An Analysis of the Supreme Court Judgment in HarshadGovardhan vs. IRAC

In-House Counsel

An Analysis of the Supreme Court Judgment in HarshadGovardhan vs. IRAC

B. Gopalakrishnan | October 2014

The judgment passed by the Hon. Supreme Court in the case of Harshad Govardhan Sondagar as reported 2014 6 SCC 1 throws up a larger question as to whether the Chief Metropolitan Magistrate or the District Magistrate who have been mandated under the provisions of SARFAESI Act to assist the secured creditors in taking possession of the secured assets can rightly be entrusted with the task of deciding whether a third party who is claiming to have a right over the secured assets in the form of a lawful tenant or a leasee or whether it is the DRT who is the right Fora. The said judgment reiterated the fundamental principles enumerated under the SARFAESI Act that a Civil Court cannot sit in judgment over such issues, where the secured creditor has initiated SARFAESI action.

This article aims to analyze the said findings. The author also proposes to come to a conclusion as to whether the above judgment needs a review or not. Primarily the above school of thinking emanates from the fact that the Hon. Supreme Court in the opinion of the author has limited the scope and role of DRT u/s 17 of the SARFAESI Act.We now deal with the facts of the case. The judgment by the Supreme Court arises out of SLP preferred by Harshad Govardhan Sondagar and a host of others who claims to be the leasees or a tenant of premises which was mortgaged to Banks as security for loan advanced by the said Banks. The Borrowers defaulted in the re-payment of the secured loan and the loans have been classified as non-performing asset.

The secured creditors thereafter invoked the provisions of the SARFAESI Act namely 13 (2) and since there was no response forthcoming, the Banks invoked the provisions of 13 (4) and tried to take over the asset. In order to take over the assets, the Banks or financial institutions approached the Magistrate u/s 14 of the SARFAESI Act, threatened by the dispossession of the premises, the tenants moved to Supreme Court. The contention was that they were not the Borrowers but they are the leasee’s or tenants of the Borrowers and they are entitled to remain in the possession of the secured asset. Instead of limitating of the findings on this specific issue the Hon. Supreme Court has gone on a wider issue in the judgment.

In this connection the Bombay High Court in the case of Tradewell vs. IndianBank reported in 2007 CRI LJ 2544 has held that when a secured creditor takes measure under 13 (4) on account of the failure of the borrower to repay his liability and if the secured creditor moves to Magistrate u/s 14 of the SARFAESI Act and considering the fact that the liability of the borrower has been crystalized there can be no adjudication by the Chief Judicial Magistrate and possession has to be taken by a non-adjudicatory process and there is no question of pointing out to the Chief Metropolitan Magistrate at that stage the person who is to be dispossessed is a tenant.

The matter then reached the Division Bench of Bombay High Court. The Division Bench in the case of Tradewell held that the remedy lies in the DRT u/s 17 of the SARFAESI Act and if the tenant a third party succeeds the DRT can restore the possession to the Borrower or third party. This view was followed in the case of IARC vs Union of India.

The Appellants before Supreme Court pleaded if the impugned judgment of the Court is implemented the Appellant has no option but to surrender to Chief Metropolitan Magistrate of Mumbai and then move the DRT u/s 17 of the SARFAESI Act. According to the Appellant such remedy is not available under theSARFAESI Act and will become meaningless since they have to move from the tenanted premises before approaching DRT and only if their tenancy is found to be in order than they will be able to come back therefore they file this special leave application. The Appellant and the Respondent took the following arguments in support of their contention

Arguments by Petitioner

According to the appellant the tenant is a lessee and has a right to be in possession of the property of the lessor during the period of the lease and this right cannot be taken away save by authority of law.
It is also submitted that there is nothing in the provisions of the SARFAESI Act, and in particular Section 13 of the said Act, to show that this right of a lessee to remain in possession of the secured asset during the period of the lease stands extinguished when the secured creditor initiates action under Section 13 of the SARFAESI Act.
The language of Section 13(4) of SARFAESI Act is a clear indication that a lease of a secured asset by the borrower before receipt of a notice by him under subsection (2) of Section 13 of the SARFAESI Act was not prohibited under the said Act.
In the absence of any express language in the SARFAESI Act affecting a lease of a secured asset made by the borrower in favour of a lessee, the lease continues to be a valid lease even after the secured creditor initiates action under Section 13 of the SARFAESI Act.
The appellants also are of the view that there is no remedy under theSARFEASI Act to protect the lawful possession of the lessee under a lease and the Act does not bar the remedies under the respective local tenancy laws.

Arguments made by Respondents

The Respondents contented that while there are no restrictions on the right of the borrower to make a lease of an immovable property prior to the mortgage, once a mortgage is created, his right to make a lease of the mortgaged property is regulated by the provisions of Section 65A of the Transfer of Property Act, 1882.
The respondents also argues that under Section 65A of the Transfer of Property Act, a mortgagor, while lawfully in possession of the mortgaged property, has the power to make leases thereof subject to the provisions of sub-section (1) of Section 65A of the said Act.
As per the provisions of Section 13,if the borrower makes a lease of the secured assets after receipt of a notice under subsection (2) of Section 13 of the SARFAESI Act without the prior written consent of the secured creditor, the lease would accordingly be void and the possession of the secured asset of the lessee is not protected by law.
All though the SARFAESI Act is silent on the remedies available to a lessee who is in lawful possession of a secured asset, in the case of the aforesaid two categories of leases created prior to the mortgage and created after the mortgage in accordance with Section 65A of the Transfer of Property Act, the lessee has a remedy of filing an application under Section 17(1) of the SARFAESI Act as the application under Section 17(1) of the SARFAESI Act can be filed by “anyperson” and not just the borrower.
SARFAESI Act has been enacted to enable the secured creditors to recover the secured debts without the intervention of courts and tribunals and third-parties claiming to be lessees but not bonafide lessees under leases which are not in accordance with Section 65A of the Transfer of Property Act should not be allowed to frustrate the main object of the Act by preventing the secured creditors from taking the possession of the secured assets and realizing the secured debts.
Under sub-section (4) of Section 13 of the SARFAESI Act, the secured creditor has a right to take over the possession of the secured assets and since Section 35 of the SARFAESI Act provides that the provisions of the SARFAESI Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, sub-section (4) of Section 13 of the SARFAESI Act will override the rights of the lessee to remain in possession of the secured assets

Under the heading “Orders and directions of this Court in the facts of the cases before the Court” ,the Court directed the Chief Metropolitan Magistrate and the District Magistrate to examine the validity of the claim of the Appellants whether they have a valid tenancy or not. The Court also quashed and set aside the earlier order passed by the Magistrate u/s 14 of the SARFAESI Act.

The Court further directed that the Magistrate or the District Magistrate shall consider the claims of the Appellant that they were in the possession of the secured assets under the lease made prior to the creation of the mortgage anddecide the application u/s 14 in accordance with the judgment and any other law which may be relevant and they have been given four months to look into the matter and dispose of the application.

The vital question is whether the above decision lays down and law or not. Does it mean that u/s 14 any application before the Magistrate or District Magistrate, if there is any claim of a tenancy the same has to be looked into by the Chief Metropolitan Magistrate or District Magistrate before passing any order or not.

The other question of importance in, does the judgment re-enforce the fact that Civil Courts or even any special Court set up to decide on tenancy matter or rental matter especially on the given facts of the case namely section 55 of the Maharashtra Rent Control Act, will not have any jurisdiction in dealing with the tenancy of a property wherein the secured creditor has invoked the provisions of SARFAESI Act.

In the author’s opinion, the findings of the Supreme Court has not laid down per se a rule that the appropriate Court or authority under the provisions of SARFAESI Act when a secured creditor enforces the security under the said Act and when there is a claim of tenancy is the Chief Metropolitan Magistrate or the District Magistrate. This conclusion is reached on the basis of the fact that the Hon. Supreme court has clearly stated that the orders or directions are based on the given fact and nothing is stated to say that the above direction are due to an interpretation of section 14 of the SARFAESI Act. However, the flip side of the said judgment will that on the givenfacts and circumstances of the said cases and since the Hon. Supreme Court has directed the Chief Metropolitan Magistrate and District Magistrate to look into the tenancy claim a precedent has been set by this judgment which will force or compel a Chief Metropolitan Magistrate and District Magistrate to necessarily look into such claims.

As regards second question is concerned the judgment can be used further re-enforce the fact that when a secured creditor proceeds under the SARFAESI Act no other Court other than the DRT or the Chief Metropolitan Magistrate or the District Magistrate has the right to sit in judgment over any issues.

Under these circumstances for a practitioner of law the judgment can be cited to re-enforce the fact that no other Court has jurisdiction, especially a Civil Court, when a secured creditor proceeds under SARFAESI Act. The other line of thinking is that as regards the direction given by the Court on the given facts and circumstances of the case do not per se lay down any law or which is of a grave concern. In the author’s personal opinion the Hon. Supreme Court could have left the fact to decide whether there is a tenancy or not to DRT rather than the Chief Metropolitan Magistrate or the District Magistrate. The DRT has much more expertise and wisdom in deciding such an issue than a Chief Metropolitan Magistrate who deals in criminal jurisprudence and a District Magistrate who mostly deals with administrative issues. The Hon. Supreme Court could have without dispossessing the tenants directed the DRT to admit their petition u/s 17 and could have given the timelineto decide on this case.

Therefore, it is necessary in the given circumstances and looking at the practical aspects to file a review of this judgment and make it clear that the above direction is only limited to the given cases and does not interpret section 14. Besides the Hon. Supreme Court has to be informed that in a given circumstances if the tenancy is found to be valid it should not preclude the secured creditor from selling the property to a willing buyer. The judgment has also not thought about the after effects of such findings of a tenancy by a Chief Metropolitan Magistrate or the District Magistrate. The result will be that by citing this judgment some Borrowers can frustrate the sale of a secured property.