Home » Banking & Security Law » Latest Judgments From Debt Recovery Proceedings & SARFAESI Act

Latest Judgments From Debt Recovery Proceedings & SARFAESI Act

The Debt Recovery Proceedings are proceedings which provide relief to the Organized Lending companies such as Banks, Non-Banking Financial Corporations or other recognized credit agency by Government. The laws which govern these proceedings are Recovery of Debt and Bankruptcy Act, 1993 (‘RDBI Act’), the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (‘SARFAESI Act’) and The Securities Interest (Enforcement) Rules, 2002. The laws in its design, help the lenders to take stringent action against the borrower in repaying their debts and to protect the business interest of the lenders.

The article compiles a summary detailing of three recent cases on the above legal topic and the latest findings from different High Courts and the merits on which these findings are based.

Case I : Praleen Chopra vs Smt. Honey Bhagat & Ors.

“Once a Sale deed is registered then any of its clauses cannot be declared void by executing a separate Memorandum of Agreement by the same parties in the sale deed.

The question is not directly related to the Debt Recovery Proceedings but rather it involves the question on the validity of a sale deed which was used to create a mortgage and the said sale deed cannot be declared void where the parties have entered into the Memorandum of Understanding which restricts the further disposition rights of the Buyer in the Sale Deed.

Facts: The plaintiff filed the suit to declare the sale deed dated 1st Nov 2013 void, whereby the plaintiff representing as an attorney of Ms Savita Bhatia, Mr Rajeev Narula, Mr Rakesh Narula and Mr Hitesh Narula has transferred the suit property to the defendant no.1 to 3. The defendant 1 to 3 mortgaged the property with the Devan Housing Finance (defendant no.4).

The plaintiff originally the director of the M/s Earthz Urban Spaces Pvt. Ltd. (EARTHZ) and was authorized to file this suit. Though a dispute arose as to plaintiff’ right to sue in the case because the plaintiff did not had the title to the suit property and was in the sale deed acting in behalf of the original owners through a power of attorney. A question related to the right of plaintiff in instituting this suit was discussed on merits and it was held that the plaintiff did not had any right in instituting such suit, which though, has not been described with merits in this article.

Further, the defendants 1 to 3 after registration of the sale deed then mortgaged the suit property with Dewan Housing Finance and raised a debt of Rs.4,54,99,809/- and was later defaulted in repayment.

The defendants 1 to 3 after registration of sale deed delayed the payment of remaining consideration amount of Rs.2,81,00,000/-. The parties then executed an MOU whereby, the petitioner alleged that the defendant 1 to 3 will have no right or authority to enter into an agreement in relation to the property until it does not pay the remaining Rs2,81,00,00/-.

The defendants 1 to 3 defaulted in the payment of their debt and a recovery action under Section 13(4) of SARFAESI was taken by the defendant no.4 (Devan Housing Finance), whereby, a possession notice was issued and an auction sale was conducted and defendant no.5 (auction purchaser) became the owner.

The petitioner raised that, the defendants 1 to 3 had no title to the property because the sale deed was void due to the MOU between the plaintiff and defendant no.1 to 3.

Held: The court rejected the grounds of the plaintiff and held that, as per Section 91 of the Evidence Act, 1872 in terms of contract or disposition of property in the form of a document no evidence shall be given in proof of the terms of such contract, grant or other disposition of property, or of such matter, except the document itself. Under Section 92 of the Evidence Act, 1872 in a contract of grant or disposition of property reduced in the form of a document have been proved according to Section 91, no evidence of any oral agreement or statement shall be admitted as between the parties to any such instrument for the purpose of contradicting, varying, adding to or subtracting from its terms.

Thus, the clause in the MOU whereby, the binding obligation of having no right or authority to enter into any third-party agreement with the disputed property till the payment of consideration amount of Rs. 2,81,00,000 is inconsistent with the clause in reference to the registered sale deed.

The Court referred to the case Roop Kumar vs Mohan Thedani (2003) 6 SCC 595 it was held that it is a general and most inflexible rule that wherever written instruments are appointed, either by the requirement of law, or by the contract of the parties, to be the repositories and memorials of truth, any other evidence is excluded from being used either as a substitute for such instruments, or to contradict or alter them.

Also as per Section 55(4)(b) of the Transfer of Property Act, 1882 in the absence of a contract to the contrary, where the ownership of the property has passed to the buyer before the payment of the whole of the purchase money, then the seller is entitled only to a charge upon the property in the hands of the buyer. This means the plaintiff can sue for the consideration amount and cannot sue to make sale deed void.

Thus, on the above legal grounds, the case was dismissed.

Case 2 : The Authorized Officer/Chief Manager, Indian Bank vs The Tehsildar, Ramanuj Nagar

A Defective Title Of The Borrower In A Mortgage Makes the Revocery Action Under SARFAESI Illegal. 

The case involves a legal conundrum in a situation when a borrower having a defective title to a property and mortgages the same. Whether in this situation the Bank has the right to take actions under SARFAESI Act?

Facts: The judgement is however delivered on four writ petition namely WP 33756, 18872 and 32394 of 2019, wherein WP 18872 and 32394, the order dated 22.03.2019 of Debt Recovery Appellate Tribunal, Chennai was challenged by the petitioner Bank which directed it to return 50% of the recovery amount back to auction purchaser. Whereas in WP 33756, a request for the calling of revenue record Na.Ka.4197/2013/A2 of the Tehsildar and quashing the said order dated 03.09.2013, thereby providing a patta on the land Survey No.13/1 situated in No.74, Kundrathur Village, Mathura Karima Nagar, Saidapet Taluk, Chennai MGR District  (disputed property) to the Bank, which was rejected by the Tehsildar.

The facts of the cases are the borrower a company named M/s.U.S.Engineering Enterprises Limited, mortgaged the suit property on the basis of a sale deed with the Respondent Bank. The Borrower received the disputed property through a sale deed from one E. Sridharan who had the power of attorney of 0.84 percent of the property from one known as Mr. Devan . On this basis, E. Sridharan executed a sale deed in favour of M/s U.S Engineering Enterprises Limited, the borrower in this case.

In WP. 18872 it was revealed by the peitioners (auction purchasers) that the property mortgage is a road to other plots, which were transferred to 13 individuals from sale deed dated from 1990-1991 and the said property cannot be mortgaged or transferred by the borrower because there is an ambiguity on the title of the property. On this basis, the DRAT (Appellate Tribunal) had set aside the order of DRT and directed to pay the 50% of the recovery money back to the auction purchaser from the Bank.

Held: The Court held that the bank and borrower did not had a perfect title on the mortgaged property and if having no perfect title the transfer is not bound to happen and the bank is bound to repay back the 50% of the amount with interest. The fact that the borrower did not had the perfect title is gross negligence in the part of the Bank and for this, the Bank has only option to recover its debt from the Borrower and all operation is SARFESI is void because the existence of a defect cannot be factored into a perfect sale. The auction purchasers in WP 18872 of 2019 are innocent and gullible in purchase of the property where the title is defective on the part of the borrower and the Bank. The Court also relied on the presumption that, if purchaser verified the fact the, the situation can be avoided. But the fact will not benefit the Bank to recover the amount without a valid title.

The Court upheld the DRAT order but decided to lower the interest rate to 7.5% and further directed to return the amount to the appellant within 6 months from the date of receipt of the copy of the order. The Court did not interfere with the order of the Tehsildar having no error in it. All Writ Petitions were consequently dismissed.

Case 3 : Paras Jain vs Authorized Officer, Indian Overseas Bank

An Illegal Issuance of Possession Notice by the Bank Can Make the Whole Auction Proceeding Defective.

The case signifies the importance of a possession notice issued by the Bank under Section 13(4) of the SARFAESI Act and its strict adherence to the rules prescribed under Rule 4 and Rule 8 of the Security Interest (Enforcement) Rules, 2002.

Facts: The following case is a writ appeal filed by the appellant against the judgement passed by the Single Judge in a Writ Petition which challenged the legality of the order dated 29.06.2015 passed by the DRAT.

The appellant in this case successfully participated in an auction sale of a mortgaged property. Meanwhile, the borrower approached the DRT which quashed the possession notice dated 02.11.2010 upon which the auction sale was declared void on the ground that the notice was not published in two newspapers according to the rules.

The appellant then filed a review application against the said order before the DRT and the Bank in between issued a fresh possession notice. The appellant again filed a miscellaneous application against the issue of fresh possession notice which was dismissed by the DRT and later by the DRAT on an appeal before against such dismissal.

The bids for auction sale were opened on 17.06.2011. The appellant made the highest bid of Rs. 14.5 lakhs in the said auction. As per the procedure the appellant paid 20% of the bid price and deposited it with the Bank. Though, the later part for confirmation of sale was not obliged by the Bank because of the operation of interim stay by DRT through its order dated 16.06.2011.

Meanwhile, the borrower made an application under Section 17 of the SARFAESI before the DRT which ordered to stay the auction proceeding conducted by the respondent Bank. The appellant later alleged that the Bank made an assurance that it was looking after the proceeding and will take care of the interest of the appellant and the said auction will be in favour of the Bank.

The DRT then through its order dated 18.06.2012 decreed that the whole securitization proceeding under Section 13(4) was illegal and the Bank erred in publishing the notice concerning the auction sale in one newspaper. Aggrieved by the said judgement the appellant filed a review petition before the DRT which was rejected, then it appealed before the DRAT which was also dismissed and again dismissed in a Writ Petition before the Single Bench of the High Court.

The appellant raised the issue that an auction sale was already conducted by the Bank and it cannot undo it by quashing possession notice by the order of DRT and the Bank’s call for another auction sale on a fresh issue of possession notice, whereas the first auction sale was completed and the appellant became the highest bidder in it. Secondly, the appellant raised that the Bank did published its possession notice in two newspaper which the Bank understated in the proceedings before the DRT. The appellant also pointed out that in the review application before the DRT where an order for FIR or inquiry was made in disturbing the public record of the review application and the learned DRT gave the judgement without having any material outcome from the said FIR or inquiry.

Held: It appeared from the findings of the Court that, the possession notice was published in two newspaper but one newspaper named the borrower Kiran Chandak, proprietor of Anokhi Creations and other named as Shakuntala Chandak which had an error in depicting the name of the borrower.

The Bank issued a corrigendum mentioning the error, however, it that did not publish in two newspaper as per requirement under Rule 8(2) of Security Enforcement Rules. Though the auction was scheduled and did held on 17.06.2011 but the DRT on 16.06.2011 passed an interim order on the application of the borrower and stayed the auction sale.

Also, it appeared from the appellant’s letter dated 19.07.2011 that he knew about the DRT’s order and was waiting that the proceedings to be decided in favour of the Bank.

Also, appellant knowing about the DRT proceedings had the reasonable opportunity to sought impalement in the proceedings initiated by the Borrower. He did not do so and rather waited for an order by the DRT.

The Bank also mentioned that the proceeding was delayed for 7 years which had increased the value of the property and the publishing a new possession notice the Bank can capitalized a higher value from it.

The Bank also made it clear that the 20% deposit made by the appellant is secured and is in the form of a Fixed Deposit and he can re-claim and withdraw the deposit which had increased in the 7 years period.

The Court thus, on basis of the above reasons dismissed the Writ Appeal and mentioned that there was no legality in the part of DRAT order in dismissing the first possession notice.

Leave a Reply

Your email address will not be published.