K. R.
Krishnegowda vs Athorised Officer decided on 27.03.12 by High Court of Karnataka
Comments by DRT Legal Solutions:-
Notice u/s 13(4) is a Must before approaching Magistrate u/s 14
It is
observed that in many cases, after issue of notice under section 13(2) and just
after getting the Objection and Representation from the borrowers, the banks are
approaching the Magistrate without any notice to the borrower. The Magistrate
issues the order for possession and at the last moment, the possession is taken
all of a sudden. As per this judgment, the notice u/s 13(4) as well as paper
publication is mandatory. Hence it is one of the important judgment helpful to
the borrowers. Important portions of the judgment have been marked in Red.
In this
connection it is relevant to submit that past several years we have been
cautioning our clients to be in touch with the office of the Magistrate as well
as to file caveat. This judgment has validated our approach.
Citation
2013 (1) Bankers’ Journal 382, K.R. Krishnegowda vs Authorised Officer
LAWS(KAR)-2012-3-19
AIR(KAR)-2012-0-116
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Judgment
HIGH COURT OF KARNATAKA
Decided on March 27, 2012
W.P.No.43211 of 2011
K.R. Krishnegowda
Appellant
VERSUS
Chief Manager/Authorised Officer, Kotak Mahindra Bank
Respondents
Advocates :- P.Swetha
, H.M.Mariyappa , K.N.Krishna Rao
JUDGEMENT
NAGARATHNA, J. -
(
1.) THIS writ petition raises the issue of the requisite procedure to be
followed prior to taking possession of a secured asset under the provisions of
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (hereinafter referred to as the "Act", for the sake
of brevity).
(
2.) THE petitioners are debtors, who have filed this writ petition, being
aggrieved by the order dated 06.09.2011 passed by the Debt Recovery Appellate
Tribunal, Chennai, (DRAT) in R.A.(S.A.)/97/2010, as well as the order dated
27.12.2008, passed by the Deputy Commissioner-cum-District Magistrate, in
respect of property belonging to the second petitioner, which is situated at
B.S.K. III Stage, Bangalore, invoking the provisions of Sections 13(4) and 14 of
the Act, consequent upon the notice issued under Section 13(2) of the Act. Since
the petitioners had failed to repay the debt to the respondent-Bank, notice
under Section 13(2) of the Act was issued to the first petitioner on 02.07.2008,
who is the principal borrower as well as to the second petitioner who is the
guarantor for the loan of Rs.20.00 lakh which was disbursed subject to deposit
of title deeds by entering into a registered mortgage deed dated 24.01.2006. THE
said notice was issued on the premise that there was non-repayment of the loan.
THE same was replied to on 03.08.2008.
The grievance of the petitioners is that after receipt of the reply, the
respondent-Bank without complying with the procedure prescribed under Section
13(4) of the Act took steps under Section 14 for the purpose of taking
possession. More particularly, the contention of the petitioners is that
possession was sought to be taken without issuing any prior notice. Therefore,
the order of the Deputy Commissioner/District Magistrate dated 27.12.2008 was
assailed in S.A.No.283/2009 before the Debts Recovery Tribunal (DRT) by order
dated 20.07.2009 contending that there was non-compliance of the principles of
natural justice.
Therefore, three months time was granted to the petitioners to regularise the
loan account and at the same time, reserving liberty to the respondent-Bank, to
issue fresh possession notice in accordance with law before taking recourse to
Section 14 of the Act. The said order was assailed by the respondent-Bank before
the DRAT, which set aside the order of the DRT restraining the bank from
invoking the provisions of Section 14 of the Act. It is against the said order
that this writ petition has been filed.
The respondent bank has filed statement of objections seeking dismissal of the
writ petition.
(
3.) WE have heard the learned counsel for the parties.
It is contended on behalf of the petitioners that Chapter III of the Act deals
with enforcement of security interest under Section 13(2). A notice with regard
to repayment of secured debt has to be issued in case there is a default and the
account of the borrowers is classified as a non-performing asset, granting 60
days time from the date of the notice to repay in full the liabilities to the
secured creditor, failing which rights under sub-section (4) of Section 13 could
be enforced. In the instant case, no doubt, notice under Section 13(2) has been
issued, to which a reply has also been given. Not being satisfied with the reply
given by the petitioners/borrowers, respondent-Bank has taken recourse to take
possession of the secured asset i.e., the immovable property at BSK III Stage,
Bangalore-84. However, in doing so, there has been total non-compliance of
principles of natural justice as well as the procedure envisaged under the Act
as well as the Rules framed under the Act.
(
4.) DRAWING our attention to Rules 4 and 8 of the Security Interest
(Enforcement) Rules, 2002 (hereinafter referred to as the "Rules"), it is
contended that possession of the secured asset can be taken by issuance of a
notice to the borrowers or by affixing it on the place of the property. The said
notice has also to be published in two leading newspaper in one vernacular
language seven days prior to the date of taking possession and thereafter
possession of the immovable property can be taken. However, in the instant case,
what the respondent-Bank has resorted to is filing an application before the
Deputy Commissioner / District Magistrate under Section 14 who has directed
physical possession of the property be taken. That in the absence of issuance of
any notice as prescribed under the Rules before initiating action under
sub-section (4) of Section 13 of the Act and the District Magistrate also
proceeding to pass orders for taking of physical possession without issuance of
notice to the petitioners under Section 14 of the Act is in total violation of
principles of natural justice. Therefore, learned counsel for the petitioners,
relying on certain decisions, has contended that the action of the
respondent-Bank being a transgression in law, the same requires to be setaside.
Per contra, counsel for the respondent-Bank has sought to justify the action
initiated by the Bank by stating that the Section 13 or the Rules do not
contemplate issuance of notice before taking possession, but after the
possession is taken, notice would be issued prior to sale of the secured asset
and therefore, there is no infraction of the Act or the Rules.
Before proceeding to answer the issue raised in this writ petition, it would be
useful to extract Sections 13, 14 and 17 of the Act and Rules 4 and 8 of the
Rules:
"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 the court or tribunal, by such creditor in
accordance with the provisions of this Act. (2) Where by 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). (3) The notice referred
to in subsection (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 subsection (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 thereasons 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
or the debt;] (c) appoint any person (hereinafter referred to as the manager),
to manage the secured assets the possession of which has 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. (5) Any payment made by
any person referred to in clause (d) of sub-section (4) to the secured creditor
shall give such person a valid discharge as if he has made payment to the
borrower.(6) Any transfer of secured asset after taking possession thereof or
take over of management under sub-section (4), by the secured creditor or by the
manager on behalf of the secured creditors shall vest in the transferee all
rights in, or in relation to, the secured asset transferred as if the transfer
had been made by the owner of such secured asset. (7) Where any action has been
taken against a borrower under the provisions of subsection (4), all costs,
charges and expenses which, in the opinion of the secured creditor, have been
properly incurred by him or any expenses incidental thereto, shall be
recoverable from the borrower and the money which is received by the secured
creditor shall, in the absence of any contract to the contrary, be held by him
in trust, to be applied, firstly, in payment of such costs, charges and expenses
and secondly, in discharge of the dues of the secured creditor and the residue
of the money so received shall be paid to the person entitled thereto in
accordance with his rights and interests. (8) If the dues of the secured
creditor together with all costs, charges and expenses incurred by him are
tendered to the secured creditor at any time before the date fixed for sale or
transfer, the secured asset shall not be sold or transferred by the secured
creditor, and no further step shall be taken by him for transfer or sale of that
secured asset (9) In the case of financing of a financial asset by more than one
secured creditors or joint financing of a financial asset by secured creditors,
no secured creditor shall be entitle to exercise any or all the rights conferred
on him under or pursuant to sub-section (4) unless exercise of such right is
agreed upon by the secured creditors representing not less than three-fourth in
value of the amount outstanding as on a record date and such action shall be
binding on all the secured creditors: Provided that in the case of a company in
liquidation, the amount realised from the sale of secured assets shall be
distributed in accordance with the provisions of Section 529A of the Companies
Act, 1956(1 of 1956): Provided further that in the case of a company being wound
up on or after the commencement of this Act, the secured creditor of such
company, who opts to realise his security instead of relinquishing his security
and proving his debt under proviso to sub-section (1) of section 529 of the
Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured
assets after depositing the workmen's dues with the liquidator in accordance
with the provisions of section 529A of that Act: Provided also that the
liquidator referred to in the second proviso shall intimate the secured
creditors the workmen's dues in accordance with the provisions of section 529A
of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be
ascertained, the liquidator shall intimate the estimated amount of workmen's
dues under that section to the secured creditor and in such case the secured
creditor may retain the sale proceeds of the secured assets after depositing the
amount of such estimated dues with the liquidator: Provided also that in case
the secured creditor deposits the estimated amount of workmen's dues, such
creditor shall be liable to pay the balance of the workmen's dues or entitled to
receive the excess amount, if any, deposited by the secured creditor with the
liquidator. Provided also that the secured creditor shall furnish an undertaking
to the liquidator to pay the balance of the workmen's dues, if any.
Explanation:- For the purposes of this sub-section, (a) "record date" means the
date agreed upon by the secured creditors representing not less than
three-fourth in value of the amount outstanding on such date; (b) "amount
outstanding" shall include principal, interest and any other dues payable by the
borrower to the secured creditor in respect of secured asset as per the books of
account of the secured creditor. (10) Where dues of the secured creditor are not
fully satisfied with the sale proceeds of the secured assets, the secured
creditor may file an application in the form and manner as may be prescribed to
the Debts Recovery Tribunal having jurisdiction or a competent court, as the
case may be, for recovery of the balance amount from the borrower. (11) Without
prejudice to the rights conferred on the secured creditor under or by this
section, the secured creditor shall be entitled to proceed against the
guarantors or sell the pledged assets without first taking any of the measures
specified in clauses (a) to (d) of subsection (4) in relation to the secured
assets under this Act. (12) The rights of a secured creditor under this Act may
be exercised by one or more of his officers authorised in this behalf in such
manner as may be prescribed. (13) No borrower shall, after receipt of notice
referred to in subsection (2), transfer by way of sale, lease or otherwise
(other than in the ordinary course of his business) any of his secured assets
referred to in the notice, without prior written consent of the secured
creditor. 14. Chief Metropolitan Magistrate or District Magistrate to assist
secured creditor in taking possession of secured asset: (1) Where the possession
of any secured asset is required to be taken by the secured creditor or if any
of the secured asset is required to be sold or transferred by the secured
creditor under the provisions of this Act, the secured creditor may, for the
purpose of taking possession or control of any such secured asset, request, in
writing, the Chief Metropolitan Magistrate or the District Magistrate within
whose jurisdiction any such secured asset or other documents relating thereto
may be situated or found, to take possession thereof, and the Chief Metropolitan
Magistrate or, as the case may be, the District Magistrate shall, on such
request being made to him- (a) take possession of such asset and documents
relating thereto; and (b) forward such assets and documents to the secured
creditor. (2) For the purpose of securing compliance with the provisions of
subsection (1), the Chief Metropolitan Magistrate of the District Magistrate may
take or cause to be taken such steps and use, or cause to be used, such force,
as may, in his opinion, be necessary. (3) No act of the Chief Metropolitan
Magistrate or the District Magistrate done in pursuance of this section shall be
called in question in any court or before any authority. 17. Right to appeal:-
(1) Any person (including borrower), aggrieved by any of the measures referred
to in sub-section (4) of section 13 taken by the secured creditor or his
authorised officer under this Chapter, [may make an application along with such
fee, as may be prescribed] to the Debts Recovery Tribunal having jurisdiction in
the matter within forty five days from the date on which such measures had been
taken: [Provided that different fees may be prescribed for making the
application by the borrower and the person other than the borrower].
[Explanation - For the removal of doubts it is hereby declared that the
communication of the reasons to the borrower by the secured creditor for not
having accepted his representation or objection or the likely action of the
secured creditor at the stage of communication of reasons to the borrower shall
not entitle the person (including borrower) to make an application to the Debts
Recovery Tribunal under sub-section (1) of section 17]. [(2) The Debts Recovery
Tribunal shall consider whether any of the measures referred to in sub-section
(4) of section 13 taken by the secured creditor for enforcement of security are
in accordance with the provisions of this Act and the rules made thereunder. (3)
If, the Debts Recovery Tribunal, after examining the facts and circumstances of
the case and evidence produced by the parties, comes to the conclusion that any
of the measures referred to in sub-section (4) of section 13, taken by the
secured creditor are not in accordance with the provisions of this Act and the
rules made thereunder, and require restoration of the management of the secured
assets to the borrower or restoration of possession of the secured assets to the
borrower, it may by order, declare the recourse to any one or more measures
referred to in sub-section (4) of section 13 taken by the secured assets as
invalid and restore the possession of the secured assets to the borrower or
restore the management of the secured assets to the borrower, as the case may
be, and pass such order as it may consider appropriate and necessary in relation
to any of the recourse taken by the secured creditor under sub-section (4) of
section 13. (4) If, the Debts Recovery Tribunal declares the recourse taken by a
secured creditor under sub-section (4) of section 13, is in accordance with the
provisions of this Act and the rules made thereunder, then, notwithstanding
anything contained in any other law for the time being in force, the secured
creditor shall be entitled to take recourse to one or more of the measures
specified under sub-section (4) of section 13 to recover his secured debt. (5)
Any application made under sub-section (1) shall be dealt with by the Debts
Recovery Tribunal as expeditiously as possible and disposed of within sixty days
from the date of such application: Provided that the Debts Recovery Tribunal
may, from time to time, extend the said period for reasons to be recorded in
writing, so, however, that the total period of pendency of the application with
the Debts Recovery Tribunal, shall not exceed four months from the date of
making of such application made under subsection (1). (6) If the application is
not disposed of by the Debts Recovery Tribunal within the period of four months
as specified in sub-section (5), any party to the application may make an
application, in such form as may be prescribed, to the Appellate Tribunal for
directing the Debts Recovery Tribunal for expeditious disposal of the
application pending before the Debts Recovery Tribunal and the Appellate
Tribunal may, on such application, make an order for expeditious disposal of the
pending application by the Debts Recovery Tribunal. (7) Save as otherwise
provided in this Act, the Debts Recovery Tribunal shall, as far as may be,
dispose of application in accordance with the provisions of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the
rules made thereunder:] The Security Interest (Enforcement) Rules, 2002 8. Sale
of immovable secured assets:- (1) Where the secured asset is an immovable
property, the authorised officer shall take or cause to be taken possession, by
delivering a possession notice prepared as nearly as possible in Appendix IV to
these rules, to the borrower and by affixing the possession notice on the outer
door or at such conspicuous place of the property. (2) [The possession notice as
referred to in sub-rule (1) shall also be published, as soon as possible but in
any case not later than seven days from the date of taking possession, in two
leading newspapers], one in vernacular language having sufficient circulation in
that locality, by the authorised officer. (3) In the event of possession of
immovable property is actually taken by the authorised officer, such property
shall be kept in his own custody or in the custody of any person authorised or
appointed by him, who shall take as much care of the property in his custody as
a owner of ordinary prudence would, under the similar circumstances, take of
such property. (4) The authorised officer shall take steps for preservation and
protection of secured assets and insure them, if necessary, till they are sold
or otherwise disposed of. (5) Before effecting sale of the immovable property
referred to in sub-rule (1) of rule 9, the authorised officer shall obtain
valuation of the property from art approved valuer and in consultation with the
secured creditor, fix the reserve price of the property and may sell the whole
or any part of such immovable secured asset by any of the following methods:-
(a) by obtaining quotations from the persons dealing with similar secured assets
or otherwise interested in buying the such assets; or (b) by inviting tenders
from the public; (c) by holding public auction; or (d) by private treaty. (6)
The authorised officer shall serve to the borrower a notice of thirty days for
sale of the immovable secured assets, under sub-rule (5): Provided that if the
sale of such secured asset is being effected by either inviting tenders from the
public or by holding public auction, the secured creditor shall cause a public
notice in two leading newspapers one in vernacular language having sufficient
circulation in the locality by setting out the terms of sale, which shall
include,- (a) the description of the immovable property to be sold, including
the details of the encumbrances known to the secured creditor; (b) the secured
debt for recovery of which the property is to be sold; (c) reserve price, below
which the property may not be sold; (d) time and place of public auction or the
time after which sale by any other mode shall be completed; (e) depositing
earnest money as may be stipulated by the secured creditor; (f) any other thing
which the authorised officer considers it material for a purchaser to know in
order to judge the nature and value of the property. (7) Every notice of sale
shall be affixed on a conspicuous part of the immovable property and may, if the
authorised officer deems if fit, put on the web-site of the secured creditor on
the Internet. (8) Sale by any method other than public auction or public tender,
shall be on such terms as may be settled between the parties in writing".
(
5.) SUB -section (1) of Section 13 begins with a non-obstante clause which
enables the secured creditor to enforce any security interest created in its
favour without the intervention of the court or the tribunal in accordance with
the provisions of the Act. SUB-section (2) of Section 13 prescribes the issuance
of a notice granting a period of 60 days time from the date of the notice for
the discharge of the liabilities to the secured creditor by the borrower,
failing which the secured creditor is entitled to exercise all or any of the
rights under sub-section (4). The contents of notice are 'mentioned in
sub-section (3) of Section 13. SUB-Section (3A) of Section 3, which has been
inserted by an amendment with effect from 11.11.2004, enables a borrower to make
a representation or object to the notices issued under sub-section (2) of
Section 13 on consideration of which, communication of the non-acceptance of the
same shall have to be issued to the borrower, which however, is not justiciable
as per the proviso thereto. In case the borrower fails to discharge his
liability in full within the period of 60 days as specified in sub-section (2)
of Section 13, then the secured creditor may take recourse to one or more of the
measures stated in sub-section (4) of Section 13. For the purposes of this case,
Clause (a) of sub-section (4) is relevant i.e., taking possession of the secured
asset of the borrower including the right to transfer by way of lease,
assignment or sale for realising the secured asset. In fact, the management of
the business of a borrower could also be taken over as also a manager could be
appointed to manage the secured assets, possession of which is taken over by the
secured creditor or a borrower could be directed to pay so much of the money as
is sufficient to pay the secured debt. After possession of the secured asset is
taken, transfer of the same by the secured creditor or by the manager on behalf
of the secured creditors shall vest with the transferee as if it is a transfer
made by the owner as secured asset. Under sub-section (11) of Section 13, the
rights conferred on the secured creditor in Clauses (a) to (d) of sub-section
(4) could be exercised against the guarantors also. Once a notice is received
under sub-clause (2), no borrower can transfer by way of sale, lease or
otherwise the secured assets referred to in the notice without prior written
consent of the secured creditor as per sub-section (13) of section 13.
(
6.) SECTION 14 states that if possession of any secured asset is required to be
taken by the secured creditor or if any secured asset is required to be sold or
transferred, then the secured creditor may, for the purpose of taking possession
or control or any such secured asset, request in writing to the Chief
Metropolitan Magistrate or the District Magistrate within whose jurisdiction any
such secured asset or other documents relating thereto is situated or found, to
take possession thereof and the Chief Metropolitan Magistrate or the District
Magistrate as the case may be, on such request being made can take possession of
such assets and forward such assets and documents to the secured creditor. Under
sub-section (3) of SECTION 14, it is stated that the action of the Chief
Metropolitan Magistrate or the District Magistrate shall not be called in
question, in any court or before any authority.
Section 17 prescribes the right of appeal to any person (including a borrower),
being aggrieved by any of the measures referred to in sub-section (4) of section
13 taken by the secured creditor or his authorised officer under Chapter III, by
making an application to the DRT having jurisdiction in the matter within
forty-five days from the date on which such measures have been taken. The DRT
can consider whether any of the measures referred to in sub-section (4) of
section 13 taken by the secured creditor for enforcement of security is in
accordance with the provisions of the Act and the Rules. If the said actions are
not in accordance with the requirements of the Act and the Rules, the DRT can
inter alia order restoration of possession of the secured assets to the borrower
by holding that the measures taken are invalid and thereby restored the
possession of the secured assets to the borrower and pass such order as may be
necessary with regard to the recourse taken by the secured creditor under
sub-section (4) of section 13.
Rules 3 and 3A of the Rules prescribe the procedure to be adopted with regard to
issuance of a demand notice under sub-section (2) of Section 13. Under Rule 4,
it is stated that if the amount mentioned in the demand notice is not paid
within the time specified, then the authorised officer can proceed to realise
the amount by adopting any one or more of the measures specified in sub-section
(4) of Section 13 of the Act for taking possession of movable property, which
aspect is not relevant for the present case. Rule 8 deals with the steps to be
taken before sale of a secured asset including the taking of possession, as far
as immovable secured assets are concerned. The authorised officer shall take or
cause to be taken possession, by delivering a possession notice prepared as
nearly as possible in Appendix IV to the Rules, to the borrower and by affixing
the same on the outer door or at such conspicuous place of the property.
Appendix IV is infact worded as if a possession notice has to be issued after
possession has been taken of the property, but sub-rule (1) of Rule 8 states
that the possession notice to be issued must be as nearly as possible as
Appendix IV to the Rules which would manifest an intention to take possession
indicating the date of taking possession or otherwise the mere issuance of a
notice would render the notice to be vague and purposeless. Sub-rule (2)
prescribes the publication of the possession notice seven days prior to the
"date of taking possession" in two leading newspapers, one of which is in
vernacular language, having sufficient circulation in the locality by the
authorised officer. Therefore issuance of a notice to the borrower as well as by
news paper publication is expressly provided and hence would have to be complied
with by a secured creditor. Sub-rule (3) states that in the event of possession
of immovable property is actually taken by the authorised officer, such property
shall be kept in his own custody or in the custody of any person authorised or
appointed by him, who shall take as much care of the property in his custody as
an owner of ordinary prudence would, under the similar circumstances, take care
of such property till they are sold or otherwise disposed of. Sub-rules (5) to
(8) of Rule 8 and as well as Rule 9 pertain to the steps to be taken prior to
and during the process of sale of the secured assets.
(
7.) ON a conspectus reading of sub-section (4) of Section 13, Section 14 with
Rule 8, the question that would arise is, as to the stage at which notice under
Rule 8 would have to be issued, as the contention of the counsel for the
respondent is that the notice regarding possession would be issued after an
order under Section 14 is passed and possession is taken and before sale. When
once there is non-compliance of the demand made under sub-section (2) of Section
13, steps could be initiated under sub-section (4) by taking possession of the
secured asset. The question is, as to whether the borrower ought to know as to
when exactly possession of the secured asset would be taken, when once the
demand under sub-section (2) of Section 13 is not complied with by the borrower.
Having regard to sub-section (13) read with sub-section (2) of Section 13 would
imply that the receipt of notice under sub-section (2) results in a virtual
attachment of the secured asset. If the demand made in Sub-section (2) of
Section 13 is not complied with and the representation as well as the objections
filed by the borrower are also not accepted and communicated to the borrower,
then in that case, steps could be initiated under sub-section (4) of Section 13.
Having regard to the fact that sub-section (6) of Section 13 enables a secured
creditor to transfer the secured asset after taking possession would imply that
the possession of the secured asset vests with the secured creditor prior to any
such transfer. The procedure for taking possession or control of the secured
asset by the secured creditor is envisaged in Section 14 after the date
mentioned in the possession notice at which stage, it is not necessary to
actually inform or indicate to the borrower, the taking of possession by secured
creditor. Section 14 in fact does not prescribe an opportunity of hearing the
borrower before an order is passed with regard to taking of possession. But we
have held that if possession has to be taken by the secured creditor, then in
that event, the borrower must be informed or intimated about the taking of
possession, more precisely, the actual date on which possession would be taken
over from the borrower by the secured creditor which would have to be indicated
to the former. It is in this regard, that insofar as immovable property is
concerned, sub-rules (1) and (2) of Rule 8 prescribe notices or intimation to
the borrower in two ways; (i) by delivery of possession notice and (ii) by
newspaper publication, clearly indicating the date on which possession of the
secured asset would to be taken by the secured creditor. If on the date
indicated in the possession notice, the secured creditor is unable to take
possession of the secured asset, then in that case, recourse may be had to
Section 14 of the Act, at which stage a further notice to the borrower is not
envisaged under the said section.
Therefore, what emerges is the mandatory requirement under the Act read with the
Rules, that in order to enable the borrower to know the date on which possession
would be taken by the secured creditor, sub-rules (1) and (2) of Rule 8 would
have to be complied with by issuance of notices indicating the date on which
possession would be taken. There is another purpose for issuing the notice prior
to taking possession and that is, to enable the borrower to discharge the
liability to the secured creditor. Also a 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 can pay the secured creditor, so much of the money as is
sufficient to pay the secured debt as per clause (d) of sub-section (4) of
Section 13 read with sub-section (5) thereof. We have also borne in mind the
fact that on an application being filed under Section 14 of the Act before the
Magistrate, there is no provision for issuance of notice to the borrower before
an order to take possession is issued. We are, therefore, of the considered view
that before initiating action under sub-section (4) of Section 13 of the Act,
the issuance of notice as per sub-rules (1) and (2) of Rule 8 has to be complied
with indicating the date on which possession of the property would be taken from
the borrower by the secured creditor. If on the said date possession of the
secured asset cannot be taken or it is not surrendered by the borrower, then the
secured creditor can take recourse to Section 14 of the Act and take possession
of the secured immovable property, of course, we hasten to add that the Notices
issued under sub-Rules (1) and (2) of Rule 8 cannot be assailed per se as the
purpose of issuance of such notices is only to indicate the date of taking
possession. 15(a)
Therefore the issuance of notice in terms of Rule 8 of the Rules is a mandatory
requirement having regard to the purpose of following the principles of natural
justice so as to prevent miscarriage of justice and so as to ensure fair play in
action. Issuance of notice prior to initiation of action under sub-section 4 of
Section 13 is thus a mandatory procedural requirement, the non-observance of
which would invalidate the exercise of power.
The taking of possession of a secured asset of a borrower under sub-section 4 of
Section 13 is a drastic measure and the exercise of such a power would
definitely visit the borrower with civil consequences. In Mohinder Singh Gill
versus The Chief Election Commissioner [AIR 1978 SC 851], the Supreme Court has
opined that civil consequences would cover not merely civil liberties and
personal rights of a person but also material deprivations as well as right to
property. Therefore, we have held that the issuance of notices in terms of Rule
8 of the Rules is a necessary requirement prior to taking possession, although
Rule 8 speaks of sale of immovable secured assets, even if eventually after
taking possession the secured assets are not sold.
(
8.) IN this context, we are fortified in our view by the following decisions,
which lay emphasis on compliance with the principles of Natural Justice under
various provisions of the Act and Rules under considerations.
(a) IN the case of "Mardia Chemicals Ltd. & others Versus Union of INdia &
others (2004) 4 SCC 311], the Supreme Court has emphasised the need to maintain
transparency and fairness while dealing with a defaulting borrower in the
following words: "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
subsection (4) of Section 13 in case of non-compliance with 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 subsection (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 subsection (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 not 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 provided 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 for not accepting the objections taken by the
secured borrower may not be taken to give 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 Debts 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 the 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 preset case, in view 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 of the developments
immediately before taking measures under subsection (4) of Section 13 of the
Act. It will also cater to 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. 48. The next safeguard available to a
secured borrower within the framework of the Act is to approach the Debt
Recovery Tribunal under Section 17 of the Act. Such a right accrues only after
measures are taken under sub-section (4) of Section 13 of the Act".
(b) IN the case of M/s. Transcore Versus Union of INdia &another (AIR 2007 SC
712), the Supreme Court has discussed the inter play of Section 13(4), and 14
with Rules 8 and 9 in the following manner: 55. The word possession is a
relative concept. It is not an absolute concept. The dichotomy between symbolic
and physical possession does not find place in the Act. As stated above, there
is a conceptual distinction between securities by which the creditor obtains
ownership of or interest in the property concerned (mortgages) and securities
where the creditor obtains neither an interest in nor possession of the property
but the property is appropriated to the satisfaction of the debt (charges).
Basically, the NPA Act deals with the former type of securities under which the
secured creditor, namely, the bank/FI obtains interest in the property
concerned. It is for this reason that the NPA Act ousts the intervention of the
courts/Tribunals.: 56. Keeping the above conceptual aspect in mind, we find that
Section 13(4) of the NPA Act proceeds on the basis that the borrower, who is
wider a liability has failed to discharge his liability within the period
prescribed under Section 13(2), which enables the secured creditor to take
recourse to one of the measures, namely, taking possession of the secured assets
including the right to transfer by way of lease, assignment or sale for
realizing the secured assets. Section 13(4-A) refers to the word "possession"
simpliciter. There is no dichotomy in sub-section (4-A) as pleaded on behalf of
the borrowers. Under Rule 8 of the 2002 Rules, the authorised officer is
empowered, to take possession by delivering the possession notice prepared as
nearly as possible in Appendix IV to the 2002 Rules. That notice is required to
be affixed on the property. Rule 8 deals with sale of immovable secured assets.
Appendix IV prescribes the form of possession notice. It inter alia states that
notice is given to the borrower who has failed to repay the amount informing him
and the public that the bank/FI has taken possession of the property under
Section 13(4) read with Rule 9 of the 2002 Rules. Rule 9 relates to time of
sale, issue of sale certificate and delivery of possession. Rule 9(6) states
that on confirmation of sale, if the terms of payment are complied with, the
authorised officer shall issue a sale certificate in favour of the purchaser in
the form given in Appendix V to the 2002 Rules. Rule 9(9) states that the
authorised officer shall deliver the property to the buyer free from all
encumbrances known to the secured creditor or not known to the secured creditor
(Emphasis supplied). Section 14 of the NPA Act states that where the possession
of any secured asset is required to be taken by the secured creditor or if any
of the secured asset is required to be sold or transferred, the secured creditor
may, for the purpose of taking possession, request in writing to the District
Magistrate to take possession thereof. Section 17(1) of NPA Act refers to right
of appeal. Section 17(3) states that if the DRT as an appellate authority after
examining the facts and circumstances of the case comes to the conclusion that
any of the measures under Section 13(4) taken by the secured creditor are not in
accordance with the provisions of the Act, it may by order declare that the
recourse taken to any one or more measures is invalid, and consequently, restore
possession to the borrower and can also restore management of the business of
the borrower. Therefore, 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 the DRT is entitled to put the clock back by
restoring the status quo ante. Therefore, it cannot be said that if possession
is taken before confirmation of sale, the rights of the borrower to get the
dispute adjudicated upon is defeated by the authorised officer taking
possession. As stated above, the NPA Act provides for recovery of possession by
non-adjudicatory process, therefore, to say that the rights of the borrower
would be defeated without adjudication would be erroneous. Rule 8, undoubtedly,
refers to sale of immovable secured asset However, Rule 8(4) indicates that
where possession is taken by the authorised officer before issuance of sale
certificate under Rule 9, the authorised officer shall take steps for
preservation and protection of secured assets till they are sold or otherwise
disposed of Under Section 13(8), if the dues of the secured creditor together
with all costs, charges and expenses incurred by him are tendered to the
creditor before the date fixed for sale or transfer, the asset shall not be sold
or transferred. The costs, charges and expenses referred to in Section 13(8)
will include costs, charges and expenses which the authorised officer incurs for
preserving and protecting the secured assets till they are sold or disposed of
in terms of Rule 8(4). Thus, Rule 8 deals with the stage anterior to the
issuance of sale certificate and delivery of possession under Rule 9. Till the
time of issuance of sale certificate, the authorised officer is like a court
receiver under Order XL, Rule 1, CPC. The court receiver can take symbolic
possession and in appropriate cases where the court receiver finds that a third
party interest is likely to be created overnight, he can take actual possession
even prior to the decree. The authorized officer under Rule 8 has greater powers
man even a court receiver as security interest in the property is already
created in favour of the banks/Fls. That interest needs to be protected.
Therefore, Rule 8 provides that till issuance of the sale certificate under Rule
9, the authorized officer shall take such steps as he deems fit to preserve the
secured asset. It is well settled that third party interests are created
overnight and in very many cases those third parties take up the defence of
being a bonafide purchaser for value without notice. It is these types of
disputes which are sought to be avoided by Rule 8 read with Rule 9 of the 2002
Rules. IN the circumstances, the drawing of dichotomy between symbolic and
actual possession does not find place in the scheme of the NPA Act read with the
2002 Rules. (c) IN the case of United Bank of INdia versus Satyawati Tondon and
others [(2010) 8 SCC 110], though the issue was regarding availing of remedy
under Section 17 of the Act rather than filing a writ petition under Article 226
of the Constitution of INdia, at Paragraphs 41 and 42 reference to notices under
sub-section (2) and (4) and Section 13 being issued before filing an application
under Section 14 of the Act has been made. IN the said case, notice prior to
taking action under sub-section (4) of Section 13 had been issued and
thereafter, Section 14 had been invoked. IN the said case, it was held that
guarantor could also avail the remedy provided under Section 17 of the Act. (d)
Similarly, in the case of Kanaiyalal Lalchand Sachdev and others versus State of
Maharashtra and others [(2011) 2 SCC 782], while holding that an efficacious,
alternative remedy is provided under Section 17 of the Act, to assail an action
under sub-section (4) of Section 13 of the Act, it is noticed that after the
issuance of notice under sub-section (2) of Section 13, a public notice in the
News Papers had been issued regarding the same and thereafter, application was
filed under Section 14 of the Act, for taking possession of the secured assets.
After an order was passed under Section 14, another notice was issued to the
borrowers to handover possession which was challenged in the writ petition.
While holding that a writ petition was not maintainable, the Supreme Court
nevertheless noted that News Paper publication prior to taking of possession had
been issued in the said case. (e) IN case of Authorised Officer, INdian Overseas
Bank and Another versus Ashok Saw Mill [(2009) 8 SCC 366], it has been held
thus:- "36. The intention of the legislature is, therefore, clear that while the
banks and financial institutions have been vested with stringent powers for
recovery of their dues, safeguards have also been provided for rectifying any
error or wrongful use of such powers by vesting the DRT with authority after
conducting an adjudication into the matter to declare any such action invalid
and also to restore possession even though possession may have been made over to
the transferee. 37. The consequences of the authority vested in the DRT under a
sub-section (3) of Section 17 necessarily implies that the DRT is entitled to
question the action taken by the secured creditor and the transactions entered
into by virtue of Section 13(4) of the Act. The legislature by including
sub-section (3) in Section 17 has gone to the extent of vesting the DRT with
authority to even set aside a transaction including sale and to restore
possession to the borrower in appropriate cases. Resultantly, the submissions
advanced by Mr Gopalan and Mr Altaf Ahmed that the DRT has no jurisdiction to
deal with a post-Section 13(4) situation, cannot be accepted." The secured
creditor can also by notice in writing, call upon a person who has previously
acquired any of the secured assets from the borrower to pay the money, which may
be sufficient to discharge the liability of the borrower. (f) IN the case of
Subhash Chandra Panda Versus State of Orissa & others (AIR 2008 Orissa 88), the
Division Bench while holding that the financial institution concerned had no
jurisdiction to invoke Section 13(2) of the Act, nevertheless opined that notice
under section 13(4) has to be issued before the borrower is dispossessed. "23.
From the discussion which has been made hereinabove, it is clear that on the
dates on which the alleged transactions were made between the petitioner and the
opposite party No.6, it was not a financial institution within the meaning of
Securitization Act and it could not invoke Section 13. That being the position,
the notice which is issued to the petitioner under Section 13(2) of the
Securitization Act is without jurisdiction. It is highly doubtful whether any
notice under Section 13(4) was given. Even if it is given for the same reason,
it is wholly without jurisdiction and the proceeding on the basis of which the
petitioner has been dispossessed from his residential property is illegal and
without any authority of law. Thus, the entire action of opposite party No.6 is
unauthorised, illegal and bad in law." (g) The case of Mrs. Sunanda Kumari &
another Versus Standard Chartered Bank [(2007 135 Comp. Cases 604 (Karn.) (D.B.
of this Court) has dealt with the aspect as to whether the Magistrate has to
issue notice before passing an order under section 14 of the Act and has
answered in the negative. "8. Regarding the question whether the Magistrate is
required to issue notice to the borrower before passing an order under section
14, we are of the view that in the absence of any provision in the Act or the
Rules framed thereunder requiring such notice, the Magistrate is not required to
issue any notice to the borrower before passing an order under section 14.
Learned counsel for the petitioners contended that even though there is no
specific provision in the Act or the rules requiring such notice, the principles
of natural justice require that a notice should be issued by the Magistrate
before passing an order under section 14. We are not inclined to agree with the
above contention. The borrower is given a notice under sub-section (2) of
section 13 which specifically says that if the liabilities are not discharged in
full within 60 days from the date of notice the secured creditor shall be
entitled to all or any of the rights as mentioned in sub-section (4) of section
13 of the Act. Again the borrower is given a reply under subsection (3A) stating
why his representation or objection against the notice under sub-section (2) is
not acceptable and untenable. Thus, the borrower has sufficient notice regarding
the steps being initiated, the amount sought to be recovered and the
consequences of not discharging the liability within the period stipulated in
the notice under sub-section (2). IN other words, the borrower is informed in
advance that if the liabilities are not discharged within the stipulated period,
the secured creditor will be resorting to any of the remedies available under
sub-section (4) of section 13 of the Act and may file an application under
section 14 and the Magistrate may pass an order under section 14. IN our view,
the above safeguards satisfy the principles of natural justice and no further
notice by the Magistrate is required before passing an order under Section 14."
However, in none of the aforesaid decisions is there a direct reference to the
stage at which notice and publication have to be taken prior to taking
possession. Of course, in the context of Rule 9 of the Rules dealing with sale
and delivery of possession, a discussion is made with regarding to Rule 8 and
Section 14 in M/s Transcore. But, in every case where possession of the secured
asset is taken would not result in a sale of the same. However, notice of taking
possession must be given to the borrower, indicating the date of taking
possession and thereafter steps could be taken to take possession, if necessary
by invoking Section 14 of the Act. It is reiterated that at the stage of
considering the application filed by the borrower under Section 14, notice need
not be issued to the borrower by the Magistrate.
In that view of the matter compliance of sub-rule (1) and (2) of Rule 8 of the
Rules is a mandatory requirement before possession of the secured asset is
sought to be taken by a financial institution. Any violation or infraction of
Section 13(4) of the Act by the financial institution could be called in
question by way of filing an appeal under section 17 of the Act, and the DRT has
the power to restore possession to the borrower.
(
9.)
IN
the instant case, indubitably, no notice has been issued under sub-rule (1) or
any publication has been made under sub-rule (2) of Rule 8 of the Rules,
informing the petitioners on which date possession of the secured asset would be
taken. Instead Section 14 has been directly resorted to by the respondent, which
is clearly without the mandate of the law and is an infraction of the same.
Therefore, there has been violation of the principles of natural justice in the
instant case. Hence, the order passed on 27.12.2008 by the Deputy Commissioner
is quashed. Consequently, the order passed by the DRAT is also quashed and the
order of the DRT is restored. The respondent is directed to comply with
sub-rules (1) and (2) of Rule 8 by indicating the date on which possession of
the secured assets would be taken and thereafter, proceed in accordance with
law.
(
10.) IN the result, the writ petition is allowed. No costs.
DRT Judgments Favourable to Borrowers and Guarantors – Now Full text of such
Judgments is being provided on this Web Site with Important Portions marked in Red
vide link
DRT Judgments Favourable / Useful to Borrowers
We have been providing citations and extracts of judgments favourable / useful
to Borrowers and Guarantors. Subsequently several borrowers approached us to
provide the full text of the said judgments. Hence we have now started
providing full texts of such judgments on our this web site itself as above. Since the
advocates are quite busy in their routine work, we have marked the important
portion of such judgments in Red. Thus with passage of time, a library of
important judgments with full text in soft copies and important portions marked
in Red is being built up on the internet at our web site. The borrowers should go
through such judgments periodically and apprise their advocates. It is needless
to mention that such valuable information is free of cost in the best interests
of borrowers and guarantors. You may therefore spread the word among the
litigant borrowers, guarantors and their advocates to visit the above link
periodically. If one finds judgments useful and favourable to the borrowers and
guarantors, he may mail the full text of such
judgment for publication on our web site.
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