The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)- Balancing the Rights and Liabilities of Creditors and Debtors – A Judicially Calibrated Framework By Advocate Ranjitsinh Ghatge 🦅

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)

- Balancing the Rights and Liabilities of Creditors and Debtors – A Judicially Calibrated Framework

By Advocate Ranjitsinh Ghatge 🦅

I. Introduction: Why SARFAESI Exists

The SARFAESI Act, 2002 was enacted against the backdrop of mounting non-performing assets (NPAs) choking the Indian banking system. Conventional civil recovery mechanisms were slow, expensive, and ineffective. Parliament therefore created a non-adjudicatory enforcement mechanism enabling secured creditors to enforce security interests without court intervention, subject to post-action judicial review.

At the same time, the Act could not—and does not—permit arbitrary deprivation of property. Over the last two decades, constitutional courts have acted as balancing institutions, ensuring that creditor efficiency does not degenerate into debtor oppression.

II. The Architecture of SARFAESI: Rights & Liabilities in Equilibrium

A. Rights of the Secured Creditor

1. Enforcement Without Prior Court Decree

Upon default and classification of an account as NPA, a secured creditor may issue a demand notice under Section 13(2) and, on non-compliance, take measures under Section 13(4)—including possession, management takeover, or sale of secured assets.

2. Priority Over Other Creditors

Secured creditors enjoy statutory priority, especially post-2016 amendments, subject to limited exceptions (e.g., workmen’s dues in liquidation).

3. Speed and Certainty

The Act is designed to ensure time-bound recovery, protecting public funds and systemic financial stability.

B. Liabilities and Checks on the Creditor

1. Strict Procedural Compliance

Any deviation—defective notice, improper valuation, non-consideration of objections—can vitiate proceedings.

2. Consideration of Borrower’s Representation

Under Section 13(3A), the creditor must consider and reply to borrower objections with reasons.

3. Judicial Scrutiny by DRT/DRAT

Actions under Section 13(4) are subject to challenge under Section 17, ensuring legality, proportionality, and fairness.

III. Rights of the Borrower (Debtor): Not a Silent Spectator

1. Right to Notice and Hearing (Post-Notice Stage)

Though SARFAESI excludes a pre-decisional hearing, post-notice safeguards are robust.

2. Right to Redemption

The borrower may redeem the secured asset any time before sale confirmation by clearing dues.

3. Right Against Arbitrary Action

Excessive, premature, or mala fide enforcement is open to correction by DRTs and constitutional courts.

IV. Landmark Judgments – A Judicial “Interview” of the Act

Below is a curated judicial dialogue—cases that strengthened creditor rights, followed by decisions that protected debtors.

A. Judgments Favouring Secured Creditors

1. Mardia Chemicals Ltd. v. Union of India (2004)

Judicial View:

The Supreme Court upheld the constitutional validity of SARFAESI, recognising that banking recovery is a matter of economic policy. The Court clarified that borrowers cannot insist on a pre-action hearing, as long as post-action remedies exist.

Impact:

Laid the constitutional foundation of SARFAESI and legitimised creditor-driven enforcement.

2. Transcore v. Union of India (2008)

Judicial View:

SARFAESI proceedings are supplementary, not alternative, to DRT proceedings. Banks may pursue both simultaneously.

Impact:

Strengthened creditor strategy and removed procedural shackles.

3. United Bank of India v. Satyawati Tondon (2010)

Judicial View:

High Courts must exercise restraint under Article 226 when efficacious remedies under SARFAESI/DRT exist.

Impact:

Curtained frivolous writ petitions and reinforced the statutory recovery framework.

B. Judgments Protecting Borrowers / Debtors

4. Mathew Varghese v. M. Amritha Kumar (2014)

Judicial View:

Sale of secured assets must strictly comply with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002. Even technical lapses can invalidate the sale.

Impact:

A landmark reaffirmation that procedure is a substance in SARFAESI enforcement.

5. ITC Limited v. Blue Coast Hotels Ltd. (2018)

Judicial View:

Classification of an account as NPA must strictly follow RBI guidelines. Mechanical or premature classification is illegal.

Impact:

Protected borrowers from arbitrary NPA tagging—the trigger point of SARFAESI.

6. Harshad Govardhan Sondagar v. International Assets Reconstruction Co. (2014)

Judicial View:

Lawful tenants cannot be summarily evicted under SARFAESI without due process.

Impact:

Balanced third-party rights and prevented collateral injustice.

V. The Constitutional Compass: Article 300A & Due Process

While SARFAESI is a special statute, property rights under Article 300A remain relevant. Courts have repeatedly held that: 

a. Deprivation of property must be by authority of law,

b. Enforcement must be fair, reasonable, and proportionate, 

c. Economic efficiency cannot override constitutional morality.

VI. SARFAESI in the Post-IBC Era: Complement, Not Competition

With the Insolvency and Bankruptcy Code, 2016 (IBC), SARFAESI now operates as a pre-insolvency recovery tool. Creditors must make a strategic choice—individual enforcement (SARFAESI) or collective resolution (IBC)—each with distinct consequences for debtors.

VII. A Law of Power, Tempered by Responsibility

The SARFAESI Act is neither pro-creditor nor anti-debtor—it is pro-system. For creditors, it is a sword against wilful default. For borrowers, it is a regime that demands discipline but guarantees legality. For courts, it is a constant exercise in balancing economic necessity with constitutional fairness. The true success of SARFAESI lies not in recoveries alone, but in credible, lawful, and humane enforcement—a principle the Indian judiciary has consistently upheld.

About the Author

Advocate Ranjitsinh Ghatge 🦅

+919823044282

Practising litigation lawyer | Banking & Recovery Laws | SARFAESI • DRT • IBC

“Law is not merely a tool of enforcement—it is an instrument of balance.”

2005

14th Paush 14234

04th January 2026