2016 (11) TMI 1731 - HC - Indian Laws

Grant of complete waiver of deposit under section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - default in payment of liabilities - HELD THAT - The statements of object and reasons of the SARFAESI Act indicate that the financial sector, being one of the key drivers in India's efforts to achieve success in rapidly developing its economy, did not have a level playing field as compared to other participants in the financial markets of the world. There was no legal provision for facilitating securitisation of financial assets of banks and financial institutions, and unlike international banks, the banks and financial institutions in India did not have the power to take possession of securities and sell them. The Legislature felt that our existing legal framework had not kept pace with the changing commercial practices and financial sector reforms, which resulted in delays in recovery of defaulting loans. This in turn had the effect of mounting levels of non-performing assets of banks and financial institutions. In order to bring the Indian Banking Sector on par with International Standards, the Government set up two Narasimhan Committees and the Andhyarujina Committee for the purposes of examining banking sector reforms. Section 18(1) clearly stipulates, any person aggrieved by any order made by the DRT under Section 17, may prefer an appeal to the DRAT within 30 days from the date of receipt of the order of the DRT. The 2nd proviso to Section 18(1) stipulates that no appeal shall be entertained by the DRAT unless the borrower has deposited with it 50% of the amount of debt due from him, as claimed by the secured creditors or as determined by the DRT, whichever is less. The 3rd proviso to Section 18(1) gives a discretion to the DRAT to reduce the aforesaid amount to not less than 25%, provided the DRAT gives reasons for the same which are to be recorded in writing. What becomes clear from the aforesaid provisions is that there is a jurisdictional bar from entertaining an appeal filed by the borrower from an order passed under Section 17, unless the borrower deposits 50% of the amount of debt due from him, as claimed by the secured creditors or as determined by the DRT, whichever is less - There is also a discretion granted to the DRAT to reduce this amount to 25% provided it finds adequate reasons for doing so and gives reasons, that are recorded in writing. If this deposit is not made, then the DRAT has no jurisdiction to entertain the appeal of the borrower. There was non-compliance of Rules 6(2) and 8(6) of the SARFEASI Rules. It is true that the said rules Rules 6(2) and 8(6) are mandatory and ordinarily have to be complied with by the secured creditor before it proceeds to sell its secured assets. Rule 6(2) comes into play when the secured creditor seeks to sell movable property and Rule 8(6) comes into play when the borrower is selling immovable property. The facts of this case clearly show that the 1st Respondent - borrower itself, to pay the dues of Respondent Nos. 2 to 5, had agreed to sell the subject properties. In fact, the 1st Respondent - borrower proposed that the subject properties would be sold to M/s. Shubham Developers for Rs. 7.47 crores and thereafter to Respondent No. 6 for Rs. 6.76 Crores. When these transactions did not fructify, Respondent Nos. 2 to 5 revoked the OTS sanctioned in favour of the 1st Respondent - borrower and thereafter proceeded to sell the subject properties under the provisions of the SARFAESI Act - This being the factual position, it is clear that the 1st Respondent - borrower had given up its right of redemption as contemplated under Rules 6(2) and 8(6) by itself offering to sell the subject properties to pay the dues of Respondent Nos. 2 to 5. Application disposed off.

Summary

Issues Involved:
1. Legality of the DRAT's full waiver of deposit under Section 18 of the SARFAESI Act.
2. Validity of the sale notice description of the subject properties.
3. Compliance with Rules 6(2) and 8(6) of the SARFAESI Rules.

Detailed Analysis:

1. Legality of the DRAT's Full Waiver of Deposit:

The primary contention was whether the DRAT's order dated 1 April 2009, granting a complete waiver of the deposit required under Section 18 of the SARFAESI Act, was legally sustainable. Section 18 mandates that no appeal shall be entertained unless the borrower deposits 50% of the debt due, with a discretion to reduce this amount to not less than 25%. The court emphasized that this provision is mandatory and cannot be waived entirely. The Supreme Court's decision in Narayan Chandra Ghosh v. UCO Bank (2011) 4 SCC 548 was cited, affirming that the DRAT has no power to grant a full waiver of the deposit. The High Court concluded that the DRAT's order was ex-facie illegal and set it aside, noting that the borrower cannot use the sale proceeds of the disputed property to fulfill the pre-deposit requirement while simultaneously challenging the sale.

2. Validity of the Sale Notice Description:

The DRAT had set aside the sale on the ground that the description of the subject properties in the sale notice was vague and not properly described. The High Court examined the sale notice and found that it provided a clear description of the property, including the area and location. The possession notice issued under Rule 8(1) of the SARFAESI Rules also contained a similar description, which was not contested by the borrower at any stage. The court held that the borrower's argument about the vague description was without merit and that the sale notice was sufficiently clear for prospective purchasers.

3. Compliance with Rules 6(2) and 8(6) of the SARFAESI Rules:

The DRAT had also set aside the sale on the ground of non-compliance with Rules 6(2) and 8(6) of the SARFAESI Rules, which require a 30-day notice to the borrower before the sale of secured assets. The High Court acknowledged that these rules are mandatory but noted that they are for the benefit of the borrower and can be waived. It was found that the borrower had proposed the sale of the subject properties to settle the dues and had thus waived its right to receive the notice. The court cited the Supreme Court's decision in General Manager, Sri Siddeshwara Cooperative Bank Ltd. v. Ikbal & Ors. (2013) 10 SCC 83, which held that even mandatory provisions could be waived by the party for whose benefit they were enacted. Consequently, the High Court held that the DRAT's decision to set aside the sale on this ground was incorrect.

Conclusion:

The High Court quashed and set aside the DRAT's orders dated 1 April 2009 and 7 January 2014, reinstating the sale in favor of the petitioner. The court ruled that the DRAT had misdirected itself on both the waiver of deposit and the grounds for setting aside the sale, and emphasized the importance of adhering to statutory provisions and the borrower's conduct in waiving its rights.