Section 13(4) SARFAESI: The Measures on Default

If the borrower does not pay within the sixty days of the demand notice, Section 13(4) is where the creditor's power bites. It lists the measures the secured creditor may take to realise the debt, from possession and sale to taking over the business, and the Act then says how the proceeds are applied and how any shortfall is recovered. This note sets out the measures, the two forms of possession, and the application of the sale proceeds.

1. The Measures

What the creditor may do once the notice period expires

Figure 1: What the creditor may do once the notice period expires

Possession and transfer, s.13(4)(a). Take possession of the secured asset, including the right to transfer it by lease, assignment or sale to realise the secured debt, the central measure in practice.
Takeover of management, s.13(4)(b). Take over the management of the business of the borrower, available where the security covers the business and it is severable, to preserve and realise its value (Topic 31)
Appoint a manager, s.13(4)(c). Appoint a manager to run the secured asset or the business taken into possession, so it is not left idle while the sale is arranged.
Call in third parties, s.13(4)(d). Require any person who owes money to the borrower or holds the borrower's assets to pay the secured creditor directly, reaching money in others' hands.

2. Symbolic and Physical Possession

Two forms of taking possession

Figure 2: Two forms of taking possession

Symbolic possession. Possession taken on paper, by a possession notice affixed on the asset and published; the asset passes constructively into the creditor's hands under Rule 8 (Topic 25)
Physical possession. Actual physical possession of the asset, often taken with the assistance of the Magistrate under s.14, where the borrower will not hand it over (Topic 29)
Why the distinction. Symbolic possession lets the sale process begin, but physical possession is usually needed to deliver the asset to a buyer and give clear enjoyment.
The borrower's remedy. Taking possession is the s.13(4) measure that triggers the borrower's right to apply to the DRT under s.17 (Topic 35)

3. Applying the Proceeds

The order in which the money is applied

Figure 3: The order in which the money is applied

Costs first, s.13(7). The proceeds of enforcement are applied first to the costs, charges and expenses of taking possession and conducting the sale.
Then the secured debt. Next the money is applied to discharge the dues of the secured creditor, which is the object of the whole exercise.
Surplus to the borrower. Any surplus left after the secured debt is satisfied is returned to the person entitled, ordinarily the borrower, so the creditor cannot keep more than its due.
Balance from the borrower, s.13(10). If the proceeds fall short of the debt, the creditor may recover the balance by applying to the DRT, so enforcement does not extinguish the shortfall (Topic 35)

⚠ Exam trap

List the s.13(4) measures in full: possession with the right to lease, assign or sell; takeover of management; appointment of a manager; and calling in third parties who owe or hold the borrower's assets. Distinguish symbolic possession (constructive, on paper under Rule 8) from physical possession (often taken with s.14 assistance), and note that taking possession is the measure that opens the s.17 remedy. On the money, remember the s.13(7) order: costs first, then the secured debt, then surplus to the borrower, with any shortfall recovered from the borrower under s.13(10).

4. Frequently Asked Questions

What measures can a secured creditor take under Section 13(4)?

On the borrower's failure to discharge the secured debt within the sixty-day notice period, Section 13(4) allows the secured creditor to take possession of the secured asset, including the right to transfer it by lease, assignment or sale; to take over the management of the business of the borrower where the security covers it and it is severable; to appoint a manager for the secured asset or business taken into possession; and to require any person who owes money to the borrower or holds the borrower's assets to pay the secured creditor directly. Possession may be symbolic or physical, and the proceeds are applied under Section 13(7) first to costs, then to the secured debt, with any surplus returned to the borrower.

What happens if the sale proceeds are not enough to clear the debt?

Enforcement under Section 13(4) does not wipe out any shortfall. Under Section 13(7), the proceeds of the sale are applied first to the costs and expenses of the enforcement and then to the dues of the secured creditor; if a surplus remains, it is returned to the borrower or other person entitled. If the proceeds fall short of the secured debt, Section 13(10) allows the secured creditor to recover the balance by applying to the Debt Recovery Tribunal. So the creditor can both realise the secured asset under the Act and pursue the borrower for any remaining amount through the Tribunal.

5. Related Topics

Topic 29: Section 14 Magistrate's Assistance. How physical possession is obtained.
Topic 35: Section 17 Application. The borrower's remedy once a measure is taken.