SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

Facts: Present appeals filed by various aggrieved parties, either borrowers or Secured Creditors for challenging constitutional validity of Section 2(1)(o) of Act pertaining to Non-Performing Assets.

Held: Submission that amendment of definition of expression 'NPA' under Section 2(1)(o) of Act was bad on account of excessive delegation of essential legislative function, was untenable and was required to be rejected. Another submission that by authorizing different Regulators to prescribe different norms for identification of NPA with reference to different Creditors amount to unreasonable classification was also required to be rejected for reason that all Creditors did not form uniform/homogenous class. Section 13 of Act obligated Secured Creditor to communicate reasons for non-acceptance of representation or objections to borrowers. Amended definition of expression "NPA" Under Section 2(1)(o) of Act was constitutionally valid. Another important aspect of the Act is that the activity of the Securitisation Companies (SC) and Reconstruction Companies (RC) are given a statutory recognition. Their activity is regulated Under Sections 3 and 4 of the Act. Under Section 3 such companies are required to be registered with the RBI. Such registration is liable for cancellation Under Section 4 on the happening of any one of the events specified therein. Section 5 confers statutory authority upon SCs and RCs to acquire the "financial assets"11 of any CREDITOR. Section 5(2)12 further provides that upon such acquisition of an asset, the SC or RC, as the case may be, steps into the shoes of the original SECURED CREDITOR from whom the asset is acquired.

Facts: The present appeal has been preferred against the order rendered by DRT-II wherein an application moved by Allahabad Bank for deletion of its name from the array of the parties was dismissed. According to Allahabad Bank it had assigned the debt in favour of the assignee M/s. IARC Pvt. Ltd. under the deed of assignment and the assignee company has already been impleaded as respondent. Counsel for the appellant argued that succinctly stated the debt stands transferred to M/s. IARC Pvt. Ltd. and it has ceased to be a necessary party.

Held: The bank assigned the loan to a ARC, but the borrower continued paying rent to the bank, also the action taken by the bank u/s 13(2) & 13(4) was questionable and the DRT (trial court) was yet to adjudicate. So, the DRAT dismissed the appeal of the Bank seeking deletion of its name from array of parties, which had cited Section 5(4) in seeking so. The same could not be done till the alternate remedy asked for by the borrower u/s 17(1) has been adjudicated upon. Thus, until then, both the assignor as well as the assignee were held to be necessary parties to this case.

Facts: The Appellant bank had provided financial assistance to one company/principal borrower. The Respondent 1(R1) was one of the two guarantors for the said loan transaction. The R1 had offered his immovable property as security. As the principal borrower committed default, the Appellant issued a demand notice u/s. 13(2) of the SARFAESI Act, 2002. The Appellant then issued possession notice Under Section 13 (4) of 2002 Act. After taking symbolic possession of the secured asset, the upset price at Rs. 69,75,000/- thereof was determined and was accepted by the Appellant. A notice of sale was issued and was also given to the principal borrower and both the guarantors, to give them one last and final opportunity to discharge the debt within 30 days from the date of the said notice. A copy of e-auction notice was also enclosed indicating that the sale date was fixed as 21.11.2015. As per the e-auction notice, the auction was held on 21.11.2015. The property was sold to the highest bidder, for an amount of Rs. 73,25,000/-. The R1 filed petition before the High Court, for a declaration that the e-auction notice was illegal and in contravention of the provisions of the 2002 Act and Rules framed thereunder. The High Court took the view that it was imperative for the secured creditor to put the borrower on a notice of 30 days' duration about the intention to sell the secured asset and the mode of sale. This should precede the issuance of a public notice for sale. Hence, the present appeal.

Held: It is, therefore, imperative that for the sale to be effected Under Section 13(8), the procedure prescribed under Rule 8 read along with Rule 9(1) has to be necessarily followed, inasmuch as that is the prescription of the law for effecting the sale by referring to Sections 13(1), 13(8) and 37, read along with Section 29 and Rule 15. In the present case, as the public auction sale held on 21.11.2015 has not materialized, the Appellant may have to resort to a fresh public notice for sale of the secured asset of the Respondent No. 1, if the outstanding liability is still unpaid and the sale is to be effected either by inviting tenders from the public or by holding public auction.

Facts: The seminal question involved in present appeals is whether the Chief Judicial Magistrate is competent to process the request of the secured creditor to take possession of the secured asset under Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 . There are conflicting views of different High Courts on this question. The High Courts of Bombay, Calcutta, Madras, Madhya Pradesh and Uttarakhand have interpreted the said provision to mean that, only the Chief Metropolitan Magistrate in metropolitan areas and the District Magistrate in non -metropolitan areas are competent to deal with such request. On the other hand, the High Courts of Kerala, Karnataka, Allahabad and Andhra Pradesh have taken a contrary view of the same provision, to mean that it does not debar or preclude the CJM in the non metropolitan areas to exercise power under Section 14 of the 2002 Act.

Held: It is urged that taking any other view would require rewriting of Section 14 of the 2002 Act and in the process doing violence to the legislative intent. That must be eschewed. It is urged that in contradistinction to the expression used in Section 14 "CMM" and "DM", Section 30 of the same Act (2002 Act) refers to the authority as "Metropolitan Magistrate" or a "Judicial Magistrate", as the case may be for taking cognizance of offences punishable under the Act. The CJM is equally competent to deal with the application moved by the secured creditor under Section 14 of the 2002 Act. Accordingly, view taken by the High Courts of Kerala, Karnataka, Allahabad and Andhra Pradesh is upheld and decisions of the High Courts of Bombay, Calcutta, Madras, Madhya Pradesh and Uttarakhand in that regard is reversed.

Facts: The Appellant is a nationalized bank which had lent Rs. 8,00,000/- to R1 by way of a term loan on certain conditions and so as to secure the said debt, R1 debtor had mortgaged his immovable property forming part of premises. As R1 committed default in re-payment of the said loan, the Appellant initiated proceedings under the provisions of the SARFAESI Act, 2002. When notice u/s.13(2) of the Act had been issued and further proceedings were sought to be initiated by the Appellant against R1, the said proceedings had been challenged by R1 by filing civil suit in the Court of Civil Judge, Delhi, the said suit is rejected by the trial court. Being aggrieved by the rejection of the said application, the Appellant filed Civil Revision Petition in the High Court of Delhi. The said petition was also rejected and being aggrieved by the said judgment, the present appeal has been filed by the Appellant.

Held: The application submitted by the Appellant bank Under Order VII Rule 11 of the Code of Civil Procedure should have been granted by the trial Court as, according to Section 34 of the Act, a Civil Court has no jurisdiction to entertain any appeal arising under the Act. The Debt Recovery Tribunal constituted under the DRT Act has jurisdiction to entertain an appeal as per Section 17 of the Act even if the amount involved is less than Rs. 10 lakh. But, the said appellate jurisdiction need not be misunderstood with the original jurisdiction of the Tribunal. For the aforestated reasons, the impugned judgment as well as the order rejecting the application filed Under Order VII Rule 11 are set aside.

Facts: State Bank of India leading a consortium of banks (Repsondent Banks) filed an application under S.14 of SARFAESI Act contending that they were entitled to take physical possession of a building in Mumbai named Kingfisher House, a property which was mortgaged by Kingfisher Airlines Limited in favour of the consortium. Kingfisher Airlines Limited holds that a large number of petitions for winding up of the Company is pending before this court (High Court) and if the earliest of these petitions is admitted, then the assets would come under the jurisdiction of this court. Hence the Company filed the Application to direct the Respondent Bank(s) not to proceed with the Application filed under Section 14 of the SARFAESI Act before the CMM Court and for a direction that physical possession of the secured asset shall not been taken in undue haste. The said Application was filed contending that by invoking the jurisdiction of the this Court for winding up, the Banks are deemed to have relinquished and surrendered all security interest and therefore seeking to invoke Section 14 of the SARFAESI Act after filing the Petition for winding up is wholly illegal and without jurisdiction. Further the proceedings under SARFAESI may jeopardize the interests of a large number of creditors, employees, shareholders and the company as well.

Held: A plain reading of Section 34 of the SARFAESI Act would indicate that the jurisdiction of all civil courts is barred and no injunction can be granted by any Court in respect of any action taken or to be taken pursuant to SARFAESI Act. Such bar would apply to Company Court as well. Section 35 of the SARFAESI Act declares that the provisions of the Act would prevail over other laws notwithstanding anything inconsistent therein. Though Section 446 (2) of the Companies Act, 1956 provides that the Company Court shall have absolute jurisdiction to entertain and dispose of any suit or proceedings notwithstanding anything contained in any other law, this provision is applicable to a post winding up order. That apart, the non obstante clause contained in the subsequent enactment would normally prevail. Therefore, it was held that the Karnataka High Court as a Company Court did not have jurisdiction to interfere. A secured creditor can choose to stand outside the winding up and yet simultaneously prefer a company petition and also that the Company Court could not exercise jurisdiction over the property when recourse is sought to be taken against the secured asset by a secured creditor under SARFAESI Act.

Facts: X, the plaintiff is the sister of Y. Z is the son of Y. According to X, her mother had gifted her half share in a suit property through an oral gift in 11.3.1982 and since then X has been the absolute owner. X handed over the property to Y under the bona fide intention that Y would look after the property in the best interest of X. Y however claims that their mother executed a trust deed on the property on 5.2.1983 in favour of Z, the beneficiary. Y is the trustee of the property. Y availed loan from Indian Bank on strength of the suit property. Upon default in repayment of loan, the Defendant invoked provisions of SARFAESI Act 2002 and thus took over the possession of the suit property. X claims that the possession by the Bank should be withdrawn and that the trust deed does not bind her. The Bank denies the averment by X regarding the gift. The Bank further claimed that the suit is not maintainable and is expressly barred under s.17 and s.34 of the Act. At this stage, an application was also filed with under Order 7 Rule 11(d) of the CPC by the Plaintiff seeking direction against the Defendant for withdrawl of possession notice (the main relief) along with other reliefs. The civil court rejected the plaint stating jurisdiction of civil court is barred and hence the present appeal.

Held: Taking over of the possession of the suit property is one of the coercive steps undertaken by the Defendant under s. 13(4). The fact that such steps were taken by the Bank is evident from the statements and documents provided by the Plaintiff in her plaint. The Plaintiff, who is the aggrieved party in this case, would then have only a specific remedy as provided under S.17 of the SARFAESI Act. Upon conjoint reading of S.17 and S.34, it is clear that there is a statutory bar on Civil Court to try cases in which action under SARFAESI Act has already been taken or are to be initiated. The Civil Court thus cannot impose an injunction. Further, the High Court upheld that the decision of the Civil Court was right in rejecting the plaint.

Facts: Industrial Financial Corporation of India (IFCI), (the creditor), in the capacity of a financial institution entered into a corporate loan agreement with Blue Coast Hotels (hereinafter 'the debtor') for a sum of Rs. 150 crores. The agreement included a creation of a special mortgage to secure the corporate loan. The mortgaged property comprised of the whole of the debtor's hotel property-including the agricultural land on which the debtor was to develop villas. The debtor defaulted in repayment of the loan and the debtor's account became a Non-Performing Asset (NPA). A notice under Section 13(2) of the Act was sent by the creditor calling upon the debtor to pay the amount overdue. After various rounds of litigation the creditor auctioned the mortgaged property in order to recover the debt amount. An appeal was preferred wherein the High Court held entire proceedings for recovery and sale of the hotel to be illegal being in violation of the Act. Aggrieved by, present appeal was preferred.

Held: The language of Sub-section (3A) to be clearly impulsive. The word 'shall' invariably raise a presumption that the particular provision is imperative. There is nothing in the legislative scheme of Section 13(3A) which requires the Court to consider whether or not, the word 'shall' is to be treated as directory in the provision. Under Section 13(2) and after the debtor's letter of representation many opportunities were granted by the creditor to the debtor to repay the debt which were all met by proposals for extension of time. Eventually, the debtor even executed "A Letter of Undertaking" acknowledging the right of IFCI to sell the assets in the case of default.
Non-compliance of Sub-section (3A) of Section 13 cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions. the judgment of the High Court is set aside and direct the debtor and its agents to handover possession of the mortgaged properties to the auction purchaser within a period of six months from the date of this judgment along with the relevant accounts.

Facts: Respondent-Punjab National Bank had given loan facility to a Company called "M/s. India Iron & Steel Corporation Limited". To secure the loan amount, the Borrower had secured their assets, which consisted of the land, factory building, plant and machinery situated at Dhampur. The Borrower, however, failed to clear their loan amount and became a defaulter in its repayment. The PNB, therefore, invoked their powers Under Section 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and issued a public sale notice in leading English newspapers for sale of the mortgaged assets of the Borrower in the public auction. The Appellant, herein, was the bidder who failed to pay the regular installments towards sale money in terms of memorandum of understanding to Respondent. Dispute arose between Appellant and Respondent before Debt Recovery Tribunal (DRT) wherein an order was passed directing the Appellant not to remove any material from the factory premises. That led the Respondent to forfeit the Appellant's deposit which was challenged in High Court. High Court dismissed the Appellant's petition on the ground of availability of alternative statutory remedy to the Appellant of filing the application under Section 17 of SARFAESI Act before DRT to challenge the action of Respondent in forfeiting the deposit money of the Appellant. Hence, present appeal was filed by Appellant.

Held: An action of Respondent in forfeiting the deposit made by Appellant was part of the measures taken by Respondent under Section 13(4). Measures taken under Section 13 (4) would not be completed unless the entire procedure laid down in Rules 8 and 9 for sale of secured assets was fully complied with by the Respondent. Tribunal had been empowered by Section 17(2),(3) and (4) to examine all the steps taken by Respondent with a view to find out as to whether the sale of secured assets was made in conformity with the requirements contained in Section 13(4) read with the Rules or not. The expression "any of the measures referred to in Section 13(4) taken by Respondent in Section 17(1) would include all actions taken by Respondent under the Rules which relate to the measures specified in Section 13(4). Appellant was aggrieved by the action of Respondent in forfeiting their money. The Appellant falls within the expression "any person" as specified under Section 17(1) and hence was entitled to challenge the action of Respondent before DRT by filing an application under Section 17(1) of Act. Lower Court was justified in dismissing the Appellant's petition on the ground of availability of alternative statutory remedy of filing an application under Section 17(1) of Act before the concerned Tribunal to challenge the action of Respondent in forfeiting the Appellant's deposit under Rule 9(5). The Appellant is, accordingly, granted liberty to file an application before the concerned Tribunal (DRT) Under Section 17(1) of the SARFAESI Act, which has jurisdiction to entertain such application within 45 days from the date of this order.