SARFAESI Act, 2002 | Chapter II
Section 6 of SARFAESI Act, 2002: Notice to Obligor and Discharge of Obligation
Section 6 explains how a bank or financial institution may notify persons concerned when its financial assets are acquired by an asset reconstruction company (ARC), how payments made after notice discharge the obligor, and how collections are treated when no notice is given.
Purpose and important definitions
Under Section 5, an ARC may acquire financial assets from a bank or financial institution. Section 6 addresses notification of that acquisition and the consequences for payments or property received in relation to those assets.
Obligor: A person liable to the originator, whether under a contract or otherwise, to pay a debt or discharge an obligation in respect of a financial asset, whether existing, future, conditional or contingent, as defined under Section 2 of the Act.
Asset reconstruction company: A company registered with the Reserve Bank of India under Section 3 for carrying on the business of asset reconstruction, as described in Section 2.
Financial asset: A debt or receivable and other specified rights or interests, including certain secured claims, falling within the definition under Section 2. Originator: The bank or financial institution that owns the financial asset acquired by the ARC.
How Section 6 operates
Section 6(1): Notice of acquisition
The bank or financial institution may, if it considers appropriate, give notice of acquisition by an ARC to the obligor, other concerned persons and the relevant registering authority, including the Registrar of Companies, where the mortgage, charge, hypothecation, assignment or other interest was registered. The wording makes this notice discretionary under Section 6(1), rather than universally mandatory.
Section 6(2): Payment and full discharge
Once the bank or financial institution gives the notice and the obligor receives it, the obligor must pay the concerned ARC in respect of the financial asset identified in that notice. Payment to the ARC in discharge of the specified obligation gives the obligor a full discharge from liability in respect of that payment. It does not, merely by itself, extinguish any unpaid balance or other outstanding obligations.
Section 6(3): No notice and collections held in trust
When no notice is given, money or other property subsequently received by the bank or financial institution in relation to the acquired asset is held in trust for the benefit of the ARC. The bank or financial institution must promptly pass that money or property to the ARC or its duly authorised agent.
Section 6 - Statutory provisions
Sub-section (1)
The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by any asset reconstruction company, to the concerned obligor and any other concerned person and to the concerned registering authority (including Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment or other interest created on the financial assets had been registered.
Sub-section (2)
Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or financial institution, the obligor, on receipt of such notice, shall make payment to the concerned asset reconstruction company, as the case may be, and payment made to such company in discharge of any of the obligations in relation to the financial asset specified in the notice shall be a full discharge to the obligor making the payment from all liability in respect of such payment.
Sub-section (3)
Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or financial institution, any money or other properties subsequently received by the bank or financial institution, shall constitute monies or properties held in trust for the benefit of and on behalf of the asset reconstruction company, as the case may be, and such bank or financial institution shall hold such payment or property which shall forthwith be made over or delivered to the asset reconstruction company, as the case may be, or its agent duly authorised in this behalf.
Legislative note: The expression "asset reconstruction company" was substituted for the former references to "securitisation company or reconstruction company" by Act 44 of 2016, effective 1 September 2016.
Practical implications for borrowers, banks and ARCs
- For an obligor: Check the identity of the acquiring ARC, the financial asset referred to in the notice, payment instructions and authorised account details. Keep proof of every payment.
- For the transferring bank: Decide whether to issue notice to the obligor and the concerned registering authority, and arrange to transfer collections received after acquisition.
- For the ARC: Maintain clear records of the acquisition, notice and amounts received to prevent duplicate demands or payment disputes.
Distinction from Section 13: A notice under Section 6 concerns the acquisition of a financial asset and the recipient of payment. It should not be confused with the demand notice under Section 13(2), which concerns enforcement of a secured debt and has different statutory requirements.
Official law and regulatory resources
For the Act, amendments and related instruments, consult the India Code - SARFAESI Act, 2002, the Reserve Bank of India for ARC regulation, and the Department of Financial Services.
This article explains the statutory framework generally. Particular rights and obligations depend on the asset transfer documents, notices and applicable law.