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2016 (4) TMI 676 - DELHI HIGH COURT

2016 (4) TMI 676 - DELHI HIGH COURT - TMI - Prevailing rights of recovery - whether mortgage inuring in its favour had to prevail over the PSB’s claim in execution of a money decree and directing that proceeds from the sale of a property by the Recovery Officer be used first to satisfy MMTC’s claim - Held that:- This Court does not have the benefit of evidence one way or the other to conclude that an enforceable mortgage claim existed. It is also noteworthy that neither of the authorities below .....

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are concerned. However, because of Order XXXIV Rule 14, the route adopted by MMTC to enforce that award is not correct. At the same time, any observations on the merits of the potential claim of MMTC in a suit for sale ought to be avoided.

Limitation in the filing of the suit - Held that:- Here, it would be relevant to notice that having upheld PSB's contention that by reason of Order XXXIV Rule 14 and the decision in M.R. Satwaji Rao (supra) as well as Booz Allen (supra), the corolla .....

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s declared a nullity. As this court does not have the benefit of the record before the executing court, it does not express itself on the execution proceedings.

The matter is remanded back to the Learned Recovery Officer to determine whether there is evidence to show that PSB has some ‘interest in, or was possessed of, the property in question’. Consequent to his findings, the Recovery Officer shall then proceed in accordance with provisions of law. - W.P.(C) 6327/2011 - Dated:- 27-11 .....

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in execution of a money decree and directing that proceeds from the sale of a property by the Recovery Officer be used first to satisfy MMTC s claim. 2. The brief facts are that on 21.05.1993, MMTC extended credit facilities to the Second Respondent, M/s Himanshu Jewellers (hereafter Himanshu ) a partnership firm acting through one of its partners, the third respondent ( Jagdish Kumar ), for jewellery export, in terms of its prevailing policies. The loan was encapsulated in a written agreement .....

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efaulted inasmuch as the full payment of the amounts with interest at agreed rates had not been made, MMTC invoked the arbitration clause on 19.06.1996. A three member Arbitral Tribunal was constituted before which MMTC claimed about ₹ 29 lacs with interest and costs. 3. Himanshu contested the proceedings before the Arbitral Tribunal and denied its liability to MMTC. After considering the terms of the agreement, the invoices in question and the payments made by Himanshu, the Arbitral Tribu .....

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imanshu was held liable to pay ₹ 14,73,973/- plus interest and costs. 4. Meanwhile, unbeknown to MMTC and independent of Himanshu s agreement with it, the latter had approached PSB for credit facilities, in 1994. PSB granted Packing credit facility to the extent of ₹ 20 lakhs, Foreign Bill Purchase facility to the tune of ₹ 40 lakhs and Bank guarantee to the extent of ₹ 60 lakhs. PSB alleges that the borrower, i.e. Himanshu failed to maintain financial discipline in regar .....

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and Conciliation Act, 1996, it applied for execution of such decree before the competent civil court by way of Ex. No. 347/06. On 18.11.2006, the civil court directed auction of property No. 2778/2779, Gali No. 20, First Floor, Beadon Pura, Karol Bagh (hereafter the disputed property ). PSB, in the meanwhile had independently moved the Recovery Officer in terms of provisions of Section 25 (a) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereafter the Recovery Act ) .....

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ued that it had pre-existing rights as a secured creditor, by virtue of the deposit of title deeds to the said property by its owner, Shri. Jagdish Kumar, the third respondent. 6. On 25.11.2009, the Recovery Officer held that PSB had an overriding right to proceed against the disputed property. The order, inter alia, stated that: Ld. counsel for the MMTC, the noticee, however submits that the award dated 21.12.2002 is a decree and the MMTC has the first charge over the said property and the CH B .....

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e alleged award. The Section 34 of RDDBFI Act 1993 provides for over riding effect of this Act and section 25 of RDDBFI Act 1993 provides-the powers to the Recovery officer without making distinction between the properties charged or otherwise . As such the application of MMTC regarding claiming the first right & precedence over the above referred property is hereby rejected. 7. MMTC felt aggrieved by the above order of the Recovery Officer and appealed to DRT, under Section 30 (1) of the Re .....

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e mortgage could not claim overriding rights. In so concluding, the DRT relied on a judgment of the Supreme Court reported as M.R. Satwaji Rao v B. Shama Rao2008 (5) SCC 124 to the effect that ……………..Rule 14 of Order XXXIV CPC which prohibits the mortgagee to bring the mortgaged property to sell otherwise than by instituting a suit for sale in enforcement of the mortgage. Admittedly, the said suit by the mortgagee was not in terms of Rule 14 of Order XXXIV. The .....

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uit was 30 years. It held, more importantly that the disputed property was not mortgaged with PSB and that since it was mortgaged with MMTC, the latter had, by virtue of Section 48, TPA a prior claim over it. Consequently, the Appellate Tribunal, by the impugned order directed the Recovery Officer to sell the disputed property with the consent of both MMTC and PSB. Both of them could produce bidders. The proceeds of the sale were to be applied first to satisfy MMTC s claim after which they could .....

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of Order XXXIV, Rule 14, Code of Civil Procedure, MMTC could not have rested its claim only on the basis of the arbitral tribunal s award - which resulted in a decree. It was urged here that an arbitration proceeding is neither appropriate nor competent in respect of mortgage transactions, which are to be proceeded with in terms of the only manner known to law i.e. a suit for foreclosure and sale. It is argued in this context that the award at best was a money decree and could under no circumst .....

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tions were especially relied on: 28. A decree for sale of a mortgaged property as in the case of a decree for order of winding up, requires the court to protect the interests of persons other than the parties to the suit/petition and empowers the court to entertain and adjudicate upon rights and liabilities of third parties (other than those who are parties to the arbitration agreement). Therefore, a suit for sale, foreclosure or redemption of a mortgaged property, should only be tried by a publ .....

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time barred. Counsel for the PSB lastly urged that the MMTC could not have successfully argued to avoid the consequences of the enforcement of a recovery certificate under the Recovery Act, without preferring an objection in terms of Rule 11 of the Second Schedule to the Income Tax Act, 1963, which refers to the procedure applicable, by virtue of Section 29 of the Recovery Act. 12. Mr. Rohit Puri on behalf of MMTC argued that this Court should not interfere with the impugned order, which is well .....

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oceedings and orders before the Recovery Officer and the two tribunals below record that the PSB was not a mortgagee in respect of the said disputed property, rather a mere unsecured creditor. In the circumstances, the Appellate Tribunal s conclusions with respect to applicability of Section 48 and the primacy of MMTC s claims were sound and justified. Analysis and Conclusions 13. Chronologically speaking, the following events occurred: In 1993, MMTC advanced a loan to the second Respondent, sup .....

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r is now out of the picture, and the two lenders are fighting to claim priority over the asset. 15. MMTC initiated execution proceedings of the award before a civil court. The Arbitration and Conciliation Act, 1996 confers the status of a decree to an arbitral award, which can be enforced according to the provisions of the Code of Civil Procedure. PSB commenced recovery proceedings before the DRT. The proceedings before the Recovery Officer are governed by the Recovery Act. The Recovery Officer .....

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is preferred to, or any objection is made to the attachment or sale of, any property in execution of a certificate, on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection : Provided that no such investigation shall be made where the Tax Recovery Officer considers that the claim or objection was designedly or unnecessarily delayed. (2) Where the property to which the claim or objection applies has bee .....

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terest in, or was possessed of, the property in question. (4) Where, upon the said investigation, the Tax Recovery Officer is satisfied that, for the reason stated in the claim or objection, such property was not, at the said date, in the possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his .....

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person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim. (6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive. 17. Section 48 of the Transfer of Property Act reads a .....

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e has obtained a decree for the payment of money in satisfaction of a claim arising under the mortgage, he shall not be entitled to bring the mortgaged property to sale otherwise than by institution a suit for sale in enforcement of the mortgage. 19. Order 34 Rule 14 of the CPC is clear that the enforcement of a mortgage debt by way of sale of the mortgaged property can only be by filing a separate suit, and not by means of execution proceedings of the earlier decree. By virtue of Section 36 of .....

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ccordance with a procedure prescribed by law, and the sale ordered by the executing civil court must have no effect. Their conclusion however, is, that the mortgage must be ignored altogether. 21. The learned DRAT below us, in reversing the order of the DRT, on the other hand, proceeds to hold (correctly in the opinion of this court) that if an earlier mortgage existed it would take prior claim by virtue of Section 48 of the Transfer of Property Act. However, the DRAT went on to direct the Recov .....

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er, simply, the effect in this case is that the enforcement of mortgage claims cannot be in the manner that they were attempted (i.e. by way of execution proceedings in a civil court) and the enforcement of a mortgage debt by sale must instead be by way of a separate suit. 23. If the mortgage does indeed exist, it will create a prior charge over the property, being prior in time (Section 48 of the Transfer of Property Act). The opinion of the Recovery Officer that the Recovery Act, by virtue of .....

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orced by sale through a separate civil suit does not obviate the mortgage itself. So far as the Debt Recovery Officer is concerned, Rule 11 merely requires him to investigate if evidence of a prior charge on the property exists, and then proceed accordingly. His task is not to finally give effect to the mortgage debt, nor is it to deny its existence in law. Indeed, his determination is not final and is subject to a civil suit that may be filed in that regard (See Rule 11(6) which states, inter a .....

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d itself is a simple money decree, to the extent it determines liability of the second and third respondents. In that sense, the position is similar to M.R. Satwaji Rao (supra) where it was held that: "We have already referred to Rule 14 of Order XXXIV CPC which prohibits the mortgagee to bring the mortgaged property to sell otherwise than by instituting a suit for sale in enforcement of the mortgage. Admittedly, the said suit by the mortgagee was not in terms of Rule 14 of Order XXXIV. The .....

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s the most appropriate course of action to take. This conclusion is based primarily on the fact that a blind application of M.R. Satwaji Rao (supra) or Booz Allen (supra) does not result in the invalidation of the Award, which has attained finality, inter parties (as far as MMTC and its borrowers) vis-à-vis the issue of liability of the said borrowers and guarantors are concerned. However, because of Order XXXIV Rule 14, the route adopted by MMTC to enforce that award is not correct. At t .....

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