Breaking: Section 13(3A) of SARFAESI Act mandatory, not directory, SC [Read Judgment]
News

Breaking: Section 13(3A) of SARFAESI Act mandatory, not directory, SC [Read Judgment]

Meera Emmanuel

The Supreme Court has held that in recovering secured property from Non-Performing Assets (NPAs), a secured creditor is bound to consider representations, if any, made by the debtor under Section 13(3A), after the initiation of proceedings under Section 13 of the SARFAESI Act. However, this mandate can also be constructively satisfied.

The Bench of Justices SA Bobde and L Nageswarao Rao clarified this position in a judgment delivered on Monday. The Court was dealing with a special leave appeal filed in a dispute between Blue Coast Hotels Ltd., Goa (‘debtor’), the Industrial Financial Corporation of India/IFCI (‘creditor’) and ITC Ltd. (‘auction purchaser’).

The Blue Coast Hotel had entered into a loan agreement with IFCI in 2010. Property mortgaged as part of the loan agreement included the entire hotel property as well as adjoining agricultural land, which was intended for villa development.

On default in loan payments, the debtor was classified as an NPA. The creditor eventually initiated recovery proceedings by sending a notice under Section 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, in March 2013.

In response, the debtor made a representation in May 2013, seeking extension of time. However, the creditor proceeded to take symbolic possession of the mortgaged property in June 2013. A notice for the auction sale of the property was also eventually published.

In the meanwhile, the debtor moved a securitization application in the Debt Recovery Tribunal (DRT) in July 2013, against the creditor’s efforts to take over the property. The tussle between creditor and debtor dragged on in the DRT, the Debt Recovery Appellate Tribunal, the District Magistrate’s court and the High Courts of Goa and Bombay.

The Supreme Court was called to intervene on a petition moved by ITC Ltd., which purchased the mortgaged the property after the creditor published an auction notice for the fourth time. The appeal by ITC was filed against the Bombay High Court’s verdict in favour of the debtor, passed in 2016.

One of the grounds on which the Bombay High Court based its decision was that the creditor had failed to consider properly the representation of the debtor made in May 2013. This was viewed as a breach of Section 13 (3A) of the SARFAESI Act.

Section 13(3A) enables debtors/borrowers to make a representation or raise objections after notice is issued to them by creditors under Section 13 (2) of the Act. As per the provision, the creditor is expected to consider the representation and give a reasoned reply thereto.

On appeal, the apex court noted that the crucial question to be answered was,

“…whether the Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower’s representation. In other words, whether sub-section (3A) of Section 13 is mandatory or directory in nature.

This question was answered in the affirmative. The Court observed that the manner in which the provision is worded indicates that it was meant to be mandatory.

We find the language of sub-section (3A) to be clearly impulsive. It states that the secured creditor ‘shall consider such representation or objection and further, if such representation or objection is not acceptable or tenable, he shall communicate the reasons for non-acceptance’ thereof.

We see no reason to marginalize or dilute the impact of the use of the imperative ‘shall’ by reading it as ‘may’. The word ‘shall’ invariably raises a presumption that the particular provision is imperative.”

Further, it could be logically deduced that the parliament intended for the provision to be mandatory.

As the Section stood originally, there was no provision for the above mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2).

As it was introduced via sub-section (3A), it could not be the intention of the Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor.

There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor’s representation has not been accepted.”

Moreover, the Court opined that any provision which requires reasons to be furnished must be considered mandatory. It remarked,

Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully. We are not prepared in such circumstances to interpret the silence of the Parliament in not providing for any consequence for non-compliance with a duty to furnish reasons. The provision must nonetheless be treated as ‘mandatory’.

However, the Court went on to indicate that a creditor’s response to such representations made by the debtor need not be as straightforward as a direct reply/rejection.

Whereas no direct reply was made to the debtor’s representation, the creditor in the instant case had provided repeated opportunities subsequently for the debtor pay back dues owed.

The creditor appeared to have entered into negotiations for the settlement of the dues and even accepted cheques in repayment much after the notice under Section 13(2) and after the debtor’s letter of representation. Many opportunities were granted by the creditor to the debtor to repay the debt which were all met by proposals for extension of time.

The Court found that this constructively satisfies the mandate laid down under Section 13 (3A).

“…we have no doubt that the failure to furnish a reply to the representation is not of much significance since we are satisfied that the creditor has undoubtedly considered the representation and the proposal for repayment made therein and has in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail.

Therefore, in the fact and circumstances of this case, we are of the view that the debtor is not entitled to the discretionary relief under Article 226 of the Constitution which is indeed an equitable relief.

On the facts of the case, the Court also found that the bar on creating interest over agricultural land under Section 31 (i) of the SARFAESI Act would not apply in the instant case. While the land adjoining the Hotel premises stood recorded as ‘agricultural land’ in revenue entries, the character of the land and the purpose for which it was set apart indicated that it was not so.

Another notable question answered was whether the creditor could maintain an application of possession under Section 14 of the Act; even though it had taken over only symbolic possession before the sale of the property to the auction purchaser.

The Court discerned that this would depend on whether the creditor remained a secured creditor after the sale of property to the auction purchaser. In this case, the property rights were not completely transferred to the creditor, even after the auction sale.

The creditor only had constructive or symbolic possession. Therefore, even after sale the transfer of the secured asset by the creditor cannot be construed to be a complete transfer as contemplated by Section 8 of the Transfer of Property Act. Therefore,

“…the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act.”

Allegations of fraud and collusion between the creditor and auction purchaser were also found to be devoid of merit by the apex court.

Having arrived at these conclusions, the Court set aside the Bombay High Court judgement. The Blue Coast Hotel/debtor, was directed to handover possession of the mortgaged properties to ITC/the auction purchaser within a period of six months.

Read the Judgement:

Supreme-Court-Section-13-3A-SARFAESI-March-19.pdf
Preview
Bar and Bench - Indian Legal news
www.barandbench.com