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Debt Recovery Proceedings Some Latest Judgements III

The article provides a summary detailing of three cases of Debt Recovery Proceedings or of the nature of Financial Disputes from different High Courts of India. Debt Recovery Proceedings generally means where the lender Banks through judicial actions make recoveries of their bad debts. The Recovery of Debts & Bankruptcy Act, 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are primary statues that assist in the recovery of debts for the Banks or Financial institutions.

The cases below provide the legal principles in the Debt Recovery Proceedings.

Case 1: Akshat Commercials Private Ltd. Vs Kalpana Chakroborty

A delay in filing a Securitization Application before the DRT cannot be condoned by an Application for Condonation of delay

[Bench: Hon’ble Justice Shri Bhaskar Bhattacharya and Hon’ble Justice Shri P Mandal of the High Court of Calutta in W.P No. 131 of 2018]  

The present case is a Writ Appeal filed by the non-applicant in the original writ petition wherein, the Debt Recovery Tribunal disallowed the application under Section 17(1) of the SARFAESI Act and Section 5 of the Limitation Act, on the ground that the application has been filed beyond the period of limitation and the condonation of delay is not applicable in the case of Debt Recovery Tribunal cases.

The Single Bench of the writ court held that Section 5 of the Limitation Act for condonation of delay is applicable in the proceedings before the DRT and ordered the Tribunal to hear the application on the basis of merits. Thus, the writ appeal by the present appellant.

Fact-  The facts of the case have been described in the above paragraphs.

Held- To adjudicate the matter in issue, the Division bench of the High Court observed the following provisions under Section 17, 35, 36 and 37 of the SARFAESI Act; Section 24 of the Recovery of Debt and Bankruptcy Act, 1993 and Section 26 of the Limitation Act, 1963.

The Court came up with two questions which are:

  1. What is the nature of Section 17(1) of the SARFAESI, does it qualify as a ‘Suit’ or an ‘application’ as per the definition under Section 2(a) and (b) of the Limitation Act?
  2. Does Section 5 of the Limitation Act, 1963 can be exercised on special acts.

As per Section 17(1), which itself has provided a limitation period of 45 days from any action taken by the secured creditor under Section 13(4) of the SARFAESI. Also as per Section 17(6), the actions taken under SARFAESI before the Debt Recovery Tribunal shall be as far maybe dispose of any application as per the procedure provided in the RDBI Act, 1993.

In Section 26 of the RDBI Act, 1993 which says that the provisions of the Limitation Act, 1963 shall be applicable as far possible. This means the Limitation Act is subject to interpretation by the Courts for its applicability in Debt Recovery Proceedings.

The Court dealt with the nature of Section 17(1) and referred to the case of Mardia Chemicals Ltd. Vs Union of India and also M/s Transcore vs Union of India wherein, the application under Section 17(1) was not considered as an appellate proceeding, rather than a raising of grievances against the action or measure taken by a party in contract. This is an initial proceeding as a civil suit and such proceedings, as a matter of fact, are in lieu of civil suit where a proper remedy is available, but a bar created under Section 35 of the Act.

After the said judgment, the Parliament amended the provision and in place of ‘appeal’, the word ‘application’ was amended into the provision. Then again in M/s Transcore Ltd. Vs Union of India taking into consideration of the amended provision reiterated the above judgement in Mardia Chemicals (supra):

“We may like to observe that proceedings under Section 17 of the Act, in fact, are not appellate proceedings. It seems to be a misnomer. In fact it is the initial action which is brought before a forum as prescribed under the Act, raising grievance against the action or measures taken by one of the parties to the contract. It is the stage of initial proceeding like filing a suit in civil court. As a matter of fact proceedings under Section 17 of the Act are in lieu of a civil suit which remedy is ordinarily available but for the bar under Section 34 of the Act in the present case.” (Paragraph 59 of Mardia (supra)).

Thus, from the two judgements it well recognized that Section 17(1) is of the nature of the original proceeding and can be termed as a suit which does not amplify the applicability of Section 5 of the Limitation Act because the applicability of the Limitation Act due to the provision contained in Section 26 of the RDBI Act, 1993 the proposition of ‘as far as may be’ thus, cannot be applicable on suits.

For this, the court referred to the judgement of Gopal Sardar vs. Karuna Sardar [2004(4) SCC 252] where the question as to the Section 5 of the Limitation Act applied in a proceeding for preemption under Section 8 of the West Bengal Land Reforms Act (WBLRA) though the said provision is used in the initiation of a proceeding as an ‘application’. In this judgement the court referred to a Division Bench judgement of the Hon’ble S.C in Sirish Maji vs Nishit Doloi [(1999(1) CHN 365)], where the initiation of a proceeding as an ‘application’ under Section 8 of WBLRA was deemed to be a suit. The Court in the judgement referred to Section 2(b) and 2(l) of the Limitation Act, where the definition of “application” means and includes a petition; and that of “suit” means which does not include an appeal or an application.

It also explained the category ‘application’ is a step ancillary to or taken in course of the first and Article 118 to 137 of the Limitation Act are governed by it. Whereas, a suit is a complete or independent proceeding falling within the first class of proceedings. Thus, ‘application’ is not, in this sense, an independent or complete proceeding and in this sense used in the Limitation Act thus falls within the second class of proceeding.

Thus, the Court held the view that by virtue of the provisions contained in Sections 17(7) of the SARFAESI Act and Section 24 of the RDBI Act, the provisions of the Limitation Act would “as far as may be” applicable but not all the provisions of the said Act.

The Court heavily relying on the contentions raised in the Gopal Sardar case and rejecting the contention the Learned Single Judge Bench relied on the writ petition, it concluded with the interpretation that Section 17(1) gives 45 days for approaching the DRT and the sub-section (5) gives a time limit of 60 days for disposal of such application u/s.17(1) and if not disposed in the time period within 4 months any party may make an application to the Appellate Tribunal expeditious disposal.

Therefore, 45 days for invoking the original jurisdiction is a suit and a further time-limit for disposal of proceedings and a right to complain before the appellate forum, so it was never the intention of the legislature to apply Section 5 of the Limitation Act to such original proceeding under Section 17(1) of the SARFAESI Act.

The Court held the learned Debt Recovery Tribunal rightly refused to conde the delay and also set aside the judgement passed by the Learned Single Judge in the Writ Petition.

Case 2: M/s Tripower Enterprises vs State Bank of India

Title Documents submitted before the DRT can be released where an auction sale certificate is issued and Mortgage is valid.

[Bench: Hon’ble Justice Mr A.M Khanwilkar and Hon’ble Justice Mr Ajay Rastoji of The Supreme Court of India in SLP(c) 30392/2019]

The appellant who is an auction purchaser in this cased filed the writ appeal for confirmation of the auction sale by delivering the title documents submitted by the Bank in an O.A 11/2008 proceedings before the Debt Recovery Tribunal.

The question arose before the Hon’ble Bench of S.C whether the title documents can be released by its order where the documents are exhibited before the Learned DRT for adjudication and whether during the pendency of the case the documents can be by order even if the sale of the secured asset as mentioned in the title documents had been conducted successfully by the Bank in an Auction sale?

Facts– The Respondent No. 3 M/s Rukmini Mills Ltd. The borrower had availed credit from the Bank and for which Associates Trading Corporation Pvt. Ltd (Respondent No.2) became the guarantor of the loan. The borrower, however, committed default and the Bank filed an O.A No. 11/2008 before the DRT Madurai. The bank also issued a notice for taking symbolic possession of the secured assets under Section 13(4) of the SARFAESI Act on 13.05.2008.

After the possession notice, the guarantor challenged the same by filing a petition S.A No. 225/2008 before the same DRT, which was rejected on 15.10.2008. The auction thereby was conducted.

The appellant ultimately turned out to be the highest bidder in the e-auction conducted by the Bank on 28.02.2017 and a sale certificate of the secured assets purchased by the appellant was issued by the Bank on 29.04.2017.

Before, the finalization of the auction in favor of the appellant, the Bank had filed an application before the DRT an I.A no.995/2017 in the O.A 11/2008 for return of the original documents, so that the Bank would be obliged to hand over the same to the auction purchaser upon the sale certificate.

The allegation of the guarantor was that there was no valid mortgage in respect of the secured asset referred to as ‘B’ Schedule property because the equitable mortgage was created by an incompetent person and also, that the issue of validity is pending and to be examined by the DRT in the O.A 11/2008.

Held– The decision of this court revolves on one defense of the respondent Guarantor, which is upon the validity of the mortgage deed because the signatory of the mortgagor on the document was allegedly not an authorized person of the respondent. Thus, two questions arose before the court Whether the mortgage deed executed by the borrower, guarantor, and the Bank was valid? and Whether the executor of the respondent guarantor was an authorized person?

It was pointed out by the respondent in the proceedings before the DRT and in its order dated 09.06.2015 that in the documents for extension of the mortgage was signed by Mr. S Balasubramaniam (respondent No.4). It was asserted that he was never a Director of the Respondent Company and was a stranger to it.

The Court observed in the S.A 225/2008 filed by the guarantor challenging the possession notice dated 15.10.2008 by the Bank under Section 13(4) of the SARFAESI Act. In the proceedings, the guarantor made the same allegation that the mortgagor was not an authorized person. As per the final order of the proceedings, the Court observed that the Respondent Bank in proving the claim of mortgage produced some additional documents of the Guarantor company which are filed with the ROC (Registrar of Companies). In those reports between 1985 to 1996 Mr. Balasubramanian and MR. Kumarappan, who signed the documents as Directors, no proof is submitted that they were the Directors as per the records of ROC. However, in the Balanced Sheet which is periodically filed before the ROC has been signed by Mr. Balasubramanan and Mr. Kumarappan and the same have been accepted by the ROC and kept in records. This proved that they were in charge of the affairs of the Company. Hence, the learned DRT was convinced about the validity of the mortgaged documents.

On a similar note, in the aforesaid final order the Respondent No.8 Mr. S Thiagarajan also a Director had filed an affidavit on 27.01.2011 stating that the Guarantor Company is willing to pay the sum of Rs.350.12 lakhs within the time frame fixed by the DRT to be minimum of six months. This, in fact, countered the allegation made by the Guarantor company. Also, in an appeal before the DRAT which was dismissed on the ground to non-compliance with the pre-deposit condition, thus, the argument came to its finality of the validity of mortgage deed by a non-authorized person to end. The Guarantor again raised the same issue before the DRT Chennai, and demanded the injunction of the sale proceeds, which was dismissed on the grounds as per the judgement of the Learned DRAT.

The guarantor finally raised another plea before DRT Chennai challenging the auction sale notice dated 09.02.2017 as held on 28.02.2017 and consequential sale certificate issued to the appellant as on 29.04.2017, which was also rejected being barred by limitation. The same plea was also rejected by the High Court.

On the other question about the release of title deeds to the Bank because a sale certificate was issued by the Bank. As per the title deed which is in favor of Respondent No. 11. The High Court and the DRAT in its order did not allowed the release of documents because the title deeds are required in a trial before the DRT.

The Court also observed that the release of title deed was filed before the auction sale in the O.A 11/2008 before the DRT which was allowed and then rejected before the DRAT and then the High Court, wherein it was rejected on the ground that, the issue is sub-judice and the title deed is to require by the Learned Tribunal for the disposal of the said O.A.

Another question arose before the Hon’ble court, is whether DRT is competent in deciding the validity of the mortgage. The Court did not interfere as it is pending before the learned DRT and allowed that the parties are free to urge all contention as per the law. The Court fixed the issue as to whether the DRT should had allowed the application for the return of original documents as filed by the Bank. It was observed that the Bank had filed the application before the auction sale as alleged by the guarantor. This had happened because a previous auction sale was conducted where no successful bids were made and the Bank has to commence the auction sale process again.

The Court in its discretion held, by reversing the decision of the High Court and brought modification in the order of the DRAT to the effect that the application filed by the Bank being partly allowed by ordering the return of the original documents, except in respect of the land bearing Paimash No. 722/4 of the Respondent No.11 which was subjected to a decree in O.S no. 186/1976. Thus, the judgement was partly allowed by the Supreme Court in its special leave petition.

Case 3: G. Tuhin Kumar vs State Bank of India

The Original Borrower acquiring Loan from the Bank through a Benami Transaction will also have the protection established by the law if the Benamidar is in his Fiduciary relationship. 

[Bench: Hon’ble Justice Mr M.s Ramachandra Rao and Hon’ble Justice Mr T. Amarnath Goud of High Court of Telangana in W.P 46380 of 2018]

The case involves a very peculiar situation where a loan is issued to a ‘Benami’ and the bank which have provided the loan is to perform a recovery action against the Benamidar/borrower by the auctioning of the secured asset/land against the objection of the original purchaser or the holder of land.

The case is a brief overview of the legal existence of benamidar in a loan transaction by the Bank and the what Rights of protection does the Benamidar and the original beneficiary of the loan has in a Debt Recovery Action by the Bank.

Facts– The case involves the borrower as respondent No. 5 against whom a possession notice is issued by the Bank (Respondent No. 2) under Section 13(2) of the SARFAESI Act, 2002, the wife of the borrower (Respondent No 8), then the wife of the petitioner who is not impleaded as a party to this case and the petitioner who is an Advocate and the actual benefactor of the loan provided by the Bank but not the borrower because the Banks have a policy of not providing loan to the Advocates. Also, the wife of the petitioner and the ex-wife of the borrower (resp. no.5) are sisters.

The secured asset is an occupancy flat identified by the petitioner which was registered in favor of respondent no. 5 after a sanctioning of loan from the Bank (Respondent no 5) on the mortgage.

The secured asset is an occupancy flat which was identified by the petitioner and was intended to purchase the said property but later helped Respondent No. 5 to negotiate with the builder M/s Udaya Heights Pvt. Ltd. (the builder) and paid him through several cheques of total Rs. 9,00,000/- and thereafter the loan was sanctioned by the Bank to the Respondent No. 5. The occupancy, flat was registered with Respondent No. 5 and a mortgage was created on it.

After a brief period of time, Respondent No. 5 had a separation with his wife and finally had a divorce with respondent No. 8. This event also caused a rift between the respondent No. 5 and the petitioner. Later, the respondent no. 5 wrote a letter to the Bank that he cannot repay the loan amount and that it should not accept payments from any third party into the Home loan account, and requested the Bank to auction the property. He wrote another letter to the Chairman of the Bank requesting it to sell the above property. The loan account was declared NPA on June 2017.

The Bank issued notice Section 13(2) of the Act to 5th respondent demanding him to pay Rs. 54,66,856 in 2 months on loan account. The petitioner acted and sent an objection under Section 13(3A) of the Act to the Bank that he obtained the loan on the name of 5th respondent because he being an Advocate was not being encouraged by Banks to provide the loan and in place, the 5th Respondent agreed to it. The petitioner had paid the builder and also the Bank for purchase of the property but because of martial disputes between 5th respondent and his wife, he persuaded the Bank to make the loan as an NPA and petitioner would be put to grave prejudice if Bank were to sell the property. The petitioner requested that he be permitted to deposit monthly installments regularly.

So, the petitioner filed this Writ Petition challenging the action of the Bank in the classification of home loan into NPA and not replying to the objections made in the notice to the respondent No.5.

Meanwhile, the Bank under Rule 8(i) of the Security Interest Enforcement Rules took symbolic possession of the secured asset.

The Court in the proceedings allowed the operation of stay against the possession notice under Section 13(4) of the SARFAESI Act.

Held– The questions before the Court are:

  1. Whether a Benami transaction of loan between the borrower and the original benefactor of the loan is a valid agreement in a loan transaction?
  2. Whether the Writ Petition is maintainable even if a remedy through Section 17 of the SARFAESI Act is available with the Petitioner?

On the first question, it was well settled between the parties that the petitioner is the benefactor of the loan provided by the bank to the Respondent No. 5/borrower, and such fact was not been objected by the borrower himself and was just a nominal owner under a family agreement.

Though the Bank in its defense alleged that the petitioner got the loan sanctioned in his name as a ‘Benami’. To examine this allegation, the Court referred to the Prohibition of Benami Transaction Act, 1988, though the non-amended was applicable as the Act 43 of 2016 w.e.f 1.11.2016 was not applicable to it because the loan was sanctioned on 05.03.2016 and such amendment did not had a retrospective effect. As opined by the Hon’ble S.C in Mangahai Ammal Through L.Rs and Ors. Vs. Rajeswari and Ors [2019 (5) ALD 16 (SC)].

A ‘benami transaction’ as per Section 2(a) of the Act means ‘any transaction in which property is transferred to one person for a consideration paid or provided by another person’.

Also in, Valliammal v. Subrammanian [(2004) 7 SCC 233], the Hon’ble S.C set out the parameters to determine what is a ‘Benami transaction’ and laid down six circumstances which can be taken as a guide to determine the nature of the transaction.

  1. The source from which the purchase money come;
  2. The nature and possession of the property; after the purchase;
  3. Motive, if any, for giving the transaction a benami colour;
  4. The position of the parties and the relationship, if any, between the claimant and the alleged benamidar;
  5. The custody of the title deeds after the sale and;
  6. The conduct of the parties concerned in dealing with the property after the sale.

Nevertheless, the source from where the purchase money came and the motive why the property was purchased benami are by far the most important tests for determining whether the sale standing in the name on one person, is in reality for the benefit of another.

Also as per Section 3(1), prohibits benami transaction, whereas Section 4 saves certain transaction from the prohibition and explains in short that, no suit, claim or action to enforce a right in respect of any property held benami shall lie against the person in whose name the property is held or against any other person at the instance of a person claiming to be the real owner of such property. Thus, the nature of purchase by 5th respondent is in a fiduciary capacity to acquire for the petitioner is to be proved.

The Court cited the case Marcel Martins v. M.Peter [(2012) 5 SCC 342], wherein the ‘fiduciary capacity’ was described as per Section 4(3) of the Benami Transaction (Prohibition) Act, 1988, which described a transaction where the property is held by the person who stands in a capacity for the benefit of the person towards whom he stands in such a capacity, as quoted from the judgement in Para 37:

  “… It is manifest that while the expression “fiduciary capacity” may not be capable of a precise definition, it implies a relationship that is analogous to the relationship between a trustee and the beneficiaries of the trust. The expression is, in fact, wider in its import for it extends to all such situations as place the parties in positions that are founded on confidence and trust on the one part and good faith on the other.”

However, a sale transaction of the subject property was financed in the instant case, wherein a sale deed was executed by the builder in favor of the 5th respondent is Rs. 35.20 Lakhs. This amount was arranged by 5th respondent by paying the builder Rs.26.20 lakhs out of the Home loan, whereas the balance Rs.9lakhs was paid by two cheques to the builder.

The petitioner produced a bank statement in I.A No. 6 of 2019 indicated that Rs.10 Lakhs was transferred by the petitioner’s wife through a bank transfer from her account to her sister’s account who was the wife (Resp No. 8) of the respondent no.5 at that time. After this, the respondent no.8 transferred Rs.9 lakhs from her account to 5th Respondent with the SBI, which paid the builder through the aforementioned cheques.

Similarly, the petitioner showed several bank statements wherein he was transacting heavy amounts with the builder and the Bank in several instances. The builder even issued a receipt of payment of Rs.8 lakh in the name of Respondent No. 5 through a cheque drawn by the petitioner and her wife from her own SB account, though it gave the receipt in the name of the 5th respondent. None of these payments were disputed by the 5th Respondent.

The 5th respondent, however, in its defense showed that he made EMI payments from 09.04.2016 to 30.06.2017. The Court verified the following contention, as per petitioner, for easy payment of EMI, the SBI had issued a Green Remit Card and through this card, the petitioner regularly remitted EMI to the Saving Bank Account of 5th Respondent with SBI and the same was again transferred to the loan account of the 5th respondent. From this, the petitioner in its I.A no. 6 of 2019 showed how the 5th respondent was financed.

Almost all payments were made through RTGS/NEFT or transferred through cheques so they cannot be denied by the 5th respondent. Thus, it was proved that 5th Respondent took the loan to purchase the property for the benefit of the petitioner and her wife. The purchase money was provided by the petitioner and that the petitioner’s wife and her sister the ex-wife of the 5th respondent created position of confidence and trust on the person and acted in good faith the ostensible title of the 5th respondent was held by him in a fiduciary capacity for the benefit of the petitioner and his wife.

On the second question, the respondent Bank raised that the stay application under I.A no 2 of 2019 is not maintainable as it had not violated any constitutional or statutory rights of the petitioner. Even the petitioner is not a borrower, a guarantor, or having any contractual or legal claim over the property. It also urged that only a civil suit claim of this nature by the petitioner can be decided.

The Court did not agree by the contentions raised by the Bank and pointed out that the petitioner had financed the sale and had declared by the Court as the real owners of the disputed property and thus, can approach the Court under Art. 226 of the Constitution of India when he is sought to be deprived of the same by invoking the provisions of the SARFAESI Act, 2002. The legal claim of the petitioner was proved where the respondent no. 5 is the ‘benamidar’ and the petitioner gets the benefit of the exemption under S.4(3)(b) of the Benami Transaction (Prohibition) Act, 1988.

On the question of a civil suit by the petitioner, the Court cited the Hon’ble Supreme Court in ABL International Ltd. And another v. Export Credit Guarantee Corporation of India Ltd. And others [(2004)3 SCC 553] where it was held that parties to a suit can raise a dispute regarding the facts of the case in entertaining a petition under Art. 226 of the Constitution. In an appropriate case, a Writ Court has jurisdiction to entertain a Writ Petition involving disputed questions of fact and there is no absolute bar for entertaining a Writ Petition even if the same arises out of contractual obligation or involves some disputed question of fact. Also, that the petitioner cannot invoke the jurisdiction of this Court to dispute the right and title of the 5th respondent which is solely a private dispute and the dispute raised in the Writ Petition is totally unconnected with the Bank.

Similarly, again with the Hon’ble Supreme Court in Popatrao Vyankatrao Patil v. State of Maharastra and others, it was held that when a petition involves disputed questions of fact and law, the High Court would be slow in entertaining the petition under Art. 226 of the Constitution of India, however, it is only a rule of self-restraint not a hard and fast rule, even if there are disputed questions of facts which fall for consideration but if they do not require elaborate evidence to be adduced. Such power is to be used to exercise in exceptional circumstances where the High Court finds that the action of the State or its instrumentality is arbitrary and unreasonable and violation of Art. 14 of the Constitution.

Inducing upon the above judgement, the Court opined a view that the petitioner’s plea is dilatory, lengthy and pensive process, if this plea is raised by the Bank and since the Bank statements became a substantive part for the petitioner’s case, there is not much dispute about the facts, and there is no necessity to drive the petitioner to a civil suit.

On the question invoking the jurisdiction of the Writ Court, the Court pointed out that the writ petition is against the action of the Bank in initiating proceedings under SARFAESI against the property which the petitioner is in occupations as beneficiaries of the transaction between the petitioner and 5th respondent who is the holder in a fiduciary capacity. The Writ Petition is not filed to decide the title dispute between them, though it came to be decided because it is intrinsically connected with the relief sought in the Writ Petition.

The Court disposed of declaring the 5th respondent the ostensible owner of the subject property and the real owner, the petitioner who financed the purchase of the subject property and the Bank was directed to transfer the subjected property to the petitioner by private treaty invoking Rule 8(5)(d) of the Security Interest Enforcement Rules, 2002.

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