The Application of Limitation Principles under Section 36 of the SARFAESI Act, 2002

The Application of Limitation Principles under Section 36 of the SARFAESI Act, 2002: A Judicial Examination

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 non-performing assets (NPAs) without extensive court intervention. A cornerstone of this legislative framework is the ability of secured creditors to enforce their security interests. However, this power is not unfettered and is subject to certain conditions, including adherence to the principles of limitation. Section 36 of the SARFAESI Act specifically addresses this aspect, mandating that any measure to enforce security interest under Section 13(4) can only be taken if the creditor's claim in respect of the financial asset is within the period prescribed by the Limitation Act, 1963.

This article undertakes a comprehensive analysis of Section 36 of the SARFAESI Act, exploring its interpretation by the judiciary in India. It delves into the meaning of a "claim made within the period of limitation," the interplay with other provisions of the SARFAESI Act and the Limitation Act, 1963, and the implications for both secured creditors and borrowers. The objective is to elucidate the legal position concerning the time-bar for initiating recovery actions under the SARFAESI Act, drawing upon key judicial pronouncements and statutory provisions.

Understanding Section 36 of the SARFAESI Act, 2002

Section 36 of the SARFAESI Act, titled "Limitation," provides as follows:

"No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963)."

The plain language of Section 36 establishes a clear prerequisite for a secured creditor to exercise its powers under Section 13(4) of the SARFAESI Act, which includes taking possession of secured assets, managing them, or appointing a manager. The fundamental condition is that the creditor's "claim in respect of the financial asset" must not be time-barred under the Limitation Act, 1963. This provision ensures that the SARFAESI Act cannot be used as a tool to revive debts that have become unenforceable due to the lapse of the prescribed limitation period. The Statement of Objects and Reasons of the SARFAESI Act highlighted the need for speedy recovery (TJSB Sahakari Bank Ltd. v. District Collector, 2023 SCC OnLine Bom 1011), but Section 36 ensures this speed does not override fundamental principles of limitation.

The Karnataka High Court in Sri C. Laxman Gowda And Another v. Debt Recovery Appellate Tribunal, Chennai (WP No. 19539/2012, Karnataka HC, 2013) observed that while Section 35 of the SARFAESI Act gives overriding effect to its provisions, Section 36 expressly incorporates the Limitation Act, 1963. This signifies that the non-obstante clause in Section 35 does not dilute the applicability of the Limitation Act as mandated by Section 36.

Interplay with the Limitation Act, 1963

The Limitation Act, 1963, prescribes specific periods within which legal proceedings for various types of claims must be initiated. For instance, the period of limitation for filing a suit for recovery of money based on a loan agreement is generally three years from the date the cause of action arises (Article 19 or 21, Schedule to the Limitation Act, 1963). For mortgage suits, the period is typically twelve years from the date the money sued for becomes due (Article 62). For execution of a decree, it is twelve years from the date the decree becomes enforceable (Article 136).

The critical phrase in Section 36 is "unless his claim in respect of the financial asset is made within the period of limitation." The interpretation of "claim is made" has been a subject of judicial scrutiny. Does it mean that the notice under Section 13(2) of the SARFAESI Act itself must be issued within the original limitation period from the date of default or NPA classification? Or can the "claim" be considered "made" if other legal proceedings for recovery of the same debt were initiated within the limitation period?

Judicial Interpretation of "Claim Made Within Limitation"

The judiciary has provided significant clarity on the interpretation of Section 36. A pivotal line of reasoning emerges from the Delhi High Court's decisions in the Somnath Manocha cases.

The Somnath Manocha Principle: Claim Kept Alive by Prior Proceedings

In Somnath Manocha v. Punjab & Sind Bank & Ors. (2011 SCC OnLine Del 4403), the learned Single Judge of the Delhi High Court addressed a situation where the bank had filed a recovery suit in 1984, which was within the limitation period. Subsequently, in 2004, the bank issued a notice under Section 13(2) of the SARFAESI Act. The petitioner contended that the SARFAESI action was time-barred. The Court held:

"Section 36 SARFAESI Act requires that a claim should have been made by the lender in respect of the financial assets within the period of limitation prescribed under the LA. Section 36 does not mandate that the notice under section 13(2) sarfaesi act must be issued within such period of limitation. A claim in respect of the financial asset, could be by way of any proceedings in accordance with law... In the present case, the Bank had made a claim in respect of the secured financial asset by filing a suit in the year 1984. Admittedly, the suit was filed within the limitation period. Therefore, the essential requirement of Section 36 SARFAESI Act was fulfilled."

This interpretation was upheld by the Division Bench of the Delhi High Court in Somnath Manocha v. Punjab And Sindh Bank & Anr. (2012 SCC OnLine Del 2251). The Division Bench reiterated that the SARFAESI Act provides an additional remedy and that if a claim (e.g., a suit for recovery) was initiated within the limitation period, the condition under Section 36 is met, allowing the secured creditor to subsequently invoke SARFAESI proceedings. The court reasoned that the legislative intent was to allow recovery of sums owed even prior to the SARFAESI Act's enactment, as long as the claim was made within limitation.

This view implies that the "making of a claim" under Section 36 is not confined to the initiation of SARFAESI proceedings themselves. If the secured creditor has already taken steps to recover the debt by filing a suit or an application before the Debts Recovery Tribunal (DRT) within the prescribed limitation period, the claim is considered "live," and the bar under Section 36 would not apply to subsequent SARFAESI actions.

Application to Decree Debts

The Kerala High Court in E.P Sreedharan v. The Manager Indian Bank & Anr. (2011 SCC OnLine Ker 3959) dealt with a scenario where SARFAESI proceedings were initiated to recover a "decree debt." The court observed that a decree debt falls within the definition of "debt" under the SARFAESI Act (read with the Recovery of Debts Due to Banks and Financial Institutions Act, 1993). In such cases, the period of limitation for enforcing the decree (12 years under Article 136 of the Limitation Act, 1963) would be relevant. If the Section 13(2) notice under SARFAESI Act for recovery of the decree debt is issued within this 12-year period from the date of the decree, the action would not be barred by Section 36.

Commencement of Limitation: The Deepak Bhandari Perspective

While not directly interpreting Section 36 of SARFAESI, the Supreme Court's decision in Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Limited (2015 5 SCC 518), concerning the State Financial Corporations Act, 1951, provides insights into the commencement of limitation periods for recovery actions by financial corporations. The Court held that the limitation period for filing a suit by an SFC for recovery of the balance amount, after selling mortgaged/hypothecated assets under Section 29 of the SFC Act, commences from the date of such sale when the outstanding balance is ascertained. This case distinguished between the initial recall notice and the subsequent accrual of the right to sue for the deficiency. While Section 36 of SARFAESI refers to the "claim in respect of the financial asset" (which typically relates to the original default), the principle of identifying the precise point when a claim becomes enforceable or when a fresh cause of action arises (e.g., after part recovery) is pertinent to limitation law generally.

The Nature of SARFAESI Proceedings: An Additional Remedy

The Supreme Court in Transcore v. Union Of India And Another (2008 1 SCC 125) firmly established that the remedies under the SARFAESI Act are in addition to, and not in substitution of, other remedies available to secured creditors, such as approaching the DRT or civil courts. Section 37 of the SARFAESI Act explicitly states that its provisions are "in addition to, and not in derogation of" other laws like the Companies Act, 1956, the RDDBFI Act, 1993, etc. (Urmila Kumari v. Om Prakash Jangra And Ors., 2015 SCC OnLine Del 7280; Sri C. Laxman Gowda, supra).

This "additional remedy" status lends support to the interpretation of Section 36 adopted in Somnath Manocha (supra). If SARFAESI is an alternative or supplementary route for recovery, it logically follows that if the primary claim is alive and pending before another forum (initiated within limitation), the secured creditor should be able to switch to or concurrently use the SARFAESI mechanism, provided the underlying debt itself is not extinguished by limitation.

The Supreme Court in Mardia Chemicals Ltd. And Others v. Union Of India And Others (2004 4 SCC 311), while upholding the constitutional validity of the SARFAESI Act, emphasized the need for fairness and adherence to procedural safeguards. Section 36 acts as one such safeguard, ensuring that the expedited recovery process under SARFAESI is not misused to enforce stale claims.

Section 36 and Specific Scenarios

Acknowledgement of Debt and Part Payment

Sections 18 and 19 of the Limitation Act, 1963, provide for the extension of the limitation period upon a valid acknowledgement of liability or part payment of debt made before the expiry of the prescribed period. If such an acknowledgement or part payment extends the limitation period for the underlying debt (the "financial asset"), it would logically follow that the "claim" for the purpose of Section 36 of the SARFAESI Act also remains within limitation for this extended period. Therefore, SARFAESI measures could be initiated within this fresh period of limitation.

Trigger Point for SARFAESI Action

The notice under Section 13(2) of the SARFAESI Act is considered the trigger point for the recovery process under the Act (Bajarang Shyamsunder Agarwal v. Central Bank Of India And Another, 2019 9 SCC 94). If no prior legal proceedings have been initiated to keep the claim alive, then this notice (or the subsequent measures under Section 13(4)) must fall within the limitation period calculated from the date of default or when the account was classified as NPA, for the claim to be considered "made within limitation" under Section 36.

Implications for Secured Creditors and Borrowers

The interpretation of Section 36 has significant practical consequences:

  • For Secured Creditors: They must be diligent in pursuing their claims. While the Somnath Manocha (supra) line of cases offers flexibility if a claim is already sub judice, creditors cannot indefinitely wait to invoke SARFAESI if no other recovery proceedings have been timely initiated. The primary financial claim must be enforceable in law. Banks and FIs must maintain accurate records of NPA classification dates, acknowledgements, part payments, and dates of filing suits/OAs to ensure compliance with Section 36.
  • For Borrowers: Section 36 provides a crucial defense against the enforcement of stale or time-barred debts through the SARFAESI mechanism. Borrowers can challenge SARFAESI actions if the underlying claim was not "made" within the limitation period as per the Limitation Act, 1963. The right to raise the plea of limitation is a statutory right.

The Supreme Court in Authorized Officer, State Bank Of Travancore And Another v. Mathew K.C. (2018 3 SCC 85) emphasized the need to exhaust statutory remedies under SARFAESI (like approaching the DRT under Section 17) before invoking writ jurisdiction. This implies that challenges based on Section 36 should primarily be raised before the DRT.

Conclusion

Section 36 of the SARFAESI Act, 2002, plays a vital role in balancing the objective of speedy recovery of NPAs with the fundamental legal principle that stale claims should not be enforced. The judicial interpretation, particularly in cases like Somnath Manocha (supra), clarifies that the term "claim is made" under Section 36 does not narrowly mean that the SARFAESI action itself must be the first step taken within the original limitation period. If a secured creditor has already initiated legal proceedings (such as a suit or DRT application) for the recovery of the financial asset within the prescribed limitation period, the claim is considered live, and subsequent invocation of SARFAESI measures would not be barred by Section 36.

This interpretation aligns with the status of SARFAESI Act as an additional remedy. However, it underscores the necessity for creditors to act diligently. In the absence of any prior legal action keeping the claim alive, the SARFAESI proceedings themselves must be initiated within the limitation period applicable to the underlying financial asset. Section 36 thus remains a significant safeguard for borrowers, ensuring that the powerful tools provided under the SARFAESI Act are not used to circumvent the law of limitation.

References

(Note: This list is illustrative based on the text. A full list would include all cited materials.)