SARFAESI Act 2002 Explained | Supreme Court Case Law & Recovery Process
The SARFAESI Act, 2002 — Comprehensive Blog
By:
Jayprakash B. Somani
Advocate, Supreme Court of India & Insolvency Professional
Cell: PA 9322188701
www.jayprakashsomani.com
Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted as Act No. 54 of 2002 to address the persistent problem of non-performing assets (NPAs) in India by granting banks and financial institutions the power to enforce security interests without court intervention.
Before this Act, lenders depended on slow civil court processes, which delayed recovery and blocked credit flow to the economy. The SARFAESI Act provides a statutory framework for securitisation, reconstruction of financial assets, and enforcement of security interests in a time-bound manner.
Structure of the SARFAESI Act
Total Sections: 42
Total Chapters: 6 (plus add-on chapters/parts)
Schedule: 1 (mostly procedural/rules-related)
Chapter-wise Classification
| Chapter | Subject Matter | Sections |
|---|---|---|
| I | Preliminary – short title, extent, commencement & definitions | 1–2 |
| II | Regulation of Securitisation & Reconstruction | 3–12B |
| III | Enforcement of Security Interest | 13–19 |
| IV | Central Registry (CERSAI) | 20–26A |
| IVA | Registration by Secured & Other Creditors | 26B–26E |
| V | Offences & Penalties | 27–30D |
| VI | Miscellaneous | 31–42 |
Key Objectives of the Act
The main purposes of the SARFAESI Act are:
To enable banks and financial institutions to enforce security interests directly upon borrower default without requiring judicial orders.
To facilitate securitisation and reconstruction of financial assets for efficient recovery.
To provide a legal framework for Asset Reconstruction Companies (ARCs) to acquire and manage NPAs.
To reduce the burden on courts and accelerate recovery of dues.
Important Sections and Their Meanings
Section 1 – Short Title, Extent and Commencement
Defines the name of the Act, its territorial extent (whole of India), and its effective date (21 June 2002).
Section 2 – Definitions
Defines key terms such as secured creditor, security interest, financial asset, borrower, default, non-performing asset (NPA), and asset reconstruction company.
Sections 3–12B – Securitisation and Registration
These provisions deal with:
Registration of Asset Reconstruction Companies (ARCs)
Acquisition and management of financial assets
Issuance of security receipts
RBI’s supervisory and regulatory powers
Section 13 – Enforcement of Security Interest
This is the core provision of the Act. It empowers secured creditors to:
Issue a 60-day demand notice to defaulting borrowers.
On failure to comply, take measures such as possession of secured assets, appointment of a manager, lease or sale of assets, or assignment of rights — without court intervention.
Section 14 – Assistance by Magistrate
Permits secured creditors to seek assistance of the Chief Metropolitan Magistrate or District Magistrate for taking possession of secured assets.
Section 17 – Right to Appeal
Borrowers may appeal to the Debt Recovery Tribunal (DRT) within 45 days against actions taken under Section 13. The Supreme Court struck down the requirement of depositing 75% of the claimed amount as unconstitutional.
Sections 20–26A – Central Registry (CERSAI)
Establishes the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) to record security interests and avoid multiple claims.
Sections 27–30 – Offences and Penalties
Prescribe penalties for non-compliance with RBI or adjudicating authority directions and provide appellate remedies.
Key Concepts Explained
Secured Creditor
Includes banks, financial institutions, notified NBFCs, ARCs, and debenture trustees holding security interests.
Default and NPA
SARFAESI proceedings can be initiated only when the borrower’s account is classified as an NPA as per RBI norms.
Security Interest
Includes mortgage, charge, hypothecation, assignment of receivables, and similar interests.
Auction or Sale of Secured Assets
After compliance with Section 13 procedures, secured creditors may sell assets to recover dues without approaching civil courts.
Leading Supreme Court Case Law
Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311
This landmark judgment upheld the constitutional validity of the SARFAESI Act while striking down the requirement of a 75% pre-deposit for filing an appeal under Section 17. The Supreme Court emphasized that although lenders can enforce security interests without court intervention, borrower safeguards and procedural fairness must be maintained.
This decision remains the cornerstone of SARFAESI jurisprudence.
Other Judicial Developments
Subsequent rulings have clarified that:
SARFAESI applies to NBFCs and cooperative banks when notified.
Due process, including proper notice and consideration of objections, is mandatory.
Principles of natural justice must be followed during possession and sale.
High Courts have also dealt with issues relating to tenancy rights, leases, and competing claims on a case-to-case basis.
Impact and Importance
The SARFAESI Act has transformed debt recovery in India by:
Reducing dependence on lengthy civil litigation
Strengthening the ARC ecosystem
Improving credit discipline
Enhancing transparency through CERSAI
Courts continue to ensure that enforcement actions remain fair, reasonable, and lawful.
Conclusion
The SARFAESI Act, 2002 is a pivotal legislation in India’s financial system, empowering banks, financial institutions, and ARCs to recover dues efficiently while balancing borrower rights through appellate remedies. Judicial interpretation, particularly in Mardia Chemicals Ltd. v. Union of India, has ensured that the Act operates effectively without compromising fairness and natural justice.
