SARFAESI & DRT: Eviction of Tenant under SARFAESI Act, 2002?

Though the object of SARFAESI Act, 2002 is very good aiming at reducing ‘Non-Performing Assets” (NPA), the Constitutional Courts had to interpret the provisions of the Act dealing with many complicated issues and keeping in view the interests of the borrowers. Many issues under the provisions of SARFAESI Act, 2002 are settled now, however, the issue of eviction of Tenant using the authority or the power under Section 14 remains very significant. Many states have special laws protecting the interests of the Tenants and it has a very great object despite criticism. There need not be any written agreement or registered Lease Deed etc. for availing the protection under Tenant Protect Laws and depending upon the provisions of the law in that particular state. Even the express provisions of the Agreement or the Lease Deed can be ignored if the clauses in that particular agreement or the Deed goes against the express provisions of the Tenant Protection Laws in a particular state and the provisions of the Tenant Protection Law will prevail. In the light of the object of the SARFAESI Act, 2002 and the object of Tenant Protection Laws in a particular State, the issue of eviction of Tenant under Section 14 of SARFAESI Act, 2002 occupies significance. There can be complications if the Bank is asked to approach the Rent Control Courts to evict the Tenant. Again, there can serious issues if the Bank is allowed to proceed against the Tenant under Section 14 of the SARFAESI Act, 2002 without having any regard to the Lease Agreement, Understanding or the Lease Deed. The complications with the eviction of Tenant by the Bank in the course of its action under the provisions of SARFAESI Act, 2002 are, in brief, as follows:

1. If the Bank is not allowed to proceed against the Tenant under Section 14 to take physical possession of the property, then, the ‘Secured Asset’ may not fetch good value when it goes for auction. It can be detrimental to the interests of the borrowers and also can be detrimental to the interests of the Banks too in some cases. The bidders may definitely discount the risk of eviction while bidding for the property in auction. If the property is not fetching the market value, then, it may provide a right to the borrower or the owner of the property to challenge the auction too.

2. If the Bank is asked to approach Rent Control Courts or Rent Control Tribunal under the special State law dealing with the protection of Tenants, then, it would be interesting to see as to the grounds available to the Bank to ask for eviction of Tenants from the ‘Secured Asset’.

3. From Tenants point of view, he or she may suffer an irreparable loss due to the action of the Bank under SARFAESI Act, 2002 and the Tenant may find it difficult to proceed against the owner of the property in getting the Advance amount back or in claiming the damages. There is a justification from Tenants point of view and it will be definitely difficult for the Tenant to vacate the premises immediately as against their plans. Who will compensate the Tenant in genuine cases?

4. We can not also rule-out the possibility of fictitious arrangements or Agreements if the protection is provided to the Tenants and it is held that the Banks can not take physical possession of the ‘Secured Asset’ under Section 14. We know many cases pending before Rent Control Courts or Tribunal for years. In many cases, Tenants used to approach Debt Recovery Tribunal now under section 17 as soon as they come to the knowledge of SARFAESI proceedings. The DRT, in my opinion, may rule in favour of Bank in many of these cases and the Tenant is carefully been scrutinized.

There can be many complications when it comes to eviction of Tenant by the Bank while it proceeds against the ‘Secured Asset’ under the provisions of SARFAESI Act, 2002. The issue is not simple and it is complicated requiring a special law as otherwise, we would be seeing many judgments on this issue expressing different views and it will take some time to see a settled legal position in this regard. After many judgments or views, now the issues like cause of action to file an appeal under section 17, the remedy against the order of Magistrate Court under Section 14 and the powers of DRT under Section 17 etc. are settled. Likewise, in the absence of any special law or attention by the law-makers with regard to eviction of Tenants under SARFAESI Act, 2002, there be will many more judgments on this issue and it may take some time to see a settled legal position in this regard. I was always thinking of this complicated issue under the provisions of the SARFAESI Act, 2002 and I am happy to note a judgment of Madras High Court dealing with this particular issue in the light of all related legislations. A detailed observation of Madras High Court in W.P.Nos.23850 & 27432 of 2010, between Indian Bank Adyar Branch Vs. M/s Nippon Enterprises South, CDJ 2011 MHC 1482 is as follows:

“25. Point no.(ii): The contention of the tenant is that its right to continue to be in possession of the property in question as lessee is protected by the TN Rent Control Act. Hence, under Section 13(4) of the SARFAESI Act, only symbolic possession could be taken and not actual/physical possession. It is the further contention that the SARFAESI Act cannot extinguish the right accrued to a tenant under the provisions of the TN Rent Control Act. On the other hand, it is the contention of the bank that the SARFAESI Act has got overriding effect over the TN Rent Control Act in view of the provisions of Section 35 and therefore the rights said to have been accrued in favour of the tenant under the TN Rent Control Act cannot be enforced as against the bank while the bank invokes the provisions of the SARFAESI Act.

26. The question is, therefore, as to whether the SARFAESI Act has got overriding effect over the TN Rent Control Act. Section 35 of SARFAESI Act reads as under:-

"35. The provisions of this Act to override other laws.--The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

27. The power to make laws by the Parliament and State Legislature flows from Article 245 of the Constitution. Article 246 of the Constitution deals with the respective subject matter of laws that could be made by the Parliament and State Legislature respectively as provided in Seventh Schedule. By virtue of the non obstante clause contained in Article 246(1) of the Constitution, Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I of Seventh Schedule. By virtue of the non obstante clause contained in Article 246(2) of the Constitution, Parliament and, subject to clause (1), the Legislature of any State shall have power to make laws with respect to any of the matters enumerated in List III of Seventh Schedule. Likewise, by virtue of Article 246(3) of the Constitution, subject to clauses (1) and (2), the State Legislature has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II of Seventh Schedule. Article 254 of the Constitution is a mechanism to reconcile a law made by the Parliament and a law made by the State Legislature, in the event there is inconsistency.

28. The scope and ambit of Article 254 of the Constitution came up for consideration before the Supreme Court on various occasions. A Constitution Bench of the Supreme Court in M.Karunanidhi v. Union of India, (1979) 3 SCC 431 had an occasion to consider the issue relating to repugnancy between the law enacted by the Parliament and the State Legislature and evolved certain principles to be applied for determining the repugnancy between those laws. In paragraph 8 of the said judgment, the Supreme Court has held as follows:-

"8. It would be seen that so far as clause (1) of Article 254 is concerned, it clearly lays down that where there is a direct collision between a provision of law made by Parliament with respect to one of the matters enumerated in the Concurrent List,, then, subject to the provisions of clause (2), the State law would be void to the extent of the repugnancy. This naturally means that where both the State and Parliament occupy the field contemplated by the Concurrent List then the Act passed by Parliament being prior in point of time will prevail and consequently the State Act will have to yield to the Central Act. In fact, the scheme of the Constitution is a scientific and equitable distribution of legislative powers between Parliament and the State Legislatures. First, regarding the matters contained in List I, i.e., the Union List to the Seventh Schedule, Parliament alone is empowered to legislate and the State Legislatures have no authority to make any law in respect of the Entries contained in List I. Secondly, so far as the Concurrent List is concerned, both Parliament and the State Legislatures are entitled to legislate in regard to any of the Entries appearing therein, but that is subject to the condition laid down by Article 254(1) discussed above. Thirdly, so far as the matters in List II, i.e., the State List are concerned, the State Legislatures alone are competent to legislate on them and only under certain conditions Parliament can do so. It is, therefore, obvious that in such matters repugnancy may result from the following circumstances:

1. Where the provisions of a Central Act and a State Act in the Concurrent List are fully inconsistent and are absolutely irreconcilable, the Central Act will prevail and the State Act will become void in view of the repugnancy.

2. Where however a law passed by the State comes into collision with a law passed by Parliament on an Entry in the Concurrent List, the State Act shall prevail to the extent of the repugnancy and the provisions of the Central Act would become void provided the State Act has been passed in accordance with clause (2) of Article 254.

3. Where a law passed by the State Legislature while being substantially within the scope of the entries in the State List entrenches upon any of the Entries in the Central List the constitutionality of the law may be upheld by invoking the doctrine of pith and substance if on an analysis of the provisions of the Act it appears that by and large the law falls within the four corners of the State List an entrenchment, if any, is purely incidental or inconsequential.

4. Where, however, a law made by the State Legislature on a subject covered by the Concurrent List is inconsistent with and repugnant to a previous law made by Parliament, then such a law can be protected by obtaining the assent of the President under Article 254(2) of the Constitution. The result of obtaining the assent of the President would be that so far as the State Act is concerned, it will prevail in the State and overrule the provisions of the Central Act in their applicability to the State only. Such a state of affairs will exist only until Parliament may at any time make a law adding to, or amending, varying or repealing the law made by the State Legislature under the proviso to Article 254.

So far as the present State Act is concerned, we are called upon to consider the various shades of the constitutional validity of the same under Article 254(2) of the Constitution."

29. Subsequently, in Government of Andhra Pradesh and another v. J.B.Educational Society and another, (2005) 3 SCC 212, in paragraph 9, after referring to M.Karunanidhi's case, the Supreme Court has held as follows:-

"9. Parliament has exclusive power to legislate with respect to any of the matters enumerated in List I, notwithstanding anything contained in clauses (2) and (3) of Article 246. The non obstante clause under Article 246(1) indicates the predominance or supremacy of the law made by the Union Legislature in the event of an overlap of the law made by Parliament with respect to a matter enumerated in List I and a law made by the State Legislature with respect to a matter enumerated in List II of the Seventh Schedule."

30. In Central Bank of India v. State of Kerala, (2009) 6 CTC 656, after referring to the judgment in State of West Bengal v. Kesoram Industries Limited, (2004) 1 SCC 201, the Supreme Court has observed as "In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State Law will be ultra vires and shall have to give way to the Union Law."

31. Recently in Zameer Ahmed Latifur Rehman Sheikh v. State of Maharashtra and others, AIR 2010 SC 2633, after referring to the above judgments, more particularly, the judgment of the Constitution Bench in M.Karunanidhi's case, in paragraph 38, the Supreme Court has held as follows:-

"38. It is common ground that the State legislature does not have power to legislate upon any of the matters enumerated in the Union List. However, if it could be shown that the core area and the subject matter of the legislation is covered by an entry in the State List, then any incidental encroachment upon an entry in the Union List would not be enough so as to render the State Law invalid, and such an incidental encroachment will not make the legislation ultra vires the Constitution."

32. While dealing with an identical case, a Constitution Bench of the Supreme Court in Offshore Holdings Private Limited v. Bangalore Development Authority and others, 2011 (1) Scale 533, in paragraph 61, has held as follows:-

"61. We are dealing with a federal Constitution and its essence is the distribution of legislative powers between the Centre and the State. The Lists enumerate, elaborately, the topics on which either of the legislative constituents can enact. Despite that, some overlapping of the field of legislation may be inevitable. Article 246 lays down the principle of federal supremacy that in case of inevitable and irreconcilable conflict between the Union and the State powers, the Union power, as enumerated in List I, shall prevail over the State and the State power, as enumerated in List II, in case of overlapping between List III and II, the former shall prevail. This principle of federal supremacy laid down in Article 246(1) of the Constitution should normally be resorted to only when the conflict is so patent and irreconcilable that co-existence of the two laws is not feasible. Such conflict must be an actual one and not a mere seeming conflict between the Entries in the two Lists. While Entries have to be construed liberally, their irreconcilability and impossibility of co-existence should be patent. One, who questions the constitutional validity of a law as being ultra vires, takes the onus of proving the same before the Court. Doctrines of pith and substance, overlapping and incidental encroachment are, in fact, species of the same law. It is quite possible to apply these doctrines together to examine the repugnancy or otherwise of an encroachment. In a case of overlapping, the Courts have taken the view that it is advisable to ignore an encroachment which is merely incidental in order to reconcile the provisions and harmoniously implement them. If, ultimately, the provisions of both the Acts can co-exist without conflict, then it is not expected of the Courts to invalidate the law in question."

33. In yet another judgment in Girnar Traders v. State of Maharashtra and others, 2011 (1) Scale 223, in paragraph 78, the Constitution Bench of the Supreme Court has held as follows:-

"78. A self-contained code is an exception to the rule of referential legislation. The various legal concepts covering the relevant issues have been discussed by us in detail above. The schemes of the MRTP Act and the Land Acquisition Act do not admit any conflict or repugnancy in their implementation. The slight overlapping would not take the colour of repugnancy. In such cases, the doctrine of pith and substance would squarely be applicable and rigours of Article 254(1) would not be attracted...."

34. Keeping in mind the principles evolved by the Supreme Court in the above judgments, let us consider the scheme of the SARFAESI Act and the TN Rent Control Act. The SARFAESI Act is traceable to Entry 45 of List I of the Seventh Schedule, whereas the TN Rent Control Act is traceable to Entry 6 of list III. Both the Acts have been enacted by the Parliament and the State Legislature respectively well within their respective competence in their respective fields. The question to be considered is as to whether there is any overlapping between the two enactments. To find out whether a particular enactment is within the legislative competence of the Parliament or State Legislature, the doctrine of pith and substance is to be applied. If the same is applied to the facts of the present case, it goes without saying that the SARFAESI Act is an Act aiming at a mechanism to recover the outstanding dues towards the banks and financial institutions by following certain procedures without the intervention of the Courts and Tribunals. Prior to the enactment of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the dues to the banks were to be recovered only by approaching the civil Courts. Having experienced the delay in civil courts and taking into account that public money is locked in the hands of unscrupulous persons which is not good for the banking sector and ultimately the economy of the country, the Central Government constituted a committee on the financial system headed by Shri M.Narasimhan to go into the issue and based on the recommendations of the said Committee, the above Act was passed thereby ousting the jurisdiction of the civil Courts in respect of the debts due to the banks and constituting Tribunals. Under the said Act, the banks could approach the Debts Recovery tribunal and for appeal, the Debts Recovery Appellate Tribunal constituted under the Act for recovery of its dues. The said Act is a complete code in itself. During the working of the said Act, it was felt that even the said Act was not effective, as the same did not achieve the desired result. Therefore, it was thought of evolving a new mechanism so that the debts due to the banks could be recovered in a speedy manner. It was under those circumstances, two committees were constituted and the said committees recommended to the Government that even the intervention of the tribunal may not be necessary and instead, the banks themselves can be given power to directly recover the debts due to the banks by following certain procedures. It was based on the said recommendations, the SARFAESI Act came into being. The Act can be treated as one of the legislative measures taken by the Government for ensuring that the dues of secured creditors including banks and financial institutions are recovered from the defaulting borrower without undergoing long drawn litigation in civil Courts. A close reading of the scheme of the SARFAESI Act would go to show that it aims at speedy recovery of the debts due to the banks and financial institutions without the intervention of either the civil court or tribunal. Certain safeguards are also provided for the debtor to approach the Debt Recovery Tribunal by making application under Section 17 of the SARFAESI Act and also to make further appeal to the Debts Recovery Appellate Tribunal, if the debtor is aggrieved by any of the actions of the bank under Section 13 of the SARFAESI Act. From the scheme of the Act, beyond any controversy, the SARFAESI Act is basically procedural in nature only to recover the dues. The Act does not create any substantive right in the bank.

35. As against the above, the TN Rent Control Act was enacted by the State Legislature under Entry 6 of Concurrent List to protect the interest of the tenants. As it was felt that the provisions of the TP Act were not found to be effective to protect the interest of the tenants, the State Legislature thought it fit to bring in the legislation mainly with a view to protect the rights of the lessees. It is needless to point out that under the TP Act, a lease can be terminated without assigning any reason by simply issuing a statutory notice under Section 106 of TP Act. The TN Rent Control Act was enacted to regulate the letting of residential and non-residential buildings and control of rents of such buildings and the prevention of unreasonable eviction of tenants therefrom. For the said purpose, Rent Control Tribunals are constituted with a provision of appeal enabling the aggrieved persons to approach them. A further revision is also contemplated to the High Court. Under the TN Rent Control Act, a tenant can be evicted only on specific grounds enumerated under Section 10 of the Act. The lease cannot be terminated by the unilateral act of the landlord. Further, under the TN Rent Control Act, tenancy under an unregistered deed or even under oral agreement is protected and such tenant is also entitled to have equal rights like that of the tenant under the registered lease under Section 107 of the TP Act. The entire scheme of the Act would go to show that it is more substantive as well as procedural and the Act is a complete code in itself. This Act clearly mandates that a tenant is entitled to continue to be in possession of the building until and otherwise he is evicted as per the provisions of the Act and not otherwise.

36. Under Section 13(4) of the SARFAESI Act, the secured creditor can take possession of the secured assets of the borrower. There can be no difficulty in taking such possession of the secured assets either under Section 13(4) or under Section 14 of the SARFAESI Act, if the secured asset is in the possession of the borrower or guarantor, as the case may be. SARFAESI Act entitles the creditor to take possession of the secured assets either by issuing possession notice under Section 13(4) or by making application to the Chief Metropolitan Magistrate/District Magistrate to take physical possession under Section 14. Though the function of Chief Metropolitan Magistrate/District Magistrate is only ministerial, the provision of Section 14 confers drastic power to take possession even by use of force. The difficulty arises only in cases where the possession of the property is in the hands of the tenant (lessee). The SARFAESI Act does not contain any specific provision enabling the secured creditor to take possession from the hands of a tenant (lessee). On the other hand, the TN Rent Control Act contemplates that a tenant is entitled in law to continue to be in possession unless he is evicted under the provisions of the said Act. SARFAESI Act being mainly procedural and the TN Rent Control Act being exclusively dealing with the substantive right of tenants, both the Acts operate on different fields. Only in the event the SARFAESI Act contains a provision to enable the bank to take possession of a secured asset from a lessee, then only it can be held that there is conflict between the SARFAESI Act and the TN Rent Control Act in which case, the TN Rent Control Act should give way for the SARFAESI Act to have overriding effect. However, there is no such provision in the SARFAESI Act enabling the bank to take possession from the lessee, though the Act speaks of the right of the bank to take possession of the secured asset. Moreover, right from Section 13(2) till exhausting the provision of appeal, the bank deals only with the borrower/guarantor and the lessee is nowhere in the picture, as the Act does not require the bank to involve the lessee/tenant as well in the proceedings. Thus, we do not find any overlapping or inconsistency between these two Acts. When there is no such overlapping or repugnancy between these two provisions in respect of taking possession from the lessee, it has to be held that physical possession of the secured assets from the lessee/tenant can be taken only by invoking the provisions of the TN Rent Control Act.”

In these cases, the issue of registration of Lease Agreements or Deeds occupies significance and in many cases of this kind, emphasis is being laid on the issue of registration as required under Transfer of Property Act or Registration Act. Even dealing with the issue of requirement of registration of Rental Agreements or Lease Deeds in the light of protection available to the Tenants under the State Laws, the Court has observed as follows:

“44. Incidentally a question was raised as to whether an unregistered instrument can create a lease. The said question came up for consideration before the Supreme Court in the judgment in Rana Vidya Bhushan Singh v. Shri Rati Ram, (1969) 1 SCWR 341, wherein the Supreme Court observed as follows:-

"The agreement was unregistered. It could not create in favour of the defendant the right of a tenant for a period of fifteen years. The agreement was on that account inadmissible in evidence to support that claim. But in support of the plea that his possession was that of a tenant the defendant was entitled to rely upon the recitals contained in that agreement of lease ... ... ... A document required by law to be registered, if unregistered, is inadmissible as evidence of a transaction affecting immovable property, but it may be admitted as evidence of collateral facts, or for any collateral purpose, that is for any purpose other than that of creating, declaring, assigning, limiting or extinguishing a right to immovable property."

In the event an unregistered document is sought to be relied upon for collateral purpose, namely, the purpose other than that of creating, declaring, assigning, limiting or extinguishing a right over immovable property, it is admissible in evidence.

45. In Anthony v. K.C.Ittoop and Sons and others, (2001) 1 M.L.J. 12, the Supreme Court found that there are three interdictions to claim that an instrument can create a valid lease in law. The first inhibition is that it should be in accordance with the provisions of Section 107 of the Transfer of Property Act. That Section reads as under:-

"107. A lease of immovable property from year to year, or for any term exceeding one year, or reserving an yearly rent, can be made only by a registered instrument."

The second inhibition, as pointed out by the Supreme Court, is Section 17(1)(d) of the Registration Act, which states that where a lease of immovable property from year to year or for any term exceeding one year or reserving an yearly rent, such document should be compulsorily registered. The third inhibition, as noted by the Supreme Court, is Section 49 of the Registration Act relating to the consequence of non-compliance of Section 17. Section 49(c) contemplates that no document required by Section 17 or by any provision of the Transfer of Property Act to be registered shall be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered.

46. Having regard to the above three inhibitions, the Supreme Court has held that insofar as the instrument of lease is concerned, there is no scope for holding that the appellant is a lessee by virtue of the said instrument. Nevertheless, the Supreme Court, taking into consideration of the proviso to Section 49 of the Registration Act, found that an unregistered lease deed may be taken as evidence of any collateral transaction not required to be effected by registered instrument. The Supreme Court, in paragraph-13 of that judgment, has held as follows:-

"13. When lease is a transfer of a right to enjoy the property and such transfer can be made expressly or by implication, the mere fact that an unregistered instrument came into existence would not stand in the way of the court to determine whether there was in fact a lease otherwise than through such deed."

The Supreme Court further went on to add that when the landlord intended to put the tenant into possession of the building and the tenant was paying monthly rent or had agreed to pay the rent in respect of the building, the legal character of the appellant's possession should be attributed as a jural relationship between the parties. With that finding, the Supreme Court held in paragraph-14 as follows:-

"14. When it is admitted by both sides that the appellant was intended into the possession of the building by the owner thereof and that the appellant was paying monthly rent or had agreed to pay rent in respect of the building, the legal character of the appellant's possession has to be attributed in a jural relationship between the parties. Such a jural relationship, on the facts situation of this case, cannot be placed anything different from that of lessor and lessee falling within the purview of the second para of Sec.107 of the TP Act extracted above. ...."

47. In the given case, the lease deed which is sought to be relied upon by the tenant in a proceeding initiated by the bank under the provisions of the SARFAESI Act to contend that in the wake of the provisions of Section 31(e) and it being a tenant in bona fide occupation, the bank cannot take possession of the premises in question from the tenant under the provisions of SARFAESI Act. The reliance sought to be placed by the tenant over the unregistered lease deed is only for a collateral purpose to show that the tenant was inducted into the premises right from the year 1992 and thereafter, by an unregistered lease deed, from the year 2000 it had been in possession of the premises.

48. Hence, the contention of the learned senior counsel that in view of sub-section (2) of Section 69 of the Indian Partnership Act, the application at the instance of an unregistered partnership firm is not maintainable against the bank cannot be accepted and the point is answered accordingly.”

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

SARFAESI & DRT: Few important issues under SARFAESI Act, 2002 - II?

We all know the object of SARFAESI Act, 2002. There was a need to enable the Banks to speedily recover their loans and by approaching Civil Courts earlier, they could not effectively recover the loans and as a result Banks doing business with public money were facing enormous problems. It was in this backdrop and based on the recommendations of the committees, the “Recovery of Debts Due to Banks and Financial Institutions Act, 1993” was enacted enabling the Bank to approach the Special Tribunal called “Debt Recovery Tribunal” to get a declaration as to the outstanding due from the borrowers and to get the declaration executed. This is all a special mechanism and everybody knows this. As the Banks could not reduce their Non-performing Assets (NPA) even after enacting RDDBI Act, 1993, based on the recommendations of the Committee, “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” was enacted. Under the SARFAESI Act, 2002, Banks can follow a procedure to determine the outstanding due on their own and they will take such steps required in accordance with the Act in realizing their due. The procedure of making a demand by the Bank under section 13 (2) of the Act, entertaining objections, reply to the objections from the borrowers under section 13 (3A) within the prescribed time, taking symbolic possession of the property under section 13 (4), taking physical possession of the property/secured asset by taking assistance from the Magistrate under section 14 and conducting an auction of the property mortgaged in accordance with the provisions of the Act and rules, are well known now. The borrowers are provided with a right to appeal to the Debt Recovery Tribunal under section 17 of the Act if they are aggrieved at the action initiated by the Bank and the borrower can exercise their right of appeal as against any action by the Bank pursuant to section 13 (4) of the SARFAESI Act, 2002.

Though, the entire mechanism under SARFAESI Act, 2002 appeared to be clear, Courts had to interfere and deal with many complicated issues in the interests of the Bank and also the Borrower. I would say that, though there are some complicated issues even now, the Constitutional Courts did interpret the provisions of the Act well and many issues under the Act are now well settled. Few complicated issues under the Act in the past are as follows:

1. Is it mandatory for the Bank to reply to the objections raised by the borrower in response to the demand notice under section 13 (2)?

Now, it is mandatory to give a reasoned reply to the objections raised by the borrower and the Courts have rightly held in this regard. Under section 13 (3A), now, it is mandatory for the Banks to reply to the objections raised by the borrower within a time frame as prescribed.

2. Will the borrower loose his right to appeal under section 17 if he doesn’t prefer an appeal within 45 days from the date of receipt of notice under section 13 (4) of the Act?

This is really an important issue addressed by the Constitutional Courts. There was a confusion in this regard and now the Courts have consistently held that the borrower can question all the steps initiated by the Bank pursuant to section 13 (4). Borrower can question the ‘Sale Proceedings’ and can also challenge the order passed by the Magistrate Court under section 14 of the Act. Despite the clear wording in the provisions of the Act, the legal proposition in this regard is well settled now. This proposition is infavour of the borrower and it protects the rights of the borrower against the Bank.

3. Whether the High Court can interfere with the proceedings initiated by the Bank under the provisions of SARFAESI Act, 2002?

Definitely, there can not be any embargo on the jurisdiction of the Constitutional Courts under Article 226 of Constitution of India. However, in view of the object of SARFAESI Act, 2002 and availability of alternative remedy, the High Courts now consistently holding that the borrower is not supposed to come to High Court challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002. However, where the Bank is not correct clearly in classifying the account as ‘NPA’ which is preliminary to initiate proceedings under the provisions of SARFAESI Act, 2002, the High Courts do interfere with the action initiated by the Bank. Again, it depends upon the facts and circumstances of the case. The legal position in this regard is also settled to a great extent.

4. The powers of DRT under Section 17 of the Act?

Constitutional Courts have clearly held that the DRT has elaborate powers and it can even restore the possession back to the borrower in the event it find the action initiated by the Bank is illegal or incorrect. There is still confusion in my mind with regard to the powers of the DRT in adjudicating the due under section 17. One view is that the DRT can only look into the correctness of the procedure prescribed while entertaining appeal under section 17. The other view is that the Appeal under section 17 of SARFAESI Act, 2002 is like an original proceeding and the DRT can even adjudicate the due and can see the correctness in the outstanding due as arrived by the Bank. This requires little bit clarity in my opinion. On the issue of adjudicating the outstanding due under section 17, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487 has clearly held that the DRT can look all objections including the correctness in the outstanding due. In arriving at the conclusion, the Delhi High Court has also considered other landmark judgments of the various Courts including Supreme Court. The extract of the judgment of Delhi High Court as referred to is as follows:

“15. While we agree with the conclusion of the Full Bench in the Lakshmi Shankar Mills (P) Ltd. case however, we do not agree with the underlined observations in para 21 reproduced above that it is not necessary for the DRT to adjudicate the exact amount due to the secured creditor. In our opinion, this ratio of the judgment in the case of Lakshmi Shankar Mills (P) Ltd. (supra) seems to be in conflict with paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. & Ors. Vs Union of India & Ors. 2004 (4) SCC 311. The Supreme Court has clearly held in the case of Madia Chemicals Ltd. that the proceedings under Section 17 is in the nature of original proceedings and that even the amount which is claimed to be due to a bank/financial institution as stated in the notice under Section 13(2) can be challenged by the borrower. Paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. are relevant and the same read as under:-

“18. It is submitted that the mechanism provided for recovery of the debt under Section 13 indicated above does not provide for any adjudicatory forum to resolve any dispute which may arise in relation to the liability of the borrower to be treated as a defaulter or to see as to whether there has been any violation or lapse on the part of the creditor or in regard to the correctness of the amount sought to be recovered and the interest levied thereupon. On the other hand, Section 34 bars the jurisdiction of the civil court to entertain any suit in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. It also provides that no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act or under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Section 35 gives an overriding effect to the provisions of the Act over the provisions contained under any other law. The submission, therefore, is that before any action is taken under Section 13, there is no forum or adjudicatory mechanism to resolve any dispute which may arise in respect of the alleged dues or NPA.

54. Insofar as the argument advanced on behalf of the petitioners that by virtue of the provisions contained under sub-section (4) of Section 13 the borrowers lose their right of redemption of the mortgage, in reply it is submitted that rather such a right is preserved under subsection (8) of Section 13 of the Act. Where a borrower tenders to the creditor the amount due with costs and expenses incurred, no further steps for sale of the property are to take place. In this connection, a reference has also been made by the learned Attorney General to the decision in Narandas Karsondas V. S.A. Kamtam which provides that a mortgagor can exercise his right of redemption any time until the final sale of the property by execution of a conveyance. Shri Sibal, however, submits that it is the amount due according to the secured creditor which shall have to be deposited to redeem the property. Maybe so, some difference regarding the amount due may be there but it cannot be said that right of redemption of property is completely lost. In cases where no such dispute is there, the right can be exercised and in other cases the question of difference in amount may be kept open and got decided before sale of property.”

5. Powers of Civil Court in respect of the matters under SARFAESI Act, 2002?

The Courts have laid due emphasis on section 34 of the Act and discouraged Civil Courts to entertain or interfere in the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. But, Civil Court’s jurisdiction is not completely overruled out even now in view of the observations in the Mardia Chemicals case. Civil Courts continue having very limited jurisdiction in respect of mattes under SARFAESI Act, 2002. Where there is a fraud etc., Civil Court can interfere even in respect of the mattes under SARFAESI Act, 2002 and it is as per the observation in Mardia Chemicals case. However, another view is that the Civil Court will continue to have powers to entertain suits etc., in respect of the matters falling directly or indirectly under the provisions of the SARFAESI Act, 2002 and if a remedy before DRT is not available under section 17, then, the Civil Court can interfere and continue to have powers even in respect of the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. It all depends upon the facts and circumstances of the case and there can not be any hard and fast rule in this regard.

6. Sale proceedings under SARFAESI Act, 2002?

Practically, many borrowers think of approaching Courts seeking relief only when the Bank take steps to auction the ‘Secured Asset’. It is because, the borrowers, in many cases, continue having negotiations with the Bank Officials and it will consume lot of time. It is only when the borrowers feel that they may not get their dispute or grievance settled with the Bank, then, they will approach the Tribunal or the Courts. This is a very difficult situation. On one side, the Banks are to be allowed to proceed with the sale proceedings and supposed to confer title on the successful bidder or purchaser. Because, no purchaser would be willing to purchase the property in the auction if there would be a rider over the title of the property even when the entire consideration is paid. Again, even if the bidder takes the risk and bids for the property, there is a chance that the property may fetch lesser value and the Banks may have to compromise with their rights at times or borrowers may be the losers in some cases as the residue of the sale proceeds comes to the borrowers. This continues to be the complicated situation and it is laudable that the Courts have interpreted the provisions of the Act even at this stage in favour of the borrower. The borrower is provided with a right to even challenge the sale proceedings and can exercise the right of redemption if he succeeds in his appeal under section 17 and if the sale gets set-aside finally.

Dealing with the sale proceedings under SARFAESI Act, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487, was pleased to observe as follows:

“17. In view of the above, we hold that the right of redemption claimed by the petitioners will depend upon success of the proceedings initiated by the petitioners under Section 17 of the SARFAESI Act. In case, the petitioners finally fail, then it will not have a right of redemption, however, in case the petitioners succeed in the proceedings under Section 17 and orders are passed for setting aside the auction sale in terms of sub-section (2) to (4) of Section 17, then in such a case, it will be open to the petitioners to claim right of redemption. The conclusion which emerges is this that in case the borrower succeeds in its petition under Section 17, then, the DRT can pass orders under sub-sections 3 and 4 of Section 17 cancelling the auction sale proceedings. In case, the auction sale proceedings are cancelled because the action of the bank/financial institution is found to be violative of various provisions of the SARFAESI Act and the Rules framed there under, it is possible that a fresh auction may have to be conducted. In case a fresh auction of the mortgaged property has to be conducted then, a fresh date will be fixed for auction sale and it is at that stage that again Section 13 sub-section 8 will come into play and at which stage, the borrower can seek to exercise its right of redemption of the mortgaged property. Therefore, everything will turn upon the success or failure of the petitioners in the petition under Section 17 of the Act when the same reaches finality. Presently, the stage of the proceedings under Section 17 is that, and as already stated above, the same has been dismissed by the DRT and a statutory appeal under Section 18 is pending before the DRAT. Therefore, if the petitioners succeed in its appeal under Section 18 before the DRAT, the petitioners can exercise a right of redemption because fresh auction sale proceedings may have to be conducted and when so required to be conducted, once again a date will have to be fixed for sale/transfer/auction and before which date, the petitioners can seek to pay all the dues of the bank in terms of Section 13(8) of the SARFAESI Act.”

Note: the views expressed are my personal and a brief of few points only.

SARFAESI & DRT: Legal position under section 34 of SARFAESI Act, 2002?

I was concentrating and writing on few complicated issues under SARFAESI Act, 2002. I was also writing that there was no clarity on the issue of jurisdiction of Civil Court in entertaining SARFAESI matters in view of clear bar under section 34 of SARFAESI Act, 2002. There was a reference in the Mardia Chemicals case on the issue of Civil Court’s jurisdiction and a very limited jurisdiction of Civil Courts in respect of ‘Secured Assets’ is upheld. It is a very interesting and also a very complicated area to deal with. If Civil Courts entertain suits affecting the action initiated by the Banks under SARFAESI Act, 2002, then, it is likely that the object of SARFAESI Act, 2002 may get affected. On the contrary, there may be a genuine grievance which can not be granted by the DRT under Section 17 and under such circumstances, one may resort to Civil Court seeking remedy. Complete ouster of jurisdiction of Civil Court under Section 34 of SARFAESI Act, 2002 is not possible in view of the scope of section 17 of SARFAESI Act, 2002 which deals with the powers of DRT while entertaining an appeal by the borrower or any other person. It is true that the scope of section 17 is expanded from time to time and even the rights of the borrowers are well protected as he can question all actions now pursuant issuance of notice under section 13 (4) without bothering much at the limitation. The proposition that the DRT can even restore the possession back to the borrower in appropriate cases is being implemented now very frequently and in many cases.

When it comes to the jurisdiction of DRT and Civil Court in respect of SARFAESI matters, there can be a problem with simultaneous proceedings based on the same ‘Secured Asset’. How to address these issues will remain to be interesting till we get clarity in this regard. If it is an issue of Civil proceeding and Criminal Proceeding on the same cause, then, it is settled that the a finding in a Criminal Court need not bind the Civil Court in a Civil proceeding. But, if DRT and Civil Courts are allowed to entertain appeal and suits on the same ‘Secured Asset’ in appropriate cases, then, the effect of one proceeding over the other is complicated and it requires clarity. I have had the privilege of reading a wonderful judgment of High Court of Bombay at Nagpur dealing with the complicated issue of Civil Courts jurisdiction under Section 34. It was a wonder judgment giving clarity on the issue to some extent and even the judgment referred to leaves the question of effect of one proceeding over the other without any answer. Given the limitations, the judgment as referred to, summarize the issue of Civil Court’s jurisdiction under section 34 of SARFAESI Act, 2002. The relevant portion of the judgment of Hon’ble High Court of Bombay at Nagpur, in State Bank of India Vs. Shri Sagar s/o Pramod Deshmukh & Others, CDJ 2011 BHC 176, is extracted below:

“17. Section 34 of the said Act deals with the ouster of the jurisdiction of the Civil Court, the same being relevant is reproduced below:

“Civil Court not to have jurisdiction.-- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted to any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (51 of 1993).”

Bare perusal of Section 34 shows that the jurisdiction of the Civil Court is specifically barred to entertain any suit or proceeding only to the extent of the matters, which the Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under the said Act, to determine.

18. Once it is admitted that the suit property has in fact been mortgaged with the Bank or Financial Institution, then it cannot be disputed that the “security interest” is created, as defined under Section 2(z-f) of the said Act in favour of a “secured creditor”, as defined under Section 2(z-d) of the said Act in respect of the suit property. The secured creditor thereupon, becomes entitled to enforce its secured interest without intervention of the Courts or the Tribunals, in accordance with the provisions of the said Act and the Rules framed thereunder, as stipulated under sub-section (1) of Section 13 of the said Act and the jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act, springs in. However, even if the property in respect of which security interest is found to be created in favour of a secured creditor, that by itself will not be enough to oust the jurisdiction of the Civil Court to decide other disputes in respect of such secured assets. The jurisdiction of Civil Court to decide the suit involving such other disputes in respect of secured assets, is barred only to the extent of the matters, which the Debts Recovery Tribunal or its Appellate Tribunal is empowered by or under the said Act, to determine. The Debts Recovery Tribunal is a Court of limited jurisdiction, which cannot be enlarged beyond the examination of validity of the action of a secured creditor under Section 13. All other disputes in respect of secured assets, which do not fall within the jurisdiction of the Debts Recovery Tribunal under Section 17 or its Appellate Tribunal under Section 18, the Civil Court continues to exercise its jurisdiction. Similarly, even if the jurisdiction of the Civil Court is not barred under Section 9 of the Civil Procedure Code to decide other disputes in respect of secured assets, that cannot encroach upon the right of a secured creditor under Section 13 of the said Act, to enforce his security interest in respect of such property and the jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act, to protect such security interest of a secured creditor remains exclusive to the extent of the matters provided for under Sections 17 and 18 of the said Act. Hence, a line of demarcation in this respect is required to be drawn to define the compact area of jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act. In order to decide the question as to whether the jurisdiction of the Civil Court under Section 9 of the Civil Procedure Code is ousted or not, the real test would be to find out whether the Debts Recovery Tribunal under Section 17 of the said Act is empowered to hold an enquiry on a particular question and to grant the relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act shall decide the extent of exclusion of the jurisdiction of the Civil Court to decide the dispute in respect of the suit property.

19. Any person, including the borrower, aggrieved by any such action taken by the secured creditor under Section 13, can file an objection before the Debts Recovery Tribunal under Section 17 of the said Act. If it is found by the Debts Recovery Tribunal that the recourse taken by the secured creditors under sub-section (4) of Section 13 is in accordance with the provisions of the said Act and the Rules framed thereunder, then it has jurisdiction under sub-section (4) of Section 17 to see that the secured creditor is entitled to take recourse to one or more of the measures specified under sub-section (4) of Section 13 to recover its secured debts, notwithstanding anything contained in any other law for the time being in force. In such situation, the normal jurisdiction of Civil Court cannot be invoked to defeat the rights of secured creditor under Section 13 and to arrest the jurisdiction exercised by the Debts Recovery Tribunal under Section 17, in view of bar of its jurisdiction created under Section 34 of the said Act.

20. So far as the action of secured creditor is concerned, the Debts Recovery Tribunal exercises the jurisdiction of superintendence under sub-section (3) of Section 17, to see that the secured creditor acts only in accordance with the provisions of the said Act and the rules framed thereunder, to enforce its security interest and that it neither does exceed its jurisdiction nor acts in breach or non-compliance with the provisions of the said Act and the rules thereunder. The jurisdiction of the Debts Recovery Tribunal under sub-section (3) of Section 17 is akin to the jurisdiction of Civil Court, as has been held by the Apex Court, in Mardia Chemical's case and it also extends to protecting the interest of borrowers or any other person against any such illegal acts of secured creditor, by directing such secured creditor to restore the management or possession of secured assets to the borrower and to pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of Section 13. While exercising such jurisdiction, the Debts Recovery Tribunal can also adjudicate upon the questions whether security interest was in fact created in respect of any property or part thereof in favour of a secured creditor, or whether creation of such security interest in favour of secured creditor was legal, valid and proper, or that the measures taken by the secured creditor under sub-section (4) of Section 13 of the said Act are in accordance with the provisions of the said Act and the Rules framed thereunder, or even the question whether any bank or financial institution or any consortium or group of banks or financial institutions claiming itself or themselves to be secured creditor/s, are in fact the secured creditors in respect of any property or part thereof. The jurisdiction of Civil Court to decide all such questions is barred by Section 34 of the said Act.

33. In view of above, the sum and substance of the decision is that:

(i) The jurisdiction of the Civil Court to entertain, try and decide any suit or proceeding in respect of the property, which is the subject matter of security interest created in favour of a secured creditor, is barred only to the extent of the matters, which the Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under the Act to determine. (Para 18)

(ii) The jurisdiction of the Civil Court in respect of the matters, which do not fall within the jurisdiction of the Debts Recovery Tribunal or its Appellate Tribunal under Sections 17 and 18 of the said Act, is not ousted or barred under the provision of Section 34 of the said Act and the Civil Court continues to exercise such jurisdiction. (Para 18)

(iii) In order to decide the question as to whether the jurisdiction of the Civil Court under Section 9 of the Civil Procedure Code is ousted or not, the real test would be to find out whether the Debts Recovery Tribunal under Section 17, is empowered to hold an enquiry on a particular question and to grant relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 shall decide the extent of exclusion of jurisdiction of Civil Court to decide the dispute in respect of the suit property. (Para 18)

(iv) The jurisdiction of the Civil Court to entertain, try and decide a civil suit challenging the action of the defendant no.3-Bank to take possession of the suit property and to sell the same to recover its debts by enforcing security interest in the suit property in accordance with the provisions of Section 13 of the said Act, is completely barred by Section 34 of the said Act. (Paras 19, 20 and 23)

(v) The jurisdiction of the Civil Court to entertain, try and decide the suit for partition and separate possession of the property in respect of which security interest is created in favour of secured creditor, is not barred under Section 34 of the Act. (Para 21)

(vi) The jurisdiction of Civil Court to entertain, try and decide the Civil Suit claiming relief of declaration that the action of the secured creditor to take possession of the property and to sell the same, is fraudulent and void, as has been held by the Apex Court in Mardia Chemical's case, is not barred by Section 34 of the said Act. (Para 23)

(vii) The jurisdiction of the Civil Court to entertain, try and decide Civil Suit simpliciter for permanent injunction to permanently restrain the defendant No.3-Bank from taking possession of the suit property and selling the same or to create any third-party interest without any substantive relief of declaration that the creation of security interest in favour of a secured creditor was fraudulent and void ab initio, is completely barred under the second part of Section 34 and hence consequentially, the jurisdiction of Civil Court to pass an order of temporary injunction in such suit, restraining the defendant No.3-Bank from alienating the suit property or creating any third-party interest therein, is also barred. (Para 25)

(viii) Once it is held that the jurisdiction of Civil Court is not ousted under Section 34, to grant substantive relief of declaration that creation of security interest in favour of a secured creditor was fraudulent and void, its jurisdiction to grant consequential relief of permanent injunction and the relief of temporary injunction in such suit, is not ousted. (Para 26)

(ix) Once it is held that the jurisdiction of the Civil Court to entertain, try and decide the civil suit for partition and separate possession of the suit property is not barred by Section 34 of the said Act, then it follows that the jurisdiction of the Civil Court to grant permanent and temporary injunction restraining the defendants from dealing with the suit property or creating third party interest therein is also not ousted by Section 34 of the said Act.

(x) It is open for the plaintiffs or any other person having any right, title, share or interest in the suit property to lodge their/his objection under Section 17 of the said Act before the Debts Recovery Tribunal, which is competent to deal with it in accordance with law and to pass such orders as are necessary to protect the interest of the plaintiffs/such person vis-a-vis the suit property and also to balance the equities. (Para 30)

(xi) The question as to what shall be the effect of a decree passed in the suit for partition and separate possession of the suit property or for declaration that the action of secured creditor is fraudulent and void ab initio by the Civil Court, on the enforcement of security interest by the defendant No.3-Bank, i.e. the secured creditor, can be determined only after culmination of both the proceedings and not before. (Para 30)”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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