The SARFAESI Act, 2002 does not prescribe any time limit for the Bank to initiate recovery action against defaulting borrowers but this does not mean that Banks can take recovery measure as per its sweet will.
LIMITATION PERIOD UNDER SECTION 36 OF SARFAESI ACT, 2002
As per Section 36 of the SARFAESI Act, 2002, a secured creditor cannot take measures under Section 13(4) if the claim of the Bank is not made within the limitation period prescribed under the Limitation Act, 1963. The limitation period for enforcing mortgage on default of loan is 12 years as per Article 62 of the Schedule to the Limitation Act.
A bank is required to initiate recovery proceedings before the expiry of limitation period, otherwise such bank will not be permitted to sell the mortgaged property under the provisions of SARFAESI Act, 2002.
Issue of limitation can be better understood with the following example:
- If a borrower defaults on repayment of a loan/EMI in January 2015, the bank has 12 years (till January 2027) to enforce the mortgage under SARFAESI Act, 2002 i.e. Bank can sell the property in public auction till January, 2027.
- After the limitation period expires, the right to enforce the mortgage is lost, even though the debt itself may still exist contractually.
Key Case Law: Somnath Manocha vs. Punjab & Sindh Bank
The Hon’ble Delhi High Court in the case of Somnath Manocha vs. Punjab & Sindh Bank [AIR 2012 Del 168] declared that the recovery action initiated by the bank was time barred by virtue of operation of Section 36 of SARFAESI Act, 2002. The bank had lost its remedy of undertaking recovery action under SARFAESI Act, 2002 by enforcement of mortgage since the limitation of 12 years had expired.
TIME PERIOD BETWEEN DEMAND NOTICE AND ACTUAL RECOVERY BY SALE OF ASSETS
The process of recovery initiated with issuance of demand notice under Section 13(2) of SARFAESI Act, 2002 by the Bank must be brought to its logical conclusion within a reasonable period of time. After issuance of Section 13(2) demand notice the bank cannot sit quiet for an indefinite period before taking further action of taking possession and sale of property under Section 13(4) of SARFAESI Act, 2002.
This would definitely not mean that bank cannot show sympathy to the borrowers by offering them time to repay the loan. But such correspondences must be there in writing which would reflect that active communication channel was open between borrower and bank for negotiations and settlement. In such a case, borrower cannot blow hot and cold at the same time i.e. it cannot delay the process of recovery under the garb of settlement talks and later come up with a defense that the action of taking possession and sale of property under Section 13(4) was not taken within a reasonable time.
Key Case Law: Industrial Finance Corporation of India vs. Parekh Platinum Ltd.
The Hon’ble Gujarat High Court in the case of Industrial Finance Corporation of India vs. Parekh Platinum Ltd. [(2009) 3 BC 437(DB)] laid down the foundation of the principle that the recovery action must be completed within a reasonable period of time. In this case, the lender had shown leniency to the borrower for almost five years and even reduced the outstanding dues by offering a one-time settlement (OTS). The court observed that the exchange of letters and discussions between the parties regarding the OTS kept the matter alive. As a result, the demand notice issued under Section 13(2) of the SARFAESI Act, along with the subsequent proceedings, did not lapse or become invalid.
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