The issuance of a SARFAESI Section 13(2) notice marks a significant point in the process of recovering loans. The lender grants an interval of 60 days to the borrower in order to settle the secured debt before resorting to actions mentioned in Section 13(4). Nonetheless, receiving the notification does not automatically imply loss of possession of the secured assets. Borrowers have to scrutinize the demand letter carefully, rebut the claims, examine available ways to repay the debt, and obtain quick legal guidance.
What is a SARFAESI Section 13(2) Notice?
According to Section 13(2) of the SARFAESI Act, a secured creditor is allowed to send a demand notice to a borrower in case there is a default by the borrower, and the account is classified as a Non-Performing Asset (NPA) under the existing laws, to demand that the borrower pays the secured debt within a time limit of 60 days from the date of the notice.
The notice generally specifies:
- The amount claimed to be outstanding;
- Details of the secured debt;
- The security interest created in favour of the lender;
- Details of the secured assets; and
- The consequences of the failure to discharge the liability.
The purpose of this particular notice is to provide the borrower the opportunity to clear outstanding dues before the secured creditor takes any further measures under SARFAESI Act.
Why is the 60-Day Period Important?
The 60-day period need not be treated as merely the waiting period. It is borrower’s opportunity to:
- Verify the outstanding amount;
- Check whether the loan account has been correctly classified as NPA;
- Examine the loan and security documents;
- Identify calculation errors;
- Raise objections to the demand;
- Make payment arrangements;
- Negotiate restructuring or settlement, where appropriate;
- Arrange funds for repayment; or
- Obtain appropriate legal advice.
If a borrower disregards the notice, they might miss out on important chances of solving the issue before the lender proceeds with the matter.
Hence, ensuring the exact time and date when the notice was received.
What Information Should the Notice Contain?
The borrower should carefully read the entire Section 13(2) notice instead of focusing only on the amount demanded.
The borrower needs to check:
- Name and address of the borrower;
- Loan account number;
- Date and details of the loan;
- Amount claimed as outstanding;
- Details of interest and other charges;
- Date of classification of the account as NPA;
- Details of the secured assets;
- Particulars of the security interest;
- Details of payments already made; and
- Consequences of failure to comply with the demand.
Any apparent discrepancy needs to be identified immediately and then supported with all the relevant documents.
What Should a Borrower Do After Receiving the Notice?
The borrower should generally take the following steps without unnecessary delay:
1. Preserve the Notice
Keep original notice, envelope, email, or any other proof of the delivery safely.
2. Obtain Loan Statement
Request or collect the latest loan account statement showing the principal, interest, charges and payments made.
3. Examine the Loan Documents
Review the sanction letter, loan agreement, mortgage or hypothecation documents, repayment schedule and other relevant records.
4. Check the Outstanding Amount
Verify whether the amount demanded is actually payable.
5. Identify Any Dispute
If there is an error, dispute regarding payment, calculation, classification, or security, identify it clearly.
6. Seek for Professional Advice
Where the substantial property or financial liability gets involved, obtaining the advice from a lawyer experienced in the SARFAESI matters can help determine appropriate course of action.
How to Verify the Bank’s Claim
A borrower should not automatically assume that every figure mentioned in the notice is correct.
The borrower should compare the demand with bank statements; loan account statements; EMI payment records; receipts for payments; restructuring or settlement communications; interest calculations; and other correspondence with the lender.
If payments have already been made but have not been properly credited, documentary proof should be preserved.
Similarly, if the borrower disputes the amount claimed or any other aspect of the notice, the objection should be communicated to the secured creditor within the statutory period.
How to Submit Objections or Representation
Section 13(3A) provides an important mechanism for a borrower who has received a demand notice under Section 13(2).
The borrower may make a representation or raise objections against the demand notice.
The objections should ideally:
- Identify the specific disputed facts;
- Explain why the demand is incorrect or legally unsustainable;
- Mention relevant payments already made;
- Point out errors in calculation, where applicable;
- Refer to supporting documents; and
- Clearly state the relief or correction sought.
The representation should be submitted through a reliable mode and proof of submission should be preserved.
The secured creditor is required to consider such representation or objection and communicate reasons for non-acceptance within the framework prescribed by the SARFAESI Act.
A borrower should therefore avoid sending a vague response merely stating that the amount is disputed. Specific and document-supported objections are generally more useful.
Can the Borrower Negotiate with the Bank?
Yes. Receiving a SARFAESI notice does not necessarily prevent the borrower from approaching the lender for a negotiated solution.
Depending upon the circumstances, the borrower may explore:
- Payment of overdue instalments;
- Restructuring of the loan;
- Rescheduling of repayment;
- One-time settlement (OTS);
- Negotiated repayment arrangement;
- Sale of the secured property with lender’s consent; or
- Full repayment of the outstanding dues.
However, borrowers should not rely upon oral assurances from recovery agents or bank officials.
Any settlement or repayment arrangement should preferably be obtained in writing and should clearly specify the amount payable, payment schedule, consequences of default and treatment of the secured asset.
What Happens If the Borrower Does Not Pay Within 60 Days?
If the debtor does not pay the secured debt within the period specified in the notice under Section 13(2), then the secured creditor can act under Section 13(4) of the SARFAESI Act subject to the terms of the Act and rules.
- These measures may include:
- Taking possession of the secured assets;
- Taking over management of the secured business in appropriate cases;
- Appointing a manager for the secured assets; and
Requiring certain persons who have acquired the secured asset from the borrower to pay the secured creditor, subject to the statutory conditions.
In the case of immovable property, further steps may include possession proceedings and eventual sale of the secured asset in accordance with the applicable legal procedure.
Therefore, Section 13(2) notice should be treated as an urgent matter.
Difference Between Section 13(2) and Section 13(4)
| Particulars | Section 13(2) | Section 13(4) |
| Nature | Demand notice | Enforcement measures |
| Main Purpose | Gives borrower an opportunity to discharge debt | Enables secured creditor to enforce security interest |
| Time Period | Generally 60 days | May follow failure to comply with Section 13(2) demand |
| Possession | Normally not the immediate consequence | Possession of secured asset may be taken |
| Borrower’s Action | Pay, object, negotiate or seek legal advice | Challenge appropriate measures through available legal remedies |
| Importance | Critical opportunity to resolve default | More advanced stage of recovery proceedings |
The distinction is important because the Section 13(2) stage gives the borrower an opportunity to address the lender’s demand before enforcement measures are taken.
Rights of Borrowers Under SARFAESI Proceedings
Borrowers do not lose all legal rights merely because they have defaulted on a secured loan.
Depending upon the facts, borrowers may have rights relating to:
- Receiving the statutory demand notice;
- Submitting objections or representation;
- Receiving consideration of such objections;
- Obtaining relevant loan and account information;
- Challenging certain measures taken under Section 13(4);
- Approaching the appropriate forum within the prescribed legal framework; and
- Seeking protection where the lender’s action is contrary to law.
At the same time, borrowers should understand that merely filing an objection does not automatically stop every subsequent recovery action.
The legal effect of the borrower’s objection and the appropriate remedy will depend upon the facts and stage of the proceedings.
When Should a Borrower Approach the DRT or Court?
If the secured creditor proceeds with measures under Section 13(4), the borrower may have a statutory remedy before the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act, subject to the applicable conditions and limitation requirements.
A borrower should consider obtaining legal advice particularly where:
- The amount demanded appears incorrect;
- The account was allegedly wrongly classified as NPA;
- The borrower disputes the existence or enforceability of the debt;
- The security interest is disputed;
- Statutory requirements have allegedly not been followed;
- Possession proceedings have commenced;
- The secured property is proposed to be sold; or
- The borrower believes that the recovery action is legally defective.
The appropriate remedy depends upon the exact stage of the proceedings. A borrower should therefore avoid waiting until the property sale is imminent before seeking legal advice.
Practical Mistakes to Avoid After Receiving Notice
Borrowers commonly make the following mistakes:
- Ignoring the Section 13(2) notice;
- Waiting until the 60-day period is almost over;
- Relying only on verbal promises;
- Failing to verify the outstanding amount;
- Not preserving payment receipts;
- Signing documents without understanding their consequences;
- Transferring or dealing with the secured property without considering legal restrictions;
- Assuming that filing an objection automatically stops recovery; and
- Approaching the legal forum only after the secured asset has been sold.
Timely action can significantly improve the borrower’s ability to evaluate available options.
How Lead India Can Help?
- Provide legal guidance regarding the implications of a SARFAESI Section 13(2) notice.
- Assist borrowers in examining the demand notice, loan documents and account statements.
- Help prepare appropriate objections or representations against disputed demands.
- Assist in negotiating repayment, restructuring or settlement with banks and financial institutions.
- Advise the borrowers regarding the proceedings as per Sections 13(2), 13(3A), 13(4) and 17 of SARFAESI Act.
- Assist in protecting borrower’s legal rights during the possession and recovery proceedings.
- Provide the legal assistance in approaching the appropriate forum where the lender’s action is disputed.
The SARFAESI Act’s Section 13(2) notice is a big deal, though it does not mean the borrower has lost his rights. The borrowing party is given 60 days which gives him time to check claims, dispute them, make payments or settle the issue with the lender. It is also crucial for borrowers to act quickly, keep records and communicate in writing.
One can talk to lawyer from Lead India for any kind of legal support. In India, free legal advice online can be obtained at Lead India. Along with receiving free legal advice online, one can also ask questions to the experts online free through Lead India.
FAQs
1. What is a SARFAESI Section 13(2) notice?
A SARFAESI Section 13(2) notice is defined as a notice of demand issued by a secured lender requiring a borrower to pay the secured loan in 60 days, where all the important conditions for issuing this type of letter have been met.
2. What should I do after receiving a Section 13(2) notice?
Upon getting the Section 13(2) notice, the borrower must check the due amount, look at the loan and security papers, check the payment history of the loan, search for discrepancies and misunderstandings, and consider filing a notice.
3. Can I object to a Section 13(2) notice?
Yes. Section 13(3A) provides for the possibility for a borrower to submit a representation or raise objections regarding the demand notice. It is preferable that objections are precise and based on evidence.
4. What happens after the 60 days expire?
Once the period of 60 days expires, the secured lender is entitled to initiate actions under Section 13(4) of the SARFAESI Act, in accordance with its provisions and rules.
5. Can the bank take possession of my property immediately after issuing the Section 13(2) notice?
No. A Section 13(2) notice is merely a demand notice allowing the borrower a fair amount of time to settle its debt. Enforcements under Section 13(4) may be done only if the demands of the letter are disregarded after the stipulated period.
Talk to a Lawyer