2018 (3) TMI 932 - SC - Indian Laws

Right of secured creditor - default in the repayment of the outstanding amount - agriculture property - right of creditor after Public Auction and sale of property - right to transfer the property 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 representation and the proposal for repayment made therein and has in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail. Therefore, in the fact and circumstances of this case, we are of the view that the debtor is not entitled to the discretionary relief under Article 226 of the Constitution which is indeed an equitable relief. The mere introduction of the words without prejudice have no significance and the debtor clearly acknowledged the debt even after action was initiated under the Act and even after payment of a smaller sum, the debtor has consistently refused to pay up. Since Section 14 provides that an application for taking possession may be made by a secured creditor, and the creditor having ceased to be a secured creditor after the confirmation of sale in favour of the auction purchaser, was not entitled to maintain the application. Consequently, therefore, the order of the District Magistrate directing delivery of possession is a void order. This submission found favour with the High Court that held that the creditor having transferred the secured assets to the auction purchaser ceased to be a secured creditor and could not apply for possession. The High Court held that the Act does not contemplate taking over of symbolic possession and therefore the creditor could not have transferred the secured assets to the auction purchaser. In any case, since ITC Ltd. was the purchaser of such property, it could only take recourse to the ordinary law for recovering physical possession. 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? - Held that - 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 - Thus, the entire interest in the property not 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.

Summary

Issues Involved:
1. Validity of the auction sale and the setting aside of the sale by the High Court.
2. Compliance with Section 13(3A) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. Inclusion of agricultural land as security interest.
4. Transfer of security interest by the creditor to the auction purchaser.
5. Allegations of fraud and collusion in the auction process.

Issue-wise Detailed Analysis:

1. Validity of the Auction Sale:
The auction purchaser, ITC Ltd., challenged the Bombay High Court's order setting aside the auction sale of a five-star luxury hotel property. The sale was conducted by the Industrial Financial Corporation of India (IFCI), the secured creditor, due to the debtor's default on a corporate loan agreement. The High Court had set aside the sale, favoring the debtor, Blue Coast Hotels Ltd., on multiple grounds including non-compliance with statutory provisions and allegations of fraud.

2. Compliance with Section 13(3A):
The High Court found that the creditor violated Section 13(3A) of the Act by not responding to the debtor's representation for reschedulement of the loan. The Supreme Court examined whether this non-compliance rendered subsequent actions invalid. The Court noted that the statutory scheme requires the creditor to consider and respond to the debtor's representation. Despite the creditor's failure to provide a written reply, the Supreme Court concluded that the creditor had considered the debtor's proposals and granted multiple opportunities for repayment. Therefore, the breach of Section 13(3A) was deemed not significant enough to annul the creditor's actions.

3. Inclusion of Agricultural Land as Security Interest:
The High Court held that the inclusion of agricultural land in the notice for recovery was contrary to Section 31(i) of the Act, which exempts agricultural land from the Act's provisions. The Supreme Court clarified that the purpose of Section 31(i) is to protect agricultural land from being subjected to the Act's drastic measures. However, the Court found that the land in question, though recorded as agricultural in revenue records, was intended for non-agricultural use as part of the hotel property. The debtor had applied for conversion of the land, and the land was used for purposes related to the hotel's operations. Consequently, the Supreme Court held that the land was not agricultural for the purposes of the Act.

4. Transfer of Security Interest by the Creditor to the Auction Purchaser:
The High Court ruled that the creditor ceased to be a secured creditor after transferring the property to the auction purchaser and thus could not apply for possession under Section 14 of the Act. The Supreme Court disagreed, stating that the creditor retained symbolic possession and had the right to take actual possession. The transfer of the secured asset did not constitute a complete transfer of all rights, and the creditor remained a secured creditor under the Act. Therefore, the creditor's application for possession was valid.

5. Allegations of Fraud and Collusion:
The High Court inferred fraud and collusion between the creditor and the auction purchaser based on the breach of laws and the circumstances surrounding the auction. The Supreme Court found no evidence to support this inference. The Court noted that the property was sold through a public auction, duly advertised, and the entire sale consideration was deposited by the auction purchaser. The Court concluded that the High Court's finding of collusion was unsustainable.

Conclusion:
The Supreme Court set aside the High Court's judgment, holding that the debtor was not entitled to discretionary relief under Article 226 of the Constitution due to its conduct of repeatedly seeking extensions and failing to repay the loan. The Court directed the debtor to hand over possession of the mortgaged properties to the auction purchaser within six months. The appeals were allowed accordingly.