Enforcement of Security Interest of the Borrower involves the following steps:

1. Create the cause for action or prove default to justify taking possession of the secured assets. This is done by serving demand notice for repayment on the borrower within a prescribed period. If the borrower repays in response, the task is completed and no action is therefore needed and if he fails there is case for proceeding to take over possession of the secured assets.

2. When the prescribed period is over and the borrower has not responded with payment in full, secured creditor may take possession of the secured assets directly, or

3. Take only the management of the secured assets and appoint another person to manage the same

4. Send notice to third parties, who have obtained part/full quantum of the secured assets earlier on credit, demanding direct payment of the dues to the secured creditor and recover the same.

5. Recover also costs & expenses on account of enforcement action from the borrower

The secured creditor (bank/FI) is the competent agency as per Section 13 of the Ordinance, to initiate these steps at the commencement of the recovery process. ARC/SC will enter into picture, wherever required, after enforcement of security is completed and the secured creditor holds possession of the security. At this stage it is convenient to value the security and enter into an agreement with the ARC/SC by the secured creditor. These powers of the secured creditor are covered in Section 13 of the Ordinance. However the Ordinance also vests the power to take possession of secured assets and to enforce security interest to the ARC/SC under section 9(d) and 9(f).

The rights of the secured creditor to enforce security interest are not affected by anything contained in section 69 or section 69A of the Transfer of Property Act, 1882. Any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, in accordance with the provisions of this Ordinance.[Section 13(1)]. Civil Courts have no jurisdiction to interfere or grant injunction. However action for enforcement of security should be initiated before expiry of limitation, in respect of the claim of secured creditor against the borrower. Secured creditor can also exercise the option of action under the Ordinance and enforce security interest in respect of pending cases before civil courts/DRT, by getting them transferred for such action.

Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise any or all of the rights under Section 13(4) of the Ordinance. [Section 13(2)]

Thus there are two preceding requirements when a notice under this section can be issued-

1. The borrower must have defaulted in repayment of the debt of one or more installments thereof, and

2. His Loan account with the bank or FI should have been consequently categorised as and transferred to Non-performing Asset

The notice referred to Section 13(2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower [Section 13(3)]

In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:--

1. take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

2. take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

3. appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

4. require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

In short the provision states that the secured creditor can take possession of the secured assets either himself or entrust its management (custody & care) to a manager appointed.

The secured creditor can also pursue any debtors of the borrower, who had earlier acquired any of the secured assets from the borrower and demand payment thereof directly [Section 13(4)(d)]. Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.[Section 13(5)]

Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.[ Section 13(6)]

Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. [Section 13(7)]

If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.[Section 13(8)]

In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub- section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

• Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956

Liability of Secured Creditor Enforcing Security Interest
to Remit Workmen's Dues

• Provided further that in the case of a company being wound up on or after the commencement of this Ordinance, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956, may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of section 529A of that Act:

• Provided also that the liquidator referred to in the second proviso shall intimate the secured creditors the workmen's dues in accordance with the provisions of section 529A of the Companies Act, 1956 and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that section to the secured creditors and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator:

• Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

• Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any.

Explanation .-For the purposes of this sub- section,--

1. "record date" means the date agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding on such date;

2. "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. [Section 13(10)]

Without prejudice to the rights conferred on the secured creditor under or by this section, 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 secured assets under this Ordinance.[Section 13(11)]

The rights of a secured creditor under this Ordinance may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.[Section 13(12)]

No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.[Section 13(13)]

Where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured assets is required to be sold or transferred by the secured creditor under the provisions of this Ordinance, the secured creditor may, for the purpose of taking possession or control of any such secured assets, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured assets or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or as the case may be, the District Magistrate shall, on such request being made to him

1. take possession of such asset and documents relating thereto; and

2. forward such assets and documents to the secured creditor.

For the purpose of securing compliance with the provisions as above, the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.

No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.

1. Any person (including borrower) aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may prefer an appeal to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measures had been taken.

2. Where an appeal is preferred by a borrower, such appeal shall not be entertained by the Debts Recovery Tribunal unless the borrower has deposited with the Debts Recovery Tribunal seventy-five per cent. of the amount claimed in the notice referred to in sub-section (2) of section 13:

Provided that the Debts Recovery Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

3. Save as otherwise provided in this Ordinance, the Debts Recovery Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and rules made thereunder.

1. Any person aggrieved by any order made by the Debts Recovery Tribunal under section 17 may prefer an appeal to an Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.

2. Save as otherwise provided in this Ordinance, the Appellate Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and rules made thereunder.

If the Debts Recovery Tribunal or the Appellate Tribunal, as the case may be, on an appeal filed under section 17 or section 18, holds the possession of secured assets by the secured creditor as wrongful and directs the secured creditor to return such secured assets to the concerned borrower, such borrower shall be entitled to payment of such compensation and costs as may be determined by such Tribunal or Appellate Tribunal.