Section 4 of the Security Interest (Enforcement) Rules, 2002, outlines the procedural steps an authorized officer must follow when the borrower fails to repay the demanded amount within the specified timeframe. This section ensures that the secured creditor can recover their dues by taking possession of secured assets, particularly movable property, while maintaining procedural fairness and transparency.

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Key Procedures After Notice Issuance:

1. Possession of Movable Property
   If the borrower fails to pay the amount mentioned in the demand notice, the authorized officer can take possession of the secured movable property.

   • This process must be done in the presence of two witnesses, with a formal Panchnama drawn up (a legal document that records the details of possession).
   • The witnesses must sign the Panchnama in a format similar to Appendix I of these rules.

2. Inventory of Property
   After taking possession, the authorized officer must prepare an inventory (as per Appendix II of these rules) of the movable property taken into possession.

   • A copy of this inventory must be delivered to the borrower or a representative entitled to receive it.

3. Notification to Borrower
   A notice, along with the Panchnama and inventory, must be sent to the borrower, informing them about the possession of the movable property.

4. Electronic Notification
   As per amendments in 2016, notices may also be served through electronic modes of service, supplementing the traditional delivery methods.

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Custody of the Property

• Once possession is taken, the authorized officer is responsible for safekeeping the property, ensuring it is stored with the care an ordinary person would take under similar circumstances.
• If the property is prone to natural decay or the cost of custody exceeds its value, the officer is authorized to sell the property immediately to prevent loss.

Preservation of Assets
The authorized officer must ensure the preservation and protection of the secured assets and insure them if required, until the assets are sold or otherwise disposed of.

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Handling of Other Secured Assets

In cases involving assets like debts, shares, or other movable property not in the borrower’s possession, the following steps are to be taken:

1. For Debts Not Secured by Negotiable Instruments

   • The officer must issue notices to both the borrower (prohibiting the recovery of the debt) and the debtor (instructing them to make payments directly to the authorized officer).

2. For Shares in a Body Corporate

   • The borrower is instructed to transfer shares to the secured creditor. The body corporate is also notified to refrain from transferring shares to anyone other than the secured creditor.

3. For Other Movable Property

   • The borrower and any other person in possession of the movable property must hand it over to the authorized officer.

4. For Documents Evidencing Title

   • If the movable secured assets are not physically in possession but documented, the officer may take possession of the relevant title documents to recover the secured assets.

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Conclusion
Section 4 of the Security Interest (Enforcement) Rules, 2002, provides a clear and structured process for securing and managing movable property when a borrower defaults. It emphasizes legal transparency by involving witnesses, maintaining proper documentation, and following fair procedures to protect the interests of both the lender and the borrower. Additionally, provisions for the swift handling of perishable or decaying assets ensure that the recovery process is economically efficient

FAQs

1. What is the main purpose of the SARFAESI Act?
The SARFAESI Act aims to enable banks and financial institutions to recover their dues efficiently by allowing them to securitise and reconstruct financial assets.

2. What happens if an ARC's certificate is cancelled?
If an ARC's certificate is cancelled, it must cease its operations. However, it can appeal the decision within 30 days.

3. How does the RBI monitor ARCs?
The RBI issues guidelines and directives to ensure ARCs comply with regulations and maintain proper financial practices.

4. What are the consequences of non-compliance by an ARC?
Non-compliance can lead to the cancellation of the ARC's registration certificate, preventing it from operating legally.

5. Can an ARC continue to function if its registration is cancelled?
No, once an ARC's registration is cancelled, it must stop all operations unless it resolves the issues leading to the cancellation.

6. What types of assets can ARCs manage?
ARCs primarily manage non-performing assets (NPAs), which include loans and advances that are in default or close to being in default.

7. What is the significance of a "qualified buyer"?
Qualified buyers are investors eligible to participate in investments with ARCs, ensuring that investments are made responsibly and within regulatory frameworks