Category: <span>Bank And Financial</span>

3 Feb

SC: The Amount Received from the Auction Purchaser Cannot be Appropriated Against Pre-Deposit Contemplated Under the Section 18 of the SARFAESI Act, 2002

Section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) mandates that the borrower deposits fifty per cent of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less, with the Appellate Tribunal, as a condition precedent for filing an appeal against the order of the Debt Recovery Tribunal before the Debt Recovery Appellate Tribunal. The question is how to determine the ‘debt due’? The amount of ‘debt due’ may be different at different stages of procedure contemplated for recovery of debt, 50% of which amount the borrower is required to deposit as pre-deposit under Section 18 of the SARFAESI Act. For instance, a dispute may arise when steps are taken under Section 13(2)/13(4) against the secured assets or when the secured assets are under notice of sale or when the assets have already been sold. So the amount of debt due may vary from the amount that is mentioned in the notice under Section 13(2) of the SARFAESI Act to the amount mentioned in the sale certificate.

In an appeal filed by the auction purchasers, a similar question arose for consideration of the Supreme Court i.e. whether, while calculating the amount to be deposited as predeposit under Section 18 of the SARFAESI Act, 50% of which amount the borrower is required to deposit as pre-deposit. Secondly, in a situation where the secured assets have been auctioned and the amount is received from the auction purchaser, whether while calculating the amount of “debt due”, the amount deposited by the auction purchaser on purchase of the secured assets is required to be adjusted and/or appropriated towards the amount of pre-deposit to be deposited by the borrower under Section 18 of the SARFAESI Act?

There were two set of appeals. In the first set of appeals, Sidha Neelkanth Paper Industries Private Limited was the principal borrower who availed the credit facility extended by the Andhra Bank. Immovable properties were mortgaged by the guarantors and by the borrower to secure the said cash credit facility. On the borrower failing to repay the loan, the account was declared as a Non Performing Asset. Andhra Bank after issuing notice under Section 13(2) of the SARFAESI Act, calling upon the borrower to pay the outstanding amount of Rs. 16.61 lakhs, initating measures under Section 13(4) of the SARFAESI Act and taking possession of one of the mortgaged properties, being property bearing No. 170, Deepali, Pitampura, Delhi-110034, the mortgaged properties were put to auction. Despite several resistance and litigations from the principal borrower, the auction was conducted on 05.12.2018 and one M/s Tejswi Impex Pvt. Ltd. (auction purchaser) was the successful highest bidder for an amount of Rs. 12.5 crores. The entire amount was deposited and a sale certificate came to be issued in favour of the auction purchaser on 19.12.2018.

The borrower filed an appeal before the DRAT challenging one order passed by the DRT dismissing the application filed by the borrower praying that the Bank/assignee be restrained from proceeding with the auction. The DRAT directed the borrower to comply with the requirements of making a pre-deposit under Section 18 of the SARFAESI Act which was challenged before the High Court. The High Court directed the DRAT to hear the appeal on merits by observing that on realising the amount of Rs. 12.5 crores against the debt of Rs. 16.61 crores, it can be said that more than 50% of the debt due is secured/recovered and therefore the requirement of making a predeposit under the second proviso to Section 18 of the SARFAESI Act can be said to have been met.

The DRAT disposed of the appeal vide order dated 1.8.2019 with a direction to the DRT to dispose of the main Securitization Application within a period of three months. Subsequently, vide order dated 05.10.2019, the DRT dismissed SA No. 264/2013 filed by the borrower. Against the said order, the borrower and the owner of the mortgaged property filed an appeal under section 18 of the SARFAESI Act. The borrower sought waiver of the statutory pre-deposit under Section 18 of the SARFAESI Act, relying on the earlier order of the High Court. The DRAT allowed the waiver of the statutory pre-deposit by observing that the amount already realised by selling the mortgaged property/secured property is required to be adjusted towards the pre-deposit and/or the same can be said to be a deposit of 50% of the amount as pre-deposit, as envisaged under Section 18 of the SARFAESI Act.

The secured creditor/assignee filed the writ petition before the High Court. The High Court partly allowed the said writ petition preferred by the secured creditor/assignee by directing that the borrower is required to deposit 50% of the remaining 4.1 crores being debt due (after deducting/adjusting Rs. 12.5 crores realised/recovered by selling the mortgaged property). The High Court has also observed that it shall be open to DRAT to reduce the said predeposit amount to 25%, after recording reasons in writing for the said reduction. The High Court held that pre-deposit contemplated under the second proviso of Section 18 of the SARFAESI Act, 2002 is mandatory in nature and cannot be waived by the learned DRAT and any amount that has been repaid by the borrower and/or recovered by a secured creditor after filing of the petition under Section 17, shall stand to the benefit of the borrower while computing the ”amount of debt due” under the second proviso to Section 18 of the SARFAESI Act, 2002.”

In another set of appeals, the DRAT held that as the bank had already recovered the debt by selling the mortgaged property and there was no remaining amount of debt due, the requirement of pre-deposit was satisfied and the borrower/appellants were not required to tender any amount towards discharging the condition of pre-deposit for entertaining the appeal under Section 18 of the SARFAESI Act. The High Court also held that the amount realised on deposit of the sale consideration by the auction purchaser is required to be appropriated and/or adjusted towards the amount of pre-deposit required to be deposited by the borrower under Section 18 of the SARFAESI Act.

The relevant part of the Section 18 of the SARFAESI Act is as follows:

“18. Appeal to Appellate Tribunal.—(1) Any person aggrieved, by any order made by the Debts Recovery Tribunal [under section 17, may prefer an appeal along with such fee, as may be prescribed] to an Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal. [Provided that different fees may be prescribed for filing an appeal by the borrower or by the person other than the borrower:] [Provided further that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent. of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less:”

The Court first went into the analysis of whether the “debt due” under Section 18 of the SARFAESI Act would include the liability + interest. By the combined reading of Section 18, & 2(ha) of the SARFAESI Act and section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, the Court concluded that “debt” means any liability inclusive of interest which is claimed as due from any person. The Court then went on to observe that an appeal under Section 18 of the SARFAESI Act is permissible against the order passed by the DRT under Section 17 of the SARFAESI Act only and only when the “borrower” has deposited with the Appellate Tribunal fifty percent of the amount of “debt due” from him, as claimed by the secured creditors or determined by the DRT, whichever is less. Next question is meaning and determination of ‘debt due’. The Court explained that in case steps taken under Section 13(2)/13(4) against the secured assets, the ‘debt due’ shall be amount is mentioned in the notice under Section 13(2) of the SARFAESI Act. When the challenge to the sale of the secured assets, the amount mentioned in the sale certificate shall be the ‘debt due’. However, where both, namely, steps taken under Section 13(4) against the secured assets and also the auction sale of the secured assets are under challenge, in that case, the “debt due” shall mean any liability (inclusive of interest) which is claimed as due from any person, whichever is higher.

The Court was of the opinion that If the words used in the second proviso to Section 18 of the SARFAESI Act are “borrower has to deposit”, it is not appreciable how the amount deposited by the auction purchaser on purchase of secured assets can be adjusted and/or appropriated towards the amount of pre-deposit, to be deposited by the borrower. It is the “borrower” who has to deposit the 50% of the amount of “debt due” from him. At the same time, if the borrower wants to appropriate and/or adjust the amount realised from sale of the secured assets deposited by the auction purchaser, the borrower has to accept the auction sale. In other words, the borrower can take the benefit of the amount received by the creditor in an auction sale only if he unequivocally accepts the sale. In a case where the borrower also challenges the auction sale and does not accept the same and also challenges the steps taken under Section 13(2)/13(4) of the SARFAESI Act with respect to secured assets, the borrower has to deposit 50% of the amount claimed by the secured creditor along with interest as per section 2(g) of the Act 1993 and as per section 2(g), “debt” means any liability inclusive of interest which is claimed as due from any person. Therefore the concluded that where the borrower challenges the auction sale, thereafter it will not be open for the borrower to pray to use the sale proceeds received from the sale of the secured properties to be adjusted/given credit in an application for waiver of pre-deposit.

28 Feb

Secured Creditor Cannot be Restrained from Selling the Mortgaged Property Unless on Payment of Total Outstanding

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Bank And Financial

In the matter of Bank of Baroda v. M/s Karwa Trading Company & Anr. [CIVIL APPEAL NO.363 OF 2022] decided on 10.02.2022, Hon’ble Supreme Court disposed of an appeal filed by the secured creditor and held that the Appellant Bank cannot be restrained from selling the mortgaged property by holding the public auction and realise the amount and then proceeding to recover the balance of outstanding dues, unless the borrower deposits/pays the entire amount due and payable along with the costs incurred by the secured creditor as on the date of Demand Notice as per Section 13(f) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).

The Appellant Bank in the matter extended a term loan of Rs. 100 Lakhs and cash credit limit of Rs.95 lakhs in favour of the Respondent against the security of two properties, a land and a residential unit. On Respondent having failed to repay the loan, the Appellant Bank issued notice under 13(2) of SARFAESI Act demanding a sum of Rs.1,85,37,218.80/-. The Appellant took the symbolic possession of the residential unit and further issued a notice under Section 13(4) of the SARFAESI Act, 2002. An Application under Section 14 of the SARFAESI Act, 2002 was allowed and the Appellant took the possession of the residential unit.

The Appellant issued an auction notice and fixed Rs.48.65 lakhs as the reserve price of the residential unit. The Respondent however challenged the auction before Debt Recovery Tribunal (“DRT”) under Section 17 of the SARFAESI Act, 2002. Vide an interim order, the DRT inter alia held that the bank shall hand over the possession of the residential unit along with the original title deeds if the borrower deposits Rs.48.65 lakhs with the bank i.e. the reserve price. The Respondent deposited the said amount.

Appellant challenged the interim order on the grounds that total debt due against the Respondent was of Rs. 2 Crore. Also Appellant had received bids up to Rs.71 lakhs and in order to redeem the mortgaged property, the Respondent must discharge the entire liability. The Appellant further contented that a payment of even a sum of Rs.71 lakhs which is the highest bid would not discharge the entire liability outstanding against the borrower. The Appellant however submitted that it would release the security if the borrower deposits Rs.71 lakhs. The Appellant also averred that the interim order was in contravention of Section 13(8) of the SARFAESI Act. On hearing the parties, the Debt Recovery Appellate Tribunal (DRAT) did not find any fault in the order and dismissed the appeal.

On appeal, the learned single Judge of the High Court set aside the order of Hon’ble DRT and DRAT on the ground that it is in contravention of Section 13(8) of the SARFAESI Act. The Division Bench allowed the appeal and directed the Appellant to release the secured property along with the title documents to the Respondent on latter paying Rs. 17 lakhs in addition to money already deposited with the Appellant i.e. a total sum of Rs.65.65 lakhs.

The Appellant challenged the order of the Division Bench primarily on the ground that the Division Bench has erroneously directed the release of the secured property by a total payment of merely Rs.65.65 lakhs when the total payment due from the Respondent was Rs.1,85,37,218.80/-.

The Hon’ble Supreme Court took note of Section 13(8) of the SARFAESI Act. As per the provision, the secured asset shall not be sold and/or transferred by the secured creditor, where the amount dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered by the borrower or debtor to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease assignment or sale of the secured assets. The Court observed that Rs.48.65 lakhs paid by the borrower was merely the base price. Therefore, since the Respondent neither deposited nor was ready to deposit the entire amount of dues along with the cost, it was open to the Appellant to sell the secured property in auction and realise the amount and the order of Division Bench was erroneous on being in contravention with Section 13(8) of the SARFAESI Act.

The Court further clarified that a total payment of Rs.65.65 lakhs or a total realisation of Rs. 71 lakhs by way of auction by the Appellant Bank, when the total outstanding is of Rs. 1,85,37,218.80/-, shall not discharge the Respondent and liability of the Respondent to pay the balance amount would still continue. Had the Respondent deposited a total of Rs.1,85,37,218.80/- on the date of issue of demand notice under Section 13(2) of the SARFAESI Act dated 07.1.2013, the Appellant could have been restrained from selling the secured property.

In the light of the facts and circumstances, the Hon’ble Supreme Court directed that although the interim order is set aside, the main application under section 17 of the SARFAESI Act filed by the Respondent shall be decided on merits by the DRT. Further, the Appellant cannot be retrained from proceeding with the public auction and realising the amount and further recovering the outstanding dues, unless the Respondent deposits/repays the entire amount due and payable along with the costs incurred by the secured creditor as per Section 13(f) of the SARFAESI Act.

26 Feb

Whether the CMM/DM can Appoint an Advocate in Exercise of Powers under Section 14(1A) of the SARFAESI Act?

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Bank And Financial

The Hon’ble Supreme Court yesterday answered a crucial question as to whether it is open to the District Magistrate (DM) or the Chief Metropolitan Magistrate (CMM) to appoint an advocate and authorise him to take possession of the secured assets and documents relating thereto and to forward the same to the secured creditor within the meaning of Section 14(1A) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The issue arises in the special leave petitions filed by the borrowers against the judgments of High Courts of Madras wherein it has been held that an advocate can be appointed by DM and CMM under Section 14(1A) of the SARFAESI Act since an advocate is regarded as an officer of the court and, therefore, is subordinate to the CMM or the DM. The same was challenged on the ground that an advocate is not a subordinate officer to the CMM or DM. The High Court of Kerala and Delhi have also taken the same view as Madras High Court. The High Court of Bombay on the other hand has reasoned that such appointment is illegal because advocate is not a subordinate officer to the CMM or DM.

The Apex Court analysed various judgments of the High Courts starting from the earliest decision in Muhammed Ashraf & Anr. vs. Union of India & OrsAIR 2009 Kerala 14. In the said judgment, it was held that Section 14(2) of the SARFAESI Act enabled the CMM/DM to pass order even to take Police assistance and use all necessary powers in taking possession of the secured assets. The authority does not have an obligation to personally visit and take possession of the secured assets and documents. Similarly, in Sakiri Vasu vs. State of Uttar Pradesh & Ors. (2008) 2 SCC 409, it was held that the authority can use the statutory powers to use all reasonable means to grant an effective remedy.

The Apex Court observed that although the above stated judgments attained finality because the SLP against the orders were dismissed, however, the said decision was rendered before the amendment of Section 14 and in particular insertion of sub-Section (1A). The Court then went on to observe that Section 14(1A) of the 2002 Act was inserted vide Act 1 of 2013 with effect from 15.1.2013. Therefore, the question that needs to be examined is whether the amendment has changed the earlier position.

In the case of Rahul Chaudhary vs. Andhra Bank & Ors 2020 SCC OnLine Del 284, it was held by the Hon’ble Delhi High Court that sub-section (1A) of Section 14 does not bar the appointment of advocates as receivers.

The Court started its analysis by observing that the same expression i.e. “any officer subordinate to him” has been used in several legislations, including in Articles 53, 154 and 311 of the Constitution of India. However, setting in which the expression has been used in the concerned section of the Act, legislative intent and the purpose for which such dispensation has been envisaged shall decide the real purport of the expression in each case differently.

Coming to the SARFAESI Act, the Court held that the subordination under the said Act cannot be “statutory subordination” or “administrative subordination”. The Court however leaned in favour of “functional subordination” and in order to determine the same, the Court went on to analyse the objective behind SARFAESI Act. The Act was bought into force to equip and empower the banks in India to take possession of securities and sell them and thus to facilitate securitisation of financial assets of banks. It was further underlined by the Court that the provisions of the Act “enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery or reconstruction”.

The banks to take possession of the secured assets are required to approach the CMM/DM by moving an application under Section 14 of the SARFAESI Act. The CMM/DM shall then take appropriate steps i.e. proceed to take possession of the secured assets and documents after passing of an order on verification of compliance of all formalities by the secured creditor referred to in the proviso in Section 14(1) of the SARFAESI Act. The CMM/DM is required to forward the same to the secured creditor at earliest. The Court confirmed that Section 14(2) is an enabling provision and permits the CMM/DM to take such steps and use force, as may, in his opinion, be necessary. This position continues to be the same till date.

In this entire process, the Court emphasised that time is of essence and that it “cannot brook delay. This is the spirit of special enactments”. The Court also acknowledged that that firstly there is only one the CMM/DM who has to look into large number of applications. He cannot be expected to visit and take action personally in each matter. Secondly, CMM/DM is provided with limited resources which makes it difficult for him to fulfil the obligations “with utmost dispatch to uphold the spirit of the special legislation”. The Court, accordingly, held that “we are persuaded to take the view that an advocate is and must be regarded as an officer of the court and subordinate to the CMM/DM for the purposes of Section 14(1A) of the 2002 Act.”

With regard to the Sub-Section (1A) the Court clarified that it is “in the nature of an explanatory provision and it merely restates the implicit power of the CMM/DM in taking services of any officer subordinate to him. The insertion of sub-Section (1A) is not to invest a new power for the first time in the CMM/DM as such.” Therefore, the situation existing before insertion of sub-Section (1A) wherein the CMM/DM could avail the services of an advocate for taking possession of the secured assets and documents relating thereto, continues to be the same after the insertion of sub Section (1A). The Court, however, added a rider that the officer so appointed by the CMM/DM ought to be the one who is capable of executing the orders passed by the authority.

The Court also analysed the meaning of the word “any”. The Court observed that it has not been defined in the SARFAESI Act. As per Black Laws Dictionary it is often synonymous with “either”, “every” or “all”. Similarly, “officer” means someone who holds an office of trust, authority, or command. As per P. Ramanatha Aiyar’s Advanced Law Lexicon “Subordinate” means belonging to an inferior rank, grade, class or order.

The Court held that under Section 14, taking possession of the secured assets and documents relating thereto is a “ministerial step” which can be taken by the CMM/DM himself or through any officer subordinate to him, including the Advocate Commissioner.

The Court further held that the Advocate Commissioner is not a new concept. The advocates are appointed as Court Commissioner to perform diverse administrative and ministerial work. It has been reiterated in various judgments that an advocate is an officer of the court.

The Court further went on to state that “it is well established that an advocate is a guardian of constitutional morality and justice equally with the Judge. He has an important duty as that of a Judge. He bears responsibility towards the society and is expected to act with utmost sincerity and commitment to the cause of justice. He has a duty to the court first. As an officer of the court, he owes allegiance to a higher cause and cannot indulge in consciously misstating the facts or for that matter conceal any material fact within his knowledge.”

The Court additionally observed that the Central Government has also framed no rules in reference to sub-Section (1A) of Section 14 of the SARFAESI Act putting any restrictions on CMM/DM to appoint Advocate Commissioner. Further on applying the “functional subordination” test, the Court was of the opinion that sub-Section (1A) of Section 14 of the 2002 Act does not impede the CMM/DM to engage services of an advocate who is an officer of the Court. The advocate so appointed needs to be on the rolls in the Office of the CMM/DM or in public service. The Court brushed the apprehensions of the borrowers as misplaced and added that the appointment of an advocate would rather ensure that “responsibility and duty will be discharged honestly and in accordance with rules of law.”

The Court, on the basis of the reasoning given, set aside the judgment of the Bombay High Court.

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