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.

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.