How Sales Of Properties Under The SARFAESI Act End Up Creating Hassles For Co-Operative Housing Societies

The government must make it mandatory for financial institutions to inform co-operative housing societies about sales under SARFAESI process...

Flats and industrial units auctioned by Financial Institutions under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act may be good news for sellers, but the process has created headaches for co-operative societies.

Ever since the central government and the Reserve Bank of India (RBI) have exerted pressure on financial institutions to clean up their books, mega auctions and private treaty sales of unredeemed mortgaged properties acquired by them have been the norm.

The SARFAESI Act has empowered financial institutions to dispose of properties quickly, with less intervention by courts, and overall it has helped them reduce their non-performing assets. At one time, there were more than 23,000 registered properties for sale, which is also one of the factors for the current slump in the real estate sector.

Financial institutions do not stress on high prices since their prime aim is to recover, or minimize their losses, due to which valuations such houses tend to be on the conservative side, since these are essentially distress sales.

After properties are put up for sale under SARFAESI Act, financial institutions prepare several sets of notices, which are sent to borrowers, guarantors and newspaper offices, regarding repayment, possession, and later on, for sale.

However, not a single copy of these notices is sent to the concerned housing society in which the property to be sold is located. Due to this factor, a lot of such sales have taken place without taking into confidence office bearers of housing co-operative societies. Such sales end up creating problems for co-operative housing societies.

Under the SARFAESI Act, financial institutions have symbolic, physical or constructive possession of properties to be sold, but housing societies are not kept informed of the same. Under symbolic possession, financial institutions do not have physical possession and only legal papers as well as documents are in their custody.

Therefore, housing societies are in the dark about these developments, especially since only names of original owners are recorded in co-operative housing society registers.

In many cases, properties are in the physical possession of the borrower, or the defaulter, and the housing society does not know whom to approach to recover maintenance dues. Even in the case of physical possession, housing societies cannot recover their maintenance dues, since rules do allow the financial institutions to spend money on maintaining properties in their possession.

Moreover, due to non-maintenance of such properties, not only housing societies do not get their dues in time, but structural problems and weaknesses also arise due to such a situation. It is only in cases of constructive possession that properties in physical custody of financial institutions can be managed, or maintained, or acquired, or given on lease, as per provisions of the SARFAESI Act.

Most housing society office bearers have stated that during the entire process, they are merely mute spectators with financial institutions not even acknowledging their presence or claims of housing societies. Not only are co-operative housing societies not informed about legal actions and auctions at all, but even their claims are not taken into consideration since properties are sold on an 'as is where is', 'as is what is' and 'without recourse' basis.

Finally, it falls on the bidder or buyers of such auctioned properties to approach the co-operative housing societies to find out about the latest position, the details of residents, as well as collect details about maintenance bills arrears, since most of the time loan defaulters also tend to be defaulters.

Such a process also creates unexpected problems since certain housing societies are reserved for certain lifestyles like vegetarian or non-vegetarian, specific income groups, or communities like Parsis, Catholics or Jains. In such cases, bidders fail to notice the type of residents, even as both buyers as well as housing societies get stuck. Consequently, purchasers end up running from pillar to post to get their problems solved even after full payment has been made to financial institutions.

Financial institutions can undertake the process to take physical possession with the help of district magistrates, and this process can be also completed within 30 days without any court intervention. However, housing societies find it difficult to get an injunction order on the possession of the property even to get their dues though they are the real owners of the building and land on which the property is situated.

To this day, rules are not clear about the role of housing societies as to whether they can oppose such transfers of properties, or not, on some grounds or the other.

Co-operative housing society office bearers, especially those of industrial estates, have to do deal with another set of problems, if a company is under liquidation, because then the official liquidator becomes the custodian of all the assets of the firm. The question that arises is that if a company is already under liquidation, can a financial institution auction the property.

An official liquidator can auction assets of the company and settle claims of its creditors, though there is a lot of confusion in such cases. Sometimes the liquidation of the company is applied to delay a bank auction. In such cases, there arises a question if housing societies have to approach the official liquidator to claim or settle their claims, and it is a question which needs legal clarification.

There are several cases where due to intentions to pull off a fraud, a property is mortgaged to more than one financial institution, which involves prosecution and police cases. There are many housing societies, which suffer because their claims are not easily settled and it takes years to realize their receivables until the matter is settled by court.

Also, at present, as far as housing societies are concerned, there is no way to check, about whether a property is mortgaged or not, or if the intent of the property owner is to commit financial fraud, or cheat the financial institution, or potential buyer, or the co-operative society. There are many cases where financial institutions have lent money and mortgaged properties without the housing co-operative society coming into the picture.

Such situations are mostly noticed in new housing projects where flats are bought through loans, and where co-operative housing societies are formed only after a few years.

In Maharashtra, it is mandatory to file the notice of intimation regarding the deposit of a title deed with the sub-registrar's office but it is very difficult for housing societies to access that information as well as other details of a mortgaged property.

In order to fix this loophole, there is a proposal to create a central registry of all the secured assets. If this comes into being, it will maintain records of all transactions related to secured assets. It would become mandatory for all financial institutions to register all mortgaged assets with such a central registry.

Such a proposed central registry would be a kind of master database of mortgaged assets in India. If access to this central registry can be provided to the common public then housing societies would be in a position to check on each and every property in their jurisdiction and decide accordingly.

This would also fix the issue of several claimants over the same collateral. Once a mortgaged property is registered with a central registry, housing co-operative societies would find it easy to contact the appropriate authorized officer and stake their claims.

Until the time, such a central registry is created, the government must make it mandatory for financial institutions to send copies of demand notices or notices of sales to the concerned housing co-operative societies so that the latter gets to know who the potential purchasers are, as well as get their claims cleared without hassles, and as quickly as possible.