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. 

Company Law Board & SARFAESI proceedings?

Company Law Board exercises very important functions under section 397/398 of the Companies Act, 1956 providing relief to the shareholders against ‘oppression and mis-management’ in the Company. When a group of shareholders are oppressed in any company or the company is mis-managed causing loss to the interests of the shareholders, shareholders very frequently exercise the option of approaching the Company Law Board under section 397/398 of the Companies Act, 1956 if they are qualified to do so under section 399. The shareholders have the option and can even approach the High Court seeking to wind-up the Company on ‘just and equitable cause’. In appropriate cases, the shareholders do approach even the Civil Courts seeking some relief against the Company though there always remains a confusion about the jurisdiction of Civil Court in dealing with the cases of ‘oppression and mis-management’ and also there is a strong belief that it is extremely difficult to get speedy relief from a Civil Court. In the cases of ‘oppression and mis-management’, the affected shareholders expect immediate relief in order to get their interests in the Company protected and this is the reason why the shareholders approach the Company Law Board under section 397/398 of the Companies Act, 1956 where the CLB is supposed to ignore technicalities and is supposed to ‘put an end to the matters complained of’.

In the process of adjudication under section 397/398 of the Companies Act, 1956 and where mis-management in the Company is alleged, the applicant shareholders can even make many other group companies or third parties etc., as parties to the petition and can be seeking to get certain transactions cancelled. This happens when the majority group in the Company or the directors in actual control of the Company, deal with the properties and funds of the company in an illegal manner and with the ultimate intention of siphoning off funds of the Company. These things are very frequently alleged in respect of ‘closely-held companies’ and rarely seen in-respect of ‘Listed Public Limited Companies’ in view of the shareholding-pattern and the authority of the SEBI to look into certain issues and the authority of the stock-exchanges where the shares are listed if it is a listed Company. 

In appropriate cases, the Company Law Board can be passing suitable orders under section 397/398 of the Companies Act read-with section 402 of the Act and these orders can affect even the third parties including Banks at times in my opinion.

Competency of Company Law Board to interfere with SARFAESI proceedings:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is meant to enable the Banks to speedily recover their ‘secured dues’ without approaching any Court or Tribunal and even when there exists a grievance to any person affected, he can only file an appeal under section 17 of SARFAESI Act, 2002. It is settled that when a Bank initiates proceedings against a Company under SARFAESI Act, 2002, the aggrieved party can give their objections to the Bank, can seek mandatory reply from the Bank under section 13 (3A) and if they are not satisfied at the reply given by the Bank, the aggrieved party can file an appeal under section 17 of the SARFAESI Act, 2002. There is a specific provision under section 34 of SARFAESI Act, 2002 that no Civil Court can interfere with SARFAESI proceedings and even the High Court exercises caution in interfering SARFAESI proceedings though there can never be a complete bar on the jurisdiction of High Court under section 226 and 227 of Constitution of India with regard to the proceedings initiated by Public Sector Banks or Banks. However, in view of the perceived failure of the Debt Recovery Tribunals in providing speedy and effective relief, High Courts can entertain challenge to the SARFAESI proceedings in appropriate cases as otherwise; there will not be any relief to the aggrieved even when the Bank proceeds illegally and unreasonably. Though, Civil Court’s jurisdiction is not completely barred in respect of SARFAESI proceedings in view of the scope established with Mardia Chemicals Case and other subsequent cases, it is highly difficult to convince any Civil Court and get the relief against the Bank. Again, aggrieved are often afraid to approach the Civil Courts in view of the lack of expertise on the part of Civil Courts in dealing with SARFAESI issues, the technicalities, the expenses and the delay involved.

As such, though section 34 of the SARFAESI Act, 2002 specifically deals with the jurisdiction of Civil Court, it is implied that no court or the forum can interfere with the proceedings initiated by the Bank under SARFAESI Act, 2002. This is established even when the liquidation proceedings are pending against a Company and the Bank will be proceeding against the ‘Secured Assets’ even when the liquidation proceedings are taking place against the Company.

Under these circumstances, it would be interesting to look into the jurisdiction of Company Law Board to pass any order or orders under section 397/398 of the Companies Act, 1956 affecting the proceedings initiated by the Bank against the Company. Two things are very important in this regard and those are as follows:

a.                           One is that the power of the Company Law Board to pass orders section 402 of the Companies Act, 1956 affecting the third party transactions and agreements.

b.                           Second is that the relief provided to the affected person under section 17 of the SARFAESI Act, 2002.

Though it is frequently referred that the Debt Recovery Tribunal can look into all issues under section 17 of the Companies Act, 1956, the Tribunal may not be able to effectively look into certain issues. For example, there is a precedent now that the rights of Tenants under the Tenancy Laws made by the State Governments will prevail over the rights of the Bank under SARFAESI Act, 1002; and if the Bank wants to get any tenant vacated from the premises; it has to mandatorily approach the Rent Control Tribunals. Same is the case, where the Bank can not claim the complete ownership of the ‘Secured Asset’ and these issues arise when the property mortgaged is a ‘Joint Family Property’ and the Bank was negligent in accepting the property as a security. In these cases, the appropriate authority to look into the rights of the members of a family in the property is the Civil Court and the Debt Recovery Tribunal may not be competent enough to look into partition and related property issues. These are the complications with which there was a precedent initially with regard to SARFAESI proceedings that the Debt Recovery Tribunal is supposed to only look into the fact as whether the Bank has followed the procedure under SARFAESI Act, 2002 or not. But, this precedent now has changed and the authority of the Debt Recovery Tribunal under section 17 of the Act is expanded at-least as a matter of principle irrespective of practical issues and difficulties.

Like-wise, a group of shareholders in a Company may allege mis-management in the Company and can oppose any proceedings initiated by the Bank against the Company under the provisions of SARFAESI Act, 2002. If it is established that the Bank is negligent and is also at fault while sanctioning the loan to the Company, the minority shareholders can definitely be opposing the proceedings initiated by the Bank against the Company. For example, if the Bank grants loan to the Company upon certain terms without bothering at the regulations under Companies Act, 1956 and without looking into the fact as to whether the people processed the loan transaction with the Company are authorized to do so or not, then, certainly, the minority shareholders would even be questioning the Bank and the Bank can not say that they are not supposed to look into any rules and regulations; and they will only look into the security provided. This argument may not be accepted always. There may be a contention here that even the minority shareholders or a shareholder of a Company can approach the Debt Recovery Tribunal under section 17 of the Companies Act, 1956 and as such, Company Law Board can do nothing with regard to the proceedings initiated by the Bank against the Company under SARFAESI Act, 2002. It is true that the shareholders can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 according to me if they could establish that their interests in the Company are affected and the Bank is wrong in sanctioning the loan without looking into the required issues. However, the Debt Recovery Tribunal may not be competent enough to look into the corporate rights of the shareholders and the Company Law principles. The Debt Recovery Tribunal can say that the affected shareholders can only proceed against the Company or the management and they can approach the High Court seeking winding-up and can approach the Company Law Board alleging mis-management. The Debt Recovery Tribunal may be right in its contention and it’s a very complicated issue and I don’t think that these issues would arise frequently, but, there is a possibility.

The issues of Bank negligently sanctioning loans to the Company and the interests of the shareholders, is very important when the Bank intends to proceed against the Company beyond the security provided.  Even when the Company gives security, if it is wrongful on the face of it and if the minority group or the shareholders are affected because of it, then, the minority group or the shareholders can definitely be questioning even the loan transactions with the Bank. 

If any individual guarantees the repayment of loan given to the Company and individual properties were mortgaged, then, the mortgagor may have no option if he feels aggrieved, except to approach the Debt Recovery Tribunal or the High Court in appropriate cases seeking relief. The issue is when the Bank proceeds against the Company assets and the Company and the interests of the shareholders in the Company are affected. This is certainly a very complicated issue to deal-with.

Few important points to be noted:

1.     It can not be said that the Company Law Board can not pass orders under section 397. 398 and 402 of Companies Act affecting the SARFAESI proceedings initiated against the Company. 

2.     Even if there is a mis-management in the Company, if the Bank has taken due and reasonable care while sanctioning the loan to the Company, then, the CLB may hesitate to interfere with any SARFAESI proceedings initiated by the Bank against the Company.

3.     Though the Debt Recovery Tribunal can look into all objections under section 17 of the SARFAESI Act, 2002, it may not be competent enough to deal with the issues of ‘oppression & mis-management’ requiring expertise and there can be a clear link at times between the SARFAESI proceedings against the Company and the interests of the minority group as protected under Companies Act, 1956.

4.     Though every shareholder is entitled for certain rights in the Company and for the relief at times, it is certainly complicated to say that the shareholder/s not qualified to approach High Court seeking liquidation etc. and shareholders not qualified under section 397/398 of the Companies Act, 1956, can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002. It is important in the light of a single shareholder alleging that his interests in the Company are affected with the Bank proceeding against the Company.

5.     If the Bank’s sanction of loan to the Company is clear and independent of other issues in the Company, then, the allegations of mis-management in the Company may not affect the rights of the Bank in proceeding against the Company or the security provided.

6.     The Bank’s interests can in no way be affected by any orders of the Company Law Board when the loan sanctioned to the Company is guaranteed with the sufficient assets of individuals and the CLB in those cases, may hesitate to interfere with the SARFAESI proceedings initiated by the Bank.

7.     Except the issues of fraud, gross negligence and the interests of the minority group in the Company, no other issues can be raised against the Bank if Bank is involved in a proceeding under section 397, 398 and 402 of Companies Act, 1956.

8.     There are no established precedents so far on these issues, but, these issues are very significant and real with the routine commercial transactions between the Banks and Companies.

Note: the views expressed are my personal only. 

Cause of Action to Appeal to DRT continues at various stages under SARFAESI Act, 2002?

It is felt that enormous powers are conferred on Banks or Public Financial Institutions under SARFAESI Act, 2002 from the stage of determination of outstanding due, entertaining objections, taking possession of the property and selling the property through private treaty at times and in public auctions very often. The borrower too has got a right to question the illegality if any on the part of the Bank in proceeding against the ‘secured asset’ under the Act. The right of the borrower to question the illegal act on the part of the Bank if any starts when the Bank issues a possession notice under section 13 (4) of the Act. Within 45 days from the date of receipt of notice under section 13 (4), the borrower can prefer an appeal to the Debt Recovery Tribunal under Section 17 of the Act seeking stay of further proceedings and seeking to set-aside the action initiated by the Bank under the provisions of SARFAESI Act, 2002 starting from the demand notice under section 13 (2). There were and there are many complicated areas under SARFAESI Act, 2002. The legislature wanted to make a balance between the rights of the borrowers and the interests of the Bank and focused on speedy recovery of loans as can be seen from the objects. Though, there were many complicated areas in the course of proceeding against the ‘secured asset’ under the provisions of SARFAESI Act, 2002, the issue of cause of action to file an appeal under section 17 of the Act was debated and remained complicated for some time. After considering the complications, the plight of the borrowers and the need of providing the borrower a remedy for his grievance, according to me, now it is settled that the borrower can question the action of the Bank under the provisions of SARFAESI Act, 2002 at any stage and on each event after issuance of notice under section 13 (4) of the Act. There still exist complications even with this proposition. There can be cases where the borrower could have remained silent after receiving notice under section 13 (4) and could have got all the knowledge of proceedings initiated by the Bank till the steps to sell the property and will he be allowed to question the sale proceedings finally? This is a very important question as the situation would be different if the borrower expresses his acceptable inability to approach the DRT under section 17 immediate to receipt of notice under section 13 (4). However, in view of the vast powers conferred on the Bank to enforce the ‘secured interest’, the borrower should be given an opportunity to file an appeal liberally though granting of relief will depend on the facts and circumstances of the case and also the law. The views expressed by the High Courts in few cases on the issue of cause action to file an appeal under section 17 of SARFAESI Act, 2002 are as follows:

1. Madras High Court – in Indian Overseas Bank Vs. G.S.Rajshekaran (2008 (4) MLJ 1012):

“From the aforesaid facts, it would be evident that the respondent-Writ Petitioner had not challenged the notice issued under Section 13(2) of the SARFAESI Act, but challenged the action of the appellant-Bank in taking possession of the secured asset for realising the same and such action of taking the possession of the secured asset though started on 13.11.2007, the cause of action continued till the notice dated 26.12.2007 was issued for auction-sale of the secured asset under Section 13(4) of the SARFAESI Act.

9. Section 13(4) of the SARFAESI Act enables the secured creditor to take recourse to one or more of the measures to recover the secured debt as shown under Clauses (a), (b), (c) and (d) of Section 13(4). The cause of action takes place as and when one or other such measure to recover the secured debt is taken by the secured creditor.”

2. Madras High Court – in Ponnusamy and another Vs. Debt Recovery Tribunal 2009 (1) LW 954, 2009 (2) CTC 302, 2009 (3) MLJ 1271:

“38. In Karnataka State Financial Corporation Vs. N. Narasimahaiah {2008 (5) SCC 176}, the Supreme Court held 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."

39. Viewed in the context of the ratio laid down by the Supreme Court extracted above, it could be seen that the right conferred upon the secured creditor under Section 13 (4) of the SARFAESI Act, is a right of recovery. The right conferred upon the debtor or the surety under Section 17 is a right to save one's own property. To hold that the fate of a debtor or surety will be sealed in a period of 45 days from the date of initiation of the measures under Section 13 (4) and that he would be left remediless after the said period on account of non-availability of Section 5 of the Limitation Act, would defeat the right to property. Therefore the Court has to choose an interpretation which would lean in favour of the right to property. If so done, the conclusion is irresistible that Section 5 of the Limitation Act, would apply to applications filed under Section 17 of the SARFAESI Act.

40. In so far as the present case is concerned, the possession notice under Section 13 (4) is dated 16.10.2007 and the notice of sale is dated 26.12.2007. The application was filed on 14.1.2008 and hence it was within the period of limitation, from the date of the notice of sale. Therefore there was not even a necessity for the petitioners to have filed an application to condone the delay, in so far as their prayer for setting aside the notice of sale was concerned.”

3. Bombay High Court – in Anand Jayant More Vs. Bank of India (2009 (6) ALL MR 187, 2010 (1) AIR(Bom) R 375, 2010 (2) BCR 484:

“11. Considering the rival submission, the first question is: whether the Debts Recovery Tribunal has jurisdiction to deal with post Section 13(4) situation. Both the Tribunal as well as Appellate Tribunal have proceeded on the basis that it is not open to the borrower to question the sale of the property which is post Section 13(4) situation. This issue has now been authoritatively answered by the Apex Court in the recent decision in the case of Authorized Officer, Indian Overseas Bank & Anr. vs. M/s.Ashok Saw Mill reported in 2009(9) SCALE 649. The main question examined by the Apex Court in this decision was whether the Debts Recovery Tribunal would have jurisdiction to consider and adjudicate with regard to post Section 13(4) events or whether its scope in terms of Section 17 of the Act would be confined to the stage contemplated under Section 13(4)? The Apex Court has answered the said issue in the affirmative. It has held that the consequences of the authority vested in Debts Recovery Tribunal under sub-section (3) of Section 17 necessarily implies that the Debts Recovery Tribunal is entitled to question the action taken by the secured creditors and the transactions entered into by virtue of Section 13(4) of the Act. It has expounded that the Legislature by including sub-section (3) in Section 17 has gone to the extent of vesting the Debts Recovery Tribunal with authority to even set-aside a transaction including sale and to restore possession to the borrower in appropriate cases. It has also noted that the dichotomy in the views expressed by the Bombay High Court and the Madras High Court has in fact been resolved to some extent in the case of Mardia Chemicals (supra) and also by virtue of the amendments effected to Sections 13 and 17 of the principal Act. It has thus held that the Debts Recovery Tribunal has jurisdiction to interfere with the action taken by the secured creditor even after the stage contemplated under Section 13(4) of the Act, as the action of the secured creditor is not only open to scrutiny and can be set-aside but it is also open to the Tribunal to restore status-quo ante in a given situation.”

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