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Latest Judgements on The SARFAESI Act

The law of debt recovery is mostly based on two laws which are the Recovery of Debt and Bankruptcy Act, 1992 and the Securitization and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act).

These two laws determine the judicial procedure for recovery of debts by the Bank through which the sale of secured assets takes place. The law of SARFAESI gives stringent powers to the Banks and Financial Institutions against the borrower. Whereas, the RDB Act provides the whole judicial proceeding before the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal.

This article describes some latest judgements and legal findings determined by different High Court in India and of the Supreme Court of India.

Index

Case 1: Sanjeev Tiwari vs State of Uttarakhand and Others

[Hon’ble Justice Mr Ravindra Maithani in CrMA 712/2017 at High Court of Uttarakhand at Nainital]

Use of Criminal Prosecution is a delay tactic against debt recovery in the SARFAESI Act

Facts– In the said case, the borrower being defaulted on the loan alleged that the Bank without intimation to the borrower entered into the premises of the secured asset and locked it. The Bank dined the allegation and upon which, the petitioner filed a complained before the police against the Bank on 13.01.2015.

The Bank later filed an application under Section 156(3) of the CrPC whereby it alleged that the Manager of M/s General Power Company Limited took a loan from Punjab National Bank and it suddenly closed the credit limit of the company which affected the business activity of the petitioner.

The petitioner allegation that on 12.01.2015 the officers of the Bank visited the company premises without prior information and removed every person from the premises and locked it.

The Company informed the police on 13.01.2015 that, the Bank officers were removing articles from the plant of the company because of which a mail was sent to the Bank on 03.09.2015 and the Bank replied on 18.09.2015 that, it never took possession of the company premises.

After, hearing the allegation by the court below it rejected the application under Section 156(3) of the CrPC by an order dated 26.11.2016 on the ground that since the action is taken under SARFAESI Act criminal action may not be taken in the matter against the respondent Bank.

Therefore, the petitioner filed this application under Section 482 of Cr.P.C against the said order.

Held- The Court observed that, the notices by the Bank had categorically stated that the Bank had taken possession of the assets of the company in consequences of which the petitioner filed a writ petition (previous writ petition) before this Court which ordered to open the lock and on proper the petitioner found some articles are missing.

The Bank, however, submitted that it never took physical possession of the property of the company and the notice was a symbolic possession as per the Section 13(2) of the SARFAESI Act. The Court also observed that in the previous writ petition the order dated 30.03.2016, the writ court agreed and held that, the Bank did not take physical possession neither it placed a lock at the company premises.

After the change of events, an auction notice was issued on the date 16.12.2014 by which the Bank recorded that, it did not take the possession of the secured asset, but it again issued an auction notice dated 11.04.2015 whereby the Bank has categorically stated that possession of the secured assets is taken by the Bank which wholly established the allegation made by the petitioner.

Therefore, the question arises:

Does the two-auction notice by the Bank establish the fact, that the physical possession was taken by the Bank?

The answer was categorically described in the previous writ petition which held that the Bank did not put a lock on the plant of the Company. Only a symbolic possession was taken by the Bank and it was clear that the Bank did not lock the company premises on 12.01.2015.

Since the borrower/petitioner is a defaulter and using criminal prosecution as a delay tactics for the same.

The Court referred to the case of Priyanka Srivastava vs State of U.P [(2015) SCC 287], where the Hon’ble Supreme Court discussed the delay tactics in connection with Section 156(3) of CrPC, that if a borrower is allowed to take recourse to criminal law in the manner it has been taken, then it needs no special emphasis to state that this will have the potentiality to affect the marrows of the economic health of a nation. Statutory remedies have cleverly been bypassed and prosecution route has been undertaken for instilling fear amongst the individual authorities compelling them to conceded to the request for one-time settlement which the financial institution possibly might not have acceded.

The Court also opined the company in such a situation has to take recourse under Section 17 of the SAFAESI Act.

The Court, therefore, dismissed the petition and held that the application under Section 156(3) of the Code does not disclose any cognizable offence. It definitely appears to have been moved by the petition to pressurize the Bank so that they may under the fear of the criminal prosecution settle the case with the borrower.

Case 2: Bhanumathy Usha vs The Jammu & Kashmir Bank Ltd

[Hon’ble Justice Raja Vijaraghavan  in WP(c) No 5015 of 2011 of the High Court of Kerela at Ernakulam]

A secured asset being a subject matter of civil dispute cannot be discharged under the SARFAESI Act.

The case decides a legal question related to pending property disputes and the transferring right the litigating parties will have or not have in furtherance of their interest where an injunction has been placed by the judgement of the Courts.

Facts- The petitioner has filed this writ petition against the legal notice issued by the respondent no. 1 Bank from not carrying the recovery action against the property which was placed as a security interest by the respondent no.4 as a mortgage.

The petitioners and respondent no. 4 and 5 are siblings and are in disputes to the land bearing Sy.No 93/14-1 of Attipra Village for the partition and declaration of the said land.

The trial court has completed its proceedings but an injection has been established by the effect of preliminary and supplementary injunction dated 31.5.2005 whereby, respondent no.4 was not allowed to transfer his part of shares by creating any charge or assignment.

The respondent no. 4 on the date 11.2.2005 mortgaged the said property to the Respondent  no.1 and also managed to agree with the sale on the part of his land to the respondent no 3 which cannot take effect because there was an order of injunction against the 4th respondent from creating any charge or encumbrance over the property.

However, the respondent no. 3 defaulted on its loan and the Bank issued a notice under Section 13(2) of the SARFAESI Act for the recovery of debt. The Bank also indicated that it will take physical possession of the property under Section 14 of the Act, for this, it placed the notice on the wall of the mortgaged property.

The petitioner for this filed this writ petition.

Held-  The Court held on two legal questions from the facts of the case

Whether Respondent no. 4 has the right to assign the property in favour of respondent no. 3?

The Court observed that due to the operation of the order of injunction which restrained respondent no.4 from creating any charge in respect of the property or from making any construction thereon. The 4th respondent went ahead and executed a deed of assignment in respect of the property which was pending in a suit in favour of 3rd respondent.

The Court referred to the judgment in Rajendar Singh vs Santa Singh [AIR 1973 SC 2537], where the doctrine of lis pendens was applied in a suit involving the dispute of immovable property, where a party to the suit through a private dealing tried to frustrate the subject matter of the suit in litigation.

The acquiring of any immovable property during litigation was held be bound by the application of the doctrine of lis pendens which means who seek to acquire rights over the immovable property which are the subject matter of litigation the Courts having power and jurisdiction to prevent the object of a pending action from being defeated.

Therefore, the execution of sale deed by respondent no.4 is hit by the doctrine of lis pendens and alienation of the property cannot be executed.

The other question before the Court was

Whether the Petitioner has an alternate remedy as per the SARFAESI Act?

As per Section 34 of the SARFAESI Act which bars from any jurisdiction in the matter related to the SARFAESI Act and the petitioner has filed this writ petition against the notice issued under Section 13(2) of the Act.

The Court referred to a Division Bench judgement in Elamma and Others vs Kaduthruthy Urban Cooperative Bank Ltd and Others [2018(5) KHC 70] it was held that the bar of the Civil Court under Section 34 of the SARFAESI Act is in relation to a matter which the Debt Recovery Tribunal can determine in respect of the action taken under the SARFAESI Act. It was held that a person cannot be pinned down to the remedies under the SARFAESI Act when he asserts that the property is not a secured asset.

Therefore, the Court held the petitioner has the right to proceed against the properties as per partition and the respondent no.1 Bank is not entitled to proceed against the properties which were mortgaged by the respondent no. 3 but the Court allowed the Bank to proceed with recovery action through other modes.

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