Tuesday, October 4, 2011

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 Banks 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 its 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 Banks 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 Nonperforming 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 Banks 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:

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A person named AB wants purchase a property from a person named BC. 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. 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. The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property. 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. Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property. 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. 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. 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. 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. 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. 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.

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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 Banks 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 nonperforming 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 8th 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 11th 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 14th 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 nonacceptance 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 subsection (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.

Posted by V.D.RAO at 2:12 AM 0 comments Email ThisBlogThis!Share to TwitterShare to Facebook Labels: auction sale, challenge to sale, drt, npa, NPA classification, powers of DRT, sarfaesi, SARFAESI Act, section 13 (2), secured creditor

Monday, October 3, 2011

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 Banks 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 Banks 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 cant 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 inW.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.
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Monday, April 4, 2011

DRT & SARFAESI: RBI guidelines on NPA and its interpretation?

It is very important for the Banks to deal with the will defaulters and to reduce NPA in the interest of the Banking Industry and in the interest of the country too. There were constant efforts to enable the banks to speedily recover the dues from the borrowers. Bank could not recover their dues effectively by approaching Civil Courts and as a result The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was enacted. Under the RDDBI Act, a Special Tribunal called Debt Recovery Tribunal was established and the Banks could file an application under section 19 of RDDBI Act seeking a Certificate of Recovery against the borrowers and this Certificate of Recovery is like a decree passed by a Civil Court. The DRT need not follow Civil Procedure Code while entertaining the application filed by the Banks under section 19 of RDDBI Act, 1993 and there was a special mechanism for execution of the orders too. Even with this RDDBI Act, 1993, Banks could not achieve considerable results forcing the legislature to think further effective mechanism to recover the dues and as a result and based on the recommendations of the committee The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted. Under the SARFAESI Act, 2002, the Banks need not approach any Court or Tribunal to get the dues of the borrowers determined and to proceed against the Secured Asset. Under the SARFAESI Act, 2002, if an account is classified as NPA, then, the Banks can proceed to recover the dues. Under the said Act, the Banks will give a demand notice to the borrower and guarantor under section 13 (2) of the Act and the they will deal with the objections of the borrowers to the demand notice and

if the objections of the borrowers are overruled, then, the Bank will proceed taking symbolic possession of the property, taking physical possession of the property and then will dispose of the same in accordance with the provisions of the Act and connected rules. Under SARFAESI Act, 2002, there is no need for the Banks to approach any Court or Tribunal for recovery of their dues and they may have to get the assistance of the Magistrate Court under Section 14 of the Act while taking physical possession of the property where there is a resistance in taking the possession. If the borrower is aggrieved at the action initiated by the Bank under SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal under Section 17 of the Act by paying the prescribed fee. Many legal issues under SARFAESI Act, 2002 were now settled. The important issues dealt by the Courts under SARFAESI Act, 2002, are, according to me, as follows: (a). At what stage the borrower can approach the Debt Recovery Tribunal challenging the action initiated by the Bank? (b). Can the borrower challenge the notice issued by the Bank under section 13 (2) of SARFAESI Act, 2002? (c). The jurisdiction of High Court under Article 226 of Constitution of India in dealing with SARFAESI matters? (d). The powers of the DRT and as to whether the DRT can look into the correctness of the outstanding due arrived by the Bank? (e). Can the DRT order the restoration of possession if it is proved that the Bank is not right in proceeding under the provisions of SARFAESI Act, 2002? (f). Is it right to say that the DRT can only look into the procedural irregularities while entertaining an Appeal filed by the borrower under Section 17 of the Act? (g). The issue of deposit to be made to the DRAT while preferring an Appeal against the final order of the DRT? (h). The nature of guidelines issued by Reserve Bank of India? (i). The jurisdiction of Civil Court in respect of SARFAESI matters? (j). Can the Bank simply reject the objections raised by the borrowers under section 13 (3A) of the Act? These are the few important issues, the Constitutional Courts have dealt with so far laudably and all these are, infact, directed towards protecting the interests of the

borrowers and without disturbing the object of SARFAESI Act, 2002. There were many complaints from the borrowers that the Bank is unreasonable in proceeding against them under SARFAESI Act, 2002 and many say that they are not the willful defaulters and the action of the Bank affects them severely. It is settled that the RBI guidelines on Asset Classification are mandatory and not recommendatory. RBI does frame and update the guidelines dealing with Classification of Assets from to time keeping in view of various issues. A reading of the RBI guidelines appears to be very fair and infact, the guidelines enables the Bank to exercise their own fair judgment on many issues. The RBI guidelines on Asset Classification are specific on certain issues and on many other issues, it emphasize the need for not troubling the good borrowers or the bonafide borrowers. I have also seen guidelines that the Banks should not rely on technical deficiencies if the record of recovery of Account is good. Likewise, the RBI guidelines on Asset Classification appear to be fair and the question is with regard to interpretation of the guidelines. It is now clear that it is mandatory for the Banks to follow the RBI guidelines in classifying an account as NPA. The Banks are infact, supposed to have their own clear internal mechanism to deal with the Non-performing Assets. However, most of the Banks may have their own administrative machinery to make use of the provisions of SARFAESI Act, 2002 and they will proceed to classify an account as NPA relying on RBI guidelines. I had to focus on a very specific guideline of the RBI saying that the Bank should proceed borrower-wise and not facility-wise. However, I have came across some incidents where the Banks proceed with borrower-wise at times and proceed with facility-wise at times. If it is facility-wise, the Banks may have to issue so many demand notices and there is no need in issuing so many demand notices to the same borrower. There is logic behind RBI guideline as I understood. The RBI guidelines appears to be very fair and it has even dealt with the issue as to what happens if the borrower is very good in meeting the commitments in respect of so many facilities and if there is a slight deviation in respect of one facility.If the Bank proceeds borrower-wise in these cases, then, the borrower will suffer irreparable loss. While emphasizing the object of speedy recovery of dues, while framing clear guidelines on certain issues, RBI guidelines expects the Banks to exercise their own reasonable judgment on their own. What if an Account is classified as NPA wrongfully and what can the borrower do in these cases? I have seen some cases where the High Court did entertain Writ Petitions when the classification of account itself under challenge clearly. But, if the borrower is asked to approach the Debt Recovery Tribunal challenging the action of the Bank at a later point of time and when the Bank issues a notice under section 13 (4), then, the borrower, if he is genuine, may have to suffer irreparable loss. There will be Paper Publication of the factum of taking symbolic possession and it can affect the reputation and credit worthiness of the borrower in the market and the even if the borrower approaches the Debt Recovery Tribunal under section 17, there may not be much emphasis on the issue of exercise of discretion by the Banks in

classifying the account as NPA and the borrowers, in most of the cases, are forced to make some deposit and the Tribunal says it is to get the bonafides proved. The Debt Recovery Tribunals should function effectively and when there is a prima facie case and when it appears that the Banks are unreasonable in proceeding against the borrower, an interim relief can be granted to the borrower and even the borrower can be asked to regularize his account or continue making payments as committed originally. But, what happens normally is that the borrower will be spending huge expenses for paying Court Fee and for paying legal fees and even then, the relief is not guaranteed. Though the RBI guidelines say that the Banks need not consider the value of Secured Asset while classifying the account as NPA, the DRT can consider many issues while granting interim relief. But, initially, it was settled that the DRT can only look into the irregularities in proceeding against the borrower under the provisions of the Act. Now, the scope of powers of DRT under section 17 was expanded and the DRT can look into various issues and can even look into the correctness of the determination of outstanding due. It is true that there can be borrowers who try to delay the payment as committed to the Banks, but, it is also to be noted that the Banks too can be unreasonable to the genuine borrowers at times. Note: the views expressed are my personal and a view point only.
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Saturday, March 19, 2011

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

Though the object of SARFAESI Act, 2002 is very good aiming at reducing NonPerforming Assets (NPA), the Constitutional Courts had to interpret the provisions of the Act dealing with many complicated issues and keeping in view the interests of the borrowers. Many issues under the provisions of SARFAESI Act, 2002 are settled now, however, the issue of eviction of Tenant using the authority or the power under Section 14 remains very significant. Many states have special laws protecting the interests of the Tenants and it has a very great object despite criticism.There need not be any written agreement or registered Lease Deed etc. for availing the protection under Tenant Protect Laws and depending upon the provisions of the law in that particular state. Even the express provisions of the Agreement or the Lease Deed can be ignored if the clauses in that particular agreement or the Deed goes against the express provisions of the Tenant Protection Laws in a particular state

and the provisions of the Tenant Protection Law will prevail. In the light of the object of the SARFAESI Act, 2002 and the object of Tenant Protection Laws in a particular State, the issue of eviction of Tenant under Section 14 of SARFAESI Act, 2002 occupies significance. There can be complications if the Bank is asked to approach the Rent Control Courts to evict the Tenant. Again, there can serious issues if the Bank is allowed to proceed against the Tenant under Section 14 of the SARFAESI Act, 2002 without having any regard to the Lease Agreement, Understanding or the Lease Deed. The complications with the eviction of Tenant by the Bank in the course of its action under the provisions of SARFAESI Act, 2002 are, in brief, as follows:
1. If the Bank is not allowed to proceed against the Tenant under Section 14 to take physical possession of the property, then, the Secured Asset may not fetch good value when it goes for auction. It can be detrimental to the interests of the borrowers and also can be detrimental to the interests of the Banks too in some cases. The bidders may definitely discount the risk of eviction while bidding for the property in auction. If the property is not fetching the market value, then, it may provide a right to the borrower or the owner of the property to challenge the auction too. 2. If the Bank is asked to approach Rent Control Courts or Rent Control Tribunal under the special State law dealing with the protection of Tenants, then, it would be interesting to see as to the grounds available to the Bank to ask for eviction of Tenants from the Secured Asset. 3. From Tenants point of view, he or she may suffer an irreparable loss due to the action of the Bank under SARFAESI Act, 2002 and the Tenant may find it difficult to proceed against the owner of the property in getting the Advance amount back or in claiming the damages.There is a justification from Tenants point of view and it will be definitely difficult for the Tenant to vacate the premises immediately as against their plans. Who will compensate the Tenant in genuine cases? 4. We can not also rule-out the possibility of fictitious arrangements or Agreements if the protection is provided to the Tenants and it is held that the Banks can not take physical possession of the Secured Asset under Section 14. We know many cases pending before Rent Control Courts or Tribunal for years. In many cases, Tenants used to approach Debt Recovery Tribunal now under section 17 as soon as they come to the knowledge of SARFAESI proceedings. The DRT, in my opinion, may rule in favour of Bank in many of these cases and the Tenant is carefully been scrutinized.

There can be many complications when it comes to eviction of Tenant by the Bank while it proceeds against the Secured Asset under the provisions of SARFAESI Act, 2002. The issue is not simple and it is complicated requiring a special law as otherwise, we would be seeing many judgments on this issue expressing different views and it will take some time to see a settled legal position in this regard. After many judgments or views, now the issues like cause of action to file an appeal under section 17, the remedy against the order of Magistrate Court under Section 14 and the powers of DRT under Section 17 etc. are settled. Likewise, in the absence of any special law or attention by the law-makers with regard to eviction of Tenants under SARFAESI Act, 2002, there be will many more judgments on this issue and it may take some time to see a settled legal position in this regard. I was always thinking of

this complicated issue under the provisions of the SARFAESI Act, 2002 and I am happy to note a judgment of Madras High Court dealing with this particular issue in the light of all related legislations. A detailed observation ofMadras High Court in W.P.Nos.23850 & 27432 of 2010, between Indian Bank Adyar Branch Vs. M/s Nippon Enterprises South, CDJ 2011 MHC 1482 is as follows: 25. Point no.(ii): The contention of the tenant is that its right to continue to be in possession of the property in question as lessee is protected by the TN Rent Control Act. Hence, under Section 13(4) of the SARFAESI Act, only symbolic possession could be taken and not actual/physical possession. It is the further contention that the SARFAESI Act cannot extinguish the right accrued to a tenant under the provisions of the TN Rent Control Act. On the other hand, it is the contention of the bank that the SARFAESI Act has got overriding effect over the TN Rent Control Act in view of the provisions of Section 35 and therefore the rights said to have been accrued in favour of the tenant under the TN Rent Control Act cannot be enforced as against the bank while the bank invokes the provisions of the SARFAESI Act. 26. The question is, therefore, as to whether the SARFAESI Act has got overriding effect over the TN Rent Control Act. Section 35 of SARFAESI Act reads as under:"35. The provisions of this Act to override other laws.--The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." 27. The power to make laws by the Parliament and State Legislature flows from Article 245 of the Constitution. Article 246 of the Constitution deals with the respective subject matter of laws that could be made by the Parliament and State Legislature respectively as provided in Seventh Schedule. By virtue of the non obstante clause contained in Article 246(1) of the Constitution, Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I of Seventh Schedule. By virtue of the non obstante clause contained in Article 246(2) of the Constitution, Parliament and, subject to clause (1), the Legislature of any State shall have power to make laws with respect to any of the matters enumerated in List III of Seventh Schedule. Likewise, by virtue of Article 246(3) of the Constitution, subject to clauses (1) and (2), the State Legislature has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II of Seventh Schedule. Article 254 of the Constitution is a mechanism to reconcile a law made by the Parliament and a law made by the State Legislature, in the event there is inconsistency. 28. The scope and ambit of Article 254 of the Constitution came up for consideration before the Supreme Court on various occasions. A Constitution Bench of the Supreme Court in M.Karunanidhi v. Union of India, (1979) 3 SCC 431 had an occasion to consider the issue relating to repugnancy between the law enacted by

the Parliament and the State Legislature and evolved certain principles to be applied for determining the repugnancy between those laws. In paragraph 8 of the said judgment, the Supreme Court has held as follows:"8. It would be seen that so far as clause (1) of Article 254 is concerned, it clearly lays down that where there is a direct collision between a provision of law made by Parliament with respect to one of the matters enumerated in the Concurrent List,, then, subject to the provisions of clause (2), the State law would be void to the extent of the repugnancy. This naturally means that where both the State and Parliament occupy the field contemplated by the Concurrent List then the Act passed by Parliament being prior in point of time will prevail and consequently the State Act will have to yield to the Central Act. In fact, the scheme of the Constitution is a scientific and equitable distribution of legislative powers between Parliament and the State Legislatures. First, regarding the matters contained in List I, i.e., the Union List to the Seventh Schedule, Parliament alone is empowered to legislate and the State Legislatures have no authority to make any law in respect of the Entries contained in List I. Secondly, so far as the Concurrent List is concerned, both Parliament and the State Legislatures are entitled to legislate in regard to any of the Entries appearing therein, but that is subject to the condition laid down by Article 254(1) discussed above. Thirdly, so far as the matters in List II, i.e., the State List are concerned, the State Legislatures alone are competent to legislate on them and only under certain conditions Parliament can do so. It is, therefore, obvious that in such matters repugnancy may result from the following circumstances: 1. Where the provisions of a Central Act and a State Act in the Concurrent List are fully inconsistent and are absolutely irreconcilable, the Central Act will prevail and the State Act will become void in view of the repugnancy. 2. Where however a law passed by the State comes into collision with a law passed by Parliament on an Entry in the Concurrent List, the State Act shall prevail to the extent of the repugnancy and the provisions of the Central Act would become void provided the State Act has been passed in accordance with clause (2) of Article 254. 3. Where a law passed by the State Legislature while being substantially within the scope of the entries in the State List entrenches upon any of the Entries in the Central List the constitutionality of the law may be upheld by invoking the doctrine of pith and substance if on an analysis of the provisions of the Act it appears that by and large the law falls within the four corners of the State List an entrenchment, if any, is purely incidental or inconsequential. 4. Where, however, a law made by the State Legislature on a subject covered by the Concurrent List is inconsistent with and repugnant to a previous law made by Parliament, then such a law can be protected by obtaining the assent of the President under Article 254(2) of the Constitution. The result of obtaining the assent of the President would be that so far as the State Act is concerned, it will prevail in

the State and overrule the provisions of the Central Act in their applicability to the State only. Such a state of affairs will exist only until Parliament may at any time make a law adding to, or amending, varying or repealing the law made by the State Legislature under the proviso to Article 254. So far as the present State Act is concerned, we are called upon to consider the various shades of the constitutional validity of the same under Article 254(2) of the Constitution." 29. Subsequently, in Government of Andhra Pradesh and another v. J.B.Educational Society and another, (2005) 3 SCC 212, in paragraph 9, after referring to M.Karunanidhi's case, the Supreme Court has held as follows:"9. Parliament has exclusive power to legislate with respect to any of the matters enumerated in List I, notwithstanding anything contained in clauses (2) and (3) of Article 246. The non obstante clause under Article 246(1) indicates the predominance or supremacy of the law made by the Union Legislature in the event of an overlap of the law made by Parliament with respect to a matter enumerated in List I and a law made by the State Legislature with respect to a matter enumerated in List II of the Seventh Schedule." 30. In Central Bank of India v. State of Kerala, (2009) 6 CTC 656, after referring to the judgment in State of West Bengal v. Kesoram Industries Limited, (2004) 1 SCC 201, the Supreme Court has observed as "In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State Law will be ultra vires and shall have to give way to the Union Law." 31. Recently in Zameer Ahmed Latifur Rehman Sheikh v. State of Maharashtra and others, AIR 2010 SC 2633, after referring to the above judgments, more particularly, the judgment of the Constitution Bench in M.Karunanidhi's case, in paragraph 38, the Supreme Court has held as follows:"38. It is common ground that the State legislature does not have power to legislate upon any of the matters enumerated in the Union List. However, if it could be shown that the core area and the subject matter of the legislation is covered by an entry in the State List, then any incidental encroachment upon an entry in the Union List would not be enough so as to render the State Law invalid, and such an incidental encroachment will not make the legislation ultra vires the Constitution."

32. While dealing with an identical case, a Constitution Bench of the Supreme Court in Offshore Holdings Private Limited v. Bangalore Development Authority and others, 2011 (1) Scale 533, in paragraph 61, has held as follows:"61. We are dealing with a federal Constitution and its essence is the distribution of legislative powers between the Centre and the State. The Lists enumerate, elaborately, the topics on which either of the legislative constituents can enact. Despite that, some overlapping of the field of legislation may be inevitable. Article 246 lays down the principle of federal supremacy that in case of inevitable and irreconcilable conflict between the Union and the State powers, the Union power, as enumerated in List I, shall prevail over the State and the State power, as enumerated in List II, in case of overlapping between List III and II, the former shall prevail. This principle of federal supremacy laid down in Article 246(1) of the Constitution should normally be resorted to only when the conflict is so patent and irreconcilable that coexistence of the two laws is not feasible. Such conflict must be an actual one and not a mere seeming conflict between the Entries in the two Lists. While Entries have to be construed liberally, their irreconcilability and impossibility of co-existence should be patent. One, who questions the constitutional validity of a law as being ultra vires, takes the onus of proving the same before the Court. Doctrines of pith and substance, overlapping and incidental encroachment are, in fact, species of the same law. It is quite possible to apply these doctrines together to examine the repugnancy or otherwise of an encroachment. In a case of overlapping, the Courts have taken the view that it is advisable to ignore an encroachment which is merely incidental in order to reconcile the provisions and harmoniously implement them. If, ultimately, the provisions of both the Acts can co-exist without conflict, then it is not expected of the Courts to invalidate the law in question." 33. In yet another judgment in Girnar Traders v. State of Maharashtra and others, 2011 (1) Scale 223, in paragraph 78, the Constitution Bench of the Supreme Court has held as follows:"78. A self-contained code is an exception to the rule of referential legislation. The various legal concepts covering the relevant issues have been discussed by us in detail above. The schemes of the MRTP Act and the Land Acquisition Act do not admit any conflict or repugnancy in their implementation. The slight overlapping would not take the colour of repugnancy. In such cases, the doctrine of pith and substance would squarely be applicable and rigours of Article 254(1) would not be attracted...." 34. Keeping in mind the principles evolved by the Supreme Court in the above judgments, let us consider the scheme of the SARFAESI Act and the TN Rent Control Act. The SARFAESI Act is traceable to Entry 45 of List I of the Seventh Schedule, whereas the TN Rent Control Act is traceable to Entry 6 of list III. Both the Acts have been enacted by the Parliament and the State Legislature respectively well within their respective competence in their respective fields. The question to be

considered is as to whether there is any overlapping between the two enactments. To find out whether a particular enactment is within the legislative competence of the Parliament or State Legislature, the doctrine of pith and substance is to be applied. If the same is applied to the facts of the present case, it goes without saying that the SARFAESI Act is an Act aiming at a mechanism to recover the outstanding dues towards the banks and financial institutions by following certain procedures without the intervention of the Courts and Tribunals. Prior to the enactment of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the dues to the banks were to be recovered only by approaching the civil Courts. Having experienced the delay in civil courts and taking into account that public money is locked in the hands of unscrupulous persons which is not good for the banking sector and ultimately the economy of the country, the Central Government constituted a committee on the financial system headed by Shri M.Narasimhan to go into the issue and based on the recommendations of the said Committee, the above Act was passed thereby ousting the jurisdiction of the civil Courts in respect of the debts due to the banks and constituting Tribunals. Under the said Act, the banks could approach the Debts Recovery tribunal and for appeal, the Debts Recovery Appellate Tribunal constituted under the Act for recovery of its dues. The said Act is a complete code in itself. During the working of the said Act, it was felt that even the said Act was not effective, as the same did not achieve the desired result. Therefore, it was thought of evolving a new mechanism so that the debts due to the banks could be recovered in a speedy manner. It was under those circumstances, two committees were constituted and the said committees recommended to the Government that even the intervention of the tribunal may not be necessary and instead, the banks themselves can be given power to directly recover the debts due to the banks by following certain procedures. It was based on the said recommendations, the SARFAESI Act came into being. The Act can be treated as one of the legislative measures taken by the Government for ensuring that the dues of secured creditors including banks and financial institutions are recovered from the defaulting borrower without undergoing long drawn litigation in civil Courts. A close reading of the scheme of the SARFAESI Act would go to show that it aims at speedy recovery of the debts due to the banks and financial institutions without the intervention of either the civil court or tribunal. Certain safeguards are also provided for the debtor to approach the Debt Recovery Tribunal by making application under Section 17 of the SARFAESI Act and also to make further appeal to the Debts Recovery Appellate Tribunal, if the debtor is aggrieved by any of the actions of the bank under Section 13 of the SARFAESI Act. From the scheme of the Act, beyond any controversy, the SARFAESI Act is basically procedural in nature only to recover the dues. The Act does not create any substantive right in the bank. 35. As against the above, the TN Rent Control Act was enacted by the State Legislature under Entry 6 of Concurrent List to protect the interest of the tenants. As it was felt that the provisions of the TP Act were not found to be effective to protect the interest of the tenants, the State Legislature thought it fit to bring in the legislation

mainly with a view to protect the rights of the lessees. It is needless to point out that under the TP Act, a lease can be terminated without assigning any reason by simply issuing a statutory notice under Section 106 of TP Act. The TN Rent Control Act was enacted to regulate the letting of residential and non-residential buildings and control of rents of such buildings and the prevention of unreasonable eviction of tenants therefrom. For the said purpose, Rent Control Tribunals are constituted with a provision of appeal enabling the aggrieved persons to approach them. A further revision is also contemplated to the High Court. Under the TN Rent Control Act, a tenant can be evicted only on specific grounds enumerated under Section 10 of the Act. The lease cannot be terminated by the unilateral act of the landlord. Further, under the TN Rent Control Act, tenancy under an unregistered deed or even under oral agreement is protected and such tenant is also entitled to have equal rights like that of the tenant under the registered lease under Section 107 of the TP Act. The entire scheme of the Act would go to show that it is more substantive as well as procedural and the Act is a complete code in itself. This Act clearly mandates that a tenant is entitled to continue to be in possession of the building until and otherwise he is evicted as per the provisions of the Act and not otherwise. 36. Under Section 13(4) of the SARFAESI Act, the secured creditor can take possession of the secured assets of the borrower. There can be no difficulty in taking such possession of the secured assets either under Section 13(4) or under Section 14 of the SARFAESI Act, if the secured asset is in the possession of the borrower or guarantor, as the case may be. SARFAESI Act entitles the creditor to take possession of the secured assets either by issuing possession notice under Section 13(4) or by making application to the Chief Metropolitan Magistrate/District Magistrate to take physical possession under Section 14. Though the function of Chief Metropolitan Magistrate/District Magistrate is only ministerial, the provision of Section 14 confers drastic power to take possession even by use of force. The difficulty arises only in cases where the possession of the property is in the hands of the tenant (lessee). The SARFAESI Act does not contain any specific provision enabling the secured creditor to take possession from the hands of a tenant (lessee). On the other hand, the TN Rent Control Act contemplates that a tenant is entitled in law to continue to be in possession unless he is evicted under the provisions of the said Act. SARFAESI Act being mainly procedural and the TN Rent Control Act being exclusively dealing with the substantive right of tenants, both the Acts operate on different fields. Only in the event the SARFAESI Act contains a provision to enable the bank to take possession of a secured asset from a lessee, then only it can be held that there is conflict between the SARFAESI Act and the TN Rent Control Act in which case, the TN Rent Control Act should give way for the SARFAESI Act to have overriding effect. However, there is no such provision in the SARFAESI Act enabling the bank to take possession from the lessee, though the Act speaks of the right of the bank to take possession of the secured asset. Moreover, right from Section 13(2) till exhausting the provision of appeal, the bank deals only with the borrower/guarantor and the lessee is nowhere in the picture, as the Act does not

require the bank to involve the lessee/tenant as well in the proceedings. Thus, we do not find any overlapping or inconsistency between these two Acts. When there is no such overlapping or repugnancy between these two provisions in respect of taking possession from the lessee, it has to be held that physical possession of the secured assets from the lessee/tenant can be taken only by invoking the provisions of the TN Rent Control Act. In these cases, the issue of registration of Lease Agreements or Deeds occupies significance and in many cases of this kind, emphasis is being laid on the issue of registration as required under Transfer of Property Act or Registration Act. Even dealing with the issue of requirement of registration of Rental Agreements or Lease Deeds in the light of protection available to the Tenants under the State Laws, the Court has observed as follows: 44. Incidentally a question was raised as to whether an unregistered instrument can create a lease. The said question came up for consideration before the Supreme Court in the judgment in Rana Vidya Bhushan Singh v. Shri Rati Ram, (1969) 1 SCWR 341, wherein the Supreme Court observed as follows:"The agreement was unregistered. It could not create in favour of the defendant the right of a tenant for a period of fifteen years. The agreement was on that account inadmissible in evidence to support that claim. But in support of the plea that his possession was that of a tenant the defendant was entitled to rely upon the recitals contained in that agreement of lease ... ... ... A document required by law to be registered, if unregistered, is inadmissible as evidence of a transaction affecting immovable property, but it may be admitted as evidence of collateral facts, or for any collateral purpose, that is for any purpose other than that of creating, declaring, assigning, limiting or extinguishing a right to immovable property." In the event an unregistered document is sought to be relied upon for collateral purpose, namely, the purpose other than that of creating, declaring, assigning, limiting or extinguishing a right over immovable property, it is admissible in evidence. 45. In Anthony v. K.C.Ittoop and Sons and others, (2001) 1 M.L.J. 12, the Supreme Court found that there are three interdictions to claim that an instrument can create a valid lease in law. The first inhibition is that it should be in accordance with the provisions of Section 107 of the Transfer of Property Act. That Section reads as under:"107. A lease of immovable property from year to year, or for any term exceeding one year, or reserving an yearly rent, can be made only by a registered instrument." The second inhibition, as pointed out by the Supreme Court, is Section 17(1)(d) of the Registration Act, which states that where a lease of immovable property from

year to year or for any term exceeding one year or reserving an yearly rent, such document should be compulsorily registered. The third inhibition, as noted by the Supreme Court, is Section 49 of the Registration Act relating to the consequence of non-compliance of Section 17. Section 49(c) contemplates that no document required by Section 17 or by any provision of the Transfer of Property Act to be registered shall be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered. 46. Having regard to the above three inhibitions, the Supreme Court has held that insofar as the instrument of lease is concerned, there is no scope for holding that the appellant is a lessee by virtue of the said instrument. Nevertheless, the Supreme Court, taking into consideration of the proviso to Section 49 of the Registration Act, found that an unregistered lease deed may be taken as evidence of any collateral transaction not required to be effected by registered instrument. The Supreme Court, in paragraph-13 of that judgment, has held as follows:"13. When lease is a transfer of a right to enjoy the property and such transfer can be made expressly or by implication, the mere fact that an unregistered instrument came into existence would not stand in the way of the court to determine whether there was in fact a lease otherwise than through such deed." The Supreme Court further went on to add that when the landlord intended to put the tenant into possession of the building and the tenant was paying monthly rent or had agreed to pay the rent in respect of the building, the legal character of the appellant's possession should be attributed as a jural relationship between the parties. With that finding, the Supreme Court held in paragraph-14 as follows:"14. When it is admitted by both sides that the appellant was intended into the possession of the building by the owner thereof and that the appellant was paying monthly rent or had agreed to pay rent in respect of the building, the legal character of the appellant's possession has to be attributed in a jural relationship between the parties. Such a jural relationship, on the facts situation of this case, cannot be placed anything different from that of lessor and lessee falling within the purview of the second para of Sec.107 of the TP Act extracted above. ...." 47. In the given case, the lease deed which is sought to be relied upon by the tenant in a proceeding initiated by the bank under the provisions of the SARFAESI Act to contend that in the wake of the provisions of Section 31(e) and it being a tenant in bona fide occupation, the bank cannot take possession of the premises in question from the tenant under the provisions of SARFAESI Act. The reliance sought to be placed by the tenant over the unregistered lease deed is only for a collateral purpose to show that the tenant was inducted into the premises right from the year 1992 and thereafter, by an unregistered lease deed, from the year 2000 it had been in possession of the premises.

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