2018 (11) TMI 498 - SC - Indian Laws

Maintainability of application - SARFAESI Act - default in repayment of a secured debt or any instalment - recovery of borrowed amount - physical or actual possession of secured assets by banks/financial institutions not taken place - Whether an application under section 17(1) of the SARFAESI Act, at the instance of a borrower, is maintainable even before physical or actual possession of secured assets is taken by banks/financial institutions in exercise of their powers under section 13(4) of the Act read with rule 8 of the Security Interest (Enforcement) Rules, 2002? Held that - There isa radical change in the borrower dealing with the secured asset from this stage. At the stage of a section 13(2) notice, section 13(13) interdicts the borrower from transferring the secured asset (otherwise than in the ordinary course of his business) without prior written consent of the secured creditor. But once a possession notice is given under rule 8(1) and 8(2) by the secured creditor to the borrower, the borrower cannot deal with the secured asset at all as all further steps to realise the same are to be taken by the secured creditor under the 2002 Rules. Section 19, which is strongly relied upon by Shri Ranjit Kumar, also makes it clear that compensation is receivable under section 19 only when possession of secured assets is not in accordance with the provision of this Act and rules made thereunder. That this is the general scheme of the Act is also clear from section 17(2) which states that the Debts Recovery Tribunal, when an application is filed before it, shall consider whether any of the measures referred to in section 13(4) taken by the secured creditor are in accordance with the provisions of the Act and rules made thereunder. The scheme of section 13(4) read with rule 8(1) therefore makes it clear that the delivery of a possession notice together with affixation on the property and publication is one mode of taking possession under section 13(4) - This being the case, it is clear that section 13(6) kicks in as soon as this is done as the expression used in section 13(6) is after taking possession . Also, it is clear that rule 8(5) to 8(8) also kick in as soon as possession is taken under rule 8(1) and 8(2). The statutory scheme, therefore, in the present case is that once possession is taken under rule 8(1) and 8(2) read with section 13(4)(a), section 17 gets attracted, as this is one of the measures referred to in section 13(4) that has been taken by the secured creditor under Chapter III. It is hereby declared that the borrower/debtor can approach the Debts Recovery Tribunal under section 17 of the Act at the stage of the possession notice referred to in rule 8(1) and 8(2) of the 2002 Rules - appeal allowed.

Summary

Issues Involved:
1. Maintainability of an application under Section 17(1) of the SARFAESI Act by a borrower before physical or actual possession of secured assets is taken by banks/financial institutions.
2. Interpretation of Section 13(4) of the SARFAESI Act and Rule 8 of the Security Interest (Enforcement) Rules, 2002.
3. Legal implications of symbolic possession versus actual physical possession under the SARFAESI Act.

Detailed Analysis:

1. Maintainability of an Application under Section 17(1) of the SARFAESI Act:
The core issue was whether a borrower can file an application under Section 17(1) of the SARFAESI Act before physical or actual possession of secured assets is taken. The Full Bench of the Allahabad High Court had previously held that such an application is maintainable only after the measures under Section 13(4) have been taken and physical possession is acquired. However, the Supreme Court overturned this, stating that the borrower can approach the Debts Recovery Tribunal (DRT) at the stage of the possession notice under Rule 8(1) and 8(2) of the 2002 Rules.

2. Interpretation of Section 13(4) of the SARFAESI Act and Rule 8 of the Security Interest (Enforcement) Rules, 2002:
The Supreme Court analyzed Section 13(4) of the SARFAESI Act, which allows secured creditors to take possession of secured assets if the borrower fails to discharge his liability. The Court clarified that "possession" under Section 13(4)(a) includes both symbolic and actual physical possession as per Rule 8 of the 2002 Rules. Rule 8(1) and 8(2) deal with symbolic possession, while Rule 8(3) deals with actual physical possession. The Court emphasized that the statutory scheme allows for symbolic possession to trigger the borrower's right to approach the DRT under Section 17(1).

3. Legal Implications of Symbolic Possession versus Actual Physical Possession:
The Court highlighted the distinction between symbolic and actual physical possession. Symbolic possession involves delivering a possession notice and affixing it on the property, which is sufficient to trigger the borrower's right to challenge the secured creditor's actions under Section 17(1). The Court rejected the argument that only actual physical possession could invoke the borrower's right to approach the DRT, stating that such an interpretation would cause undue hardship to borrowers, particularly those with running businesses.

The judgment emphasized that the SARFAESI Act and the 2002 Rules provide a comprehensive framework that allows secured creditors to take possession and realize secured assets while also safeguarding the borrower's rights to seek judicial intervention against wrongful actions. The Court underscored that the legislative intent was to balance the rights of secured creditors to recover debts swiftly with the borrower's right to fair treatment and judicial recourse.

Conclusion:
The Supreme Court's judgment clarified that borrowers can file applications under Section 17(1) of the SARFAESI Act upon receiving a possession notice under Rule 8(1) and 8(2), without waiting for actual physical possession to be taken. This interpretation aims to protect borrowers from potential wrongful actions by secured creditors and ensures a fair and balanced approach to debt recovery under the SARFAESI Act.