Madras High Court
Industrial Finance Corporation Of vs The Debts Recovery Appellate Tribunal on 6 September, 2011
Author: D.Murugesan
Bench: D.Murugesan, K.K.Sasidharan
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 06.09.2011
CORAM
THE HONOURABLE MR.JUSTICE D.MURUGESAN
AND
THE HONOURABLE MR.JUSTICE K.K.SASIDHARAN
W.P.No.6710 of 2011
1. Industrial Finance Corporation of
India Limited (IFCI)
represented by its Regional Manager
at Continental Chambers
No.142, Mahatma Gandhi Road
Post Box No.3318, Chennai 600 034
2. Industrial Finance Corporation of
India Limited (IFCI)
represented by its Authorised Officer
IFCI Tower, No.61, Nehru Place
New Delhi 110 019 .. Petitioners
VS
1. The Debts Recovery Appellate Tribunal
Ethiraj Salai, Egmore
Chennai 600 008
2. The Debts Recovery Tribunal-I
Deva Towers, 6th Floor
No.770-A, Anna Salai
Chennai 600 002
3. Sterling Holiday Resorts (India) Limited
represented by its Joint Managing Director
Mr.S.Sidharth Shankar
(Amalgamated with
M/s Sterling Resorts & Hotels (India) Limited
No.163, T.T.K.Road, Alwarpet
Chennai 600 018 .. Respondents
Petition under Article 226 of the Constitution of India, praying for the issue of a Writ of Certiorarified Mandamus, calling for the records of the first respondent with regard to the order dated 9.3.2011 passed in R.A.(S.A.) No.107 of 2010 on the file of the first respondent filed against S.A.No.189 of 2009 on the file of the second respondent and quash the same and consequently direct the petitioners to proceed with the auction sale of the properties mortgaged with the petitioners.
For Petitioners :: Mr.G.Masilamani
Senior Counsel for
Mr.Shivakumar
For Respondents :: Mr.A.L.Somayaji
Senior Counsel for
Mr.G.Sundaram for R3
ORDER
D.MURUGESAN, J.
The question raised in this writ petition is (a) as to whether the secured creditor is bound to communicate within one week from the receipt of representation/objection made by the borrower, the reasons for its non-acceptance in terms of sub-section (3-A) of Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the Act) read with Rule 3-A(c) of the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as the Rules) and the compliance is mandatory?
(b) To what relief the petitioner is entitled to?
2. We have heard Mr.G.Masilamani, learned Senior Counsel for the petitioners and Mr.A.L.Somayaji, learned Senior Counsel for the third respondent.
3. To answer the above questions, this Court must first consider the objects of the Act and the Rules made thereunder as well as the law laid down by the Supreme Court. Sub-section (3-A) of Section 13 of the Act and Rule 3-A of the Rules read thus:
"S.13(3-A). 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 under section 17 or the Court of District Judge under section 17-A. R.3-A. Reply to representation of the borrower.--(a) After issue of demand notice under sub-section (2) of section 13, if the borrower makes any representation or raises any objection to the notice, the Authorised Officer shall consider such representation or objection and examine whether the same is acceptable or tenable.
(b) If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make any changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within seven days from the date of receipt of the representation or objection.
(c) If on examining the representation made or objection raised, the Authorised Officer 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."
4. In Mardia Chemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, the Supreme Court considered the scope of the Act and upheld its validity and held in paragraphs 35 and 36 as follows:-
"35. The Narasimhan Committee was constituted in the year 1991 relating to the Financial System prevailing in the country. It considered wide ranging issues relevant to the economy, banking and financing etc. Under Chapter V of the Report under the heading 'Capital Adequacy, Accounting Policies and other Related Matters', it was opined that a proper system of income recognition and provisioning is fundamental to the preservation of the strength and stability of banking system. The Committee also suggested for reconstruction of assets saying:
"The Committee has looked at the mechanism employed under similar circumstances in certain other countries and recommends the setting up of, if necessary by special legislation, a separate institution by the Government of India to be known as 'Assets Reconstruction Fund (ARF) with the express purpose of taking over such assets from banks and financial institutions and subsequently following up on the recovery of dues owed to them from the primary borrowers."
While recommending for setting up of special Tribunals, the Committee observed:
"Banks and financial institutions at present face considerable difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delay in the legal processes. A significant portion of the funds of banks and financial institutions is thus blocked in unproductive assets, the values of which keep deteriorating with the passage of time. Banks also incur substantial amounts of expenditure by way of legal charges which add to their overheads. The question of speeding up the process of recovery was examined in great detail by a committee set up by the Government under the Chairmanship of the late Shri Tiwari. The Tiwari Committee recommended, inter alia, the setting up of Special Tribunals which could expedite the recovery of process...."
The Committee also suggested some legislative measures to meet the situation.
36. In its Second Report, the Narasimhan Committee observed that NPAs in 1992 were uncomfortably high for most of the public sector banks....... One of the measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the asset without intervention of the court and for reconstruction of the assets. It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions had been attracting the attention and the matter was considered in depth by the committees specially constituted consisting of the experts in the field. The Committee also opined that in the prevalent situation where the amount of dues were huge and hope of early recovery was less, it could be said that a more effective legislation for the purpose was uncalled for or that it could not be resorted to."
5. After the above report of the Narasimham Committee, yet another Committee was constituted headed by Mr.Andhyarujina for bringing about the needed steps within the legal framework. By referring to the above recommendations, the Apex Court in Mardia Chemicals case observed as follows:-
"Considering the totality of circumstances the financial climate world over, if it was thought as a matter of policy, to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy."
In order to come to the above conclusion, the Court observed that some facts which need to be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. As a large sum of amount remains unrecovered, normal process of recovery of debts through courts is lengthy and time taken is not suited for recovery of such dues. For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill-effects.
6. Considering all the above, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the governments in creating Debt Recovery Tribunals and appointing Presiding Officers, for a long time. Even after leaving that margin, it is to be noted that things in the concerned spheres are desired to move faster. In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. It cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another expert committee was constituted then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.
7. The enforcement of security interest is governed by Chapter III. Sub-section (1) of Section 13 empowers a secured creditor, notwithstanding anything contained in Section 69 or 69-A of the Transfer of Property Act, 1882, to enforce any security interest created in accordance with the provisions of the Act. In the event the borrower makes any default in repayment of the secured debt or any instalment thereof, the secured creditor would be entitled to classify his account in respect of such debt to be a Non-Performing Asset. Thereafter, 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).
8. By the above provision, the declaration of a debt as non-performing asset is a pre-condition for issuance of notice under Section 13(2). This law has been laid down by this Court in the judgment in Signal Apparels Pvt.Ltd., rep.by its Director and Signal Export rep.by its Partner v. Canara Bank, P.N. Road Branch rep.by its Authorised Officer-Chief Manager and another, 2010 (5) CTC 337. After the debt is classified as Non-Performing Asset, the borrower will get an opportunity to discharge in full his liabilities to the secured creditor within sixty days. There is no opportunity for the borrower at that stage to approach the secured creditor and point out that the classification of the debt as Non-Performing Asset was not correct with reference to the factual statement of accounts.
9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.
10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to civil Court for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,
(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;
(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.
(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.
11. In the above background, the question raised in the writ petition must be considered. In Mardia Chemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:
"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower 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 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.
46.We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.
47.This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."
12. The very same question again came up for consideration before the Supreme Court in Transcore v. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:
"24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961. After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.
25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act."
13. Most recently in Kanaiyalal Lalchand Sachdev v. State of Maharashtra, (2011) 2 SCC 782, the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-
"16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same."
14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.
(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-
"69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.
(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-
"77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).
15. The judgments of the Supreme Court in Transcore and Kanaiyalal Lalchand Sachdev also proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.
16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.
17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.
18. The decision of the Supreme Court in Mardia Chemicals Ltd., was made on 8th April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11th November, 2004.
19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in Mardia Chemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14th November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.
20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.
21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons 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 of the Act.
22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).
23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.
24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.
25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.
26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.
27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.
28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.
29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.Sunanda Kumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:
"It is not disputed that even though the petitioners had submitted Annexure 'C' reply to Annexure 'B' notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure 'D' application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular...."
30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. Punjab and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:
"21.....It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone."
31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in Krushna Chandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:
"7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits."
32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumar v. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.
33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is mandatory.
34. This takes us to the next question as to whether the entire proceedings initiated by the secured creditor are liable to be quashed on the sole ground of non-compliance of Section 13(3-A) of the Act and Rule 3-A of the Rules, as a general rule. In order to apply the legal position under Section 13(3A) read with Rule 3-A, the facts of the case must also be considered.
35. The writ petition, at the instance of Industrial Finance Corporation of India Limited (shortly known as "IFCI"), is filed questioning the order of the Debts Recovery Appellate Tribunal, Chennai dated 9.3.2011 passed in R.A.(S.A.) No.107 of 2010. The facts giving rise to the present writ petition show that the third respondent-M/s Sterling Holiday Resorts (India) Limited, presently amalgamated with M/s Sterling Resorts & Hotels (India) Limited, availed certain credit facilities from M/s Industrial Finance Corporation of India, the petitioners herein as well as from M/s Tourism Finance Corporation of India Limited on 4.12.91 for the purpose of setting up Three Star Hotels in Kodaikkanal and Ooty under the project finance participation scheme and necessary deeds of mortgage were created in respect of the immovable properties situate at FernHill, Ooty. As the third respondent committed default in repayment, the petitioners filed Original Application No.277 of 2000 before the Debt Recovery Tribunal, New Delhi for recovery of a sum of Rs.8,87,36,938/- with pendente lite and future interest from 31.5.2000 under the Recovery of Debts Due to Banks and Financial Institutions Act. Pending such application, the petitioners issued a notice dated 23.6.2003 under sub-section (2) of Section 13 of the Act to the third respondent claiming a sum of Rs.67,312,785/- with further interest from 15.4.2003. The third respondent did not make any representation or raised any objection. The said notice came to be challenged before the Debts Recovery Tribunal, New Delhi in O.A.No.11 of 2004 and the same was dismissed for default. In spite of the above order, the secured creditor also did not take measures to recover the dues by issuing possession notice under Section 13(4) of the Act.
36. Subsequently, talks for one time settlement were commenced. Thereafter, on obtaining consent from M/s Tourism Finance Corporation of India Limited for taking action under the Act, the petitioners once again issued a notice dated 30.12.2007 under sub-section (2) of Section 13 claiming a sum of Rs.17,71,78,492/- with further interest from 31.10.2007. Pursuant to the same, the third respondent by their letter dated 26.12.2007 offered to settle the dues and it was followed by a further offer dated 28.7.2009. The petitioners by their letter dated 13.8.2009 rejected the offer made by the third respondent and issued the possession notice dated 21.8.2009 under sub-section (4) of Section 13 of the Act and an inventory was taken by the Authorised Officer in respect of the movables as per Rule 4(2) of the Security (Interest) Enforcement Rules. Aggrieved by the said notice as well as the rejection of the offer, the third respondent filed S.A.No.189 of 2009 before the Debts Recovery Tribunal-I, Chennai seeking to set aside the demand and possession notices as well as the letter of rejection and to award compensation and also prayed for an ad-interim injunction restraining the petitioners from proceeding further and also from interfering with the management of the hotel affairs. The Tribunal, without going into the merits of the matter, by order dated 26.8.2009, granted interim injunction subject to payment of Rs.1.70 crores by the third respondent on or before 5.00 p.m., on 28.8.2009 and a further payment of Rs.1.70 crores on or before 26.10.2009 and failing compliance of the order, the petitioners were permitted to proceed further. The said order was questioned by the petitioners before the Debts Recovery Appellate Tribunal, Mumbai, which was incharge of the Debts Recovery Appellate Tribunal, Chennai and the order of the Tribunal was modified to payment of Rs.4.00 crores in two instalments vide order dated 8.9.2009.
37. In the meantime, the Debts Recovery Tribunal, New Delhi allowed the O.A.No.277 of 2000 filed by the petitioners and passed a decree for recovery as prayed for by order dated 23.10.2009. Thereafter, the third respondent settled the dues of M/s Tourism Finance Corporation of India Limited. Questioning the order of the Debts Recovery Appellate Tribunal dated 8.9.2009, the petitioners filed W.P.No.24396 of 2009 and the said writ petition was disposed of on 27.11.2009 by directing the Debts Recovery Tribunal-I, Chennai to dispose of the S.A.No.189 of 2009 within a period of two months from the date of receipt of a copy of the order. Ultimately, the Debts Recovery Tribunal-I, Chennai by order dated 5.3.2010 disposed of the S.A.No.189 of 2009 on the following terms:
"It is ordered that the measures taken by the respondent upto the issuance of Possession Notice dated 21.08.2009 as enclosed at Page-50 of the Memorandum of Appeal, in so far as it relates to the taking of symbolic possession of the description of the property mentioned in the said notice, is sustainable under the law and consequently, liberty is granted to Respondent to take fresh further measures under SARFAESI Act in accordance with the SARFAESI Act and Rules made thereunder. At the same time it is ordered that the Respondent has not taken actual possession or management of the Appellate Company being a running unit or appointed the Manager as per the specific provisions of SARFAESI and Rules made thereunder or issued sale notice dated 24.8.2009 in accordance with provisions of SARFAESI Act and Rules and therefore the said measures taken by the Respondent are set aside. At the same time it is made clear that it is left open to the Respondent to take proper and appropriate action from the stage of Possession Notice in so far as it relates to symbolic possession is concerned in accordance with the provisions of SARFAESI Act and Rules. The appeal is ordered accordingly without cost due to circumstances of the case stated above."
38. In the meantime, as against the final order passed by the Debts Recovery Tribunal, New Delhi in O.A.No.277 of 2000, the third respondent filed Appeal No.67 of 2010 for reduction in the rate of interest and Appeal No.112 of 2010 was filed by the petitioners seeking enhancement of the rate of interest and contractual rate of interest. By order dated 6.8.2010, the Tribunal disposed of both the appeals by directing the third respondent to pay the petitioners simple interest @ 16% per annum.
39. Aggrieved by the final order in S.A.No.189 of 2009 dated 5.3.2010, the third respondent preferred R.A.No.107 of 2010 before the Debts Recovery Appellate Tribunal, Chennai. The Debts Recovery Appellate Tribunal by order dated 9.3.2011 allowed the appeal on the following terms:
"Therefore from the fact that the Authorised Officer has failed to comply with Sec.13(3A) of the SARFAESI Act and from the fact that the taking of the physical possession of the movables of the company is in contravention of the provisions of the SARFAESI Act and from the fact that it has been categorically held by the Ld.Presiding Officer that there was a contravention of the provisions of the SARFAESI Act by the Authorised Officer and from the fact that the respondent has chosen not to challenge the finding of the Ld.Presiding Officer that the Authorised Officer has contravened the provisions of the SARFAESI Act and from the fact that serious prejudice has been caused to the appellant by aforestated contraventions of the provisions of the SARFAESI Act and the Rules made thereunder by the Authorised Officer this Tribunal is compelled by Sec.17(3) of the SARFAESI Act to hold that the order of the Ld.Presiding Officer is liable to be set aside and further compelled to proceed to hold that the proceedings taken by the Authorised Officer under the provisions of the SARFAESI Act are liable to be set aside. Accordingly, the proceedings of the Authorised Officer under Section 13(4) of the SARFAESI Act is hereby set aside and the Authorised Officer is directed to handover possession of all the movables of which he had taken possession through the inventories dated 21.8.2009 to the appellant or to its representative within three days of the receipt of a copy of this order."
40. The above order of the Debts Recovery Appellate Tribunal is questioned by the petitioners in this writ petition.
41. The credit facility was extended to the third respondent during the year 1991. The secured creditor initiated recovery proceedings far back in the year 2000 when they filed O.A.No.277 of 2000 before the Debts Recovery Tribunal, New Delhi for recovery of dues. While the said application was pending, the petitioners issued notice under Section 13(2) dated 23.6.2003. The third respondent neither paid the dues nor raised any objection, but chose to question that notice by filing O.A.No.11 of 2004 before the Debts Recovery Tribunal, New Delhi and allowed the same to be dismissed for default. However, the secured creditor did not take action immediately to issue notice under Section 13(4) of the Act. From the facts narrated above, it was only subsequently and long after, statutory proceedings under the SARFAESI Act were once again initiated and notice under Section 13(2) was issued on 30th October, 2007. The third respondent did not pay the dues as demanded and made a proposal dated 26th December, 2007 for one time settlement. It is also a matter of record that there was neither any reply to the said proposal nor any action was taken by the secured creditor under Section 13(4). Subsequently, the third respondent made a fresh proposal on 28th July, 2009 and the said proposal was considered by the petitioners and it was rejected by the communication dated 13th August, 2009. Though a notice was sent on 30th October, 2007, the fact remains that possession notice under Section 13(4) was issued only after the rejection of the OTS proposed by the third respondent by their letter dated 28th July, 2009. The proposal made by the third respondent on 28th July, 2009 was in the nature of One Time Settlement. Reply dated 26th December, 2007 sent by the third respondent to the notice under Section 13(2) was also in the nature of OTS. The third respondent as per proposal dated 28th June, 2009 agreed to pay a sum of Rs.225 lakhs in full and final satisfaction of the claim made by the petitioners. The said proposal was not considered by the petitioners. The subsequent proposal was made to settle the claim for Rs.111.86 lakhs. The said proposal was rejected by the petitioners on 13th August, 2009. The letters dated 26th December, 2007 and 28th July, 2009 sent by the third respondent did not contain any other representation or objection for the petitioners to consider and reply. Possession notice was issued only thereafter. In the above factual backdrop, it cannot be now said that there was non-compliance of the provisions of Section 13(3-A) of the Act and Rule 3-A(c) of the Rules.
42. Further, it is also contended that the revised proposal was submitted on 28th July, 2009 and the same was rejected by letter dated 13th August, 2009, which was posted at Delhi on 17th August, 2009 and in that event, the reply was beyond the period of seven days. However, it is not clear on which date the above proposal of the third respondent dated 28th July, 2009 was acknowledged by the petitioners to contend that it has not been replied in a period of seven days. Hence, the contention that the reply has been sent beyond a period of seven days also cannot be accepted. Therefore, factually there was substantial compliance of Section 13(3A) of the Act and Rule 3-A(c) of the Rules.
43. The facts of the subject case show that the proposal made by the third respondent through their reply dated 26th December, 2007 and the revised proposal made through their letter dated 28th July, 2009 were all in the nature of OTS, the only difference being the total amount agreed to be paid. The third respondent has no case that immediately after issuance of notice under Section 13(2), the petitioners have issued possession notice under Section 13(4) of the Act. Admittedly, possession notice was issued only after the disposal of the subsequent proposal made by the third respondent by way of OTS. The idea behind Section 13(3-A) is to apprise the borrower of the consideration of the objections and the stand of the secured creditor in respect of such objections. The Debts Recovery Appellate Tribunal proceeded on the basis that failure on the part of the petitioners to send a reply within a week vitiated the entire proceedings notwithstanding the consideration of the very same proposal before taking measures under Section 13(4) of the Act. Hence, on the facts of this case, we hold that there was substantial compliance of Section 13(3-A) of the Act and Rule 3-A(c) of the Rules by the petitioners. The above facts were not taken into consideration by the Debts Recovery Appellate Tribunal while setting aside the order of the Debts Recovery Tribunal. Hence, for our own reasons, the order of the Debts Recovery Appellate Tribunal in quashing the entire proceedings cannot be sustained and is liable to be set aside.
44. For all the above reasons, the order dated 9th March, 2011 on the file of the Debts Recovery Appellate Tribunal is set aside and the writ petition is allowed. No costs.
Index : yes (D.M.,J.) (K.K.S.,J.)
Internet: yes 06.09.2011
ss/tar
To
1. The Registrar
Debts Recovery Appellate Tribunal
Ethiraj Salai, Egmore
Chennai 600 008
2. The Registrar
Debts Recovery Tribunal-I
Deva Towers, 6th Floor
No.770-A, Anna Salai
Chennai 600 002
3. The Regional Manager
Industrial Finance Corporation of
India Limited (IFCI)
Continental Chambers
No.142, Mahatma Gandhi Road
Post Box No.3318
Chennai 600 034
4. The Authorised Officer
Industrial Finance Corporation of
India Limited (IFCI)
IFCI Tower, No.61, Nehru Place
New Delhi 110 019