It
is always welcome to enable the Banks to recover their dues using the
provisions of SARFAESI Act, 2002. It is known that it is very difficult for the
Banks to approach Civil Court
asking for a decree and getting that decree executed. With the intention of
enabling the Banks to reduce their NPAs through faster recovery of dues, ‘The
Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ was
enacted. Despite constituting ‘Debt Recovery Tribunals’ under the RDDBI Act,
1993 and providing special procedure to be followed before the Tribunal, Banks
could not reduce their NPAs as expected and it has led the legislature to enact
‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002’. It is all appreciable as the Banks deal with the public
money and public interest is obviously involved in reducing the Banks’ NPA
Accounts.
However,
no one in this country should be denied of an effective remedy and the criticism
is that the provisions of SARFAESI Act, 2002 are being misused by the Banks at
times and it is draconian. The issue went to Supreme Court and the
constitutional validity of SARFAESI Act, 2002 was upheld, however, the
judiciary was very much cautious of the interests of the borrowers and
providing them an effective remedy. From
then, judiciary in this country has made every effort to ensure that the object
of the SARFAESI Act, 2002 is not diluted and at the same time, the interests of
the borrowers are also protected. Lot of
confusion was there initially as to how certain provisions of SARFAESI Act,
2002 are to be interpreted; however, many issues are settled now with judiciary
taking consistent stand on many issues.
We
can not simply brush aside the concerns of the borrowers and the interest of
the borrowers in the property mortgaged with the Bank. Though right to property
is not a fundamental right, the Supreme Court has highlighted the significance
of right to property as it is a Constitutional Right and the relevant
observation of the Supreme Court in Karnataka
State Financial Corporation Vs. N.Narasimahaiah
(2008 (5) SCC 176), is as follows:-
"40. Right to property, although no longer a
fundamental right, is still a constitutional right. It is also human right. In
the absence of any provision either expressly or by necessary implication,
depriving a person therefrom, the Court shall not construe a provision leaning
in favour of such deprivation."
"In
a case where a Court has to weigh between a right of recovery and protection of
a right, it would also lean in favour of the person who is going to be deprived
therefrom. It would not be the other way round."
In-spite
of the clarifications and the efforts of the judiciary in providing guidance as
to how the provisions of SARFAESI Act, 2002 are to be interpreted and followed,
many still believe that certain issues are still to be addressed under SARFAESI
Act, 2002. Some of the critical issues under SARFAESI Act, 2002 are dealt-with
hereunder.
1: NPA classification & settlement of
issues at an early stage itself
Many
borrowers feel that they are being harassed by the Bank officials unreasonably
and using the provisions of SARFAESI Act, 2002. They claim that they are not
‘willful defaulters’ and even if there is some kind of default, they are
willing to correct the same and honour the commitments agreed upon. While in some cases, the Bank Officials
rightly show some kind of interest in helping the borrowers within the legal
frame-work, in some cases, the Bank Officials act unreasonably and invoke the
provisions of SARFAESI Act, 2002 by classifying the account as ‘Non-performing
Asset’ even if there is a possibility of regularizing the loan account.
Obviously, the Bank should follow the guidelines issued by the Reserve Bank of India in
classifying any loan account as ‘Non-performing Asset’. But, it is a question
of interpretation largely and as to how the Bank Officials want to use the
guidelines. Normally, the issue of classification of account as ‘Non-performing
Asset’ is not dealt with by the Tribunal or the Courts and they tend to support
the classification of any loan account as NPA if there is a default in payments
as agreed. But, the guidelines issued by the Reserve Bank of India with
regard to Asset Classification are not one-sided and it all depends upon
interpretation of those guidelines in respect of a particular ‘loan account’ or
borrower.
Dealing
with the subject, the High Court of Andhra Pradesh in M/s. Sri Srinivasa Rice and Floor Mill Vs. State Bank of India
(2007 (4) ALT 317: 2007 (4) ALD 649: 2007 AIR(AP) 252) was pleased to observe as follows:
“There is, as considered earlier in the judgment, no
statutory format, express or by necessary implication, that requires the
respondent bank to follow a particular or formal procedure or requires a formal
declaration as a condition precedent to classification of debt as NPA. From the
scheme of the Act in general and the provisions of Sec.13 (2) in particular the
conclusion is compelling that the legislature has consecrated the power,
authority and discretion (to classify a debt as a NPA) to the secured creditor
within the generic guidelines to be ascertained from the definition of a non
performing asset [Sec.2(o)].
A wide margin of discretion is available to the
respondent bank as the secured creditor, within the legislative presents of the
Act, to assess and classify a debt but within the legislative framework. This
Court is not constituted an appellate authority over the bank’s exercise of
discretion in this area. The respondent bank, as legislatively recognized is an
institution having the requisite expertise to form a commercial judgment on
known principles of banking practices and procedures fertilized by R.B.I
directions and guidelines to assess and classify a debt as NPA. From the wealth
of material pleaded in the counter-affidavit the bank had assessed the debt as
non-performing asset. On facts, the petitioners have miserably failed to
establish that such assessment by the bank is perverse or irrational to a
degree warranting oversight and correction in judicial review.”
My view:
Many
loan accounts infact can be settled at the stage of classifying the account as
NPA if the Bank is accommodative and willing to regularize the loan accounts if
the value of the asset has not gone down and if there is no problem with the
quality of asset mortgaged. It is known that it is not mandatory for the Bank
to intimate the borrowers informing about the classification of account as NPA
and the consequences. It is also not correct to say that the borrower is
unaware of the consequences of default. In some cases, the Bank Officials do follow an
amicable route and get their accounts regularized upholding the need of good
relations with the borrower. But, it is not so in some cases and the movement
the Bank issues a demand notice under section 13 (2) of the Act, they tend to
take the proceedings further, though at any stage, the Bank can consider the
proposal for regularization of accounts if there are no other disputes between
the Bank and the borrower in relation to that particular loan transaction or
transactions.
2: Powers of DRT
Section
17 of SARFAESI Act, 2002 provides a right of appeal against the action
initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrower
or any one aggrieved can challenge the possession notice issued under section
13 (4) of SARFAESI Act, 2002 and there is a time-limit prescribed for
preferring an appeal. However, as the Courts have rightly made it clear that the
borrower is entitled to question all measures initiated by the Bank pursuant to
the possession notice under section 13 (4) and with this interpretation, there
is no much relevance to the time-limit prescribed to prefer an appeal though it
will be in the interests of the borrower to prefer an appeal as early as
possible if there is a genuine grievance with the Bank.
While
the rights of the borrowers or the persons aggrieved to prefer an appeal under
section 17 of SARFAESI Act, 2002 is almost settled, the issue of powers of Debt
Recovery Tribunal under section 17 of the Act are still debated. From the stage
of maintaining that ‘the DRT is supposed to only look into the procedural
issues’, with the interpretation of Courts, the scope of powers of DRT under section
17 of SARFAESI Act, 2002 is significantly expanded though certain issues still requires consideration.
Emphasizing
that the Debt Recovery Tribunal is empowered to set-aside a sale conducted
under the provisions of the SARFAESI Act, 2002, the Hon’ble Supreme Court of
India in CIVIL APPEAL NO. 4429 OF 2009 (2009 (8) SCC 366, 2009 (8)
MLJ 897; 2009 (8) SCJ 979) was pleased to observe as follows:
“23. The intention of the legislature is, therefore, clear
that while the Banks and Financial Institutions have been vested with stringent
powers for recovery of their dues, safeguards have also been provided for
rectifying any error or wrongful use of such powers by vesting the DRT with
authority after conducting an adjudication into the matter to declare any such
action invalid and also to restore possession even though possession may have
been made over to the transferee. The consequences of the authority vested in
DRT under Sub-Section (3) of Section 17 necessarily implies that the DRT is
entitled to question the action taken by the secured creditor and the
transactions entered into by virtue of Section 13(4) of the Act. The
Legislature by including Sub-Section (3) in Section 17 has gone to the extent
of vesting the DRT with authority to even set aside a transaction including
sale and to restore possession to the borrower in appropriate cases.”
Emphasizing that the Debt Recovery
Tribunal can look into the issue of claims and counter-claims under section 17,
the Madras High Court in Misons Leather Ltd. Vs. Canara
Bank (2007 (4) MLJ 245), was pleased to observe as follows:
“In a given case, the claim of the Bank/Financial
Institutions may be barred by limitation or there may be cases, where the
adjustment of the amount paid is not reflected in the notice or the calculation
of interest may not be in accordance with the contract between the parties.
Needless to say that all such grounds, which render the action of the
Bank/Financial Institutions illegal can be raised in the proceedings under
Section 17 of the Act before the Debt Recovery Tribunal.”
Dealing with the issue straight away, the Hon’ble Calcutta
High Court earlier in Star Textiles and Industries Ltd Vs.
Union of India (2008 (3) WBLR 385), was pleased to observe as follows:
“(14.) THE legislature having conferred power on the Debts
Recovery tribunal to decide as to whether measure (s) taken by the secured
creditor in terms of Section 13 (4) of the Act is/are in accordance with the
provisions of the Act or not, it necessarily has to decide whether pre-conditions
for issuance of notice under Section 13 (2) existed or not. That would involve
a determination as to whether there has been default on the part of the
borrower to repay the secured debt or not and further, as to whether
classification of the account as non-performing asset has been made in
accordance with the directions or guidelines as referred to in Section 2 (o) of
the Act or not. If the Debts Recovery tribunal is satisfied that recourse has
been taken to measures specified in section 13 (4) of the Act not in accordance
with the provisions contained in sections 13 (2) read with 2 (o) of the Act, it
has the authority to declare the action of the secured creditor as invalid. At
the same time, the Debts Recovery tribunal may in a given situation find no
fault and uphold the action of the secured creditor. Also, in the exercise of
power conferred by Section 17 of the act, the Debts Recovery Tribunal may
uphold partially the action of the secured creditor by pronouncing that amount
"x" is not the correct computation of liability, but it is "x -
y" which is the liability. That would amount to determination of the exact
amount of debt due and payable by the borrower.”
My view:
Though
the Debt Recovery Tribunal is empowered to deal with the issues of quantum of
debt and the related claims under section 17 of SARFAESI Act, 2002, there is a
criticism that the Debt Recovery Tribunal avoids adjudication on certain issues
and helps the Bank by allowing the Appeal filed by the borrowers under section
17 on technical grounds and enabling the Banks to further deal with the
borrower. If this is the case, the borrower is forced to approach Tribunal many
times and he is made to run from pillar to post. Logically, the borrower can
insist the Debt Recovery Tribunal to deal with the issues raised by him in his
appeal and if there is an observation in the order against the Bank and for the
borrower, then, that is like a decree unless reversed and the observations do
matter and have binding nature on Banks. This is what is supposed to happen if
the borrower has a really good case with regard to the quantum of amount
demanded by the Bank, but, it is very rare to see issues proceeding this way as
many allege. If the DRT is hesitant or not effective in addressing all the issues
raised by the borrower in his appeal under section 17, then, the borrower will
be left with no remedy and he can not also approach the Civil Court in view of
section 34 and even if he approaches the Civil Court, it is very difficult to
convince and maintain a Civil Suit in respect of a loan transaction where the
Bank has initiated SARFAESI proceedings.
3: Sale
of Assets under SARFAESI Act
Sale
of Assets by the Bank under the provisions of SARFAESI Act, 2002 is often
criticized by the borrowers. In some cases, the auction process is hurriedly
completed and it would be extremely difficult for the borrowers to get the
transaction set-aside though the DRT is empowered to do so under section 17. It
is the responsibility of the Bank to ensure that they get the maximum possible
price for the property in Public Auction as they are the trustees of the
property and as the balance sale consideration, after adjustments, goes to the
borrower. There is lot of complication in this process and it is very difficult
for the borrowers at times to fight with the Banks and it has something to do
with the issue of lack of proper understanding of procedures and law under
SARFAESI Act, 2002. Not only while auctioning the properties under SARFAESI
Act, 2002, the Bank exercise enormous amount of discretion when many properties
are available for auction and the disposal of a property chosen by the borrower
clears the debt. Even from the point of
view of the bidder or purchaser, there can be issues. There may be cases where
the bidder or the purchaser paid the entire sale consideration and litigation
coming to Courts leading to non-conferment of complete ownership right. If the
delay between the payment of sale consideration and actual conferment of clear
title is more, the bidder or purchaser is also in trouble as he will only get a
minimum interest over his investment if the Sale is finally set-aside and the Bank is
asked to repay the Sale Consideration to the auction-purchaser.
Dealing
with the rights of the borrower in getting maximum possible price to the
property in a public auction conducted by the Bank and the vis a vis
responsibility of the Banks, the Hon’ble Madras High Court in K.
Raamaselvam & Others Vs. Indian Overseas Bank, 2009 (5) CTC 385, 2009 (5)
LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, was pleased to observe as
follows:
“For example, if the secured
creditor, on the basis of the relevant materials, comes to a conclusion that
the highest bid offered, even though higher than the reserve price, does not
reflect the true market value and there has been any collusion among the
bidders, the secured creditor in its discretion may refuse to confirm such
highest bid notwithstanding the fact that the highest bid is more than the
upset price. This is because the secured creditor is not only interested to
realise its debt, but also expected to act as a trustee on behalf of the
borrower so that the highest possible amount can be generated and surplus if
any can be refunded to the borrower. The first proviso in no uncertain terms
makes it clear that no sale can be confirmed by the authorised officer, if the
amount offered is less than the reserve price specified under the Rule 8(5).
However, the subsequent proviso gives discretion to the authorised officer to
confirm such sale even if the bid is less than the reserve price, provided the
borrower and the secured creditor agree that the sale may be effected at such
price which is not above the reserve price. This is obviously so because the
property belongs to the borrower and as security for the secured creditor and
both of them would be obviously interested to see that the property is sold at
a price higher than the reserve price. However, if both of them agree that the
property can be sold, even it has not fetched a price more than the reserve price;
the authorised officer in its discretion may confirm such auction.”
My view:
Though
it is settled that the Bank is supposed to mandatorily follow the procedure
prescribed for conduct of a public auction under SARFAESI Act, 2002, it all
depends upon the facts and circumstances of the case and the underlying issue
is getting the maximum possible price for the property.
4. High Court’s Jurisdiction in a proceeding
under SARFAESI Act, 2002
Though
High Courts used to entertain writ petitions under Article 226 of Constitution
of India challenging the notice under section 13 (2) of SARFAESI Act even
initially, there was a considerable amount of restraint and the emphasis was
always to ensure that the borrower raises all his issues under section 17 of
the Act by preferring an Appeal. The
jurisdiction under Article 226, 227 and Article 32 of Constitution of India are
untouchable and the Courts can only take a decision as to when to exercise such
a jurisdiction or not. It is laudable that the High Courts have not proceeded
in diluting the provisions of SARFAESI Act, 2002 and the Courts have
strengthened the process in public interest and in the interests of the Bank.
However,
considering the effectiveness of remedy available before the Debt Recovery
Tribunal and clear arbitrariness in dealing with the borrowers under SARFAESI
Act, 2002, many feel that there is no wrong if the High Court entertains Writ
Petitions under Article 226 and as the High Court will also pass reasoned order
as, now a days, it is not taking much time to get a Writ Petition disposed of.
Again, the Courts understand the need of early disposal of Writ Petitions in
SARFAESI matters and great caution is exercised in this regard as I feel. Many believe that the borrowers are
unnecessary made to approach the Debt Recovery Tribunal where the process is
slow for the borrowers and where the borrowers are made to deposit substantial
amount of outstanding due for getting any interim stay. Once the borrower
approaches the Debt Recovery Tribunal and if he is aggrieved of the proceedings
of the DRT or any order, the next remedy available for him is to file an appeal
before the DRAT which is again a very slow process and not effective. Again, if it is a challenge against the final
order in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to
deposit substantial amount and it can even be 75%. Thus, the borrower is made
to deposit the entire money or forget his property even when his grievance is
not adjudicated.
Emphasizing
that ordinarily the borrower is not allowed to knock the jurisdiction of High
Court under Article 226 in SARFAESI matters, the Calcutta High Court, in Annapurna Vs. State of West Bengal, 2009
(4) CalLT 557, 2009 AIR(Cal) 236, was
pleased to observe as follows:
“25. The overriding provision in Section 35 of the Act and
the intent thereof apparent from Section 37 thereof that provides that the Act
is in addition to, and not in derogation of, certain other regulatory and
general statutes, conceives of a single window redress before the Debts
Recovery Tribunal. The jurisdiction under Article 226 of the Constitution
cannot be taken away by such a statute but a grievance capable of being
redressed by the tribunal under the said Act should ordinarily not be allowed
to proceed in the High Court.”
On
the same lines and in support of exercise of extraordinary jurisdiction under
Article 226 even in matters where SARFAESI Act is invoked and dealing with the
argument of availability of alternative remedy, the Hon’ble Madras High Court
in Sheeba Philominal Merlin &
Another Vs. The Repatriates Co-op Finance & Development Bank Ltd., Chennai
& Others, 2010 (4) LW 497, 2010 (5) CTC 449, 2010 (7) MLJ 882, was
pleased to observe as follows:
“35. With regard to alternative remedy, it is seen that
there is a statutory violation by not issuing notice under Section 13(2) and
13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002.
There is contravention of statute and violation of principles of natural justice
and also violation of constitutional right to hold property as per Article 300A
of the Constitution of India.
It has been held by the Honourable Supreme Court in Vimala Ben Ajith Bhai Patel
-Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right
to property can be taken away only as per law and right to hold the property
has been glorified as "Human Right".
36. That apart, it is well settled law that
availability of an alternative remedy is not an absolute bar for exercising the
writ jurisdiction and it is only a self-imposed restraint on its power. This
has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh
reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade
Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs-
Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of
availability of alternate remedy miserably fails. The petitioners cannot
approach the Tribunal, as the measures taken by the Bank were belatedly known
to the petitioners and by that time the time prescribed under the Act was over.
The Judgement in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact,
justifies the contention of the petitioners. As per the judgement, Courts
cannot extend the time limit prescribed by the Statute. As such the only remedy
for the petitioners is to file a writ petition which has been rightly done by
them.
37. The Tribunal is not competent to look into
violation of fundamental rights and constitutional rights and this Court being
a custodian of Constitutional rights is entitled to examine the matter. A
Constitution Bench of the Honourable Supreme Court in its judgment in State of
West Bengal and others -Vs- The Committee For Protection of Democratic Rights,
West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of
the Constitution of India can be exercised for enforcing any legal right
conferred by a statute and it is further held that under Article 226 of the
Constitution of India, the High Court has got more wider power than the
Honourable Supreme Court. In Secretary Cannanore Muslim Educational
Association, Kanpur vs. State of Kerala reported in 2010
(5) SCALE 184, the Apex Court
held that the High Court is conferred with wide power to " reach injustice
whenever it is found". Therefore as injustice is writ large and glaring,
necessarily the judicial arm of this court has to reach there and it cannot be
prevented by plea of availability of alternative remedy.”
My view:
If there
is clear unfairness or arbitrariness on the part of the Bank in invoking the
provisions of SARFAESI Act or in the process, in my view, the High Court should
provide relief to the borrower without laying much emphasis on the issue of
availability of alternative remedy under section 17 of SARFAESI Act, 2002.
Banks are in no way impacted with this as the High Courts are always concerned
with the public interest and as they will be disposing of the Writ Petitions
under Article 226 so early, on request, in respect of SARFAESI matters.
5.
Civil Court’s
jurisdiction:
There
is a clear Bar under section 34 of SARFAESI Act, 2002 on Civil Courts in
dealing with SARFAESI related issues. It is also very difficult to convince a
particular Civil Court
that it has jurisdiction to entertain a particular suit against the Bank
irrespective of Bank referring to the provisions of SARFAESI Act. Civil
Court’s jurisdiction is not completely barred and
infact can not be barred even in cases where the Bank has invoked the provisions
of SARFAESI Act, 2002. If the DRT is not clearly empowered to deal with certain
issues raised by the borrower or to be raised by the borrower or the aggrieved
person, the borrower or the aggrieved can certainly approach Civil Court and it is settled. But, when
a borrower is entitled to approach the Civil Court depending upon the facts of
that particular case, then, it is certain that it is not easy to convince a Civil Court that it
has jurisdiction to entertain a particular suit against the Bank when the Bank
has invoked the provisions of SARFAESI Act, 2002. If the Civil Court is convinced of entertaining
a particular suit against the Bank, then, obviously, there can be an injunction
against the Bank in proceeding under the provisions of SARFAESI Act and there
is nothing to worry on this as only very few negligible cases qualify to be
maintained before a Civil Court.
There is nothing to worry for the Banks too with regard to Civil Court’s jurisdiction and they are
entitled to immediately seek redressel under Article 227 if they feel that the Civil Court is
exercising the jurisdiction which is not vested.
There
can really be genuine cases which can be and should be decided by the Civil Court.
However, with some borrowers trying to stall the SARFAESI proceedings by filing
a suit in Civil Court
and High Courts coming heavily, it is often felt that the borrower has no
remedy before a Civil Court
if the Bank invokes the provisions of SARFAESI Act once. It is a misconception and a Civil Suit before
a Civil Court against the Bank is maintainable in appropriate cases
irrespective of whether the Bank has invoked the provisions of SARFAESI Act or
not.
Note: the views expressed are my personal.
