2013 (9) TMI 216 - SC - Companies Law

Rule 9 of the Security Interest (Enforcement) Rules - Held that - The facts were eloquent and indicated that the observations made by the Single Judge that borrower was victimized and a fraud was practiced upon, have no basis - The finding by the Single Judge that the sale of secured interest had been in violation of borrower s right to livelihood and the observation of the Division Bench that non-compliance of Rule 9 hads violated, the borrower s right to property were misconceived - there was no justification whatsoever for the learned Single Judge to allow the borrower to by-pass the efficacious remedy provided to him under Section 17 and invoke the extraordinary jurisdiction in his favour when he had disentitled himself for such relief by his conduct - The Single Judge was clearly in error in invoking his extraordinary jurisdiction under Article 226 in light of the peculiar facts indicated above - The Division Bench also erred in affirming the erroneous order of the Single Judge SARFAESI Act lays down the detailed and comprehensive procedure for enforcement of security interest created in favour of a secured creditor without intervention of the court or tribunal - Section 13(2) required the secured creditor to issue notice to the borrower in writing to discharge his liabilities within 60 days from the date of the notice - Such notice must indicate that if the borrower failed to discharge his liabilities, the secured creditor shall be entitled to exercise its rights in terms of Section 13(4) - A reading of sub-rule (1) of Rule 9 makes it manifest that the provision was mandatory - As regarded balance amount of purchase price, sub-rule (4) provided that the said amount shall be paid by the purchaser on or before the fifteenth day of confirmation of sale of immovable property or such extended period as may be agreed upon in writing between the parties - The period of fifteen days in Rule 9(4) was not that sacrosanct and it was extendable if there was a written agreement between the parties for such extension. There was no doubt that Rule 9(1) is mandatory but this provision was definitely for the benefit of the borrower - Similarly, Rule 9(3) and Rule 9(4) were for the benefit of the secured creditor (or in any case for the benefit of the borrower) - It was settled position in law that even if a provision was mandatory, it can always be waived by a party (or parties) for whose benefit such provision had been made - The provision in Rule 9(1) being for the benefit of the borrower and the provisions contained in Rule 9(3) and Rule 9(4) being for the benefit of the secured creditor (or for that matter for the benefit of the borrower), the secured creditor and the borrower can lawfully waive their right - These provisions neither expressly nor contextually indicate otherwise Order set aside.

Issues Involved:
1. Compliance with Rule 9 of the Security Interest (Enforcement) Rules, 2002.
2. Legitimacy of the auction sale conducted by the Bank.
3. Borrower's waiver of rights under Rule 9.
4. Appropriateness of the High Court's intervention under Article 226 of the Constitution.
5. Availability and exhaustion of alternative remedies under Section 17 of the SARFAESI Act.

Detailed Analysis:

1. Compliance with Rule 9 of the Security Interest (Enforcement) Rules, 2002:
The core issue in these appeals revolves around the mandatory nature of Rule 9 of the 2002 Rules, which outlines the procedure for the sale of immovable property. Rule 9(1) mandates that no sale of immovable property shall occur before the expiry of 30 days from the date of public notice. Rule 9(3) requires a deposit of 25% of the sale price immediately upon sale, and Rule 9(4) stipulates that the balance amount must be paid within 15 days of the sale confirmation, unless extended by a written agreement between the parties. The Supreme Court's analysis emphasized that these provisions are mandatory but can be waived by the parties for whose benefit they are made.

2. Legitimacy of the Auction Sale Conducted by the Bank:
The auction sale conducted by the Bank on 11.01.2006 was challenged on grounds of non-compliance with Rule 9. Specifically, the auction was held before the expiry of 30 days from the public notice, and the auction purchaser did not pay the balance amount within 15 days. Despite these procedural lapses, the Bank argued that the borrower had waived his rights by consenting to the auction and the delayed payment through a letter dated 13.11.2006. The Supreme Court found that the borrower's consent constituted a written agreement, thus validating the sale under Rule 9(4).

3. Borrower's Waiver of Rights under Rule 9:
The borrower's letter dated 13.11.2006 to the Bank, consenting to the auction and delayed payment, played a crucial role in the judgment. The Supreme Court held that the borrower had effectively waived his rights under Rule 9(1), (3), and (4). The Court noted that even mandatory provisions can be waived by the party for whose benefit they are made, and in this case, the borrower had given explicit written consent, thus satisfying the requirement of a written agreement for an extension of time under Rule 9(4).

4. Appropriateness of the High Court's Intervention under Article 226 of the Constitution:
The High Court had quashed the sale certificate and the demand notice, invoking its extraordinary jurisdiction under Article 226 of the Constitution. The Supreme Court criticized this intervention, emphasizing that the borrower had an alternative and efficacious remedy under Section 17 of the SARFAESI Act, which he did not exhaust. The Court reiterated the principle that statutory procedures cannot be circumvented on misplaced considerations, and the High Court should have insisted on the exhaustion of alternative remedies.

5. Availability and Exhaustion of Alternative Remedies under Section 17 of the SARFAESI Act:
The borrower had a remedy under Section 17 of the SARFAESI Act to appeal to the Debts Recovery Tribunal (DRT) against the Bank's action. The Supreme Court underscored that this remedy is comprehensive and adequate, and the borrower should have availed it before approaching the High Court. The Court referred to the precedent set in Satyawati Tondon, which mandates that High Courts should refrain from entertaining petitions under Article 226 when an effective alternative remedy is available.

Conclusion:
The Supreme Court concluded that the High Court erred in exercising its extraordinary jurisdiction under Article 226 and in quashing the sale certificate and demand notice. The borrower's conduct, including his waiver of rights and failure to exhaust alternative remedies, disentitled him from seeking relief under Article 226. Consequently, the appeals were allowed, and the impugned orders of the High Court were set aside, reinstating the sale certificate issued in favor of the auction purchaser.

← Previous Next →