Secured Creditor, Secured Asset and Secured Debt under SARFAESI

Enforcement under SARFAESI depends on three definitions clicking into place at once: the actor must be a secured creditor, the obligation a secured debt, and the target a secured asset. Miss any one and the Act has nothing to work on. This note takes the triad on its own, who qualifies as a secured creditor and how that list has widened, what makes a debt and an asset secured, and the way the three definitions move together.

1. The Triad

Figure 1: The three definitions and why each matters

• Secured creditor, s.2(1)(zd). The holder of the security interest who is entitled to enforce it, and the only kind of person who may invoke the Act; the definition lists banks and financial institutions, asset reconstruction companies, debenture trustees, and, by notification, NBFCs and others (section 2 below)
• Secured debt, s.2(1)(ze). A debt secured by a security interest: the obligation the enforcement sets out to realise, which must be an NPA before the s.13(2) notice can issue (Topic 9)
• Secured asset, s.2(1)(zc). The property on which the security interest is created, the thing possession and sale under s.13(4) will reach, whether the borrower's or, where the borrower is a guarantor, the guarantor's charged property.

2. Who May Be a Secured Creditor

Figure 2: The widening list of invokers

• Banks and financial institutions. The original core of the Act, including scheduled banks and, after years of doubt, co-operative banks: in Pandurang Ganpati Chaugule v. Vishwasrao Patil (2020) the Supreme Court held co-operative banks fall within the Act, upholding the notification route (Topic 2)
• Asset reconstruction companies. On acquiring the financial asset under s.5, an ARC steps into the bank's shoes and enforces as a secured creditor in its own right, the link between securitisation and enforcement (Topic 17)
• Debenture trustees. A debenture trustee holding security on behalf of debenture holders enforces for them, a secured creditor by the nature of the trust it holds.
• Notified NBFCs and others. The Central Government may notify non-banking financial companies as secured creditors above an asset threshold, and only for secured debts above a notified minimum amount; these thresholds have been progressively lowered over time by notification, widening access to the Act, the precise current figures being a matter to check against the latest notification.

3. How the Three Move Together

Figure 3: Break one link and the Act cannot act

• All three or none. A secured creditor can act only where a secured debt rests on a secured asset charged by a security interest; the three are a chain, and breaking one link, an unsecured debt, or no enforceable security interest, leaves the creditor to a civil suit or the DRT instead (Topic 75)
• The guarantor's asset. Because borrower is defined to include the guarantor (Topic 8), the guarantor's charged property is itself a secured asset, so the creditor may proceed against it under the Act, a point frequently litigated and upheld.
• The creditor must prove its standing. A body not within s.2(1)(zd), or not validly notified, is not a secured creditor and cannot use the Act, so a borrower's first challenge is often whether the creditor qualifies at all.

4. Frequently Asked Questions

Who can be a secured creditor under the SARFAESI Act?

Under Section 2(1)(zd), the holder of a security interest entitled to enforce it: banks and financial institutions (including co-operative banks, as settled in Pandurang Ganpati Chaugule in 2020), asset reconstruction companies as assignees of the financial asset, debenture trustees, and non-banking financial companies and other entities notified by the Central Government above an asset threshold for secured debts above a notified amount. Only a secured creditor within this definition may invoke the Act, and it may act only against a secured asset charged by a security interest for a secured debt that has become a non-performing asset.

Can a bank proceed under SARFAESI against a guarantor's property?

Yes, where the guarantor has created a security interest over the property. Because the definition of borrower includes the guarantor, the guarantor's charged property is a secured asset within the Act, so the secured creditor may take the Section 13(4) measures against it just as against the principal borrower's secured asset. The requirement is that there be a security interest over the property; a mere personal guarantee without any charged asset gives nothing for the Act's possession and sale machinery to reach.

5. Related Topics

• Topic 11: Security Interest. The interest that makes the debt and asset secured.
• Topic 8: Section 2 Definitions. The full definitional map.