FAQs on Enforcement of Security Interest - Part 1

• Q.1: Whether DRT has discretionary powers?

A: Supreme Court in Nahar Industrial Investments (P) Ltd. Vs. H.S.B.C. CTC 2009(2)SC 74 held that: DRT is statute create body. It has no discretionary power. DRT is not common law court nor is within the hierarchy of High Court. C.P.C. and Evidence Act have no application to DRT. It has to frame its own rules and regulations and follow the principles of natural justice. It cannot grant declaratory decree. It cannot grant specific reliefs like mandatory injunction etc.

• Q.2: Under what circumstances civil court’s jurisdiction is barred?

A: Civil Court’s jurisdiction is totally barred in respect of the matters over which DRT is conferred with jurisdiction. Section 34 clearly lays down that, no civil court shall have jurisdiction to entertain any suit or proceeding “in respect of any matter” which a DRT or an Appellate Tribunal is empowered by or under the Securitisation Act to determine. The expression ‘inrespect of any matter’ referred to in Section 34 would take in the “measures” provided under sub-section (4) of Section 13 of the Securitisation Act. According to recent judgment of Supreme Court [See judgment of Supreme Court in Jagdish Singh Vs Heeralal & Ors.(SLP 18 of 2011)] even all disputes pertaining to partition among co-parceners can be entertained by DRT. Civil court cannot exercise jurisdiction

• Q.3: Under what circumstances civil court’s jurisdiction is not totally barred?

A: If the applicant pleads grounds of Fraud/Misrepresentation in Sec.17 Application, it is civil court which has to decide such dispute. (Mardia Chemicals case).The level of proof required for proving fraud is extremely high. The party who alleges fraud / misrepresentation should furnish the full particulars in the plaint. (A.C. Ananta Swamy Vs. Boraiah: MANU/SC/0655/2004). Application of CPC and Evidence Act are essential to prove fraud / misrepresentation. High level proof is required in such cases (Sangam Singh Gaekwad Vs. Shantadevi Gaekwad (2005) II SCC 314).CPC and Evidence Act have no application to DRT proceedings (Nahar Industrial Investments (P) Ltd. Vs. H.S.B.C 2009 (2) C.T.C 74).

• Q.4: Whether DRT under Sec.17 of SARFAESI Act adjudicates on the quantum of the claim amount in the demand notice?

A: No power to decide the quantum of the claim amount is conferred to DRT in the SARFAESI Act. The Act is executory (and not adjudicatory) in nature. Process of adjudication is not the scheme of the Act. In the SARFAESI Act there is no such provision. DRT can only scrutinize the action taken by the secured creditor under the Act and hence it cannot determine the quantum of amount in the demand notice. SARFAESI Act proceeds on the basis that borrower created security interest in favour of bank and his liability stood crystallised on account of his account slipped to NPA

• Q.5: When BIFR proceedings are barred?

A: Reference by borrower to BIFR under Sec.15(1) is barred after assignment of the NPA Financial Assets to Securitization or Asset Reconstruction Company(Paper Prints (India) Pvt.  Ltd. Vs. Phoenics ARC (P) Ltd. 2013 (1) DRTC 67 (Bom.).

• Q.6: When BIFR proceedings stand abate?

A: If secured creditor(s) with 60% balance outstanding, take measures under Se.13(4) of SARFAESI Act, the BIFR proceedings stand abated (come to an end)

• Q.7: Is there any statutory prohibition against issuing more than one notice U/S.13(2) of the Act?

A: There is no statutory bar for issuing any number of demand notices provided the right to enforce the security interest is not time barred.

• Q.8: Whether machinery attached to the earth is immovable property.

A: TP Act defines "immovable property" as under:"Immovable property" does not include standing timber, growing crops or grass. According to General Clauses Act, "immovable property" shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Please refer to the judgment inDuncans Industries Ltd. Vs. State Of U.P. & Ors. (AIR 2000 SC355). This judgment of Supreme Court differs with its earlier judgment rendered in [Sirpur Paper Mills Ltd. Vs. Collector Of Central Excise, Hyderabad (AIR 1998 SC 1489).  Thus movable machinery if fastened to the earth with cement and concrete it becomes immovable property. General Cluses Act is meant to clarify such contingencies. Plant and machinery should be treated as part of the immovable secured asset if they are fastened to the earth with cement and concrete as on the date of taking possession. In the possession notice (Appendix-IV) the same must be mentioned specifically giving brief description of the particulars of the machinery vide separate annexure attached to it.

• Q.9: Whether machinery attached to the earth temporarily for operational efficiency is immovable property.

A: If the  machinery attached to the earth is meant for operational efficiency as temporary arrangement, it cannot be treated as immovable property [Sirpur Paper Mills Ltd. Vs. Collector Of Central Excise, Hyderabad (AIR 1998 SC 1489). The Authorised Officer has to record a panchanama and inventory as per Appendixes I and II following the Sib- Rules (1 to 3) of Rule 4 of SI(E) Rules.

• Q.10: Whether secured creditor can adjust forfeited ‘EMD’ amount to secured creditor’s profit account?

A: Secured creditor cannot appropriate the forfeited ‘EMD’ amount to profit account’. What is forfeited is regarded as part of debt recovered in the action (Tetra Hedron Vs. Indian Secured creditor).Secured creditor is entitled to adjust legally incurred expenditure first, before adjusting the forfeited EMD amount to loan account

• Q.11: Whether successful purchaser can appoint nominee for obtaining sale certificate?

A: No. Not permissible in law as nominee does not find place in the register of tenders who submitted sealed tenders. Such sale shall not be considered as valid sale.(Hemalatha Ranganthan Vs. Indian Secured creditor)

• Q.12: Whether secured creditor can adjust forfeited ‘EMD’ amount to secured creditor’s profit account?

A: Secured creditor cannot appropriate the forfeited ‘EMD’ amount to secured creditor’s profit account. Since the amount recovered is part of the debt recovered in the in the action under SARFAESI Act. Hence it should go to loan account. Secured creditor is entitled to adjust legally incurred expenditure first, before adjusting the forfeited EMD amount to loan account (Tetra Hedron Vs. Indian Secured creditor)

• Q13: What is the difference between sale deed and sale certificate?

A: Sale deed contains indemnity where the seller undertakes to indemnify the purchaser to make good the loss in the event of defect in the title to the property mortgaged to the secured creditor. Whereas sale certificate does not contain such indemnity to answer the purchaser in such event.

• Q.14: Whether mortgagor has power to lease mortgaged property? If so under what conditions?

A: Mortgager has power to lease the mortgaged property under S.65A of TP Act. Lease should commence within 6 months from the date it is made. Possession should be with mortgager. Lease period cannot exceed 3 years. Condition for payment of rent and reentry on default to pay rent within time must find place in the lease deed. No renewal is permissible. Reservation of best rent is essential covenant. No premium shall be paid. No advance rent shall be paid. Mortgage deed should contain contrary intention to modify the terms above specified.

• Q.15:  What is period of limitation for initiation of action in respect of movable and immovable secured assets?

For movable secured assets, the period of limitation is three years from the date the debt becomes due (and not from the date of creation of hypothecation security) unless saved by the debt acknowledgment duly signed by the borrower. For immovable secured assets, according to Art.62 of Limitation Act 12 years is the period prescribed. It begins to run from the date the debt becomes due, unless saved by the debt acknowledgment signed by the borrower

• Q.16: Is there any statutory prohibition against issuing more than one notice u/s.13(2) of the Act?

There is no statutory bar for issuing any number of demand notices provided the right to enforce the security interest is not time barred.

• Q.17: Whether DRT/Court has power to strike down/set aside the demand notice on any ground?

DRT/Court has no power to strike down the demand notice on any grounds. DRT/Court has power to stay or set aside the possession notice u/s 13(4) or post 13(4) events only.

• Q.18: What is the difference between sale deed and sale certificate?

A: Sale deed contains indemnity favoring the purchaser to make good the loss if the title of the borrower to the property (which was mortgaged as security). Authorized Officer is answerable to the purchaser for any defects in the title. But sale certificate does not contain any such indemnity. Hence it is safe to the AO and the bank.

• Q.19: Whether mortgagor has power to lease mortgaged property? If so under what circumstances?

Mortgager has power to lease the mortgaged property under S.65A of TP Act. Lease should be in accordance with local law. Lease should commence within 6 months from the date it is made. Possession should be with mortgager. Lease period cannot exceed 3 years. Condition for payment of rent and reentry on default to pay rent within time must find place in the lease deed. No renewal is permissible. Reservation of best rent is essential covenant. No premium shall be paid. No advance rent shall be paid. Mortgage deed should contain contrary intention to modify the terms above specified. If the lease is obtained after service of S.13(2) notice or in breach of S.65A of TP Act the tenant cannot be treated as bona fide tenant.

•  Q.20: Whether Bona fide tenant can be forcibly dispossessed?

A: No. A bona fide tenant cannot be forcibly dispossessed. See judgment of Karnataka High Court rendered inHutchison Essar South (P) Ltd. Vs. Union Bank of India : AIR 2008 Kar. 14. Secured creditor can take only symbolic possession of secured asset under occupation of the bona fide tenant

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