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.

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. 

Why High Courts are now burdened with DRT/SARFAESI matters?

Constitution of DRTs & DRATs:

After the constitution of Debt Recovery Tribunals (DRT) and Debt Recovery Appellate Tribunals (DRAT) under ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993” and after conferring the authority to entertain appeals from the aggrieved persons under section 17 of SARFAESI Act, 2002, Banks have gained an upper-hand in the course of recovery of their dues.  It is hard to see a Bank now going to Civil Court or facing a Civil Proceeding in-respect of recovery of their dues.  Even Consumer Courts are discouraged or not entertaining complaints from the borrowers against the Banks seeking stay-orders or discourage borrowers initiating consumer proceedings anticipating some kind of recovery proceeding by the Bank.   With a great object of speeding-up the Bank’s recovery process and to reduce their NPAs, Special Tribunals called ‘Debt Recovery Tribunals’ were constituted.  There was great opposition from the legal fraternity against the continuance of creation of Special Tribunals like National Company Law Tribunal etc. At the same time, there are professionals supporting the creation of Special Tribunals as the matters like Tax, Company issues etc. requires speedy disposal and specialist approach.   It’s a deeper issue to look at as to why Special Tribunals are not functioning as expected making the judiciary to intervene constantly either under Article 226 or 227 of Constitution of India. While some Special Tribunals are functioning well and justified, some are criticized most often.

Criticism:

While the Banks or the Public Financial Institutions must be very happy with the constitution of ‘Debt Recovery Tribunals’, there are many complaints from the borrowers against the functioning of ‘Debt Recovery Tribunals’ and ‘Appellate Tribunal’.  It is also true that even unscrupulous litigants tend to comment on the functioning of ‘Tribunals’ to their advantage. Again, it all mostly depends upon the mind-set or the ability of the Presiding Officer presiding a particular Tribunal. While some Presiding Officers presiding the ‘Debt Recovery Tribunal’ are appreciated, some are criticized most often.  There is a perception that the ‘Debt Recovery Tribunal’ functions as an agent institution for the Bank in the course of their recovery of dues. It is most often criticized that the Debt Recovery Tribunals support Banks irrespective of their mistakes and do not support the borrowers despite having merit in their contention.  The DRTs are not supposed to follow an elaborate procedure and they are guided by the principles laid-down by the High Courts and Supreme Court from time to time.  It is alleged that this helps the Banks to use the procedure before DRT to their advantage.  It is also known that the Bank Officials do maintain very good relation with the staff attached with the Debt Recovery Tribunals and Appellate Tribunals.  There is a glaring difference between the normal Court System and procedure; and DRT set-up.  It is also alleged that the office attached to the ‘Debt Recovery Tribunals’ try to delay the numbering of appeal papers etc. being filed by the borrowers.  Infact, the Tribunals are supposed to be public friendly as opposed Courts.  The Tribunals are not supposed to rely so much on technicalities like Courts. Looking at the practice, often, one gets an impression that Courts are public friendly now-a-days than Tribunals.

Dealing with the functioning of a particular Presiding Officer in a Case, a Bench of Madras High Court headed by Hon’ble Justice D.Murugesan & Hon’ble Justice K.K.Sasidharan, in W.P.No.11113 of 2012, reported in CDJ 2012 MHC 2971, was pleased to observe as follows:

“15. The appeal in question was preferred by the petitioner and it was numbered as Appeal No.1/2009. The third respondent was not a party to the proceeding. The third respondent in her capacity as auction purchaser filed an application in I.A.No.278/2012 to implead her as a party to the proceeding. The application was filed by Ms. Sankaran Latha, Advocate, Coimbatore, on 27 March 2012. The application was taken on file and allowed by the Debts Recovery Tribunal, Coimbatore even without ordering notice to the writ petitioner or Bank. The application in I.A.No.278/2012 does not contain any indication that before filing the said application, copy has been served on the petitioner. We are not in a position to understand as to how in a pending matter, an application could be moved by a third party without giving notice to the other side whether it be the petitioner or the respondent. Though the petitioner was not given notice in the impleading petition in I.A.No.278/2012, he was given notice in I.A.No.285/2012 filed to review the order in I.A.No.522 of 2009. The Presiding Officer ought to have issued notice to the petitioner before passing orders in the interlocutory application to implead the third respondent as a party to the appeal. There is no dispute that it is the discretion of the Court to implead a party to a pending matter, in case, for an effective adjudication of the matter, presence of such party is absolutely necessary. Even in such a case, before deciding the issue, the petitioner who was instrument in filing the application should have given due audience. The presiding officer appears to have ignored basic principles of justice.

16. This Bench has been dealing with Debts Recovery Tribunal cases for the last one year. We have come across several such illegal orders passed by the Presiding Officer, Debts Recovery Tribunal, Coimbatore. Writ petitions and Civil Revision Petitions have been preferred not only by the borrowers but also by the Banks and other financial institutions. In some cases, the Bank settled the matter with the principal borrower or guarantor. The Presiding Officer was not in favour of such settlement. This made the Presiding Officer to pass orders directing Chairman and Managing Director of the Bank to submit a report, detailing the circumstances under which the local officials settled the matter with the principal debtor. In some of the matters involving Indian Overseas Bank, the Presiding Officer permitted the borrower to auction and sell machineries and to pay the amount even without notice to the Bank. This made the Bank to file writ petitions before this Court and we have already stayed such orders. Bank would be in a position to engage a counsel at Chennai and file writ petitions and civil revision petitions. It is only the poor borrowers who have to pay the amount, ultimately along with the litigation expenses incurred by the Bank. In case the borrowers and the guarantors are affected, necessarily, they have to engage a counsel here at Madras and file appropriate applications to challenge such orders. This also would cause considerable expenses to the poor litigants.

17. There is no doubt that the Debts Recovery Tribunal, Coimbatore, is entitled to pass discretionary orders, in accordance with law. The problem is on account of passing orders violating the mandatory provisions of law. The petitioner in the present writ petition and the petitioners in other writ petitions as well as the Standing Counsel for different banks jointly made allegations against the Presiding Officer stating that he has been supporting a particular counsel and whenever the said counsel is engaged, the officer would pass favourable orders to please that counsel, flouting the legal provisions.

18. M/s Canara Bank, Kongu Nagar, Tiruppur, filed a writ petition before this Court in W.P.No.9775 of 2012 challenging the order passed by the very same Presiding Officer restraining the Bank from proceeding under the SARFAESI Act. The said order was challenged by the borrower in W.P.No.2103/2012 complaining that the original application was allowed even without permitting the borrower to file his statement. During the course of hearing of those two writ petitions, the learned counsel for the petitioner as well as the Bank made similar allegations against the Presiding Officer. While disposing of those writ petitions, we have expressed our strong displeasure in passing such orders in a hasty manner. The relevant paragraph or the order reads thus:-

"10. There is nothing on record to show that the borrowers have filed their counter in O.A.No.72 of 2011. In fact, the first hearing itself was only on 14 September, 2011. We are not in a position to understand the logic in passing such hasty orders by the Debts Recovery Tribunal, Coimbatore. In fact, we have been witnessing many such orders passed by the Presiding Officer, Coimbatore in a hasty manner and in violation of the mandatory previsions of the statute. The members of the legal fraternity time and again complained across the Bar that the Presiding Officer, Debts Recovery Tribunal, Coimbatore is in the habit of keeping the records with him till the appeal time is over and never issues the certified copy of the order before the statutory period for filing appeal. We do not want to comment anything n this, at this point of time, without giving an opportunity to the Presiding Officer to offer his remarks.

11. The impugned order clearly shows that the Debts Recovery Tribunal, Coimbatore violated all the canons of justice in his attempt to dispose of matters. We are not in a position to appreciate the course of conduct adopted by the Debts Recovery Tribunal to dispose of the original application without giving an opportunity to the parties either to file their statement or to make submissions."

19. Factual matrix of the present case clearly indicates that the Presiding Officer allowed the impleading application filed by the third respondent without even issuing notice to the petitioner. The factum of impleading coupled with the appearance of a particular counsel made the petitioner to entertain a reasonable doubt that he would not get justice from the Presiding Officer. We are not here to examine the said issue in extensor more on account of the fact that we have not called for a report from the Presiding Officer with regard have not called for a report from the Presiding Officer with regard to such allegations. In any case, the parties have now expressed their consent to transfer the matter to Debts Recovery Tribunal, Chennai.

20. We are, therefore, of the view that interest of justice would be sub-served in case the appeal preferred by the petitioner in Appeal No.1/2009 is transferred from the file of Debts Recovery Tribunal, Coimbatore, to the Debts Recovery Tribunal, Coimbatore, to the Debts Recovery Tribunal II, Chennai.

21. The Registry is directed to transfer the records received from the Debts Recovery Tribunal, Coimbatore, directly to the Debts Recovery Tribunal II, Chennai, along with a copy of this order so as to enable the Tribunal to take up the matter and dispose of the same in accordance with law.

22. We have already extracted the submissions made before us by the counsel on either side in the present writ petition and the members of the Bar. In fact, the Bar was unanimous while making submission that the Presiding Officer, Debts Recovery Tribunal, Coimbatore, has been showing undue favour to a particular counsel and that appearance of that counsel would tilt the balance in favour of the party who has engaged the said counsel. Litigants should have a feeling that their cases are heard by the Presiding Officer without bias. Judiciary would lose its name in case parties entertain a reasonable doubt, about the integrity of the Presiding Officer. We have been seeing many such orders passed by the Presiding Officer, Debts Recovery Tribunal, Coimbatore, taking contradictory stand and passing orders in violation of the settled legal principles. Therefore, we are of the view that the matter requires consideration by the concerned authorities.

23. The Secretary, Ministry of Finance, New Delhi, and Ministry of Law and Justice, are directed to conduct an enquiry and take appropriate action the matter.”

This is only a small reference of the functioning of a particular Presiding Officer. But, infact, there were serious issues and serious allegations most often.

Why High Courts are burdened with DRT/SARFAESI matters now?

Initially, High Courts used to entertain Writ Petitions in-respect of SARFAESI proceedings. Later-on, it is complained that Bank’s recovery process gets hampered due to filing of Writ Petitions in High Courts and High Courts passing stay or adverse orders. Pursuant to the complaint or taking note of the situation at that time, there were many judgments and the judgment of Supreme Court that the High Courts should exercise restraint in respect of entertaining Writ Petitions pertaining to SARFAESI matters. During this period, many Writ Petitions were dismissed or disposed of at the admission stage itself and the High Courts were not granting any relief or stay orders as prayed by the borrowers. This practice has continued for a while though it was maintained that there can never be a complete bar on the jurisdiction of High Courts under Article 226 of Constitution of India in respect of Writ Petitions challenging SARFAESI proceedings. It was termed as ‘self-imposed restriction’.

However, in the recent past, in many cases as alleged, Banks took advantage of the powers under SARFAESI Act, 2002 and the functioning of DRTs and DRATs.  As a result, borrowers were struggling to get justice or advocate their case properly. They complain as to how the numbering of appeal papers gets delayed with the DRT, how the presiding officers will be on-leave without any effective alternative arrangement, how the Bank proceeds with the SARFAESI proceeding despite filing or pendency of an appeal under Section 17, the practice of mandating the borrowers to deposit substantial amount as a pre-condition for the grant of any stay-order, the delay and the pre-deposit condition with the DRAT. There are several issues or complaints with the SARFAESI proceedings and the functioning of DRTs and DRATs. When a borrower fails to find a place to advocate his case properly and fairly, he will have no option except approaching High Courts under Article 226 of Constitution of India. According to me, understanding the plight of borrowers in some cases in SARFAESI matters, the abuse of powers under SARFAESI Act, 2002 and the functioning of Debt Recovery Tribunals and Debt Recovery Appellate Tribunals, the High Courts do interfere with SARFAESI proceedings or the DRT proceedings now in appropriate cases. No High Court interferes with the SARFAESI proceedings initiated by the Bank or the proceedings pending before the DRT or DRAT unless there is a strong case and justification.

All these issues make the High Courts burdened with the DRT/SARFAESI matters despite having Special Tribunals called ‘Debt Recovery Tribunal’ and ‘Debt Recovery Appellate Tribunal’. It is a result of misuse or improper use of powers under SARFAESI Act, 2002 or the failure of DRTs and DRATs to provide an effective relief to the borrowers in appropriate or deserved cases.

Note: the views expressed are my personal. 

‘Tenancy Rights’ and action under SARFAESI Act, 2002?

Banks used to take advantage of the provisions of SARFAESI Act, 2002 earlier in taking possession of the ‘secured asset’ even when the tenant was in possession of the property. Absolutely, there is no difficulty in taking the possession of the ‘secured asset’ using the protection and assistance under Section 14 of the Act if the property was actually in possession of the borrower or the guarantor. Courts were looking into the issue of rights of tenants and the bona fides as the owner of the property can play with the Bank with fictitious arrangements.  Any person aggrieved, including a Tenant, can approach the Debt Recovery Tribunal under section 17 of the Act. When a tenant approaches the Court or the Tribunal seeking protection of his rights and questioning the action being taken by the Bank using Section 14 of SARFAESI Act, 2002, the Court or the Tribunal used to look into or emphasize as to:

(a). Whether there are bona fides in the contention of the tenant?

(b). If Tenant relies on any agreement with the landlord, the date of the agreement or the date from when the Tenant was in possession of the property.

(c). The knowledge of the Bank in respect of tenancy while sanctioning the loan.

(c). Whether the agreement between the tenant or the landlord registered and legal?

When a tenant files an application under section 17 of the SARFAESI Act, 2002 questioning the action of taking physical possession of the property by the Bank, the interpretation initially was infavour of the Banks in most of the cases unless the tenant establishes a clear case. However, now, the Courts rightly are emphasizing at the laws protecting the rights of the tenants and as to how the Banks are not allowed to take advantage of the provisions of the SARFAESI Act, 2002. Looking at the plight of the tenants, State Governments must have made laws to protect the rights of the tenants and the tenants used to be protected irrespective of the agreement between the landlord and the tenant while if there exist any agreement, the relevant contents like the payment of advance, rent agreed etc. are taken into consideration.  The laws infavour of the tenants are called ‘welfare legislation’ and justified time and again irrespective of the criticism by the landlords that they are being harassed and in most of the times, it becomes very difficult to get the tenants vacated.  A tenant can ask for fixation of fair rent irrespective of the clauses in the agreement if there is any agreement and the landlord is asked to follow a procedure in evicting the tenant and the landlord is supposed to establish a ground for getting the tenant vacated.  If the landlord wants to get a tenant evicted, he has to approach the Tribunal or the Court under the special legislation protecting the rights of the tenants if there is any such legislation; and even if the landlord wins the case against the tenant, the tenant has got a right of Appeal, a writ jurisdiction or revisional jurisdiction can also be invoked thereafter and matters can even go to the Supreme Court.  These laws infavour of tenants are often criticized, but, those continue to have the statutory force unless repealed.

Explaining as to how the rights of the tenants are to be protected and the Banks are not allowed to get the tenants evicted without following the due process of law, the High Court of Kerala, in N.P. Pushpangadan & Others Vs. The Federal Bank Ltd (2011 (4) ILR(Ker) 196, 2011 (4) KLT 134 (FB), 2011 (4) KLJ 93, 2011 (4) KHC 40), was pleased to explain the issues and held as follows:

“22. An owner of a building wish to get his tenant evicted. A particular owner may have so many tenants under him. In view of the provisions of the Kerala Buildings (Lease and Rent Control) Act, a landlord can get an order of eviction only if the grounds enumerated in the Rent Control Act are established. An unscrupulous landlord may apply under Section 133 of the Code of Criminal Procedure and get an order for demolition of the building, even without notice to the tenants. The tenants may, sometimes, be successful in resisting such illegal action, by approaching the civil court. If it were to be held that the Securitisation Act overrides the Kerala Buildings (Lease and Rent Control) Act, a landlord who has let out his building to several tenants and wants to get them evicted can easily manipulate things to achieve that object without recourse to the machinery provided under the Rent Control Act. He can take a loan from a bank on mortgaging the tenanted building, deliberately commit default in repaying the loan and allow the measures under Section 13(4) and 14 of the Securitisation Act to be taken by the secured creditor. The tenants can thus be easily evicted summarily, either before the sale or after sale under the Securitisation Act. If a sale takes place, the landlord can also manage to have it purchased in the name of his confidant. In such cases, how could the civil court or the High Court or the authorities under the Securitisation Act protect the interests of the tenants, if the interpretation of the law is as stated above? If that is the interpretation of law, we would be creating two categories of tenants in respect of  tenanted buildings; namely (a) those who are governed by the Kerala Buildings (Lease and Rent Control) Act but whose landlord has not taken any loan and created security interest in respect of the tenanted building and (b) those who are not entitled to the protection of the Rent Control Act only for the reason that the landlord has created a security interest in respect of the building and proceedings under the Securitisation Act have been taken. The Securitisation Act, in our view, does not create such a situation denying the rights of tenants under the Kerala Buildings (Lease and Rent Control) Act.”

On the same point, the High Court of Madras in Indian Bank Vs. M/s Nippon Enterprises South (2011 (2) CTC 474, 2011 (2) LW 521, 2011 AIR (Mad) 238), was pleased to observe as follows:

“36. Under Section 13(4) of the SARFAESI Act, the secured creditor can take possession of the secured assets of the borrower. There can be no difficulty in taking such possession of the secured assets either under Section 13(4) or under Section 14 of the SARFAESI Act, if the secured asset is in the possession of the borrower or guarantor, as the case may be. SARFAESI Act entitles the creditor to take possession of the secured assets either by issuing possession notice under Section 13(4) or by making application to the Chief Metropolitan Magistrate/District Magistrate to take physical possession under Section 14. Though the function of Chief Metropolitan Magistrate/District Magistrate is only ministerial, the provision of Section 14 confers drastic power to take possession even by use of force. The difficulty arises only in cases where the possession of the property is in the hands of the tenant (lessee). The SARFAESI Act does not contain any specific provision enabling the secured creditor to take possession from the hands of a tenant (lessee). On the other hand, the TN Rent Control Act contemplates that a tenant is entitled in law to continue to be in possession unless he is evicted under the provisions of the said Act. SARFAESI Act being mainly procedural and the TN Rent Control Act being exclusively dealing with the substantive right of tenants, both the Acts operate on different fields. Only in the event the SARFAESI Act contains a provision to enable the bank to take possession of a secured asset from a lessee, then only it can be held that there is conflict between the SARFAESI Act and the TN Rent Control Act in which case, the TN Rent Control Act should give way for the SARFAESI Act to have overriding effect. However, there is no such provision in the SARFAESI Act enabling the bank to take possession from the lessee, though the Act speaks of the right of the bank to take possession of the secured asset. Moreover, right from Section 13(2) till exhausting the provision of appeal, the bank deals only with the borrower/guarantor and the lessee is nowhere in the picture, as the Act does not require the bank to involve the lessee/tenant as well in the proceedings. Thus, we do not find any overlapping or inconsistency between these two Acts. When there is no such overlapping or repugnancy between these two provisions in respect of taking possession from the lessee, it has to be held that physical possession of the secured assets from the lessee/tenant can be taken only by invoking the provisions of the TN Rent Control Act.”

It is a different case if it is clearly proved that a person claiming to be a tenant and the agreement with the land-lord is fictitious though it is very difficult to establish mala fides on the part of the Bank.

If the legal proposition is allowed to be settled in the near future that the Banks can not override the provisions of the laws made by State Governments in the interests of the tenants and Banks can not evict the tenants using Section 14 of SARFAESI Act, 2002, then, both the interests of the Banks and also the borrowers are to be looked-into carefully.  The Banks can sell the secured assets by following the due procedure and there is no need for the Banks to take physical possession of the property before selling the properties in auction. There were some conflicting judgments as to the responsibilities of the Banks in taking physical possession of the property even after confirmation of sale infavour of the bidder and the need of Banks to take physical possession of the properties while conducting the auction. However, as I think, it is settled that the Banks can auction the property under the provisions of SARFAESI Act, 2002 without taking actual possession of the property and there is no responsibility on the part of the Bank in getting the physical possession of secured asset even when the auction sale is concluded and the price is received unless it is agreed otherwise at the time of Auction. But, the interesting issue is like:

What happens to the value of the property if it is sold without taking actual possession of the property?

When a Bank sells the property in Public Auction or other permitted means without actually taking the physical possession of the property, the Bank may get lesser price for the property as the bidder has to take the risk of getting the tenant vacated. The Banks can justify selling the property for a lesser price in view of the compulsions and the legal position. The borrower or the guarantor who has mortgaged the property with the Bank may have a different and serious contention in this regard. When the property is sold for a lesser price in view of the risk involved in getting the tenant vacated, the Borrower may not agree to that contention and may seriously contend that the property is undervalued and sold for a lesser price. The Borrower has every right to raise these kinds of arguments as the balance sale consideration after adjustments, should go to the borrower or the guarantor as the case may be. Again, if the sale consideration is not sufficient to meet the liability, the Bank may initiate further proceedings against the borrower for the remaining.

It all depends upon the facts of that particular case like the outstanding amount, the value of the property and the contention of the borrower or the owner of the property and there may not be any hard-and-fast rule on these complicated issues under SARFAESI Act, 2002.

The borrower or the guarantor can not speak for the tenant and it is for the tenant to ask for the protection of his rights when the Bank initiates steps to take physical possession of the property.  The responsibilities of the owner of the property in normal circumstances may be different and in normal circumstances, the owner may be duty bound to ensure that no third party disturbs the tenant.

Note: the views expressed are my personal and do not represent anyone or organization. 

DRT & SARFAESI: How High Court’s intervention in SARFAESI matters justified?

No one can defend a willful defaulter and no one can possibly object to the need of providing a special legislation to enable the Banks to recover their dues speedily and thus reduce their ‘Non-performing Assets’. Constitutional validity of ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (in short ‘SARFAESI’) was upheld by the Supreme Court and the Courts have given guidelines from time to time as to how to interpret various provisions of SARFAESI Act, 2002. The Apex Court and even the High Courts have discouraged borrowers in approaching High Courts in SAFAESI matters. Initially, the borrowers used to question even the notice under Section 13 (2) of SARFAESI Act, 2002 in High Court under Article 226 of Constitution of India and there were cases where the proceedings of the Bank were stayed even in those cases. Thereafter, the Courts were very strict in entertaining challenge to demand notice issued by the Bank under section 13 (2) of the Act. Instead, the Courts have, from time to time, extended the scope of enquiry of the Debt Recovery Tribunals under Section 17 of the Act and also gone to the extent that every action initiated or taken by the Bank pursuant to section 13 (4) of the Act can be challenged under Section 17 of the Act. Despite so many guidelines and exercise of restraint of jurisdiction under Article 226 of Constitution of India, it is of the concern of many borrowers or bona fide borrowers or guarantors that the relief before Debt Recovery Tribunal under section 17 is not effective. It is increasingly felt that the Debt Recovery Tribunal is a forum to support the Bank irrespective of its mistakes and it is not for the borrowers or guarantors at all. The Tribunal is now being seen by many as an organization working under the control of Finance Ministry with a specific objective rather than a ‘Special Court or Tribunal’ dealing specifically with the recovery matters as the Banks may find it difficult to get this process completed in Civil Courts. There can not be any major difference between a ‘Tribunal’ and ‘Court’ except that even a non-judicial member can be a part of Tribunal and the Tribunal need not follow the ‘Civil Procedure Code’. Tribunals are normally created with a specific objective and through a special legislation and follows a different kind of procedure as prescribed and the object is to reduce the burden in Courts and making a specialized body to decide the issues in accordance with law.

In this background, it is worth noting the observation of a Constitution Bench of the Supreme Court in the case of Associated Cement Companies Ltd. V. P.N.Sharma, AIR 1965SC1595, speaking through Gajendragadkar, C.J., while holding that the appellate authority under the Punjab Welfare Officers Recruitment and Conditions of Service Rules, 1952, is a Tribunal, observed:

“…Special matter and questions are entrusted to them for their decision and in that sense, they share with the courts one common characteristic; both the courts and the Tribunals are ‘constituted by the State and are invested with judicial as distinguished from purely administrative or executive functions…’ They are both adjudicated bodies and they deal with and finally determine disputes between parties which are entrusted to the jurisdiction….As in the case of courts, so in the case of Tribunals, it is the State’s inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial function which they discharge. Judicial functions and judicial powers are one of the essential attributes of a sovereign State, and on considerations of policy, the state transfers its judicial functions and powers mainly to the courts established by the Constitution; but that does not affect the competence of the State, by appropriate measures, to transfer a part of its judicial powers and functions to Tribunals by entrusting to them the task of adjudicated upon special matters and disputes between parties. It is really not possible or even expedient to attempt to describe exhaustively the features which are common to the Tribunals and the courts, and features which are distinct and separate. The basis and the fundamental feature which is common to both the courts and the Tribunals is that they discharge judicial functions and exercise judicial powers which inherently vest in a sovereign state.”

In a landmark judgment of R.Gandhi Vs. Union of India, the Apex Court has upheld the judgment of Madras High Court to a great extent and with the result, the establishment of ‘National Company Law Tribunal’ and ‘Appellate Tribunal’ has not taken place till today. The Madras High Court has dealt with the issue clearly and the Supreme Court has given the final verdict on the issue and the Companies Bill is, now, as I think, pending before the Standing Committee.

It was infact was a very serious issue and in the same judgment of R.Gandhi Vs. Union of India, the Madras High Court has extracted the judgment of Delhi High Court on the same issue and it is as follows:

“In the case of Union of India V. Delhi High Court Bar Association (2002) 110 Comp Case 141; (2002) 4 SCC 275, a two-judge Bench of the court held that the Debt Recovery Tribunals through it may not strictly fall within the concept of judiciary as envisaged by article 50, it is nevertheless an effective part of the justice delivery system. It was also held therein that the creation of such Tribunals in the place of a civil court to decide civil disputes relating to debt recovery matters does not interfere with the independency of judiciary. The court held that nobody has an absolute right to demand that the disputes be adjudicated upon only by a civil court under the Code of Civil Procedure.

The court observed at paragraphs 24 and 25 of that judgment (page 157):

The manner in which a dispute is to be adjudicated upon is decided by the procedural laws which are enacted from time to time. It is because of the enactment of the Code of Civil Procedure that normally all disputes between the parties of a civil nature would be adjudicated upon by the civil courts. There is no absolute right in anyone to demand that his dispute is to be adjudicated upon only by a civil court. The decision of the Delhi High Court proceeds on the assumption that there is such a right. As we have already observed, it is by reason of the provisions of the Code of Civil Procedure that the civil court had the right, prior to the enactment of the Debt Recovery Act, to decide the suits for recovery filed by the banks and financial institutions. This forum, namely, that of a civil court, now stands replaced by a Banking Tribunal in respect to of the debts due to the bank. When in the Constitution articles 233A and 323B contemplate establishment of a Tribunal and that does not erode the independence of the judiciary, there is no reason to presume that the Banking Tribunals and the Appellate Tribunals so constituted would not be independent, or that justice would be denied to the defendants or that the independence of the judiciary would stand eroded.

Such Tribunals, whether they pertain to income-tax or sales tax or excise and customs or administration, have now become an essential part of the judicial system in this country. Such specialized institutions may not strictly come within the concept of the judiciary, as envisaged by article 50, but it cannot be presumed that such Tribunals are not an effective part of the justice delivery system, like courts of law. It will be seen that for a person to be appointed as a Presiding Officer of a Tribunal, he should be one who is qualified to be a District Judge and, in case of appointment of the Presiding Officer of the Appellate Tribunal he is, or has been, qualified to be a judge of a High Court or has been member of the Indian Legal Service who has held a post in Grade I for at least three years or has held office as the Presiding Officer of a Tribunal for at least three years. Persons who are so appointed as Presiding Officers of the Tribunal or of the Appellate Tribunal would be well versed in law to be able to decide cases independently and judiciously. It has to be borne in mind that the decision of the Appellate Tribunals is not final, in the sense that the same can be subjected to judicial review by the High Court under articles 226 and 227 of the Constitution.”

Why many say that the relief before Debt Recovery Tribunal is not effective?

1. The ‘section office’ attached to these Tribunals appears to be implementing directives of the Bank or Bank officials rather acting as officers of a Court or Tribunal.

2. On mere technical grounds, the ‘section office’ attached to these Courts or Tribunals return or reject papers making the Borrower/Appellant to run from pillar to post.

3. While the Borrower or the Appellant struggles to express his grievance and seek justice from Tribunal, the Bank proceeds with their action under SARFAESI Act and even completes the sale of ‘Sale of Secured Asset’.

4. There may not be presiding officers to the Tribunal at times without having an effective alternative arrangement.

5. The Tribunal keeps the matters pending without passing any orders and the Bank will not stay their proceedings and takes every opportunity to effectively use the provisions of SARFAESI Act, 2002.

Like-wise, borrowers or the litigants attribute several reasons as to why the relief provided before the Debt Recovery Tribunal under Section 17 of SARFAESI Act, 2002 is not effective. If the borrower approaches the High Court under Article 226 questioning the clear arbitratory exercise of power, the High Court will be asking the borrower as to why he can not avail the remedy provided under Section 17 of the Act. The borrower can not approach the Civil Court. If the borrower looses his case on technical grounds and despite having a good ground, he will have to make substantial deposit for maintaining an appeal before Debt Recovery Appellate Tribunal.

As lot of people will have exposure to Banks, the misuse of provisions of SARFAESI Act, 2002 by the Banks, at times, is being constantly discussed. The voice against Banks when the Bank initiates SARFAESI proceedings is increasing day-by-day. There are serious allegations very often against Banks when they proceed with the sale of ‘Secured Asset’.

Now, it should become a regular practice that when there is a good case and clear arbitrariness on the part of the Bank in proceeding under SARFAESI Act, 2002, the High Court can interfere and the reasons for exercise of power be stated in brief while granting relief to the borrowers. There are cases where the High Courts have come heavily on the Banks and their actions under SARFAESI Act, 2002. This exercise is likely to continue and the High Courts may be forced to listen to the grievance of the borrowers in SARFAESI matters despite the argument of the Bank that “anyone aggrieved can approach Debt Recovery Tribunal under Section 17”.

Note: the views expressed are my personal.