Is the relief provided to the really aggrieved under SARFAESI Act, 2002 effective?

I had the privilege of appearing in some cases under SARFAESI Act, 2002 both for the Banks and also for the debtors/guarantors. No citizen is allowed to say that they will take loan, execute documents and will not repay the loan to the Bank taking advantage of technicalities and the delay the process in Traditional Courts. As such, though the legislature has felt it necessary to enact a special legislation allowing the Banks to speed-up their recovery process and though the issue of Constitutional validity of the Debt Recovery Laws were challenged, the Apex Court has laudably held that the special enactments meant for speedy recovery or recovery of loan by the Banks are valid though certain observations were made pertaining to certain provisions of the Act. However, under the guise of special law, the rights of the ordinary people should not be ignored and the rights of the people/innocent owners are to be protected at any cost.

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short “SARFAESI Act”), the Bank can proceed with the recovery process and proceed with the property mortgaged as a security without recourse to traditional Civil Courts. Its true that the Bank may not be able to recover the money from the debtor or it may get unreasonably delayed if they have to approach the Civil Courts for recovery and consequential steps. Many know as to what happens in Civil Courts and many know as to how to delay a Civil Case for so many years. Under SARFAESI Act, 2002, the Bank itself determines the amount of debt when there is a default and proceeds with the property mortgaged in accordance with the provisions of the Act and the concerned regulations. The Bank makes a demand for payment, receives the reply if any, addresses the grievance of the debtor if required and if it is not satisfied with the reply, then, accordingly, the Bank proceeds with auctioning the property in accordance with law and thereby quickens the recovery process. Thus, the object of SARFAESI Act is really laudable if the law is implemented in letter and spirit. But, when there is a clear violation of statutory provisions or when the Bank proceeds against a property unreasonably using the provisions of SARFAESI Act, 2002, then, there should be effective remedy available to the innocent owner of the property. It is true that the Act itself provides a relief to the aggrieved to file an appeal challenging the steps taken by the Bank pursuant to the notice issued by the Bank under section 13 (2) of the SARFAESI Act, 2002, however, many feels that the remedy is not effective despite establishing a clear case against the Banks in many cases. It is also seen that the Debt Recovery Tribunal constituted under the Act which deals with the grievance of the aggrieved, passes conditional order many times while granting stay. It is true that in some peculiar cases, a conditional order can be passed, but, it has become routine as I have seen and heard from my colleagues at the Bar. What can an innocent owner do when he is not provided with an effective remedy against the Bank? He may hesitate to approach the High Court directly as many legal practitioners advice the aggrieved to approach Tribunal as it is likely that the High Court may not entertain a Writ Petition directly and in many cases such Writ Petitions are disposed giving liberty to the aggrieved to approach the Tribunal. It is really understandable and in such cases, the Debt Recovery Tribunal should really be effective and should not invite any criticism, but, everyone knows as to what happens in Debt Recovery Tribunals and Appellate Tribunals. Some presiding officers of the Debt Recovery Tribunals may adopt a different and right approach, but, every legal practitioner can tell or guess as to what happens before the Tribunal. There may be cases where the debtors may try to delay the recovery process by filing cases and nobody sympathizes in those cases and those cases to be dealt with very strictly.

It can not be said that the provisions of the special legislation to be implemented in letter and spirit without thinking at the consequences and it can not be said that the ultimate object of the enactment is to be taken into consideration while dealing with the cases challenging the action initiated by the Bank under SARFAESI Act, 2002. For example, with a very laudable object, the Chapter-XVII was introduced in Negotiable Instruments Act, 1881 making the act of dishonour of cheque an ‘offence’ though civil remedy is also available for recovery of money. Section 139 of the N.I.Act says that there would be presumption available in favour of the Complainant that the cheque is issued for discharging a legally enforceable debt. Despite such clear wording and special provisions dealing even with the procedure in cheque bouncing cases, the Courts have interpreted the provisions from time to time protecting the rights of the innocent and providing protection to the innocent against motivated harassment using the special law. As such, the rights of the innocent or the innocent owners or the debtors are to be protected under SARFAESI Act, 2002 and the remedy should really be effective and adjudication to be really logical. I have seen a wonderful judgment of a bench of Madras High Court comprising Hon’ble Mr.Justice F.M.Ibrahim Kalifulla & Justice N.Kirubakaran in W.P. No. 15272 of 2009. It was a case where the High Court has taken a serious view of procedural irregularities committed by the Bank using the provisions of SARFAESI Act and provided an instant relief to the aggrieved.

The reference to the legal position in the said judgment is as follows:

“The object of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto and the Act came into force on 17-12-2002. The Act aims at speedy recovery of defaulting loans and to reduce the mounting levels of non-performing assets of banks and financial institutions. The Act has been passed based on the recommendations of Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms and to consider the need for changes in the legal system in respect of these areas. The provisions of the would enable the banks and financial institutions to realise long-term assets, manage problems of liquidity and asset liability mismatches and to improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

For getting a decree in usual course before a Civil Court litigants including Banks have to file the suit before a civil court. After service of notice, written statement and trial, the suit would be decided by passing a decree. The decree would possibly be challenged by way of appeal upto Supreme Court and it would take about 5 to 15 years to attain finality. There would be possibility of dismissal of suit on various grounds. After the decree is passed by the competent civil court, the same would be put to execution by filing E.P. The Execution Court after service of notice would bring the property of the debtor/guarantor for sale through auction. To reach this stage, lot of money, especially very long time have to be spent. The above process is dispensed with by the Special Act "SARFAESI ACT" which is meant only for the financial institutions. As per the Act, the first step would be to issue notice U/s. 13(2) by the authorised officer who is deemed to be armed with a money decree which attained finality. By the statute the authorised officer, is clothed with powers of trial court and execution court and the code of Civil Procedure which governs the civil proceedings is no more necessary. To put it otherwise, by the Special Act, the authorized officer acts like a Civil Court clothed with powers hitherto exercised by it.

What the Honourable Supreme Court held in Mardia Chemicals Ltd., -Vs- Union of India reported in A.I.R. 2004 S.C.2371:(2004) 4 S.C.C.311, while upholding the validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) is as follows:

“The financial institutions, namely the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and the financing companies/institutions are not free to ignore performance of their obligation as a party to the contract. They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American Courts, in view of the facts and circumstances and the terms of the contracts and other details relating to those matters, that may or may not strictly apply, nonetheless, even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of concept of lender's liability. It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely, borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defence deficiencies on the part of the banks and financial institutions.”

The Supreme Court in Central Bank of India vs. State of Kerala and others reported in 2009 (4) SCC 94 restated the object of the Act as follows:

"44. Simultaneously, the jurisdiction of the civil courts was barred and all pending matters were transferred to the Tribunals from the date of their establishment. For some years, the new dispensation of adjudication worked well. However, with the passage of time, proceedings before the Debts Recovery Tribunals also started getting bogged down due to invoking of technicalities by the borrowers. Faced with this situation, the Government again asked the Narasimham Committee to suggest measures for expediting recovery of debts, etc. due to banks and financial institutions.

45. In its Second Report, the Narasimham Committee observed that the non-performing assets of most of the public sector banks were abnormally high and the existing mechanism for recovery of the same was wholly insufficient. In Chapter VIII of the Report, the Committee observed that the evaluation of legal framework has not kept pace with the changing commercial practice and financial sector reforms and as a result of this the economy has not been able to reap full benefits of the reform process.

46. By way of illustration, the Committee referred to the scheme of mortgage under the Transfer of Property Act and suggested that the existing laws should be changed not only for facilitating speedy recovery of the dues of banks, etc. but also for quick resolution of disputes arising out of the action taken for recovery of such dues.

47. The Andhyarujina Committee constituted by the Central Government for examining banking sector reforms also considered the need for changes in the legal system. Both the Narasimham and Andhyarujina Committees suggested enactment of new legislation for securitisation and empowering the banks and financial institutions to take possession of the securities and sell them without intervention of the court. "

5. The aforesaid Act clothes the authorized officer of the bank with enormous powers to deal with the secured assets to recover the outstanding amounts. Once the power is given, the Courts have held that the same has to be exercised in the way it is to be done and not otherwise. Here is a case where the first respondent/bank, contrary to the Act acted in whimsical and capricious manner and brought the property of the petitioners and sold the same to the fourth respondent in an ill-devised manner which is unknown to law.”

In the same judgment, dealing with the issue of availability of alternative remedy under the SARFAESI Act, 2002 before the Debt Recovery Tribunal, the High Court has laudably held as follows:

“With regard to alternative remedy, it is seen that there is a statutory violation by not issuing notice under Section 13(2) and 13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002. There is contravention of statute and violation of principles of natural justice and also violation of constitutional right to hold property as per Article 300A of the Constitution of India. It has been held by the Honourable Supreme Court in Vimala Ben Ajith Bhai Patel -Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right to property can be taken away only as per law and right to hold the property has been glorified as "Human Right".

That apart, it is well settled law that availability of an alternative remedy is not an absolute bar for exercising the writ jurisdiction and it is only a self-imposed restraint on its power. This has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs- Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of availability of alternate remedy miserably fails. The petitioners cannot approach the Tribunal, as the measures taken by the Bank were belatedly known to the petitioners and by that time the time prescribed under the Act was over. The Judgement in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact, justifies the contention of the petitioners. As per the judgement, Courts cannot extend the time limit prescribed by the Statute. As such the only remedy for the petitioners is to file a writ petition which has been rightly done by them.

The Tribunal is not competent to look into violation of fundamental rights and constitutional rights and this Court being a custodian of Constitutional rights is entitled to examine the matter. A Constitution Bench of the Honourable Supreme Court in its judgment in State of West Bengal and others -Vs- The Committee For Protection of Democratic Rights, West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of the Constitution of India can be exercised for enforcing any legal right conferred by a statute and it is further held that under Article 226 of the Constitution of India, the High Court has got more wider power than the Honourable Supreme Court. In Secretary Cannanore Muslim Educational Association, Kanpur vs. State of Kerala reported in 2010 (5) SCALE 184, the Apex Court held that the High Court is conferred with wide power to " reach injustice whenever it is found". Therefore as injustice is writ large and glaring, necessarily the judicial arm of this court has to reach there and it cannot be prevented by plea of availability of alternative remedy.”

In many cases, despite having a clear case, the aggrieved may hesitate to approach the High Court under Article 226 or 227 of Constitution of India looking at the ‘principle of availability of alternative remedy’, however, the Hon’ble High Court has deal with the issue elaborately in the judgment under reference and I am sure that the observation can not be overruled in my opinion.

Not only dealing with the law and laying down a guiding principle with regard entertaining Writ Petitions in respect of “SARFAESI Act” cases, the High Court has provided an effective remedy to the Petitioner and the relevant portion of the judgment is as follows:

”46. In this case the action of the bank officials resulted in loss to bank as well as to the guarantor, as the property ex-facie was allegedly sold for a very low price. It is common knowledge that it is very difficult to get a ground in and around Chennai for a price lesser than Rs.50 lakhs where as in this case a property measuring about 3168 ¾ sq. ft. in Ayanavaram was allegedly sold palpably at a very low price of Rs.33,50,000/-. As stated above, this Court orders high level inquiry to go into every aspect about the transaction involving bank officials, P.Md. Thahir and the bidders. Given facts and circumstances of the case, this court is prima facie convinced that violations were made with the connivance of Bank Officials the Bidders and P.Md.Thahir son of Sheik Mohammed, 309 "D" Block, East Cemetry Road, Chennai-600 021. Therefore this Court directs the respondent Bank to entrust the matter to an investigation agency preferably CB-CID who can investigate and proceed as per law.

47. For non-compliance of mandatory provisions of the Act, fraud, lack of fair play, bonafides etc., the entire proceedings initiated by respondent bank in favour of the fourth respondent gets vitiated and is hereby set aside. In view of the same, the fourth respondent is directed to hand over the possession of the property to the petitioner within 15 days from the date of receipt of a copy of this order.

48. There will be an order of exemplary cost of Rs.50,000/- (Rupees fifty Thousand only) payable by the respondents bank 1 to 3 to the petitioners within 15 days from the date of the receipt of a copy of this order. Consequently, connected M.P.No.1 of 2009 is closed.”

It is true that there can be inevitable complications in an Appeal before the Debt Recovery Tribunal and it is so where the property belongs to Company and many proceedings were pending against the Company. There can be liquidation in respect of the Company and in such cases; the Official Liquidator should defend the rights of the Company before the Tribunal. There can be a scheme pending for consideration before the High Court in respect of a Company and these issues complicates the cases before Debt Recovery Tribunal at times. But, in other cases, there can not be any complications and there should effective remedy available to the aggrieved if there is merit in the contention and I do strongly feel that the High Court is required to entertain Writ Petitions even in respect of “SARFAESI Act” if required and in exceptional cases. We know that there can be people to approach the High Court with ulterior motives and such cases can easily be dealtwith. But, there should be effective remedy to the innocent owners and the innocent owners should not get troubled with the irregularities committed by the Bank or committed by individuals with the involvement of Bank either directly or indirectly.

Thus, it is difficult to deal with the question as to whether the rights of innocent owners of property protected are under SARFAESI Act, 2002. But, no innocent should be troubled unnecessarily and without any relief. It is not correct to refer very frequently that the “Right to property” is not a Fundamental Right and High Court should not entertain Writ Petitions in respect of cases under SARFAESI Act, 2002 though caution is to be exercised.

Note: the views expressed are my personal and have no intention to insult any one or organization.