Multiple Notices

The Chhattisgarh High Court in M/S. Dauji Farms Limited & Ors. v. Dena Bank & Anr. addressed the issue of issuing a second demand notice under Section 13(2). The court observed that there is no prohibition or restriction prescribed under Chapter III of the SARFAESI Act that would restrain a bank from issuing a subsequent notice, especially if no prejudice is caused to the borrower and it affords an extra opportunity to show cause.[1]

Interplay with Other Remedies

The Supreme Court in Transcore v. Union Of India And Another clarified that remedies under the SARFAESI Act and the Debts Recovery Tribunal Act, 1993 (DRT Act) are complementary and not mutually exclusive. The issuance of a Section 13(2) notice is part of the SARFAESI Act's independent mechanism.[20] Furthermore, the Section 13(2) notice is a precursor if the secured creditor decides to seek assistance from the Chief Metropolitan Magistrate or District Magistrate under Section 14 of the SARFAESI Act for taking possession of the secured asset. The Supreme Court in Standard Chartered Bank v. V. Noble Kumar And Others outlined that after issuance of the demand notice, the secured creditor can directly approach the Magistrate under Section 14.[21] This was also noted in AJAY HARGOVINDDAS JOBANPUTRA v. RAJKOT NAGRIK SAHAKARI BANK LIMITED.[22]

Availability of Appeal under Section 17

While the communication under Section 13(3A) does not give an immediate right of appeal, any person (including the borrower) aggrieved by any of the measures referred to in Section 13(4) taken by the secured creditor can make an application to the Debts Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act. The DRT has wide powers to examine the legality and propriety of the creditor's actions, including the validity of the initial Section 13(2) notice and compliance with Section 13(3A).[23] The Supreme Court in Authorized Officer, State Bank Of Travancore And Another v. Mathew K.C. emphasized the necessity of exhausting statutory remedies under Section 17 before approaching High Courts via writ petitions.[24] The DRT's jurisdiction under Section 17 encompasses a review of all measures taken by the secured creditor.[25]

Conclusion

The demand notice under Section 13(2) of the SARFAESI Act, 2002, is a critical and foundational step in the enforcement of security interests by secured creditors in India. It embodies a balance between the creditor's right to recover dues and the borrower's right to be informed and given an opportunity to repay. Strict adherence to the procedural and substantive requirements of Sections 13(2), 13(3), and 13(3A), as well as the relevant Rules, is imperative for the validity of subsequent enforcement actions. Judicial scrutiny, primarily through the DRT under Section 17, ensures that these provisions are complied with, thereby safeguarding the interests of all parties involved and upholding the objectives of the SARFAESI Act in facilitating efficient debt recovery while maintaining procedural fairness.

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