Can a Bank go back from the promise of ‘Settlement of Default of Debt’ or ‘Settlement of Debt’?

It is known that while some loan transactions with the Bank like Housing Loan, Educational Loan etc. are very simple, some commercial loan transactions are very complex in nature. The Bank may provide various loan facilities to the Borrower and most of these commercial loans are complex to understand and these loans infact involve many complexities. When a Businessmen or a Corporate gets various loan facilities and if there is a default or allegation of default with regard to a particular loan facility, the Bank proceeds against the borrower and claims for the settlement of entire outstanding debt in respect of all facilities. The Banks use the provisions of “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)” which appear to be draconian in some cases while the Act is justified from another angle.  Irrespective of the long standing relation of creditor and borrower, in some cases, the Bank may be unreasonable towards a borrower and may insist for recovery of the entire outstanding dues even if the borrower commits a default in respect of only one facility among many other facilities extended to the same borrower. The Bank may say that they will proceed ‘borrower-wise’ in classifying any Account as ‘Non-performing Asset’ and proceed with the recovery process under the provisions of SARFAESI Act, 2002. Banks or the officers concerned do exercise some discretion in this regard while the Bank or the officers are left with no discretion in respect of few other cases. The Bank has to follow the RBI guidelines and the RBI circulars having binding nature from to time. It is known that the Banks should follow the guidelines of ‘Asset Classification’ prescribed by the Reserve Bank of India in classifying any loan account as ‘Non-performing Asset’. The guidelines never intended to unnecessarily and unreasonably harass the borrowers. The guidelines refers to the significance of looking at ‘risk factor’, the ‘value of security’, track record of the borrower and even getting the loan Account updated though Bank usually follows their internal guidelines.

In some cases, the borrowers do not want to litigate the issues with the Bank and may try their level best to get the default rectified and may try to get the account settled finally under ‘One-time Settlement Scheme’. The Bank or the officers concerned in most of the cases maintain written or oral communication with the borrowers when there is default. The borrowers, in-turn, explains their difficulties in view of their long standing relationship with the Bank and may seek some relaxation and may seek indulgence of the Bank to rectify the default in repayment. This communication or negotiation happens before classifying any loan Account as “Non-performing Asset” and even after the classification of account as NPA and before initiating the proceedings under the provisions of SARFAESI Act, 2002. In some cases, the borrowers negotiate with the Bank for rectifying the default or for a ‘final settlement’ even after the issuance of demand notice by the Bank under section 13 (2) of the Act. This is the reason as to why there is delay on the part of the Bank in proceeding with the recovery under the provisions of SARFAESI Act, 2002 even after the issuance of demand notice under section 13 (2). When a borrower intends to avoid litigation, he may listen or act upon the oral understanding with the officials. Sometimes, the understanding for ‘rectification of default’ or ‘settlement of loan’ can be in writing also. While the ‘rectification of default’ is oral in most of the cases, the ‘final settlement of the account’ is in writing normally.

‘Settlement of Default of Debt/Regularisation’:

It is frequently alleged now-a-days by the borrowers that the Bank or the officers of the Bank agrees for the ‘settlement for rectification of default’, receives the money from the borrower and later-on, insists for the full settlement of the outstanding due. Inspite of updating the loan account, the Bank may choose to proceed under the provisions of SARFAESI Act, 2002 and may say that they are acting on the basis of classification and they never agreed for ‘regularizing the loan account’. This happens even after the demand notice issued under section 13 (2). Even after the demand notice, the borrower can negotiate with the Bank and the Bank may receive some substantial amount of money in-between and even then, suddenly may choose to proceed with the issuance of notice under section 13 (4). These are the usual allegations from the borrowers against the Bank when it comes to ‘regularization of loan accounts’.  The allegation in some cases is that the Banks goes back from their promise and in some cases, the Bank is not co-operating for regularization as even the RBI guidelines refer to the regularization if other factors like the track-record, risk-factor, value of security etc. are justified. Another thing is that the intention behind giving notice to the borrower under section 13 (2) of the Act is to invite objections if any. Law mandates the Bank to give a reasoned reply to the objections raised by the borrower under section 13 (3A). But, what happens is that the Banks agree for some kind of settlement either orally or in writing even after the issuance of notice under section 13 (2). Later on, after a gap of some one year and when the borrower makes the substantial payment, the Bank acts upon the demand notice and issues a possession notice under section 13 (4) of the Act. This is infact incorrect. If something notable has taken place with regard to the recovery of loan after the issuance of notice under section 13 (2) and if the Bank is silent in acting on section 13 (2) for a considerable time in view of the payments made by the borrower, then, it is incumbent upon the Bank to issue the demand notice afresh taking note of subsequent developments and this fresh demand notice under section 13 (2) of SARFAESI Act can give an opportunity to the borrower to include his objections afresh without taking a direct recourse to an appeal to Debt Recovery Tribunal (DRT) or without having to approach the High Court seeking intervention at times. But, this is not happening. In most of the cases, unless the Debt Recovery Tribunal sets the SARFAESI proceedings aside, the Banks do not issue demand notice twice under section 13 (2) and instead acts upon the demand notice issued earlier irrespective of time gap or lapse. These are the usual problems being faced by the borrowers in getting his or their account regularized or updated. The borrowers are infact left with no remedy in these cases as the scope of powers of DRT under section 17 of the Act does not include the power to give direction to the Banks to agree for regularization. These kinds of cases mostly come to High Court and the High Courts usually issues suitable directions noting the interests of the Bank and the rights and plight of the borrower.

‘Settlement of Debt/One-time Settlements’:

The second issue is with regard to ‘final settlement of debts’. In many cases, Banks are going back from their promise of ‘one-time settlement’. The Banks agree for ‘final settlement of account’ with the borrower. The Banks may ask the borrower to give an offer letter in a format and with some averments and then, the Banks will agree for settlement. When the substantial amount is paid, the Banks may say and are saying in most of the cases that the RBI guidelines do not allow them to get the account settled under ‘One-time Settlement’. Again, the Banks may say that the borrower has not disclosed all the facts with the Bank while coming forward with the ‘One-time Settlement Proposal’. Once the settlement proposal is agreed, the Banks will be very silent till the substantial amount is deposited with the Bank and finally, they can say that they do not have right to go for ‘settlement’ or can blame the borrower that he has not disclosed the whole facts.  These things do happen regularly now-a-days. The DRT normally do not look into these issues and the DRT may at best, look at the procedural irregularities if any and even the disputes pertaining to outstanding are not entertained as such though the DRT can look into those issues. The DRT normally goes with the stand taken by the Bank unless the Bank is apparently wrong in their approach. Public Sector Banks should concentrate on the recovery of money and at the same time, can not harass the borrowers who are willing to get their accounts regularized or willing to get their account finally settled. Even, the RBI guidelines hint at this. When there is security lying with the Bank and when original documents are with the Bank, the Banks pressurize the borrowers with all kinds of things and using the provisions of SARFAESI Act, 2002 to their advantage. The DRT in these cases proves to be ineffective and the borrower is not entitled to approach the Civil Court in these cases in view of the bar under section 34 of SARFAESI Act, 2002. Though there is a scope for the Civil Court to entertain even the SARFAESI related matters in some cases in a limited sense pursuant to the Mardia Chemical’s case, it is very difficult to persuade the Civil Court with regard to its jurisdiction in SARFAEI matters and this can be attributed to the lack of expertise on the part of the Civil Courts with the Securitisation Law.

Conclusion:

When there is a borrower willing to get his account regularized and willing for settlement, the Banks can not harass those borrowers. In most of the cases, where the borrowers allege wrong treatment or breach of promise on the part of Banks with regard to ‘settlement for regularization’ and ‘final settlement of outstanding due’, the borrowers do approach the High Court and in most of the cases, High Courts do justice to the Petitioner or the borrower keeping the interests of the Bank and borrowers in view. High Courts are very careful in interfering with the SARFAESI proceedings initiated by the Banks as it can not be seen as an alternative to the Debt Recovery Tribunals (DRTs). But, in fit cases, the High Courts may not agree with the arguments of the Banks with regard alternative forum and may exercise the jurisdiction under Article 226 of Constitution of India. 

The issue as to whether the Banks can go back from the ‘settlement of default’ or ‘settlement of loan’ will depend upon the facts of the case and especially the contents of written offer and agreement by the Banks.

Note: the views expressed are my personal. 

Points to be raised in a SARFAESI Appeal and getting relief?

It has almost settled and become like a regular practice for the borrowers to question the proceedings initiated by the Banks at the last stage under the provisions of “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. In fact, the law mandates that the aggrieved can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 within 45 days from the date of issuance of notice under section 13 (4) of the Act. However, as the process of recovery of money do not end at the issuance of section 13 (4) of the Act and as it is likely that the Bank can commit mistakes in the process and process even after the issuance of notice under section 13 (4), it is settled that the borrower is entitled to question all steps initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrowers have started questioning the Sale Process conducted by the Bank and also started questioning the order of the Magistrate under section 14 of the Act before the High Court regularly and as a result, the Courts have consistently held that the borrower is entitled to question all the steps initiated by the Bank under the provisions of SARFAESI Act, 2002. There is another point in this. If the borrower is silent even after the receipt of notice under section 13 (4) and do not prefer any appeal, there can be an argument from the Bank that there is nothing wrong in the proceedings initiated by the Bank till the notice under section 13 (4). If such an argument is accepted and if the borrower is silent even after the receipt of notice under section 13 (4) of the Act, then, the scope of Appeal preferred by the borrower at a subsequent stage gets narrowed-down. If the Borrower challenges the Sale Process only, the borrower may have to confine himself to the illegalities committed by the Bank in the Sale Process. However, if the borrower could offer some kind of explanation as to why he could not challenge the proceedings initiated by the Bank under section 13 (4) of the Act, then, he must be allowed to raise all the points in his Appeal under section 17 of SARFAESI Act, 2002.

When an Appeal is prepared or preferred under section 17 of the SARFAESI Act, 2002, there will be usual grounds with the intention of getting some time to repay the loan. The usual grounds are vague and are like:

1. The borrower is not a willful defaulter.

2. The classification of Account as ‘Non-performing Asset (NPA)’ is incorrect.

3. The interested charged is exorbitant.

4. No notice or caution is issued by the Bank before classifying the Account as ‘NPA’.

5. The outstanding claimed by the Bank is incorrect.

6. The value of the ‘secured asset’ mortgaged with the Bank is much more than the outstanding loan.

7. The Bank has not issued any notice or demand notice under section 13 (2) or 13 (4) of the Act etc.

These are the usual grounds in any SARFAESI Appeal preferred by the borrower under section 17 of the Act. As the law is settled that the procedure prescribed under the provisions of SARFAESI Act, 2002 is mandatory, the Debt Recovery Tribunal has to give a serious thought to the averment made in the Appeal that no demand notice is received by the borrower under section 13 (2) or 13 (4). If that is established, then, the Appeal deserves to be allowed straight-away and without any further enquiry. But, for knowing this, the DRT may give notice to the Bank to file their counter and to ascertain the truth. This process will take time as there will be a procedure for the paper work done legally in any Public Sector Bank. At times, it may take few months also.  In view of the averments in the Appeal that no notice is issued under section 13 (2) or 13 (4), the DRT may consider granting relief to the Appellant or the borrower. While doing so, the Debt Recovery Tribunal will consider the outstanding payable, the security and the averments with regard to the value of security mortgaged with the Bank.  In view of these practical and procedural difficulties, the DRT may be forced to grant an interim-stay of further proceedings initiated by the Bank and the DRT may insist that the borrower remits some deposit and usually it can be from 10% to 30% depending upon the discretion of the DRT. It all depends upon the averments made in the Appeal. It would be extremely difficult for the DRT to ascertain the facts by looking at the averments in the Appeal and if the DRT refrains from granting any interim-order, then, there is a possibility that the Bank proceeds with the process and even can complete the Sale Process at times creating some third party interest which will further complicate issues.

But, when a borrower is serious in raising objections in his appeal under section 17, those objections to be in detail and specific. If the grounds in an Appeal under section 17 of SARFAESI Act, 2002 are mechanical and vague, then, it is very much possible for the DRT to come to an easy conclusion that the Appeal is preferred only to drag the proceedings and nothing more. In those circumstances, as soon as the Bank files its counter affidavit answering all the allegations in the Appeal preferred under section 17, the DRT may dismiss the Appeal. If the Appeal grounds are so vague and mechanical, it would be very difficult for the borrower to bring any new or additional facts in any further appeal proceedings before the DRAT or to the High Court subsequently. However, if the borrower chooses to file an appeal challenging the possession notice issued by the bank under section 13 (4) and while the Appeal is pending if the Bank goes ahead with further process with infirmities and illegalities, then, the Borrower is entitled to bring those further infirmities and illegalities in the form of an additional affidavit in the Appeal. As such, when the borrower is serious in his attempt to fight with the Bank challenging the SARFAESI proceedings under section 17 of the Act, pleadings to be detailed and perfect rather mechanical and vague. Even the DRT may not give much weight to the Appeal and the equities beyond a certain point if the grounds raised in the Appeal under section 17 are so vague and mechanical.

There may be instances where the borrower is not interested to fight with the Bank and instead may want to update the loan account and he must even have taken steps to do that. Under such circumstances, if the Bank is unreasonable and proceeds with their proceedings, then, the borrower can very well stick to his stand very firmly that he is not willful defaulter, has a fairly good track record in repayment issues, has the valuable security lying with the Bank and can continue to insist that the Bank is illegal in not agreeing to update the Account. It is a very interesting point if this stand is taken before the DRT. The DRT is empowered with certain powers under section 17 while entertaining an appeal from the borrower or any aggrieved person. Initially, the function of the DRT is to look into the procedural lapses committed by the Bank and nothing more. Later-on, the Courts have expanded the scope of powers of DRT and held that the DRT can look into the disputes pertaining to the outstanding claimed and all other issues and the DRT is even empowered to restore the possession back to the borrower if the physical possession of the property is taken by the Bank already. However, the DRT continues to exercise very limited powers and due this also; many Writ Petitions are filed to the High Court and even on SARFAESI issues, the High Courts issue directions to the Bank very frequently. While the DRT exercises some limited powers, there can not be any limitation on the powers or the power to issue directions by the High Court from time to time under Article 226 of Constitution of India.

Irrespective of the powers of the DRT under section 17 of SARFAESI Act, 2002, the borrowers should take-up all possible legal points in detail to the extent possible. Only due to the confusion with regard to the powers of DRT under section 17, the borrowers continue to approach Civil Courts at times and continue to approach the High Court very regularly. There can be a case where the borrower admits the minor default in repayment, he must have been other-wise good in repayment issues and must have expressed his willingness to update his account without raising any kind of litigation. If such is the attitude of the borrower, then, the borrower may prefer to approach the High Court seeking a suitable direction to allow him to get his account updated as even the RBI guidelines permit that and cautions against unnecessary harassment to the borrowers using technicalities. If this kind of cases are taken to DRT, then, apart from the expenses involved, the procedure before the DRT is different and the procedure delays the efforts of the borrower to get his account updated and the DRT may finally choose to look into the issue as to whether there is any procedural irregularity on the part of the Bank under the Act. An account which should have been updated very easily, may end-up as ‘Non-performing Asset’ forcibly and can lead to long litigation with the DRT, DRAT, High Court and Supreme Court and more interim applications in-between. It will not benefit either the borrower or the Bank and the Bank must be with the intention that they can recover the legal expenses incurred from the borrower finally.

As such, the borrowers should be very clear in their approach and should be careful in raising objections in their Appeal under section 17 of the SARFAESI Act, 2002.  

Note: the views expressed are my personal.

Considering ‘VALUE OF ASSET’ in SARFAESI matters?

It has become very easy in most of the cases for the Bank now to recover their dues under ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. Under the Act, the Bank classifies the loan account as ‘NPA’ as per the RBI guidelines, gives a demand notice under section 13 (2) of the Act asking the borrower/s to pay the entire outstanding, deal with the objections if any from the borrower/s under section 13 (3A), will take the symbolic possession of the property under section 13 (4), proceeds with taking the physical possession of the property with the police assistance etc. under section 14 if there is resistance in taking physical possession of the property and then, proceeds with auctioning the property in accordance with the provisions of SARFAESI Act, 2002 and connected rules. Unless the Bank is at fault at the time of sanctioning the loan and unless the Bank commits procedural irregularity, in most of the cases, Bank succeeds with its efforts to recover the dues under SARFAESI Act, 2002. There are several critical and complex issues under SARFAESI Act, 2002. There were many judgments of Courts interpreting the provisions of SARFAESI Act, 2002 and guiding the Banks in acting under the provisions of SARFAESI Act, 2002.  Despite providing a right to the borrower/s or aggrieved to approach Debt Recovery Tribunal under section 17 of the Act challenging the action initiated by the Bank under SARFAESI Act, 2002, many do feel that the remedy provided to the borrower/s under section 17 and also appeal provision to file an appeal to DRAT is not effective. There is still a big question mark at the effectiveness of the procedure being followed by the DRT and the powers of DRT. Powers of DRT are well settled now with the judgments of Supreme Court and these powers now extend to the extent of ordering re-possession and a power to look into the disputes pertaining to calculation of ‘outstanding’. While some seek for examination and cross-examination of Bank officers in a proceeding before DRT, it also to be considered that if that practice is usually followed, then, DRT can become another Civil Court. Another important fact is that there is tremendous work-pressure on the Presiding Officers (PO) of DRT & DRAT while the parties expect the Presiding Officers to listen to them in-detail. These are all real issues under SARFAESI Act, 2002.

It is settled now that the RBI guidelines governing the ‘classification of accounts’ and related treatment are mandatory.  Few basic things in the RBI guidelines related to NPA’s and its treatment as per the updated guidelines issued in RBI/2012/13/64 dated 2.7.2012 are as follows:

Identification of NPA’s:

“2.1.2 With a view to moving towards international best practices and to ensure greater transparency, '90 days' overdue” norms for identification of NPAs have been made applicable from the year ended March 31, 2004. As such, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance where:

(i)  Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan.

(ii) The account remains 'Out of order’ for a period of more than 90 days, in respect of an Overdraft / Cash Credit (OD/CC).

(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.

(iv)  In the case of direct agricultural advances as listed in Annex 1, the overdue norm specified at para 2.1.5 would be applicable. In respect of agricultural loans, other than those specified in Annex 1, identification of NPAs would be done on the same basis as non-agricultural advances.

(v) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.”

Treatment of NPA’s & record of recovery:

“2.2.1.(i) The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA.”

Few basic considerations for classification of Assets:

“3.3.1. (i) Broadly speaking, classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation of dues.

(ii) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security and existence of other factors such as, frauds committed by borrowers, it will not be prudent for the banks to classify them first as sub-standard and then as doubtful after expiry of 12 months from the date the account has become NPA. Such accounts should be straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.”

Important issues underlined in the RBI guidelines:

1.     RBI guidelines specifics as to the parameters to be applied with regard to classification of accounts and its treatment.

2.     If the record of recovery is good and if the risk of loss is less due to the value of security, then, the Bank should be cautious in classifying the account as ‘NPA’.

Apart from these guidelines, RBI issues guidelines through circulars to the Banks from time to time taking stock of many issues. Certain circulars or guidelines can be industry specific.

Consideration of ‘value of asset’:

Obviously, there can not be any risk of loss to the Bank if the value of security provided by the borrower/s is much more than the outstanding. If there are no serious complaints against a particular borrower and if he commits default and expresses his willingness to update the account and if the value of the security is intact and much more than the outstanding, then, Banks can certainly accommodate the requests from such borrowers. It is very frequently complained that the Bank is not accommodative to the borrowers even when the value of security is more and the Bank mechanically follows the RBI guidelines with regard to classification of account as ‘NPA’.   There can not be any justification as to why the Banks can not be accommodative to the temporary problems of the borrowers in remitting the dues as agreed where the value of security is much more than the outstanding.  Banks show more eagerness in disposing the asset than providing an opportunity to the borrower to regularize or to update his or her account.

Ascertainment and establishing the ‘value of asset’ can also be very difficult for the borrower.  Apart from the valuation report submitted by the borrower or obtained by the Bank while sanctioning the loan, it would be very difficult to establish the current market-value of the property while the Bank knows as to how to get the valuation reports and fix ‘reserve price’ and dispose of the property.  When the value of security provided by the borrower/s is much more than the outstanding due, then, definitely, Bank can go slow and accommodate the request of the borrower seeking time to update and regularize as ultimately Bank can realize the entire outstanding with interest, penal interest and also legal expenses.  But, when the Bank proceeds with its action under SARFAESI Act, 2002 and if the borrower challenges the action under section 17, can the DRT consider the ‘value of asset’ or ‘realisable value of asset’ for granting some relief to the borrower or the appellant is another important issue. According to me, DRT can certainly consider the ‘value of asset’ also apart from other considerations while granting or rejecting the relief sought by the borrower. It has become a practice in Debt Recovery Tribunals as many say that the Tribunals mandate the borrowers to make some deposit in order to get relief and there is a statutory provision of depositing 50% of the outstanding with the DRAT if the borrower chooses to prefer an appeal against the order of DRT. This procedure and practice makes it very clear that the object is to allow the Banks to recover their dues.  Consideration of ‘value of asset’ is more important for the borrowers as ultimately borrower suffers if the asset is sold in an ‘auction’ for a meager price. It is a known fact that there can be clear gap between the prevalent market-price of an asset and the price for which the property is sold in a ‘public auction’ conducted by the Bank under the provisions of SARFAESI Act, 2002. It is certainly the risk and responsibility of the borrowers to establish the price of property and to establish the difference between outstanding due and the market value of the property. It is infact difficult thing to do for the borrowers in many cases.

Courts now have made it very clear that even the ‘Auction Sale’ under the provisions of SARFAESI Act, 2002 can be a subject matter of an appeal under section 17 and the DRT or the High Court under Article 226 can set-aside the sale in appropriate cases. But, frequently getting the ‘Auction Sales’ set-aside under SARFAESI Act, 2002 is not a good trend and it can affect the credibility of the Bank auctions under the provisions of SARFAESI Act, 2002 and the bidders consider lot of risk factors while bidding for a property and it can result in a situation where the bidders are careful and careful in locking their deposits with the Bank. Very delicate balance is to be done on these issues while interfering with the ‘Auction Sales’ though it is also the responsibility of the bidders to do their own assessment of the issue by getting fullest possible information from the Banks and doing their own enquiries as the Bank sells the property with ‘as and where condition’.  How the DRT considers the value of asset while deciding the relief sought by the borrowers under section 17 and how the DRT or the Court looks into the objections with regard to valuation of the property is a matter for detail and no ‘hard and fast rule’ can be laid in this regard. However, keeping the interests of the borrowers and the public interest in consideration, the Act and rules provide detailed procedure to be followed in conducting ‘auctions’ and the procedure is summed-up by Madras High Court in a recent judgment of A. Varalakshmi Vs. The Chief Manager Punjab National Bank reported in CDJ 2012 MHC 3240 and the relevant portion of the judgment is as follows:

“18. Once the possession of the secured asset has been taken by virtue of the provisions of the SARFAESI Act, in terms of sub-rule (5) of Rule 8 of the Rules, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of the immovable secured asset by any of the following four methods viz., (a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or (b) by inviting tenders from the public; (c) by holding public auction; or (d) by private treaty. Sub-rule (5) of Rule 8 refers to effecting of sale of immovable property as contemplated in sub-rule (1) of Rule 9 of the Rules. Sub-rule (1) of Rule 9 provides that no sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower. Rule 9(1) refers to the proviso to sub-rule (6) of Rule 8, where it states that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers; one in vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall include (a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor; (b) the secured debt for recovery of which the property is to be sold; (c) reserve price, below which the property may not be sold; (d) time and place of public auction or the time after which sale by any other mode shall be completed; (e) depositing earnest money as may be stipulated by the secured creditor; (f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property.

19. A combined reading of the above provisions would show that in the event the authorised officer intends to sell the secured asset by inviting tenders from the public in terms of sub-rule (5)(b) of Rule 8 or by holding public auction in terms of sub-rule (5)(c) of Rule 8, he shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale as indicated earlier in terms of the proviso to sub-rule (6) of Rule 8. This provision is intended for the purpose that when the sale is to be effected by inviting tenders from the public by holding public auction, the public must be made aware of the description of the immovable property, the details of the encumbrances, the secured debt for recovery of which the property is to be sold, reserve price, time and place of public auction, deposit of earnest money and other conditions which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the secured asset. The said proviso to sub-rule (6) of Rule 8 is mandatory in the event the authorised officer intends to sell the secured asset by inviting tenders from the public by holding public auction. One more condition for such sale is that in terms of Rule 9(1), no sale of immovable property shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers by virtue of the proviso to sub-rule (6) or notice of sale is served to the borrower. To this extent, there is no dispute.

20. However, in the event the authorised officer intends to sell the secured asset by the above two methods by fixing the reserve price and if he fails to obtain a price higher than the reserve price, he shall effect the sale at such price which is consented by the borrower in terms of the second proviso to Rule 9(2) of the Rules. The authorised officer has two options. In the event the authorised officer fails to obtain a price higher than the reserve price and in the event the consent of the borrower is obtained, he can sell the secured asset at such price for which the borrower has consented by following the procedure enumerated in sub-rule (5)(b) and (c) as well as sub-rule (6) of Rule 8. The consequential question would be in the event the consent of the borrower could not be obtained, namely, when the borrower refuses to give consent, what would be the procedure to be adopted by the authorised officer? In the event no consent could be obtained, he cannot resort to sell the property either by obtaining quotations or by private treaty and has no other option except to resort to sale by public tenders or public auction. In this context, a reference also can be made to the first proviso to Rule 9(2) of the Rules providing that no sale under the rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of Rule 9. Only for that reason, the second proviso requiring the consent of the borrower has been made. This issue will be considered in point no.(3). As far as the first question is concerned, in the event the authorised officer fails to obtain a price higher than the reserve price, he cannot sell the secured asset for a lesser price than the reserve price without the consent of the borrower. The said issue came up for consideration before a Division Bench of this Court in K.Raamaselvamand others v. Indian Overseas Bank, Aminjikarai Branch and another, AIR 2010 Madras 93, where the Division Bench held as follows:-

"12....It is crystal clear from the present stand taken by the borrower that there is no consent for confirmation of such sale. As a matter of fact, the Authorised Officer has never bothered to find out from the borrower whether he was willing that the sale should be confirmed, despite the fact that the Authorised Officer had failed to obtain a price higher than the reserve price.

14. We do not think that in view of the clear language in the second proviso, such a contention can ever be countenanced. In fact, the first and second provisos contemplate the situation that if the bid amount is less than the reserve price, such a position is covered by the first proviso and if the bid amount is more than the reserve price, the situation is contemplated in the main provision. However, if the Authorized Officer fails to obtain the price higher than the reserve price, with the consent of the borrower, the sale may be confirmed only after the borrower and the secured creditor give their consent. By no stretch of imagination, it could be construed that even if the Authorised Officer fails to obtain price higher than the reserve price, he may, confirm the sale without obtaining any consent from the borrower or from the secured creditor."

What if the borrower fails to give consent?

21. Point No.(3): This question relates to a situation when the borrower refuses to give consent to the authorised officer to sell the secured asset for less than the reserve price and the authorised officer decides to sell the secured asset by private treaty. The power of the authorised officer to sell the secured asset by private treaty is beyond dispute, as it is one of the methods contemplated for sale of immovable property in terms of Rule 8(5) of the Rules. However, in the event the authorised officer decides to sell the secured asset by private treaty, such sale should be strictly in conformity with Rule 8(8) of the Rules. The said sub-rule states that “sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing”. When this rule mentions the sale by any methods other than public auction or public tender, it conveys two things, namely, in the event the sale is made through public auction or public tender in terms of Rule 8(5)(b) and (c), the provisions of sub-rules (6) and (7) of Rule 8 would be attracted. In the case of any other sale, the provisions of Rule 8(5)(a) & (d) would alone be attracted. As a consequence, a sale by private treaty must be on such terms as between the parties in writing. The word “parties” came up for consideration before a Division Bench of this Court-Madurai Bench in J.RajivSubramanian and another v. M/s Pandiyas and others, AIR 2012 Madras 12, where the Division Bench held as follows:-

“33. The first question for our consideration is as to what are the formalities to be adopted when invoking private treaty and effecting a sale on that basis. In this connection, it would be worthwhile to refer to Rule 8(5) of the Security Interest (Enforcement) Rules, 2000 which reads thus:

"5. Before effecting the sale of the immovable property referred to in sub-rule (1) of rule 9, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:

a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or

b) by inviting tenders from the public;

c) by holding public auction; or

d) by private treaty."

As per the private treaty, other than public auction or public tender, it can be settled between the parties invoking as per Rule 8(8) of the Security Interest (Enforcement) Rules, 2002. The sale of properties by private treaty is also permissible in law. The only condition is that it shall be on such terms as settled between all the parties in writing. From this, it is clear that the presence of debtor and his willingness in writing are essential.”

Note: the views expressed are my personal

Effect of improper presentation of ‘SARFAESI APPEAL’?

It is alleged that the Banks or the officials of the Bank often misuse the provision of ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002)”. It is also alleged that the Bank officials help some clients/borrowers using all technicalities and their expertise in financial matters. While the Bank officials help few, they tend to be very perfect and sincere in respect of other cases where there is enough security and where the default is negligible and can be corrected. I don’t think that the guidelines of RBI with regard to ‘Asset Classification’ are one-sided. RBI guidelines with regard to ‘Asset Classification’ are balanced and never intended to harass the borrowers who have got a very good track-record in repayment otherwise. It is true that the officials dealing with ‘classification of accounts’ and officials dealing with the recovery tend to exercise some kind of discretion and it is alleged that the actions of the Bank officials in some cases are biased. On the same footing, it should also be recognized that it would extremely difficult for the Bank to recover their dues and reduce their ‘Non-performing Assets’ without the aid from a special law like SARFAESI Act, 2002. There are people who are very much experienced in dealing with the legal issues and they know as to how to find loopholes in law and make use of the loopholes to their advantage. It is known that a borrower can challenge the action initiated by the Bank by filing an appeal under section 17 of the SARFAESI Act, 2002 with the Debt Recovery Tribunal and an appeal is also provided with the Debt Recovery Appellate Tribunal. While the Act provides a right to the borrower to challenge the possession notice issued by the Bank under section 13 (4) within a time-limit, it is now settled that all actions initiated by the Bank under the provisions of SARFAESI Act, 2002 can be challenged with the Debt Recovery Tribunal under section 17. This observation is quite often seen when the High Court deals with a Revision Petition challenging the Civil Suit filed by the borrower in respect of SARFAESI proceedings and when a proceeding like Writ or Civil Revision Petition is filed by the borrower challenging the order passed by the Chief Judicial Magistrate under section 14 of SARFAESI Act, 2002. Though technicalities to be ignored by the Debt Recovery Tribunal while entertaining an Appeal under section 17, there is logic as to why the borrower should be allowed to challenge all actions initiated by the Bank. The Bank might be right in their actions till the issue a possession notice under section 13 (4) of the Act and the borrower may have no major grievance with the Bank. Thereafter, the Bank’s action might be illegal with regard to conduct of sale of the property. Under those circumstances, there is no way except to allow the borrower to challenge the illegality by filing an Appeal under section 17 and it is in line with the object of section 34 of the Act and the judicial pronouncements that where there is an effective alternative remedy, a Writ Petition under Article 226 is not maintainable. The reasons behind High Courts entertaining Writ Petitions frequently even in respect of SARFAESI proceedings now-a-days is a different issue though it is settled that there can not be any absolute bar on the jurisdiction of High Court under Article 226 of Constitution of India.

While this is the brief back-ground of a SARFAESI proceedings being initiated by the Banks or Public Sector Institutions, the manner in which the borrowers or the aggrieved pursues his/her challenge under section 17 of the Act is another significant issue. In most of the cases, appeals under section 17 are filed mechanically and with vague grounds like the notice under section 13 (2) of the Act has not been received, objections are not considered by the Bank properly, account has never become NPA, the borrower is not the willful defaulter etc. As the Bank will be proceeding with their action under SARFAESI Act, 2002 once they initiate the proceedings and issues notice under section 13 (2) and 13 (4) of the Act, the Debt Recovery Tribunal grants an interim-stay of the proceedings and may ask the borrower to deposit some percentage of the outstanding-claimed with the Tribunal. Thereafter, the Bank takes its time as it should follow some procedure and co-ordinate its efforts among its officers, and then, files a reply/counter to the appeal. The Bank in most of the cases insists that they have followed the procedure correctly and in most of the cases, Bank succeeds in an appeal under section 17. The borrower may continue his fight with the Bank and his intention may not always be to evade the payment which he can not do if there is a security. But, the borrower may have to follow-up his case properly and may have to bring all actions of the Bank to the knowledge of the Debt Recovery Tribunal from time to time and he may have to resort to many proceedings at times.  

The borrower may have got a very good point to raise or may have a reasonable and legally acceptable objection to the proceedings initiated by the Bank under SARFAESI Act, 2002.  If the borrower fails to bring the true picture to the knowledge of the Court or the Tribunal and takes-up mechanical grounds only for the purpose of getting instant relief, the borrower may have to suffer a lot in the course. If the borrower takes all mechanical grounds and initiate all kinds of proceedings with the intention of getting some kind of instant relief, then, finally, when the real issue comes, he may loose the case. When borrower initiates many proceedings with the intention of gaining some time and getting instant relief, and then if he has real issue with the ‘Auction proceedings’ and choose to challenge the ‘auction sale’, then, the Bank will plead and show the track-record of the borrower from the beginning and it can impact the decision-making by the Court or the appropriate forum.  The borrower may be having a point that his property worth 1 crore is being sold for a meager sum of Rs.10 lakhs, and even then, his appeal or challenge may not have much value or weight if the Bank establishes that the borrower wants to drag the matter continually, and then, the Bank will be showing all the previous proceedings and the grounds taken and pleaded by the borrower in his appeal under section 17 and in various proceedings.  If the borrower continues to take-up mechanical grounds or grounds which are not reasonable and legally acceptable, and still initiates various proceedings, then, there can be some observation by the Court or the Tribunal that the borrower intends to only drag the proceedings and wants to delay the process of recovery. These kinds of observation can prove to be disastrous for the borrower and when needed and when there is a good point to raise and challenge, he may not be able to effectively raise and convince the court or the forum dealing with the issue. Few important issues in this regard are as follows:

(a)     Maintain written communication with the Bank and the proof of communication. In most of the cases, written communication is not maintained and the borrower acts upon the oral communication with the officials.

(b)     Though it is difficult to question the Bank officials especially by the business people having many transactions and facilities with the Bank, once the Bank issues demand notice, it is advisable for the borrower to raise all his objections and points as to why his account should not be classified as ‘Non-performing Asset’ and all his grievances with the Bank.  This is not happening in most of the cases and instead, the borrowers are taking a stand in their appeal under Section 17 that they have not received the demand notice under section 13 (2). According to me, this is not correct though the Tribunal may grant instant relief at times if this ground is taken, but, it will go against the borrower once the Bank files their reply or counter.

(c)      The borrowers should take all grounds and raise all issues in their appeal under section 17. Not only taking all grounds and raising all issues, it is in the interests of the borrowers to bring to the knowledge of the Tribunal about the objectionable actions of the Bank during the pendency of the Appeal. The DRT, at times, may be saying that the Appeal has become infructuous etc., if the challenge is made to section 13 (4) notice and the Bank proceeds and completes further course of action. This approach is not right as the borrower can not be asked to come again and again and file appeal after appeal in respect of the proceedings initiated in a particular account. Once the appeal is filed and pending, the DRT should look into all the issues and issues subsequent to filing of Appeal. The borrower should bring everything to the knowledge of the DRT through affidavits. If the borrower fails to do this, then, it would be extremely difficult to plead new facts and to file other additional documents at an appellate stage.

(d)     The borrower should restrain initiating various proceedings unless there is a strong legal basis. If the borrower initiates various proceedings against the Bank in-respect of the same account and if the borrower fails to convince the forum to get relief, then, the Bank can plead that the borrower is a habitual litigant and his only intention is to drag the case and nothing more. This kind of track-record of the borrower may go against him at an important stage in the case and especially when the property is being disposed of by the Bank. If there is a legally acceptable approach by the borrower to the SARFAESI proceedings initiated by the Bank, then, the Court or the forum can appreciate his points on the value of security, objections to the valuation and can provide some kind of relief. Courts can also provide relief to the borrowers at times to get a good price for the property instead of supporting the auction process initiated by the Bank or allowing the Bank to proceed with the Sale process. If the DRT or the Court only stays the confirmation of Sale, it can never be seen as a relief to the borrower as he has to establish a clear case in his main appeal or has to pay the entire out-standing irrespective of his objections to the proceedings initiated by the Bank. If the Court dealing with the ‘SARFAESI Auction’ is convinced at the argument of the borrower, then, the Court or the forum can straight-way stay the auction process instead of allowing the auction and staying only ‘confirmation’.

(e)     There can be cases where the  borrower looses very valuable property for a lesser outstanding payable and everyone knows as to the price for the property in ‘Bank Auctions’ in most of the cases. If the borrower raises legally acceptable or considerable grounds, it is likely that the Tribunal or the Court may consider his case sympathetically on other issues as it is likely to consume some considerable time to complete the entire ‘SARFAESI proceedings’ once initiated.

Thus, raising mechanical and vague grounds in an appeal by the borrower under section 17 may provide him some instant and temporary relief in the case, but, he will loose the case when required. Certain things can only be vague like ‘classification of account’ as it is a bigger issue and requires the interpretation of RBI guidelines, but, to the extent possible the borrower should raise all his points in his appeal, should bring all facts and developments to the knowledge of the Tribunal in his appeal and should file all the relevant documents at once. If the borrower is seen as sincere in filing an appeal and pursuing the case with the Bank under section 17 of SARFAESI Act, 2002, then, it can only benefit the borrower in the proceeding when required.  The Tribunal or the Court will have an impression on the petitioner or the party before it based on the pleadings and based on his conduct of proceedings.

Note: the views expressed are my personal.

Approaching DRAT in SARFAESI matters appears to be very costly?

Under the provisions of ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ in short), the Bank can invoke the process of recovery of money on its own without any adjudicatory process. The Banks can proceed with the enforcement of ‘security’ under the provisions of SARFAESI Act, 2002. If any borrower or any person is aggrieved with the action initiated by the Bank under the provisions of SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal (DRT) under section 17 of the Act by paying the prescribed fee. Irrespective of the wording in section 17 with regard to the powers of the Tribunal and irrespective of the initial proposition that the DRT is only supposed to look at the procedural irregularity, in view of the subsequent judgments of the Apex Court and other High Courts, the DRT can look into all objections and provide relief to the borrower or any person aggrieved.  However, in many cases, the Debt Recovery Tribunals may ask the borrower to make some deposit for asking the Bank to exercise restraint pending the disposal of the Appeal. Unless there is an apparent mistake on the part of the Bank in following the procedure, in most of the cases, the Appeals filed by the borrowers will get dismissed finally. The Appeal filed by the borrower under section 17 may be decided at the first hearing itself or it may take a maximum of one year in most of the cases. If the borrower has got any objection to the order of the DRT mandating the borrower to make some deposit, then, the option left with the borrower is to file an appeal with the DRAT or approaching High Court. If the borrower fails to comply with the order mandating him to deposit some amount, then, the Bank will proceed with the process and can even auction the property pending ‘SARFAESI Appeal’ and it means, the appeal becomes meaningless unless the DRT allows the Appeal and gives relief to the borrower taking all subsequent events also into consideration. Though there exist many technical, deeper and practical issues in filing Appeal under section 17 and getting relief, this is normally what happens if the borrower files an appeal under section 17 challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002.

It is very much possible that even before the decision on a ‘SARFAESI Appeal’ under section 17, the borrower could have deposited or paid some 20% of the outstanding amount claimed by the Bank.  We should remember that the Bank can exercise lot of discretion in providing relief or relaxation to the borrower when it comes to making payments towards installments. RBI guidelines give some room for the Banks to exercise some discretion. However, in many cases, the officials concerned may hesitate to take risk and exercise discretion and it results in classifying an account as Non-Performing Asset (NPA). If the borrower fails to adhere to monthly payment conditions consecutively for three months, the Bank can classify the Account as NPA. There are other considerations for classifying an account as ‘NPA’.  The point to be noted is that the borrowers have to face the proceedings under SARFAESI Act, 2002 for even minor default or negligible default which requires a sympathetic view.

While the Banks can get interest, penal interest and legal expenses incurred from the borrower, the borrower has to fight everything on his own. Supposing that the borrower looses the Appeal under section 17 of SARFAESI Act, 2002, then, section 18 of the Act provides a right of Appeal for the borrower. However, the borrower has to pay 50% of the amount claimed as a pre-deposit for maintaining an appeal and this pre-deposit amount can only be reduced to 25% for the reasons recorded in writing by the judge or the presiding officer of DRAT.  It is complained that section 18 is very unreasonable and it curtails the right of the borrower to maintain an Appeal. However, the Apex Court has upheld the validity of section 18 meaning that only Apex Court can again deal with the issues under section 18.  At times, the borrower may feel that he is forced to pay the full amount or at-least 75% of the outstanding amount claimed by the borrower even before his appeal before DRAT gets disposed of. As such, they complain that section 18 of SARFAESI Act, 2002 is meaningless.   

While the High Court entertains Writ Petitions now-a-days in appropriate cases and provide relief to the borrower, it is very difficult to straight away challenge the order of the DRT in the High Court and the High Court may not entertain such Writ Petitions as it can pave way to escape the pre-deposit condition with the DRAT.

A two member Bench headed by Hon’ble Justice Dr.D.Y.Chandrachud & Justice Mr.Anoop V.Mohta of Bombay High Court in W.P.No.4231 of 2011 reported in 2011 (4) AIR(Bom) R 763, 2011 (4) BCR 503, 2011 AIR(Bom) 132, CDJ 2011 BHC 774, was pleased to deal with the issues and scope of section 18 of SARFAESI Act, 2002 as follows:

“3. The Petitioners have challenged the constitutional validity of the provisions of the first and second provisos to section 18 of the Act on the ground that they are discriminatory. The submission is based on a comparison with the provisions of Section 21 of the Recovery of Debts due to Banks and Financial Institutions Act 1993. According to the Petitioners while the Act of 1993 confers discretion upon the Appellate Tribunal to allow a complete waiver of the pre-deposit, the discretion of the Appellate Tribunal, while entertaining an appeal under section 18 of the Securitisation Act is curtailed. By the first proviso to section 18(1) an appeal cannot be entertained unless the borrower has deposited an amount of 50% of the debt due as claimed by the secured creditor, or as determined by the Tribunal, whichever is less. By the second proviso, the Appellate Tribunal is empowered for reasons to be recorded in writing to reduce the amount to not less than 25% of the debt referred to in the second proviso.

4. Notice was issued to the Attorney General of India in view of the constitutional challenge. The learned Additional Solicitor General of India has appeared in the proceedings.

5. The constitutional challenge to the provisions of the second and third provisos of section 18 must fail. An appeal, it is well settled, is a statutory creation. A statute which confers a right of appeal can condition the exercise of that right on the observance of conditions which the legislature may consider appropriate to impose. The Securitisation Act is an act to regulate securitisation and reconstruction of financial assets and enforcement of security interests. The Statement of objects and reasons accompanying the introduction of the Bill in Parliament sets out the background in which the law was enacted as follows:

“The financial sector has been one of the key “drivers in India’s efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the Court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21 June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery of reconstruction.”

6. The second and third provisos to sub section (1) of section 18 were inserted by Amending Act 30 of 2004. The reasons for the amendment are explained in the Statement of objects and reasons. The statement adverts to the judgment of the Supreme Court inMardiaChemicals Ltd. v. Union of India (2004) 4 SCC 311which had declared as ultra vires a provision under which a deposit of 75% of the amount claimed was necessary before an appeal could be entertained. The amendment was brought about in view of the judgment of the Supreme Court and with a view to discourage borrowers from postponing the repayment of their dues and to enable secured creditors to speedily recover their debts, if required by enforcement of security or other measures specified in sub section (4) of Section 13 of the Act.

7. The constitutional validity of the provisions of section 18 (1) have been upheld by a judgment of a Division Bench of the Delhi High Court in R.V. Saxena v. Union of India AIR 2006 DELHI 96 .Chief Justice Makandeya Katju (as His Lordship then was) speaking for the Division Bench held thus :

“The right of appeal is not an inherent right “ butis a creature of the statute. The Legislature can impose conditions under which this is to be exercised. Moreover, the proviso to section 18 does not require the entire amount to be deposited, but only 50% thereof which can be reduced to a minimum of 25% of the sum. We see no illegality in this proviso. There are similar provisions in many enactments and they are being upheld by the Supreme Court. For example, in the second proviso under Section 15(1) of the Foreign Trade (Development and Regulation) Act, 1992, it is provided that the appeal against an order imposing a penalty or redemption charges shall not be entertained unless the amount of the penalty or redemption charges have been deposited by the appellant. Similarly in many other statutes, there are such similar provisions.”

8. The Division Bench of the Delhi High Court inter alia relied upon the decisions of the Supreme Court in Gujarat Agro Industries Co. Ltd. v. Municipal Corporation of the City of Ahmedabad (1999) SCC 468 , Vijay Prakash D. Mehta v. Collector of Customs (Preventive)(1988) 4 SCC 402 , AnantMills Ltd. v. State of Gujarat 1975 (2) SCC 175.andShyamKishore v. Municipal Corporation of Delhi (1993) 1 SCC 22.

9. Counsel appearing on behalf of the Petitioner, however, submitted that the object of both the Act of 1993 as well as of the Securitisation Act is the same viz. to ensure the speedy recovery of debts due to banks and financial institutions. Hence, it was urged that it would be plainly discriminatory and violative of Article 14 for Parliament to legislate, that while the Debts Recovery Appellate Tribunal, when it considers an appeal under the Act of 1993, can grant a complete waiver of predeposit, the same Tribunal is precluded from granting a waiver in the entirety, when it considers an appeal under the Securitisation Act.

10. This argument is not open to the Petitioner to urge, in any event before this Court, in view of the fact that by a recent judgment of the Supreme Court the rationale for the provisions of section 18 has been considered and determined in NarayanChandra Ghosh v. UCO Bank (2011) 4 SCC 548. A Bench of two learned Judges of the Supreme Court while construing the provisions of the second and third provisos noted that the Appellate Tribunal has the power to reduce the amount, for reasons to be recorded in writing, to not less than 25% of the debt, referred to in the second proviso. The judgment of the Supreme Court lays down that the right of appeal being a creation of statute, it was open to Parliament to condition that right subject to an order of deposit and to restrict the discretion of the Appellate Tribunal in the matter of granting a waiver. The Supreme Court held as follows:

“The language of the said proviso is clear “and admits of no ambiguity. It is well-settled that when a Statute confers a right of appeal, while granting the right, the Legislature can impose conditions for the exercise of such right, so long as the conditions are not so onerous as to amount to unreasonable restrictions, rendering the right almost illusory. Bearing in mind the object of the Act, the conditions hedged in the said proviso cannot be said to be onerous.”

11. The mandate of the third proviso has thus been held by the Supreme Court not to be onerous in its nature or character. These observations were undoubtedly not made in the context of a constitutional challenge. Nonetheless, they are significant because the Supreme Court in holding that the requirement is not onerous has indicated a view on the fairness and reasonableness of the provision.

 12. There is a fundamental reason why the submission of the Petitioner cannot be accepted. The object and purpose of the Securitisation Act was to facilitate a recovery of the dues of the banks and financial institutions by a non-adjudicatory process. The Securitisation Act enables banks or financial institutions to enforce their security interests expeditiously without being required to move a Court or Tribunal. This was emphasized in the following observations of the Supreme Court in Transcorev. Union of India 2007(2) Bankers’ Journal 303.

“Basically, the Securitisation Act is enacted “ toenforce the interest in the financial assets which belong to the bank / financial institution by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of Securitisation Act is recovery by non-adjudicatory process. A secured asset under Securitisation Act is an asset in which interest is created by the borrower in favour of the bank / financial institution and on that basis alone the Securitisation Act seeks to enforce the security interest by non-adjudicatory process. Essentially, the Securitisation Act deals with the rights of the secured creditor. The Securitisation Act proceeds on the basis that the debtor has failed not only to repay the debt, but he has also failed to maintain the level of margin and to maintain value of the security at a level is the other obligation of the debtor. It is this other obligation which invites applicability of Securitisation Act. It is for this reason, that Section 13(1) and 13(2) of the Securitisation Act proceed on the basis that security interest in the bank / financial institution needs to be enforced expeditiously without the intervention of the Court / Tribunal; that liability of the borrower has accrued and on account of default in repayment, the account of the borrower in the books of the bank has become nonperforming. For the above reasons, Securitisation Act states that the enforcement could take place by nonadjudicatory process and that the said Act removes all fetters under the above circumstances on the rights of the secured creditor.”

13. These observations of the Supreme Court emphasize at more than once place that the Securitisation Act allows enforcement by a non-adjudicatory process. The Act removes fetters on the rights of the secured creditor. The Securitisation Act has therefore been held to create an additional remedy. Consistent with the object of Parliament of facilitating the enforcement of security interests by a non-adjudicatory process, Parliament could conceivably impose a condition by which it could require the making of a deposit as a condition precedent to the maintainability of an appeal under section 18. Such a condition has been imposed under the second proviso to sub section (1) of section 18 by which an appeal cannot be entertained unless the borrower has deposited with the Appellate Tribunal 50% of the amount debt due as claimed by the secured creditor, or as determined by the Tribunal, whichever is less. Parliament conferred upon the Appellate Tribunal a discretion to reduce the amount required to be deposited, but while conferring that discretion on the Appellate Tribunal restricted it by stipulating that the Appellate Tribunal may reduce the amount to not less than 25% of the debt referred to in the second proviso. This is consistent with the parliamentary intent of ensuring that basically the Securitisation Act must follow an efficacious non-adjudicatory process for the enforcement of a security interest. The interposition of an adjudicatory function in the Securitisation Act must, therefore, be confined to those areas as legislated upon by Parliament and subject to the restrictions imposed by the Parliament while so legislating. Therefore, we find that there were valid reasons why Parliament made a different provision in the Securitisation Act in the matter of the discretion of the Appellate Tribunal under section 18(1) in dispensing with the requirement of pre-deposit. It was open to Parliament, while conferring discretion on the Appellate Tribunal to restrict the exercise of the discretion to reduce the quantum of deposit to not less than 25% of the debt due under the second proviso to section 18(1).”

Conclusion:

The constitutional validity of section 18 is upheld by the Apex Court. However, when the borrower is aggrieved with the order of DRAT to the request for depositing the minimum 25% as pre-deposit in appropriate cases, such an order can be taken to High Court and the High Court can provide relief to the borrower or the Appellant. However, even the High Court may not be able to direct the DRAT to accept a pre-deposit which is lesser than 25% of the outstanding.

I feel that the DRAT must have been given the right to completely waive the pre-deposit condition in exceptional cases.

There can be cases where the pre-deposit condition under section 18 can appear to be very draconian while in other cases, it may be justified in the interests of the Banks or Public Financial Institutions.

Note: the views expressed are my personal.