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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note: the views expressed are my personal.

SARFAESI Act: Can the Bank adopt unfair/illegal methods to recover its due?

Recovery of its due has been a hectic exercise for the Banks in the absence of a special legislation. ‘Non-performing Assets’ were growing and a need was felt to reduce the ‘Non-performing Assets’ of the Banks drastically. As the recovery through Courts was a difficult exercise for the Banks, initially, a special legislation called ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’ was enacted creating a Special Tribunal called ‘Debt Recovery Tribunal’. Under the Act, the Banks are entitled to approach the Tribunal by filing an ‘Original Application’ which is similar to filing a suit in Civil Court proceedings. However, unlike the ‘Civil Court’ which is supposed to follow the ‘Civil Procedure Code’, a special and simple procedure has been prescribed under ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’. At the end of adjudication, the Tribunal is supposed to grant a certificate called ‘Recovery Certificate’ infavour of the Bank crystallizing the amount to be recovered from the borrower and it is like a ‘Decree’ granted by a Civil Court. There was a mechanism attached to the Debt Recovery Tribunal to conduct execution proceedings pursuant to the grant of ‘Recovery Certificate’. Thus, with ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’, the Banks were enabled to recover their dues speedily through the proceedings before the Special Tribunal called ‘Debt Recovery Tribunal’.

However, the object of reducing ‘Non-performing Assets’ could not be achieved even after enacting ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’ and as a result, another legislation on the similar field was enacted and it is ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Called ‘SARFAESI Act’ in short)’. Under SARFAESI Act, 2002, the Bank can determine the outstanding due after noting the objections from the borrower/guarantor if any and can proceed against the ‘secured asset’ by taking physical possession of the same and initiating auction proceedings in accordance with the provisions and the SARFAESI rules. Under SARFAESI Act, the Bank need not approach the Courts for getting the due crystallized as it will do everything on its own and the only occasion for the Bank to approach Court is under Section 14 of the Act seeking police assistance etc. while taking physical possession of the ‘Secured Asset’. The borrower or any person aggrieved is provided with a right to question the action of the Bank under SARFAESI Act, 2002 by filing an appeal to the Debt Recovery Tribunal under Section 17 of the Act. On different provisions of SARFAESI Act, 2002, the Courts have passed some land-mark judgments making good balance between the object of SARFAESI Act, 2002 and the interests of the borrower.

Few brief points, pursuant to the judgments of Constitutional Courts on SARFAESI Act, 2002, are as follows:

1. While upholding the constitutional validity of ‘SARFAESI Act, 2002’, Courts have made it very clear that the Bank is supposed apply its mind to the objections raised by the Bank and the reply to the Borrower has been made as ‘mandatory’ and subsequent to the intervention of direction from the Court, section 13 (3A) was inserted.

Criticism: While appreciating the concern of the Courts in the interests of the borrowers, many also continuously criticize as to how the Banks follow the directions or implement the provisions. There are critics arguing that the it is very difficult to know as to whether the Bank has applied its mind or not while replying the objections raised by the borrower under section 13 (3). There is also a criticism that the reply from the Bank may not have any value, though the object is good theoretically. Because, the reply from the Bank to the borrower, will not enable the borrower to question the same in any Court unless the Bank issues a notice to the borrower under Section 13 (4) which is normally referred as ‘Possession Notice’.

2. The Courts have made it very clear that the borrower can raise all his objections before the Debt Recovery Tribunal in an appeal under section 17 of the Act. The scope of enquiry has literally been expanded by the Courts and the ‘Debt Recovery Tribunal’ can not confine its enquiry only to the procedural issue as to whether the Bank is right in following the procedure. Consequent to the expansion of scope of enquiry, the scope of powers of ‘Debt Recovery Tribunal’ were also expanded to some extent.

3. Courts have come very heavily, from time to time, on procedural irregularities committed by the Bank as each provision was backed with certain object. This is very laudable.

4. Initially, it is understood that the Borrower can only question the possession notice issued by the Bank under Section 13 (4) of the Act. However, the Courts have consistently held that all measures taken by the Bank under Section 13 (4) of the Act are appeallable before the Tribunal. This is very important issue and Bank is in no way gets prejudiced if the borrower is given a right to question all measures taken by the Bank. In the absence of such a provision pursuant to Court’s intervention, the borrower is left with no remedy when his property worth 1 crore is sold for a meager sum of 10 lakhs by the Bank. In no stretch of imagination, it can be said that the Bank always acts fairly as it is a Public Sector Undertaking and which may not have any motives.

The most important thing to be discussed is as to whether the Bank can act unfairly or illegally in the course its recovery of money. It may be true in some cases where the borrower tries to trouble the Bank in getting or recovering the outstanding due. No action of the borrower can trouble the Bank if it holds a right over ‘Secured Asset’ and if there is ‘Secured Asset’. Banks are provided with a special legislative set-up, though drastic, to recover its dues. Banks can not complain at the special legislation enabling it to recover its due and the borrower keep complaining at this special legislation and they keep calling it as ‘draconian’.

With this back-ground, the Banks are not entitled to act unfairly or illegally in the course of recovery of money. The delay tactics, at times, adopted by the borrower is no excuse for the Banks as to why it has not acted fairly as every Public Sector Bank is supposed to act fairly and strictly in accordance with law.

I would like to give an example as to how the Banks too can trouble the borrowers using the stringent provisions of SARFAESI Act, 2002 and it is as follows:

Facts:

A borrower avails various loan facilities including an agricultural loan from a Bank and the various loan facilities are extended to many family members. Only one member of the family oversees all these credit facilities from the Bank. It was a ‘secured loan’. The sole member/borrower who has maintained all the loan accounts from the Bank has expired and other family members are not aware of the loan facilities granted by the Bank fully. However, the family members came to know about the existence of loans with the Bank. The Bank has also sent demand notices under section 13 (2) while main borrower was alive. The family has also realized that the ‘secured asset’ was already transferred or sold without any knowledge to the Bank. The family members have conveyed all facts to the Bank and wanted to settle all ‘loan accounts’ and they have requested the Bank for a ‘One-Time Settlement’. The Bank has agreed for a ‘One-Time Settlement’ and receives the full amount under OTS. After the receipt of money from the borrowers, the Bank sends a communication to the borrowers saying that the ‘OTS acceptance’ is cancelled as the OTS was not in accordance with the regulations.

After canceling the OTS, the Bank issues notices under section 13 (4) of the Act clubbing all loan facilities, however, splitting all loan facilities, into two sets.

The family members of the borrowers are literally shocked. Now, the Bank proceeds under section 13 (4) without referring anything as to what has happened in-between and balance outstanding is claimed under section 13 (4).

Analysis:

1. Bank is supposed to take every-care while accepting the OTS and it can not cancel the OTS after receipt of money substantial money from the borrower. Its an unfair practice unless the facts are such that the OTS cancellation is justified.

2. Bank will be clubbing all loan facilities, but issue notices as it likes. Sometimes, there can be one notice and there can be separate notices also despite the fact that the ‘Secured Asset’ is one and the same. When it issues ‘separate notices’, the borrower will be finding it extremely difficult while approaching the Courts or the Tribunal and they may be asking the borrower to file different Appeals or Cases though the entire transaction is same in substance.

3. The object of giving demand notice and seeking objections from the borrower is in line with the principles of natural justice and fair play. If much water is flown in between the notice under section 13 (2) and section 13 (4), the Bank is supposed to start the proceedings again under section 13 (2) and so that the borrower can raise his objections. But, this remains a complicated issue again.

4. The Borrower is entitled to ask for a ‘Specific Performance’ of OTS terms, however, it can be done in Civil Courts. DRT can say that it is not concerned with the OTS issues and even the High Court may ask the borrower to approach the Tribunal under section 17.

Like-wise, the borrower may also be facing lot of difficulties if the Bank misuses the provisions of the SARFAESI Act or intends to trouble the borrower. Irrespective of the object of SARFAESI Act, there is no justification whatsoever for the Banks or Public Sector Banks to act unfairly or act in a manner which is prejudicial to the borrower.

Note: the views expressed are my personal.