SARFAESI & DRT: Few important issues under SARFAESI Act, 2002 - II?

We all know the object of SARFAESI Act, 2002. There was a need to enable the Banks to speedily recover their loans and by approaching Civil Courts earlier, they could not effectively recover the loans and as a result Banks doing business with public money were facing enormous problems. It was in this backdrop and based on the recommendations of the committees, the “Recovery of Debts Due to Banks and Financial Institutions Act, 1993” was enacted enabling the Bank to approach the Special Tribunal called “Debt Recovery Tribunal” to get a declaration as to the outstanding due from the borrowers and to get the declaration executed. This is all a special mechanism and everybody knows this. As the Banks could not reduce their Non-performing Assets (NPA) even after enacting RDDBI Act, 1993, based on the recommendations of the Committee, “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” was enacted. Under the SARFAESI Act, 2002, Banks can follow a procedure to determine the outstanding due on their own and they will take such steps required in accordance with the Act in realizing their due. The procedure of making a demand by the Bank under section 13 (2) of the Act, entertaining objections, reply to the objections from the borrowers under section 13 (3A) within the prescribed time, taking symbolic possession of the property under section 13 (4), taking physical possession of the property/secured asset by taking assistance from the Magistrate under section 14 and conducting an auction of the property mortgaged in accordance with the provisions of the Act and rules, are well known now. The borrowers are provided with a right to appeal to the Debt Recovery Tribunal under section 17 of the Act if they are aggrieved at the action initiated by the Bank and the borrower can exercise their right of appeal as against any action by the Bank pursuant to section 13 (4) of the SARFAESI Act, 2002.

Though, the entire mechanism under SARFAESI Act, 2002 appeared to be clear, Courts had to interfere and deal with many complicated issues in the interests of the Bank and also the Borrower. I would say that, though there are some complicated issues even now, the Constitutional Courts did interpret the provisions of the Act well and many issues under the Act are now well settled. Few complicated issues under the Act in the past are as follows:

1. Is it mandatory for the Bank to reply to the objections raised by the borrower in response to the demand notice under section 13 (2)?

Now, it is mandatory to give a reasoned reply to the objections raised by the borrower and the Courts have rightly held in this regard. Under section 13 (3A), now, it is mandatory for the Banks to reply to the objections raised by the borrower within a time frame as prescribed.

2. Will the borrower loose his right to appeal under section 17 if he doesn’t prefer an appeal within 45 days from the date of receipt of notice under section 13 (4) of the Act?

This is really an important issue addressed by the Constitutional Courts. There was a confusion in this regard and now the Courts have consistently held that the borrower can question all the steps initiated by the Bank pursuant to section 13 (4). Borrower can question the ‘Sale Proceedings’ and can also challenge the order passed by the Magistrate Court under section 14 of the Act. Despite the clear wording in the provisions of the Act, the legal proposition in this regard is well settled now. This proposition is infavour of the borrower and it protects the rights of the borrower against the Bank.

3. Whether the High Court can interfere with the proceedings initiated by the Bank under the provisions of SARFAESI Act, 2002?

Definitely, there can not be any embargo on the jurisdiction of the Constitutional Courts under Article 226 of Constitution of India. However, in view of the object of SARFAESI Act, 2002 and availability of alternative remedy, the High Courts now consistently holding that the borrower is not supposed to come to High Court challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002. However, where the Bank is not correct clearly in classifying the account as ‘NPA’ which is preliminary to initiate proceedings under the provisions of SARFAESI Act, 2002, the High Courts do interfere with the action initiated by the Bank. Again, it depends upon the facts and circumstances of the case. The legal position in this regard is also settled to a great extent.

4. The powers of DRT under Section 17 of the Act?

Constitutional Courts have clearly held that the DRT has elaborate powers and it can even restore the possession back to the borrower in the event it find the action initiated by the Bank is illegal or incorrect. There is still confusion in my mind with regard to the powers of the DRT in adjudicating the due under section 17. One view is that the DRT can only look into the correctness of the procedure prescribed while entertaining appeal under section 17. The other view is that the Appeal under section 17 of SARFAESI Act, 2002 is like an original proceeding and the DRT can even adjudicate the due and can see the correctness in the outstanding due as arrived by the Bank. This requires little bit clarity in my opinion. On the issue of adjudicating the outstanding due under section 17, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487 has clearly held that the DRT can look all objections including the correctness in the outstanding due. In arriving at the conclusion, the Delhi High Court has also considered other landmark judgments of the various Courts including Supreme Court. The extract of the judgment of Delhi High Court as referred to is as follows:

“15. While we agree with the conclusion of the Full Bench in the Lakshmi Shankar Mills (P) Ltd. case however, we do not agree with the underlined observations in para 21 reproduced above that it is not necessary for the DRT to adjudicate the exact amount due to the secured creditor. In our opinion, this ratio of the judgment in the case of Lakshmi Shankar Mills (P) Ltd. (supra) seems to be in conflict with paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. & Ors. Vs Union of India & Ors. 2004 (4) SCC 311. The Supreme Court has clearly held in the case of Madia Chemicals Ltd. that the proceedings under Section 17 is in the nature of original proceedings and that even the amount which is claimed to be due to a bank/financial institution as stated in the notice under Section 13(2) can be challenged by the borrower. Paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. are relevant and the same read as under:-

“18. It is submitted that the mechanism provided for recovery of the debt under Section 13 indicated above does not provide for any adjudicatory forum to resolve any dispute which may arise in relation to the liability of the borrower to be treated as a defaulter or to see as to whether there has been any violation or lapse on the part of the creditor or in regard to the correctness of the amount sought to be recovered and the interest levied thereupon. On the other hand, Section 34 bars the jurisdiction of the civil court to entertain any suit in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. It also provides that no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act or under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Section 35 gives an overriding effect to the provisions of the Act over the provisions contained under any other law. The submission, therefore, is that before any action is taken under Section 13, there is no forum or adjudicatory mechanism to resolve any dispute which may arise in respect of the alleged dues or NPA.

54. Insofar as the argument advanced on behalf of the petitioners that by virtue of the provisions contained under sub-section (4) of Section 13 the borrowers lose their right of redemption of the mortgage, in reply it is submitted that rather such a right is preserved under subsection (8) of Section 13 of the Act. Where a borrower tenders to the creditor the amount due with costs and expenses incurred, no further steps for sale of the property are to take place. In this connection, a reference has also been made by the learned Attorney General to the decision in Narandas Karsondas V. S.A. Kamtam which provides that a mortgagor can exercise his right of redemption any time until the final sale of the property by execution of a conveyance. Shri Sibal, however, submits that it is the amount due according to the secured creditor which shall have to be deposited to redeem the property. Maybe so, some difference regarding the amount due may be there but it cannot be said that right of redemption of property is completely lost. In cases where no such dispute is there, the right can be exercised and in other cases the question of difference in amount may be kept open and got decided before sale of property.”

5. Powers of Civil Court in respect of the matters under SARFAESI Act, 2002?

The Courts have laid due emphasis on section 34 of the Act and discouraged Civil Courts to entertain or interfere in the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. But, Civil Court’s jurisdiction is not completely overruled out even now in view of the observations in the Mardia Chemicals case. Civil Courts continue having very limited jurisdiction in respect of mattes under SARFAESI Act, 2002. Where there is a fraud etc., Civil Court can interfere even in respect of the mattes under SARFAESI Act, 2002 and it is as per the observation in Mardia Chemicals case. However, another view is that the Civil Court will continue to have powers to entertain suits etc., in respect of the matters falling directly or indirectly under the provisions of the SARFAESI Act, 2002 and if a remedy before DRT is not available under section 17, then, the Civil Court can interfere and continue to have powers even in respect of the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. It all depends upon the facts and circumstances of the case and there can not be any hard and fast rule in this regard.

6. Sale proceedings under SARFAESI Act, 2002?

Practically, many borrowers think of approaching Courts seeking relief only when the Bank take steps to auction the ‘Secured Asset’. It is because, the borrowers, in many cases, continue having negotiations with the Bank Officials and it will consume lot of time. It is only when the borrowers feel that they may not get their dispute or grievance settled with the Bank, then, they will approach the Tribunal or the Courts. This is a very difficult situation. On one side, the Banks are to be allowed to proceed with the sale proceedings and supposed to confer title on the successful bidder or purchaser. Because, no purchaser would be willing to purchase the property in the auction if there would be a rider over the title of the property even when the entire consideration is paid. Again, even if the bidder takes the risk and bids for the property, there is a chance that the property may fetch lesser value and the Banks may have to compromise with their rights at times or borrowers may be the losers in some cases as the residue of the sale proceeds comes to the borrowers. This continues to be the complicated situation and it is laudable that the Courts have interpreted the provisions of the Act even at this stage in favour of the borrower. The borrower is provided with a right to even challenge the sale proceedings and can exercise the right of redemption if he succeeds in his appeal under section 17 and if the sale gets set-aside finally.

Dealing with the sale proceedings under SARFAESI Act, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487, was pleased to observe as follows:

“17. In view of the above, we hold that the right of redemption claimed by the petitioners will depend upon success of the proceedings initiated by the petitioners under Section 17 of the SARFAESI Act. In case, the petitioners finally fail, then it will not have a right of redemption, however, in case the petitioners succeed in the proceedings under Section 17 and orders are passed for setting aside the auction sale in terms of sub-section (2) to (4) of Section 17, then in such a case, it will be open to the petitioners to claim right of redemption. The conclusion which emerges is this that in case the borrower succeeds in its petition under Section 17, then, the DRT can pass orders under sub-sections 3 and 4 of Section 17 cancelling the auction sale proceedings. In case, the auction sale proceedings are cancelled because the action of the bank/financial institution is found to be violative of various provisions of the SARFAESI Act and the Rules framed there under, it is possible that a fresh auction may have to be conducted. In case a fresh auction of the mortgaged property has to be conducted then, a fresh date will be fixed for auction sale and it is at that stage that again Section 13 sub-section 8 will come into play and at which stage, the borrower can seek to exercise its right of redemption of the mortgaged property. Therefore, everything will turn upon the success or failure of the petitioners in the petition under Section 17 of the Act when the same reaches finality. Presently, the stage of the proceedings under Section 17 is that, and as already stated above, the same has been dismissed by the DRT and a statutory appeal under Section 18 is pending before the DRAT. Therefore, if the petitioners succeed in its appeal under Section 18 before the DRAT, the petitioners can exercise a right of redemption because fresh auction sale proceedings may have to be conducted and when so required to be conducted, once again a date will have to be fixed for sale/transfer/auction and before which date, the petitioners can seek to pay all the dues of the bank in terms of Section 13(8) of the SARFAESI Act.”

Note: the views expressed are my personal and a brief of few points only.