2008 (4) TMI 500 - HC - Companies Law

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? Whether for granting any stay of auction the Debt Recovery Tribunal can impose any condition relating to deposit? 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? 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? Held that - The right of the Bank is not automatically suspended upon filing of an Application under section 17 of the Securitisation Act and the secured creditor can proceed to auction secured asset where no stay is granted by the Tribunal. The Tribunal has power to impose the condition relating to deposit for grant of stay of auction. The Tribunal has no power to pass any interim mandatory order relating to restoration of possession or restoration of management before the finalisation of the proceedings under section 17 of the Securitisation Act and All such grounds which rendered the action of the Bank/Financial Institution illegal can be raised in the proceedings under section 17 of the Securitisation Act before the Debt Recovery Tribunal. It is for the Debt Recovery Tribunal to decide in each case whether the action of the Bank/Financial Institution was in accordance with the provisions of the said Act and legally sustainable.

Issues Involved:
1. Whether the secured creditor can proceed to auction the secured asset during the pendency of proceedings under section 17 before the Debt Recovery Tribunal.
2. Whether the Debt Recovery Tribunal can impose any condition relating to deposit for granting a stay of auction.
3. Whether the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal has the power to pass interim orders relating to restoration of possession or management before finalization of proceedings under section 17.
4. The scope of enquiry under section 17 of the SARFAESI Act and whether the merits of the borrower's contentions can be decided while dealing with the validity of the action taken by the Bank under section 13.

Detailed Analysis:

Issue 1: Auction of Secured Asset During Pendency of Proceedings
The court addressed whether the right of the Bank to take proceedings under section 13(4) remains suspended upon filing an application under section 17. It was determined that there is no automatic stay of proceedings under section 13(4) upon filing an application under section 17. The Tribunal has the power to grant interim orders, but this does not imply an automatic suspension of the Bank's rights to proceed with the auction. The court emphasized the importance of the Securitisation Act's objective to provide a speedy and summary remedy for recovery of dues, which would be defeated by an automatic stay.

Issue 2: Imposition of Condition for Granting Stay of Auction
The court examined whether the Debt Recovery Tribunal can impose conditions such as deposit for granting a stay of auction. It was concluded that the Tribunal has the jurisdiction to pass interim orders, including the imposition of conditions for granting a stay of auction. This is derived from sub-section (12) of section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, read with sub-section (7) of section 17 of the Securitisation Act. The Supreme Court in Mardia Chemicals Ltd. v. Union of India supported this view, affirming the Tribunal's power to impose conditions deemed fit and proper.

Issue 3: Interim Orders for Restoration of Possession or Management
The court considered whether the Tribunal has the power to pass interim mandatory orders for restoration of possession or management before the finalization of proceedings under section 17. It was held that the Tribunal does not have the power to issue such interim mandatory orders. The statutory scheme of the Securitisation Act allows the Tribunal to restore possession or management only after it concludes that the measures taken under section 13(4) were not in accordance with the Act. The Tribunal's ancillary powers to pass interim orders do not extend to overriding the specific provisions of section 17(3).

Issue 4: Scope of Enquiry under Section 17
The court analyzed the scope of enquiry under section 17 and whether the merits of the borrower's contentions can be decided. It was affirmed that the Tribunal can consider all grounds that render the action of the Bank/Financial Institution illegal. These include objections to the notice under section 13(2), such as claims barred by limitation or incorrect calculation of interest. However, the Tribunal is not required to adjudicate the exact amount due to the secured creditors. The primary concern is the validity of the measures taken by the Bank under section 13(4). The judgment of the Division Bench in Misons Leathers Ltd. v. Canara Bank was upheld, confirming that the Tribunal should decide whether the Bank's actions were legally sustainable.

Summary of Findings:
1. The right of the Bank is not automatically suspended upon filing an application under section 17, and the secured creditor can proceed to auction the secured asset where no stay is granted by the Tribunal.
2. The Tribunal has the power to impose conditions relating to deposit for granting a stay of auction.
3. The Tribunal has no power to pass interim mandatory orders for restoration of possession or management before the finalization of proceedings under section 17.
4. All grounds rendering the action of the Bank/Financial Institution illegal can be raised in proceedings under section 17. The Tribunal must decide if the Bank's actions were in accordance with the Act and legally sustainable.

The reference was answered accordingly, and the petitions were directed to be placed before the appropriate court.

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