Gauhati High Court
M/S. L. Doulo Builders And Suppliers Co. ... vs North Eastern Development Finance ... on 6 March, 2020
Bench: Suman Shyam, Hitesh Kumar Sarma
Page No.# 1/27
GAHC010304832019
THE GAUHATI HIGH COURT
(HIGH COURT OF ASSAM, NAGALAND, MIZORAM AND ARUNACHAL PRADESH)
Case No. : WP(C) 9241/2019
1:M/S. L. DOULO BUILDERS AND SUPPLIERS CO. PVT. LTD.
HAVING ITS REGISTERED OFFICE AT 5TH MILE MODEL VILLAGE, P.S.-
DIMAPUR, DIST-DIMAPUR, REPRESENTED BY ONE OF ITS DIRECTORS SRI
LHOUPENYI DOULO, S/O LATE YESOU DOULO, R/O 5TH MILE MODEL
VILLAGE, P.S.-DIMAPUR, DIST-DIMAPUR, NAGALAND-797112
VERSUS
1:NORTH EASTERN DEVELOPMENT FINANCE CORPORATION LTD.
(NEDFI)
A COMPANY INCORPORATED AND REGISTERED UNDER THE COMPANIES
ACT, 1956 HAVING ITS REGISTERED OFFICE AT NEDFI HOUSE, DISPUR,
G.S. ROAD, GUWAHATI, DIST-KAMRUP (M), ASSAM-781006
Advocate for the Petitioner : MR SISHIR DUTTA
Advocate for the Respondent : MR S DUTTA
BEFORE HONOURABLE MR. JUSTICE SUMAN SHYAM HONOURABLE MR. JUSTICE HITESH KUMAR SARMA JUDGMENT AND ORDER (CAV) Date : 06-03-2020 (Suman Shyam.J) Heard Mr. Sishir Dutta, learned senior counsel assisted by Mr. M. Choudhury, learned counsel appearing for the writ petitioner. We have also heard Mr. Subrata Page No.# 2/27 Dutta, learned counsel appearing for the respondent.
2. The writ petitioner is a company registered under the Companies Act, 1956 having its registered office at the 5th Mile Model Village, District - Dimapur in the State of Nagaland. The petitioner company has approached this Court by filing the present writ petition, inter-alia, assailing the possession notice dated 23.03.2019 issued by the respondent under section 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 (hereinafter 'the Act of 2002'). The writ petitioner has also challenged the order dated 16.03.2019 passed by the Deputy Commissioner, Dimapur in exercise of power under section 14 of the Act of 2002 directing the Sub-Divisional Officer Civil (Sadar), Dimapur, to oversee law and order situation during taking over physical possession of the assets mentioned in the order. The basic contention of the writ petitioner in this case is that there is no secured asset in this case and to that extent, the respondent is also not a secured creditor. As such, the Act of 2002 would not be applicable in this case. That apart, in view of the provision of Article 371A of the Constitution of India, the provisions section 13 (4) of the Act of 2002 would not be applicable to any immovable property situated within the State of Nagaland.
3. The facts of the case, shorn of unnecessary details, are that on 13.12.2000, the petitioner company had applied for a term loan from the respondent for the purpose of setting up a 5000 MT cold storage at Dimapur in the State of Nagaland. Based on the application made by the petitioner, the respondent had sanctioned rupee term loan of Rs. 2 crores. Although the loan was sanctioned for a sum of Rs. 2 crores, yet, Page No.# 3/27 the respondent had actually disbursed only Rs.1,49,63,580/- and the remaining amount was adjusted against the interest component. The 5th Model Village Council, Dimapur, stood as a guarantor in respect of the loan. Upon disbursement of the loan, the writ petitioner had initiated immediate steps for construction of the cold storage unit but there was delay in completion of the same and the project could be completed only in the year 2004. In the year 2007 the petitioner had applied for a working capital of Rs.165.15 lakhs from the respondent and a sum of Rs.1 crore, as working capital, was sanctioned by the respondent which amount was disbursed on 03.08.2007. Notwithstanding the same, the cold storage unit did not run smoothly for various reasons, as a result of which, there was default in repayment of the loan. Consequently, the loan account had become Non-Performing Asset (NPA). On 31.08.2010, the respondent had issued a Loan Recall notice informing the petitioner that a sum of Rs.3,44,58,174/- had fallen due and payable by the petitioner and the amount be paid within 15 days along with interest calculated with effect from 01.09.2010 failing which, appropriate steps would be taken for enforcing the securities and for realizing the dues. When the petitioner failed to respond to the notice dated 31.08.2010, a demand notice dated 30.06.2011 was issued under section 13(2) of the Act of 2002 addressed to the petitioner company, its Directors and the 5th Model Village Council, Dimapur renewing the demand for payment of the sum of Rs 3,85,28,571/- with interest and cost, within sixty days from the date of the notice, failing which, the respondent would exercise its rights under sub-section 4 of section 13 of the Act of 2002. On 31.01.2019, the respondent had applied for assistance from the Deputy Commissioner, Dimapur seeking assistance for taking over physical Page No.# 4/27 possession of the mortgaged properties in connection with the loan granted to the petitioner. By the order dated 16.03.2019, the District Magistrate, Dimapur, in exercise of powers under section 14 of the Act of 2002, had empowered the Sub-Divisional Officer (C), Sadar, Dimapur to oversee the process of taking over physical possession of the assets mentioned in the order. On 23.03.2019, the respondent has taken over physical possession of the assets of the writ petitioner company including the cold storage as well as the properties belonging to the Directors of the petitioner company.
4. By referring to section 13 of the Act of 2002, Mr. Dutta, learned senior counsel for the writ petitioner has argued that in this case there is no security interest created in favour the respondent. Therefore, the respondent is not a secured creditor within the meaning of the Act of 2002. Such being the position, the impugned notice issued under section 13(2) and the subsequent action initiated by the respondent under section 13(4) of the Act of 2002 was illegal and hence, liable to be set aside by this court.
5. By inviting the attention of this court to the pleadings in the writ petition the learned senior counsel has argued that the respondent has already instituted an application being O.A. No.163/2018 before the learned Debt Recovery Tribunal (DRT), Guwahati, for recovery of an amount of Rs.7,64,35,358/- from the writ petitioner in respect of the same loan agreement and therefore, remedy, if any, available to the respondent lies in obtaining a certificate of recovery in the said proceeding and not under the Act of 2002. Mr. Dutta has also argued that since the Act of 2002 would not Page No.# 5/27 have any applicability in the facts and circumstances of this case, hence, the order dated 16.03.2019 issued under section 14 of the Act of 2002 by the Deputy Commissioner, Dimapur, is non-est in the eye of law.
6. Mr. Subrata Dutta, learned counsel for the respondent, on the other hand, has questioned the maintainability of the writ petition by urging that the impugned notice dated 23.03.2019 and the order issued under section 14 of the Act of 2002 are assailable under section 17 of the Act of 2002 and therefore, this writ petition ought to be dismissed on the ground of availability of adequate alternative remedy. Mr. Dutta has also submitted that in commercial matters such as this, the Writ Court would not ordinarily interfere and come in the way of recovery of dues involving public money in a proceeding initiated under the legislation enacted by the Parliament. In support of his aforesaid argument, Mr. Dutta has relied upon the decision of the Hon'ble Supreme Court rendered in the case of United Bank of India Vs. Satyawati Tondon and others reported in (2010)8 SCC 110.
7. By drawing the attention of this Court to the deed of guarantee (Annexure-6) dated 11.05.2001, Mr. Dutta has further argued that the Model Village Council had agreed to repay the loan advanced by the respondent to the writ petitioner to the extent of Rs.200 lakhs and therefore, in terms of section 2(zf)(i) the deed of guarantee would constitute a security agreement within the meaning of section 2(zb) of the Act. Since the deed of guarantee dated 11.05.2001 is based on the agreement dated 11.05.2001 entered by and between the Model Village Council, 5 th Mile, Dimapur and the writ petitioner herein with a view to secure the loan advanced by Page No.# 6/27 the respondent, it cannot be said that the impugned action initiated by the respondent is dehors the Act of 2002.
8. After hearing the argument advanced by learned counsel for both the parties, it is apparent that the writ petitioner is not disputing the fact that it had availed financial assistance from the respondent to the extent of Rs.200 lakhs as term loan and thereafter, working capital advance of Rs.165.15 lakhs. However, the controversy in this writ petition pertains to the validity of the recourse taken by the respondent for enforcing the security agreement by invoking the provisions of the SARFAESI Act, 2002.
9. From the materials available on record, it is evident that the notice dated 30.06.2011 had been issued under section 13(2) of the Act of 2002. The notice refers to loan agreement dated 11.05.2001, deed of hypothecation and equitable mortgage as well as the collateral security, all of which were allegedly created on 11.05.2001 for the purpose of securing the loan of Rs.200 crores. The notice dated 30.06.2011 also refers to the deed of guarantee dated 11.05.2001 executed by the Model Village Council with the respondent. In the impugned notice, it has also been mentioned that a sum of Rs.3,85,28,571/- was due on the date of issuance of the notice and if the amount is not paid within the stipulated time, then in that event, further action under sub-section (4) of section 13 of the Act of 2002 would be initiated.
10. Since the writ petitioner has assailed the proceeding initiated by the respondent under the Act of 2002, it would be relevant to reproduce the relevant provisions of section 13 of the Act of 2002 here-in-below :-
Page No.# 7/27 "13. Enforcement of security interest (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub- section (4).
Provided that -
(i) the requirement of classification of secured debt as non-
performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and
(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee.
(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower Page No.# 8/27 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 17A.
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:--
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:
PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:
PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt.
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has Page No.# 9/27 been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
xxxx xxx xxxx xxxx xxxx xxxx xxxx xxxx
xxxx xxxx xxxxx xxxx xxxx xxxx "
11. Section 13(1) of the Act of 2002 makes it clear that the said provisions would be attracted when any security interest created in favour of a secured creditor is sought to be enforced without the intervention of the court or tribunal by such secured creditor.
12. Sub-section (2) of section 13 can be invoked when a borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of the secured debt or any installment thereof and his account in respect of such debt is classified by the secured creditor as non-performing asset. It is only then that the secured creditor may require the borrower to discharge its full liabilities within 60 days from the date of the notice. If the borrower fails to respond to the notice issued by the secured creditor under section 13(2), then in that event, as per sub-section (4) of section 13, it will be open for the secured creditor to take over physical possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset and also to take over the management of the business of the borrower including the right to Page No.# 10/27 transfer by way of lease, assignment or sale for realizing the secured asset. While taking over physical possession of the secured assets under section 13(4), it would be open for the secured creditor to seek assistance of an order under section 14 (1) to be issued by the Chief Metropolitan Magistrate or the District Magistrate, as the case may be.
13. Thus, it is evident that section 13 and 14 of the Act of 2002 puts in place a scheme for enforcing a security agreement and for taking over physical possession of the secured assets of a borrower in default without the intervention of the court or tribunal.
14. A security agreement is defined in section 2 (zb) of the Act of 2002 which reads as follows :-
"(zb) "security agreement" means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;"
15. Section 2(zd) of the Act of 2002 defines secured creditor which is quoted herein below :-
"(zd) "secured creditor" means--
(i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l);
(ii) debenture trustee appointed by any bank or financial institution; or
(iii) an asset reconstruction company whether acting as such or Page No.# 11/27 managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or
(iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or
(v) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.]"
16. Section 2(zf) of the Act of 2002 defines "security interest" which is extracted herein below for ready reference :-
"(zf) "security interest" means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes--
(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or
(ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset;"
17. Section 2(l) of the Act of 2002 provides the definition of "financial assets" and Page No.# 12/27 according to sub-clause (vb) any right, title or interest on any intangible asset would also be included in the list of obligation of the secured debtor. Clause 2(l)(vb) is reproduced herein below for ready reference :-
"(vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or"
18. From a conjoint reading of the various provisions of the Act of 2002, as noticed above, what transpires is that the bank or financial institution can initiate action under the Act of 2002 only against a secured creditor coming within the meaning of section 2(zd) for enforcing a security interest. In order to have a "security interest", there must be right, title or interest created upon the property in favour of the secured creditor. In other words, in order to qualify as a secured creditor under the Act of 2002, the bank or the financial institution must inter-alia, hold right title or interest upon any tangible or intangible assets which comes within the definition of "financial assets" as provided in Clause 2(l ).
19. Article 371A of the Constitution of India was inserted by the 13th Constitutional Amendment. Article 371A provides that no Act of the Parliament would apply to the State of Nagaland in respect of religious or social practices of the Nagas, Naga customary law and procedure, administration of civil and criminal justice involving decisions according to Naga customary laws, ownership and transfer of land and its resources without the approval of the Nagaland State Legislative Assembly based on Page No.# 13/27 a resolution. Therefore, unless approved by the Legislative Assembly of Nagaland, no Act of the Parliament can affect rights involving ownership and transfer of land within the State of Nagaland. In the present case , there is no dispute about the fact that there is no such resolution of the Nagaland State Assembly agreeing to apply any of the provisions of the Act of 2002 including section 13 in that State.
20. The Nagaland Village and Area Council Act, 1978 (for short "Act of 1978") was enacted by the Nagaland Legislative Assembly which had received the assent of the Governor on the 9th of March, 1979. The Act of 1978 (as amended) provides for establishing a Village Council for every recognized village in Nagaland. Under the said Act the Village Council is to be constituted by the members chosen by the Villagers as per the customary practice. The Village Council appoints one of its members as the Chairman of the Council and is responsible for implementing various development schemes in the villages. As per section 21 of the Act of 1978, every Village Council shall be a body corporate by the name of the Village for which it is constituted and shall have perpetual succession and a common seal, and shall by the said name use and be used through its Chairman, with power to acquire hold and dispose of property, both movable and immovable and to contract and do all other things necessary for the purpose of this Act.
21. The Village Council constituted under the Act of 1978 is also competent to borrow money from the Government, Banks or financial institutions besides providing security for due payment of loan received by a permanent resident of the village from the Government, bank or the financial institution. The powers and duties of a Page No.# 14/27 Village Council is provided under section 12 of the Act of 1978 which is reproduced here-in below :-
"Powers and Duties
12. The Village Council shall have the following powers and duties :
(1) to formulate Village Development Schemes, to supervise proper maintenance of water supply, roads, forest, sanitation, education and other welfare activities;
(2) to help various Government agencies in carrying out development works in the Village;
(3) to take development works on its own initiative or on request by the Government;
(4) to borrow money from the Government, Banks or financial institutions for application in the development and welfare work of the Village and to repay the same with or without interest as the case may be;
(5) to apply for and receive grant-in-aid, donations, subsidies from the Government or any agencies;
(6) to provide security for due repayment of loan received by any permanent resident of the Villages from the Government, Bank or financial institution;
(7) to lend money from its funds to deserving permanent residents of the Village and to obtain repayment thereof with or without interest; (8) to forfeit the security of the individual borrower on his default in repayment of loan, advanced to him or on his commission of a breach of any of the terms of loan agreement entered into by him with the Council and to dispose of such security by public auction or by private Page No.# 15/27 sale;
(9) to enter into any loan agreement with the Government Bank and financial institutions or a permanent resident of the Village; (10) to realize registration fees for each litigation within its jurisdiction; (11) to raise fund for utility service within the Village by passing a resolution subject to the approval of the State Government.
Provided that all monetary transactions shall be conducted through a scheduled Bank or the Nagaland State /co-operative Bank.
(12) to constitute Village Development Board;
(13) power to do certain acts in the event of an epidemic.
On the outbreak of an epidemic or infectious disease Village Council shall initiate all preventive measures."
22. In view of obstacle created by Article 371A regarding transfer and ownership of land in the State of Nagaland, the 5th Mile Model Village Council of Nagaland had entered into an agreement with the petitioner company on 11.05.2011 paving the way for the later to obtain a loan from any financial corporation without placing any property on mortgage with such financial institution. The Village Council had also recommended the loan to be disbursed in favour of the writ petitioner. The agreement dated 11.05.2001, in the second paragraph of the recital, reads as follows :-
" Whereas in the State of Nagaland, transfer of land by any tribal in favour of non-tribal including juristic person is not permitted under the law "
23. The relevant clauses of the agreement dated 11.05.2001, along with the schedule, are extracted herein below for ready reference:-
Page No.# 16/27 "NOW THIS DEED WITNESSES AS FOLLOWS :-
1. As per the modalities at Annexure-1, the Model Village Council has recommended and forwarded the said Sri K. Doulo representing M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. to North Eastern Development Finance Corporation Ltd., Guwahati for availing loan facility after observing all the said modalities framed on 11 th day of May, 2001.
2. North Eastern Development Finance Corporation Ltd. has agreed in principle to provide term loan to the extent of Rs.200 lakh (Rupees Two hundred lakhs) only to M/s. L. Doulo Builders & Suppliers Company Pvt.
Ltd. with the specified terms and conditions made in the Loan Agreement dated 11th day of May, 2001 between them, and accordingly said Sri K. Doulo representing M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. Model Village Council to act as guarantor for the said loan.
3. At the request of said Sri K. Doulo representing M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. the Model Village Council has agreed to stand as surety for and guarantee refund of the said loan with interest in case said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. fails or neglects to repay the loan with interest in accordance with the terms and conditions of the said Loan Agreement.
4. In consideration of this agreement and in consideration of Model Village Council to stand as surety and guarantor for refund of the said loan to North Eastern Development Finance Corporation Ltd, said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. as the beneficial owner, do hereby grant, transfer, convey unto the said Model Village Council all the assets fully described in the schedule below to hold the same absolutely and for ever and/or further to seize and dispose of all the mortgaged assets for realization of the said loan with interests, to appoint Page No.# 17/27 auditors for examination of all accounts, balance sheet and profit and loss accounts of the business of the said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd.
5. The term and conditions of this agreement shall not be affected by any change in the constitution of the Model Village Council nor on the death of said K. Doulo representing M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd.
IN WITNESS WHEREOF the parties hereto have set and subscribed their respective hands and seals the day, month and year first above written.
Schedule of the property
Sl. Name of the assets Measurement Value/Amount (in
No. Rs.)
1 Residential 2 storyed Building Area 20,000 Sq. ft. 45,00,000
Model Village
2 Project site, Developed Model Area 1,07,700 Sq. ft. 30,00,000
Village
3 Residential Plot, Developed Area 15,000 Sq. ft. 10,00,000
Model Village
Total 85,00,000
(Rupees Eighty Five Lakhs) only.
1. Residential Building is bounded by :
North - N. Angami
South - V. C. Road
East - L. Chakhesang
West - N. Angami.
2. Project site (Developed) is bounded by :
North - V. C. Road
South - Medothul
East - Medothul
West - Thraromy clan.
3. Residential Plot is bounded by :
Page No.# 18/27
North - K. Khalo
South - V. C. Road
East - V. C. Road
West - L. Chakhesang.
Sd/- Illegible
(Model Village Council)."
24. We also find from the record that on 11.05.2001, the 5 th Model Village Council, Dimapur had executed a deed of agreement with the respondent agreeing to stand as a guarantor of the loan to be advanced to the petitioner. In the said agreement, it has also been mentioned that Sri K.Doulo representing the writ petitioner company has mortgaged his assets valued at Rs 85,00,000/- with the Model Village Council for availing the loan from the respondent. The terms and conditions of the guarantee agreement are extracted herein below for ready reference :-
"1. In consideration of North Eastern Development Finance Corporation Ltd.
having agreed to provide term loan to the extent of Rs.200 lakh (Rupees Two hundred lakhs) only to said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. for the purpose herein above indicated, the Model Village Council do hereby guarantee that in case the aforesaid Company fail and/or neglect to repay the said loan with interests in accordance with the terms and conditions contained in the Loan Agreement dated 11th day of May, 2001 mentioned above, the Model Village Council shall repay to the North Eastern Development Finance Corporation Ltd. such amounts as they may be called upon to pay.
2. This guarantee of the Model Village Council shall be effective immediately upon the disbursement of the said loan from the North Eastern Development Finance Corporation Ltd. to said M/s. L. Doulo Page No.# 19/27 Builders & Suppliers Company Pvt. Ltd. and shall continue in force until and unless the entire amount of loan with interest and other charges is fully repaid by said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd.
3. The guarantee hereinbefore mentioned shall not be affected by any change in the constitution of the Model Village Council nor on the death of said K. Doulo of M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd."
25. From a careful analysis of the materials on record, we find that although the petitioner had entered into a loan agreement with the respondent on 11.05.2001 for availing the term loan, yet, there was no creation of mortgage over any of the assets of the petitioner company or its Directors qua the respondent. Article- III of the loan agreement which deals with "security for the loan" does not also mention about any specific immovable property of the borrower in respect of which any mortgage or charge had been created in favour of the lender i.e. the respondent. Rather, we find that mortgage, if any, was created by the Director of the petitioner company in favour of the Model Village Council, which stood as a guarantor in respect of the term loan. The same properties mortgaged by the Director of the petitioner company with the Village Council, could not have been simultaneously pledged with the respondent for securing the loan.
26. Although, Article-III of the loan agreement mentions about creation of charge by way of hypothecation in favour of lender of all the borrower's movables including movable machineries, spares, tools etc, yet, here also we find that there is no description of such machineries and tools in the agreement nor is there any hypothecation agreement signed by the parties. From a reading of the terms and conditions contained in the loan agreement dated 11.05.2001, we find that there is Page No.# 20/27 no creation of any "security interest" by the petitioner qua the respondent within the meaning of section 2(zf) which can be held to be enforceable under the provisions of the Act of 2002.
27. We also find that on the basis of the agreements signed by the respondent with the petitioner as well as the guarantor, no right, title or interest had been validly created in favour of the respondent over any of the tangible or intangible asset of the petitioner. The learned counsel for the respondent has also failed to invite our attention to any such document or instrument which creates a semblance of right, title or interest of the respondent qua the immoveable properties or assets of the writ petitioner or the Village Council. Therefore, we are of the un-hesitant opinion that there is no security interest created in favour of the respondent either by the borrower or the guarantor in this case.
28. It is also clear from the agreement executed by and between the respondent and the Model Village Council on 11.05.2001 that the said agreement is merely a guarantee agreement without creating any right, title or interest of the lender over any of the immoveable properties mentioned in the impugned notice dated 30.06.2011 or the order dated 16.03.2019. If that be so, it is evident that there is no "security agreement" in this case. The respondent cannot claim to be a "secured creditor" within the meaning of the Act of 2002 merely on the basis of a guarantee agreement entered with Model Village Council. Such being the position, we are of the view that the respondent is not a "secured creditor" within the meaning of section 2 (zd) of the Act of 2002.
Page No.# 21/27
29. In the case of Standard Chartered Bank Vs. V. Noble Kumar and others reported in (2013) 9 SCC 620 one of the questions that had arisen for the consideration of the Supreme Court was as to whether, it was essential for a secured creditor to first make an attempt to take possession of the secured assets and only when the creditor faces resistance to such an attempt that the authority of a Magistrate under section 14 of the Act of 2002 should be availed. While answering the said question in the negative, the Supreme Court, on an interpretation of section 13(2) of the Act of 2002, has observed that two conditions must be satisfied for a secured creditor to take possession of the secured asset :-
(i) That there must be a security agreement which creates the liability of the borrower to make repayment to the secured creditor of the secured debt; and
(ii) The secured creditor is required to demand the borrower by notice in writing to discharge the full liability within a period of 60 days from the date of the notice.
30. In the case of Mathew Varghese Vs. M. Amritha Kumar and others reported in (2014) 5 SCC 610 the Supreme Court while interpreting the provisions of the SARFAESI Act, 2002, has observed that under section 13(1) the security interest created in favour of the secured creditor may be enforced without the intervention of the Court and Tribunal but the enforcement should be strictly in accordance with the provisions of the Act. The observations made in paragraph 27 are reproduced herein below for ready reference :-
"27. Under Section 13(1), it is provided that any security interest created Page No.# 22/27 in favour of the secured creditor may be enforced without the intervention of the court and tribunal by such creditor in accordance with the provisions of this Act. The non obstante clause in the opening set of expressions contained in Section 13(1), as pointed out by Mr. Singh, learned Senior Counsel for the borrowers, is restricted to Section 69 or Section 69-A of the TP Act. Apart from noting the said statutory impediment, to be noted in Section 13(1), the more important feature to be noted is that a free hand is given to the secured creditor for the purpose of enforcing any security interest created in favour of the secured creditor, without the intervention of the court or tribunal. The only other relevant aspect contained in the said sub-section is that such enforcement should be in accordance with the provisions of this Act. A reading of Section 13(1), therefore, is clear to the effect that while on the one hand any secured creditor may be entitled to enforce the secured asset created in its favour on its own without resorting to any court proceedings or approaching the Tribunal, such enforcement should be in conformity with the other provisions of the SARFAESI Act."
31. Again, in the case of M. D. Frozen Foods Exports Private Limited and others Vs. Hero Fincorp Limited reported in (2017) 16 SCC 741 one of the issues that arose for consideration of the court was as to whether, resort can be had to section 13 of the SARFAESI Act in respect of debts which had arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the financial institution. A linked question was that whether the lender can invoke the SARFAESI Act where its notification as financial institution under section 2(1)(m) had been issued after the account became NPA ? Answering the first question in the negative, the Supreme Court while referring to a Full Bench decision of the Orissa High Court rendered in the case of Sarthak Builders (P) Ltd. v. Orissa Rural Dev. Corpn. Ltd. reported in AIR 2014 Ori 83 has made the following observations :-
Page No.# 23/27 "38. The Full Bench of the Orissa High Court in Sarthak Builders (P) Ltd. v.
Orissa Rural Dev. Corpn. Ltd. [ AIR 2014 Ori 83 ] has, in fact, succinctly set out this aspect. No doubt, till the respondent was not a "financial institution" within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, it was not a "secured creditor" as defined under Section 2(1)(zd) of the SARFAESI Act and, thus, could not invoke the provisions of the SARSAESI Act. However, the right to proceed under the SARFAESI Act accrued once the notification was issued."
32. What crystallizes from the law laid down in the aforesaid decisions of the Apex Court is that the Act of 2002 provides for an expeditious procedure for the bank or the financial institution to recover its dues without seeking the assistance of the court or a tribunal. However, the proceeding initiated under the SARFAESI Act, 2002 is essentially an enforcement proceeding where a secured creditor is permitted to enforce a security agreement by taking recourse to the provisions of the Act. It is thus axiomatic that existence of a valid security agreement is a pre-requisite for invoking the provisions of the SARFAESI Act, 2002.
33. From a reading of the relevant provisions of the Act of 2002 in the light of the decisions referred to above, what follows is that for invoking the power under section 13 read with section 14 of the Act of 2002, the following conditions must be fulfilled :-
(1) There must be an actionable debt.
(2) There must be a security interest created in favour of the secured
creditor which is enforceable in the eye of law.
(3) The power under the SARFAESI Act can be invoked only by a secured
creditor.
Page No.# 24/27
(4) The possession of the secured asset can be taken over under section
13(4) .
(5) Any action under section 13(4) must be preceded by a notice in writing
from the secured creditor demanding that the borrower discharges its full liability within a period of 60 days from the date of notice.
34. In the case in hand, it appears that having realized the bar in transfer of ownership of land created by Article 371A, the respondent had resorted to a via media for extending the term loan to the writ petitioner and had allowed the Model Village Council to accept the mortgage of the properties of one of the Directors of the writ petitioner company and also to stand as a guarantor of the loan. The power of the Village Council to provide security under section 12 (6) of the Act of 1978, is limited to providing security for repayment of loan obtained by any permanent resident of the village. However, a guarantee provided under section 12(6) would not amount to a "security agreement" under section 2 (zb) unless such interest is created in favour of a secured creditor by following the procedure prescribed by the Act of 2002.
35. In the present case, what transpires from the record is that what was not permissible directly under the law was being sought to be achieved by the respondent indirectly by adopting such measures with a view to circumvent the bar created under Article 371 A of the Constitution. However, in doing so, the respondent had clearly acted in derogation of the Act of 2002. Having regard to the scheme of the Act of 2002, we are of the view that the recourse taken by the respondent in Page No.# 25/27 permitting the writ petitioner to mortgage the assets of its Director with the Village Council was at the cost of invalidating all future action initiated by invoking section 13 (2) and (4) of the Act of 2002. Unless there is a valid security interest created in favour of a secured creditor, the question of enforcing the same by invoking the SARFAESI Act 2002 cannot arise in the eye of law.
36. Coming to the plea of availability of alternative remedy raised by the respondent's counsel, we find that the remedy under section 17 of the Act of 2002 is available only when measures to recover secured debts is taken by a secured creditor and not otherwise. In the present case, we have already held that the debt of the petitioner does not qualify as a secured debt nor is the respondent a secured creditor. If that be so, the Debt Recovery Tribunal, in our view, would not have the jurisdiction to entertain an application under section 17 even if the same was preferred by the writ petitioner. In other words, the remedy provided under section 17 of the Act of 2002, in our opinion, would not be available to the writ petitioner in the facts of the present case. As such, we are of the view that there was no efficacious alternative remedy available to the writ petitioner and therefore, the plea as regards maintainability of the writ petition stands rejected.
37. From a perusal of the pleadings in the writ petition, we find that the impugned notice dated 23.03.2019 issued under section 13(4) of the Act of 2002 as well as the order dated 16.03.2019 has been assailed by taking a plea that the same contravenes Article 371A of the Constitution of India. However, during the course of hearing, learned counsel for the writ petitioner has not canvassed the said plea Page No.# 26/27 before us. Moreover, we find that Article 371A of The Constitution creates a bar only with regard to transfer of ownership of land . Although the ultimate objective of any action initiated under section 13(4) in taking over physical possession of the secured asset is to recover the debt by transferring the same by way of lease, assignment or sale, yet, no such step for selling the assets of the petitioner has been initiated by the respondent till now. The question of applicability of the Act of 2002 may arise if any attempt is made by the financial institution to transfer ownership of land in violation of the mandate of Article 371A of the Constitution. Since for the present, there is no move to transfer the land in favour of any non-member of the Nagaland Village Council and considering the fact that no argument have been addressed on that score, we are inclined to consider the aforesaid aspect of the matter in the present proceeding and leave the issue open to be decided in an appropriate proceeding.
38. For the reasons stated herein above, we are of the opinion that the impugned notices dated 30.06.2011 and 23.03.2019 as well as the order dated 16.03.2019 are wholly illegal and without jurisdiction.
The same are accordingly set aside.
We have taken note of the submission of Mr. Dutta, learned senior counsel for the writ petitioner, that in terms of the order dated 16.03.2019 passed by the learned Deputy Commissioner, Dimapur, Nagaland, the respondent has taken over physical possession of the immoveable properties of the writ petitioner including the cold storage unit as a result of which, the unit constructed by the petitioner has been rendered as inoperative and is being wasted.
Page No.# 27/27 In view of what has been held above, the respondent is directed to restore possession of all the immoveable properties mentioned in the possession notice dated 23.03.2019 including the cold storage unit back to the writ petitioner within a period of 15 (fifteen) days from today.
It is, however, made clear that the determination made here-in-before is limited to the question of validity of the action initiated by the respondent by invoking the SARFAESI Act,2002 in the facts and circumstances of this case and the same does not in any way impinge upon the rights of the respondent to recover its dues from the writ petitioner in accordance with law. This order would, therefore, not come in the way of the respondent in pursuing the proceeding pending before the learned DRT, Guwahati in the form of O.A. No.163/2018 for recovery of the unpaid debt from the borrower or the guarantor.
The writ petition stands allowed to the above extent.
Parties to bear their own cost.
JUDGE JUDGE Comparing Assistant