Civil Court’s jurisdiction in respect of SARFAESI proceedings?

The object of SARFAESI Act, 2002 is to enable the Banks to recover their dues without resorting to Civil Court for obtaining decree and consequential execution in accordance with the provisions of Civil Procedure Code. It is known fact that a proceeding initiated in a Civil Court can be prolonged unreasonably and everybody is aware of the delay in traditional courts in India. As such, in accordance with the object of providing speedy mode of recovery for the Banks in respect of secured loans, section 34 contains a Bar on Civil Courts in entertaining suits in respect of the matter in which the Bank has initiated a proceeding under SARFAESI Act, 2002. In view of many judgments of constitutional courts from time to time under Article 227 of Constitution of India, it is settled that the Civil Court has no jurisdiction to entertain any proceeding or suit in a matter in which the Bank has initiated proceedings under SARFAESI Act, 2002. However, as per the judgment rendered by the Apex Court in Mardia Chemicals Case, there can be exception and in exceptional cases the Civil Court can entertain suits in respect of the subject of the matter in which the Bank has initiated steps under the provisions of the Act. When we see the reason as to why the jurisdiction of Civil Courts are not completely barred under section 34 of the Act as per the judgment in Mardia Chemicals Case in the light of section 17, I don’t think that it is because of getting certain issues established only in ‘Trial’. There were some judgments and it is felt normally that disputed and complicated facts can only be decided by a Civil Court in a Trial. If we apply the same principle, I don’t think that the Tribunals like Debt Recovery Tribunal and Company Law Board can effectively function as intended. Nothing prevents the Tribunals in summoning witnesses and recording evidence in appropriate cases and if these procedures are made compulsory even in Tribunals, then, there will not be any difference between the Civil Court and the Tribunal. There may be cases where a third party or person is being troubled by the Bank under SARFAESI Act, 2002 and even in such cases, the legislature has intended the aggrieved to approach the Debt Recovery Tribunal only as section 17 provides a right to ‘any other person’ including borrower. There can be some other cases where genuinely the issues are to be settled by a Civil Court and complicated succession issues can be taken as an example of this kind. Though, the issue is not addressed so far straight away according to me, the courts discourage the Civil Courts in entertaining suits in respect of the matters in which the Bank has initiated proceedings under SARFAESI Act, 2002. The reason behind the scope for exceptional Civil Court’s jurisdiction should have been elaborated and it will certainly require clarification. Otherwise, there should be a complete Bar on Civil Court’s jurisdiction in respect of a SARFAESI proceeding unless the issue is relegated to the Civil Court by the Tribunal itself. It’s a very complicated issue under SARFAESI Act, 2002.

Dealing with one of such cases and holding against the Civil Court’s jurisdiction in the light of the law laid down by the Hon’ble Apex Court in Mardia Chemicals Case, the Hon’ble Bombay High Court in State Bank of India Vs. Smt.Jigishaben B.Sanghavi & Others, CDJ 2010 BHC 2688, was pleased to observe as follows:8

“20. Where as in the present case, the grievance by a third person is that: (i) There was no mortgage; (ii) There was no mortgage by the HUF; (iii) The mortgage, if any, is illegal in relation to the share alleged to be that of the HUF; and (iv) No action had been instituted against the HUF before the Tribunal; these are all grounds of challenge which, in substance, can be asserted before the Debts Recovery Tribunal. These are matters which the Debts Recovery Tribunal is empowered by or under the Act to determine. None of the grounds which are sought to be urged in the plaint fall outside the province and jurisdiction of the Debts Recovery Tribunal. Once we come to that conclusion, the necessary corollary is that recourse to proceedings in the form of a civil suit is barred by Section 34.

21. The case, however, which has been sought to be established in these proceedings on behalf of the original Plaintiffs is that the Plaintiffs have in the averments in the plaint brought their case within the purview of the exception carved out by the Supreme Court in Mardia Chemicals. Now, as we have stated earlier, in determining whether such a plea has to be accepted, the Plaint as a whole has to be read. As the Supreme Court observed in Popat and Kotecha (supra), a plaint cannot be compartmentalized or dissected, nor can the averments be read in isolation. The pleading has to be construed as a whole. In Mardia Chemicals, the Supreme Court held that “to a very limited extent, the jurisdiction of the Civil Court can also be invoked” (at para 51, page 2392). The limited exception which is carved out by the Supreme Court is where the action of the secured creditor is alleged to be fraudulent or where the claim of the secured creditor is so absurd and untenable that it would not require any probe whatsoever. Similarly, the Supreme Court held that an exception would be carved out to the extent the scope is permissible to bring an action in a Civil Court in a case involving an English mortgage. In that context, the Supreme Court reiterated the principle which was enunciated by the Madras High Court that a mortgagor can come to the Court before sale with an injunction for staying the sale if there are materials to show that the power of sale is being exercised in a fraudulent or improper manner contrary to the terms of the mortgage. But even in such a case, the pleadings in an action for restraining a sale by a mortgagee must “clearly disclose” a fraud or irregularity on the basis of which the relief is sought.

21A. These observations of the Supreme Court emphasize that the exception which is carved out is a limited exception. Like all exceptions, this exception must be strictly construed. A borrower or a third party cannot be permitted to defeat or to render nugatory the provisions of the Act merely by a stray reference to an allegation of fraud or, as in the present case, by an averment in paragraph 15 of the plaint of “a systematic fraud”. The entirety of the plaint has to be construed. Essentially, in the present case, the averments in the plaint are that: (i) The HUF was a co-owner/tenant in common of the residential flat; (ii) The Bank has taken recourse to proceedings for recovery to which the HUF was not a party; (iii) The Plaintiffs had, in the course of the recovery proceedings, raised an objection before the Recovery Officer to the tenability of the action taken by the Bank; (iv) The Bank had taken recourse to its remedy under the Securitization Act without awaiting the result of the objection raised by the Plaintiffs; (v) The action under Section 13(2) was initiated in disregard to the provisions of the Securitization Act; (vi) The mortgage executed by the Second, Third and Fourth Defendants was defective because the original Share Certificates were not with the Bank; (vii) The First Defendant had no security interest and no secured assets and, therefore, was not entitled to invoke the provisions of Subsection (4) of Section 13 against the right claimed by the HUF; (viii) A ‘systematic fraud’ was played by the First Defendant to pressurize the Plaintiffs; and (ix) There was an absence of legal necessity which would vitiate the mortgage alleged to have been created by the Second Defendant as Karta of the HUF. The reliefs which are sought in the suit have already been adverted to earlier. These averments, when construed in their entirety, would reveal that the grievance which the Plaintiffs have in the suit is in respect of the validity of the mortgage which is alleged to have been executed by the Second Defendant as Karta of the HUF and of the tenability of the action adopted by the Bank under the Securitization Act, so as to meet the interest of the HUF claimed in the residential flat. The Plaintiffs as third parties have sufficient recourse to challenge the lawfulness of the action of the Bank by invoking their remedies under Section 17. Thus, clearly within the meaning of Section 34, a suit in respect of any matter which the Tribunal is empowered by or under the provisions of Section 17 to determine is barred. The suit, therefore, in our view, was clearly barred by Section 34. The stray reference to an allegation of fraud in paragraph 15 of the Plaint is not sufficient to bring the case within the scope of the exception carved out by the Supreme Court in Mardia Chemicals.”

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

Can the Bank forcibly evict the borrower/guarantor without obtaining an order under section 14 of SARFAESI Act, 2002?

Bombay High Court in M/s.Clarity Gold Pvt.Ltd. & Another Vs. State Bank of India & Others CDJ 2011 BHC 085:

“19. The Tribunal came to the conclusion that the Bank had taken forcible possession of the property without seeking recourse to an order of the Chief Metropolitan Magistrate under Section 14. Now, under Section 14, where the possession of any secured asset is required to be taken by the secured creditor, the secured creditor may make request in writing to the Chief Metropolitan Magistrate or the District Magistrate concerned to take possession. Thereupon, the Chief Metropolitan Magistrate or the District Magistrate is empowered to take possession of the asset and documents relating thereto and to forward them to the secured creditor. Under subsection (2) the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use or cause to be used such force as may in his opinion be necessary. Section 14 of the Act is an enabling provision under which the secured creditor is empowered to seek recourse to the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate for the purpose of taking possession. Though Section 14 is an enabling provision, it will be wholly impermissible for a secured creditor, despite the provisions of Section 14, to take the law into his own hands and to forcibly evict a borrower from the secured asset. Our legal system is governed by the rule of law. If the borrower hands over possession voluntarily to the secured creditor in pursuance of a notice under Section 13(4), it would be open to the secured creditor to take possession. But, if possession is not voluntarily handed over, the secured creditor cannot take the law into his own hands and secure vacant possession by taking recourse to the police machinery. In such an event, the only remedy that is available is to seek an appropriate order from the Chief Metropolitan Magistrate, or as the case may be, the District Magistrate. Parliament has specifically authorised in subsection (2) those authorities to take or cause to be taken such steps and use or caused to be used such force as may be necessary. Authorisation of the use of force for taking possession is therefore a matter which lies in the jurisdiction and power of the authorities prescribed by Section 14. No secured creditor can by seeking assistance of police machinery unilaterally carry out the eviction of the borrower and take over forcible possession of the secured asset.”

NPA due to Bank’s mistake – remedies available to the Borrower – SARFAESI Act - a Case Study?

It appears to me that the SARFAESI Act, 2002 was enacted on the assumption that the Bank will commit no mistake in the course of its business relations with the borrowers. It is understandable as to why the Banks need a special legislation like SARFAESI Act, 2002, but, there can not be any justification for not providing an effective remedy to the borrowers in case they have a genuine grievance. The Bank will sanction loans to the borrowers on specific terms and conditions. There can be variety of credit facilities. In the course of adhering to the terms and conditions; like borrowers, the Banks too can commit mistakes and there can not be any doubt in this regard. Looking at the provisions of the SARFAESI Act, 2002, the rules, the practice and few precedents; borrowers and also professionals alike are doubtful in getting relief from the specially constituted Debt Recovery Tribunal which entertains appeals from the borrowers under section 17 of the Act. I have heard many borrowers saying that the Debt Recovery Tribunals will support the Banks and their actions, and will not effectively listen to the grievances of the borrowers. Such an assumption on the functioning of Debt Recovery Tribunals and Appellate Tribunals may not be correct though the system needs to look within. The Courts too have understood the difficulties in approaching the Civil Courts in recovering the outstanding dues and the Courts have upheld the provisions of SARFAESI Act, 2002 with few suggestions in the Course. The SARFAESI proceeding and litigation, as many feel, goes as follows:

1. The Bank will classify a loan account as NPA (Non-performing Asset) as per the RBI guidelines on Asset Classification etc. It is debatable as to whether it is right to apply the guidelines issued by the RBI mechanically or not. There may be cases where the Bank or the concerned officials believe in the credentials and credit worthiness of a borrower due to past record. Even in these cases, the Bank normally classifies the account as NPA if the borrower fails to meet the agreed commitments and the Bank will rely on the guidelines issued by the Reserve Bank of India. There can be two views on this. If the discretion is given to the Bank in classifying an Account as NPA, will it really benefit the bonafide borrowers?. As such, the law in this regard is that the Bank should follow the RBI guidelines in classifying an Account as NPA and RBI guidelines are mandatory. The classification of an Account as NPA is the preliminary thing before proceeding further in recovering the dues under the provisions of SARFAESI Act, 2002.

2. After classifying an account as NPA, the Bank or the authorized officer of the Bank will issue a demand notice to the borrower under section 13 (2) of the Act demanding the borrower to pay the entire outstanding due as on date.

3. The borrower can raise his objections if any to the demand being made by the Bank under section 13 (2). It is to be noted that if the borrower is silent to the demand notice, the same will be noted when the borrower files an appeal before the Debt Recovery Tribunal under section 17 of the Act.

4. If the borrower raises any written objections to the Bank’s demand notice under section 13 (2), then, the Bank should reply to the objections. The reply is mandatory. The courts have emphasized the need on the part of the Bank to apply its mind properly to the objections raised by the borrower. Borrowers contend that the Bank will not listen to the objections and mechanically reject those. If the Bank finds merit in the objections raised by the borrower, then, the Bank can correct itself and proceed accordingly.

5. If the Banks rejects the objections raised by the borrower under section 13 (3A), then, the Bank will issue a possession notice under section 13 (4) of the Act. It is called symbolic possession.

6. The possession notice issued by the Bank under section 13 (4) of the Act provides a right to the borrower to approach the Debt Recovery Tribunal and file an Appeal if he feels aggrieved.

7. The borrower should pay the prescribed fee while filing an appeal under section 17 and normally the borrower prays for a stay of SARFAESI proceedings. Many borrowers feel that the Debt Recovery Tribunal will ask the borrower to deposit some amount while granting stay if the DRT comes to a conclusion to grant a stay. I feel that the borrower need not make a deposit always and the DRT will grant a stay directly without asking for any deposit in some cases based on facts. If the DRT is not inclined to grant a stay and if the DRT dismisses the application seeking stay, then, the borrower is entitled to file an appeal to the DRAT (Debt Recovery Appellate Tribunal).

8. In case where the borrower did not approach the Tribunal and in case where the borrower fails to meet the demand made by the Bank, the Bank will take such steps in taking physical possession of the property under section 14 and can sell the secured asset in public auction etc.

Though the procedure under SARFAESI Act, 2002 appear to be simple, there were many complications in the course. It is presumed that the DRT will only look into the procedural lapses and other disputes pertaining to maintenance of account, violation of terms and conditions etc., can not be looked into by the DRT. Then, where is the remedy to the borrower for his genuine grievance?. Is it proper to ask the borrower to approach Civil Court against the Bank paying Court fee and asking for damages etc.? The Civil Court may not be entitled to grant a stay of SARFAESI proceeding in view of Section 34 of the Act. If the borrower approaches the High Court, the High Court may say that the alternative remedy is available before the DRT and as such a Writ under Article 226 is not maintainable. In these circumstances, where is the effective remedy available to the borrower unless the DRT looks into all the genuine objections of the borrower keeping the technicalities apart? It may be contended that if the Bank commits any mistake, then, the DRT can award cost and compensation to the borrower as enshrined under section 19 of the Act. But, the careful perusal of the Section 19 makes it very clear that the DRT can award costs and compensation only when it is provided that the procedure followed by the Bank in proceeding against the secured asset is incorrect. We may not have many precedents where the DRT award compensation to the borrowers. These are the various complications in fighting against the mistake committed by the Bank while classifying an account as NPA and while seeking relief against the SARFAESI proceeding. As such, the entire process to be clear and the DRT should effectively function and grant relief to the borrowers if there is a merit in the borrowers’ contention. If the specially constituted Tribunals supported by Courts fail to function, then, there can not be any meaning in constituting the Tribunals and the High Courts would be flooded with petitions under Article 226 of Constitution of India and petitions under Article 227 of Constitution of India. Dealing with the issue of functioning of Tribunals in India, the Hon’ble High Court of Calcutta in Chanda Engineers (India) Ltd Vs. U.C.O. Bank 2005 AIR(Cal) 28, 2005 (125) CC 708, was pleased to observe as follows:

“(2.) So far as the power of Article 227 is concerned, in earlier, High Courts hardly got any opportunity to apply the power of superintendence under it over the Lower Courts and Tribunals. Number of litigations was much less. Lower Courts had enough opportunity to go through procedural propriety. There was no mushroom growing of Tribunals. Only few traditional Tribunals were existing. Provision was normally applied where there was neither any scope of appeal nor any scope of usual revision. But since when various Tribunals either by way of Constitutional amendment or under the respective statutes are formed and also revisional jurisdictions are curtailed by way of amendment of the Code of Civil Procedure particularly in respect of the interlocutory matters, number of applications under Article 227 of the Constitution of India have been increased. Therefore, if the totality of the scenario is projected it will be seen that from when several jurisdictions of the High Courts are curtailed number of making applications under Article 227 of the Constitution of India have been increased. If this is the trend then formation of Tribunals for the sake of people is a big question for the legislature. It is high time to think whether the installation of various Tribunals is really minimizing number of disputes or increasing the number of disputes.”

Thus, the borrower will have to face lot of difficulties once the account is classified as NPA. In cases where the outstanding is only few lakhs and the borrower do not run a big business concern, then, it would really be difficult to face the Banks under the provisions of SARFAESI Act, 2002. There is an issue of work pressure with Tribunals and getting a competent counsel engaged is also a costly thing when the amount outstanding is not much. The borrowers may not really understand the whole procedure and the implications under SARFAESI Act, 2002 and as such there is a need to ignore technicalities and keep the law constant. There were contradictory views on certain issues under SARFAESI Act, 2002. Thus, a wrong classification of an account as NPA will have disastrous consequences though one may say that the law is clear and the SARFAESI Act, 2002 provides a remedy to the borrower to file an Appeal under section 17. I would like to share a case study in this regard and the facts are as follows.

Facts of the Case:

A Bank has issued a notice to the borrower under section 13 (2) of the Act demanding the payment of outstanding being 25 lakhs. The borrower’s contention is that there was a fire accident in the Factory admittedly. The Bank was supposed to process the insurance thing and it is part of terms and conditions of credit facility. However, the insurance claim was delayed to due to the mistake by the Bank in informing the changed address of the borrower to the Insurance Company though the borrower has duly informed about the change of address and other relevant issues from time to time. As the borrower in this particular case is not a willful defaulter, has approached the Bank seeking waiver of interest and penal interest etc. as that was resulted due to the Bank’s mistake. The borrower contention is that he has to suffer a loss of 12 lakhs due to the Bank’s mistake and the Bank continues to charge interest and penal interest against the outstanding though the Insurance Claim was delayed due to the mistake of the Bank. Even after the issuance of notice, the borrower has paid a sum of 4 lakhs initially and 8 lakhs thereafter. The borrower’s query is as to how to get effective relief in this case as he was subjected to heavy loss?. The borrower’s contention is that his account was classified as NPA due to charging of interest and penal interest without looking at the mistake committed by the Bank.

Analysis:

In the case referred to above, it may be easy to say that the borrower can send his objections under section 13 (3A) and can file an appeal challenging the notice under section 13 (4) of the Act. It is also easy to say that the borrower can get compensation under section 19. Practically, the issue is different and technicalities are also there. Some may say that the borrower can only approach the Civil Court claiming damages and the DRT will only look into the procedural lapses in issuing notice under section 13 (2), reply under section 13 (3A), notice under section 13 (4) of the Act etc. This is a bonafide case and why should the borrower approach different forums involving lot of costs. Why can’t the DRT look into the issues of mistakes committed by the Bank in arriving at the outstanding due etc. Despite having a clear case, the borrower is made to suffer and many issues under SARFAESI Act, 2002 as such requires clarity and technicalities are to be ignored.

Note: the views expressed are my personal and a view point and am aware of various other complicated issues under SARFAESI Act, 2002.

Clubbing of many loan Accounts/transactions – Bank’s ‘Right of lien’ – SARFAESI Act, 2002?

The enactment of ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ has facilitated an easy mode of recovery of loan for the banks where there is a ‘Secured Asset’ and it will definitely reduce the rate of ‘Non-performing Assets (NPA)’. Non-performing Assets (NPA) effect the functioning of the banking system in India. Just because the Banks face problems in recovering the dues, the interests of the borrowers can not be compromised and they should be provided with an effective remedy when there exist a genuine grievance. It can not be said that the Bank or the Secured Creditor will always be right and never commit mistakes or wrongs. An analysis of many judgments of Constitutional Courts on the provisions of SARFAESI Act, 2002 makes it clear that the Courts endeavored to maintain and preserve the balance between the object of the enactment and the rights of the borrowers. While there are many complicated issues under the provisions of SARFAESI Act, 2002, the issue of ‘clubbing of different loan transactions’ while proceeding under the provisions of SARFAESI Act, 2002 and the ‘Right of Lien’ available to the Bank under section 13 (7) deserves consideration and these are really complicated issues. It all depends upon the facts and circumstances of the case. Can the Bank be allowed to disturb the well maintained account of the borrower under the provisions of SARFAESI Act, 2002 due to the default of the borrower in respect of another completely different loan transaction? Can the Bank exercise ‘Right of Lien’ suiting to their convenience and needs though the Account on which the Lien is sought to be exercised is totally different loan transaction? Indian Contracts Act provides ‘Right of Lien’ and whether the same substantial law be applied even under the provisions of SARFAESI Act, 2002? These are some interesting and complicated issues.

If the borrower maintains two different accounts with the same security, then, the Bank may be allowed to proceed against the ‘Secured Asset’ even if the borrower makes default in respect of one account giving rise for invocation of the provisions of SARFAESI Act, 2002. Again, even in respect of two completely different loan transactions having separate secured assets, if the borrower defaults in respect of both the Accounts, for the sake of convenience, the Bank can proceed against the two loan Accounts simultaneously and in one proceeding as objection to these kind of proceedings would be technical in fact in my opinion. But, what if the Bank disturbs the Accounts of borrower on the ground of default in another completely different loan transaction and having a separate Secured Asset? These are not technical issues and these are substantial issues having significance.

Dealing with the ‘Right of Lien’ available to the Bank under Section 13 (7) of the SARFAESI Act, 2002 and referring to the law on ‘Right of Lien’ under Indian Contracts Act extensively, the Hon’ble Gujarat High Court, in Gaurangbhai Bipinbhai Pandya Versus Bank of Baroda, 2008 AIR (Guj) 1513, 2008 (2) GCD 1584, 2008 (2) GLR 1513, was pleased to observe as follows:

“(13) It deserves to be recorded that when the bank enforces its security interest under the Securitisation Act, it is clothed with the statutory power under the Securitisation Act. Therefore, the power so vested with the bank under the Securitisation Act, can be construed within the scope of ambit of such power only, and it cannot be mixed up with the rights, if any, with the bank pertaining to the different loan transaction, in different capacity based on separate agreement entered into for such purpose. If the language of section 13 (7) of the Act is considered, it provides that the secured creditor shall hold the amount in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received is required to be paid to the person entitled thereto in accordance with his rights and interests. Therefore, the secured creditor holding the money in trust, after recovery of the amount of costs, charges, expenses and the dues of the secured creditors and his dues, is required to return the residue of the money to the person concerned (the person whose property is sold or disposed of by the secured creditors). The use of the word in section 13 (7) “in absence of any contract to the contrary" would be applicable to the contract, if any, pertaining to such property or realisation of the security interest of such property, or to such contract incidental to the principal transaction of creation of security interest or realisation of security interest. Therefore under the act, such word "in absence of any contract to the contrary" cannot be related to any contract, which is not directly or indirectly concerned with such loan transaction, or a different contract all together pertaining to a different loan transaction, and the creation of separate security interest on account of such separate loan transaction. It is by now well settled that when any statutory powers are to be exercised by any authority or persons, clothed to exercise the power, such power can be exercised within four corners of conferment of such power. Any action beyond the scope of conferment of such power would be without jurisdiction or without any competence or authority. It further deserves to be recorded that when any power is conferred, such power can be read for taking any action, which may be incidentally required to be taken for exercise of such power, but it cannot be co-related or permitted to be transgressed beyond the scope and ambit of the very loan transaction, for which the security interest was created.

(14) Therefore, it appears that on a true construction of section 13 (7), the bank can exercise the right under the contract, if it is so conferred upon it by the loan transaction or the agreement pertaining thereto through which, the security interest is created or any incidental thereto. Such use of the language "in absence of any contract to the contrary" cannot be related to altogether different contract of different loan transaction or different property altogether.

(15) There are two additional circumstances, as expressly made clear by the legislature under section 13 (7) of the Act, one is that such amount is to be held by the secured creditors in trust, therefore, capacity to hold the amount is like the trustees, and the second is that it is mandated by the legislature by using word "shall be paid to the person entitled thereto" for payment of the residue of the amount. Therefore, in view of the specific word used by the legislature in the later part of the section 13 (7) so far as return of the money is concerned, the strict interpretation is called for and it cannot be inter mixed with the other rights of the secured creditors, pertaining to other contract of different loan transaction. It is hardly required to be stated that the person holding money in fiduciary capacity owes more responsibility and accountability, and he cannot inter mixed his personal rights to the money held by him in fiduciary capacity. Therefore, if the secured creditor who is holding the position of the trustee is required to retain money of the surplus amount, he cannot be permitted to retain money or appropriate money or permitted to exercise any so-called right based on separate transaction of loan of separate property, which is not concerned with the loan transaction in question for which the security interest was created, and is enforced by exercising power under Securitisation Act.

(22) IF Section 35 of the Securitisation act is read with Section 37 of the securitisation Act, there cannot be any second view than that the Securitisation Act, has the overriding effect over any other law for the time being enforced, if anything is inconsistent with the Securitisation Act. Therefore, if any rights are available other than under the Securitisation Act, then they are saved. If the right arises under the securitisation Act itself, the Securitisation act, is to be given precedence, and such rights would prevail over the other rights. When its a matter for enforcement of the rights under the Securitisation Act, it would equally be a matter for discharging of the obligation under the Securitisation Act, and the reason being that rights of the secured creditors under the Securitisation Act, are not the rights in absolute, but by way of inbuilt mechanism under the Act, it also creates an obligation as conceived and expressly provided under the Act. In view of the observations and discussions, the right is conferred upon respondent bank, as the secured creditor to realise money by disposal of the property, over which the security interest has created, and obligation is also by virtues of later part of Section 13 (7) to return the residue of the amount to the person concerned whose property is sold. Therefore, if the matter is covered for creation of the right and of obligation under the Securltisation Act, the same would prevail over any other rights created under any other law for the time being enforced.

(23) Hence, so-called right of lien of the bank under the Contract Act, for different loan transaction all together, cannot be read to dilute overriding effect of Section 35 of the Securitisation Act, as provided under section 35 of the Securitisation Act. Therefore, on reconciliation provisions of Section 35 and with Section 37 of the Securitisation act, read with the observations made by this court for obligation created with the secured creditor to return the money under Section 13 (7) of the Act, the contention of learned counsel for the respondent bank cannot be accepted for maintaining right of lien under the Contract Act, as against the provisions for obligation created under the securitisation Act.”

*** The analysis in the judgment referred to above did not consider the issue of Bank’s insisting for signatures on agreements having elaborate clauses and if those clauses are to be seen grammatically, then, the Banks will have absolute discretion with regard to ‘Right of Lien’.

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

Procedure for Sale or Auction Sale of ‘Secured Asset’ under the provisions of SARFAESI Act, 2002?

While everybody appreciates the legislative intention behind enacting special legislations like RDDB Act, 1993 and SARFAESI Act, 2002, when it comes to the sale of mortgaged property through auction, many interesting points would emerge for consideration. If it is a sale of mortgaged property pursuant to the Recovery Certificate issued by the Debt Recovery Tribunal in an Application filed by the Bank under Section 19 of RDDB Act, 1993, the Recovery Officer or the Bank shall have to follow the provisions contained in Schedule II and III of Income Tax Act with such modifications as may be necessary. On the same footing, the Bank should follow the provisions of SARFAESI Act, 2002 and SARFAESI Rules meticulously while selling the ‘secured asset’ through Public Auction or through a Private Treaty. It is settled that the Bank or the Public Financial Institution should follow the relevant SARFAESI Rules strictly while selling the ‘Secured Asset’. There is one interesting point in this regard. Initially, the Bank was not allowed to pursue proceedings under the provisions of SARFAESI Act, 2002 without first withdrawing the pending application before the DRT under Section 19 of RDDB Act, 1993 if any. The legal position has changed thereafter and the Bank is now allowed to proceed simultaneously. As it is considered that the Bank will take recourse to SARFAESI Act, 2002 to enforce the Secured Asset, the borrower may neglect the proceedings under the RDDB Act, 1993 and there can be some ex-parte issuance of Recovery Certificate and the Recovery Officer may initiate execution proceedings. If the ‘Secured Asset’ is sought to be sold under the provisions of SARFAESI Act, 2002 and SARFAESI Rules, then, the borrower can question the Sale under section 17 of the Act in view of the settled proposition now that the cause of action continues under the provisions of SARFAESI Act, 2002 and pursuant to issuance of notice under section 13 (4). It is not the case when it comes to sale of mortgaged property belonging to the borrower or the guarantor by the Recovery Officer under RDDB Act, 1993. If the borrower or the owner of the property intends to question the sale proceedings under RDDB Act, 1993, they have approach the Recovery Officer and for questioning the sale, the borrower may have to deposit the amount shown in the proclamation notice as per Rule 60 and the scope for questioning the sale is very narrow under Schedule – II of Income Tax Act. Thus, the scope of challenge to Sale Proceeding under RDDB Act, 1993 is narrow while the scope of questioning the Auction Sale under the provisions of SARFAESI Act, 2002 very wide according to me. These are the complications when it comes to proceeding simultaneously against the Bank and the Bank may ultimately be in an advantageous position than the borrower. Borrower is duty bound to pay the debt and at the same, if there is a genuine grievance, he should have an effective remedy against the Bank or the Public Financial Institutions.

Dealing with the bidding process or the sale of ‘Secured Asset’ under the provisions of SARFAESI Act, 2002 and the rules, the Hon’ble Madras High Court, in K. Raamaselvam & Others Vs. Indian Overseas Bank & Another, 2009 (5) CTC 385, 2009 (5) LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, was pleased to observe as follows:

“9. A bare reading of Rule 9(2) makes it clear that three contingencies can arise when an auction takes place. Those are, (i) the bidder offers an amount, which is more than the upset price, (ii) the bidder offers an amount, which is less than the reserve price, and (iii) the bidder offers an amount, which is neither less nor more than the upset price. If the amount offered by the highest bidder is more than the upset price fixed under Rule 8(5) the sale shall be confirmed in favour of such higher bidder. This however, is subject to confirmation by the Secured Creditor. If the bid amount is less than the upset price, no sale shall be confirmed as contemplated under the first proviso to Rule 9(2). The second proviso makes it clear that if the authorised officer fails to obtain a price higher than the reserve price, the sale can be confirmed only with the consent of the borrower and the secured creditor. It is thus obvious that if the price offered is same as the reserve price, it cannot be said that the Authorised Officer has obtained a price higher than the reserve price. A combined reading of all the provisions contained in Rule 9(2) makes it clear that if the price offered is higher than the reserve price, it shall be confirmed by the Authorised Officer, but such confirmation is subject to the further confirmation by the Secured Creditor. If however, price offered is not higher than the reserve price, which means it may be on par with the reserve price or less than the reserve price, the auction can be confirmed only with the consent of the borrower and the Secured Creditor and not otherwise. Learned counsel for the Bank by relying upon the decision of the Supreme Court, has submitted that in normal circumstances, reserve price is fixed to indicate the minimum price at which property can be sold. We do not think that such a contention can be accepted in view of second proviso to Rule 9(2) is to the effect that if the Authorised Officer fails to obtain a price higher than the reserve price it can be confirmed only with the consent of the Secured creditor as well as the borrower and not bereft of such consent. But the learned counsel for the Bank as well as purchaser had submitted that since the proceeding under Section 17 is pending, the question now raised in the writ petition as well raised in the proceedings and in view of such existence of such alternative remedy, the writ petition should not be entertained.

10. It is no doubt true, that any illegality in the auction can be raised in a proceeding under Section 17.

We do not think that such a plea should be countenanced, in the present case, as the question now raised depends purely on a question of interpretation of the Statutory Rule. The existence of alternative remedy is not considered as an absolute bar for entertaining a writ petition. This is more so, in view of the fact that the Bank, a public sector undertaking and even considered as State under Article 12 of the Constitution of India, is expected to act strictly in accordance with the Statute and Rules.

22. A fair reading of the provisions contained in Rule 9 makes it clear that if the highest bid is higher than the upset price, such highest bid shall be confirmed by the authorised officer in favour of the highest bidder, which, however, is subject to confirmation by the secured creditor. This provision is apparent from the provisions contained in Rule 9(2). At that stage, obviously discretion is given to the secured creditor to accept the highest bid or even go in for a fresh bid.

For example, if the secured creditor, on the basis of the relevant materials, comes to a conclusion that the highest bid offered, even though higher than the reserve price, does not reflect the true market value and there has been any collusion among the bidders, the secured creditor in its discretion may refuse to confirm such highest bid notwithstanding the fact that the highest bid is more than the upset price. This is because the secured creditor is not only interested to realise its debt, but also expected to act as a trustee on behalf of the borrower so that the highest possible amount can be generated and surplus if any can be refunded to the borrower. The first proviso in no uncertain terms makes it clear that no sale can be confirmed by the authorised officer, if the amount offered is less than the reserve price specified under the Rule 8(5). However, the subsequent proviso gives discretion to the authorised officer to confirm such sale even if the bid is less than the reserve price, provided the borrower and the secured creditor agree that the sale may be effected at such price which is not above the reserve price. This is obviously so because the property belongs to the borrower and as security for the secured creditor and both of them would be obviously interested to see that the property is sold at a price higher than the reserve price. However, if both of them agree that the property can be sold, even it has not fetched a price more than the reserve price; the authorised officer in its discretion may confirm such auction.”

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

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

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

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

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

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

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

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

"40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation."

"In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round."

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

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

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

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

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

NPA classification/SARFAESI Act – discretion of Bank/Secured Creditor?

The Banks or Secured Creditors do feel comfortable in recovering their dues using the provisions of SARFAESI Act, 2002. The object of the enactment, as everybody knows, is to enable the Banks/Secured Creditors to reduce the level of ‘Non-performing Assets (NPA)’. In the absence of a special legislation like ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’ and “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”, it is infact very difficult for the Banks to recover debts approaching Civil Courts. The observation of Hon’ble Madras High Court in The Repatriates Co-op Finance & Development Bank Ltd., Chennai & Others, 2010 (4) LW 497, 2010 (5) CTC 449, 2010 (7) MLJ 882, on the plight of Banks in recovering their dues from the borrower through Civil Courts, is as follows:

“3. For getting a decree in usual course before a Civil Court litigant including Banks have to file the suit before a Civil Court. After service of notice, written statement and trial, the suit would be decided by passing a decree. The decree would possibly be challenged by way of appeal upto Supreme Court and it would take about 5 to 15 years to attain finality. There would be possibility of dismissal of suit on various grounds. After the decree is passed by the competent civil court, the same would be put to execution by filing E.P. The Execution Court after service of notice would bring the property of the debtor/guarantor for sale through auction. To reach this stage, lot of money, especially very long time has to be spent. The above process is dispensed with by the Special Act "SARFAESI ACT" which is meant only for the financial institutions. As per the Act, the first step would be to issue notice U/s. 13(2) by the authorised officer who is deemed to be armed with a money decree which attained finality. By the statute the authorised officer, is clothed with powers of trial court and execution court and the code of Civil Procedure which governs the civil proceedings is no more necessary. To put it otherwise, by the Special Act, the authorized officer acts like a Civil Court clothed with powers hitherto exercised by it.”

The primary objective of the Banks/Secured Creditor should be to deal with the defaulters and not to harass the borrowers using the provisions of SARFAESI Act, 2002. The borrower very often raises a grievance that they are not willful defaulters and the Bank or Bank Officials are harassing them. But, the Bank says that they follow the guidelines issued by the Reserve Bank of India and in many cases, they follow the guidelines very strictly and mechanically. The borrower, in many cases now, may not be able to convince the Bank that he can not be construed as a defaulter and he will pay the loan amount if the Bank is liberal. It is true that the borrower gets a right to question the action initiated by the Bank if the Bank is incorrect in classifying an account as ‘NPA”. The borrower can certainly insist the Bank to follow the guidelines issued by the Reserve Bank of India and the courts have held that the guidelines are mandatory from the borrower point of view. The Bank or the Secured Creditor, though is entitled to classify an account as ‘NPA” based on the guidelines issued by the Reserve Bank of India, the borrower can certainly question the issue of classification if he can establish that the Bank has acted unreasonably or the classification is perverse on the face of it. It may be really difficult for the borrower to question the classification of Account by the Bank, but, in some cases, the borrower may have a case to show that the Bank has acted unreasonably. On the issue of classification of Account by the bank as “NPA”, the Hon’ble Madras High Court in

M/s. Signal Apparels Pvt. Ltd. & Another Vs. Canara Bank P.N. Road Branch, Tirupur & Another, 2010 (5) CTC 337, 2010 (8) MLJ 967, was pleased to observe as follows:

“16. To put it precisely, for invocation of provision of Section 13(2) of the Act, the declaration of an asset or account to be a non-performing asset is a condition precedent. In the event such declaration is not in accordance with the R.B.I. guidelines and the account of a borrower is a performing account, Section 13(2) may not be pressed into service; as such account cannot be brought under Section 2(o) of the Act. Equally, going by the scheme of the Act, the discretion conferred on the bank to declare an asset to be a non-performing asset is in order to tackle the issue of increase of non-performing asset to high level. That is why; the legislature had left the discretion to the bank while declaring a debt as a non-performing asset, qualifying such bank to follow the directions or guidelines issued by the Reserve Bank of India while classifying the assets to be sub-standard, doubtful or loss assets to be known as non-performing assets. This discretion is on national policy and all that requires for the secured creditor is to exercise the discretion judicially. In the wake of the right of the secured creditor to declare a debt as a non-performing asset, to show the application of mind for such declaration, it may indicate the reasons thereof in the notice under Section 13(2) and the Section does not contemplate that in all cases such reasons should be indicated in the notice. The application of mind could be culled out from the materials that were existed on the date of such declaration.”

On the same issue of classification of Account as ‘NPA’ by the Bank before proceeding against the borrower under the provisions of SARFAESI Act, 2002, the Hon’ble Andhra Pradesh High Court, in M/s. Sri Srinivasa Rice and Floor Mill Vs. The Authorised Officer, State Bank of India (2007 (4) ALT 317, 2007 (4) ALD 649, 2007 AIR (AP) 252), was pleased to observe as follows:

“There is, as considered earlier in the judgment no statutory format, express or by necessary implication, that requires the respondent bank to follow a particular or formal procedure or requires a formal declaration as a condition precedent to classification of debt as NPA. From the scheme of the Act in general and the provisions of Sec.13 (2) in particular, the conclusion is compelling that the legislature has consecrated the power, authority and discretion (to classify a debt as a NPA) to the secured creditor within the generic guidelines to be ascertained from the definition of a non performing asset [Sec.2 (o)]. A wide margin of discretion is available to the respondent bank as the secured creditor, within the legislative presents of the Act, to assess and classify a debt but within the legislative framework. This Court is not constituted an appellate authority over the bank’s exercise of discretion in this area. The respondent bank, as legislatively recognized is an institution having the requisite expertise to form a commercial judgment on known principles of banking practices and procedures fertilized by R.B.I directions and guidelines to assess and classify a debt as NPA. From the wealth of material pleaded in the counter-affidavit the bank had assessed the debt as non-performing asset. On facts, the petitioners have miserably failed to establish that such assessment by the bank is perverse or irrational to a degree warranting oversight and correction in judicial review.”

Conclusion: The issue is really complicated. If it is a case where the Bank has ignored the guidelines issued by the Reserve Bank of India, then, the borrower can question the illegal action of the Bank and can definitely succeed. However, if the issue is about reasonableness in classifying an Account as “NPA” though the Bank has followed the guidelines issued by the Reserve Bank of India strictly, then, the borrower has to establish a strong case about his track-record and intention when it comes to repayment of the outstanding-due; and also as how the Bank acts unreasonably.

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