Since Independence, the Government of India has adopted several ad-hoc measures to tackle sickness among financial institutions, foremost through nationalisation of banks and relief measures. Over the course of time, the Government has put in place various mechanisms for cleaning the banking system from the menace of Non Performing Assets and revival of a healthy financial and banking sector…
Recession is the buzzword these days. The cause of this global problem is the financial crisis faced by our bankers. Though the concept of banking business has undergone multiple changes in today’s world of globalised free market economy, their core activity is still focused on lending and investment. Today’s crisis is faced by banks and financial institutions due to difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delays in legal process. A significant portion of funds of banks and financial institutions is thus blocked in unproductive assets, the value of which keeps deteriorating with the passage of time.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was legislated as a panacea to the delay in legal process and with a blend of three different concepts of:
Under the SARFAESI Act, if a loan becomes a non-performing asset (NPA), i.e., if a borrower is in default in respect of payment of interest or any instalment of principle beyond a period of 90 days of such amount becoming due, then secured creditors are entitled to enforce the security interest created in their favour in accordance with the provisions of SARFAESI Act. The secured creditors are required to give a notice of 60 days describing the default and the measures proposed to be taken. The borrower is given an opportunity to make representation to secured creditors and the secured creditors, after giving reasons for rejecting the representation of the borrower under section 13(3A) take measures referred to in section 13(4) of the SARFAESI Act. The measures may include, as provided under section 13(2),take over possession of the secured assets or taking over the management of the business, appoint any person as manager, without the interventions of the courts to enforce the security interest. The exercise of power by secured creditors must be fair and reasonable as held in Mardia Chemicals Ltd. vs. Union of India [AIR 2004 SC 2371]. The Supreme Court has also observed that, the secured creditor must apply its mind to the objections raised to the demand notice in section 13(2). It is also necessary for the secured creditor to communicate the reasons for not accepting the objection raised by the borrower.
The Act also provides that, there can be simultaneous proceedings under Section 13 of SARFAESI Act and Section 19 of the Recovery of Debts by Banks and Financial Institutions Act as held in Transcore vs. Union of India [AIR 2007 SC 712], by approaching the Tribunal.
It is interesting to note that, the government steps into the shoes of a secured lender as a security interest holder, as far as the government dues are concerned under rule 13(9) of the SARFAESI Act. In Central Bank of India vs. State of Kerala (2009) 4 SCC 94, the Supreme Court dealt with the issue with regard to the statutory first charge created by various central and state laws will prevail over the claims of the secured lenders even while disposing of the assets under SARFAESI Act.
In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditor may take an action against such asset without consent in writing of at least 75% of the secured lenders. As per the principles of statutory first charges, the government becomes a security interest holder over an asset to the extent of unpaid taxes. This is automatic and without any need for registration of charges or any similar act of creation.
Section 69 of the Transfer of Property Act 1882, provides for exercise of power of the right of sale of mortgaged property without intervention of court of law, for realisation of mortgage debt in limited situation where there is (a) the mortgage is English Mortgage and neither mortgagor nor mortgagee is a Hindu, Muslim or a Buddhist; (b) Such a power of sale without court intervention is expressly conferred under the mortgage deed and the mortgage is government and (c) such a power of sale without court intervention is contained in mortgage deed and the mortgage property is situated in Presidency Towns of Madras, Calcutta, Bombay or any other notified town.
It is interesting to note that Section 13(1) of the SARFAESI Act begins with a non-obstante clause to the effect that the provisions of Section 13 have an overriding effect over the provisions of Sections 69 and 69A of the Transfer of Property Act 1882 which means that even though powers of sale without court intervention by the mortgagees are confined specifically to English mortgages, Section 13 will operate in all kinds of mortgage without involving interventionfrom any court of law or a Tribunal. Section 13 gives powers to banks and financial institutions to enforce their security interest; this is not restricted to mortgages only. It extends to all kinds of security interest created by way of hypothecation, assignment, pledges, mortgages and charges.
In my opinion, there is ample clarity on the issue of jurisdiction of civil courts in maintaining matters under SARFAESI Act. In the matter of Mardia Chemicals vs. Union of India (2004) 4 SCC 311, the Supreme Court while upholding the constitutional validity of SARFAESI Act also dealt with issue of jurisdiction and held that to a very limited extent the jurisdiction of the Civil Courts can be invoked and further specified the circumstances under which the civil courts will have jurisdiction. Of late, it was seen that many ofthe borrowers on receipt of notice under SARFAESI Act approach High Courts under civil writ jurisdiction challenging the action being taken by the secured creditor and many of the High Courts grant reliefs/stay as well. However, the Supreme Court in the matter of United Bank of India vs. SatyawatiTondon and Ors. AIR 2010 SC 3413, once again reiterated that a borrower who wishes to challenge the action of the secured creditor under the SARFAESI Act needs to approach DRT and the forum of writ jurisdiction of High Court cannot be invoked.
The issue of jurisdiction of the Civil Courts under Section 34 of the Act, was elaborately discussed in a recent judgment of High Court of Bombay in State Bank of India vs. ShriSagar s/o PramodDeshmukh& Others, CDJ 2011 BHC 176, wherein it was held that for all other disputes in respect of secured assets, which do not fall within the jurisdiction of the Debts Recovery Tribunal under section 17 or its Appellate Tribunal under Section 18, the Civil Court continues to exercise its jurisdiction. The court observed that even if the jurisdiction of the Civil Court is not barred under Section 9 of the Civil Procedure Code to decide other disputes in respect of secured assets, that cannot encroach upon the right of a secured creditor under Section 13 of the said Act, to enforce his security interest in respect of such property and the jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act, to protect such security interest of a secured creditor remains exclusive to the extent of the matters provided for under Sections 17 and 18 of the said Act. The court went on to hold that, a line of demarcation in this respect is required to be drawn to define the compact area of jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act and that the extent of jurisdiction of the Debts Recovery Tribunal under the said provision shall decide the extent of exclusion of the jurisdiction of the Civil Court to decide the dispute in respect of the suit property.
Section 13 of the SARFAESI Act stipulates that where a Borrower cannot be served through ordinary process of issuance of notice by post, the Borrower must be served through publication of notice in two newspapers; one in English language and the other in Vernacularlanguage. Therefore, in case the Borrower has not been served through post and notices have been returned undelivered, then the service of notice at the last known address of the address needs to be done through publication of notice in the aforesaid manner. It is always advisable for a secured creditor to check the records and see if the borrower / guarantors have intimated the Bank about change of address. If new address has been notified after execution of loan and security documents, then the Borrower must be served at the new address failing which the possibility of successful challenge to the securitisation proceedings cannot be ruled out. However, where a Borrower successfully proves that he has intimated fresh address to the Bank and despite that the Bank has failed to serve the notice at the new address, then DRT usually grants relief to the Borrower and shall quash the proceedings initiated by the Bank.
Drawing legal proposition from decided cases, sometimes, is impractical and also not advisable as far as the rights of the borrower vis-a-vis the powers of the Tribunal are concerned and hence each case is usually decided on its own facts. Especially, where DRTs treat themselves as courts of equity and treat the application filed by the Borrower under SARFAESI Act under equity and conscience; even if the Bank has taken all the lawful recourse to the proceedings, in many cases, depending upon the financial repayment capacity and other extraneous factors, DRT grant reliefs to the Borrower as the Borrower prays to the court that in the event their only property which is mortgaged to the Bank is re-possessed, he and his family members will render homeless. Therefore, except those cases where the mala-fide intention of the Borrower is proved to the satisfaction of the DRT, the DRTs usually allow the Borrowers time for repayment of outstanding amount. Having said that, it may be noted that in the above-referred recent judgment of State Bank of India vs. ShriSagar s/o PramodDeshmukh& Others, the Bombay High Court has laid down certain propositions as regards the jurisdiction of the Civil Court or DRT in respect of certain rights of the borrowers which can serve as a guiding factor.
It may be noted that, if a borrower after service of demand notice fails to discharge liability towards the secured creditor within 60 days the secured creditor is empowered to exercise any one or more of the rights mentioned in section 13(4) that includes power to sell, lease and assign for realisation of secured asset. The Security Interest (Enforcement) Rules 2002, at rules 4 to 7 deals with the procedure for taking possession of movable property and rules 8 to 9 lay down the procedure to be adopted for taking possession of the immovable property.
It may be kept in mind that generally the secured creditor in practice adopts a joint procedure for taking possession of and selling both the kinds of property together for apparent reasons of economy of time and money. But in a situation where more than one property is scattered at distant places and involved in enforcement of security interest, the properties may be taken possession of either jointly or separately as the case may be, if the secured debts to be realised by sale of one or more of theproperties only then the other remaining property may either be not taken possession or if repossessed already they may be de sealed, as the case may be. If the sale proceeds of the secured assets are insufficient to adjust the accounts, the secured creditor under Section 13(10), may file an application before the Tribunal or a suit before the civil court as may be applicable for recovery of balance amount from the borrower.
There is no provision in the SARFAESI Act to the effect that the secured creditor cannot recover its dues from 3rd party mortgaged assets until the property of the principal debtor is sold off. This is fortified by the judgement in Ashok Sharda vs. Small Industries Development Bank of India II [(2008) BC 466]. After the movable assets are taken possession of by the authorized officer of the bank, he has to keep them in his own custody or with the agent. In case the goods are of perishable nature the authorized officer is empowered to sell them at once which implies without following lengthy procedure otherwise applicable for sale of secures assets. In case of immovable property, the authorized officer of the bank shall prepare possession notice as per the rules and deliver a copy thereof to the borrower and fix it on the outer door of the property or any at any conspicuous place of theproperty. It is, however, a uniform practice among the secured creditors all over the country to include movable assets such as hypothecated stocks, goods, raw materials, etc., in general in possession notice and there is nothing in the Act or the Rules that bars it. The description of the hypothecated goods, plant, machinery etc., in the possession notice ensure transparency and better communication between the parties.
The scope and ambit of the SARFAESI Act or Securitization Act had been elaborately considered by the Apex Court in Mardia Chemicals Ltd. vs. Union of India, decided on 8th April, 2004, however the issue whether lenders could simultaneously proceed under the SARFAESI Act for cases that were already pending adjudication with the DRTs under the provisions of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act, 1993) was not decided in that case.
A dichotomy thereafter arose in judicial views taken by various High Courts whether a Bank or Financial Institution having elected to seek their remedy in terms of the RDDBFI Act for recovery could still invoke the provisions of the SARFAESI Act for realizing the secured assets without even withdrawing or abandoning the same. The question of proceeding simultaneously under SARFAESI Act and under the RDDBFI Act where proceedings or adjudication under the RDDBFI Act were already pending before the DRTs came to be settled by the Supreme Court by its decision of 2006 in Transcore vs. Union of India & Another. In Transcore’s case, the Apex Court inter alia held that the object of the SARFAESI Act and the RDDBFI Act (or DRT Act) is the same, namely recovery of debts. Conceptually, there is no inherent or implied inconsistency between the remedies provided under the two Acts and they are cumulative in nature for secured creditors. The Apex Court held that, though the RDDBFI Act is a complete code, the SARFAESI Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. The Apex Court further held that withdrawal of proceedings pending before DRT is not pre-condition for taking recourse to the SARFAESI Act. However, though the Apex Court in Transcore’s case considered the issue whether during pendency of an Application filed under section 19 of the RDDBFI Act, a Bank or FI could simultaneously proceed under the SARFAESI Act, the issue whether upon final adjudication of an Application under Section 19 of the RDDBFI Act could a Bank or FI proceed to initiate action under the SARFAESI Act apparently was not dealt with.
In my opinion once an Application under Section 19(1) of the RDDBFI Act has been finally adjudicated upon by the DRT, leading to issuance of a recovery certificate, its execution is provided under the RDDBFI Act itself i.e., Section 25 read with Section 29 and the second schedule of the Income Tax Act, 1961 and Certificate Proceeding Rules, 1962, thus a Bank or FI cannot thereafter invoke the provisions of the Securitization Act.
Section 34 of the Securitization Act apparently bars the jurisdiction of a civil court to entertain any suit or proceeding in respect of any matter which a DRT or DRAT is empowered by or under the Act to determine and no injunction shall be granted by any court or authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Securitization Act or the RDDBFI Act. The courts have laid due emphasis on Section 34 of the Act and have discouraged Civil Courts to entertain or interfere in matters where the Bank or FI has initiated action or measures under the provisions of SARFAESI Act. But, the Civil Court’s jurisdiction is not completely debarred even now in view of the observations in Mardia Chemicals case. Itmust be remembered that a DRT is not a Civil Court. It does not pass decrees. Where cases involve fraud, Civil Courts can still interfere. In my view, notwithstanding section 34, a Civil Court would continue to have powers to entertain suits in respect of matters falling directly or indirectly under the provisions of the SARFAESI Act if a remedy before a DRT is not available under Section 17(1) of the SARFAESI Act. However, it all depends upon the facts and circumstances of each case and there can be no hard or fast rule in this regard. In Mardia Chemicals case, the Apex Court noted that Civil Courts can be approached in a limited number of cases. The court illustrated that one of such event where the civil Court will have jurisdiction is where “the action of the secured creditor is alleged to be fraudulent or their claim may be so absurd and untenable which may not require any probe whatsoever or to say precisely to the extent the scope is permissible to bring an action in the civil court in the cases of English mortgages.”
The Apex Court in Mardia Chemicals case observed that the Appeal referred to in Section 17(1) of the Securitization Act was in fact not an Appeal and the word ‘Appeal’ was a misnomer. By amendment caused to Section 17 by Act 30 of 2004 the words “may prefer an appeal” as hitherto appearing in Section 17(1) came to be amended to read “may make an application…” The Apex Court further observed that, it cannot be denied that the lenders owe a duty to act fairly and in good faith and there has to be fair dealing between the parties and such lenders are not free to ignore performance of their part of the obligations as a party to the contract. The provisions of the Securitization Act, cannot be construed as a one sided affair shutting out all possible and reasonable remedies to the borrowers, the borrowers are not left remediless in case they had been wronged against all subjected to unfair treatment violating the terms and conditions of the contract. Borrowers can certainly plead deficiencies on the part of the Financial Institutions. The provisions of Section 17(7) of the Securitization Act provide that such Application filed under Section 17(1) of the Act shall as far as may be disposed of by the DRT in accordance with the provisions of the RDDBFI Act and the Rules made there under. The scope of an Application under Section 17(1) of the Securitization Act is not limited to adjudication as to the whether the measures referred to in Section 13(4) of the Act have been taken in accordance with the provisions of the Act and Rules framed there under.
The Madras High Court in Misons Leather Ltd. vs. Canara Bank in dealing with the scope of an Application under Section 17(1) of the Act upon considering the observations of the Apex Court in Mardia Chemicals case overruled the contention that the scope of Section 17 is restricted as to the compliance of the provisions of the Act and various other grounds such as demand of amount; failure to follow mandatory guidelines of RBI; offer of one time settlement; calculation of interest; nature of secured creditors and all other incidental questions could not be canvassed before a DRT in an Application under Section 17(1) of the Act. It further held that, it was open to a borrower/guarantor/mortgagor to demonstrate before the DRT that resort to Section 13 of the Act was not permissible by law. The Madras High Court also furnished illustrations where questions and issues could be raised for adjudication by a DRT in an Application filed under Section 17(1) of the Act. In a recent decision of a Division Bench of the Delhi High Court in M/s Ram MurtyPyaraLal& Others vs. Central Bank of India whilst considering the observations of the Supreme Court in Mardia Chemicals case, it was held that the DRT can look into all objections including the correctness in the outstanding dues.
I am in disagreement with those that seek to narrow down the scope of the adjudication by the DRT in an Application under Section 17(1) of the Act. The observations of the Apex Court in Mardia Chemicals case and the decision of the Madras High Court in Misons Leather’s case in my view leaves no room for confusion as to the scope of adjudication of an Application filed under Section 17(1) of the Act.
Before the verdict of the Supreme Court in Messrs Transcore vs. Union of India [AIR 2007 SC 712], there was confusion that possession under section 13(4) was a two-fold concept. It was symbolic when the authorized officer delivered and pasted a copy of the possession notice on outer door of the property leaving its physical possession in the hands of the owner and it became actual only when the property got vacated and sealed with the magisterial assistance. However, Supreme Court held that, the word possession is a relative concept. It is not an absolute concept. The dichotomy between symbolic and physical possession does not find place on the SARFAESI Act.
There is a conceptual difference between securities by which the creditor obtains ownership in the property concerned (mortgages) and securities where the creditor obtains neither an interest in nor possession of the property but the property is appropriated to the satisfaction of the debt(charges). Basically, the SARFAESI Act deals with the former type of securities under which the secured creditor, namely, the bank obtains interest in the property concerned. It is for this reason that, the SARFAESI Act ousts intervention of the courts. Section 13(4)(A) refers to the word possession simpliciter. There is no dichotomy on subsection 4A. The authorized officer of the bank under rule 8 has greater power than even a court receiver as security interest in the property is already created in favour of the banks which needs to be protected.
Therefore, rule 8 provides that till issuance of the sale certificate under rule 9, the authorized officer shall take such steps as he deems fit to preserve the secured assets. It is well settled that, third party interest are created overnight and inmany cases those third parties takes up the defence of being bonafide purchaser for value without notice. It is these type of issues that are sought to be avoided by rule 8 read with rule 9 of the 2002 Rules. In these circumstances, the drawing of dichotomy between symbolic and actual possession does not find place in the scheme of the SARFAESI Act read with the 2002 Rules.
When a mortgagor transfers immovable property by way of a mortgage to a secured creditor and agrees with the secured creditor in the loan documents not to transfer by way of lease etc., or otherwise deal with the property, he is bound by such stipulation in the loan documents. On sale of the property, the property has to be delivered by the authorized officer to the purchaser under rule 9(9) of The Security Interest (Enforcement), free from Encumbrances Rules. The physical possession can be taken by following the procedure laid down in Section 14 of SARFAESI Act. No eviction suit is required. The tenant could be removed by approaching Chief Metropolitan Magistrate or District Magistrate under Section 14 of the SARFAESI Act as held in BIB & Developers Ltd. vs Union Bank of India (2007) 2 Kerala Law Times 237.
The overriding provision of Section 35 of the SARFAESI Act effectively nullifies the rights normally admissible even to a tenant under the Lease and Rent Control Act as it can be only be subservient to a later Central enactment. If the borrower has inducted somebody overnight only to defeat the rights of the secured creditor then also the provision of the SARFAESI Act can be pressed into service for taking possession. However, if the secured asset is in possession of a bonafide lessee or tenant he cannot be thrown out by invoking Sections 13 and 14 of the Act. It is open to the mortgagee bank to sell the assets with tenancy intact. From a plain reading of Section 14 it manifests that it is a directing provision to overcome the hardships countered by secured creditors preventing them, to repossess the secured assets. The difficulty is faced by the secured creditor when stiff resistance is created by borrower, family, created tenants. The Chief Metropolitan Magistrate can remove the hurdle in the path of the secured creditor created directly or indirectly by defaulters and factors mentioned above. This section means that the necessary protection sought for by the secured creditor is provided to them by the Magistrate at an earliest on filing of the application by the secured creditor. The substantive provision entitling the secured creditor of taking possession of the secured assets is contained in Section 13(4), and Section 14 merely contains provisions to facilitate taking over of possession without any impediment.
At a glance at the statement of objectives of the SARFAESI Act, 2002 read with the decision of the Supreme Court in Madia Chemicals case [AIR 2004 SC 2371], it becomes clear that speedy recovery of Non Performing Assets of banks without involving intervention of courts of law in the process, is the mainpurpose behind the legislation, especially due to the delay before the Indian courts. It is true that the borrowers have got right and remedies under the Act, since under Section 17 the borrower can vindicate his grievance by making an application to the Debt Recovery Tribunal. The legislature under Section 17(5) stresses that an application under Section 17 should be disposed off by the Tribunal as expeditiously as possible within a period of 60 days which could be extended from time to time to 4 months from the date of filing the application which is apparently the maximum time given by the Parliament to the DRT for making final disposal of the application under Section 17. The proviso to sub-section 5 says that, Tribunal shall record reasons for grant of extension of time. If, for any reason, the application is not disposed off within extended period of 4 months, then either party can make an application to the Appellate Authority for the Tribunal for quick disposal of the application pending disposal before the Tribunal.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
