AUTH.OFFR.,INDIAN OVERSEAS BANK Vs M/S.ASHOK SAW MILL
Case number: C.A. No.-004429-004429 / 2009
Diary number: 31975 / 2008
Advocates: M. A. CHINNASAMY Vs
S. THANANJAYAN
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. _______OF 2009 (Arising out of S.L.P.(C)No.27399 of 2008)
Authorized Officer, Indian Overseas Bank & Anr. ... Appellants
Vs. M/s. Ashok Saw Mill ... Respondent
With CIVIL APPEAL NO. of 2009
(Arising out of S.L.P.(C)No.3020 of 2009)
J U D G M E N T
ALTAMAS KABIR, J.
1. Leave granted in both the Special leave
petitions.
2. The respondent firm and its sister concern,
M/s. Ashok Woodworks, which is also a partnership
firm, availed of various loans from the appellant
Bank which were secured by movable and immovable
assets. The loanee firms having defaulted in
repayment of the loans and since their accounts
became Non Performing Assets (hereinafter referred
to as ‘NPA’), the Bank initiated action against
them under the provisions of the Securitisation and
Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (hereinafter
referred to as ‘the SARFAESI Act’) and issued
separate demand notices to the respondent
partnership firm and its sister concern under
Section 13(2) thereof on 17th September, 2002, and
21st September, 2002, for the recovery of
Rs.1,56,47,638/and Rs.1,40,18,468.36, respectively.
3. As the respondent and its sister concern did
not respond to the said demand notices, the
appellant Bank invoked Section 13(4) of the above
Act and took possession of the secured assets on 4th
December, 2002. The said action of the Bank, as
also the vires of the SARFAESI Act, were challenged
2
by the respondent partnership firm and its sister
concern by way of two separate writ petitions,
being Writ Petition Nos.46328 and 46329 of 2002, in
which an interim stay of all further proceedings
under the said Act was granted on 27th December,
2002. The said writ petitions were ultimately
heard and dismissed by a common order on 23rd April,
2004, with liberty to the respondent firm to
approach the Debts Recovery Tribunal (hereinafter
referred to as ‘the DRT’), within 30 days. Since,
despite such liberty, the respondent firm did not
approach the DRT, the Bank took a decision to sell
the secured assets of the respondent firm. At that
stage, negotiations were held between the parties
for a One-Time Settlement, which also failed,
causing the Bank to issue a sale notice dated 26th
July, 2007, inviting sealed tenders for the sale of
the secured assets of the firm. The same was
challenged by the respondent firm on 18th August,
2007, in Writ Petition No.27472 of 2007 on the
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ground that it was unable to move the DRT in view
of the expiry of the period of limitation
prescribed under the Act. After hearing the
parties, the High Court refused to grant any
interim relief and posted the writ petition for
final disposal.
4. During the pendency of the said writ petition,
the respondent firm, along with M/s. Ashok
Woodworks, filed SARFAESI Application No.74 of 2007
before the Debts Recovery Tribunal at Madurai for
setting aside the sale notice dated 26th July, 2007,
on the selfsame cause of action. Despite being
informed of the pendency of the writ petition for
the selfsame reliefs, the said Tribunal by its
order dated 7th September, 2007, directed the Bank
to defer the proposed sale which was scheduled to
be held on 7th September, 2007. The appellant Bank
thereupon filed Civil Writ Petition No.1392 of 2007
before the Madurai Bench of the Madras High Court
challenging the filing of S.A. No.74 of 2007. The
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same was admitted and all proceedings in S.A. No.74
of 2007 were stayed. The said writ petition came
up for hearing before the High Court on 18th
September, 2007, and was disposed of in the absence
of the counsel for the Bank with liberty to the
respondent firm to move the Debts Recovery Tribunal
at Madurai. The appellant Bank filed Review
Petition No.165 of 2007, praying for recall of the
order dated 18th September, 2007, by which the writ
petition had been disposed of in its absence. On
6th October, 2007, the appellant Bank was permitted
to open the sealed tenders which it had received
pursuant to the sale notice dated 26th July, 2007,
subject to the condition that the sale effected
would be subject to the confirmation of the Court.
Pursuant to the said order, the sealed tenders were
opened on 8th October, 2007, and 3 of the 5
properties were sold and the same was recorded by
the DRT. Subsequently, despite the pendency of the
review petition, the respondent firm withdrew S.A.
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No.74 of 2007, and filed a fresh application being
S.A. No. 104 of 2007. The review petition filed by
the Bank before the Madurai Bench of the Madras
High Court was consequently rendered infructuous
and was dismissed on 23rd June, 2008.
5. Aggrieved by the said order, the Bank filed
Writ Appeal No.926 of 2008, which was dismissed by
the Division Bench of the High Court on 1st
September, 2008, against which the present appeal
has been preferred.
6. Appearing for the appellant Bank, Mr. V.T.
Gopalan, learned Senior Advocate, urged that before
the learned Single Judge it had been contended that
the provisions of the SARFAESI Act being similar to
an English mortgage, on the issuance of notice
under Section 13(4) thereof and upon taking over
possession of the secured assets, the property
vested with the Bank which was thereafter at
liberty to bring it to sale as it deemed fit and
6
proper. It had also been submitted that despite
liberty having been granted to the respondent firm
to move the DRT within the time permitted under the
said order, the respondent firm had chosen not to
do so and was, therefore, precluded from
challenging the same subsequently. In this regard,
reliance had been placed on the decision of this
Court in Mardia Chemicals Ltd. & Ors. Vs. Union of
India & Ors. [(2004) 4 SCC 311], in which the
validity of the SARFAESI Act had been challenged.
While upholding the constitutional validity of the
Act, it was also held that the steps taken pursuant
to notice under Section 13(4) of the Act could not
be challenged before the DRT under Section 17 of
the SARFAESI Act beyond the period prescribed
thereunder. Reference was also made to the
decision of this Court in Transcore Vs. Union of
India & Anr. [(2008) 1 SCC 125], where the same
view was reiterated.
7
7. Mr. Gopalan submitted that a Division Bench
decision of the Bombay High Court rendered in UCO
Bank, Churchgate Branch Vs. M/s. Kanji Manji
Kothari & Company and its partners [Writ Petition
No.3566 of 2007] on 19th December, 2007, was also
cited before the learned Single Judge in support of
the contention that once possession is taken under
Section 13(4) of the Act, the right, title and
interest of the borrower gets extinguished and
thereafter it would not be open for the borrower to
challenge the subsequent sale in an application
under Section 17 of the SARFAESI Act. It was also
urged that the Tribunal could not entertain a
debate on the question whether the debt had become
due or not because the SARFAESI Act proceeds on the
basis that the liability is crystallized and the
debt becomes due the moment action under Section
13(4) is taken and a security interest is also
created in the secured assets. It was also
observed that while the DRT is entitled to consider
8
whether the possession of the secured assets had
been taken in accordance with the SARFAESI Act and
the rules framed thereunder, once the liability
stood crystallized it could no longer be
adjudicated upon by the DRT.
8. Mr. Gopalan submitted that the scope of the
inquiry before the DRT is confined to the action
taken by the secured creditor under Section 13(4)
of the SARFAESI Act and the subsequent action taken
to bring the secured assets to sale or to transfer
the interest therein in any manner whatsoever,
could not be made the subject matter of inquiry
before the DRT. In other words, the jurisdiction
of the Tribunal under Section 17(3) would have to
be confined to any action taken by the secured
creditor in taking possession of the secured assets
under Sub-section (4) of Section 13 and not in
regard to any subsequent steps which the secured
creditor may take to dispose of the secured assets
in accordance with the provisions of the Act. Mr.
9
Gopalan submitted that the SARFAESI Act neither
contemplates restoration of possession of the
secured assets by efflux of time nor does it place
a mandate on the secured creditor to dispose of the
secured assets within a specified period. It was
urged that since the secured assets vest with the
secured creditor once possession is taken, the
rules do not contemplate the involvement of the
borrower in the sales process and the Authorized
Officer is also empowered under Rule 8 of the
Security Interest (Enforcement) Rules, 2002, to
sell the secured assets by way of private treaty.
9. Mr. Gopalan lastly contended that the Writ
Appeal No.926 of 2008 had been filed against the
order of the learned Single Judge dated 23rd June,
2008, made in Review Application No.165 of 2007
filed by the Bank for review of the order dated 18th
September, 2007, passed in the writ petition filed
by the Bank and that such appeal was not
maintainable having regard to the provisions of
10
Order 47 Rule 7 of the Code of Civil Procedure.
Consequently, the order passed therein was invalid
on such score as well and was liable to be set
aside.
10. While adopting Mr. Gopalan’s submissions, Mr.
Altaf Ahmed, learned Senior counsel appearing for
the Auction Purchaser in the appeal arising out of
S.L.P.(C)No.3020 of 2009, submitted that the action
taken by the Bank under Section 13(4) of the
SARFAESI Act was not governed by the provisions of
the Limitation Act. He urged that Section 13(2) of
the Act, which deals with the enforcement of
security interest, does not prescribe any period of
limitation and only sets out the procedure for the
recovery of dues once a debt is classified as a
Non-Performing Asset (NPA). Mr. Ahmed submitted
that Section 13(2) provides for a demand to be made
within 60 days from the date of notice being issued
to the borrower to discharge his liabilities in
full. But once the demand was made, no further
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period of limitation is prescribed or contemplated
for taking action in terms of Section 13(4) of the
Act. Mr. Ahmed urged that Section 36 of the Act,
which deals with limitation, will have to be read
in the aforesaid manner since it refers only to
steps to be taken under Section 13(4) which would
relate back to the stage of Section 13(2) of the
Act.
11. Mr. Ahmed submitted that Section 34 gives the
provisions of the SARFAESI Act an over-riding
effect over the general law, which will also
include the law of limitation.
12. Opposing the submissions made on behalf of the
Bank and the Auction Purchaser, Mr. S. Sethuraman,
learned Advocate appearing for the respondent,
submitted that after the pronouncement of the
decision in Mardia Chemicals Ltd.’s case (supra),
certain amendments were effected to Section 17 of
the SARFAESI Act, whereby the provisions of Sub-
12
Sections (2) and (3) of Section 17 of the SARFAESI
Act were substituted with Sub-Sections (2) to (7)
by Act 30 of 2004, in which a new dimension was
added providing for an inquiry before the Tribunal
in an application filed under Section 17. The same
gave rise to a continuing cause of action which was
available to a borrower to work out his remedy
under Section 17 of the SARFAESI Act by challenging
the sale notice.
13. In support of his submissions, Mr. Sethuraman
referred to and relied on two decisions of the
Madras High Court in (1) Indian Overseas Bank &
Ors. Vs. G.S. Rajshekarn, [(2008) 4 MLJ 1012] and
(2) Ramco Super Leathers Ltd. & Anr. Vs. UCO Bank &
Anr., [(2007) 5 MLJ 986], which were affirmed by
the Full Bench of the Madras High Court in M/s.
Lakshmi Shankar Mills (P) Ltd. Vs. The Authorized
Officer/Chief Manager, Indian Bank & Ors., [(2008)
2 LW 381]. Mr. Sethumaran submitted that after
considering the provisions of Section 17 in detail,
13
the learned Single Judge relying upon the Division
Bench judgment came to the conclusion that any
person, including a borrower, could file an appeal
under Section 17 at any stage, including the stage
when the management of the business is taken over
or possession is taken of the secured assets of the
borrower. In such a case, the Tribunal has power
to restore possession in favour of the borrower, if
such action taken under Sub-Section (4) of Section
13 is declared invalid.
14. The main question which falls for determination
in this appeal is whether the DRT would have
jurisdiction to consider and adjudicate with regard
to post 13(4) events or whether its scope in terms
of Section 17 of the SARFAESI Act would be confined
to the stage contemplated under Section 13(4), as
contended on behalf of the appellants. An
additional question with regard to the
maintainability of the appeal will have to be taken
14
into consideration while deciding the present
appeal.
15. In order to answer the aforesaid questions
which arise in this appeal, it will be necessary to
look into the relevant provisions of Sections 13
and 17 of the SARFAESI Act, as they originally
stood and as they now stand after the amendments
effected thereto by the amending Act of 2004.
16. In the Statement of Objects and Reasons of the
amending Act reference has been made to the
decision of this Court in Mardia Chemicals Ltd.’s
case (supra). It has been mentioned therein that
Sub-Section (2) of Section 17 had been declared
ultra vires Article 14 of the Constitution. It was
also mentioned that it had become necessary to make
amendments in Sections 13 and 17 of the Act since
it had been held that where a secured creditor had
taken action under Sub-Section (4) of Section 13 of
the Act, it would be open to the borrowers to file
15
appeals under Section 17 of the Act within the
period of limitation as prescribed therefor. It is
on such account that Section 13 of the principal
Act was amended by inserting Sub-Section (3-A).
17. Further more, in Sub-Section (4) Clause (b) was
substituted by a fresh provision which entitled the
secured creditor to take over the management of the
business of the borrower, including the right to
transfer by way of lease, assignment or sale for
releasing the secured asset.
18. The said amendments were made in order to give
an opportunity to the borrower to approach the DRT
at any stage against any measure taken by the
secured creditor under Sub-Section (4) of Section
13 which were not in conformity therewith and to
have the possession of secured assets restored in
the event such action was found to be invalid. At
the same time, more power was given to the secured
creditor to exercise control over the management of
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the business of the borrower which included the
right to transfer by way of lease, assignment or
sale of the secured assets for releasing the same.
19. The scheme of the SARFAESI Act as it now stands
after the 2004 Amendment for enforcement of
security interest is that notwithstanding the
provisions of Section 69 or Section 69-A of the
Transfer of Property Act, any security interest
created in favour of any secured creditor may be
enforced, without the intervention of the Court or
Tribunal, in accordance with the provisions of the
Act. Chapter III of the Act which deals with
enforcement of security interest begins with
Section 13, which is one of the Sections relevant
for a decision in this appeal. Since we are
concerned with Sub-Sections (1) to (4) of Section
13, the same are extracted hereinbelow :
“13. Enforcement of security interest.- (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any
17
security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
(3) The notice referred to in sub- section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non- payment of secured debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.
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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 secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise 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 that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt;
(c) appoint any person (hereafter referred to as the manager), to manage the
19
secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any 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, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.”
20. The other relevant provision which is Section
17 is also included in Chapter III and has been
extensively amended after the decision in the
Mardia Chemicals Ltd.’s case (supra). The same is
also reproduced hereinbelow for a better
understanding of the scheme of the Act after the
amendments effected :
“17. Right to appeal.-(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, [may make an application along with such fee, as may be prescribed] to the Debts Recovery Tribunal having jurisdiction in the matter within forty- five days from the date on which such measure had been taken.
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Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.
[Explanation.-For the removal of doubts, it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub-section (1) of section 17.]
[(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.
(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the secured
21
creditors as invalid and restore the possession of the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section 13.
(4) If, the Debts 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
22
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 the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.
(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made thereunder.]"
21. It is clear that while enacting the SARFAESI
Act the Legislature was concerned with measures to
regulate securitisation and reconstruction of
financial assets and enforcement of security
interest. The Act enables the Banks and Financial
Institutions to realise long-term assets, manage
problems of liquidity, asset liability mismatches
and improve recovery by exercising powers to take
possession of securities, sell them and reduce non-
performing assets by adopting measures for recovery
23
or reconstruction. The provisions of Section 13
enable the secured creditors, such as Banks and
Financial Institutions, not only to take possession
of the secured assets of the borrower, but also to
take over the management of the business of the
borrower, including the right to transfer by way of
lease, assignment or sale for realizing secured
assets, subject to the conditions indicated in the
two provisos to Clause (b) of Sub-Section (4) of
Section 13.
22. In order to prevent misuse of such wide powers
and to prevent prejudice being caused to a borrower
on account of an error on the part of the Banks or
Financial Institutions, certain checks and balances
have been introduced in Section 17 which allow any
person, including the borrower, aggrieved by any of
the measures referred to in Sub-Section (4) of
Section 13 taken by the secured creditor, to make
an application to the DRT having jurisdiction in
the matter within 45 days from the date of such
24
measures having taken for the reliefs indicated in
Sub-Section (3) thereof.
23. The intention of the legislature is, therefore,
clear that while the Banks and Financial
Institutions have been vested with stringent powers
for recovery of their dues, safeguards have also
been provided for rectifying any error or wrongful
use of such powers by vesting the DRT with
authority after conducting an adjudication into the
matter to declare any such action invalid and also
to restore possession even though possession may
have been made over to the transferee. The
consequences of the authority vested in DRT under
Sub-Section (3) of Section 17 necessarily implies
that the DRT is entitled to question the action
taken by the secured creditor and the transactions
entered into by virtue of Section 13(4) of the Act.
The Legislature by including Sub-Section (3) in
Section 17 has gone to the extent of vesting the
DRT with authority to even set aside a transaction
25
including sale and to restore possession to the
borrower in appropriate cases. Resultantly, the
submissions advanced by Mr. Gopalan and Mr. Altaf
Ahmed that the DRT has no jurisdiction to deal with
a post 13(4) situation, cannot be accepted. The
dichotomy in the views expressed by the Bombay High
Court and the Madras high Court has, in fact, been
resolved to some extent in the Mardia Chemicals
Ltd.’s case (supra) itself and also by virtue of
the amendments effected to Sections 13 and 17 of
the principal Act. The liberty given by the
learned Single Judge to the appellants to resist
S.A.No.104 of 2007 preferred by the respondents
before the DRT on all aspects was duly upheld by
the Division Bench of the High Court and there is
no reason for this Court to interfere with the
same.
24. We are unable to agree with or accept the
submissions made on behalf of the appellants that
the DRT had no jurisdiction to interfere with the
26
action taken by the secured creditor after the
stage contemplated under Section 13(4) of the Act.
On the other hand, the law is otherwise and it
contemplates that the action taken by a secured
creditor in terms of Section 13(4) is open to
scrutiny and cannot only be set aside but even the
status quo ante can be restored by the DRT.
25. The other point regarding the maintainability
of the appeal against the review petition, is of
little consequence since the appeal was preferred
by the appellants themselves. Having invoked the
jurisdiction of the Appellate Court, it was no
longer open to the appellants to take a contrary
view and to urge that such appeal was not
maintainable having been filed against an order
passed in a review petition.
26. We, therefore, see no reason to interfere with
the judgment and order of the High Court and the
27
appeal is accordingly dismissed, but without any
order as to costs.
27. The Civil Appeal No. ________ of 2009 (@
Special Leave Petition No.3020 of 2009 filed by M/s
Vasantha Communications Pvt. Limited and others is
also disposed of on the basis of the findings in
this judgment, without any order as to costs.
________________J. (ALTAMAS KABIR)
________________J. (CYRIAC JOSEPH)
New Delhi Dated:16.07.2009
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