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Transactions to Which the SARFAESI Act is Not Applicable

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a powerful tool for lenders to recover dues from defaulting borrowers. However, not all transactions fall within the scope of this legislation. There are specific exceptions where the provisions of the SARFAESI Act do not apply.

Understanding these exceptions is crucial for financial institutions, legal professionals, and borrowers alike.

1. Liens on Goods, Money, or Securities

The SARFAESI Act does not apply to liens created under:

• The Indian Contract Act, 1872
• The Sale of Goods Act, 1930
• Any other applicable law in force

The Act recognizes three types of liens: on money, goods, and securities.

What Is a Lien?

A lien is the legal right or interest a creditor has in another person's property until a debt or obligation is discharged. Unlike a mortgage, a lien typically does not involve possession of the property by the creditor.

The term “lien” comes from the idea of “binding” or a right to retain the property until dues are paid.

Importantly, a lien does not transfer ownership. It is a possessory right, judicially defined as an implied pledge. In Vijaykumar v. Jullunder Body Builders [(1983) 54 Comp. Cases 125 (Delhi)], the court elaborated on this principle, reinforcing the creditor's right to retain possession until debt repayment.

Bank’s General Lien

Banks are entitled to a general lien, even over fixed deposit amounts, but only to the extent of the customer’s liability.

Key Differences

• Lien vs. Pledge:

In a pledge, the debtor delivers the property to the creditor as security. In a lien, the creditor retains goods already in their possession for some other purpose.

• Lien vs. Mortgage:

A mortgage involves immovable property and is always conditional, with the borrower having a right to redeem. A lien, however, may involve movable or immovable property, and the right vests absolutely in the creditor. Unlike mortgages, liens do not allow for successive encumbrances.

2. Pledge of Movables

The Act does not apply to pledges of movable property as defined in Section 172 of the Indian Contract Act, 1872.

3. Security in Aircraft

Any creation of a security interest in an aircraft, as defined under Section 2(1) of the Aircraft Act, 1934, is exempt from the SARFAESI Act.

4. Security in Vessels

The creation of any security interest in a vessel, as defined under Section 3(55) of the Merchant Shipping Act, 1958, also falls outside the purview of the Act.

5. Rights of Unpaid Sellers

The SARFAESI Act does not interfere with the rights of an unpaid seller as outlined in Section 47 of the Sale of Goods Act, 1930.

6. Properties Not Liable to Attachment

The Act does not apply to properties that are not liable to attachment or sale under the first proviso to Section 60(1) of the Code of Civil Procedure, 1908, except in cases where the property is specifically charged with the recoverable debt.

7. Low-Value Financial Assets

If the security interest is for the repayment of a financial asset not exceeding ₹1,00,000, the SARFAESI Act does not apply.

8. Minor Dues

The Act is not applicable when the amount due is less than 20% of the principal amount and the interest thereon.

9. Agricultural Land

The SARFAESI Act strictly excludes any security interest created on agricultural land.

Conclusion

While the SARFAESI Act is a robust mechanism for financial asset recovery, it comes with clear boundaries. These exemptions ensure a balanced approach—protecting vulnerable sectors like agriculture and safeguarding minor transactions from aggressive enforcement.

Understanding these exclusions is essential for banks, NBFCs, legal professionals, and borrowers to navigate the recovery process lawfully and efficiently.

✍️ Sadashiv B. Pimplaskar

Legal Advisor, MyRinBazaar