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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note: the views expressed are my personal.

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

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

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

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

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

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

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

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

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

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

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

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

Facts:

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

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

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

Analysis:

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

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

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

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

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

Note: the views expressed are my personal.

DRT & SARFAESI: SARFAESI proceedings - rights of the Borrowers - related complications?

Many argue that the provisions of SARFAESI Act, 2002 are draconian in nature. Borrowers do often refer to their good relations with the Bank for a considerable time and they express angst at the Bank’s action under the provisions of the SARFAESI Act, 2002. The borrowers do often question as to why the Bank should not consider the reputation of the customer, understand the temporary difficulties and grant time rather proceeding against the ‘Secured Asset’ using the provisions of the SARFAESI Act, 2002 mechanically. The situation of the borrowers may be sympathetic to the officials of the Bank at times, but, they too can do nothing when an account becomes a ‘Non-performing Asset’. The officials of the Bank are bound to act against the ‘Non-performing Assets’ in accordance with their internal guidelines and in accordance with the provisions of the Act. The argument that the provisions of the SARFAESI Act are draconian was set-aside by the Constitutional Courts while giving guidelines and clarifying the legal position from time to time.

The problem comes to the borrowers in ascertaining the clear legal position under the provisions of the SARFAESI Act, 2002 and it’s a very complicated thing. Even when the borrower approaches a professional asking for an advice, the professional may not be in a position to give clear suggestion to the borrowers. There is an example. In SARFAESI proceedings, the barrower and the Bank officials may communicate with each other and at the same time, they think about defending their respective rights in accordance with law. In many cases, the borrowers approach a professional asking for an advice based on the communication or the oral communication from the officials of the Bank concerned. The Bank officials may ask the borrowers to deposit some amount and may promise that the action under SARFAESI Act may be deferred based on the payment. It will be very difficult for a professional to opine on the Bank’s offer.

It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal based on the request made by the borrower under Section 17 of the Act, but, there is decrease in this tendency, of late. Earlier, based on the grounds in the Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’. The usual grounds of an appeal under section 17 of the Act can be as follows:

1. The Bank has grossly erred in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request.

2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.

3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.

4. The Borrower has not received any notice under section 13 (2) of the Act and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it.

5. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act.

6. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.

7. The Bank has failed to proceed against the borrower and instead harassing the guarantor.

8. The Bank is not right in not proceeding against the property of the borrower and it is illegal to proceed against the property of the guarantor without proceeding against the borrower.

9. There was no ‘valid mortgage’ with the Bank at all.

10. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.

11. The Auction process is unfair and illegal.

The above are the few grounds and there can be many more grounds to file an appeal under section 17 of the SARFAESI Act, 2002. No purpose will be served by filing an appeal mechanically unless the intention of the borrower is bonafide and unless there is arguable case against the Bank. It can never be said that the Bank or Bank officials are always right and the borrower is always a ‘willful defaulter’. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank.

It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers. I would like to give one example as to why borrowers/guarantors/public feels this way and the example is as follows:

Facts & Proceedings:

1. A person named ‘AB’ wants purchase a property from a person named ‘BC’.

2. While intending to purchase the property, Mr.AB wanted to inspect the original title deeds of the property of ‘BC’ and also wanted to check encumbrance over the property.

3. As the Original Deeds are available with ‘BC’ which are in order and as there is no encumbrance over the property, Mr.AB has purchased the property for a valuable considerable after paying requisite Stamp Duty and registration charges.

4. The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property.

5. While the property is in possession of Mr.AB, suddenly a Bank named ‘DE’ has affixed a notice under section 13 (4) at the property.

6. Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property.

7. The Bank has replied saying that the property is mortgaged with the Bank with due registration by Mr.AB and he has defaulted to repay loan.

8. Further enquiry has revealed that the Bank is at fault while getting the property mortgaged from Mr.AB and there is no reason as to why they have not insisted for the Deposit of Title Deeds.

9. As there is no option, Mr.AB has filed an appeal under Section 17 of the SARFAESI Act, 2002 alleging everything as to how he is a bonafide purchaser. He also leveled clear allegations against the Bank and their negligent attitude.

10. The Appeal is dismissed by the Debt Recovery Tribunal vaguely saying that the Bank has followed the procedure correctly under the provisions of SARFAESI Act, 2002 and without noting or dealing with the allegation pertaining to mortgage and without noting that the Bank has not replied to the charges made by the Appellant.

11. Mr.AB, as there is no option, has filed an Appeal with the DRAT. While the Appeal is pending, the Bank has brought the property for auction and while the proceeding is going on, the Bank has completed the Auction and says that it has confirmed the auction infavour of the ‘only bidder’ who bid the property on a particular date.

12. Mr.AB is being asked now to get the details of the bidder, implead him as party to the proceedings and also asked to challenge the act of Sale afresh.

The above case is an example as to how borrowers/guarantors and public get troubled with this recovery system. It may be true that that the Bank is supposed to defeat the unfair attitude of the borrower, but, there is a law and if the borrower raises a considerable legal point, the same is to be considered. Law is always supported by logic, and it can not be said that the legal point or right being raised by the borrower/person can be ignored without any reason. Against this background, of late, even the High Courts coming heavily against the Bank and High Court is setting-aside the proceedings of DRT or DRAT.

Complications in finding the remedy or granting the remedy:

Due to the reasons mentioned above, it is most often difficult for the borrowers/guarantors/public to find-out the appropriate remedy against the Bank if there is a good ground to challenge the Bank’s action. It is also difficult and complicated for the DRT and DRAT to grant relief to the borrowers and the adjudicating authority shall not purely depend upon the technicalities if it suits the Bank and can not ignore the legal principles raised by the borrower as a ‘delay tactic’. Just because, the Bank says a particular thing against a particular person, the same can not be the gospel truth. It all depends upon the facts and circumstances of the case.

Referring to the legal background under SARFAESI Act, 2002, dealing with the mandatory nature of Section 13 (3-A) and emphasizing as to the complications while granting relief as we can assume, the Madras High Court in W.P.No.6710 of 2011 reported in CDJ 2011 MHC 4916, is observed as follows:

“9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.

10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to Civil Court for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,

(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;

(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.

(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.

11. In the above background, the question raised in the writ petition must be considered. In MardiaChemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:

"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.

46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.

47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."

12. The very same question again came up for consideration before the Supreme Court in Transcorev. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:

"24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.

25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act."

13. Most recently in KanaiyalalLalchand Sachdev v. State of Maharashtra, (2011) 2 SCC 782,the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-

"16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same."

14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.

(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-

"69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.

(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-

"77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).

15. The judgments of the Supreme Court in Transcoreand Kanaiyalal Lalchand Sachdevalso proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.

16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.

17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.

18. The decision of the Supreme Court in MardiaChemicals Ltd. was made on 8^th April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11^th November, 2004.

19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14^th November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.

20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.

21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under Section 17 of the Act.

22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).

23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.

24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.

25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.

26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.

27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.

28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.

29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.SunandaKumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:

"It is not disputed that even though the petitioners had submitted Annexure 'C' reply to Annexure 'B' notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure 'D' application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular...."

30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. Punjab and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:

"21.....It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone."

31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in KrushnaChandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:

"7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits."

32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumarv. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.

33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is mandatory.”

Note: the views expressed are my personal.

SARFAESI & DRT: ‘SARFAESI Auctions’ & the need of fairness?

It may be true that Banks do face numerous difficulties in recovering the dues despite having ‘security’. But, there can not be any difficulty for the Banks in recovering their dues under SARFAESI Act, 2002. It is alleged that even the Debt Recovery Tribunals and Appellate Tribunal do favour Banks and keep on insisting on making substantial payment to the Bank without looking into the merits or demerits in the Appeal filed by the borrower under the Act. According to me, earlier, the High Courts used to discourage the borrowers filing Writ Petitions and Civil Revision Petitions under Article 227 either during the pendency of the Appeal before the Tribunal or before filing the Appeal. The High Courts say that the borrower can avail the alternative remedy before the Debt Recovery Tribunal. In pending cases, there used to be directions for disposal of a particular application or appeal in a prescribed time. But, there will be difficulties in prescribing the time-frame for the DRT or DRAT to dispose of a particular application or Appeal. It is true that some borrowers do approach the Tribunal in order to delay the recovery process and in some cases, there can be genuine grievance and each case should depend upon its own merits. Only with this spirit, the Courts held that the Debt Recovery Tribunals can go into all issues in the Appeal and the Tribunals can even restore the possession of the ‘Secured Asset’ back. In a proceeding like an appeal under section 17 of SARFAESI Act, 2002, if the Debt Recovery Tribunal relies on technicalities, then, the borrower need not even approach the Tribunal seeking justice and that can not be the object or spirit behind SARFAESI Act, 2002. It is complicated for the borrower to pursue his remedy under section 17 of the SARFAESI Act, 2002 and there are issues like:

1. The borrower may be talking to the Bank for settlement even when the Bank proceeds under the provisions of SARFAESI Act, 2002. At this stage, the borrower will be under dilemma as to whether to file an Appeal antagonizing the Bank or the Bank Manager or to pursue the talks of settlement.

2. The borrower will be having a right to object to the demand or the notice issued by the Bank under Section 13 (2) of the Act. But, the borrower may choose not to raise any objections considering his relations with the Bank or Bank Manager and considering settlement talks.

3. Even when it comes to settlement, in many cases, the Bank Manager may orally say something and believing that the borrower may make some deposit and then, the Bank turns around and will say that the entire outstanding is to be cleared.

4.The law prescribes a time limit for filing an appeal pursuant to the notice issued by the Bank under section 13 (4) of the Act. However, in view of the continuous talks, assurances from the Bank or the Manager concerned, the borrower may not choose to exercise his right of Appeal.

5.Though it is now settled that all actions of the Bank pursuant to Section 13 (4) of the Act are appeallable, the borrower may have to explain to the Tribunal as to why there is a delay in filing the Appeal and there can be insistence for filing ‘condonation of delay’ application. It is really illogical in the context that even the ‘Auction Sale’ can be challenged under Section 17.

6. It is often alleged that the Debt Recovery Tribunal insists for ‘substantial deposit’ while granting a temporary stay of Bank’s proceedings. In many cases, this temporary relief ends even without looking at the allegations in the Appeal seriously.

7. The Bank keeps on proceeding under SARFAESI Act, 2002 even when an Appeal is pending. If there is some development during the pendency of the Appeal, the Bank will contend that the original Appeal becomes infructuous. This is illogical. The Debt Recovery Tribunal shall consider all issues pertaining to the Bank’s action when the Appeal is pending. Even where the borrower only challenges the notice under section 13 (4) and if the property is sold pending the Appeal, then, the DRT shall consider setting aside the sale also if it is found that the Sale is illegal. There can’t be any logic in asking the borrower to file an appeal afresh and at the best, the borrower may be asked to file additional affidavit if there are further allegations about the ‘Sale Proceedings’.

Like-wise, there are several issues if the borrower wants to pursue his case against the Bank through an appeal under section 17 of the SARFAESI Act, 2002. There can not be any problem if the Debt Recovery Tribunal takes quick decisions instead of keep-on adjourning the issues. In the recent past, there are several serious allegations against the Bank as to how it conducts the ‘Auction Sale’. In one case, an Appeal is pending before the DRAT and as the Bank is proceeding with the auction, the borrower has mentioned the urgency and wanted to look into the issue on urgent basis as there will be ‘third party interest’ if the auction is proceeded to. While the proceeding is ‘on’, the Bank says that the ‘Auction’ is going-on and then says that the ‘Auction’ is over as there is one ‘bid’ and it is confirmed also. How come this be termed as a fair ‘Auction Sale’. The DRAT should have decided the issue ‘then and there’ instead of keeping the matter pending and adjourning the matter without recording anything on merits and submissions of the parties concerned.

These genuine difficulties of the borrowers and the reality as to how the provisions of SARFAESI Act, 2002 are misused, there is a merit in the argument that the High Court can interfere under Article 226 of the Constitution in ‘SARFAESI proceedings’. Now, the argument will be against the ‘judicial restraint’ in this regard. If the borrower is not genuine, then, he can be handled straight-away and even if the borrower is not genuine on one issue, that can not be a ground for the Bank to be ‘unfair’ to him while using the provisions of SARFAESI Act, 2002.

In the recent past, the Madras High Court has passed several judgments coming heavily against the Banks and their action. It is laudable and the Banks and their officers should be taken to task in appropriate cases. The extract of a recent wonderful judgment of Madras High Court in W.P.No.21987 of 2010 & M.P.No. 1 of 2010, reported in CDJ 2011 MHC 5036, emphasizing as to how the ‘Auction process’, is to be fair is as follows:

“18. The course of conduct adopted by the Bank clearly gives an indication that the market rate was deliberately reduced in the subsequent valuation report. The forced/distress value was shown only for the purpose of fixing a lesser amount as reserve price. In case there were no bidders during the second auction, the Authorised Officer in all fairness should have postponed the auction. It is not the case of the Bank that several attempts were made earlier to dispose of the property. Given the location of the property, there would be no difficulty to get higher price as indicated in the earlier valuation report.

19. It is true that the there is no provision akin to that of Order XXI Rule 72 of the Code of Civil Procedure in SARFAESI Act dis-entitling the decree holder from participating in the auction without the express permission of Court. However, in a matter like this, when there were no bidders, the Bank should not have knocked down the property for a paltry sum.

20. The petitioner is still liable to pay the balance amount to the Bank, in spite of losing the property.

21. The Bank is a responsible body. The SARFAESI Act gives wide powers to the Bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to Court. Therefore the Bank is expected to conduct the procedure in a bona fide manner. The dealings of the Bank should be fair and transparent. When the amount due from the borrower is more than Rs.4 cores, the attempt of the Bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery.

22. The Authorised Officer is none other than the officer of the Bank. The auction was conducted at the premises of the respondent Bank. Admittedly there were no other bidders. In case the Bank was having an idea to purchase the property, they should have given prior intimation to the borrower. The fact that there is no statutory prohibition against the secured creditor taking part in the auction, will not enable them to purchase the property by re-fixing the market price as well as the reserve price and to purchase the property at such reduced rate. This is absolutely not the intention of the law makers while enacting the SARFAESI Act.

23. In Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 the Supreme Court found that there were no rules or guidelines framed by the Kerala Financial Corporation for sale of properties. Therefore, the Supreme Court indicated certain guidelines in the matter of sale of properties owned by the Corporation till such formation of rules, guidelines or orders. The relevant norms are extracted below :-

"(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price.

(vi) The essential ingredients of sale are correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them."

24. In Eureka Forbes Ltd., vs. Allahabad Bank and ors. [2010(6) SCC 193], the Supreme Court while considering the concept of public accountability and performance, indicated that the same would apply to the banks as well. The Supreme Court observed :-

"82. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision-making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance."

25. There is no dispute that judicial review is concerned only with the decision making process. Courts and Tribunals are not expected to sit in appeal over the decisions taken by the authorities including banks. However, when a case of grave miscarriage of justice is made out, necessarily, the Court has to come to the rescue of the affected party. The Court of equity is expected to advance justice. When it is made out that substantial injustice has been done to a party, the Court should not shirk its responsibility. Technicality has no say in such matters.

26. The authority given to the Bank to recover the dues without recourse to legal proceedings will not give them the right to snatch away the property from the borrower. The very fact that in spite of the steep rise in land value, the market value was shown at a low rate after a period of about two years itself shows the mala fides in the matter. The subject sale effected by the Authorised Officer of the Bank cannot be treated as a valid public sale. Therefore we are constrained to set aside the sale made in favour of the Bank.

27. The Authorised Officer is directed to issue fresh auction notice and conduct the auction as per statute in a fair and transparent manner, without giving room for complaints.”

Note: the views expressed are my personal.