Auth.Offr.,Indian Overseas Bank & Anr vs M/S.Ashok Saw Mill

firm, availed of various loans from the appellant 2

Bank which were secured by movable and immovable

assets. The loanee firms having defaulted in

repayment of the loans and since their accounts

became Non Performing Assets (hereinafter referred

to as `NPA'), the Bank initiated action against

them under the provisions of the Securitisation and

Reconstruction of Financial Assets and Enforcement

of Security Interest Act, 2002 (hereinafter

referred to as `the SARFAESI Act') and issued

separate demand notices to the respondent

partnership firm and its sister concern under

Section 13(2) thereof on 17th September, 2002, and

21st September, 2002, for the recovery of

Rs.1,56,47,638/and Rs.1,40,18,468.36, respectively.

3. As the respondent and its sister concern did

not respond to the said demand notices, the

appellant Bank invoked Section 13(4) of the above

Act and took possession of the secured assets on 4th

December, 2002. The said action of the Bank, as

also the vires of the SARFAESI Act, were challenged 3

by the respondent partnership firm and its sister

concern by way of two separate writ petitions,

being Writ Petition Nos.46328 and 46329 of 2002, in

which an interim stay of all further proceedings

under the said Act was granted on 27th December,

2002. The said writ petitions were ultimately

heard and dismissed by a common order on 23rd April,

2004, with liberty to the respondent firm to

approach the Debts Recovery Tribunal (hereinafter

referred to as `the DRT'), within 30 days. Since,

despite such liberty, the respondent firm did not

approach the DRT, the Bank took a decision to sell

the secured assets of the respondent firm. At that

stage, negotiations were held between the parties

for a One-Time Settlement, which also failed,

causing the Bank to issue a sale notice dated 26th

July, 2007, inviting sealed tenders for the sale of

the secured assets of the firm. The same was

challenged by the respondent firm on 18th August,

2007, in Writ Petition No.27472 of 2007 on the 4

ground that it was unable to move the DRT in view

of the expiry of the period of limitation

prescribed under the Act. After hearing the

parties, the High Court refused to grant any

interim relief and posted the writ petition for

final disposal.

4. During the pendency of the said writ petition,

the respondent firm, along with M/s. Ashok

Woodworks, filed SARFAESI Application No.74 of 2007

before the Debts Recovery Tribunal at Madurai for

setting aside the sale notice dated 26th July, 2007,

on the selfsame cause of action. Despite being

informed of the pendency of the writ petition for

the selfsame reliefs, the said Tribunal by its

order dated 7th September, 2007, directed the Bank

to defer the proposed sale which was scheduled to

be held on 7th September, 2007. The appellant Bank

thereupon filed Civil Writ Petition No.1392 of 2007

before the Madurai Bench of the Madras High Court

challenging the filing of S.A. No.74 of 2007. The 5

same was admitted and all proceedings in S.A. No.74

of 2007 were stayed. The said writ petition came

up for hearing before the High Court on 18th

September, 2007, and was disposed of in the absence

of the counsel for the Bank with liberty to the

respondent firm to move the Debts Recovery Tribunal

at Madurai. The appellant Bank filed Review

Petition No.165 of 2007, praying for recall of the

order dated 18th September, 2007, by which the writ

petition had been disposed of in its absence. On

6th October, 2007, the appellant Bank was permitted

to open the sealed tenders which it had received

pursuant to the sale notice dated 26th July, 2007,

subject to the condition that the sale effected

would be subject to the confirmation of the Court.

Pursuant to the said order, the sealed tenders were

opened on 8th October, 2007, and 3 of the 5

properties were sold and the same was recorded by

the DRT. Subsequently, despite the pendency of the

review petition, the respondent firm withdrew S.A. 6

No.74 of 2007, and filed a fresh application being

S.A. No. 104 of 2007. The review petition filed by

the Bank before the Madurai Bench of the Madras

High Court was consequently rendered infructuous

and was dismissed on 23rd June, 2008.

5. Aggrieved by the said order, the Bank filed

Writ Appeal No.926 of 2008, which was dismissed by

the Division Bench of the High Court on 1st

September, 2008, against which the present appeal

has been preferred.

6. Appearing for the appellant Bank, Mr. V.T.

Gopalan, learned Senior Advocate, urged that before

the learned Single Judge it had been contended that

the provisions of the SARFAESI Act being similar to

an English mortgage, on the issuance of notice

under Section 13(4) thereof and upon taking over

possession of the secured assets, the property

vested with the Bank which was thereafter at

liberty to bring it to sale as it deemed fit and 7

proper. It had also been submitted that despite

liberty having been granted to the respondent firm

to move the DRT within the time permitted under the

said order, the respondent firm had chosen not to

do so and was, therefore, precluded from

challenging the same subsequently. In this regard,

reliance had been placed on the decision of this

Court in Mardia Chemicals Ltd. & Ors. Vs. Union of

India & Ors. [(2004) 4 SCC 311], in which the

validity of the SARFAESI Act had been challenged.

While upholding the constitutional validity of the

Act, it was also held that the steps taken pursuant

to notice under Section 13(4) of the Act could not

be challenged before the DRT under Section 17 of

the SARFAESI Act beyond the period prescribed

thereunder. Reference was also made to the

decision of this Court in Transcore Vs. Union of

India & Anr. [(2008) 1 SCC 125], where the same

view was reiterated.

8

7. Mr. Gopalan submitted that a Division Bench

decision of the Bombay High Court rendered in UCO

Bank, Churchgate Branch Vs. M/s. Kanji Manji

Kothari & Company and its partners [Writ Petition

No.3566 of 2007] on 19th December, 2007, was also

cited before the learned Single Judge in support of

the contention that once possession is taken under

Section 13(4) of the Act, the right, title and

interest of the borrower gets extinguished and

thereafter it would not be open for the borrower to

challenge the subsequent sale in an application

under Section 17 of the SARFAESI Act. It was also

urged that the Tribunal could not entertain a

debate on the question whether the debt had become

due or not because the SARFAESI Act proceeds on the

basis that the liability is crystallized and the

debt becomes due the moment action under Section

13(4) is taken and a security interest is also

created in the secured assets. It was also

observed that while the DRT is entitled to consider 9

whether the possession of the secured assets had

been taken in accordance with the SARFAESI Act and

the rules framed thereunder, once the liability

stood crystallized it could no longer be

adjudicated upon by the DRT.

8. Mr. Gopalan submitted that the scope of the

inquiry before the DRT is confined to the action

taken by the secured creditor under Section 13(4)

of the SARFAESI Act and the subsequent action taken

to bring the secured assets to sale or to transfer

the interest therein in any manner whatsoever,

could not be made the subject matter of inquiry

before the DRT. In other words, the jurisdiction

of the Tribunal under Section 17(3) would have to

be confined to any action taken by the secured

creditor in taking possession of the secured assets

under Sub-section (4) of Section 13 and not in

regard to any subsequent steps which the secured

creditor may take to dispose of the secured assets

in accordance with the provisions of the Act. Mr. 10

Gopalan submitted that the SARFAESI Act neither

contemplates restoration of possession of the

secured assets by efflux of time nor does it place

a mandate on the secured creditor to dispose of the

secured assets within a specified period. It was

urged that since the secured assets vest with the

secured creditor once possession is taken, the

rules do not contemplate the involvement of the

borrower in the sales process and the Authorized

Officer is also empowered under Rule 8 of the

Security Interest (Enforcement) Rules, 2002, to

sell the secured assets by way of private treaty.

9. Mr. Gopalan lastly contended that the Writ

Appeal No.926 of 2008 had been filed against the

order of the learned Single Judge dated 23rd June,

2008, made in Review Application No.165 of 2007

filed by the Bank for review of the order dated 18th

September, 2007, passed in the writ petition filed

by the Bank and that such appeal was not

maintainable having regard to the provisions of 11 Order 47 Rule 7 of the Code of Civil Procedure.

Consequently, the order passed therein was invalid

on such score as well and was liable to be set

aside.

10. While adopting Mr. Gopalan's submissions, Mr.

Altaf Ahmed, learned Senior counsel appearing for

the Auction Purchaser in the appeal arising out of

S.L.P.(C)No.3020 of 2009, submitted that the action

taken by the Bank under Section 13(4) of the

SARFAESI Act was not governed by the provisions of

the Limitation Act. He urged that Section 13(2) of

the Act, which deals with the enforcement of

security interest, does not prescribe any period of

limitation and only sets out the procedure for the

recovery of dues once a debt is classified as a

Non-Performing Asset (NPA). Mr. Ahmed submitted

that Section 13(2) provides for a demand to be made

within 60 days from the date of notice being issued

to the borrower to discharge his liabilities in

full. But once the demand was made, no further 12

period of limitation is prescribed or contemplated

for taking action in terms of Section 13(4) of the

Act. Mr. Ahmed urged that Section 36 of the Act,

which deals with limitation, will have to be read

in the aforesaid manner since it refers only to

steps to be taken under Section 13(4) which would

relate back to the stage of Section 13(2) of the

Act.

11. Mr. Ahmed submitted that Section 34 gives the

provisions of the SARFAESI Act an over-riding

effect over the general law, which will also

include the law of limitation.

12. Opposing the submissions made on behalf of the

Bank and the Auction Purchaser, Mr. S. Sethuraman,

learned Advocate appearing for the respondent,

submitted that after the pronouncement of the

decision in Mardia Chemicals Ltd.'s case (supra),

certain amendments were effected to Section 17 of

the SARFAESI Act, whereby the provisions of Sub- 13

Sections (2) and (3) of Section 17 of the SARFAESI

Act were substituted with Sub-Sections (2) to (7)

by Act 30 of 2004, in which a new dimension was

added providing for an inquiry before the Tribunal

in an application filed under Section 17. The same

gave rise to a continuing cause of action which was

available to a borrower to work out his remedy

under Section 17 of the SARFAESI Act by challenging

the sale notice.

13. In support of his submissions, Mr. Sethuraman

referred to and relied on two decisions of the

Madras High Court in (1) Indian Overseas Bank &

Ors. Vs. G.S. Rajshekarn, [(2008) 4 MLJ 1012] and

(2) Ramco Super Leathers Ltd. & Anr. Vs. UCO Bank &

Anr., [(2007) 5 MLJ 986], which were affirmed by

the Full Bench of the Madras High Court in M/s.

Lakshmi Shankar Mills (P) Ltd. Vs. The Authorized

Officer/Chief Manager, Indian Bank & Ors., [(2008)

2 LW 381]. Mr. Sethumaran submitted that after

considering the provisions of Section 17 in detail, 14

the learned Single Judge relying upon the Division

Bench judgment came to the conclusion that any

person, including a borrower, could file an appeal

under Section 17 at any stage, including the stage

when the management of the business is taken over

or possession is taken of the secured assets of the

borrower. In such a case, the Tribunal has power

to restore possession in favour of the borrower, if

such action taken under Sub-Section (4) of Section

13 is declared invalid.

14. The main question which falls for determination

in this appeal is whether the DRT would have

jurisdiction to consider and adjudicate with regard

to post 13(4) events or whether its scope in terms

of Section 17 of the SARFAESI Act would be confined

to the stage contemplated under Section 13(4), as

contended on behalf of the appellants. An

additional question with regard to the

maintainability of the appeal will have to be taken 15

into consideration while deciding the present

appeal.

15. In order to answer the aforesaid questions

which arise in this appeal, it will be necessary to

look into the relevant provisions of Sections 13

and 17 of the SARFAESI Act, as they originally

stood and as they now stand after the amendments

effected thereto by the amending Act of 2004.

16. In the Statement of Objects and Reasons of the

amending Act reference has been made to the

decision of this Court in Mardia Chemicals Ltd.'s

case (supra). It has been mentioned therein that

Sub-Section (2) of Section 17 had been declared

ultra vires Article 14 of the Constitution. It was

also mentioned that it had become necessary to make

amendments in Sections 13 and 17 of the Act since

it had been held that where a secured creditor had

taken action under Sub-Section (4) of Section 13 of

the Act, it would be open to the borrowers to file 16

appeals under Section 17 of the Act within the

period of limitation as prescribed therefor. It is

on such account that Section 13 of the principal

Act was amended by inserting Sub-Section (3-A).

17. Further more, in Sub-Section (4) Clause (b) was

substituted by a fresh provision which entitled the

secured creditor to take over the management of the

business of the borrower, including the right to

transfer by way of lease, assignment or sale for

releasing the secured asset.

18. The said amendments were made in order to give

an opportunity to the borrower to approach the DRT

at any stage against any measure taken by the

secured creditor under Sub-Section (4) of Section

13 which were not in conformity therewith and to

have the possession of secured assets restored in

the event such action was found to be invalid. At

the same time, more power was given to the secured

creditor to exercise control over the management of 17

the business of the borrower which included the

right to transfer by way of lease, assignment or

sale of the secured assets for releasing the same.

19. The scheme of the SARFAESI Act as it now stands

after the 2004 Amendment for enforcement of

security interest is that notwithstanding the

provisions of Section 69 or Section 69-A of the

Transfer of Property Act, any security interest

created in favour of any secured creditor may be

enforced, without the intervention of the Court or

Tribunal, in accordance with the provisions of the

Act. Chapter III of the Act which deals with

enforcement of security interest begins with

Section 13, which is one of the Sections relevant

for a decision in this appeal. Since we are

concerned with Sub-Sections (1) to (4) of Section

13, the same are extracted hereinbelow :

"13. Enforcement of security interest.-

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any 18

security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

(3) The notice referred to in sub-

section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non- payment of secured debts by the borrower. (3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.

19

Provided that the reasons so 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 or the Court of District Judge under section 17A.

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:--

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

Provided that the right to transfer by way of lease assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:

Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt;

(c) appoint any person (hereafter referred to as the manager), to manage the 20

secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt."

20. The other relevant provision which is Section

17 is also included in Chapter III and has been

extensively amended after the decision in the

Mardia Chemicals Ltd.'s case (supra). The same is

also reproduced hereinbelow for a better

understanding of the scheme of the Act after the

amendments effected :

"17. Right to appeal.-(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, [may make an application along with such fee, as may be prescribed] to the Debts Recovery Tribunal having jurisdiction in the matter within forty-

five days from the date on which such measure had been taken.

21

Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.

[Explanation.-For the removal of doubts, it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub-section (1) of section 17.]

[(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.

(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the secured 22

creditors as invalid and restore the possession of the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section

13.

(4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub-section (4) of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub- section (4) of section 13 to recover his secured debt.

(5) Any application made under sub-section (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application:

Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery Tribunal, shall not exceed four months from the date of making of such application made under sub-section (1).

(6) If the application is not disposed of by the Debts Recovery Tribunal within the 23

period of four months as specified in sub-

section (5), any part to the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.

(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made thereunder.]"

21. It is clear that while enacting the SARFAESI

Act the Legislature was concerned with measures to

regulate securitisation and reconstruction of

financial assets and enforcement of security

interest. The Act enables the Banks and Financial

Institutions to realise long-term assets, manage

problems of liquidity, asset liability mismatches

and improve recovery by exercising powers to take

possession of securities, sell them and reduce non-

performing assets by adopting measures for recovery 24

or reconstruction. The provisions of Section 13

enable the secured creditors, such as Banks and

Financial Institutions, not only to take possession

of the secured assets of the borrower, but also to

take over the management of the business of the

borrower, including the right to transfer by way of

lease, assignment or sale for realizing secured

assets, subject to the conditions indicated in the

two provisos to Clause (b) of Sub-Section (4) of

Section 13.

22. In order to prevent misuse of such wide powers

and to prevent prejudice being caused to a borrower

on account of an error on the part of the Banks or

Financial Institutions, certain checks and balances

have been introduced in Section 17 which allow any

person, including the borrower, aggrieved by any of

the measures referred to in Sub-Section (4) of

Section 13 taken by the secured creditor, to make

an application to the DRT having jurisdiction in

the matter within 45 days from the date of such 25

measures having taken for the reliefs indicated in

Sub-Section (3) thereof.

23. The intention of the legislature is, therefore,

clear that while the Banks and Financial

Institutions have been vested with stringent powers

for recovery of their dues, safeguards have also

been provided for rectifying any error or wrongful

use of such powers by vesting the DRT with

authority after conducting an adjudication into the

matter to declare any such action invalid and also

to restore possession even though possession may

have been made over to the transferee. The

consequences of the authority vested in DRT under

Sub-Section (3) of Section 17 necessarily implies

that the DRT is entitled to question the action

taken by the secured creditor and the transactions

entered into by virtue of Section 13(4) of the Act.

The Legislature by including Sub-Section (3) in

Section 17 has gone to the extent of vesting the

DRT with authority to even set aside a transaction 26

including sale and to restore possession to the

borrower in appropriate cases. Resultantly, the

submissions advanced by Mr. Gopalan and Mr. Altaf

Ahmed that the DRT has no jurisdiction to deal with

a post 13(4) situation, cannot be accepted. The

dichotomy in the views expressed by the Bombay High

Court and the Madras high Court has, in fact, been

resolved to some extent in the Mardia Chemicals

Ltd.'s case (supra) itself and also by virtue of

the amendments effected to Sections 13 and 17 of

the principal Act. The liberty given by the

learned Single Judge to the appellants to resist

S.A.No.104 of 2007 preferred by the respondents

before the DRT on all aspects was duly upheld by

the Division Bench of the High Court and there is

no reason for this Court to interfere with the

same.

24. We are unable to agree with or accept the

submissions made on behalf of the appellants that

the DRT had no jurisdiction to interfere with the 27

action taken by the secured creditor after the

stage contemplated under Section 13(4) of the Act.

On the other hand, the law is otherwise and it

contemplates that the action taken by a secured

creditor in terms of Section 13(4) is open to

scrutiny and cannot only be set aside but even the

status quo ante can be restored by the DRT.

25. The other point regarding the maintainability

of the appeal against the review petition, is of

little consequence since the appeal was preferred

by the appellants themselves. Having invoked the

jurisdiction of the Appellate Court, it was no

longer open to the appellants to take a contrary

view and to urge that such appeal was not

maintainable having been filed against an order

passed in a review petition.

26. We, therefore, see no reason to interfere with

the judgment and order of the High Court and the 28

appeal is accordingly dismissed, but without any

order as to costs.

27. The Civil Appeal No. ________ of 2009 (@

Special Leave Petition No.3020 of 2009 filed by M/s

Vasantha Communications Pvt. Limited and others is

also disposed of on the basis of the findings in

this judgment, without any order as to costs.

________________J.

(ALTAMAS KABIR)

________________J.

(CYRIAC JOSEPH) New Delhi Dated:16.07.2009