Section 14 of Sarfaesi Act

ROLE AND POWERS OF DISTRICT MAGISTRATE / CHIEF METROPOLITAN MAGISTRATE

Amendment to SARFAESI Act introduced in 2013 brought out certain changes in the Act wherein under section 14 compulsory filing of an affidavit by the secured creditor through their Authorised Officer with the District Magistrate / Chief Metropolitan Magistrate, as the case may be, to take possession of the secured assets is introduced. The amendment  states, “Where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him –

1. Take possession of such asset and documents relating thereto; and
2. Forward such assets and documents to the secured creditor.”

“Provided that any application by the secured creditor shall be accompanied by an affidavit duly affirmed by the authorized officer of the secured creditor, declaring that-

1. The aggregate amount of financial assistance granted and the total claim of the bank as on the date of filing the application.
2. The borrower has created security interest over various properties and that the Bank or Financial Institution is holding a valid and subsisting security interest over such properties and the claim of the Bank or the Financial is within the limitation period;
3. The borrower has created security interest over various properties giving the details of properties referred to in the sub-clause (ii) above;
4. The borrower has committed default in repayment of the financial assistance granted aggregating the specified amount;
5. Consequent upon such default in repayment of the financial assistance the account of the borrower has been classified as a non performing asset;
6. Affirming that the period of sixty days notice as required by the provisions of sub-section (2) of section 13, demanding payment of the defaulted financial assistance has been served on the borrower;
7. The objection and representation in reply to the notice received from the borrower has been considered by the secured creditor and the reasons for non-acceptance of such objection or representation had been communicated to the borrower;
8. The borrower has not made any repayment of the financial assistance in spite of the above notice and the Authorised Officer is, therefore, entitled to take possession of the secured assets under the provisions of sub-section (4) of section 13 read with section 14 of the principal Act;
9. That the provisions of this Act and the rules made there under had been complied with”

“Provided, further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall, after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of the secured asset within a period of thirty days from the date of application.”

What is the significance of the amendment in the SARFAESI Act in the context of the role of the CMM / DM?

The significance of the amendment in the Act with regards to the role of the Chief Metropolitan Magistrate / District Magistrate prior to the amendment of Section 14 was only the satisfaction of the Magistrate in relation to the documents produced by the parties and there was no necessity of any detailed inquiry for the purpose of extending assistance to the secured creditor and was merely executory in nature which has become broad and pervasive after the amendment.  Since, by virtue of the Amendment Act position of District Magistrate / Chief Metropolitan Magistrate  has undergone a significant change for the reason that the District Magistrate / Chief Metropolitan Magistrate has to satisfy himself with the contents of the affidavit for which he has to hear the opposite party also to conclusively come to conclusion without any reasonable doubt that the authorised officer has complied with the provisions under section 14 of the Act to uphold the principles of natural justice which is the driving force of DRT and DRAT as per section 17 (7) of the Act read along with section 22 of The Recovery Debts and Bankruptcy Act, 1993. Hence, if the spirit of the Act is to be upheld without bias and prejudice on account of affidavit being filed, then the affected persons are to be given an opportunity to put forth their views on the affidavit so that “Equality before Law” can be delivered which will avoid unilateral and arbitrary decision making by the concerned authorities..

Can the order of District Magistrate / Metropolitan Magistrate be challenged?

“There is no dispute that any person, including a borrower, aggrieved by any of the measures referred to in sub-section (4) of section 13 of the SARFAESI Act has a right to prefer an appeal under section 17 before the Debt Recovery Tribunal. It is now an established proposition of law that the order passed under section 14 of the Act is a post-section 13(4) action and is an appealable order. However, it is a settled proposition of law that alternative remedy is no bar from filing a writ petition in cases where there has been denial of natural justice or if an action is without jurisdiction or there is a challenge to the vires of any statute.”

It is imperative that as per the Act on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate shall have to be satisfied with regard to the contents of the affidavit and thereafter shall pass orders and however, if same is totally absent in the order under challenge “there is no reason whatsoever in support of the order. It is cryptic.”  If the order does not spell out the reasons for making such an order, it amounts to the violation of the principles of natural justice.

Can the bank / financial institution file the affidavit with DM / CMM for taking possession of the secured assets during the pendency of any writ petition?

If any writ petition is pending in high court and if any possession notice has been served during the pendency of the writ petition, then the act of issuing a possession notice by the Authorized Officer is an illegal act and such possession notice cannot be maintained under the law.

Can District Magistrate / Metropolitan Magistrate can pass any order regarding the compliance of the provisions of SARFAESI Act as enumerated u/s 14 of the said Act setting aside the request of the Authorised Officer for taking possession of the alleged secured assets?

Section 14 (1) of SARFAESI Act states “Provided further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of he secured asset.”   The usage of the word “SHALL” in the provisions of the Act makes it mandatory to follow the provisions of the Act strictly without any dilution. Hence, the District Magistrate / chief Metropolitan Magistrate as the case may be, can reject the affidavit filed by the Authorised Officer if he is not satisfied with the contents of the affidavit by giving reasons for his rejection and instruct the Authorised Officer to resubmit the affidavit by duly making necessary and required corrections in the affidavit as per the observation of the District Magistrate / Metropolitan Magistrate.

Since the compliance of section 13 (2), 13 (4) and Rule 8 are mandatory for the secured creditor to implement them, any order of the District Magistrate / Chief Metropolitan Magistrate without reference to the compliance of the aforesaid sections of SARFAESI Act, it must be presumed that no materials are placed before the District Magistrate / Chief Judicial Magistrate by the secured creditor in respect of the compliance. Further, the affidavit filed by the authorised officer should not only include the statements supported by various evidences in favour of having complied with the provisions of section 14 which includes section 13 (2), section 13 (4) and Rule 8 of the Act but also substantiated by the relevant RBI circulars and legal citations. The compliance, If not proved without any reasonable doubt, then the proceedings are unsustainable in the eye of law, as it would amount to arbitrary exercise of the powers conferred under section 14.

Point No (ix) of section 14 of SARFAESI Act to be affirmed in the affidavit being filed by the authorised officer of the secured creditor states, “that the provisions of this Act and the rules made thereunder had been complied with:’ what is the importance of this compliance?

Even though this particular point comprises of all the sections of the Act, the District Magistrate / Chief Metropolitan Magistrate should ensure the following points which are mandatory for the secured creditors to comply with.

a. Classification of account as NPA as per RBI norms and issue of notice u/s 13 (2) of the Act. The secured creditor in practice does not substantiate the RBI norms under which the account has been classified as NPA. Since the classification of NPA is based on the overdue position of the debt/liability, the bifurcation of debt / liability as enumerated here below is very essential to ascertain whether the account is actually NPA.

1. Total principal amount outstanding.
2. Overdue principal amount.
3. Total interest due.
4. Overdue interest due.
5. Total other charges due.
6. Overdue other charges.
7. Total penal interest due.
8. Overdue penal interest.

The aforesaid bifurcation is based on RBI norms under definition of NPA in their circular on prudential norms. In this connection the judgment of High Court of Judicature at Madras in the WP No. 29962 of 2013 and MP No. 1 of 2013 dated 06.11.2013 may be referred.

b. On receipt of notice u/s 13(2) of the Act, if the borrower submits their representation and objections whether the secured creditor through its authorised officer has given a reply to it within the statutory period of 15 days. Sometimes it is found that the authorised officer delegates his power to a lawyer to reply the representation and objections submitted by the borrower which as per the Act is not allowed and not maintainable under the law.

c. In terms of sections 22, 23 and 24 of the Act registration of security interest is to be `created with the Central Registry for entering the particulars of transactions relating to creation of security interest.

d. As per section 26D of the Act “no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III (Enforcement of security interest) in its favour by the borrower has been registered with the Central Registry.”

e. Section 31 of the Act stipulates the provisions of the Act not being applied in certain cases and the District Magistrate / Metropolitan Magistrate should ensure that the affidavit does not cover such stipulated cases.

As per section 17 (7) of SARFAESI Act read along with section 22 of The Recovery of Debts and Bankruptcy Act, DRT and DRAT are guided by the principles of natural justice. What is its importance?

Under Constitutional protection principles of natural justice plays an important role. the following are the two important basic principles of natural justice: 

1. No one can be a judge in his own cause (‘Nemo debet essa judex in propria cause’), 
2. Hear the other side (‘Audi Alteram Partem’).”

It further states, “The second principle, ‘Hear the other side’ means (a) that a judge must hear both sides and must not hear one side in the absence of the other. It means that the delinquent Government servant has a notice of the charges he is called upon to explain and the allegations on which those are based; (b) that he has access to all relevant evidence that he wishes to adduce; (c) that he is given the opportunity to cross-examine the prosecution witnesses and to produce witnesses in defence and offer himself for examination; (d) that no evidence should be recorded behind his back but all of it should be taken in his presence; and (e) that no materials should be relied on against him without his being given an opportunity of explaining them.” Besides, The Supreme Court, in Union of India vs. T.R. Verma, AIR 1957 SC 882 has summarised the principles of natural justice thus: “Stating it broadly and without intending it to be exhaustive, it may be observed that rules of natural justice require that a party should have the opportunity of adducing all relevant evidence on which he relies, that the evidence of the opponent should be taken in his presence, and that he should be given the opportunity of cross-examining the witness examined by that party, and that no material should be relied on against him without his being given an opportunity of explaining them.” 

Under Article 14 of the Constitution, these principles of procedural fairness, and the right to be heard are so fundamental to the dispensation of justice that our Supreme Court has in fact propounded that these principles would naturally exist even in the absence of Article 14 of the Constitution. In the Tulsiram case [(1985) 3 SCC 398], the Supreme Court observed that Article 14 did not create the principles of natural justice, but rather that Article 14 is only their constitutional guardian. In the famous Maneka Gandhi case [(1978) 1 SCC 248], Justice Bhagawati noted these to be, “a great humanising principle”, and went on to hold that procedural fairness is implied even in situations where the statute does not provide for it, thus adopting the lofty concept set out by Byles J. in Cooper v. Wandsworth Board of Works [(1863) 143 ER 414].” Further “In the landmark case of S.L. Kapoor v. Jagmohan & Ors. [AIR 1981 SC 136(1)], the question that arose is whether the rules of natural justice should be followed even when there are undisputed facts that speak for themselves since no purpose would be served by following the process of formal notice, as the result would ultimately be the same. The Supreme Court concluded that “merely because facts are admitted or are indisputable it does not follow that natural justice need not be observed.”

In view of what has been pronounced by Supreme Court of India is binding on all courts as per Article 141 of the Constitution, aggrieved persons must be given an opportunity to be heard by the court of law to uphold justice, equality before law and to keep up good conscience.

The aforesaid averments are substantiated and supported by the following judgments. 

1. The High Court at Calcutta judgment in the matter of W. P. No. 2237 (W) of 2015 in the matter of Kaliji Engineering Woks & another Vs. Syndicate Bank and others.
2. Supreme Court of India judgment in the matter of Harshad Govardhan Sondagar v. International Assets Reconstruction Company Limited And Others
3. Rajasthan High Court judgment dated 06.10.2015 in the matter of Shree Hari Handicrafts vs. Dena Bank & others.
4. Bombay High Court judgment in the matter of Blue Coast Hotels Limited vs. IFCI Limited decided on 23.03.2016.(Writ Petition Nos. 222 of 2015, 1150 of 2015, 2486 of 2015, 2486 of 2015 with Notice of Motion (Lodging) Nos. 37 of 2015, 206 of 2015, 311 of 2015, 371 of 2015, 713 of 2014, 256 of 2015, 261 of 2015, 476 of 2015 with Chamber Summons (Lodging) No. 310 of 2014, 247 of 2015, 320 of 2015)
5. Bombay High Court judgment in the matter of Kotak Mahindra Bank Ltd. vs. State of Maharashtra in the matter of writ petition 1272 of 2017 and 2233 of 2017.
6. Order passed by District Magistrate, Nagpur dated 22.10.2013 under case No. 41 / 2013 in the matter of State Bank of Patiala, Nagpur vs. Homraj Meghraj Hiranwar, Nagpur.