Arce Polymers Private Limited Vs M/S Alpine Pharmaceuticals Private Limited: Mere Failure On Bank's Part To Reply To Objections Will Not Invalidate SARFAESI Proceedings

DATE OF JUDGEMENT:
April 23, 2021

JUDGES:
JusticesL. Nageswara Rao, Sanjiv Khanna and B.R. Gavai

PARTIES:
Arce Polymers Private Limited (Appellant)
M/s. Alpine Pharmaceuticals Private Limited (Respondent)

SUBJECT

The Court while dealing with a case in which the appellant had challenged the validity of the proceedings initiated against him under the SARFAESI Act, the Court held that merely failure of the bank to reply to certain objection would not vitiate the proceedings under the Act.

OVERVIEW

1. An appeal was filed by M/s. Arce Polymers Private Limited and M/s. Andhra Bank against the order of the High Court of Telangana where the Court had quashed the proceedings initiated by the Bank against the borrower under SARFAESI Act and Security Interest (Enforcement) Rules, 2002.
2. In the instant case, the borrower was sanctioned a loan with which he mortgaged the subject property. However, he failed to repay the loan and the same was declared a non-performing asset.
3. The Bank then issued notice to the borrower under Section 13(2) of the SARFAESI Act. However, the borrower neither made the payment nor replied to the bank's notice within the stipulated time. Rather, the borrower sent a few letters to the bank stating the reasons due to which he was unable to repay the loan. The Bank, however, did not consider these letters to be a reply to its notice.
4. The bank thereafter, deferred the proceedings under the SARFAESI Act in order to enable the borrower to bring the OCC amount within the limit and to submit a detailed viability project. However, the borrower failed to keep his promise and subsequently the bank took possession of the subject property.
5. The bank agreed to the borrower's request to regularise his account provided that certain additional collateral was presented by the borrower. The borrower did not comply with the terms of the bank and did not respond or object to the notices issued by the Bank informing him of the sale of the subject property. The property was thereby sold by the Bank.

IMPORTANT PROVISIONS

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

• Section 13(3A):If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate [within fifteen days] of receipt of such representation or objection the reasons for nonacceptance of the representation or objection to the borrower

Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.]

ISSUES

• Whether the borrower had waived his right to challenge the Bank's actions?
• Whether the bank had violated its statutory duty under Section 13(3A) of the SARFAESI Act.?

ANALYSIS

1. The Court held that following the principle of equitable estoppel, the borrower is barred from challenging the Bank's actions. The borrower did not object or reply to the Bank's notice informing him about the auction of subject property. Furthermore, the borrower had repeatedly requested the bank for restructure the loans. Thus, the borrower can be considered to have waived his right to challenge the Bank's actions.
2. The actions of the borrower delayed the action on the subject property in the favour of the borrower for more than a year. The bank thus suffered on material aspects.
3. The Court observed that in the instant case, the Bank had repeatedly considered the borrower's request to extend the period of moratorium but the borrower failed to discharge his obligations. The borrower adopted a "dilatory and tricky" approach and hence the bank, having lost faith in the borrower, initiated proceedings under SARFAESI Act.
4. The Court held that where the appellant is able to prove the unlawfulness of an administrative order, then in such instances, he is certainly entitled to a remedy but the Court will have the discretion in deciding what is just and fair.
5. Since, the "disingenuous conduct" of the borrower had disentitled him from challenging the Bank's actions, the Court deemed fit not to examine the issue of the violation of Section 13(3A).

CONCLUSION

The Court was indeed right in its observation that where the defaulter has not replied to the bank's notice, he would be considered to have waived his right to challenge it. In several instances, defaulters find loopholes to delay the proceedings against them due to which the banking structure has to suffer. Such unscrupulous activities must be discouraged.

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