Critical issues determining the extent of powers vested with the secured creditors under SARFAESI Act

Object and reasons for the enactment of the SARFAESI ACT

The issue of blocking of public money of banks and financial institutions had seen its roots in the liberal policies of granting loans by the financial institutions in pursuance of the directions of the Central and the Sate Governments[1] .The aftermath  was consequently visible in an increasing amount of unsatisfied dues of banks  and the difficulties in their recovery. The central government in view of this crisis,  faced by the financial institutions,  constituted a committee under the chairmanship of Mr. Narsimham[2]  which ultimately led to the enactment of the  Recovery of Debts due to Banks and Financial institutions  Act ,1993 .The fact that approximately 15 lakh cases  and 304 cases involving  a startling amount of Rs 6000 crores , filed by the public sector banks and financial institutions respectively ,  necessitated the need for this enactment.

This new legislation created specialised forums such as Debt Recovery Tribunals  and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever increasing  non-recovered  dues.

These tribunals brought into existence special procedural mechanism for the speedy recovery of dues and also barred the jurisdiction of civil matters already pending in these tribunals. However, with the advent of time the existing  lacunae   in the enactment was severely misutilised by practising lawyers  and borrowers , which consequently led to the dues being blocked  in the web created by them. Thus , in view of the alarming increase in the dues of banks and financial institutions to the tune of Rs 12,000 crores, the Central Government was forced to introspect the existing provisions of the legislations. This situation led the government to appoint  another committee under the chairmanship of  Mr.  Andhyarujina to examine banking  sector reforms and consideration to changes in the legal system .The Narsimham  committee as well as the Andhyarujina  committee suggested the enactment of a new legislation for the establishment of securitisation and reconstruction companies and to empower the banks and financial institutions to take possession of the Non performing assets  [3] These powers were sought to be granted through the enactment of The securitisation and Reconstruction of financial assets and enforcement of security interest  Act,2002. For the first time, the  secured creditors were empowered  to  recover their dues without the intervention of the court.

The effective implementation  of the SARFAESI act was delayed for about 2 years due to filing of several  court petitions challenging its vires. The issue was finally decided by the Hon’ble Supreme Court  in Mardia Chemicals v. Union of India [4] and the validity of the SARFAESI act was upheld except the deposit of 75% amount as enshrined under section 17(2). The Court also made appreciable remarks on the dire need of enacting such legislation in view of the huge amounts of non recoverable dues on non performing assets. . The court ruled in favour of the  capabilities of the provisions of the act to redress the grievances of the borrowers and meet their demands for justice at ever level.

Though the constitutional validity of the act was upheld in 2002[5], the judiciary took every possible precautionary measure to ensure that the interests of the borrowers were protected and enhanced. The judiciary through its various pronouncements had attempted to provide adequate representations and remedies to the borrowers without brushing aside the provisions of the SARFAESI Act,2002.

The effective remedy to the borrower has been provided under the act itself. The plethora of cases decided by the Apex court as well as the high courts have highlighted these  adequate provisions and have  pronounced over the bar of jurisdiction of civil courts in matters already pending or within the jurisdiction of the Debt Recovery Tribunals .

This paper seeks to discuss some of the critical issues concerning the SARFAESI Act which lay down the extent of powers of banks under the legislation. These issues throw light on the instances and provisions under the enactment which empower the banks to an extent, sometimes used by them  arbitrarily against the interests of the borrowers.

Critical issues concerning the SARFAESI Act.

Though the enactment had provided effective measures to the secured creditors to recover their long standing dues from the Non performing assets, the rights of the borrowers could not be ignored .The SARFAESI act while enabling the secured creditors to gain through the provisions of the act, has shown a tendency to ignore the vital rights of the borrowers, especially the arbitrary powers exercise with regard to properties mortgaged in respect of the loans therein. Though right to property has ceased to be a fundamental right  after the Constitutional 44th Amendment Act, 1978 the presence of it as  a legal right cannot be ignored. The Supreme Court in Karnataka State Financial Corporation Vs. N.Narasimahaiah[6]  is as follows:-

"40. Right to property, although no longer a fundamental right, is still a constitutional right. It is also human right. In the absence of any provision either expressly or by necessary implication, depriving a person therefrom, the Court shall not construe a provision leaning in favour of such deprivation."

"In a case where a Court has to weigh between a right of recovery and protection of a right, it would also lean in favour of the person who is going to be deprived therefrom. It would not be the other way round."

In-spite of the clarifications and the efforts of the judiciary in providing guidance as to how the provisions of SARFAESI Act, 2002 are to be interpreted and followed, many still believe that certain issues are still to be addressed under SARFAESI Act, 2002. Some of the critical issues under SARFAESI Act, 2002 are dealt-with hereunder.

I. NON performing Assets classification and the notice under section 13(2)

According to the provisions of section 13(2) the banks shall classify a loan as non-performing asset [7]as per the guidelines notified by the Reserve Bank of India. A non performing asset is defined as a credit facility in respect of which the interest or instalment of the principal has remained past due for a specified period of time.[8]

With a view to moving towards international best practices and to ensure greater transparency, the '90 days' overdue' norm for identification of NPAs has been adopted from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004[9], a non-performing asset (NPA) shall be a loan or an advance where:

(i) interest and/or installment of principal remain overdue for a period of more than 90 days in respect a term loan,

(ii) the account remains 'out of order', in respect of an Overdraft/Cash Credit (OD/CC),

(iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

(iv) interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

(v) any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

There are several occasions where this power of classification of a loan account as a non-performing asset by the secured creditors is misutilised by them. Many borrowers feel harassed by the bank officials using their powers under SARFAESI Act in an unreasonable and arbitrary manner. On several occasions, the borrowers are not ‘willful defaulters’ and in the event of negligible defaults the loan accounts of such borrowers are arbitrarily classified as Non performing. The attempts by the borrowers to rectify their defaults within the legal framework and to honour their debt commitments  are ignored deliberately.

The secured creditors are bound to observe the guidelines laid down by the Reserve Bank of India, but in certain circumstances these provisions are wilfully ignored by them while classifying the loan accounts as non-performing assets.

In Mardia Chemicals v. Union of India [10], it was held that it is not on the whims and fancies of the banks to classify the loan accounts as non-performing assets. Strict  consonance with the guidelines laid down by the RBI has to be complied with. Similiarly in the case of M/S Sravan Mill P. Ltd. V Central bank Of India [11], the Andhra Pradesh High court rejected the statement ’Once an NPA  ,always an NPA.’ The respondent banks were held liable for arbitrarily classifying  the petitioner’s loan account as NPA deliberately ignoring the attempts of the petitioner to rectify the omission and to pay back the dues. The power of High Courts to entertain writ petitions with regard to arbitrary classification as NPAs was upheld in view of the inadequate provisions of section 17 to deal with the same. The court pronounced similar judgments in  K.M. Shibu v. State Bank of India, Syamala Kumari v. State Bank of India. In the plethora of cases similar to those abovementioned indicate  the lenient approach adopted by the courts in regularisation of the defaulting loan accounts. However , in spite of such attitude the banks need to  be relaxant in their policies on the classification of an account as NPA considering the fact that though a mere classification, the borrower is hurdled with burdens beyond his reasonable power from that moment itself

II. Powers of Debt Recovery Tribunal

The debt Recovery Tribunals have been empowered under section 17[12] to entertain appeals  against the misuse of powers given to banks under section 13(4). The appeals have to be filed within a prescribed time limit. Though the areas on which the appeals can be entertained has been expressly provided for, the issue concerning this specific power of the Debt Recovery Tribunal  has become a much debated topic.  From the stage of maintaining that ‘the DRT is supposed to only look into the procedural issues’, with the interpretation of Courts, the scope of powers of DRT under section 17 of SARFAESI Act, 2002 is significantly expanded though  certain issues still requires consideration.  While mentioning the powers of the DRT to set aside a sale the Hon’ble Supreme Court of India in CIVIL APPEAL NO. 4429 OF 2009 (2009 (8) SCC 366  was pleased to observe as follows:

“23. The intention of the legislature is, therefore, clear that while the Banks and Financial Institutions have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting the DRT with authority after conducting an adjudication into the matter to declare any such action invalid and also to restore possession even though possession may have been made over to the transferee. The consequences of the authority vested in DRT under Sub-Section (3) of Section 17 necessarily implies that the DRT is entitled to question the action taken by the secured creditor and the transactions entered into by virtue of Section 13(4) of the Act. The Legislature by including Sub-Section (3) in Section 17 has gone to the extent of vesting the DRT with authority to even set aside a transaction including sale and to restore possession to the borrower in appropriate cases. It was also held in the case of Bd And P Hotels (India ) Pvt Ltd vs The District Judge Jhunjhunu thatScheme of S.13(4) read with S.17(3) of SARFAESI Act clearly states that if the borrower is dispossessed, not in accordance with the provisions of SARFAESI Act, then DRT is entitled to put the clock back by restoring the status quo ante and thus a complete mechanism has been provided which enables the Bank/financial institution to realise long terms assets without intervention of any court or Tribunal. Dealing with the issue  of jurisdiction of DRT straight away, the Hon’ble Calcutta High Court earlier in Star Textiles and Industries Ltd Vs. Union of India  (2008 (3) WBLR 385), was pleased to observe as follows:

If the Debts Recovery tribunal is satisfied that recourse has been taken to measures specified in section 13 (4) of the Act not in accordance with the provisions contained in sections 13 (2) read with 2 (o) of the Act, it has the authority to declare the action of the secured creditor as invalid. At the same time, the Debts Recovery tribunal may in a given situation find no fault and uphold the action of the secured creditor.

Though the plethora of cases have specifically laid down the jurisdiction of the Debt Recovery tribunals under section 17 of the SARFAESI Act, on many occasions the tribunals  avoid adjudication upon issues having an indirect nexus with its jurisdiction. In such situations the borrower is hurdled to run from pillar to post without a redressal for his genuine grievances. In view of this critical issue , it is pertinent to mention the necessity for the Debt Recovery tribunals to widen their horizon of jurisdiction within the legal framework to adjudicate upon issue to satisfy the requirements and grievances of the borrowers.

III.  SALE OF ASSETS UNDER SARFAESI ACT   

The banks have been authorised under the provisions of the SARFAESI Act to   take possession of the secured assets and transfer by way of lease , assignment or sale of the secured asset. [13]Once a notice of 60 days is given for repayment of secured debt or instalment thereof to a defaulter and such a defaulter fails to pay the amount then the secured creditor is entitled to exercise its right under sub-section (4) of Section 13 of taking possession of the secured assets of the borrower including the right to jurisdiction by way of lease, assignment or sale for realising the secured assets.[14]

However, it is often contended by the borrowers that this power seems to be draconian in nature which permits the banks to use unauthorized  powers to cause the secured assets to be sold. Not only while taking possession of the secured assets , the banks use excessive discretion while the auctioning of the secured assets . Dealing with the rights of the borrower in getting maximum possible price to the property in a public auction conducted by the Bank and the vis a vis responsibility of the Banks, the Hon’ble Madras High Court in  K. Raamaselvam & Others Vs. Indian Overseas Bank[15]  was pleased to observe as follows:

“For example, if the secured creditor, on the basis of the relevant materials, comes to a conclusion that the highest bid offered, even though higher than the reserve price, does not reflect the true market value and there has been any collusion among the bidders, the secured creditor in its discretion may refuse to confirm such highest bid notwithstanding the fact that the highest bid is more than the upset price. This is because the secured creditor is not only interested to realise its debt, but also expected to act as a trustee on behalf of the borrower so that the highest possible amount can be generated and surplus if any can be refunded to the borrower. The first proviso in no uncertain terms makes it clear that no sale can be confirmed by the authorised officer, if the amount offered is less than the reserve price specified under the Rule 8(5). However, the subsequent proviso gives discretion to the authorised officer to confirm such sale even if the bid is less than the reserve price, provided the borrower and the secured creditor agree that the sale may be effected at such price which is not above the reserve price. This is obviously so because the property belongs to the borrower and as security for the secured creditor and both of them would be obviously interested to see that the property is sold at a price higher than the reserve price. However, if both of them agree that the property can be sold, even it has not fetched a price more than the reserve price; the authorised officer in its discretion may confirm such auction.”

Though it is settled that the Bank is supposed to mandatorily follow the procedure prescribed for conduct of a public auction under SARFAESI Act, 2002, it all depends upon the facts and circumstances of the case and the underlying issue is getting the maximum possible price for the property.

Sale of assets of company in liquidation or being wound up

A perusal of sub-section (9) of Section 13 of the SARFAESI Act would show that in case of a company in liquidation the amount realised from the sale of secured assets must be distributed in accordance with the provisions of Section 529A of the Act. The second proviso also postulates that in case of a company being wound up after the commencement of the SARFAESI Act, a secured creditor or a securitisation company may retain the sale proceeds of his secured assets after depositing workmen's dues with the liquidator as per the requirements of Section 529A of the Act.[16]

On many occasions , there seems to be an apparent contention regarding the conflict of jurisdiction  between the SARFAESI Act, 2002 and the Companies Act,1956,regarding the sale of assets of a company being wound up. The issue was raised before the Hon’ble Allahabad High Court[17] wherein the division bench was pleased to observe that there was no apparent conflict between SARFAESI Act and the Companies Act and therefore does not appear to be any conflict between the sale of the security interest. The SARFAESI Act has to be harmonized in that the Act itself declares that is in addition and not in derogation of the Companies Act.

However, in spite of laid down provisions, the banks tend to ignore these provisions extending beyond the scope of powers under the enactment. The company in liquidation or being wound up does not have adequate remedies except for approaching the DRT by way of appeal under section 17, where also the tribunals acting as agents to the banks fail to provide adequate justice to the borrowers.

In view of the genuine  grievances of the borrower depending upon case to case, it is essential that  the banks provide adequate remedies to the borrowers in respect of auctioned properties by compliance with all the provisions under the law as well as ensuring the maximum price as benefits to them.

IV. Extent of the Jurisdiction of the High Courts under the SARFAESI Act,2002

Though the High Courts used to entertain writ petitions under article 226 of the constitution of India, challenging the provisions of section 13 (2), their jurisdiction was limited on the grounds of section 17 being comprehensive  to deal with all the issues concerning therewith. The writ petitions arising before the High Courts as well as the Supreme Court under article 226 and article 32 respectively,  saw a visible tilt towards interest of the banks instead of the general interest of the public.

Furthermore, these courts failed to take adequate measures to dilute the various arbitrary provisions of the SARFAESI Act, which caused immense hardships to the borrowers at every juncture of the arising of a dispute.

Though, with the advent of time and an increasing level of judicial activism in India, these Courts sought to adjudicate upon matters under the various provisions under SARFAESI Act. The borrowers sought to look up to the High Courts as well as the Supreme Court, as the proceedings in DRT  were slow and the balance of favour rested with the banks in majority of the cases. If a borrower is aggrieved of the decision of the DRT the next approach is an appeal to the Debt Recovery Appellate Tribunal where also the proceedings fail to provide justice within a reasonable period of time. Again, if it is a challenge against the final order in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to deposit substantial amount and it can even be 75%. Thus, the borrower is made to deposit the entire money or forget his property even when his grievance is not adjudicated.

Emphasizing that ordinarily the borrower is not allowed to knock the jurisdiction of High Court under Article 226 in SARFAESI matters, the Calcutta High Court, in Annapurna Vs. State of West Bengal [18] was pleased to observe as follows:

“25. The overriding provision in Section 35 of the Act and the intent thereof apparent from Section 37 thereof that provides that the Act is in addition to, and not in derogation of, certain other regulatory and general statutes, conceives of a single window redress before the Debts Recovery Tribunal. The jurisdiction under Article 226 of the Constitution cannot be taken away by such a statute but a grievance capable of being redressed by the tribunal under the said Act should ordinarily not be allowed to proceed in the High Court.”

On the same lines and in support of exercise of extraordinary jurisdiction under Article 226 even in matters where SARFAESI Act is invoked and dealing with the argument of availability of alternative remedy, the Hon’ble Madras High Court in Sheeba Philominal Merlin & Another Vs. The Repatriates Co-op Finance & Development Bank Ltd., Chennai & Others[19] was pleased to observe as follows:

“35. With regard to alternative remedy, it is seen that there is a statutory violation by not issuing notice under Section 13(2) and 13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002. There is contravention of statute and violation of principles of natural justice and also violation of constitutional right to hold property as per Article 300A of the Constitution of India. It has been held by the Honourable Supreme Court in Vimala Ben Ajith Bhai Patel -Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right to property can be taken away only as per law and right to hold the property has been glorified as "Human Right".

36. That apart, it is well settled law that availability of an alternative remedy is not an absolute bar for exercising the writ jurisdiction and it is only a self-imposed restraint on its power. This has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs- Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of availability of alternate remedy miserably fails. The petitioners cannot approach the Tribunal, as the measures taken by the Bank were belatedly known to the petitioners and by that time the time prescribed under the Act was over. The Judgement in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact, justifies the contention of the petitioners. As per the judgement, Courts cannot extend the time limit prescribed by the Statute. As such the only remedy for the petitioners is to file a writ petition which has been rightly done by them.

37. The Tribunal is not competent to look into violation of fundamental rights and constitutional rights and this Court being a custodian of Constitutional rights is entitled to examine the matter. A Constitution Bench of the Honourable Supreme Court in its judgment in State of West Bengal and others -Vs- The Committee For Protection of Democratic Rights, West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of the Constitution of India can be exercised for enforcing any legal right conferred by a statute and it is further held that under Article 226 of the Constitution of India, the High Court has got more wider power than the Honourable Supreme Court. In Secretary Cannanore Muslim Educational Association, Kanpur vs. State of Kerala reported in 2010 (5) SCALE 184, the Apex Court held that the High Court is conferred with wide power to " reach injustice whenever it is found". Therefore as injustice is writ large and glaring, necessarily the judicial arm of this court has to reach there and it cannot be prevented by plea of availability of alternative remedy.”

It was also observed  by the Madras High court  in K. Ramaselvam v. Indian Overseas Bank [20]that ,”the act does not impose absolute bar for entertaining writ petition .Moreso , a bank being a public sector undertaking ,considered as state under article 12 of Constitution of India has to act strictly in accordance with the statutes and rules.”

With the appraisal of the abovementioned facts, there arises a need for the High Courts to entertain writ petitions  in cases where there is apparent miscarriage of justice, While doing so , the High courts should exclude or minimise the emphasis of the availability of alternative remedies under section 17 of the SARFAESI Act, in view of the larger public interest.

V. Limits to the jurisdiction of Civil Courts.

There exists a clear bar in section 34 of the SARFAESI Act , 2002 to the jurisdiction of civil courts on adjudication of matters on the various provisions of the enactment. If the borrowers seek to approach the civil courts for such an adjudication , it becomes complicated for them to persuade these courts that they have sufficient powers to deal with such issues under the enactment. In majority of the cases, the civil courts rule in favour of section 34 to exclude their power of adjudication.

As regards principles relating to exclusion of jurisdiction of civil court, the provisions and the extent of such jurisdiction  has been examined in length  by  the Apex Court in Dhulabhai Vs. State of MP[21]  which was further considered in 1988 (1) SCC 681, AIR 2005 SC 2544 and by the Rajasthan High Court  in Mohanlal Vs. Dwarka Prasad[22]

The Apex Court summarized the principles relating to the exclusion of jurisdiction of civil courts ad infra:

(a) Where the statute gives a finality to the orders of the special tribunals, the civil court's jurisdiction must be held to be excluded if there is adequate remedy to do what the civil courts would normally do in a suit. Such provision, however, does not exclude those cases where the provisions of the particular Act have not been complied with or the statutory tribunals has not acted in conformity with the fundamental principles of judicial procedure.

(b) Where there is an express bar of the jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the Civil Court.

Where there is no express exclusion, the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case, it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all questions about the said right and liability shall be determined by the tribunals so constituted, and whether remedies normally associated with actions in Civil Courts are prescribed by the said statute or not.

An exclusion of the jurisdiction of the civil court is not readily to be inferred unless the conditions above set down apply.

However, there are certain cases which require the civil courts to extend their jurisdiction  to adjudicate upon issues under the SARFAESI Act,2002 and the courts should not hesitate to do the same  when  the requirement of such  a leap, despite the existence of section 34 , is apparent.

Conclusion

Though the enactment of SARFAESI Act sought to mobilise blocked funds of the banks in the non-performing assets, the various provisions of the acts have created  deep sorrows  for the genuine buyers. The various provisions meant to balance the requirements of the borrowers and the banks, have their balance of favour tilted towards the banks. These powers are, at majority of the times, misutilised by the banks to appropriate their interests against the interests of the buyers. In such a situation it is pertinent for the civil courts to assume a more social responsibility for the larger interest of the borrowers on one hand and to share  the responsibilities of the  banks to mobilise their funds from the numerous non-performing assets.

[1] These reforms were undertaken in view of the  economic liberalization in India in 1991 influenced by the IMF and the World Bank  as part of their loan conditionality to India in the same year.  "Financial reforms and development". S.D.Naik, Business Line, the Hindu. 26 April 2002. Retrieved 22 February 2011.