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TMI Blog2008 (4) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (i)Whether even where no stay is prayed for by the Borrower, during pendency of the proceedings under section 17 before the Debt Recovery Tribunal, the Secured Creditor can proceed to auction the secured asset even before a declaration envisaged under section 17(4) of the SARFAESI Act as made by the Debt Recovery Tribunal? (ii)Whether for granting any stay of auction, the Debt Recovery Tribunal can impose any condition relating to deposit? (iii)Whether, even before finalisation of the proceedings under section 17 of the SARFAESI Act, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal has any incidental or ancillary power to pass any interim order relating to restoration of possession or restoration of management, subject to imposition of any reasonable condition as deemed fit and proper? (iv)What is the scope of enquiry under section 17 of the SARFAESI Act and whether the merits of the contentions raised by the borrower can be decided while dealing with the question relating to validity of the action taken by the Bank under section 13 of the Act? 2. Since the reference arises in the above two Writ Petitions, we may briefly refer to the relevant facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding debt if ultimately the DPG is crystallized and devolved as a liability on the petitioner. The third respondent also mortgaged its immovable property at Nallatipalayam Village, Pollachi Taluk by deposit of title deeds. At this stage, we do not deem it necessary to narrate the further facts in detail, suffice it to say that the third respondent failed to pay the instalments to the foreign Bank and consequently, the petitioner Bank initiated proceedings under the Securitisation Act. The Bank also filed O.A. No. 92 of 2005 for recovery of its dues and the same is pending before the Debt Recovery Tribunal, Coimbatore. Meanwhile, the third respondent approached the Debt Recovery Tribunal, Coimbatore in I.A. No. 538 of 2005 wherein the Tribunal stayed all further proceedings in pursuance to the possession notice issued under section 13(4) of the Securitisation Act and directed the Company to deposit a sum of Rs. 2,60,00,000 with the petitioner bank. The Company filed Appeal before the Debt Recovery Appellate Tribunal, which came to be allowed and the amount ordered to be paid was reduced to Rs. 2 crores from Rs. 2.60 crores and it was further directed that the counter claim said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tively laid down for future guidance of the Courts including the Tribunals. 6. We have heard Mr. T.R. Rajagopalan, Mr. T.V. Ramanujun, learned Senior Counsel and Mr. Rajasekaran, learned counsel appearing for the borrowers; Mr. A.L. Somayaji, learned Senior Counsel, Mr. Jayesh Dolia, learned counsel appearing for the respective Banks; Mr. V.T. Gopalan, learned Additional Solicitor General appearing for the Union of India; Mr. G. Masilamani, Advocate General, Mr. K.N. Bhat, learned Senior Counsel, Mr. S. Sethuraman and Mr. Srinath Sridevan, learned counsel appearing for the interveners on behalf of the Banks and Mr. Vijay Narayanan learned Senior Counsel and Mr. M.S. Krishnan, learned counsel appearing for the intervenors-borrowers. Mr. M.S. Krishnan, Mr. Rajasekaran and Mr. Srinath Sridevan, also filed their written submissions. 7. In Mardia Chemicals Ltd. v. Union of India [2004] 51 SCL 513 (SC) the validity of the Securitisation Act and, in particular, the vires of sections 13, 15, 17 and 34 thereof had been challenged. It was contended that the Securitisation Act vested arbitrary powers in the Banks, without any guidelines for the exercise thereof and also without providing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scope is permissible to bring an action in the Civil Court in the case of English mortgages...." (p. 550) The challenge was upheld in respect of sub-section (2) of section 17 which require a deposit of 75 per cent of the amount of the demand notice before an Appeal could be entertained by the Tribunal. The Supreme Court thereafter summarized the judgment as under :- "79. Some submissions have been made pointing out that in certain circumstances it would not be clear as to in what manner the provisions of the Act would be workable. We feel the objections pointed out are not such which render the statute invalid or unconstitutional. Such problems about working of any particular provision of the Act in any particular factual situation, may be considered as and when they may arise. We, therefore, do not think it necessary to go into those questions. 80. Under the Act in consideration, we find that before taking action a notice of 60 days is required to be given and after the measures under section 13(4) of the Act have been taken, a mechanism has been provided under section 17 of the Act to approach the Debts Recovery Tribunal. The above noted provisions are for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The effect of some of the provisions may be a bit harsh for some of the borrowers but on that ground the impugned provisions of the Act cannot be said to be unconstitutional in view of the fact that the object of the Act is to achieve speedier recovery of the dues declared as NPAs and better availability of capital liquidity and resources to help in growth of the economy of the country and welfare of the people in general which would subserve the public interest. 82. We, therefore, subject to what is provided in para 80 above, uphold the validity of the Act and its provisions except that of sub-section (2) of section 17 of the Act, which is declared ultra vires Article 14 of the Constitution of India." (p. 562) 8. It is important to note two amendments to the Securitisation Act after the judgment of the Supreme Court in Mardia Chemicals Ltd.'s case (supra). These amendments were pursuant to and in consonance with the judgment in Mardia Chemicals Ltd.'s case (supra) and the observations therein. Firstly, in section 13 of the Act, the following was added after sub-section (3), as sub-section (3A) :- "(3A) If, on receipt of the notice under sub-section (2), the borrower makes any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the creditors assets as invalid and restore the possession of the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under 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 speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r must serve a notice in writing to the borrower requiring him to discharge the liabilities within a period of 60 days failing which the secured creditor would be entitled to take any of the measures as provided in sub-section (4) of section 13. Sub-section (4) of section 13 provides for four measures which can be taken by the secured creditor in case of non-compliance with the notice served upon the borrower namely, (a) to take possession of the secured assets including the right to transfer the secured assets by way of lease, assignment or sale; (b) to take over the management of the secured assets including the right to transfer; (c) to appoint a manager to manage the secured assets which have been taken possession of by the secured creditor; and (d) to require any person who had acquired any secured assets from the borrower or from whom any money is due to the borrower to pay the same as it may be sufficient to pay the secured debt. Sub-section 3A, which has been inserted by the amendment, provides that if on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act and the rules made thereunder, then, notwithstanding anything contained in the Act or 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-secion (4) of section 13 to recover his secured debt. 12. On a plain reading of section 17, it is seen that the Tribunal has wide powers to restore possession in favour of the borrower, if such action taken under sub-section (4) of section 13 is declared invalid. Even where the property is sold or dealt with, pending hearing of the Application under section 17, the Tribunal is not rendered powerless to restore possession in favour of the borrower, if such action taken under sub-section (4) of section 13 is declared invalid. In such an eventuality, sub-section (3) of section 17 gives ample powers to the Tribunal to direct restoration of the possession or restoration of management, as the case may be or to pass such other order, as it may consider proper and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section 13. 13. Learned counsel for the borrowers however argued that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Arbitration and Conciliation Act, 1996 pursuant to which an award can be enforced only after the expiry of the period for making an Application under section 34 or, if such an Application is made, till it is refused by the Court. Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 is another example of statutory stay. There is nothing in section 17 of the Securitisation Act which would indicate that the Legislature intended that there would be automatic stay of proceedings under section 13(4) on filing an Application under section 17. 15. As regards the second question, there is no specific provision made under section 17 of the Securitisation Act or under any other provisions of the said Act empowering the Tribunal to pass any interim order. But under sub-section (12) of section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Tribunal has been empowered to pass various interim orders. If sub-section (7) of section 17 of the Securitisation Act is read along with sub-section (12) of section 19 of the Recovery of Debts due to Banks and Financial Institutions Act, it would be clear that the Tribunal also has jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be evident that any person, including borrower, could file an Appeal (Application) under section 17 at any stage, including the stage when management of business is taken or possession of secured assets of the borrower, including right to transfer is taken over by the secured creditor. In such a case, the Tribunal has power to restore possession in favour of the borrower, if such action taken under sub-section (4) to section 13 is declared invalid. Merely because a secured creditor has taken possession of secured asset, or issued notice inviting Application for sale of secured asset, or issued a Sale Certificate in favour of one or other auction purchaser, will not render the Tribunal powerless to restore possession in favour of the borrower, if such action taken under sub-section (4) to section 13 is found not in accordance with the Acts and the Rules framed thereunder, and is declared invalid." 17. We accordingly hold that there will be no automatic stay on filing of an application under section 17 of the Securitisation Act, and the Tribunal while granting stay of auction can impose a condition relating to deposit. Re. Question (iii) 18. This question concerns the jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that any of the measure taken by the secured creditor is not in accordance with the provisions of the Act. The scheme cannot be by-passed by issuing a mandatory order for redelivery of the possession before conclusion of the proceedings under section 17. We may mention that we are supported in our view by an unreported decision of the Division Bench of this Court in the case of Authorised Officer, Indian Bank v. Debt Recovery Appellate Tribunal [Writ Petition No. 46413 of 2006 dated on 7-12-2006] and a decision of the Karnataka High Court in Syndicate Bank v. Basalingappa [WP No. 2 of 2007 (GM - RES) dated 28-5-2007]. Re Question (iv) 19. This concerns the scope of the enquiry under section 17 of the Securitisation Act and the question referred to us is whether the merits of the contentions raised by the borrower can be decided while dealing with the question relating to the validity of the action taken by the bank under section 13(4) of the Securitisation Act. It was argued before the Division Bench that the decision in Ramco Super Leathers Ltd.'s case (supra) may not be correct in view of the judgment of the Supreme Court in Transcore's case (supra). In Transcore's case (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er se. The reason is that the NPA Act proceeds on the basis that the liability of the borrower has crystallized and that his account is classified as non-performing asset in the hands of the bank/FI........... 24. .............However, under section 17(2), the DRT is required to consider whether any of the measures referred to in section 13(4) taken by the secured creditor for enforcement of security are in accordance with the provisions of the NPA Act and the Rules made thereunder. If the DRT, after examining the facts and circumstances of the case and the evidence produced by the parties, comes to the conclusion that any of the measures taken under section 13(4) are not in accordance with the NPA Act, it shall direct the secured creditor to restore the possession/management to the borrower (vide section 17(3) of NPA Act). On the other hand, after the DRT declares that the recourse taken by the secured creditor under section 13(4) is in accordance with the provisions of the NPA Act then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to any one or more of the measures specified under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em without the intervention of the Court. Therefore, in an Application under section 17, the Tribunal is concerned only with the validity of the acts of the secured creditor in taking possession of the securities and dealing with the same under section 13. In our opinion, the Division Bench has rightly held that all such grounds, which would render the action of the Bank/Financial Institution illegal, can be raised before the Tribunal in the proceedings under section 17. It is for the Tribunal to decide in each case whether the action of the Bank was in accordance with the provisions of the Act and legally sustainable. However, we hasten to add that while considering the question of validity of the action of the Bank, it is not necessary for the Tribunal to adjudicate the exact amount due to the secured creditors. In other words, the purpose of an Application under section 17 is not the determination of the quantum of claim per se as the Tribunal is concerned with the issue of the validity of the measures taken by the Banks/Financial Institutions under section 13(4). In our opinion, the judgment of the Division Bench in Misons Leathers Ltd.'s case (supra), lays down the law correct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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