M/s Transcore Vs. Union of India & Anr. - A Perspective on Supreme Court Judgment
Whether the following provisos to Section 19 (1) of the DRT Act, 1993 prevent the Secured creditor to initiate action/proceed under SARFAESI Act without the leave of DRT to withdraw O.A. if action under SARFAESI Act has already been taken?
"Provided that the bank or financial institution may, with the permission of the Debts Recovery Tribunal, on an application made by it, withdraw the application, whether made before or after the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 for the purpose of taking action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), if no such action had been taken earlier under that Act:
Provided further that any application made under the first proviso for seeking permission from the Debts Recovery Tribunal to withdraw the application made under sub-section (1) shall be dealt with by it as expeditiously as possible and disposed of within thirty days from the date of such application:
Provided also that in case the Debts Recovery Tribunal refuses to grant permission for withdrawal of the application filed under this sub-section, it shall pass such orders after recording the reasons therefor."
What magic wand is to the magician is what the law to the interpreter of the law who uses it. The phrase “if no such action had been taken earlier under that Act” in the first proviso, can be construed as the condition in reference to the date of passage of this amendment, i.e., 11-11-2004 or it can otherwise be construed as general condition without having any specific reference to 11-11-2004. Hence one may argue that if secured creditor initiates action under SARFAESI, he need not seek the leave of DRT, and another may argue that the action under SARFAESI should have been initiated prior to 11-11-2004 in order that the secured creditor seek the leave of DRT to proceed under SARFAESI.
If it is to be presumed that the date of passage of amendment has no relevance, the above phrase is a general condition without having anything to do with the date of amendment, then by simply initiating some action under the SARFAESI Act, the secured creditor can escape from the obligation of seeking the leave of DRT in order to proceed under SARFAESI Act. It means two things, viz., A. he can initiate action under SARFAESI Act nobody can prevent him from initiating such action B. if such action is initiated, he need not apply for the leave of DRT to proceed under SARFAESI Act.
The word “earlier” is very tricky because it may mean the period prior to date of passage of amendment i.e., 11-11-2004, or in general sense it may refer to any action taken under SARFAESI Act whether such action is taken prior to 11-11-2004 or thereafter. If the word “earlier” is to be interpreted as reference to date of passage of amendment, then keeping it in view, one may argue that after passage of amendment act dt.11-11-2004, no secured creditor should initiate action under SARFAESI Act without obtaining leave of DRT to withdraw O.A.
But there could be a case where the action under SARFAESI is first initiated and O.A. is filed later even though both the actions are presumed to have taken place after 11-11-2004 because there is no proviso to prevent the secured creditor to file O.A. after action under SARFAESI Act is taken/initiated.
In such case, the borrower cannot contend that the action should not have been initiated under SARFAESI Act, without taking the leave of DRT to withdraw the O.A. because it is not necessary that first O.A. be filed and then only action under SARFAESI be initiated by secured creditor. It is the choice of the secured creditor, he can choose them in any order he wants. In such case where action under SARFAESI is first initiated and O.A. is filed later, the word “earlier” takes a different meaning because action is already initiated under SARFAESI Act, though initiated after 11-11-2004, but before filing of O.A., which means O.A. is not existing as on date of initiation of measures under SARFAESI Act, even though such measures are initiated after 11-11-2004. Thus the question of withdrawal of O.A. does not arise. Hence the secured creditor can not apply for leave of DRT to withdraw the O.A under the said Proviso because action is already initiated/taken “earlier” under SARFAESI Act and O.A. is non-existent.
The third proviso viz., “Provided also that in case the Debts Recovery Tribunal refuses to grant permission for withdrawal of the application filed under this sub-section, it shall pass such orders after recording the reasons therefor.", is not a compelling provision which forces the secured creditor to prevent action under SARFAESI Act, in the sense that it only means the DRT is conveying its inability to grant permission for withdrawal of the O.A., it does not mean that ‘the secured creditor is therefore not entitled to take action under SARFAESI Act’.
In fact the word “may” in the first proviso, instead of “shall” denotes that the application for withdrawal of O.A. is dependent on the choice of the secured creditor ‘whether to apply or not’, it is not a compulsion.
If it is to be presumed that the word “earlier” is made in reference to 11-11-2004 then, for O.A. made after 11-11-2004, the action under SARFAESI Act should have been initiated before 11-11-2004 in order that the secured creditor enjoy the privilege of not moving an application to obtain leave of DRT to withdraw O.A.. But the word “after” (whether made before or after the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004) may mean any date, any year after 11-11-2004. Which means that for the O.A. filed in 2050, the action under SARFAESI Act should have been taken before 11-11-2004 in order that the secured creditor has the privilege of not moving an application to withdraw the O.A. It makes no sense in view of Limitation period.
On the other hand, it cannot also be argued that the legislative intent was to have an absolute bar on initiating action under SARFAESI Act without withdrawal of O.A. (even if it is filed in 2020 or 2050) that is why the proviso is so strict as to say that the action should have been initiated/taken prior to 11-11-2004 in order to enjoy the privilege of not applying for withdrawal of O.A., because, even after 11-11-2004 the secured creditor can first initiate action under SARFAESI Act and then file O.A. under DRT Act, which possibility would extinguish the obligation to seek the leave of DRT to take action under SARFAESI Act, because there is no O.A. pending with DRT at the time of taking action under SARFAESI Act. In such eventuality the proviso itself renders meaningless.
Hence the word “earlier” should be understood to convey a meaning in general sense, not in reference to 11-11-2004.
Then the question arises - what purpose the first and third provisos to Section 19 (1) of DRT Act serve? The contentions of counsel (produced below) for defendants in the case of M/s. Transcore Vs. Union of India answer this question to some extent.
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Extract from the SC Judgment – M/s. Transcore Vs. Union of
In reply to the above submissions, Mr. K.N. Bhat, learned senior counsel appearing for Indian Overseas Bank (the bank) submitted that, Section 13(2) notice is a condition precedent for invoking Section 13(4) of the NPA Act and, therefore, the said notice is an action and not a mere show cause notice. Learned counsel submitted that Section 13(2) notice is the step-in-aid for enforcement of security interest under Chapter III of the NPA Act. He submitted that the proviso to Section 19(1) of the DRT Act cannot affect the rights of a bank/FI under the NPA Act which deals only with recovery and which only deals with enforcement of security interest. Learned counsel urged, that Section 13(2) notice is given on the basis that the client's account in the books of account, which is an asset of the bank as the amount receivable under that account, has become sub-standard, doubtful or a loss; that Section 13(2) proceeds on the basis of classification of that account as a NPA; that there is no adjudication contemplated under Section 13(2) as the said section deals with enforcement of security interest alone which security interest is recognized by the Act as a financial asset of the bank/ FI. In the circumstances, learned counsel urged that, Section 13(2) notice is not a mere show cause notice.
He submitted that, the purpose of NPA Act is to enable the secured creditor to enforce any security interest without the intervention of the court or the tribunal, apart from creation of asset reconstruction company and securitization company. In this connection, it was pointed out that sub-section (4)(a) of Section 13 of the NPA Act permits a bank/FI to take possession of the secured assets. Similarly, sub-section (4)(b) enables a bank/ FI to take over management of the business of the borrower. Similarly, sub-section (4)(c) permits appointment of a manager to manage the secured assets, the possession of which has been taken over and, similarly, sub-section 4(d) authorizes the secured creditor to require any transferee of the secured assets to pay the secured creditor the specified amount by just a written notice. According to the learned senior counsel, under the scheme of Section 13(4), all these powers are to be exercised without the intervention of the court/ tribunal.
He urged that if the proviso to Section 19(1) of the DRT Act is read as mandatory, then the consequence would be that a secured creditor can have recourse to Section 13 only with the prior permission of the DRT which would defeat the very object of the NPA Act which is to remove all fetters, if any, on the right of enforcement by the secured creditor.
It was next urged that the DRT does not have inherent powers and that Section 19(25) of the DRT Act which empowers the tribunal to issue appropriate directions for enforcement of its orders is not akin to Section 151 CPC and, therefore, a provision akin to the provision was necessary to be inserted. In this connection, learned senior counsel submitted that, in the DRT Act there was no provision similar to Order XXIII CPC and to get rid of that lacuna, the DRT Act had to be amended. He urged that, the proviso to Section 19 is an enabling provision. The bank/ FI may apply to the DRT for withdrawal of the O.A. in cases where the DRT has appointed a court receiver or in cases where the DRT had granted attachment or injunction. If the bank/ FI seeks to invoke the NPA Act vis-à-vis a financial asset over which a court receiver is appointed or over which an attachment stands then in such cases an enabling provision is made whereby the bank or FI can move the DRT for permission seeking withdrawal of O.A. in part or in whole in order to enable the bank/ FI to take appropriate steps for enforcement of security under the NPA Act.
Learned counsel submitted that, vide the impugned judgments, the High Courts have erred in making the said proviso mandatory/ obligatory. He submitted that, the very purpose behind the proviso would be defeated if it is read as mandatory. He submitted that, withdrawal application in respect of O.A. can be made by the bank/ FI at any time. The proviso is inserted only to meet contingencies where the assets are in possession of the court receiver or under attachment/ injunction. Learned counsel submitted that there is no bar to the application of both the Acts simultaneously. He submitted that the NPA Act gives to the bank/ FI an independent right and wherever required the bank/FI may apply that option as given to the secured creditor. In this connection, he submitted that, under third proviso to Section 19(1) of the DRT Act even part withdrawal of the suit/application is permissible. He further submitted that, under Section 13(10) of the NPA Act where the dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the bank/ FI may file an application to the DRT for recovery of the balance from the borrower. The point which is emphasized is that part withdrawal of the suits or the invocation of DRT jurisdiction for recovery of the balance are aspects which required an amendment to be carried out in the DRT Act as well as in the NPA Act so that the provisions are brought at par with Order XXIII CPC. This was the main object behind the enactment to the first proviso to Section 19(1) to the DRT Act. In fact, it is pointed out by the learned counsel that the amending Act 30 of 2004 has made changes in both the DRT Act and the NPA Act simultaneously which indicates that both the Acts complement each other.
He submitted that the enabling provision under the first proviso had to be made so that withdrawal is restricted to cases where the bank/FI wishes to withdraw the O.A. for the purpose of taking action under the NPA Act and not for any other purpose. It is pointed out that Order XXIII CPC provides for several situations whereas the proviso to Section 19 deals with some aspects/ situations only. In this connection, learned counsel submitted that Section 13(10) provides for a fresh cause of action. Inability to realize the entire dues does not provide any fresh cause of action for proceeding under the DRT Act.
The course of action for proceeding under the DRT Act is the debt due. Not satisfying the dues fully, according to the learned counsel, is not a cause of action attributable to the borrower. He, therefore, submitted that proviso to Section 19(1) is not a condition precedent to taking recourse to NPA Act.
Learned counsel further pointed out that, Section 36 of NPA Act talks of limitation. Section 36 of NPA Act makes it clear that no action under NPA Act can be taken unless the claim is within limitation and, therefore, according to the learned counsel, the time spent in adopting action under DRT Act is not excluded and it does not stop the limitation. Therefore, it is urged that this aspect also indicates that the proviso to Section 19(1) is not a condition precedent to taking recourse to NPA Act.
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The DRT Act deals with both secured and unsecured assets of the borrower. Whereas the Securitization Act deals only with the secured assets of the borrower with the exception of Section 13 (10) which provides for an application to DRT to recover the shortfall. Invariably the shortfall must be recovered by attaching the unsecured properties of the borrower, which cannot be done without using the provisions of DRT Act. In that sense the DRT Act is complementary to Securitization Act.
In other words, even the Securitization Act deals with unsecured assets but the procedure of recovery of shortfall shall be as per the provisions of the DRT Act. In the same vein, if the shortfall is less than Rs.10 lacs the Civil court is the forum to deal with the case. Then the provisions of CPC would apply to make an order of attachment of unsecured assets belonging to the borrower.
There might be a situation where the shortfall is less than Rs.10 lacs, in which case, withdrawal of O.A. becomes necessary for the secured creditor. This is one situation where the first proviso to Section 19 (1) of the DRT Act, appears meaningful and relevant. Secondly it makes no sense to withdraw the O.A. if the shortfall is more than Rs.10 lacs, in order to initiate action under Section 13 (10) of the Securitization Act because either the continuation of O.A. under DRT Act, or application under Section 13 (10), Rule 11 of the Securitization Act, leads to same course of action as far as DRT is concerned. Hence withdrawal of O.A. is not necessary to proceed under SARFAESI Act. The action under SARFAESI Act extinguishes with the sale of secured assets. If there is still any shortfall of debt to be realized, then O.A. may continue. That is impression that one gets reading the contentions of the counsel for the defendants as mentioned above.
However, the legislative intent in making the first proviso to Section 19 (1) is that the secured creditor must be given a choice to either continue or withdraw the O.A. (the word ‘may’ in the first proviso denotes choice) in order to proceed under SARFAESI Act. This is because the secured creditor may feel that the process of continuing O.A. is redundant in view of the easy remedy available to him under SARFAESI Act. Sometimes if the secured creditor does not attend DRT proceedings, the case may be declared exparte. So to avoid the burden of litigation, and to avoid the risk of case being declared exparte, the secured creditor may opt for withdrawal of O.A.
It also makes sense to presume that even if the O.A. cannot be filed again after withdrawal, in case of shortfall of debt to be realized after sale of secured assets the secured creditor has the remedy available under Section 13 (10) read with Rule 11 of SARFAESI Act to again take recourse under DRT Act. Hence there is every reason for him to opt for withdrawal of O.A. under DRT Act if he finds continuation of the same cumbersome. Alternatively, he may exercise his choice to not move an application before DRT to withdraw O.A. in order to proceed under SARFAESI Act.
Last but not the least, if the withdrawal of O.A. shall be made a pre-condition to proceed under SARFAESI Act, the amendment shall be made to SARFAESI Act, not to DRT Act. As such there is nothing in SARFAESI Act to suggest that withdrawal of O.A. under DRT Act is necessary to proceed under SARFAESI Act.
The expression “if no such action had been taken earlier under that Act” in the first proviso shall be understood in the sense that if action under SARFAESI Act had already been taken, the application for withdrawal of O.A. shall not be moved, there is no such option available to the secured creditor. In other words, the scheme of Section 19 (1) read with first proviso under Section 19 (1) shows that the secured creditor has no choice other than pursuing both the remedies under DRT Act and SARFAESI Act., i.e., continuation of O.A. and continuing action under SARFAESI Act, if action has already been taken under SARFAESI Act before filing of O.A. under DRT Act. One of the reasons why the first proviso stipulates that the O.A. filed after action taken under SARFAESI Act shall not be withdrawn is that the secured creditor, if he is confident of recovering the debt through SARFAESI Act he will not file O.A. under DRT Act. The very act of filing of O.A. under DRT Act after action been taken under SARFAESI Act shows that the secured creditor is not confident of recovering the debt through SARFAESI Act, hence the proviso does not allow the secured creditor to withdraw the O.A. filed after action is taken under SARFAESI Act.
This is to ensure that both the legislations complement each other to serve the common purpose of recovery of debts. That is why the amendment made on 11-11-2004 is named as Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004.
In a nutshell, this is to say that if O.A. is filed after action is taken under SARFAESI Act, it shall not be withdrawn, and alternatively if O.A. is filed before the action contemplated under SARFAESI Act, the secured creditor may exercise his choice to withdraw the same using first proviso to Section 19 (1) of the DRT Act. This follows the logic mentioned in the earlier part of this answer viz.,
But there could be a case where the action under SARFAESI is first initiated and O.A. is filed later even though both the actions are presumed to have taken place after 11-11-2004 because there is no proviso to prevent the secured creditor to file O.A. after action under SARFAESI Act is taken/initiated.
In such case, the borrower cannot contend that the action should not have been initiated under SARFAESI Act, without taking the leave of DRT to withdraw the O.A. because it is not necessary that first O.A. be filed and then only action under SARFAESI be initiated by secured creditor. It is the choice of the secured creditor, he can choose them in any order he wants.
In such case where action under SARFAESI is first initiated and O.A. is filed later, the word “earlier” takes a different meaning because action is already initiated under SARFAESI Act, though initiated after 11-11-2004, but before filing of O.A., which means O.A. is not existing as on date of initiation of measures under SARFAESI Act, even though such measures are initiated after 11-11-2004. Thus the question of withdrawal of O.A. does not arise. Hence the secured creditor can not apply for leave of DRT to withdraw the O.A under the said Proviso because action is already initiated/taken “earlier” under SARFAESI Act and O.A. is non-existent.
One of the implications of continuing both the remedies at a time is that either of the two remedies can be used to expedite the process of recovery and in case of shortfall in realization of debt even after sale of secured assets under Securitization Act, the secured creditor can continue with the O.A. instead of invoking provisions under Section 13 (10) read with Rule 11 of Securitization Act.
One of the possibilities is that O.A. may be filed before or after 11-11-2004, in both the cases if the action is not taken under SARFAESI Act, the secured creditor can choose to apply for leave of DRT to withdraw the O.A.
Another possibility is that the O.A. may be filed before or after the action taken under SARFAESI Act. In both these cases, the secured creditor shall not apply for leave of DRT to withdraw the O.A., because action has already been taken under SARFAESI Act. The only situation where the secured creditor can move an application before DRT to withdraw O.A. is where the action under SARFAESI Act has not been taken, it is being contemplated.
The situation as mentioned above shall satisfy two conditions, namely:
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the O.A. should have already been filed, whether filed before or after 11-11-2004
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no action has been taken under SARFAESI Act subsequent to filing of O.A. as mentioned in 1 above.
