Update

SARFAESI Case Updates

Aditi Pal

ringee@vinodkothari.com

August 20, 2014

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 Recent cases on SARFAESI Act

Tenancy rights and SARFAESI Act 2002

Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd.

[Supreme Court, Criminal Appeal No. 736 Of 2014]

Facts

Tenants of properties mortgaged to banks, moved a large batch of appeals. In these 75

cases, the property owners who had taken loans did not repay the amounts leading to
proceedings under SARFAESI 2002 (Act).The tenants in those properties resisted their
eviction by the secured creditors under the Act, claiming their right to occupy the
premises, leading to the appeals on the question of their rights when the property is being
taken over by creditors. Since the appeals differed on facts in each case, the court
classified them into different categories, depending on whether the lease was signed
before or after the SARFAESI proceedings started.

Issue

Whether the provisions of the Act in any way affectthe right of the lessee to remain in
possession of the secured asset during the period of a lease?

Judgment

The Apex Court held that:

Where the lessee resists the attempt of the secured creditor to take possession, the
authorized officer cannot evict the lessee by force but has to file an application
before the Chief Metropolitan Magistrate (CMM) or the District Magistrate
(District Magistrate) under section 14 of the SARFAESI and state in the
affidavit accompanying the application, the name and address of the person
claiming to be the lessee. When such an application is filed, the CMM or the DM
will have to give notice and give an opportunity of hearing to the person claiming
to be lessee as well as the secured creditor, consistent with the principles of
natural justice, and then take a decision.

If the CMM or the DM is satisfied that there is a valid lease created before the
mortgage or there is a valid lease created after the mortgage in accordance with
the requirements of section 65A of Transfer of Property Act and that lease has not
been determined in accordance with the provisions of section 111 of Transfer of
Property Act, he cannot pass an order delivering possession of the secured assets
to the secured creditor. But in case he comes to a conclusion that there is no valid
lease made either before the creation of mortgage or after creation of the mortgage
satisfying the requirements of section 65A of Transfer of Property Act or even if
 Recent cases on SARFAESI Act

there was a valid lease, the lease stands determined in accordance with Section
111 of Transfer of Property Act, he can pass an order for delivering possession of
the secured asset to the secured creditor.

Section 14(3) of the SARFAESI attaches finality to the decision of the CMM or
the DM and this decision cannot be challenged before any court or any authority.

Based on this judgment one understands that, if any of the appellants claim that they are
entitled to possession of a secured asset for any term exceeding one year from the date of
the lease made in his favour, he has to produce proof of execution of a registered
instrument in his favour by the lessor. In an event, he is unable to produce proof of
execution of a registered instrument in his favour and instead relies on an unregistered
instrument or oral agreement accompanied by delivery of possession, the CMM or the
DM, will have to come to the conclusion that he is not entitled to the possession of the
secured asset for more than a year from the date of the instrument or from the date of
delivery of possession in his favour by the landlord. This aspect, is most definitely not
conducive to the tenants or lessees.

Link - http://supremecourtofindia.nic.in/outtoday/736.pdf

[Notice Whether Rule 8 and 9 of SARFAESI may be waived]

Vasu P. Shetty v. Hotel Vandana Palace

Supreme Court
Civil Appeal No. 4679 Of 2014
[Arising out of Special Leave Petition (Civil) No. 35168 OF 2011]
Facts
Respondent (borrower) had taken loan from Syndicate Bank (Bank). Because of its
default in repaying the said loan, the bank took action under the provisions of the
SARFAESI Act 2002. After taking formal possession of the mortgaged property which
was given as a surety for due discharge of the loan, the said property was put to sale. The
appellant was the highest bidder whose bid was accepted resulting into issuance of the
sale certificate. Borrower challenged the said sale by filing application before the DRT.
This application was dismissed. The borrower filed writ petition before the High Court of
Karnataka against the order of DRT. The writ petition was dismissed as well. The
borrower appealed against the order. This time it triumphed, as the division bench had set
aside the sale of the property in favour of the appellant. The reason given is that the
public notice issued for the said sale was defective as 30 days time which is mandatorily
required under Rules 8 and 9 of SARFAESI Act was not given.
 Recent cases on SARFAESI Act

Issue
Whether there could be a waiver of the mandatory requirements under Rule 8 and 9 of
SARAESI Act 2002

Judgment

The apex court noted and emphasized that proceedings under the SARFAESI
against the borrowers are initiated only when the borrower is in dire straits. The
provisions enacted to ensure that the secured asset is not sold for a song.
Therefore, the secured creditors are expected to take bonafide measures to ensure
that there is maximum yield from such secured assets for the borrowers.

The apex court also noted that a contrary view was taken by itself in Sri
Siddeshwara Cooperative Bank Ltd. v. Ikbal (2013) 10 SCC 83 wherein it was
held that the mandatory provision of 30 days notice can be waived by the
borrower and in such an eventuality, the sale cannot be voided. In this case the
court after interpreting the provisions of Rule 9, returned a categorical opinion
that the said provision is mandatory in nature. It was further held that even though
this Rule is mandatory, that provision is for the benefit of the borrower. The Court
held that it is a settled position in law that even if a provision is mandatory, it can
always be waived by a party (or parties) for whose benefit such provision has
been made. The provision in Rule 9(1) being for the benefit of the borrower and
the provisions contained in Rule 9(3) and Rule 9(4) being for the benefit of the
secured creditor (or for the benefit of the borrower), the secured creditor and the
borrower can lawfully waive their rights. These provisions neither expressly nor
contextually indicate otherwise. Obviously, the question whether there is waiver
or not depends on the facts of each case and no hard and fast rule can be laid
down in this regard. Ikbals case proceed further to lay down the principle that
since these provisions are for the benefit for the borrower, borrower can always
waive those procedural requirements. Ikbals case clarified the question whether
there is a waiver or not depends on the facts of each case and no hard and fast rule
can be made in this regard.
In the present case, Supreme Court affirmed Ikbals case. With respect to
particular facts of the present case, it was held that no case of waiver was made
out.

This judgment held that delaying tactics adopted by the borrower would not amount to a
waiver of requirement of notice of 30 days as well as other requirements of settling terms
of sale by private treaty between the parties, notice of sale to be published in a vernacular
language newspaper and obtaining fresh valuation prior to conducting the sale. The effect
of this judgment is that even in cases where repeated auctions are required to be held on
account of delaying tactics adopted by the defaulters, the requirements of minimum
notice of 30 days and other formalities have to be complied with by banks/FIs. Needless,
to say, it further hampers the expedition of the process.
 Recent cases on SARFAESI Act

Link - http://judis.nic.in/supremecourt/imgs1.aspx?filename=41445

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