Clubbing of many loan Accounts/transactions – Bank’s ‘Right of lien’ – SARFAESI Act, 2002?

The enactment of ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ has facilitated an easy mode of recovery of loan for the banks where there is a ‘Secured Asset’ and it will definitely reduce the rate of ‘Non-performing Assets (NPA)’. Non-performing Assets (NPA) effect the functioning of the banking system in India. Just because the Banks face problems in recovering the dues, the interests of the borrowers can not be compromised and they should be provided with an effective remedy when there exist a genuine grievance. It can not be said that the Bank or the Secured Creditor will always be right and never commit mistakes or wrongs. An analysis of many judgments of Constitutional Courts on the provisions of SARFAESI Act, 2002 makes it clear that the Courts endeavored to maintain and preserve the balance between the object of the enactment and the rights of the borrowers. While there are many complicated issues under the provisions of SARFAESI Act, 2002, the issue of ‘clubbing of different loan transactions’ while proceeding under the provisions of SARFAESI Act, 2002 and the ‘Right of Lien’ available to the Bank under section 13 (7) deserves consideration and these are really complicated issues. It all depends upon the facts and circumstances of the case. Can the Bank be allowed to disturb the well maintained account of the borrower under the provisions of SARFAESI Act, 2002 due to the default of the borrower in respect of another completely different loan transaction? Can the Bank exercise ‘Right of Lien’ suiting to their convenience and needs though the Account on which the Lien is sought to be exercised is totally different loan transaction? Indian Contracts Act provides ‘Right of Lien’ and whether the same substantial law be applied even under the provisions of SARFAESI Act, 2002? These are some interesting and complicated issues.

If the borrower maintains two different accounts with the same security, then, the Bank may be allowed to proceed against the ‘Secured Asset’ even if the borrower makes default in respect of one account giving rise for invocation of the provisions of SARFAESI Act, 2002. Again, even in respect of two completely different loan transactions having separate secured assets, if the borrower defaults in respect of both the Accounts, for the sake of convenience, the Bank can proceed against the two loan Accounts simultaneously and in one proceeding as objection to these kind of proceedings would be technical in fact in my opinion. But, what if the Bank disturbs the Accounts of borrower on the ground of default in another completely different loan transaction and having a separate Secured Asset? These are not technical issues and these are substantial issues having significance.

Dealing with the ‘Right of Lien’ available to the Bank under Section 13 (7) of the SARFAESI Act, 2002 and referring to the law on ‘Right of Lien’ under Indian Contracts Act extensively, the Hon’ble Gujarat High Court, in Gaurangbhai Bipinbhai Pandya Versus Bank of Baroda, 2008 AIR (Guj) 1513, 2008 (2) GCD 1584, 2008 (2) GLR 1513, was pleased to observe as follows:

“(13) It deserves to be recorded that when the bank enforces its security interest under the Securitisation Act, it is clothed with the statutory power under the Securitisation Act. Therefore, the power so vested with the bank under the Securitisation Act, can be construed within the scope of ambit of such power only, and it cannot be mixed up with the rights, if any, with the bank pertaining to the different loan transaction, in different capacity based on separate agreement entered into for such purpose. If the language of section 13 (7) of the Act is considered, it provides that the secured creditor shall hold the amount in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received is required to be paid to the person entitled thereto in accordance with his rights and interests. Therefore, the secured creditor holding the money in trust, after recovery of the amount of costs, charges, expenses and the dues of the secured creditors and his dues, is required to return the residue of the money to the person concerned (the person whose property is sold or disposed of by the secured creditors). The use of the word in section 13 (7) “in absence of any contract to the contrary" would be applicable to the contract, if any, pertaining to such property or realisation of the security interest of such property, or to such contract incidental to the principal transaction of creation of security interest or realisation of security interest. Therefore under the act, such word "in absence of any contract to the contrary" cannot be related to any contract, which is not directly or indirectly concerned with such loan transaction, or a different contract all together pertaining to a different loan transaction, and the creation of separate security interest on account of such separate loan transaction. It is by now well settled that when any statutory powers are to be exercised by any authority or persons, clothed to exercise the power, such power can be exercised within four corners of conferment of such power. Any action beyond the scope of conferment of such power would be without jurisdiction or without any competence or authority. It further deserves to be recorded that when any power is conferred, such power can be read for taking any action, which may be incidentally required to be taken for exercise of such power, but it cannot be co-related or permitted to be transgressed beyond the scope and ambit of the very loan transaction, for which the security interest was created.

(14) Therefore, it appears that on a true construction of section 13 (7), the bank can exercise the right under the contract, if it is so conferred upon it by the loan transaction or the agreement pertaining thereto through which, the security interest is created or any incidental thereto. Such use of the language "in absence of any contract to the contrary" cannot be related to altogether different contract of different loan transaction or different property altogether.

(15) There are two additional circumstances, as expressly made clear by the legislature under section 13 (7) of the Act, one is that such amount is to be held by the secured creditors in trust, therefore, capacity to hold the amount is like the trustees, and the second is that it is mandated by the legislature by using word "shall be paid to the person entitled thereto" for payment of the residue of the amount. Therefore, in view of the specific word used by the legislature in the later part of the section 13 (7) so far as return of the money is concerned, the strict interpretation is called for and it cannot be inter mixed with the other rights of the secured creditors, pertaining to other contract of different loan transaction. It is hardly required to be stated that the person holding money in fiduciary capacity owes more responsibility and accountability, and he cannot inter mixed his personal rights to the money held by him in fiduciary capacity. Therefore, if the secured creditor who is holding the position of the trustee is required to retain money of the surplus amount, he cannot be permitted to retain money or appropriate money or permitted to exercise any so-called right based on separate transaction of loan of separate property, which is not concerned with the loan transaction in question for which the security interest was created, and is enforced by exercising power under Securitisation Act.

(22) IF Section 35 of the Securitisation act is read with Section 37 of the securitisation Act, there cannot be any second view than that the Securitisation Act, has the overriding effect over any other law for the time being enforced, if anything is inconsistent with the Securitisation Act. Therefore, if any rights are available other than under the Securitisation Act, then they are saved. If the right arises under the securitisation Act itself, the Securitisation act, is to be given precedence, and such rights would prevail over the other rights. When its a matter for enforcement of the rights under the Securitisation Act, it would equally be a matter for discharging of the obligation under the Securitisation Act, and the reason being that rights of the secured creditors under the Securitisation Act, are not the rights in absolute, but by way of inbuilt mechanism under the Act, it also creates an obligation as conceived and expressly provided under the Act. In view of the observations and discussions, the right is conferred upon respondent bank, as the secured creditor to realise money by disposal of the property, over which the security interest has created, and obligation is also by virtues of later part of Section 13 (7) to return the residue of the amount to the person concerned whose property is sold. Therefore, if the matter is covered for creation of the right and of obligation under the Securltisation Act, the same would prevail over any other rights created under any other law for the time being enforced.

(23) Hence, so-called right of lien of the bank under the Contract Act, for different loan transaction all together, cannot be read to dilute overriding effect of Section 35 of the Securitisation Act, as provided under section 35 of the Securitisation Act. Therefore, on reconciliation provisions of Section 35 and with Section 37 of the Securitisation act, read with the observations made by this court for obligation created with the secured creditor to return the money under Section 13 (7) of the Act, the contention of learned counsel for the respondent bank cannot be accepted for maintaining right of lien under the Contract Act, as against the provisions for obligation created under the securitisation Act.”

*** The analysis in the judgment referred to above did not consider the issue of Bank’s insisting for signatures on agreements having elaborate clauses and if those clauses are to be seen grammatically, then, the Banks will have absolute discretion with regard to ‘Right of Lien’.

Note: the views expressed are my personal and a view point only.