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Loan Recovery By Banks Some Latest Judgments

The article features legal questions that arose from the cases related to the Loan or Debt recovery cases by the Bank. The description with summary details with important points has been raised with each case featured. The cases heard through video conferencing method during the ongoing national lockdown due to COVID-19 pandemic

Debt Recovery Proceedings means where the Banks through judicial actions conduct recoveries which are not paid by the borrowers. The Recovery of Debts & Bankruptcy Act, 1993 (RDB Act) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) 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: Dhira Sahoo vs AO, H.D.F.C Bank Ltd & Anr.

The possession of the residential house has to be returned to the borrower in compliance of the order of Debt Recovery Tribunal by the Bank even it intends to file an appeal before the Appellate Tribunal

[Bench: Hon’ble Chief Justice Mr Mohammad Rafiq and Hon’ble Justice Mr Chitta Ranjan Dash]

The Bank was directed by the order of the Debt Recovery Tribunal to hand over the possession of the secured asset which was acquired by the operation of Section 13(4) of the SARFAESI Act back to the Borrower. The Bank did not comply with the order of the DRT and stating that it will file an appeal against the order of DRT. Thus, raising a question can Bank hold possession of the property by merely seeking the ground of filing an appeal.

Facts- The Petitioner/ Borrower filed this cased after being aggrieved by the action taken by the Respondent Bank which took the mortgaged property or the residential house of the borrower by the action under Section 13(4) of the Act.

The petitioner/ borrower is a proprietor of M/s Maa Tarini Enterprise. The firm credited a loan for its business of about Rs 35.00 lakhs from the respondent bank and out of which it placed Rs 10 Lakhs in a fixed deposit.

The Bank initiated a recovery proceeding and took the possession of the residential house of the petitioner on 03.12.2019. The petitioner filed a Securitization Application (S.A) before the Debt Recovery Tribunal.

The said S.A was disposed of with the direction to the petitioner/borrower to deposit Rs.20.00  lakhs within fifteen days from the date of this order and the balance amount of Rs.5,31,384.15ps with interest on or before 31.03.2020. The respondent-bank was directed to deliver back the possession of the property to the applicant within 48 hours after the payment of Rs.20.00 lakh by the applicant.

In a similar proceeding and pursuant to the order passed in the Securitization Application the Tribunal, disposed of an Original Application filed by the Bank for recovery of the total amount of Rs. 36.31 lakhs on the date 04.01.2020.

The petitioner deposited Rs. 20 lakhs in compliance of direction in the S.A proceedings within 15 days. However, due to lockdown, the petitioner could not arrange the same by selling other property as the title documents within the house which is in the possession of the Bank. The respondent did not comply with the order of the Tribunal and has not handed over the possession of the house to the petitioner.

Thus, the petitioner filed the writ of mandamus to be issued against the Bank to hand over the possession of his house pursuant the order of Tribunal dated 04.01.2020.

Held – The Court observed that the petitioner has already complied with the deposit of Rs. 20 Lakhs as per the order of the Tribunal and a remaining deposit of Rs. 6.19 Lakh with interest is to further be deposited. The Court also observed that the petitioner and his family consisting of a wife and four daughters are facing grave hardship.

The Respondent Bank in its defence reiterated that the petitioner is required to pay a total outstanding amount of Rs. 18 Lakhs over and above the amount of Rs. 20 Lakhs as deposited by the petitioner and not Rs. 5.31 Lakhs as adjudicated in the order of Tribunal. The respondent Bank is in the process to file an appeal before the DRAT. However, due to the lockdown, they could not immediately file the appeal.

The Court, therefore, directed the respondent Bank to hand over the possession of the house in question to the petitioner by 23.05.2020 with a further direction that the petitioner shall produce an undertaking before the Court that in course the petitioner will oblige to pay the remaining amount of Rs 6.19 Lakhs together with interest as per the direction of the Tribunal.

The Court also allowed the possibility of change in order by the further order passed by the Debt Recovery Appellate Tribunal as per the appeal which will be later filed by the Respondent Bank and dismissed this petition.

Case 2: Travancore Devaswom Board vs The Deputy Examiner, Local Fund Audit Thiruvananthapuram and others

The capital incurred after the sale of immovable property from an auction has its first priority to pay the loan of the Bank even before any tax charge existed on such property before such sale.

[Bench: Hon’ble Justice Mr Bechu Kurian Thomas &  Hon’ble Justice Mr C.T Ravikumar]

What if on immovable property, a levied tax is due on the said immovable property, can stop the transfer of possession to the auction purchaser because the borrower or guarantor did not pay the levied tax while being the holder of the land.

Facts – The petitioner before the Sub Registrar, Kottarkkara came up for the Registration of a sale under the SARFAESI Act, and was therefore denied Registration.

The petitioner Travancore Devaswom Board successfully bid in an auction amounting to consideration of Rs. 8,20 Crores. A sale certificate was thereafter drafted but the Sub Registrar observed with the Sale certificate, the Registrar Office noticed an endorsement in tax receipt as “revenue recovery for sales tax D5/3605/16”.

On the basis of the said enforcement on the tax, a memo was issued by the Sub Registrar stating that the sale certificate can be presented for registration only after the endorsement in the tax receipt relating to the sale tax revenue recovery is deleted.

So the whether the secured creditor under the SARFAESI Act has predominance over the statutory charge due to Government, created under other state enactments.

Held-  The case vehemently describes several legal complexes in relation to the application of laws in a federal structure as determined by our Constitution. The prevalence or the applicability of a law though framed by competent institution but is scrutinized from the lens of Constitutional parameters which has been described in this case.

What is the legal implication in case of due of tax charged to the Government?

The Court understood the peculiar situation through the Supreme Court Decision in Central Bank of India vs. State of Kerela and Other [(2009) 4 SCC 94], wherein, it was held in the aforesaid decision that the Securitization Act and the RDB (Recovery of Debt & Bankruptcy) Act do not create a first charge in favour of the Banks and other secured creditors over the statutory charges created under different statutes.

To further review this, it observed the Kerela Value Added Tax Act, 2003 (KVAT Act) which created statutory charge in respect of any tax payable by a person under that Act. Section 38 of the KVAT Act specifically states that first charge on the property shall be on any amount of tax, penalty than interest and any other amount and dealer or any other person. Thus, making the tax charge priority over all other debts for the purpose of realization of debt.

The Amendments in the Securitization and the Recovery of Debts Legislation.

The Court in reference to the question in concern observed that the SARFAESI Act and the RDB Act underwent a change by introducing an amendment by 2016. As per the Amendment Act, it introduced Section 26-E in the SARFAESI Act and Section 31B was added in the RDB Act.

Section 26-E of the SARFAESI Act gives priority in payment statutorily created in favour of a secure creditor over all other debts including taxes payable to the Central Government or State Government on registration of a security interest.

Whereas, Section 31B of the RDB Act, similar to Section 26-E has created right upon the secured creditor to realize debts due and payable to them by the sale of assets over which security interest has been created which will be in priority over all other debts including Center or State Government taxes.

Thus, both statutory provisions have created a non-obstante clause which makes it explicit to the extent that even a charge created under Central or State Enactments a secured creditor shall have the right for priority in payment and the priority to realize the debt by bringing the secured asset for sale.

The Constitutional Analysis of Inconsistency of Central or State statutory provision.

The Court underwent the Constitutional structure of framing laws in the federal structure as in Article 254(1) and Article 246 of the Constitution which dictates Parliamentary supremacy in mater in which Parliament is competent to enact. Under Article 246 the Parliaments Supremacy is irrespective of any conflict between matters in which both Centre and the State can enact on a subject matter.

In case of repugnancy of Center or State laws, as per Article 254(1), in the first situation, if the law made by Legislature of a State is repugnant to any provision of law made by the Parliament, then in such case the State legislation to the extent of inconsistency with the Parliament will be void. In another situation, where Central and State both can legislate in any field as per the entry in List III (Concurrent List) of the 7th Schedule of the Constitution, then as per Section 254(2) Central law will prevail. But if the State legislation has received its assent from the President then in such a case, then State law will prevail over the Central law.

The intention of the maker of the Constitution was certain that there must be the uniform application of laws through India and in any event of inconsistency between the Central law will prevail over the State law.

Also as per the doctrine of pith and substance, if a law is made by State within is a valid legislative power, incidentally encroaches into a matter within List I, it is possible that the law made by the State could still be valid if, in pith and substance, it is law within its field of legislation, but the encroachment into some matter in List 1 is only incidental. Such an incidental encroachment will be valid as long as the field of encroachment is not covered and if the field is already covered by a Central law, the State law will be void to the extent of repugnancy. This has been described under various Supreme Court judgments.

How the central provision makes state law repugnant?

The Section 26E of the SARFAESI Act and Section 31 B of the RDB Act commences with a non-obstante clause which is a statutory tool by which the legislature gives complete predominance to the provision over all other provisions of law. By the use of non-obstante clause Parliament intention is to give the provision an overriding effect for provisions over all other statutes. Held in Chandavarkar Sia Ratan Rao Vs Ashalata S. Guram [(1986) 4 SCC 447].

Also, in the recent case in Pioneer Urban Land and Infrastructure Ltd. and Another vs. Union of India and Others [(2019) 8 SCC 416] where it was observed that there is inconsistency arose between the provision of Insolvency and Bankruptcy Code, 216 and the provisions of the Real Estate (Regulation and Development) Act, 2016 it was held that ordinarily, the non-obstante clause creates primacy over an earlier Act containing a non-obstante clause since Parliament must be deemed to be aware of the earlier legislation.

Therefore, SARFAESI and RDB Act containing provisions after amendment with non-obstante clauses and giving specific priority to secured creditors even over the taxes due from the Government will prevail over the KVAT Act.

Conclusion

Thus, by the above application of the Court thereby directed the Sub Registrar to register the Sale certificate as presented for registration. The Court in its judgment also gave a prescription regarding the validity of Stamp paper purchased by the Petitioner for executing the sale certificate because becoming invalid within 6 months from issuance. The Court considering the pendency of the petitioner by the applicant and the ongoing pandemic of Covid-19 prevailing extended the validity of the e-stamp for the applicant to register the sale certificate.

 

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