2006 (5) TMI 195 - HC - Companies Law

Issues Involved:
1. Legality of the Bank's action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
2. Requirement for the Bank to withdraw proceedings before the Debt Recovery Tribunal (DRT) before invoking SARFAESI Act.
3. Impact of pending settlement offers on proceedings under the SARFAESI Act.
4. Validity of the District Magistrate's order under Section 14 of the SARFAESI Act.
5. Requirement for the Bank to consider objections under Section 13(3A) of the SARFAESI Act.

Detailed Analysis:

1. Legality of the Bank's Action under the SARFAESI Act:
The petitioners, a company and another borrower, challenged the Bank's action under the SARFAESI Act, arguing that their account had not been declared a non-performing asset (NPA), thus the Bank had no authority to invoke the Act. They contended that the Bank, having already initiated recovery proceedings before the DRT under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act), was debarred from taking measures under the SARFAESI Act due to the doctrine of election of remedy. The petitioners also highlighted that their objections to the notice under Section 13(2) of the SARFAESI Act had not been considered by the Bank, making the subsequent actions under Section 13(4) unauthorized.

2. Requirement for the Bank to Withdraw Proceedings before the DRT:
The court examined whether the Bank was obliged to withdraw the proceedings pending before the DRT before invoking the SARFAESI Act. It referred to Section 19 of the RDB Act, which allows a bank to withdraw its application with the Tribunal's permission to take action under the SARFAESI Act. The court noted differing views from various High Courts on whether this provision was mandatory or directory. The Bombay and Kerala High Courts opined that it was not mandatory, while the Punjab and Haryana High Court held it to be mandatory. The court agreed with the Bombay High Court's view, concluding that the proviso to Section 19 of the RDB Act is directory, allowing banks to proceed under the SARFAESI Act without first withdrawing the application pending before the Tribunal.

3. Impact of Pending Settlement Offers:
The petitioners argued that the Bank could not initiate proceedings under the SARFAESI Act while their application for settlement under the 'One Time Settlement' scheme was pending. The court rejected this contention, noting that the settlement offer was made in 2001, and the petitioners failed to honor their commitment to pay the agreed amount. Consequently, the Bank was justified in recovering its dues in full.

4. Validity of the District Magistrate's Order:
The petitioners claimed that the District Magistrate's order under Section 14 of the SARFAESI Act was void as they were not given notice or an opportunity to be heard. The court dismissed this argument, stating that Section 14 is in the nature of executing the order and does not require notice or hearing for the borrower/guarantor.

5. Requirement for the Bank to Consider Objections:
The court upheld the petitioners' contention that the Bank failed to consider their objections to the notice under Section 13(2) of the SARFAESI Act, as mandated by Section 13(3A). The Bank proceeded to take measures under Section 13(4) without addressing these objections, rendering its actions contrary to statutory requirements. Consequently, the court quashed the Bank's action of taking possession of the secured assets and directed the Bank to restore possession to the petitioners, maintaining the status quo until the Bank complies with Section 13(3A).

Conclusion:
The petition succeeded on the ground that the Bank failed to consider and decide the objections under Section 13(3A) of the SARFAESI Act before proceeding under Section 13(4). The Bank was directed to restore possession of the secured assets to the petitioners and was allowed to proceed under the SARFAESI Act only after complying with the statutory requirements. The rule was made absolute, with each party bearing its own costs.

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