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TMI Blog2013 (9) TMI 940X X X X Extracts X X X X X X X X Extracts X X X X ..... December 27, 2008 by the Deputy Commissioner was quashed. Consequently, the order passed by the DRAT was also quashed and the order of the DRT was restored - The department was directed to comply with sub-rules (1) and (2) of rule 8 by indicating the date on which possession of the secured assets would be taken and thereafter proceed in accordance with law. The receipt of notice under sub-section (2) results in a virtual attachment of the secured asset - If the demand made in section 13(2) was not complied with and the representation as well as the objections filed by the borrower were also not accepted and communicated to the borrower, then in that case, steps could be initiated u/s 13(4) – 13(6) enabled a secured creditor to transfer the secured asset after taking possession would imply that the possession of the secured asset vests with the secured creditor prior to any such transfer - The procedure for taking possession or control of the secured asset by the secured creditor was envisaged in section 14 after the date mentioned in the possession notice at which stage, it was not necessary to actually inform or indicate to the borrower, the taking of possession by the secured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt. Swetha P. and H.M. Mariyappa for the Petitioner. K.N. Krishna Rao for the Respondent. JUDGMENT B.V. Nagarathna, J. This writ petition raises the issue of the requisite procedure to be followed prior to taking possession of a secured asset under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "the Act", for the sake of brevity). 2. The petitioners are debtors, who have filed this writ petition, being aggrieved by the order dated September 6, 2011 passed by the Debts Recovery Appellate Tribunal, Chennai, (DRAT) in R. A. (S.A.)/97 of 2010, as well as the order dated December 27, 2008, passed by the Deputy Commissioner-cum-District Magistrate, in respect of property belonging to the second petitioner, which is situated at B. S. K. III Stage, Bangalore, invoking the provisions of sections 13(4) and 14 of the Act, consequent upon the notice issued under section 13(2) of the Act. Since the petitioners had failed to repay the debt to the respondent-bank, notice under section 13(2) of the Act was issued to the first petitioner on July 2, 2008, who is the principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured asset, i.e., the immovable property at BSK III Stage, Bangalore-84. However, in doing so, there has been total non-compliance of the principles of natural justice as well as the procedure envisaged under the Act as well as the rules framed under the Act. 7. Drawing our attention to rules 4 and 8 of the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as "the Rules"), it is contended that possession of the secured asset can be taken by issuance of a notice to the borrowers or by affixing it on the place of the property. The said notice has also to be published in two leading newspaper in one vernacular language seven days prior to the date of taking possession and thereafter possession of the immovable property can be taken. However, in the instant case, what the respondent-bank has resorted to is filing an application before the Deputy Commissioner/District Magistrate under section 14 who has directed physical possession of the property be taken. That in the absence of issuance of any notice as prescribed under the Rules before initiating action under sub-section (4) of section 13 of the Act and the District Magistrate also proceeding to pass orders for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower : Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A. (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely : (a)take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset ; (b)take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset : Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt : Provided further tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors : Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) : Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen s dues with the liquidator in accordance with the provisions of section 529A of that Act : Provided also that the liquidator referred to in the second proviso shall intimate the secured creditor the workmen s dues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset.-(1) Where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him (a)take possession of such asset and documents relating thereto ; and (b)forward such asset and documents to the secured creditor. (2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary. (3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bts Recovery Tribunal declares the recourse taken by a secured creditor under sub-section (4) of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub-section (4) of section 13 to recover his secured debt. (5) Any application made under sub-section (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application : Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery Tribunal, shall not exceed four months from the date of making of such application made under sub-section (1). (6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as specified in sub-section (5), any part to the application may make an application, in such form as may be prescribed, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c)by holding public auction ; or (d)by private treaty. (6) The authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule(5) : Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall include, (a)the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor ; (b)the secured debt for recovery of which the property is to be sold ; (c)reserve price, below which the property may not be sold ; (d)time and place of public auction or the time after which sale by any other mode shall be completed ; (e)depositing earnest money as may be stipulated by the secured creditor ; (f)any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. (7) Every notice of sale shall be affixed on a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13, the rights conferred on the secured creditor in clauses (a) to (d) of sub-section (4) could be exercised against the guarantors also. Once a notice is received under sub-clause (2), no borrower can transfer by way of sale, lease or otherwise the secured assets referred to in the notice without prior written consent of the secured creditor as per sub-section (13) of section 13. 11. Section 14 states that if possession of any secured asset is required to be taken by the secured creditor or if any secured asset is required to be sold or transferred, then the secured creditor may, for the purpose of taking possession or control or any such secured asset, request in writing to the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto is situated or found, to take possession thereof and the Chief Metropolitan Magistrate or the District Magistrate as the case may be, on such request being made can take possession of such assets and forward such assets and documents to the secured creditor. Under sub-section (3) of section 14, it is stated that the action of the Chief Metropolitan Magistrate or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the date of taking possession or otherwise the mere issuance of a notice would render the notice to be vague and purposeless. Sub-rule (2) prescribes the publication of the possession notice seven days prior to the "date of taking possession" in two leading newspapers, one of which is in vernacular language, having sufficient circulation in the locality by the authorised officer. Therefore issuance of a notice to the borrower as well as by newspaper publication is expressly provided and hence would have to be complied with by a secured creditor. Sub-rule (3) states that in the event of possession of immovable property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as an owner of ordinary prudence would, under the similar circumstances, take care of such property till they are sold or otherwise disposed of. Sub-rules (5) to (8) of rule 8 and as well as rule 9 pertain to the steps to be taken prior to and during the process of sale of the secured assets. 14. On a conspectus reading of sub-section (4) of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery of possession notice ; and (ii) by newspaper publication, clearly indicating the date on which possession of the secured asset would be taken by the secured creditor. If on the date indicated in the possession notice, the secured creditor is unable to take possession of the secured asset, then in that case, recourse may be had to section 14 of the Act, at which stage a further notice to the borrower is not envisaged under the said section. 15. Therefore, what emerges is the mandatory requirement under the Act read with the Rules, that in order to enable the borrower to know the date on which possession would be taken by the secured creditor, sub-rules (1) and (2) of rule 8 would have to be complied with by issuance of notices indicating the date on which possession would be taken. There is another purpose for issuing the notice prior to taking possession and that is, to enable the borrower to discharge the liability to the secured creditor. Also a person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower can pay the secured creditor, so much of the money as is sufficient to pay the secured debt as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Natural Justice under various provisions of the Act and Rules under considerations. (a)In the case of Mardia Chemicals Ltd. v. Union of India [2004] 120 Comp Cas 373 ; [2004] 51 SCL 513 (SC) Supreme Court has emphasised the need to maintain transparency and fairness while dealing with a defaulting borrower in the following words (page 402 of 120 Comp Cas) : "In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of section 13 in the case of non-compliance with notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of section 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets, etc. This will also be in keeping with the concept of right to know and lender s liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of section 13 of the Act. It will also cater to the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under section 13(2) of the Act. The next safeguard available to a secured borrower within the framework of the Act is to approach the Debts Recovery Tribunal under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmation of sale, if the terms of payment are complied with, the authorised officer shall issue a sale certificate in favour of the purchaser in the form given in Appendix V to the 2002 Rules. Rule 9(9) states that the authorised officer shall deliver the property to the buyer free from all encumbrances known to the secured creditor or not known to the secured creditor. (emphasis supplied). Section 14 of the NPA Act states that where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred, the secured creditor may, for the purpose of taking possession, request in writing to the District Magistrate to take possession thereof. Section 17(1) of the NPA Act refers to right of appeal. Section 17(3) states that if the DRT as an appellate authority after examining the facts and circumstances of the case comes to the conclusion that any of the measures under section 13(4) taken by the secured creditor are not in accordance with the provisions of the Act, it may by order declare that the recourse taken to any one or more measures is invalid, and consequently, restore possession to the borrower a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty interests are created overnight and in very many cases those third parties take up the defence of being a bona fide purchaser for value without notice. It is these types of disputes which are sought to be avoided by rule 8 read with rule 9 of the 2002 Rules. In the circumstances, the drawing of dichotomy between symbolic and actual possession does not find place in the scheme of the NPA Act read with the 2002 Rules." (c)In the case of United Bank of India v. Satyawati Tondon [2010] 158 Comp Cas 251 (SC), though the issue was regarding availing of remedy under section 17 of the Act rather than filing a writ petition under Article 226 of the Constitution of India, at Paragraphs 41 and 42 reference to notices under sub-sections (2) and (4) and Section 13 being issued before filing an application under section 14 of the Act has been made. In the said case, notice prior to taking action under sub-section (4) of section 13 had been issued and thereafter, section 14 had been invoked. In the said case, it was held that guarantor could also avail the remedy provided under section 17 of the Act. (d)Similarly, in the case of Kaniyalal Lalchand Sachdev v. State of Maharashtra [2011] 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88, the Division Bench while holding that the financial institution concerned had no jurisdiction to invoke section 13(2) of the Act, nevertheless opined that notice under section 13(4) has to be issued before the borrower is dispossessed (page 91) : "23. From the discussion which has been made hereinabove, it is clear that on the dates on which the alleged transactions were made between the petitioner and the opposite party No. 6, it was not a financial institution within the meaning of Securitisation Act and it could not invoke section 13. That being the position, the notice which is issued to the petitioner under section 13(2) of the Securitisation Act is without jurisdiction. It is highly doubtful whether any notice under section 13(4) was given. Even if it is given for the same reason, it is wholly without jurisdiction and the proceeding on the basis of which the petitioner has been dispossessed from his residential property is illegal and without any authority of law. Thus, the entire action of opposite party No. 6 is unauthorised, illegal and bad in law." (g)In the case of Mrs. Sunanda Kumari v. Standard Chartered Bank [2007] 135 Comp Cas 604 (Karn) (Division Bench of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is made with regarding to rule 8 and section 14 in Transcore's case (supra). But, in every case where possession of the secured asset is taken would not result in a sale of the same. However, notice of taking possession must be given to the borrower, indicating the date of taking possession and thereafter steps could be taken to take possession, if necessary by invoking section 14 of the Act. It is reiterated that at the stage of considering the application filed by the borrower under section 14, notice need not be issued to the borrower by the Magistrate. 19. In that view of the matter compliance of sub-rules (1) and (2) of rule 8 of the Rules is a mandatory requirement before possession of the secured asset is sought to be taken by a financial institution. Any violation or infraction of section 13(4) of the Act by the financial institution could be called in question by way of filing an appeal under section 17 of the Act, and the DRT has the power to restore possession to the borrower. 20. In the instant case, indubitably, no notice has been issued under sub-rule (1) or any publication has been made under sub-rule (2) of rule 8 of the Rules, informing the petitioners on whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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