2018 (3) TMI 932

ty in favor of auction purchaser instead of taking the physical possession first - whether the Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower’s representation - whether sub-section (3A) of Section 13 is mandatory or directory in nature? - Held that: - In any event, having regard to the character of the land and the purpose for which it is set apart, we are of the view that the land in question is not an agricultural land. The High Court mis-directed itself in holding that the land was an agricultural land merely because it stood as such in the revenue entries, even though the application made for such conversation lies pending till date. - There is no doubt that if a reply with reasons is an integral and indispensable part of the statutory scheme, the Courts would not excuse a departure from it. But, on the other hand, if the reply is merely a direction and not of substance to the scheme, the non-compliance may be excused - the failure to furnish a reply to the representation is not of much significance since we are satisfied that the creditor has undoubtedly considered the representatio .....

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having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act. - Non-compliance of sub-section (3A) of Section 13 cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions - the debtor is not entitled for the discretionary equitable relief under Articles 226 and 136 of the Constitution of India in the present case. - Appeal allowed - decided in favor of appellant. - Civil Appeal Nos. 2928-2930 of 2018, [Arising out of SLP (C) Nos. 10215-10217/2016] And Civil Appeal Nos. 2931-2933 of 2018, [Arising out of SLP (C) Nos. 10196-10198/2016] - Dated:- 19-3-2018 - Mr. S.A. Bobde And Mr. L. Nageswara Rao JJ. For the Petitioner(s)/Respondent(s) : Mr. Shyam Divan, Sr. Adv., Mr. L.K. Bhushan, Adv., Mr. Anirudharun Kumar, Adv., Mr. Mohit Sharma, Adv., for M/S. Dua Associates, AOR For the Petitioner(s) : Mr.Mukul Rohatgi, Sr. Adv., Mr. P.S. Narsimha, ASG, Mr. Shubhransho Padhi, Adv., Mr. Somay Kapoor, Adv. And Mr. Kush Chaturvedi, AOR For the Respondent(s) : Mr. C.U. Singh, Sr. Adv., .....

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anding dues. The High Court held that the creditor s failure to deal with this representation constituted a violation of Section 13 (3A) of the Act. Further, the High Court held that the notice issued under Section 13 (2) by the creditor comprising of agricultural property despite the bar under Section 31 (i) of the Act is contrary to the law since the land was not converted into non-agricultural land. The High Court also held that the auction/sale of the property based upon symbolic possession of the property is contrary to the scheme of the Act and the Rules. 6. On 18.06.2013, a notice was issued under Section 13 (4) whereby symbolic possession of the hotel property was taken over by the creditor. The debtor filed a securitization application (Dated 31.07.2013) before the Debts Recovery Tribunal (hereinafter referred to as the DRT ) against the taking over of the symbolic possession by the creditor. In the meanwhile, the creditor published the first auction sale notice (On 04.09.2013) with a reserve price of ₹ 403 crores which came to be postponed in view of the negotiations between the parties for the repayment of the dues. Upon default in the repayment of the outstanding .....

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reditor issued a notice taking over symbolic possession. 13. On 09.01.2014, the creditor published a second notice of sale at the same reserved price of ₹ 403 crores. The DRT (Vide order dated 06.02.2014) passed an interim order directing the creditor to defer the acceptance of the bids and not take any further steps with regard to the sale of the property for 60 days. 14. On 08.10.2014 the creditor issued a third Notice of Sale by public auction fixing the auction on 12.11.2014 at a reserve price of ₹ 542.57 crores. Pursuant to the writ petitions filed by the debtor, the High Court (Vide order dated 11.11.2014) allowed the bids to be received for the sale of the Goa Hotel to be held in a sealed cover till the next date of hearing which was fixed to be on 19.11.2014. However, no bids were received pursuant to the 3rd Public Auction Notice. 15. In the meanwhile, the debtor wrote to the creditor stating that the corporate loan will be taken over by Hyatt who were the operating service provider for the hotel. Hyatt in turn wrote to the creditor stating that they will not be responsible for the repayment of the loan. On 31.12.2014, a fourth and fresh notice for conducting t .....

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nsidered (constituting a breach of sub-section (3A) which is mandatory), nor communicated the reasons for non-acceptance thereof. Thus, the subsequent action of the creditor in resorting to a measure under Section 13(4) is liable to be annulled. 19. The statutory scheme in this regard has been enumerated under Section 13 of the Act (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 instalment 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 .....

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p;…………… (8)……………… (9)……………… (10)……………. (11)…………… (12)……………. (13)…………….) 20. The Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as the Rules ) framed under the Act (3-A. Reply to Representation of the borrower.- (a) After issue of demand notice under sub-section (2) of section 13, if the borrower makes any representation or raises any objection to the notice, the Authorised Officer shall consider such representation or objection and examine whether the same is acceptable or tenable. (b) If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make any changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within fifteen days from the date of receipt of the representation or objection. (c) If on examining the representa .....

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out the proposed measures and may even result in a renovation of the contract. 23. Sub-section (3A) of Section 13 was introduced in the Act by the Parliament in pursuance of the following observations of this Court in Mardia (2004) 4 SCC 311 Chemicals: 45. …The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance 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 sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accept .....

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arises for consideration before us is whether the Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower s representation. In other words, whether sub-section (3A) of Section 13 is mandatory or directory in nature. 26. There is no doubt that if a reply with reasons is an integral and indispensable part of the statutory scheme, the Courts would not excuse a departure from it. But, on the other hand, if the reply is merely a direction and not of substance to the scheme, the noncompliance may be excused. 27. This question must be answered upon a construction of the statute according to its true intent by taking into account the language in which the intent is clothed. In a passage from Crawford s Statutory Construction, it is stated - The question as to whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The meaning and intention of the Legislature must govern, and these are to be ascertained not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which w .....

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917). 29. There is nothing in the legislative scheme of Section 13 (3A) which requires the Court to consider whether or not, the word shall is to be treated as directory in the provision. As the Section stood originally, there was no provision for the above mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2). As it was introduced via sub-section (3A), it could not be the intention of the Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor s representation has not been accepted. 30. Moreover, this provision provides for communication of the reasons for not accepting the representation/objection and the requirement to furnish reasons for the same. A provision which requires reasons to be furnished must be considered as mandatory. Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully. We are .....

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oposal for reschedulement (which was the same as the one made as far back as on 22.08.2012) and reserving the right to file a reply. (ii) On 07.06.2013, the debtor again sent a proposal for extension of time for repayment, repeating its proposal dated 27.05.2013. (iii) On 20.06.2013, the creditor issued the notice of possession under Section 13(4). The taking over of possession was purely symbolic. We are informed that the debtor is in possession of the hotel till date and is running its business without any noteworthy repayment. (iv) On the next day 21.06.2013, the debtor wrote a letter to the creditor seeking extension of time and enclosed six cheques for upfront payment of ₹ 33.16 crores without making any reference to the notice of taking over of possession. The cheques were dishonoured. (v) On 04.09.2013, the creditor published a Notice of Sale by Public Auction in the newspaper fixing the date of auction as 09.10.2013 at a reserve price of ₹ 403 crores. (vi) Following this the debtor sent a letter to the creditor on 19.09.2013 undertaking that it will repay all outstanding installments by 31.12.2013 and that the sale of assets be deferred up to the said date. The .....

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Constitution which is indeed an equitable relief. Letter of Undertaking Without Prejudice 35. Much was sought to be made of the words without prejudice in the letter (Dated 25.11.2013) containing the undertaking that if the debt was not paid, the creditor could take over the secured assets. The submission on behalf of the debtor that the letter of undertaking was given in the course of negotiations and cannot be held to be an evidence of the acknowledgement of liability of the debtor, apart from being untenable in law, reiterates the attempt to evade liability and must be rejected. The submission that the letter was written without prejudice to the legal rights and remedies available under any law and therefore the acknowledgement or the undertaking has no legal effect must likewise be rejected. This letter is reminiscent of a letter that fell for consideration in Spencer s (Spencer v. Hemmerde [1922] 2 AC 507, HL at 526) case as pointed out by Mr. Harish Salve, as a rule the debtor who writes such letters has no intention to bind himself further than is bound already, no intention of paying so long as he can avoid payment, and nothing before his mind but a desire, somehow or other .....

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the High Court on the ground that the inclusion of agricultural land as security interest could not have been validly included in the notice for recovery of the secured loan. The correctness of the finding of the High Court depends on the effect of Section 31 (i) of the Act, which reads as follows:- 31. Provisions of this Act not to apply in certain cases-The provision of this Act shall not apply to- (a)…. (b)…. (c)…. (e)…. (f)…. (g)…. (h)…. (i) any security interest created in agricultural land; (j)…. 38. The purpose of enacting Section 31(i) and the meaning of the term agricultural land assume significance. This provision, like many others is intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court. The plain intention of the provision is to exempt agricultural land from the provisions of the Act. In other words, the creditor cannot enforce any security interest created in his favour without intervention of the Court or Tribunal, if such security interest is in re .....

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bles, fruits, shrubs and trees for captive consumption of the hotel. There is no substantial evidence about the growing of vegetables but what seems to be on the land are some trees bearing curry leaves and coconut. This amounts to about 12.8 % of the total area. 41. The Corporate Loan Agreement (Dated 26.02.2010) that deals with the mortgage in question in the relevant clause (Clause 2.1, part b) reads as follows:- The Borrower shall create mortgage on Exclusive basis on the Park Hyatt Goa Resort and Spa Hotel Property admeasuring 1, 82, 225 Sq Mtrs with a built up area of 25182 Sq. Mtrs situated at 263 C, Arossim, Canasaulim Goa. The mortgage is thus intended to cover the entire property of the Goa Hotel. Prima facie, apart from the fact that the parties themselves understood that the lands in question are not agricultural, it also appears that having regard to the use to which they are put and the purpose of such use, they are indeed not agricultural. 42. At the outset, it was argued on behalf of the debtor that Section 31(i) is beyond the legislative competence of the Parliament since it is only the State Legislature which is competent to legislate on land under Entry 18 of Lis .....

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cluded the said term from the definition of assets. This Court observed:- We agree that the determination of the character of land, according to the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case. What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of "assets", but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owners or possessors, so as to connect it with an agricultural purpose, the land could not be "agricultural land" for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence. (emphasis .....

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ake recourse to the ordinary law for recovering physical possession. 47. We find nothing in the provisions of the Act that renders taking over of symbolic possession illegal. This is a well- known device in law. In fact, this court has, although in a different context, held in M.V.S.Manikayala Rao v. M.Narasimhaswami (AIR 1966 SC 470) that the delivery of symbolic possession amounted to an interruption of adverse possession of a party and the period of limitation for the application of Article 144 of the Limitation Act would start from such date of the delivery. 48. The question, however, whether the creditor could maintain an application of possession under Section 14 of the Act; even though it had taken over only symbolic possession before the sale of the property to the auction purchaser, depends on whether it remained a secured creditor after having done so. Section 2(d) of the Act defines secured creditor to mean a "banking company" having the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949; Clause 2(L) 2(L) SARFAESI Actincludes debts or receivables and any right or interest in the security whether full or part underlying such de .....

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rest could not be said to have been transferred since the possession of the property was not transferred to creditor. The possession was retained by the debtor who continued to do business and receive rent from the rooms on the property and has in fact continued to do so till date. There is no doubt that after taking over the property from debtor, the creditor also acquired the right to receive the usufruct of the property i.e. the rent in this case. However, this was an interest in the property which was not at any point of time transferred to the auction purchaser. 50. In this case, the creditor did not have actual possession of the secured asset but only a constructive or symbolic possession. The transfer of the secured asset by the creditor therefore cannot be construed to be a complete transfer as contemplated by Section 8 of the Transfer of Property Act. The creditor nevertheless had a right to take actual possession of the secured assets and must therefore be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement (Dated 25.02.2015). Thus, the entire interest in the property not having been passed on to the creditor in the f .....

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the course of negotiations which continued for a considerable amount of time. Several opportunities were in fact availed of by the debtor for the repayment of the loan after the proceedings were initiated by the secured creditor. The debtor failed to discharge its liabilities and eventually undertook that if the debtor fails to discharge the debt, the creditor would be entitled to take realize the secured assets. 55. As held, we are of the view that non-compliance of sub-section (3A) of Section 13 cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions. 56. This Court in the case of State of Maharashtra v. Digambar (1995) 4 SCC 683 observed as follows:- 19. Power of the High Court to be exercised under Article 226 of the Constitution, if is discretionary, its exercise must be judicious and reasonable, admits of no controversy. It is for that reason, a person s entitlement for relief from a High Court under Article 226 of the Constitution, be it against the State or anybody else, even if is founded on the allegation of infringement of his legal right, has to necessarily depend upon unblameworthy conduct .....

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