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What Actions Can A Secured Creditor Have Against A Tenant In Possession Of Secured Asset?

In the business of lending, a borrower receives capital from the lender on the basis of any guarantee or security collateral upon which the lender maintains his confidence on such debt. The Borrower in securing its debt creates a charge or mortgage upon the property owned by the Borrower. The Lender has the right to sell off the land or building upon which the mortgage is created, but in some situation, a controversy develops wherein, the Borrower has leased out the secured property. It becomes legally challenging for the Banks or Financial Institutions for recovering the debt where the interest of the Tenant is also secured due to his contract with the Borrower and also that the Tenant having his certain right which does not allow any incursion due to the sale for the purpose of recovery by the Financial Institution. This article discusses the situation and legal grounds upon which a Secured Creditor or the Tenant upon how the law protects in such situation.

The Protection Given by Tenancy Laws and its Extent.

The State sets laws in protecting rights and interest of the Tenant or Lessee, such as The Rajasthan State Rent Control Act, 2001 or The Maharastra Rent Control Act, 1999. The State Legislature has the constitutional right to Legislative under Article 245 to Article 254. Thus, the State has to give a legislative force in protecting the interest of the tenant or the lessee. as per Entry 18 of the State List

A lease or tenancy is constructed on the basis of The Indian Contract Act, 1872 and upon the Transfer of Property Act, 1882. These protect the financial intent and interest of the parties in such contract.  

The protection to the Tenant arises from the State Tenancy laws such as the Rajasthan State Tenancy Act, 2001. The controversy in dispute can be understood by the case of ICICI Bank Limited Vs Krishna  Kumar & Ors wherein, the Tenant files an application for protection of his tenancy under Section 18 and Section 21 before the Rajasthan Rent Control Tribunal for the protection from the dispossession by the order of District Magistrate under Section 14 of the SARFAESI in favour of the Bank.

The application was filed with the intent that, the respondent bank has availed under Section 14 of the SARFESI Act, for the taking over the possession of the secured asset of the Landlord who has defaulted in payment of his debt. That the respondent-tenant has bona fied possession and the Bank cannot dispossess him from his legal tenancy. The Respondent tenant obtained a stay against from the Rent Control Tribunal against the dispossession of the tenant from his lawful tenancy. The Tenant relied on two grounds in support of its argument:

That, the Applicant bank has to approach under section 9 of the Rajasthan Rent Control Act, 2001 for proper dispossession of the tenant from the land for which the Bank has to file an application for dispossession before the Rent Control Tribunal.

To support on the above contention the tenant relied upon the Judgment of Vishal N Kalsaria vs Bank Of India & Ors, where the controversy of Central law prevailing over the State laws was questioned. The Single Judge bench observed that,

‘For the Banks to hold that the provisions of SARFAESI Act override the provisions of the various Rent Control Acts and to allow a Bank to evict a tenant from the tenanted premise, which is a secured asset of the Bank, after the default on loan by the landlord and dispense with the procedure laid down under the provisions of the Rent Control Acts and the law laid down by this Court in catena of cases, then the legislative powers of the state legislatures are denuded which would amount to subverting the law enacted by the State Legislature. Surely, such a situation was not contemplated by the Parliament while enacting the SARFAESI Act and therefore the interpretation sought to be made by the learned counsel appearing on behalf of the Banks cannot be accepted by this Court as the same is wholly untenable in law.

Thus, from the above observation in Vishal N Kalsaria, the court upheld the State Legislative power and declares that in case a dispute of State or the Central law the state legislative power is not be denuded. So such State legislative power must be enforced and for any dispute, a proper interpretation of the law has to be made to obtain a proper remedy. Thus protecting the lawful possession of the tenant on such land.

The SARFEASI Act’s Protection To The Lender.

The above protection to the tenant as provided in the State Rent Control Act does give protection for a lawful tenancy. The only question arises whether the Rent Control overrides against the law laid for the Banks in securing their debt by a recovery action on the secured asset of the borrower. For this, the provision of SARFAESI (Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002) is to be evaluated.

In the above-mentioned case of ICICI Bank limited vs Krishna Kumar & Ors, the similar evaluation of the SARFAESI was done, the learned Court observed that in the protection of the interest of the tenant on the secured asset an amendment to the Section 17 of the said Act is made. The newly amended provision of clause (4A) is:

Where any person :

(1), claims any tenancy or leasehold rights upon the secured asset, the Debt Recovery Tribunal, after examining the facts of the case and evidence produced by the parties in relation to such claims shall, for the purposes of enforcement of security interest, have the jurisdiction to examine whether a lease or tenancy,–

    • has expired or stood determined; or
    • is contrary to section 65A of the Transfer of Property Act, 1882 (4 of 1882); or
    • is contrary to terms of mortgage; or
    • is created after the issuance of notice of default and demand by the Bank under sub-section (2) of section 13 of the Act;

(2) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (i), then notwithstanding anything to the contrary contained in any other law for the time being in force, the Debt Recovery Tribunal may pass such order as it deems fit in accordance with the provisions of this Act.”.

Thus, from the above-added provision, the tenant has been given the right to have his representation before the Debt Recovery Tribunal. The Learned Court also pointed out from the case of Harshad Govardhan Sondagar Vs. International Assets Reconstruction Co. Ltd. & Ors.[(2014) 6 SCC 1] and made the observation that in view of the judgment in the case of Vishal N. Kalsaria (supra) the issue is no more relevant after the amended provisions of the SARFAESI Act which have been incorporated to safeguard the interest of both i.e. the genuine tenant as well as safeguard the interest of secured creditors against the borrowers.

Also that, the judgment rendered in the case of Vishal N. Kalsaria (supra) gave ample opportunity to even some unscrupulous borrowers to put forward a tenant and frustrate the rights of the secured creditor to recover their dues from the mortgaged property. It was in these circumstances that sub-section (4-A) was incorporated and sub-section (3) was substituted in Section 17 of the SARFAESI Act to plug the mischief.

The Court further observed the order passed by the District Magistrate in an application under Section 14 of the SARFAESI Act. In these circumstances, the tenant, aggrieved with the order seeking possession could invoke subsection (4-A) of Section 17 of the SARFAESI Act, under which the possession of his property is being taken, which lays down in clear terms that any person who claims tenancy or leasehold rights could resort to this provision for examining the leasehold or the tenancy rights upon the secured assets. Sub-section (4-A) has been incorporated for special circumstances and issues as involved in the present case with respect to the lease or tenancy being contrary to Section 65 of the Transfer of Property Act, 1882 or contrary to the terms of a mortgage or having been created after the issuance of a notice of default. 

In the similar case before the learned Single Bench of the High Court of Karnataka at Bengaluru in the case of Sri. B.V. Vidyanatha & anr. Vs. The Authorized Officer, National Co-operative Bank Ltd. & anr. disposed of a petitions filed by the tenants and the lessees, who had directly approached the High Court challenging the possession notice under section 14 of SARFAESI on the ground that the same cannot be enforced except under the State Rent Control Law The Court objected and gave them the liberty to file their applications before the concerned Debt Recovery Tribunal under Section 17(4-A) of the SARFAESI Act. The Court further contended that the Financial Institution can take its actions as under Section 14 of the SARFAESI and the tenant can have an effective, alternative remedy under Section 17(4A) SARFAESI. The Court directed the tenant to file a proper application before the Debt Revenue Tribunal within a stipulated time period and till then the Financial Institution shall not take any coercive measures of their lawful holding of the tenancy. 

The Learned Court in Harshad Govardhan Sadogar case also observed that the bank does not have to apply for eviction of the tenant as under Section 9 of the Rent Control Act. It observed that in the perusal of Section 9 of the Rent Act of 2001 shows that the grounds as mentioned can only be available to a landlord and not to a secured creditor meaning thereby that, the bank, in any case, cannot invoke Section 9 of the Rent Act of 2001.


Thus, the amended law and incorporation of sub-section (4-A) in Section 17 of the SARFAESI Act of the SARFAESI Act sufficiently empowered the tenant to challenge the proceedings qua his dispossession as a lessee or a tenant, in case, the action is being initiated against him for dispossession under the SARFAESI Act.

The SARFAESI does provide protection to the interest of the Tenant as opposed to the judgment from the Vishal L. Kalsaria case which has been later annulled on the ground that, since the amended provision of Section 17(4-A) has been added to the SARFAESI, the argument that the Co-operative federalism of our constitution in giving remedy to a lawful holding of the tenant in the case can now be taken over by the amended provision of the Act.

Picture Credit: ncscredit.com


2 thoughts on “What Actions Can A Secured Creditor Have Against A Tenant In Possession Of Secured Asset?”

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