DRT & SARFAESI: Limitation to proceed under section 13 (2) and 13 (4) of SARFAESI Act, 2002?

Despite the clear objective behind enacting SARFAESI Act, 2002, while implementing the provisions of the Act, many complications have arisen and the Hon’ble Courts have cleared some complications making a good balance between the interests of the borrowers and the objective of Act to reduce the alarming levels of Non-performing Assets (NPA). Courts have dealt with the issue of limitation to approach the Debt Recovery Tribunal under section 17 of SARFAESI Act, 2002 and according me, it is the wonderful interpretation by Courts in giving the borrower a right to challenge the Bank’s action on all measures pursuant to section 13 (4) of the Act. In the recent past, there was also a consistency with regard to entertaining Writ Petitions under Article 226 of Constitution of India in respect of SARFAESI matters. The borrowers’ interest is also protected even at the stage when the Bank approaches the Magistrate Court under section 14 of the Act and gets an order to take the physical possession of the ‘secured asset’. Though there is a tendency of discouraging the Civil Courts in entertaining Civil Suits in respect of SARFAESI proceedings given the limited scope pursuant to Mardia Chemicals case, it is important to look at the issue of making a counter claim in the form of damages or compensation against the Bank. It is true that section 19 of the SARFAESI Act, 2002 provides an authority to the Debt Recovery Tribunal to order compensation against the Bank in appropriate cases. The interpretation of section 19 would definitely be a key thing. The compensation can not be limited to the issue of procedural lacunae on the part of the Bank in taking steps under the provisions of SARFAESI Act, 2002. In appropriate cases, the claim of compensation or the damages can also be looked at while entertaining a plea for granting stay of SARFAESI proceedings initiated by the Bank. It is supported by the laudable interpretation by the Court on the issue of powers granted to the Debt Recovery Tribunal under section 17 of SARFAESI Act, 2002. It was once perceived that the Debt Recovery Tribunal is only concerned at looking the procedure followed by the Bank under SARFAESI Act, 2002, but, now the DRT is looking at all issues raised by the borrower including the issue of determination of ‘outstanding due’ and classification of an Account as ‘NPA’. There can be an argument that the if the scope of Section 19 is widened, then, the DRT may not be able to speedily dispose of the Appeals and may be forced to keep the order of stay pending till the litigation is finally disposed of. This argument, though appear to be logical, can not be sustained as the Courts are against conferring jurisdiction on other forums in respect of SARFAESI matters. This issue can be addressed with the careful exercise of power and the efficiency of the presiding officers on Civil Law and Law of Torts.

Likewise, there are many interesting and complicated issues under the provisions of SARFAESI Act, 2002. Another complicated issue is about Section 36 of SARFAESI Act, 2002 dealing with the application of the provisions of Law of Limitation. Section 36 of SARFAESI Act, 2002 is as follows:

“36.Limitation.- No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963).”

In the light of the fact where the Bank proceeds under SARFAESI Act, 2002 even after obtaining a ‘Recovery Certificate’ from the Debt Recovery Tribunal under Section 19 of RDDBI Act, 2002, section 36 of SARFAESI Act, 2002 is to be carefully looked at. The issue of simultaneous proceedings was upheld now and I don’t know to how to understand the land-mark judgment saying that the Bank need not withdraw its Original Application under section 19 of RDDBI Act, 1993 while contemplating action under SARFAESI Act, 2002. But, it is a fact that the Bank may feel comfortable in invoking the provisions of SARFAESI Act, 2002 for execution of its claim even after getting a ‘Certificate of Recovery’ under section 19 of RDDBI Act, 1993. Where there is a mortgage in favour of the Bank, the limitation to act upon the mortgage in realizing the debt is 12 years. And the 12 years limitation is to be calculated from the date when the money actually becomes due as per the provisions of Limitation Act as everybody knows. In many cases now, if the limitation is strictly applied as contemplated under Section 36 of the SARFAESI Act, 2002, the Banks may not be able invoke the provisions of the SARFAESI Act, 2002 as it could have taken considerable time in getting the ‘Certificate of Recovery’ in Original Application under Section 19 of RDDBI Act, 1993. What the Bank claims is that the limitation under Section 36 starts from the date of passing the ‘Certificate of Recovery or the decree’. On the contrary, the borrowers claim that the proceedings under RDDBI Act, 1993 and SARFAESI are completely independent though they can go simultaneously now and as such the limitation under Section 36 is to be calculated separately based on the loan transaction and default while Bank proceeding under the provisions of SARFAESI Act, 2002. There is a merit technically in this argument also as the Bank will not straight-away proceed taking possession of ‘secured asset’ where there is already a ‘Certificate of Recovery’. Even when there is a ‘Certificate of Recovery’, the Bank, if wants to invoke the provisions of SARFAESI Act, 2002, makes a fresh demand under section 13 (2), entertains objections, gives a reply if required and then only proceeds under section 13 (4) of the Act and the borrower gets a right to appeal to DRT under Section 17 of SARFAESI Act, 2002 again though there was a prior adjudication of the issue earlier under RDDBI Act, 2002. This aspect is highlighted technically and the Courts have considered the ‘Decree or the Certificate of Recovery’ as ‘debt’ or ‘financial asset’ within the purview of SARFAESI Act, 2002 and allowed the Bank to be in advantageous position in this regard. Though there were conflicting views on this like the issue of redressel against the order passed by the Magistrate under section 14 of SARFAESI Act, 2002, a consistent view is now being taken in this regard.

Few judgments extracted below will expose the trend in interpreting section 36 of SARFAESI Act, 2002 and the Complications. The Hon’ble High Court of Punjab and Haryana, in Raj Rani Versus Oriental Bank of Commerce, 2008 AIR (P&H) 66, was pleased to observe as follows:

“In the present case, the loan was availed on 23-10-1999 (P-10) and notice under Section 13 (2) of the Act was given on 28-4-2003. It is undisputed that the loan has been secured by mortgaging the properly in question as is evident from the loan application (P-7). Once the loan has been secured by mortgage or by creating a charge on immovable property in question, the provisions of Article 62 of the schedule appended to the Limitation Act, 1963 would apply which provides a period of 12 years from the date when the money becomes due. The respondent-Bank had issued notice under Section 13 (2) of the Act in April, 2003, which is less than four years. It is thus obvious that action even otherwise does not attract the bar of limitation. Therefore, the argument raised is liable to be rejected. Even on facts, it has to be held that the action does not suffer from the bar of limitation provided by Section 36 of the Act. “

On the same issue, the Hon’ble High Court of Madras in M/s. Consolidated Construction Consortium Ltd Vs. M/s. Indian Bank, 2010 AIR (Mad) 68 was pleased to observe as follows:

“33. I could see considerable force in the submission made by the learned counsel for the defendant for the following reasons.

The term ‘debt’ as defined in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is found adopted in the SARFAESI Act.

“S.2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993:

“debt” means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application.

34. A plain reading of the definition of the ‘debt’ as contained in the The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 would exemplify and demonstrate that given a ‘decree debt’ could be taken as a ‘debt’. It is quite obvious and axiomatic that for obtaining decree, considerable time would be taken by a litigant and in some cases, it might exceed even ten years or fifteen years and in such a case, if twelve years period of limitation for enforcing mortgage is calculated from the date of accrual of the cause of action based on mortgage due under the bank, then the relevant portion of the definition of ‘debt’, as contemplated under the ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ as well as SARFAESI Act would be rendered nugatory or otiose. It is therefore crystal clear that the twelve years’ limitation period has to be reckoned from the date of decree or the debt recovery certificate issued by the Tribunal. The question might arise as to whether the provisions of the SARFAESI Act, so to say Section 13(4) could be pressed into service for the purpose of executing a decree debt or the certificate issued under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

38. A plain reading of the above definition would reveal and connote that the term ‘financial asset’ includes debt and thereby the definition as contained in Section 2(g) of the ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ is ushered in. As such, the phrase ‘financial asset’ and the term ‘debt’ including ‘secured debt’ are all interlinked and interwoven, interconnected and entwined with one another like a cobweb and the term ‘debt’ envisages the ‘decree debt’ as well as the ‘debt recovery certificate.’

39. The learned Senior counsel for the plaintiff also by inviting the attention of this Court to sub-sections (1) and (2) of Section 13 of the Act would develop his argument that unless sub-sections (1) and (2) of Section 13 are attracted, the question of invoking Section 13(4) does not arise and accordingly if viewed, the debt recovery certificate cannot be taken as one contemplated under sub-section (1) or (2) of Section 13.

40. I am of the considered opinion that Section 13(4) as well as sub-sections (1) and (2) of Section 13 are widely worded to include even mortgage debts, which got crystallised in the form of a decree or debt recovery certificate. No doubt, the term ‘debt recovery certificate’ is not contemplated in the definition as contained under Section 2(g) of the ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’. But still, the clause, ‘whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application’ would amply make the point clear that the said clause is wide enough to include even the debt recovery certificate. Accordingly, if viewed it is clear that ex facie and prima facie the notice issued under Section 13(4) of the SARFAESI Act on 27-7-2009 cannot be held to be one barred by limitation.”

I am sure that the complications under section 36 of SARFAESI Act, 2002 are temporary in nature and rarely discussed now as the Banks could have completed their recovery in the cases those were pending before 2002 by now.

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

SARFAESI Act: Is it possible to get a relief automatically in SARFAESI matters?

As everybody knows, Banks had to face numerous difficulties in recovering their loans earlier due to inordinate delay in Civil Courts and due to technicalities. In order to help the Banks in recovering their dues speedily ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’ (RDDBI Act) was enacted and the Banks could file a Original Application before specially constituted Debt Recovery Tribunal seeking a ‘Certificate of Recovery’ and it is like a getting a Decree from a Civil Court in a Civil Suit seeking recovery of money. Even after RDDBI Act was enacted, the Banks could not achieve considerable results and it has prompted the legislature to enact ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (SARFAESI Act) wherein the Banks are allowed to proceed against the ‘Secured Assets’ by determining the outstanding due on their own instead of getting the ‘outstanding due’ determined by the Debt Recovery Tribunal. The object of SARFAESI Act, 2002 is to enable the Banks to reduce the mounting ‘Non-performing Assets’ (NPAs). Banks or Financial Institutions are successful, as I feel, in taking the advantage of the provisions of SARFAESI Act, 2002. There were concerns at SARFAESI Act and it has been considered as draconian, however, the constitutional validity of the Act was upheld by the Constitutional Courts. The Courts have also addressed the concerns of the borrower by interpreting section 17 of the Act which confers authority on Debt Recovery Tribunal to pass orders in an Appeal preferred by the borrowers or any aggrieved person. The issue of making statutory deposit while preferring an appeal to the Debt Recovery Appellate Tribunal has also been dealt with by the Constitutional Courts and we have seen amendment in the Act in this regard. Again, despite the clear provision that the borrower should file an appeal within the stipulated period if he is aggrieved at the action under section 13 (4), the Courts have enabled the borrowers to approach the Debt Recovery Tribunal under Section 17 of the Act against all the steps taken by the Bank pursuant to the issuance of notice under section 13 (2) of the Act and also under section 13 (4). Courts have dealt with the issue as to how the Bank should entertain objections from the borrowers or any person to the notice under section 13 (2) and now it is clear that the Bank should apply its mind property while giving a mandatory reply to the objections raised by the borrower to the demand made by the Bank under section 13 (2) of the Act. As such, most of the issues under the Act are now settled barring the effectiveness of the mechanism provided to the borrowers to get their grievances addressed and barring very few other complicated issues.

Despite having the clear legal position now under SARFAESI Act, 2002, the borrowers or litigants still feel that they can automatically get relief against the Bank when the Bank proceeds against the ‘Secured Asset’ by issuing a notice under section 13 (2) of the Act and consequential steps. Getting an automatic relief against the Bank under section 17 of the Act from the Debt Recovery Tribunal is not at all true. There may be a clear case and in such cases, when the borrower approaches the Debt Recovery Tribunal under section 17 of the Act by raising some mechanical grounds, the borrower may get an interim relief upon the condition to deposit some amount. It would be temporary and the endeavour of the Debt Recovery Tribunal will always be to recover the outstanding due and the presiding officers can be sympathetic at times though they can not act against the express provisions of the Act. In fact, in clear cases and when the outstanding due amount is not huge, then, the borrowers or the litigants should think about the expenses of approaching the Tribunal and in some cases, these expenses are substantial considering the ‘outstanding due’. Again, in most of the cases, the borrowers or the litigants lacks the understanding of law when the Bank proceeds against the ‘Secured Asset’ under the provisions of SARFAESI Act and they want to get a definite opinion as to how to question the action initiated by the Bank. In fact, it is very difficult to get a definite professional advice in respect of SARFAESI matters and the borrowers may have to continually update the developments and should get the professional advice if they choose to. It is not like getting a legal opinion as to how to file a Civil Suit for damages for breach of Agreement or Contract. The Bank may be right in classifying the account as ‘NPA’ and still they may commit a mistake in following the mandatory procedure prescribed under the provisions of SARFAESI Act, 2002 and any deviation from the mandatory procedure gives a right to the borrower to question the Bank and get an appropriate relief. The Bank may be right in issuing notice under section 13 (2), giving reply to the objections under section 13 (3A), may be right in issuing possession notice under section 13 (4), but, they might be wrong in taking steps to auction the property and it gives right to the borrower to approach the Debt Recovery Tribunal seeking relief. Thus, in most of the cases and especially when the outstanding loan mount is not huge, the borrowers should take a prudent professional advice and should deal with the Banks if they are interested in securing the ‘Secured Asset’. If the borrowers or the litigants think that they will get some relief immediately and automatically against the Banks action under the provisions of SARFAESI Act, 2002, then, its wrong and not possible. In respect of the Loan Accounts or the transactions which are clear and not complicated, the borrower may not have any effective voice against the Banks except pleading for some waiver or some time to clear the ‘Outstanding Due’.

It is not the case with the loans sanctioned to the Corporates with typical arrangements and agreements. It is not the case where many Banks hold a pari-passu charge against assets of the Company and it is not the case where so much complicated litigation is pending before different forums in respect of a Company with substantial assets and interests. There can be complications while proceeding against the ‘builders’ or the owners of the land in respect of the loan sanctioned to the ‘Builder’ with typical and complicated tri-parte agreements. There can be many complications in respect of the loans sanctioned to the Corporate Houses and they may have a strong case against the Banks when the Banks proceed under the provisions of the SARFAESI Act, 2002. The Banks also may proceed unreasonably against a particular property though the interests of the Bank are secured through other disposable ‘Secured Assets’. In these cases, the borrower may effectively convince the Debt Recovery Tribunal under Section 17 and can get a relief. There may be a case where the ‘Secured Asset’ is sold for a throw away price and in these cases, in accordance with law, the Borrower may get a relief by approaching the competent forum. So, the presumption of getting automatic relief by approaching Court or the Debt Recovery Tribunal when the Bank proceeds under SARFAESI Act, 2002 is not at all correct.

With so many judgments, the stakes, the powers of the Bank, the RBI guidelines, the discretion of Banks in some cases, conflicting judgments, the law under SARFAESI Act, 2002 is still interesting and complicated. It may prove to be costly and risky, but, where there is a good ground in challenging the action initiated by the Bank under the provisions of SARFAESI Act, the borrower can definitely press for the relief and can get the relief. Courts have held that even when the Bank takes the physical of the property if the Banks found to be wrong, the Debt Recovery Tribunal can restore the possession back to the borrower and we see many such orders in recent times.

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

DRT & SARFAESI: Approaching High Court and Civil Court may prove to be costly in SARFAESI matters?

The jurisdiction of High Court and the Civil Courts in respect of action initiated by the Bank under the provisions of SARFAESI Act, 2002 is almost settled now. There should be a careful understanding and interpretation of the legal position in this regard. There are judgments of Supreme Court and High Courts emphasizing the need of exercising due care while entertaining Writ Petitions under Article 226 of Constitution of India in respect of SARFAESI cases. However, it doesn’t mean that the High Courts should not entertain any Writ Petition under Article 226 of Constitution of India in respect of SARFAESI cases. Depending upon the facts of each and every case, the High Court may come to a conclusion as to whether to entertain a Writ Petition or not in respect of SARFAESI cases. There was a practice of filing Writ Petitions earlier in respect of SARFAESI cases and even High Courts used to entertain such Petitions. However, there is a consistency in this regard now and the High Court will normally hesitate to entertain Writ Petitions in respect of SARFAESI matters under Article 226 of Constitution of India in view of clear alternative remedy under section 17 of SARFAESI Act, 2002 before the Debt Recovery Tribunal. The issue as to whether the remedy before Debt Recovery Tribunal is effective or not is a different issue altogether. In many cases, the borrower or litigant used to get an interim stay of SARFAESI action in his Writ Petition under Article 226 of Constitution of India, however, the Writ Petition will soon gets dismissed. This is what happening now when a litigant/borrower approaches the High Court challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002. It is settled legal proposition that a Writ Petition under Article 226 of Constitution of India is not maintainable where there is an efficacious alternative remedy. Cleverly, in all cases, it may be contended that though there is an alternative remedy, the same is not efficacious. These contentions are not accepted normally except in exceptional cases warranting the High Court to exercise its extraordinary jurisdiction under Article 226 of Constitution of India. Why litigants approach the High Courts frequently in respect of SARFAESI matters is that it is not costly filing a Writ Petition and there is a need to pay a Court Fee when a borrower/litigant approaches the Debt Recovery Tribunal under section 17 of SARFAESI Act, 2002. Again, there will be lot of work pressure in High Court and if once a Writ Petition is entertained or admitted, it will take lot of time to look at the matter again and to dispose of the case. However, the practice is different now in respect of SARFAESI matters and even the Bank takes due precaution in defending Writ Petitions challenging the Bank’s action under the provisions of SARFAESI Act, 2002.

On the same footing, the litigants/borrowers do approach Civil Courts challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002 despite the clear bar under Section 34. There is confusion and there are complications in this regard. The jurisdiction of Civil Court is not completely overruled in respect of SARFAESI matters and limited jurisdiction is upheld even in the land-mark Mardia Chemicals case. Despite ruling in favour of limited jurisdiction of Civil Courts, it is really difficult to maintain a Civil Suit before a Civil Court in respect of SARFAESI cases. Again it is very difficult to rule against the Civil Court’s jurisdiction based on the Bank’s reference to the provisions of SARFAESI Act, 2002. It all depends upon the facts and circumstances of the case.

The borrower/litigants may not be able to get an effective remedy under the provisions of SARFAESI Act, 2002 before the Debt Recovery Tribunal and Debt Recovery Appellate Tribunal. There may be lot of work pressure before the DRT and DRAT, they may not understand the seriousness at the grievance of the borrower in some cases and it may be attributed to the work pressure in most of the cases. That is why; many Writ Petitions and Petitions under Article 227 of Constitution of India were filed even in respect of cases which are pending before the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal under the provisions of SARFAESI Act, 2002. When the litigant/borrower approaches the right forum as provided in the statute and then approaches the High Court on the ground that the remedy is really not efficacious, then, the High Court may give directions to the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal. It can not be said that the borrower/litigant is always wrong and Bank is always right. There are serious allegations against the Bank Officials too in many cases and there are allegations at the manner in which the Bank conducts the auctions or sells the ‘secured asset’ through Private Treaty.

The litigants/borrowers may not be aware of the legal position and technicalities. Many feel that the Bank will be automatically restrained if the borrower approaches the High Court by filing a Writ Petition or files Civil Suit before a Civil Court. Its not at all true and the borrowers may actually be prejudiced by approaching the High Court and Civil Court without approaching the Debt Recovery Tribunal or Debt Recovery Appellate Tribunal when they have a grievance at the Bank’s action under the provisions of SARFAESI Act, 2002. For example, the litigant/borrower may have a very good case against the Bank and despite having good case; the borrower might have chosen to file Writ Petitions and Civil Suit. The Bank proceeds under the provisions of SARFAESI Act, 2002 despite the pendency of Writ Petitions and Civil Suit unless there is a specific restraint order. There may be a finding in the Writ Petition or the Civil Suit against the borrower that he approaches the High Court with wrong intention despite having clear alternative remedy under section 17 of SARFAESI Act, 2002. All this attitude of the litigant/borrower may work against the litigant/borrower despite the fact that he has a genuine grievance against the Bank. This is what happening in most of the cases today. The litigant/borrower keep on approaching High Court or the Civil Court and in the meanwhile the Bank proceeds with completion of the procedure in proceeding against the ‘Secured Asset’ under the provisions of SARFAESI Act, 2002. Then, it would be difficult for the litigant/borrower to turn the clock back and to explain as to why he did not approach the Debt Recovery Tribunal under Section 17. The litigant/borrower may also plead at the professional advice and may claim that he has acted as per the professional advice, but, those issues are not considered at all by the Courts except in exceptional cases.

Thus, the borrower should be very careful in raising his grievance against the Bank and a wrong approach may really cost him a lot.

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