M/s. Santosh Sheetgrah Pvt. Ltd. vs Syndicate Bank and Others

Suneet Kumar, J.—The petitioner is a company registered under the Companies Act, 1956. The petitioner company through its Director had obtained a term loan of Rs. 1,80,00,000/- payable in seven years and a cash credit limit facility to the tune of Rs. 70,00,000/- from the respondent Bank in 2008. To secure the aforesaid loan/facility on behalf of the borrowers, the company created security interest in respect of the following properties:

Primary Security:

(I) Cold Storage Land located at Gate No. 329 and 330 Mauza Pihura, Sadabad, Dist. Mahamaya Nagar valued for Rs. 16.60 lacs.

(II) Cold Storage Building and Hypothecation of Plant and Machinery valued at Rs. 91.88 lacs.

Collateral Security:

(I) Residential House at 9, Civil Lines, Mathura, U.P. belonging to Shri Mahesh Chandra Gautam valued for Rs. 73.00 lacs.

(II) Charge on Agricultural Land situated at Khasra No. 191 and 192, Village Maharara, Sadabad, Mahamaya Nagar valued for Rs. 48.00 lacs.

(III) Charge on Agricultural Land situated at Khata No. 23 Mauza Pihura, Sadabad, Mahamaya Nagar valued for Rs. 7.00 lacs.

According to the petitioner, the total value of the primary security is approximately three crores where as the value of collateral securities is 128 lacs.

The petitioner defaulted and was unable to pay the outstanding dues of the Bank. The outstanding dues as on 30.4.2011 was Rs. 2,88,13,463.51 plus interest. The Bank initiated proceedings by issuing notice u/s 13(2) of the Act calling upon the petitioner company to discharge in full its liabilities within 60 days, giving details of the amount payable by the petitioner company. The petitioner company did not response to the notice u/s 13(2) and the 60 days expired on 27.2.2011. Thereafter the respondent Bank exercising its power conferred u/s 13(4) of the SARFAESI Act 2002 issued possession notice on 7.11.2011 in term of Rule 8(1) of Security Interest Enforcement Rules 2002 to take constructive possession of the secured asset.

The notice was fixed on the outer door of the property and also published in daily newspaper Amar Ujala and Hindustan.

The petitioner company did not handover the security to the respondent Bank, therefore, the respondent Bank vide application dated 13.8.2013 approached the District Magistrate, Mathura u/s 14 of the SARFAESI Act 2002 for taking physical possession of the residential house 9, Civil Lines, Mathura, U.P. in the name of Mahesh Chandra Gautam.

The Additional District Magistrate, Mathura vide order dated 1.11.2013 passed u/s 14 of the SARFAESI Act 2002 directing to take over possession of the property by force and to hand over the same to the Bank.

Petitioner company aggrieved by the order dated 1.11.2013 as well as application dated 13.8.2013, filed by the respondent Bank before the Collector, Mathura u/s 14 of the SARFAESI Act have filed the present writ petition seeking the following relief:

To issue a writ, order or direction in the nature of certiorari quashing the order/letter dated 13.8.2013 written by the Authorised Officer, Syndicate Bank, Branch Sadabad, Hathras and the order dated 1.11.2013 passed by the Additional direct Magistrate (Finance and Revenue), Mathura (Annexure 1 to the writ petition).

We have heard Shri B.N. Singh, learned counsel for the petitioner company as well as the learned standing counsel appearing for the State, respondent No. 4 and Shri Sanjiv Singh appearing for respondent bank Nos. 1, 2 and 3.

The contention of the petitioner is that the action initiated by the respondent Bank u/s 14 is wholly arbitrary for the reason that instead of proceeding against the primary security i.e. the assets of the company, the petitioner company has resorted to taking over possession of collateral security which happens to be residential premises of one of the Directors. The Bank should first proceed against the primary security and in case the amount sought to be recovered falls short of the amount due, it is only then the Bank can proceed to take possession of the collateral security.

In rebuttal Shri Sanjiv Singh appearing for the respondent-Bank has countered the arguments by stating that the writ petition is wholly misconceived as the order impugned in the writ petition is an order passed by the Additional District Magistrate, Mathura u/s 14 of the SARFAESI Act 2002, the writ petition is not maintainable and the remedy of the petitioner lies in approaching the Debt Recovery Tribunal by filing an appeal u/s 17 of the Act. Shri Singh further contended that the Act does not make any distinction between collateral security or primary security.

In order to consider rival submissions it is essential to examine the purpose and the scheme of the SARFAESI Act 2002.

The parliament enacted SARFAESI Act 2002 which inter alia seeks the enforcement of security interest and for matters connected therewith or incidental there to. The purpose sought to be achieved by the enactment as evidenced by the Objects and Reasons appended to the Bill is as follows:

The financial sector has been one of the key drivers in India''s efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing filed as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow place of recovery of defaulting loans and mounting levels of non performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securities and to sell them without the intervention of the Court...........

In order to achieve the said purpose Sections 13, 14 and 15 are enacted. Only Sections 13 and 14 are relevant for the purpose of this petition.

Section 13(1) enables the secured creditor to enforce a security interest which such creditor has in a secured asset without intervention of the Court or Tribunal. "Security interest" is defined u/s 2(zf) and reads as follows:

(zf) ''security interest'' which means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31;

Sub-section (2) authorises the secured creditor to exercise any of the rights under sub-section (4). 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 installment 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).

It is evident from the said sub-section that secured creditor to take possession of the secured assets. The following conditions must be satisfied.

(i) There must be a security agreement which creates the liability of the borrower to make repayment to the secured creditor of the secured debt (ii) The secured creditor is required to demand the borrower by notice in writing to discharge the full liability within a period of 60 days from the date of the notice.

Sub-section (3) of Section 13 stipulates that such notice shall give the details of (i) the amount payable by the borrower (ii) the interest in the secured asset intended to be enforced by the secured creditor.

Sub-section (4) of Section 13 provides for various measures which can be resorted to by the secured creditor in order to recover his debt. One such measure is taking possession of the secured asset. The secured creditor is also given the right either to make a further assignment of his interest or lease out the secured assets or sell the same in order to realise his debt.

Such right of the secured creditor is hedged with limitations/safeguards designed to protect interest of the borrower so that the secured creditor may not abuse his rights.

Section 13, as originally enacted, did not contain any provision for consideration of objections (if any) the borrower may have to the demand made under sub-section (2). Consequent upon the decision in Mardia Chemicals Ltd. Vs. Union of India (UOI) and Others Etc. Etc., , Parliament is induced sub-section 3A by Act 30 of the which now provides for consideration of the objections, if any raised by the borrower. Borrower includes the guarantor of the debt defined u/s 2(f).

Sub-section 3A further provides that if the secured creditor reaches a conclusion that the objections raised by the borrower are not acceptable or tenable, the creditor shall communicate the reasons for non-acceptance of the objections within a period of 15 days. The proviso to the said sub-section declares that the rejection of the objections does not confer any right on the borrower to resort to the proceedings, contemplated u/s 17.

On rejection of the objections raised by the borrower, the secured creditor is entitled to take possession of the secured assets. The possession could be taken directly by the secured creditor. However, on the possibility of resistance for such action, the secured creditor can approach the concerned Collector or Magistrate u/s 14 for obtaining possession of the secured assets.

A secured creditor who desires to seek the assistance of the State''s coercive power for obtaining possession of the secured asset is required to make a request in writing to the District Magistrate or Chief Metropolitan Magistrate within whose jurisdiction the secured asset is located.

The language of Section 14 originally enacted purportedly obliged the Magistrate receiving a request u/s 14 to take possession of the secured asset and documents, if any, related thereto in terms of the request received by him without any further scrutiny of the matter.

Subsequently, Parliament inserted a proviso to Section 14(1) and also sub-section 1A by Act 1 of 2013. These amendments are made to provide safeguards to the interest of borrower. These provisions stipulates that the secured creditor approaching the Magistrate u/s 14 is required to file an affidavit furnishing the information contemplated under various sub-clauses (i) to (ix) of the proviso and obligates the Magistrate to pass suitable orders regarding taking of the possession of the secured assets only after being satisfied with the contents of the affidavits. The borrower is not to be heard.

The petition u/s 17 is available to the borrower against any measure taken u/s 13(4). Taking possession of the secured asset is only one of the measures that can be taken by the secured creditor. Depending upon the nature of the secured asset and the terms and conditions of the security agreement, measures other than taking the possession of the secured asset are possible u/s 13(4). Alienating the asset either by lease or sale etc. and appointing a person to manage the secured asset are some of those possible measures. On the other hand, Section 14 authorises the Magistrate only to take possession of the property and forward the asset alongwith the connected documents to the secured creditor. The borrower is always entitled to prefer an appeal u/s 17 after the possession of the secured asset is handed over to the secured creditor.

In Standard Chartered Bank Vs. V. Noble Kumar and Others, , the Supreme Court was of the view that Section 13(4)(a) declares that secured creditor may take possession of the secured assets. In whatever manner, the secured creditor obtains possession either through the process contemplated u/s 14 or without resorting to such a process obtaining a possession of a secured asset is always a measure against which a remedy u/s 17 is available. Appeal u/s 17 is available to the borrower only after losing possession of the secured asset. The borrower cannot resist in handing over the possession of secured asset to the bank/financial institution.

Paragraph 28 of Standard Chartered Bank (Supra) is quoted below:

It can be noticed from the language of the proviso to Section 13(3A) and the language of Section 17 that an "appeal" u/s 17 is available to the borrower only after losing possession of the secured asset. The employment of the words "aggrieved by....................taken by the secured creditor" in Section 17(1) clearly indicates the appeal u/s 17 is available to the borrower only after losing possession of the property. To set at naught any doubt regarding the interpretation of Section 17, the proviso to sub-section (3A) of Section 13 makes it explicitly clear that either the reasons indicated for rejection of the objections of the borrower or the likely action of the secured creditor shall not confer any right u/s 17.

In Mardia Chemicals (supra) the Supreme Court in its conclusion in paragraph 80(2) held as follows:

80(2). As already discussed earlier, on measures having been taken under sub-section (4) of Section 13 and before the date of sale/auction of the property it would be open for the borrower to file an appeal (petition) u/s 17 of the Act before the Debts Recovery Tribunal.

In Kanaiyalal Lalchand Sachdev and Others Vs. State of Maharashtra and Others, , the Supreme Court held that secured creditor may, in order to enforce his rights u/s 13(4), in particular Section 13(4)(a), may take recourse to Section 14 of the Act.

Paragraph 18 of Kanaiyalal Lalchand Sachdev Case (Supra) reads as follows:

Section 14 of the Act provides that the secured creditor can file an application before the Chief Metropolitan Magistrate or the District Magistrate, within whose jurisdiction, the secured asset or other documents relating thereto are found for taking possession thereof. If any such request is made, the Chief Metropolitan Magistrate or the District Magistrate, as the case may be, is obliged to take possession of such asset or document and forward the same to the secured creditor. (See: United Bank of India v. Satyawati Tondon and others). Therefore, it follows that a secured creditor may, in order to enforce his rights u/s 13(4), in particular Section 13(4)(a), may take recourse to Section 14 of the Act.

The Supreme Court referred the judgment in Authorized Officer, Indian Overseas Bank and Another Vs. Ashok Saw Mill, , wherein the question for determination was whether the DRT would have jurisdiction to consider and adjudicate post Section 13(4) events or whether its scope in terms of Section 17 of the Act will be confined to the stage contemplated u/s 13(4) of the Act?

On an examination of the provisions contained in Chapter III of the SARFAESI Act 2002, the Apex Court was of the opinion that 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 measures having taken for the reliefs indicated in sub-section (3) thereof.

Paragraphs 36 and 39 of Indian Overseas Bank (Supra) is reproduced below:

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.

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 action taken by the secured creditor after the stage contemplated u/s 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.

On Examining Sections 13(4)(a), 14 and 17 in the light of the afore referred judgments, the following principles emerge:

(i) The secured creditor has three methods available to take possession of secured assets:

(a) Where the secured creditor after notice under rule 8(1) takes possession of the secured asset without resistance;

(b) Where secured creditor after notice under rule 8(1) is faced with resistance from the borrower, in that case secured creditor will approach the Magistrate u/s 14;

(c) Where the secured creditor approaches the Magistrate directly u/s 14 without giving notice under Rule 8(1);

(ii) After possession is handed over to the secured creditor in either of the three situations, the subsequent provisions of Rule 8 of Security Interest (Enforcement) Rules 2002 shall apply.

(iii) Aggrieved person or borrower is entitled to appeal u/s 17 after the possession of the secured asset is handed over to the secured creditor.

It is in the aforementioned background of the legal frame of Sections 13 and 14. We are required to examine the submissions of the learned counsel for the petitioner.

The contention of the learned counsel for the petitioner is that the respondent Bank should first proceed against the primary security and then against the collateral security is wholly misconceived. A bare perusal of the definition of ''security interest'' which has been referred above, clearly states that security interest means right, title and interest of any action whatsoever upon property created in favour of secured creditor and includes any mortgage.

Collateral security means a security given in addition to the direct security/primary security; an additional security given by the debtor to further safe guard the interest of the creditor.

It is evident from the definition that the secured creditor can proceed against any of the securities and the borrower can have no objection. Section 2(f) defines ''borrower'' means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by the Bank. The borrower would include guarantor.

In United Bank of India Vs. Satyawati Tondon and Others, , the Supreme Court after discussing the purpose for enactment of the SARFAESI Act held that the secured creditor can initiate proceedings u/s 13(2) and (4) and as well as move an application u/s 14 against the guarantor without first initiating action against the borrower. The liability of the guarantor and principal debtor is coextensive and the creditor/decree holder has the right to proceed against either for recovery of dues or realisation of the decretal amount. The Apex Court relied upon Bank of Bihar Ltd. Vs. Dr. Damodar Prasad and Another, ; State Bank of India Vs. Messrs. Indexport Registered and others, ; Industrial Investment Bank of India Ltd. Vs. Biswanath Jhunjhunwala, .

The contention of the learned counsel for the petitioner that the Bank should first proceed against the primary security i.e. the assets of the company and then proceed against collateral security belonging to the guarantor is against the proposition of law as stated herein above.

The Supreme Court has consistently held that the remedy u/s 17 of the SARFAESI Act is an efficacious remedy and the High Court should not ordinarily interfere under Articles 226 and 227 of the Constitution of India.

The petitioner has an alternative remedy to adjudicate his grievance against the proceedings initiated by the respondent Bank u/s 13(4)(a) by approaching the DRT u/s 17. u/s 17 any person aggrieved can approach the DRT which includes a guarantor.

In Satyawati Tondon Case (Supra), the Supreme Court held that remedies available under the SARFAESI Act is an efficacious remedy and the Court should not ordinarily entertain the petition under Article 226 if an efficacious remedy is available to the aggrieved person and the rule applies with greater rigour in matters involving recovery of taxes, cess, fees, other types of public money and the dues of banks and other financial institutions. (Refer ICICI Bank Ltd. v. State of U.P., 2009 (6) ADJ 261 (DB)).

Recently in GM, Sri Siddeshwara Co-operative Bank Ltd. and Another Vs. Sri Ikbal and Others, , the Apex Court was of the view that High Court in exercise of the power under Article 226 should not normally interfere in the matters pertaining to recovery of dues of banks and other financial institutions.

In City and Industrial Development Corporation Vs. Dosu Aardeshir Bhiwandiwala and Others, , the Supreme Court observed in para 30 as follows:

The Court while exercising its jurisdiction under Article 226 is duty-bound to consider whether:

(a) adjudication of writ petition involves any complex and disputed questions of facts and whether they can be satisfactorily resolved;

(b) the petition reveals all material facts;

(c) the petitioner has any alternative or effective remedy for the resolution of the dispute;

(d) person invoking the jurisdiction is guilty of unexplained delay and laches;

(e) ex facie barred by any laws of limitation;

(f) grant of relief is against public policy or barred by any valid law; and host of other factors.

The Supreme Court in T.P. Vishnu Kumar Vs. Canara Bank P.N. Road, Tiruppur and Others, , has held that the High Court under Article 226 should not interfere in the matters pertaining to recovery unless there is no violation of statutory rules, causing prejudice to the petitioner or the action, on the part of the bank is wholly arbitrary.

The petitioner has an alternative and efficacious remedy u/s 17 of SARFAESI Act, 2002 for redressal of his grievance.

We therefore, see no good reasons to interfere in the matter. The writ petition is accordingly dismissed. No order as to costs.