V. Noble Kumar vs Authorised Officer, Standard Chartered Bank and Others

D. Murugesan, J.—The Petitioner is the absolute owner of the property situate at No. 114-117, Old Mahabalipuram Road, Sholinganallur

Village, Chennai, admeasuring to an extent of 26,154 sq. ft. and a building with ground and first floor each measuring an extent of 1,274 sq.ft. and

783 sq.ft. comprised in re-survey No. 493/2, lying within the Sub Registration District of Saidapet. He was formally one of the Directors of

Vemasi Chemicals Private Limited at Ambattur. The said company availed a loan from the Standard Chartered Bank, Chennai, for a sum of Rs.

40 lakhs on December 30, 2003. The said loan amount carried interest at the rate of 11.5 per cent. per annum repayable in 84 equated monthly

instalments ending on December, 2010. The Petitioner had given his property documents as collateral security for the said loan. Thereafter, once

again, the company availed of loan from the very same bank for a further sum of Rs. 50 lakhs on September 24, 2004 repayable in 84 equal

monthly instalments ending on September, 2011.

The Petitioner was relieved from the company on July 17, 2006 and thereafter, the other directors were looking after the affairs of the company.

According to the Petitioner, the other directors promised him that they will regularly pay the instalments to the bank. However, the bank issued a

notice dated November 15, 2007 u/s 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 (SARFAESI Act, in short) for repayment of an amount of Rs. 62,79,835.05. The Petitioner contacted the other directors, who assured that

the amount due to the bank would be settled. However, the Petitioner came to know that the Respondent-bank had approached the Chief Judicial

Magistrate, Chengalpattu, by filing an application in Crl. M. P. No. 1518 of 2009 u/s 14 of the SARFAESI Act and the learned Chief Judicial

Magistrate had issued warrant dated December 14, 2009 appointing an Advocate Commissioner to take possession of the property. The said

Advocate Commissioner issued a notice to the Petitioner on January 13, 2010 to take possession of the property. Aggrieved by the same, the

Petitioner has approached this Court by this petition.

Learned Counsel appearing for the Petitioner raised two contentions, viz.:

(i) The bank cannot bypass Section 13(4) of the SARFAESI Act and invoke the provisions of Section 14. He would submit, before invoking

Section 14, that notice u/s 13(4) is necessary, otherwise the provisions of appeal u/s 17 will become illusory, particularly when the proceedings u/s

14 cannot be questioned by filing appeal before the Tribunal or before a court.

(ii) In the event the procedures contemplated under Rule 8 of the Security Interest (Enforcement) Rules, 2002, are not followed before Section 14

is invoked, the order passed by the Chief Judicial Magistrate would be contrary to the said Rules and consequently, the order passed u/s 14 is

liable to be set aside.

Learned Counsel appearing for the Respondent-bank would, on the other hand, submit that the bank/financial institution is entitled to take

symbolic possession u/s 13(4) of the Act and before such symbolic possession is taken, no notice is contemplated. In the event, the bank/financial

institution experienced any difficulty in taking possession, it may approach the Chief Judicial Magistrate concerned u/s 14. Learned Counsel would

submit that the rights of the bank/financial institution to invoke Section 14 of the Act is independent of the provisions of Section 13(4) in the event

the bank decides to take physical possession of secured immovable property. The powers of the Chief Metropolitan Magistrate/District Magistrate

u/s 14 is only ministerial and no adjudication is required. In view of the same, the order of the Chief Metropolitan Magistrate/District Magistrate is

final and the same cannot be called in question in any court or before any authority.

To decide the controversy, the following provisions require consideration. The provisions of Sections 13(2), 13(3A), 13(4), 14 and 17 of the

Act read as under:

Enforcement of security interest.-... (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)...

(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:

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 u/s 17 or the Court of District Judge u/s 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;...

Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset.-(1) Where the possession

of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the

secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured

asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other

documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the

District Magistrate shall, on such request being made to him:

(a) take possession of such asset and documents relating thereto; and

(b) forward such asset and documents to the secured creditor.

(2) For the purpose of securing compliance with the provisions of the Sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate

may take or cause to be taken such steps and use, or caused to be used, such force, as may, in his opinion, be necessary.

(3) No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court

or before any authority...

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 alongwith 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 measures had been taken:...

(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 creditors assets 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 subs-section (4) of Section 13....

By the above provisions, the right of the banks/financial institution to resort to the provisions of the Act would arise only in the event where any

borrower, who is under liability to a secured creditor under a security agreement, makes any default in payment of a secured debt or any instalment

thereof and his account in respect of such debt is classified by the secured creditor as non-performing asset. Therefore, from a careful reading of

the above provisions, the following eventualities can be culled out, viz.,

(i) there must be a debt by a borrower from a secured creditor under a security agreement;

(ii) there must be a default in repayment of secured debt or any instalment thereof by the borrower;

(iii) the borrower''s account in respect of such debit is classified by the secured creditor as ""non-performing asset"";

(iv) a notice in writing should be issued by the secured creditor to the borrower to discharge in full his liabilities within sixty days from the date of

the notice;

(v) in terms of Sub-section (3) of Section 13, the notice shall also give details of the amount payable by the borrower and the secured assets

intended to be enforced by the secured creditor.

At the time when Section 13(2) of the Act was considered by the Supreme Court in Mardia Chemicals Ltd. Vs. Union of India (UOI) and

Others Etc. Etc., , there was no specific provision contemplating any opportunity for the borrower to make any objection or representation to the

notice issued u/s 13(2) of the Act. When the provision of Section 13(2) was considered by the apex court, it was observed that it was necessary

that the borrowers should have remedy to ventilate their grievance by submitting a reply 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 sixty days. That explanation must be considered by the

secured creditor by applying its mind and an internal mechanism must be evolved to consider such objections raised in the reply notice.

Based on the above observation of the apex court, Sub-section (3A) of Section 13 was inserted by the Enforcement of Security Interest and

Recovery of Debts Laws (Amendment) Act, 2004, with effect from November 11, 2004. By that newly inserted provision, a borrower is made

entitled to make a representation or objection to the secured creditor on receipt of notice under Sub-section (2) of Section 13 and 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. By that provision, a right is conferred on the borrower to make a representation or objection to

the notice under Sub-section (2) of Section 13 and a corresponding duty upon the secured creditor to communicate the conclusion if such

representation or objection is not acceptable or tenable. In the event, no communication is received by the borrower within a week from the date

of receipt of the representation or objection, it could be considered that the secured creditor had accepted such representation or objection and

would not proceed further pursuant to the notice under Sub-section (3) of Section 13. In the event, the conclusion that the representation or

objection is not acceptable or tenable is communicated, that communication is only for the purpose of bringing the same to the notice of the

borrower and the borrower has no right to question such conclusion at that stage. This law has been laid down by a Division Bench of this Court in

the judgment reported in Industrial Development Bank of India Limited by Deputy General Manager and The Authorised Officer Vs. Kamaldeep

Synthetics Limited, .

In the event of failure by the borrower to discharge in full the liabilities within sixty days from the date of the notice and the representation or the

objection, if any made, was not accepted by the secured creditor and a communication of the conclusion was also made to the borrower, then the

secured creditor may take recourse to one or more of the following measures in terms of Section 13(4) of the Act:

(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 business of the borrower including the right to transfer by way of lease, assignment or sale for realising the

secured asset;

(c) appoint any person (hereafter referred to as the manager) to manage the secured assets the possession of which has been taken over by the

secured creditor; and

(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.

The secured creditor may also approach the Chief Metropolitan Magistrate/District Magistrate for assistance in taking possession of the

secured assets as provided u/s 14 of the Act. The powers of the Chief Metropolitan Magistrate or District Magistrate are only ministerial and the

orders of such judicial officers passed in exercise of the provision of Section 14 shall not be called in question in any court or before any authority

meaning thereby that the said order is not amenable to appeal u/s 17 of the Act. The scope of powers by the Chief Metropolitan

Magistrate/Judicial Magistrate u/s 14 is very limited in the sense that the officers should satisfy as to whether the secured asset falls within his

territorial jurisdiction and whether notice u/s 13(2) is given or not.

In the wake of the above provisions, where the borrower has only an opportunity to make representation or objection in terms of Sub-section

(3A) of Section 13 and even such representation or objection is not accepted by the secured creditor, the borrower has no option to challenge the

same and the secured creditor, in the event of failure of the borrower to comply with the notice u/s 13(2), can resort to the provision of Section

13(4) for taking possession and the right to make any appeal in exercise of the power u/s 17 would be available to the borrower only after the

proceedings u/s 13(4) and that power of appeal is also denied in the event the secured creditor straight away approaches the Chief Metropolitan

Magistrate or District Magistrate u/s 14, strict compliance of the provisions of Sections 13(2) and 13(4) assumes importance which is mandatory.

As regards the rules framed under the Act, viz., Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as ""the Rules""), in case of

immovable secured assets, Rule 8 contemplates that the authorised officer shall take or cause to be taken possession by delivering a possession

notice prepared as nearly as possible in Appendix IV to the Rules, to the borrower and by affixing the possession notice on the outer door or at

such conspicuous place of the property. Appendix IV to the Rules reads as under:

Appendix IV

[See Rule 8(1)]

Possession notice

(for immovable property)

Whereas

The undersigned being the authorised officer of the...(name of the Institution) under the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest (Second) Ordinance, 2002 (Ordinance 3 of 2002) and in exercise of powers conferred u/s 13(12) read with Rule

9 of the Security Interest (Enforcement) Rules, 2002 issued a demand notice dated...calling upon the borrower Shri.../M/s...to repay the amount

mentioned in the notice being Rs. ...(in words...) within 60 days from the date of receipt of the said notice.

The borrower having failed to repay the amount, notice is hereby given to the borrower and the public in general that the undersigned has taken

possession of the property described herein below in exercise of powers conferred on him/her u/s 13(4) of the said Ordinance read with Rule 9 of

the said Rules on this...day of...of the year...

The borrower in particular and the public in general is hereby cautioned not to deal with the property and any dealings with the property will be

subject to the charge of the...(name of the Institution) for an amount of Rs. ...and interest thereon.

...

Description of the immovable property

All that part and parcel of the property consisting of Flat No. .../Plot No...in Survey No. .../City or Town Survey No. .../Khasara No...within the

registration Sub-District...and District...Bounded;

On the North by

On the South by

On the East by

On the West by

Date : Sd/-

Place : Authorised Officer

(Name of the Institution)

The provisions of Sub-section (4) of Section 13 entitle the secured creditor to take possession of the secured assets of the borrower in the

event of non-compliance with notice u/s 13(2). A set of procedures is prescribed under the Rules. In terms of Rule 8(1), before the authorised

officer shall take or cause to be taken, possession of the property, he should deliver a possession notice prepared as nearly as possible in

Appendix IV. Though a discretion is vested in the authorised officer insofar as the details contained in Appendix IV, no such discretion is conferred

on the authorised officer in dispensation of a notice for having taken possession. In such event, at the time when Section 13(4) is invoked, a notice

is mandatory. The provisions of Rule 8 read with Appendix IV have its own significance inasmuch as Appendix IV contemplates that the

possession notice should indicate that the borrower having failed to repay the amount, notice is given to the borrower and the public in general that

the authorised officer has taken possession of the property. Likewise, Sub-rule (2) of Rule 8 contemplates that the authorised officer shall publish

the possession notice referred to in Sub-rule (1) in two leading newspapers, one in a vernacular language having sufficient circulation in that locality.

These are all certain provisions whereby the borrower and the general public are put on notice by the authorised officer for having taken

possession.

The provisions of the Rules contemplate the procedure for issuance of demand notice, procedure to be followed after issue of notice, valuation

of movable secured assets, sale of movable assets and issue of certificate of sale. Similarly, it also provides the procedure for sale of immovable

secured assets under Rule 8. Though the secured creditor is entitled to invoke the provisions of Section 13(4) in case of non-compliance with the

notice u/s 13(2) by the borrower, the secured creditors may also invoke the provisions of Section 14. The provisions of Section 13(4) are

available for the secured creditors to take possession of the immovable secured assets of the borrower and for that purpose, Rule 8 must be

followed and this rule is mandatory.

The above discussion on both the provisions of the Act and the corresponding Rules relating to taking over possession of immovable property

would undoubtedly show that the secured creditor cannot bypass the above procedures without any justifiable cause. A reading of the provisions

would show that only in the event when the secured creditor faces any obstruction to take possession of the property, he could approach the Chief

Metropolitan Magistrate/District Magistrate u/s 14. It cannot be the intention of the Legislature to allow a secured creditor to invoke the provisions

of Section 14 in all cases irrespective of the provisions of Section 13(4), as such power may result in drastic consequences on the borrower over

his property.

In that event, a duty is cast upon the secured creditor to satisfy the Chief Metropolitan Magistrate/District Magistrate, as the case may be, as

to the strict compliance with the provisions of Sections 13(2) onwards till steps taken u/s 13(4) and Rule 8. Though the Chief Metropolitan

Magistrate/District Magistrate discharges only a ministerial function when an order is passed u/s 14, nevertheless he must be satisfied as to, among

other things, the compliance of the other provisions and in the event the learned Magistrate is not satisfied as to the compliance with the provisions,

he may refuse to exercise the power u/s 14. In this context, we may point out that though the borrower or the guarantor would be entitled to

approach the Tribunal after the proceedings of Section 13(4), such a right is not available to the borrower or the guarantor in the event the secured

creditor approaches the Magistrate u/s 14, in the wake of specific prohibition u/s 14(3) of the Act, wherein the order passed under the said

provision is final and the same cannot be questioned in any court or any authority of law. Therefore, as a necessary corollary, legality of such an

order u/s 14 could only be tested before the High Court in exercise of power under Article 226/227 of the Constitution of India. When such an

order is amenable to the judicial review of this Court, the order should be sustainable by strict compliance of the provisions of the Act and Rules,

as otherwise, it is liable to be set aside. In this context, we may refer to the judgment of a Division Bench of the Andhra Pradesh High Court in

Sravan Dall Mill P. Limited Vs. Central Bank of India and Another, .

Even after the order u/s 14 is passed, for the purpose of taking possession, the authorised officer should comply with Rule 8 through the

Advocate Commissioner appointed u/s 14, as otherwise there will be a dichotomy resulting in a peculiar situation when a secured creditor

exercises the power u/s 13(4) and when such a power is exercised u/s 14. To elaborate, we may add that in the event Section 13(4) is invoked,

the procedure contemplated under that provision read with Rule 8 must necessarily be followed by the secured creditor while taking possession of

the immovable property. In the event the secured creditor bypassing the provisions of Section 13(4) and Rule 8 files an application u/s 14, a

situation may arise that the advocate commissioner may straightaway take possession without there being compliance with any of the provisions of

Section 13(4) or Rule 8. When both the provisions are read together, we could only come to the conclusion that the Legislature had not intended

to create such a situation. The object of Section 14 is only to be invoked in case the secured creditor faces obstruction and not as a routine,

bypassing the provisions of Section 13(4). We may also add that it is the decision of the authorised officer to invoke either Section 13(4) or

Section 14 depending upon the situation, but nevertheless, when Section 14 is invoked, the power cannot be exercised arbitrarily as appointment

of an advocate commissioner to take possession of the property will lead to deprivation of a property of an individual bypassing the safeguards

made under Rule 8. In this context, we may also refer that the Appendix IV to Rule 8 obligates the authorised officer to give a notice to the

borrower as to possession having been taken and the public in general are also made to know of such action taken by the authorised officer. We

may also point out that though rules have been framed to give effect to the provisions of Section 13(2) and 13(4) of the Act, no rule has been

framed as to how the advocate commissioner appointed by the Chief Metropolitan Magistrate/District Magistrate should take possession of the

property, whether by again following the procedure contemplated under Rule 8 or not. In the absence of the rule, the strict compliance of the

provisions of Section 13(4) and Rule 8, even in case of possession taken by virtue of an order u/s 14, assumes importance.

Learned Counsel appearing for the Respondent had relied upon a judgment of a Division Bench of this Court in Sundaram Home Finance Ltd.

v. Thasildar [2007] 2 CTC 1. That was a case where the issue was as to whether a notice is necessary before Section 13(4) is invoked and all that

the borrower would be entitled to is to file an objection to Section 13 notice and that objection will be considered and will be responded by the

secured creditor in case it is not accepted. The Division Bench was not called upon to consider the question as to when Section 14 could be

invoked.

Coming to the impugned proceedings of the learned Chief Judicial Magistrate dated December 14, 2009, the said proceedings reads as under:

Whereas it is deemed requisite, for the purpose of this Crl. M.P., that a commission should be issued, you are hereby appointed as commissioner

for the purpose to take possession of the schedule mentioned properties and to hand over the same to the Petitioner.

Process to compel the attendance before you of any witnesses, or for the production of any documents whom or which you may desire to examine

or inspect will be issued by any court having jurisdiction on your application.

You shall execute the warrant and file the report at the earliest. If any abnormal delay in executing the warrant is occurred on the part of the

Advocate Commissioner, the warrant will be recalled and the remuneration is to be refunded to the Petitioner/bank.

A perusal of the said order shows that the Chief Judicial Magistrate had merely directed the appointment of a Commissioner for the purpose of

taking possession of the schedule mentioned property and to hand over the same to the secured creditor. There is nothing to indicate as to the

compliance with the provisions of Section 13(2), 13(4) and Rule 8. As there is no reference to the compliance with the provisions by the secured

creditor, it must be presumed that no materials were placed before the Chief Judicial Magistrate by the secured creditor in respect of the

compliance. Further, the affidavit filed by the bank in support of the petition seeking for vacating interim order, nothing has been stated as to the

compliance of the provisions of Section 13(2), 13(4) and particularly Rule 8. It does not also state that even after the advocate commissioner was

directed to take possession, the above procedures have been followed. In that view of the matter, the impugned proceedings are unsustainable in

the eye of law, as it would amount to arbitrary exercise of the powers conferred u/s 14.

Accordingly, the impugned order of the learned Chief Judicial Magistrate, Chengalpattu, dated December 14, 2009, is set aside. The writ

petition is allowed. No costs. Consequently, connected M.Ps. are closed.