SARFAESI Act, 2002, Section 13(2) 13(4) ----------- Bank Loan Recovery, Bank Engaging enforcement agency and claiming amount paid to such agency--------------------- held------------------------- Unjustified and untenable.
IN THE HIGH COURT OF PUNJAB AND HARAYANA AT
CHANDIGARH
Date of Decision: 20.10.2011
(i) Civil Writ Petition No. 11662 of 2010
Mohinder Pal Singh and another …..Petitioners
Versus
State Bank of India and another …..Respondents
Present: Shri Anand Chhibbar,
Shri Ranjit Chawla and
Shri I.P. Singh, Advocates, for the petitioners.
Shri S.C. Pathela, Advocate, for the respondents.
(ii) Civil Writ Petition No. 299 of 2011
Rajeev Gulati and another …..Petitioners
Versus
State Bank of India …..Respondent
Present: Shri Karan Bhardwaj, Advocate, for the petitioners.
Shri S.C. Pathela, Advocate, for the respondent.
CORAM: HON’BLE MR. JUSTICE HEMANT GUPTA
HON’BLE MR. JUSTICE G.S. SANDHAWALIA
1. Whether Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporters or not?
3. Whether the judgment should be reported in the Digest?
HEMANT GUPTA, J.
This order shall dispose of Civil Writ Petition No. 11662 of
2010 and Civil Writ Petition No. 299 of 2011, challenging the action of
the Bank in taking possession of the secured assets, even though the
amount of the financial assistance stands substantially paid. Civil Writ Petition No. 11662 of 2010
For the facility of reference, the facts are taken from Civil
Writ Petition No. 11662 of 2010. The petitioner herein availed loan of
Rs.10 lacs on 23.8.2006 and mortgaged the property, a piece of land,
as collateral security. The petitioner defaulted in payment of the loan
which led to the issuance of a notice under Section 13(2) of the
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (for short `the Act’). A copy
of the said notice, produced by the respondent-Bank in Court, shows
the outstanding amount as Rs.12,15,630/- as on 15.5.2008 along
with further interest and incidental expenses. The Bank vide letter
dated 12.9.2008 sought the assistance of an Enforcement Agency,
namely, M/s Vrinda Corporate Services Ltd., to take possession of
the immovable and movable property as an agent of the Bank.
Subsequently, a notice for taking possession under Section 13(4) of
the Act was issued on 4.2.2009 by the Authorized Officer of the Bank.
Such notice was published in the newspaper “The Hindustan Times”
on 9.2.2009. The petitioner failed to make payment of the amount,
which led to the issuance of another notice dated 27.5.2009 under
Section 13(4) of the Act. Such notice under Section 13(4) of the Act,
was published in the newspaper `The Tribune’ (English Edition) and
vernacular newspaper `Punjabi Tribune’ dated 13.6.2009 proposing
the date of auction as 17.7.2009. The amount mentioned in the sale
notice was Rs.12,15,630/- along with interest. The petitioner
deposited a sum of Rs.2.00 lacs on 13.7.2009 and sought six
months’ time to deposit the balance amount.
Another public notice was published in the newspapers
`The Tribune’ (English Edition) and vernacular newspaper `Punjabi
Tribune’ dated 5.6.2010 proposing the date of sale as 7.7.2010. The
petitioner deposited the balance amount in parts with last deposit of
Rs.2,17,444/- on 25.6.2010. As per the petitioner, with the said
(Civil Writ Petition No. 11662 of 2010
deposit, there was only one rupee in the debit account, as per the
statement of account Annexure P.4 appended with the writ petition.
In view of the statement of account (Annexure P.4), it is argued that
the entire amount, as mentioned in the notice under Sections 13(2)
and 13(4) of the Act, stands paid, therefore, for the non deposit of the
interest amount, the property cannot be sold.
This Court on 6.7.2010 permitted the Banks to receive bids, but
it was ordered that it will not finalise the auction of the property. The
respondent-Bank initially filed written statement on 25.9.2011 raising
a plea that the jurisdiction of the Civil Court is barred in terms of
Section 34 of the Act and that the provisions of the Act, have
overriding effect on any other law in terms of Section 35 of the Act. It
is also pointed out that the outstanding dues towards the petitioners
as on 21.9.2011 are as under:-
(a) Accrued interest upto 21.9.2011 amounting to Rs.2,85,808/-
(b) Charges of enforcement agency Rs.1,28,600/-
(c) Charges of publication of notices dated 13.6.2011 Rs.24,192/-
(d) Charges of publication of notices dated 5.6.2010 Rs.18432/-
(e) Legal fee Rs.20,400/-
Total outstanding dues Rs.4,77,432/-
The writ petition was taken up for hearing on 29.9.2011
on the aforesaid date along with CWP No. 299 of 2011, which is also
being decided by the present order. In the aforesaid case also, the
Bank has engaged recovery/enforcement agency and is said to have
paid a sum of Rs.1,28,608/- even before issuance of the notice under
Section 13(2) of the Act, to such agency. The Chief General Manager
of the Bank was called to explain the conduct of the officers of the
Bank in claiming the amount paid to the enforcement agency, even
before notice under Section 13(2) of the Act, was issued. Shri S.K.
Sehgal, Chief General Manager of the State Bank of India, explained
on 30.9.2011 that the Bank has issued instructions to claim charges
(Civil Writ Petition No. 11662 of 2010
of the Enforcement Agencies only at the stage of taking over
possession i.e. after the action under Section 13(4) of the Act is taken.
The counsel for the Bank thereafter, sought time to furnish
additional affidavit to explain the claim of the charges paid to the
enforcement agencies.
In CWP No. 11662 of 2010, an additional affidavit has
been filed to the effect that the recovery case of the borrower was
handed over to the recovery/enforcement agent on 12.9.2008 and
possession of the secured assets i.e. plot measuring 403 square was
taken on 4.2.2009 and a notice under Section 13(4) of the Act, was
served on 4.2.2009. The notice was published in the newspapers on
9.2.2009. Since the borrower did not make payment of the
outstanding dues, notice of sale was issued on 27.5.2009. After the
deposit in part by the borrower, it is explained that the balance in the
account of the borrower as on 5.6.2010 was Rs.2,17,445/- and that
the borrower was also liable to pay the accrued interest and actual
expenses incurred by the Bank in effecting the recovery. The
borrower deposited an amount of Rs.2,17,444/- on 25.6.2010, but did
not pay the accrued interest amounting to Rs.2,48,461/- as on
25.6.2010 and also an amount of Rs.1,71,224/- towards the expenses
incurred by the Bank in effecting recovery. The details of the
payments are as under:-
(i) Publication of notices paid to M/s Raghuvanshi
Advertising on 21.7.2009
Rs.24192/-
(ii) Paid to M/s Vrinda Corporate Services Limited, the
Enforcement Agent on 17.8.2009
Rs.40,000/-
(iii) Publication of notices paid to M/s Design Matters
Advertising on 2.7.2010
Rs.18,432/-
(iv) Paid to M/s Vrinda Corporate Services Limited, the
Enforcement Agent on 10.7.2010
Rs.44,300/-
(v) Paid to M/s Vrinda Corporate Services Ltd. Rs.44,300/-
(Civil Writ Petition No. 11662 of 2010
Thus, it is pointed out that an amount of 4,19,685/- is still due and
payable to the petitioner.
Shri Pathela, has also filed documents such as the circulars
dated November 3, 2006 and April 24, 2011 issued by Reserve Bank
of India as well as the copies of the bills, submitted by the
enforcement agency, M/s Vrinda Corporate Services Ltd. Vide
circular dated 3.11.2006, the Reserve Bank of India has issued
“Guidelines on Managing Risks and Code of Conduct in Outsourcing
of Financial Services by Banks”. Para 5.5 of the said circular deals
with “The Outsourcing Agreement”. It is contemplated that every such
agreement should address the risks and risk mitigation strategies.
Para 5.7 of the said circular deals with the responsibilities of the
recovery agents. Shri Pathela also relies upon the Bank’s Outsourcing
Policy, 2011 contained in a master circular issued by the Banking
Operations Department Corporate Centre, Mumbai. It is pointed out
that the recovery agencies are carrying out a financial activity, which
is covered under the outsourcing arrangement permitted as per the
guidelines issued by the Bank.
Reliance was also placed upon circular dated 16.11.2002
issued by the office of the Chief General Manager of the Bank. The
said circular deals with the procedure after issuance of notice under
the Act. Clause (g) deals with taking possession of the immovable
property, which reads as under:-
“6. Procedure after issue of notice
xxx xxx
D. The guidelines that follow mainly cover the procedure for
taking possession/ sale of secured assets and appointment of
Enforcement Agencies to assist the branches.
(a) xx
(g) Taking possession of immovable property
i) Where the secured asset is an immovable property, the
authorized officer may take, or cause to be taken
(Civil Writ Petition No. 11662 of 2010
possession by delivering a Possession Notice to the
borrower as per format given in Annexure 6.
ii) The notice should also be affixed on the outer door or at
such conspicuous place of the property.
iii) The possession notice should also be published in two
leading newspapers, one in vernacular language,
having sufficient circulation in that locality.
iv) The property should be kept in the custody of the
Authorized Officer or in the custody of any person
appointed/authorized by him, who shall take due care
as a man of ordinary prudence would, under the
similar circumstances, take of such property.
v) The Authorised Officer shall take steps for preservation
and protection of secured assets and insure them, if
necessary, till they are sold or otherwise disposed of.”
xx xx xx
(o) Appointment of Enforcement Agencies (EAs)
It has been decided that, where warranted, Authorised
Officers may enlist the services of Enforcement
Agencies (EAs) for assisting them in enforcing security
rights under the Ordinance (i.e. taking possession of
the assets, maintenance and eventual sale). The
Agencies so enlisted will be an Agent of the Authorised
Officer. The salient features of the arrangement will be
as under.”
In the circular dated 10.3.2005 issued by the Bank,
attached as Annexure R-2 with CWP 299 of 2005, the remuneration
structure for the enforcement agents is as under:
For recoveries above
Rs.20 lacs and upto Rs.50
lacs
Rs.2 lacs plus 2.5% of the
amount recovered in excess of
Rs.20 lacs.
For recoveries above
Rs.50 lacs upto Rs.5
crores
Rs.2.75 lacs plus 1.5% of the
amount recovered in excess of
Rs.50 lacs.
For recoveries above Rs.5
crores
Rs.9.50 lacs plus 1% of the
amount recovered in excess of
Rs.5 crores.
It is pointed out that after such circular, the
remuneration payable to the enforcement agency has been revised
vide Circular Letter No. CirCFO/Adv/358/2006-07 dated 23.2.2007.
The relevant extracts are as under:-
(Civil Writ Petition No. 11662 of 2010
Sr.
No.
Item Remuneration Payable
a) For recoveries upto Rs.1
lac
@ 20% of the amount
recovered
b) For recoveries above
Rs.1 lac and upto Rs.20
lacs
Rs.20,000/- plus 10% of
the amount recoveries in
excess of Rs.1 lacs.
c) For recoveries above
Rs.20 lacs and upto
Rs.50 lacs
Rs.2 lacs plus 2.5% of the
amount recoveries in excess
of Rs.20 lacs.
d) For recoveries above
Rs.50 lacs and upto
Rs.5 crores
Rs.2.75 lac plus 1.5% of the
amount recoveries in excess
of Rs.50 lacs.
e) For recoveries above
Rs.5 crores
Rs.9.50 lacs plus 1% of the
amount recovered in excess
of Rs.5 crores.
Vide circular dated 5.5.2010, Annexure R-4 with CWP
299 of 2011, the remuneration structure for the enforcement agencies
has further been revised, which reads as under:-
“Proposed Fee Structure
Situation
A B C
a) For recoveries
upto Rs.10.00 lacs
4% of the amount
recovered maximum
Rs.40,000/-
(Minimum
Rs.12,000/-)
Rs.10,000/- Rs.5000/-
b) For recoveries
above Rs.10.00
lacs and upto
Rs.50.00 lacs
Rs.40,000/- plus
2.5% of the amount
recovered in excess
of Rs.10.00 lacs
Rs.15,000/- Rs.5000/-
c) For recoveries
above Rs.50.00
lacs and upto
Rs.1.00 crore
Rs.1,40,000/- plus
2.00% of the
amount recovered
in excess of
Rs.50.00 lacs
Rs.20,000/- Rs.10,000/-
d) For recoveries
above Rs.1.00
crore and upto
Rs.5.00 crores
Rs.2,40,000/- plus
1.25% of the
amount recovered in
excess of Rs.1.00
crore
Rs.25,000/- Rs.15,000/-
e) For recoveries
above Rs.5.00
crores and upto
Rs.10 croes
Rs.7,40,000/- plus
0.75% of the
amount recovered in
excess of Rs.5.00
crores
Rs.30,000/- Rs.20,000/-
(Civil Writ Petition No. 11662 of 2010
f) For recoveries
above Rs.10
crores
Rs.11,15,000/- plus
0.50% of the
amount recovered in
excess of Rs.10.00
crores
Rs.30,000/- Rs.20,000/-
Situation A: In case physical possession has been taken and
recovery is made whether before or after auction.
Situation B: In case recovery is made before possession but after
obtaining DM permission and visit made by Enforcement Agents
(EAs).
Situation C: In case recovery/settlement is made before possession
and before DC permission but before case entrusted to EAs.”
It is, thus, contended by Shri Pathela that the procedure
for enforcement agents is in accordance with the circulars issued by
the Reserve Bank of India and also the guidelines issued by the Bank.
Learned counsel for the petitioner has controverted the
said contention and relied upon circular dated 24.4.2008 issued by
the RBI, after the judgment of the Apex Court in Manager, ICICI Bank
Ltd. v. Parkash Kaur, AIR 2007 SC 1349, wherein the following is the
condition:-
“Taking possession of property mortgaged/hypothecated to
banks.
(xii) In a recent case which came up before the Honourable
Supreme Court, the Honourable Supreme Court observed that
we are governed by rule of law in the country and the recovery
of loans or seizure of vehicles could be done only through
legal means. In this connection it may be mentioned that the
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act)
and the Security Interest (Enforcement) Rules, 2002, framed
thereunder have laid down well defined procedures not only
for enforcing security interest but also for auctioning the
movable and immovable property after enforcing the security
interest. It is, therefore, desirable that banks rely only on legal
remedies available under the relevant statutes while enforcing
security interest without intervention of the Courts.”
On the basis of such facts, learned counsel for the
petitioner has argued that enforcement agents may be permissible for
(Civil Writ Petition No. 11662 of 2010
Bank to be engaged, but such enforcement agents are not
contemplated under the Act, much less before the stage of taking of
actual physical possession. It is argued that in all other actions for
the recovery of the dues by the Banks, the Bank has to seek
intervention of either the Court or the Tribunal but an action under
the Act is permissible to be taken by the Bank through its authorized
officers, therefore, the Bank cannot take assistance of an enforcement
agency while taking action under the Act.
It is contended that the actions under the Act are contemplated
by an Authorized Officer, as defined under Rule 2(a) of the Security
Interest (Enforcement) Rules, 2002 (for short `the Rules’) to mean an
Officer not less than a Chief Manager of a Public Sector Bank. In the
present case, the notices under Sections 13(2) and 13(4) of the Act,
have been issued by such authorized officer. The process of sale of
assets is to be initiated after such deemed possession, by way of
publication in the newspaper. The process of sale of immovable
secured assets is regulated by Rule 8 of the Rules. The deemed
possession is to be taken by the Authorized Officer by delivering a
possession notice on the outdoor or at such conspicuous place of the
property or in the newspaper. Before the property is put to sale, a 30
days notice is required to be served under Sub Rule 6 of Rule 8 of the
Rules. It is argued that since the property mortgaged in favour of the
Bank was an open plot, therefore, the act of taking possession does
not require any preparation of inventory or any other expenses to
secure the same. The Bank has claimed the dues to the enforcement
agents even before notice under Section 13(4) was served upon the
petitioner and published in the newspapers. It is contended that the
claim of the enforcement agents is the fixed amount on the amount
recovered and not for any services provided, which is apparent from
the bill raised and produced by Counsel for the Bank. The
(Civil Writ Petition No. 11662 of 2010
enforcement agents have raised the bills, with the following
particulars:-
In the case of Sh. Mohinder Pal Singh
Bill dated Particulars Amount
(Rs.)
10.8.2009 Charges for enforcement
as per Bank’s rates (on
the recovery of First
Rs.3,00,000/-)
40000.00
08.7.2010 Charges for enforcement
as per Bank’s rates (on
the recovery of
Rs.11,86,000/-)
Less amount received Net
Amount
128600.00
40000.00
88600.00
18.3.2011 Charges for enforcement
(pending amount)
44,300.00
Thus, on the basis of circular dated 23.2.2007 and the
aforesaid bills, it is argued by the learned counsel for the Petitioner
that the amount paid to the enforcement agent is a reward to the
enforcement agencies and not reimbursement of the expenses and
thus, such amount, cannot be charged from the petitioner. It was
explained by the counsel for the Bank that the recovery case of the
petitioner was entrusted to enforcement agency on 12.11.2008 i.e.,
after issuance of notice under Section 13(2) of the Act on 15.5.2008,
though the notices under Section 13(4) of the Act were issued on
4.2.2009 and 27.5.2009. Therefore, such charges have been rightly
claimed from the petitioner as reasonable expenses to realize the
security permissible under Section 13(7) of the Act as such amount
has been claimed after notices under Section 13(4) were issued and
published.
We have heard learned counsel for the parties at some
length and find that the action of the Bank in engaging enforcement
agency and claiming amount paid to such agency as unjustified and
untenable.
Though the Reserve Bank of India, as per the circular
dated 3.11.2006 has permitted outsourcing of certain financial
(Civil Writ Petition No. 11662 of 2010
services, but some safeguards are to be kept in view while giving effect
to the agreement engaging such enforcing agencies. Such agreement
restricts the rights of the commercial bank in engaging enforcement
agents for effecting recoveries under the Act as per clause (xii) of the
Circular dated April 24, 2008. The process of recovery through the
process of the Civil Court or the Debt Recovery Tribunal stands at a
different footing. But in the case, where the recovery process is to be
initiated under the Act, it is the Bank, the secured creditor, who is
permitted to realize its security without the intervention of the Court
or the Tribunal. Keeping in view the aforesaid fact, though the circular
dated 3.11.2006 permits outsourcing of certain services, but such
outsourcing is restricted in case, if the process of recovery is to be
initiated under the Act. The Act and the Rules contemplate an action
by the secured creditor through its authorized officer. It is Authorized
Officer who has taken action under the Act, when notice under
Section 13(4) of the Act, was published for deemed possession of the
property. Before the issuance of the notice under Section 13(4), the
enforcement agency is not expected to take any action. In fact that is
the stand of the Chief General Manager of the Bank. Even after the
possession in terms of Section 13(4) of the Act is taken, the secured
creditors can claim such expenses as are properly incurred in terms
of Section 13(7) of the Act. The said provisions contemplated for
reimbursement of expenses which the secured creditors have
incurred. There cannot be any fixed expenses payable to the
Enforcement Agents, irrespective of the costs, charges and expenses
incurred by such Enforcement Agents. Therefore, the fixed amount
claimed by the Enforcement Agency, without proof of actual
expenses, is beyond the scope of Section 13(7) of the Act or the
guidelines issued by the Reserve Bank of India.
(Civil Writ Petition No. 11662 of 2010
Even otherwise, from the circular issued by the Bank and
the bills submitted by the Enforcement Agencies, it transpires that
the charges are claimed in relation to the amount recovered. Thus,
the amount paid to the Enforcement Agencies is a reward for the
services. The amount of reward cannot be passed on to anyone else.
Such amount has to be paid to the Enforcement Agencies out of the
assets realized or by the Bank out of funds at its disposal. Section 13
(7) of the Act, authorizes the secured creditors to claim charges, costs
and expenses, which are actually incurred. The actual expenses
incurred have no co-relation with the amount recovered or
recoverable. Therefore, the claim of fixed charges in view of the
amount recovered is beyond legislative sanction and not admissible.
Apart from the said fact, the Bank has claimed legal fee.
The notices under Sections 13(2) and 13(4) of the Act are the notices
on the performa circulated on 16.11.2002. The Authorised Officer of
the Bank does not require any legal opinion in issuing such notices.
There is no justification to claim such legal charges from the
borrower, which is not related to any professional services rendered
by an Advocate to the Bank. There was no occasion for any legal
advice in issuing notice under Sections 13(2) or 13(4)of the Act.
Learned counsel for the petitioner has further agued that
the Bank has claimed interest on the amount of expenses including
the charges of enforcement agencies, legal fee and advertisement
expenses, which is not permissible in view of the judgment of this
Court in Paramjit Singh v. UCO Bank Ghudani Kalan and another,
2007(4) PLR 747, wherein, similar expenses claimed by the Bank has
been disallowed as not permissible in law. In view of the said fact, we
are of the opinion that the Bank cannot claim interest on the
expenses.
(Civil Writ Petition No. 11662 of 2010
In CWP 299 of 2011, it is averred in the written statement
that Rs. 64528/- is the due amount as on 22.8.2011 in the loan
accounts of the petitioner whereas another sum of Rs.2,28,516 is
payable on account of recovery agents fee, publication in newspapers
and legal fee etc even after the petitioner has deposited a sum of
Rs.5,00,000/- in terms of the interim order passed by this court to
restore possession of the house on deposit of the said amount. The
amount of deposit shows that the meager amount is due from the
borrower towards interest, whereas, the major amount is towards the
expenses allegedly incurred.
Consequently, we dispose of the present writ petitions with
direction to the respondent-Bank to recalculate amount payable by
the borrower(s) by deleting the charges/expenses of the Enforcement
Agencies, legal fee and the interest on the amount of expenses. The
Bank shall communicate within two weeks the due amount as on
6.7.2010 i.e. when the petitioner in CWP 11662 of 2010 made the last
payment; and as on 31.5.2011 in CWP 299 of 2011, the date of last
payment. The petitioners are granted one month thereafter to deposit
the said amount so communicated. The deposit of the amount by
petitioners shall give complete discharge of the dues of the Bank and
the title deeds etc. shall be returned to the borrower within next two
weeks.
(HEMANT GUPTA)
JUDGE
October 20 , 2011 (G.S. SANDHAWALIA)
ds JUDGE
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