Position of guarantor under sarfaesi act

Related Files

Deed of guarantee does not create any security interest. Sec.31(e) of the
Act makes it further clear from the following words:
1
any other contract in which no security interest has been created.
janardhan .rar
430 downloads
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 guarantors liability. But adjudication process is avoided 49 bombay
in SARFAESI Act in view of the recommendations of Andhyarujina sh.doc
Committee Report (which has discovered that adjudication process 49 downloads

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 42 ni act.tx
secured creditor taken under the Act and not adjudication of claim amount. 260 downloads
There is difference between scrutiny and adjudication. Scrutiny is nothing
but legal audit of the action of the secured creditor under the Act. 10
Adjudication is process of determination of claim or liability of borrower securitis.pdf
or guarantor. When DRT has no power to adjudicate on the quantum of the
377 downloads
claim of secured creditor under the Act (FB :Madras High Court: in
Laksmi Sankar Mills (P) Ltd. Vs. Authorised Officer, Indian Bank
235889 36
(2008(2)CTC 529), the question of adjudicating the guarantors liability
ep.doc
does not arise under SARFAESI Act. However it is open to the borrower
42 downloads
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 sc
determination of quantum of claim/liability. judgment..pdf
446 downloads
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) acb mohd
of Rule 3 of Security Interest (Enforcement) Rules 2002 which reads thus: isr.jpg
24 downloads
(4) Where there are more than one borrower, the demand notice shall be served on each
borrower.
wa5990-

Further, guarantor comes within the fold of the definition borrower 11-02.pdf
under Sec.2(f) of SARFAESI Act which reads thus: 456 downloads

(f) "borrower" means any person who has been granted financial assistance by any bank citataions.d
or financial institution or who has given any guarantee or created any mortgage or .doc
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 229 downloads
reconstruction company consequent upon acquisition by it of any rights or interest of any
bank or financial institution in relation to such financial assistance m
s.kathikka.pdf
Thus guarantor is also taken within the fold of definition of borrower 380 downloads
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 More >>
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 Honble 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.
 38
To activate Click to Talk, e-mail at lciconnect@lawyersclubindia.com

Posted 2 years ago

1. Whether the secured creditor is entitled to

proceed against guarantor without taking
recourse to any of the measures under
chandrasekhar Section 13 (4)?
Hyderabad
[ Scorecard : 3669]
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 guarantors 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 guarantors
properties than the principal debtors 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 guarantors 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 guarantors 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,

.........

Posted 2 years ago

Really nice information Sir

Click to Talk
Nadeem Qureshi

Advocate/
nadeemqureshi1@gmail.com
[ Scorecard : 24211]

Posted 2 years ago

Posts like this by CPS Sir & Chandrashekhar Sir,

enrich this forum.
Thank you Gentlemen.
MANOJ HARIT
 LAWYER

Posted 2 years ago

c.p.s. ramachary Dear Mr.Chandrasekhar,

Thank you for your views on the topic
1500
[ Scorecard : 1467] 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 creditors 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 guarantors property can be sold out like a
pledged asset without taking recourse to measures under
may not be correct.
Section 13 (4)
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

Posted 2 years ago

Dear Sh. Ramachary Garu,

Broadly speaking there can be three types of

Guarantors :
chandrasekhar
1. Borrower who himself stand as Guarantor to his
Hyderabad loan
[ Scorecard : 3669] 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

Posted 2 years ago

No further comments. Thanks and regards.

c.p.s. ramachary

1500
[ Scorecard : 1467]

Posted 2 years ago

Dear Sir,
Thought would discuss this interesting case with
Member (Account you.
Deleted) There is an Ancestral property - Father & 3
children, who are major at the time of mortgage.
Project Manager Father mortgages the ancestral property and acts
[ Scorecard : 22] 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.

Posted 2 years ago

Dear sir,
Five year ago my father helped his friend to get
Manish business prps loan from govt bank and in this loan
my father is a guarantor and also mortgage property
Accounts papers of our house, now the loan declared as NPA.
[ Scorecard : 22]
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.

Posted about a year ago

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
Meha Harish
guarantee cover on his buyers. In case of delay or
Proprietor default in payment by the buyer, the bank classifies
[ Scorecard : 126] 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' ??

Prev 1 2Next
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.

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.
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.

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.

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.

It all depends on the value of the property. You have not given the value of property. If it is possible
for you to surrender the portion of your uncle, talk to the banker to take possession of that portion
first and if it satisfies to appropriate the loan amount, the banker will not touch your portion. If your
father did not sign as guarantor of the loan, he can maintain a civil suit. However, the rule of estoppel
will cause trouble because your father must have been alert and objected to giving the house as
security in the beginning itself. Therefore the best approach would be to approach the banker talk to
him to wait till the partition suit comes to logical conclusion in civil court or file an interim application
in Civil court to partition the property to such an extent in favour of your uncle that would satisfy the
outstanding debt. And keep the bank informed that such an IA is pending in civil court as soon as the
Civil court allows the application, the bank would be ready to take possession of that part of property
which the Civil court releases in the name of your uncle. Or if you have money you can purchase that
which is sold by banker yourself and possess the part of your uncle legally. That means you will
negotiate with bank saying, "you enter into private treaty with us, you possess the portion that
belongs to my uncle and sell it to us". There is a provision for private treaty under Enforcement of
Security Interest Rules, 2002.

Section 13(11) of Sarfaesi Act. Without prejudice to the rights conferred on the secured creditor
under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell
the pledged assets without first taking any of the measures specified in clauses (a)
to (d) of sub-section (4) in relation to the secur ed assets under this Act.

-------------

An authoritative pronouncement from Supreme Court is required to clarify that the words, "the
secured creditor shall be entitled to proceed against the guarantors" are in relation to the pledged
assets of the guarantor because the usage of word "or" gives an interpretation that "proceed against
guarantors" and "sell the pledged assets" are two different subject matters.