Sections 13(11) to 13(13) SARFAESI: Supporting Enforcement Rules

Around the main enforcement power sit three short provisions that make it work in practice. Section 13(11) frees the creditor to go after guarantors and pledged assets without first exhausting the secured assets; Section 13(12) fixes that the creditor acts through an authorised officer; and Section 13(13) freezes the secured assets against transfer by the borrower once the notice is served. This note sets out all three and how they support the enforcement machinery.

1. The Three Provisions

Figure 1: Guarantors, the officer, and the freeze

• Section 13(11). Lets the creditor proceed against guarantors or sell pledged assets without first taking the s.13(4) measures against the secured assets: no duty to exhaust the secured assets first.
• Section 13(12). The rights of the secured creditor are exercised by one or more authorised officers in the prescribed manner, fixing who acts for the creditor (Topic 24)
• Section 13(13). After the s.13(2) notice the borrower may not transfer the secured assets without the creditor's prior written consent, freezing the assets against alienation.

2. Section 13(11): Guarantors and Pledged Assets

Figure 2: No order of exhaustion

• Guarantors first, if the creditor chooses. Under s.13(11) the secured creditor may proceed against the guarantors without first proceeding against the secured assets of the borrower.
• Pledged assets too. It may likewise sell pledged assets without first taking the s.13(4) measures, since a pledge is enforced by the pledgee directly and sits outside the Act's possession route (Topic 5)
• No order of exhaustion. The creditor is not obliged to exhaust the borrower's secured assets before turning to guarantors or pledge, a freedom the courts have consistently upheld.
• The guarantor's liability is coextensive. A guarantor cannot insist the creditor first realise the principal's secured assets; under the contract of guarantee the liability is joint and several.

3. Section 13(13): The Bar on Transfer

Figure 3: The secured assets are frozen after notice

• From receipt of the notice. The bar in s.13(13) applies from receipt of the s.13(2) notice, so the freeze begins at the very start of enforcement (Topic 26)
• No transfer without consent. The borrower may not sell, lease or otherwise transfer the secured assets without the secured creditor's prior written consent, preventing the asset being spirited away.
• Except the ordinary course of business. A transfer in the ordinary course of business is left out, so a trading borrower can still deal with its stock and keep running.
• Why it matters. The provision protects the security between notice and sale, so the creditor's enforcement is not defeated by a quick transfer to a third party.

4. Frequently Asked Questions

Can a secured creditor proceed against a guarantor without first enforcing against the borrower's secured assets?

Yes. Section 13(11) provides that the secured creditor may proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of Section 13(4) against the secured assets of the borrower. There is no rule requiring the creditor to exhaust the borrower's secured assets before turning to a guarantor, and a guarantor cannot insist that it do so, because under the contract of guarantee the liability of the guarantor is coextensive with that of the principal debtor and is joint and several. The creditor may also enforce a pledge directly, since a pledge is realised by the pledgee outside the Act's possession machinery.

Can a borrower sell the secured asset after receiving the Section 13(2) notice?

Not freely. Under Section 13(13), once the borrower has received the Section 13(2) demand notice, it may not transfer the secured assets referred to in the notice, whether by sale, lease or otherwise, without the prior written consent of the secured creditor. The one exception is a transfer made in the ordinary course of business, which is left out so that a trading borrower can continue to deal with its stock. The provision freezes the secured assets against alienation between the notice and the sale, so the borrower cannot defeat the enforcement by transferring the asset to a third party while the process is under way.

5. Related Topics

• Topic 24: The Authorised Officer. Who exercises the rights under Section 13(12)
• Topic 13: Borrower, Default and Debt. The guarantor within the borrower definition.