Section 6 SARFAESI: Notice to the Obligor and Discharge

When an ARC acquires a financial asset, the person who owes it, the obligor, needs to know whom to pay. Section 6 answers that. The bank may notify the obligor of the acquisition, and once notified the obligor must pay the ARC; where no notice is given, anything the bank still receives is held in trust for the ARC. Either way the recovery reaches the ARC. This note sets out the notice, the two discharge positions, and why the notice matters.

1. The Notice of Acquisition

From acquisition to the obligor's payment

Figure 1: From acquisition to the obligor's payment

The notice, s.6(1). The bank or financial institution may, if it considers it appropriate, give notice to the concerned obligor that the financial asset has been acquired by the ARC: the notice is permissive, not compelled in every case.
Follows acquisition under s.5. The notice presupposes a valid acquisition under s.5, by which the ARC is the deemed lender; the notice simply tells the obligor where to direct payment now (Topic 17)
To whom. It is given to the obligor, the person liable to pay, and the acquisition may also be registered with the concerned authority, giving the change of creditor a public footing.

2. Discharge With and Without Notice

Who the obligor pays, and who holds the money

Figure 2: Who the obligor pays, and who holds the money

Notice given, s.6(2). On receipt of the notice the obligor shall make payment to the ARC, and only that payment is a valid discharge; a payment to the old bank after notice does not discharge the obligor.
No notice given, s.6(3). Where no notice is given and the obligor pays the bank as before, the money the bank receives is held in trust for the ARC and must be passed on, so the ARC still gets its due.
The constant. By both routes the ARC is entitled to the payment; the notice only decides whether the obligor pays the ARC directly or the bank holds the money in trust for it.
Practical caution. After notice the obligor must redirect payment, because paying out of habit to the old bank leaves the debt undischarged and exposes the obligor to paying twice.

3. Why the Notice Matters

Permissive notice, but decisive for discharge

Figure 3: Permissive notice, but decisive for discharge

Permissive, not mandatory. s.6(1) lets the bank give notice if it considers it appropriate; the Act does not make notice a precondition to the acquisition being effective.
It fixes the valid discharge. The real effect of notice is on discharge: once given, only payment to the ARC counts, so the notice protects the ARC against the obligor paying the wrong party.
The trust is the safety net. Where notice is not given, s.6(3)'s trust ensures the ARC is not prejudiced by the obligor continuing to pay the bank, so recovery is secured either way.
It completes the transfer. Acquisition under s.5 moves the asset; the s.6 notice completes the practical shift by moving the stream of payments to the ARC (Topic 17)

⚠ Exam trap

State that the s.6(1) notice is permissive, the bank may give it if it considers appropriate, not a mandatory precondition. The sharp point is discharge: under s.6(2), after notice the obligor must pay the ARC and payment to the old bank is no discharge; under s.6(3), where no notice is given, money the bank receives is held in trust for the ARC. So the ARC is entitled to the recovery either way, and the notice only decides whether the obligor pays the ARC directly. Link the section to the s.5 acquisition it follows.

4. Frequently Asked Questions

Is the Section 6 notice to the obligor mandatory under the SARFAESI Act?

No. Section 6(1) provides that the bank or financial institution may, if it considers it appropriate, give the obligor notice of the acquisition of the financial asset by the asset reconstruction company. The notice is therefore permissive and not a precondition to the acquisition being effective. Its significance lies in the consequences for discharge: once notice is given, under Section 6(2) the obligor must pay the ARC, and a payment to the original bank after notice is not a valid discharge. Where no notice is given, Section 6(3) protects the ARC by treating any money the bank receives as held in trust for the ARC.

If the obligor pays the original bank after notice of acquisition, is the debt discharged?

No. Under Section 6(2), once the obligor has received notice of the acquisition, payment must be made to the asset reconstruction company, and only such payment is a valid discharge. A payment to the original bank or financial institution after notice does not discharge the obligor, who remains liable to the ARC and may effectively have to pay again. This is why the obligor must redirect payment to the ARC on receiving notice. Before any notice, the position is different: under Section 6(3), money the bank receives is held in trust for the ARC, so the obligor is not prejudiced for paying as before.

5. Related Topics

Topic 17: Section 5 Acquisition. The acquisition the notice follows.
Topic 12: Financial Asset and Obligor. Who the obligor is and what is owed.