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Latest Judgments from Loan Recovery Cases.

The article provides a summary detailing of two 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: Telangana State Souther Power Discom vs M/s Srigdhaa Bevrages

[Bench: Hon’ble Justice Mr Sanjay K. Kaul, Hon’ble Justice Mr K. M Joseph & Hon’ble Justice Mr Krishna Murari in SLP No. 19292/2018]

The payment of dues to the Electricity Company has to be borne by the Auction Purchaser because all liabilities associated with the asset were transferred from the Borrower to the Auction Purchaser. 

An auction is conducted which resulted in a transfer of liabilities accompanying with the property, that the new owner or the auction purchaser will now be liable to pay the dues which were benefited by the borrower during his possession. These dues or liabilities were pending because of the inaction by the borrower when he was in possession, and did not paid for the services which he had availed. Does, the company which provided the service will have a legal claim for the payment of dues, from the new owners, because he wants to avail back those services.

The said controversy arose, whether the liability is set only towards the original owner who benefited from the services, or it will be transferred to the auction purchaser as per the terms of the auction executed.

Facts- The Respondent is the auction purchaser owes the by M/s SB Beverages Private Limited which failed to pay its dues and was later auctioned by the Syndicate Bank through the sale of the secured asset provided by the borrower.

The unit in question is a bottling plant which on account of failure to repay the loan, the Syndicate Bank auctioned the property.

The auctioned property is sold in “AS IS WHERE IS, WHAT IS THERE IS AND WITHOUT ANY RECOURSE BASIS” in all respects and subject to statutory dues. This came up with a caution that for any discrepancy in the property the participating bidder is solely responsible for all future recourse from the competition of the bid.

Thereafter, Respondent/auction purchaser applied to the Appellant no.1 for seeking sanction for a 500 KVA connection for the bottling plant. This was denied because there were previous electricity dues to the tune of Rs. 50.47 lakhs for a due date till 26.10.2017.

The Appellant no.1 claimed the right to recover from the Respondent as per Clause 5.9.6 and Clause 8.4 of the General Terms and Conditions of Supply of Distribution & Retail Supply Licensees. This required for the transfer of service connection, the seller of the property should clear all the dues to the Company before selling such property.

Held- The Court observed in the auction notice, a lien for the auction property which was that the successful bidder will bear the charges and all statutory dues payable to the government, taxes and rates of both existing and future related to the property.

It was further observed that the e-auction sale notice showed the total outstanding dues were much larger but the reserve price was fixed low and auction sale consideration was Rs. 9.18 crores which were approx. Rs 10lakh more than the minimum reserve price.

Also, as per Clause 26 of the auction notice, the Authorized Officer carrying the auction absolved himself from any liability in any charge, lien, encumbrances, property tax dues, electricity due. Thus, there was little doubt that the auction notice provided for a reserve price with a bid made over Rs. 10 lakh and certain nature of the charge, lien including electricity dues were clearly beyond the above sale consideration paid by the auctioneer.

However, it was noted that in the sale deed executed in furtherance of the auction, it provided the sale “made free from all encumbrances known to the Secured Creditor.” An indemnity was provided by the vendor for any loss arising out of any defect in title, including the recovery of statutory tax. But the indemnity clause was confined to defects in titles and not to other liabilities like electricity dues.

In the judgement of Isha Marbles v. Bihar State Electricity Board & Anr [1995 SCC (2) 648] and Southern Power Distribution Company of Telangana Limited (through its CMD) & Ors. Vs Gopal Agrawal & Ors [(2018) 12 SCC 644] it was opined that a subsequent purchaser is not responsible for the earlier owner which was relied in the Writ Petition before the High Court of Telangana and Andhra Pradesh.

The Court considering the view that the dues are statutory dues as per Electricity Act, 2003 read with General Terms & Conditions of Supply.

The Court also notice subsequent judicial decisions as in the Hyderabad Vanaspathi Ltd. vs. AP State Electricity Board & Ors. which held that dues are as per the terms and conditions partake, are in the character of statutory dues. It held, that the mere fact that agreements were entered into with every consumer only served the purpose of bringing to the notice of the consumer that the terms and conditions of supply, but did not make the dues purely contractual in character. Which means that dues arising out of services provided by the Electricity supply company are not in the nature of contractual dues whereas it is a statutory due.

Also, in Dakshin Haryana Bijli Vitran Nigam Ltd. v. Paramount Polymers (P) Ltd. [(2008) 13 SCC 101] where there was a similarity as in the present case, of the specific clause dealing with electricity dues. It was observed that in such a scenario if a transferee desires to enjoy the served connection then he shall pay the outstanding dues to the supplier of electricity and reconnection or a new connection shall not be given to any premises where there are arrears on account of dues.

In Paschimanchal Vidhyut Vitran Nigam Limited & Ors. vs DVS Steel Alloys Private Limited & Ors.[(2009) 1 SCC 210] if any statutory rules govern the conditions relating to sanction of a connection or supply of electricity, the distributor can insist upon fulfilment of the requirements of such rules and regulations so long as such rules and regulations or the terms and conditions are not arbitrary and unreasonable. Conditions for clearance of dues cannot per se be termed as unreasonable or arbitrary.

In Haryana State Electricity Board v. Hanuman Rice Mills, Dhanauri & Ors. in a given scenario where the pendency of electricity dues was not mentioned in the terms & conditions of sale and it was held in those facts that the dues could no be mulled on to the subsequent transferee.

The Court observed the ambiguity on the aspect of liability of dues of the past owners who had obtained the connection. Whereas, various judicial pronouncement point out only two accomplishments:

  1. That the electricity due are statutory dues in character as per the Electricity Act and cannot be waived in view of the provision of the Act itself.

  2. In the e-auction notice, the existence of electricity dues was not quantified or not been specifically mentioned as a liability on top of it the sale was conducted on the basis of “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS”, as there is a liability to pay electricity dues exists on the purchaser.

Thus, it was concluded that the auction purchaser has to pay the liability and the respondent no.1 has the right to demand the arrears due of the last owner which the auction purchaser has to pay for availing the services.

Case 2: Narendra vs The State of Madhya Pradesh

[Bench: Hon’ble Justice Mr S.C Sharma and Hon’ble Justice Mr Shailendra Shukla in W.P No. 19665/2019 Indore bench]

An action of recovery of loan cannot be ensued by the sale of agricultural land even it is registered as a secured asset before the Bank”

The SARFEASI Act is made with the intention to the speedy recovery of dues which are demanded by the Bank. The Act has placed a stringent recovery process for the secured creditors by a sale to the secured asset by the borrower. Though, this Act has also made sure that such stringent action does not hold certain immovable properties because of the demographic and economical factor of the country. Therefore, it protected the interest of farmers by protecting their interest in agricultural land and forbade, creation of security interest on agricultural lands.

This case is about a situation where a recovery action has ensued against an agricultural land. The law of securitization is clear that it forbids such sale of immovable property which has been described in the case.

Facts- The petitioner borrower had an advanced loan from the respondent Bank for with which it mortgaged an immovable property admeasuring 5.350 hectares. The question is related to the immovable property being an agricultural land and the relevant provision of the SARFAESI Act, in recovering the dues as per Section 13(4) of the Act.

The petitioner raised the issue that it is an agricultural land which as per Section 31(i) of the Act on which no security interest can be created.

In the present case, a security interest was created in respect of several parcels of land, which were used for a single unit in establishing a five-star hotel. Out of the number of lands some were claimed as agricultural land which was purchased by the borrower.

The borrower applied to the revenue authorities for the conversion of these land to non-agricultural which was pending before the Revenue authorities.

Held – The Court observed the provision under Section 31(i) whereby it is specifically provided that no security interest is to be created in an agricultural land. Therefore, the order passed by the District Magistrate under Section 14 is void ab initio because of the overriding provision of Section 31(i) there is no justification for securitization action.

It was also observed in the judgement in ITC limited vs Blue Coast Hotels Limited [(2018) SCC Online SC 237] in which an agricultural land was included in the Notice of recovery. The Hon’ble bench of the Supreme Court elaborated that the term “agricultural land” in Section 31(i), like any other, with an intention to protect agricultural land held for the agricultural purpose by agriculturalist from the extraordinary provision of the SARFESI Act, i.e, the enforcement of security interest without the permission of the Court.

The intention of the legislator is to exempt agricultural land and the creditor cannot enforce any security interest created in his favour without the intervention of the Court or Tribunal. This safeguard is provided with the intention to protect the agriculturalist from losing their source of livelihood, i.e the agricultural land.

The provision under Section 2(zf) also, forbids in the creation of security interest as specified or to the properties mentioned in Section 31 of the Act.

Though, in the present case, the borrower has created a mortgage on several parcels of the land which are agricultural land upon which a Hotel in constructed. Since no security interest can be created in respect of agricultural lands but was created because the parties showed that the land was not being used for the agricultural purpose.

As per the total area of the Hotel which was 182225 sq.mtrs only 2335 sq meters were agricultural and was used for growing vegetables, fruits and shrubs trees for the consumption of the Hotel. The borrower, however, applied for conversion of land use to non-agricultural purpose but which is pending until the order of the Court.

The Court observed that mortgaged was intended to cover the entire property of the Hotel. The creditor understood that the lands in question are not agricultural as it so appeared to have regard to the use to which they are put and the purpose was indeed not agricultural.

It was also argued that the Section 31(i) was beyond the legislative competence of the Parliament because ‘Land’ as a subject is in Entry 18 of List II on which State Legislature can make laws. The argument was, however, negated as per cited case in Union of India and Another v. Delhi High Court Bar Association and Ors wherein, it was held that Parliament can legislate under Entry 45 of List 1 on Banking matters and can provide a mechanism for it. However, Section 31(i) which deals with the creation of security interest over agricultural land not legislation on agricultural land itself.

Therefore, the Court paved no doubt about the fact, the land on which security interest was created is an agricultural land which was illegal and thus, enforcement for security interest for recovery is barred under Section 31(I). Thus, the impugned order of the District Magistrate was set aside accordingly. Though, the Court allowed other methods to the Bank to make the recovery of its debt.

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