Category Archives: Debt Recovery Law

SARFAESI ACT – RIGHT OF A MORTGAGOR

Under the provisions of the SARFAESI Act and the relevant Rules applicable under Section 13(1), a free hand is given to a secured creditor to resort to a sale without the intervention of the Court or Tribunal. However, under Section 13(8), it is clearly stipulated that the mortgagor, i.e. the borrower, who is otherwise called as a debtor, retains his full right to redeem the property by tendering all all the dues to the secured creditor at any time before the date fixed for sale or transfer. Under sub-section (8) of Section 13 the secured asset should not be sold or transferred by the secured creditor when such tender is made by the borrower at the last moment before the sale or transfer. The said sub-section also states that no further step should be taken by the secured creditor for transfer or sale of that secured asset. Dwarika Prasad v. State of U.P., 2018 (129) ALR 220.

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SARFAESI Act – Appeal under Section 17 of the Act

The “appeal” under Section 17 is available to the borrower against any measure taken under Section 13(4). Taking possession of the secured asset is only one of the measures that can be taken by the secured creditors. Depending upon the nature of the secured asset and the terms and conditions of the security agreement, measures other than taking the possession of the secured asset are possible under Section 13(4). Alienating the asset either by lease or sale, etc., and appointing a person to manage the secured asset are some of those possible measures. On the other hand, Section 14 authorises the Magistrate only to take possession of the property and forward the asset alongwith the connected documents to the borrower. Therefore, the borrower is always entitled to prefer an “appeal” under Section 17 after the possession of the secured asset is handed over to the secured creditor. Section 13(4)(a) declares that the secured creditor may take possession of the secured assets. It does not specify whether such a possession is to be obtained directly by the secured creditor or by resorting to the procedure under Section 14. By whatever manner the secured creditor obtains possession either through the process contemplated under Section 14 or without resorting to such a process, obtaining of the possession of a secured asset is always a measure against which a remedy under Section 17 is available. Dheerendra Kumar v. Authorised Officer, 2018 (129) ALR 32.

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Pre-Deposit for Appeal under Section 18 of Securitisation Act – Refund of

The Appeal under Section 18 of the Securitisaton Act is permissible only against the order passed by Debt Recovery Tribunal under Section 17 of the Act. Under Section 17, the scope of enquiry is limited to the steps taken under Section 13(4) against the secured assets. The partial deposit before the DRAT as a pre-condition for considering the appeal on merits in terms of Section 18 of the Act, is not a secured asset. It is not a secured debt either, since the borrower or the aggrieved person has not created any security interest on such pre-deposit in favour of the secured creditor. If that be so, on disposal of the appeal, either on merits or on withdrawal, or on being rendered infructuous, in case, the appellant makes a prayer for refund of the pre-deposit, the same has to be allowed and the pre-deposit has to be returned to the appellant, unless the Appellate Tribunal, on the request of the secured creditor but with the consent of the depositors, had already appropriated the pre-deposit towards the liability of the borrower, or with the consent, had adjusted the amount towards the dues, or if there be any attachment on the pre-deposit in any proceedings under section 13(10) of the Act read with Rule 11 of the Security Interest (Enforcement) Rules, 2002, or if there be any attachment in any other proceedings known to law. Axis Bank v. S.B.S. Organics Pvt. Ltd., 2016 (132) RD 507.

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Term “Debt” – Meaning of

The term ”liability” has been defined as obligation, debt, etc. In First National Bank v. Sant Lal, AIR 1959 Punj 328, it is said that the term ‘liability’ is of large and comprehensive significance and when construed in its usual and ordinary sense, it expresses a state of being under obligation in law or in justice.

In Hindustan Laminators (P) Ltd. v. Central Bank of India, AIR 1998 Cal 300, Calcutta High Court has observed that word ‘liability’ obviously means obligation. Then it should be a liability which is alleged as due.

The term ‘due’ has different meanings. In State of Kerala v. V.S. Kalliyanikutty, JT 1999 (2) SC 540 the Supreme Court observed that ‘due’ means anything owning; that which one contracts to pay to another. It was in the context of Kerala Revenue Recovery Act, 1968.

In the context of the Companies Act, 1956, in Raymond Synthetics Ltd. v. Union of India, JT 1992 (1) SC 463, the court said that a debt is often said to be ‘due’ from a person where he is the party owing it; or primarily bound to pay, whether the time for payment has or has not arrived.

In the context of Income Tax Act, 1961, in CIT v. Southern Roadways Ltd., 2004 (266) ITR 135, the Madras High Court said that the word ‘due’ is used to refer to the debt or obligation which has become immediately payable. In CIT v. United Provinces Electric Supply Company, 2000 (244) ITR 764, the Apex Court while affirming above view of the Madras High Court observed that the initial determination is a pre-requisite for regarding that amount as having become ‘due’.

In Harshad Shantilal Mehta v. Custodian, 1998 (231) ITR 871 the Apex Court observed that ‘due’ means payable, justly owed.

In  Munsif Jahan v. Rajendra Prasad, AIR 1946 Oudh 226, the terms ‘due’ and ‘payable’ came to be considered. The court said that they are not convertible terms. A ;debt’ is said to be ‘due’ as soon as it has existence as a debt, though it may be payable on a future date. M/s B.K. Jewellers v. State Bank of India, 2016 (116) ALR 791.

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Securitisation Act – Deposit under Section 18

Though no principle of law has been laid by the Hon’ble Supreme Court in the Judgment of Persn Medicinal Plants Pvt. Ltd. v. Indian Bank, decided on 25.02.2011 but it clearly indicates that in a given situation where an amount more than the amount due from the borrower/guarantor had already been realized by auction sale, which stands confirmed and the possession of the property also had been handed over to the Bank which is utilizing the same or is utilizing the property having purchased the same in the said auction, insistence on the deposit referred to under proviso to Section 18 would be contrary to the legislative intent as also the express provision as is evident from the use of the words “50% of the amount of debt due from him”.
A similar view has been taken by a Division Bench of the Punjab and Haryana High Court in similar fact situation in the case of S.R. Forging Ltd. v. UCO Bank and another, 2013 (1) DRTC 734, which reads as under:
“At this stage, we find that out of total due amount of Rs. 18.24 crores, Rs. 17.75 crores have been received by the bank in a public auction. Therefore, the deposit of 50% of the amount due prior to sale from the petitioner would be wholly unjustified. The proviso to section 18 of the Act restricts the entertainment of the appeal unless the borrower deposits 50% of the amount of the debt claimed by the Secured Creditors. Once Rs. 17.75 crores have been received by the secured creditors, that is more than 50% of the debt due from the petitioners, the purpose of the proviso stands satisfied”. Akash Ganga Airlines Ltd. v. DRAT, 2015 (5) AWC 5186.

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Recovery of Loan – Bank cannot be permitted to take possession of the hypothecated vehicle

In a recent Judgment of the Allahabad High Court in C.M.W.P. No. 71057 of 2011 decided on 09.02.2012, reported in 2012 (3) A.W.C. 2821 it was held as under:

“The bank or financial institution cannot be permitted to take a decision on their own that there has been a default and proceed to take possession of the hypothecated vehicle without giving an opportunity to the borrower to present his case. In this manner, the banks would be judging their own cause with the right of execution, as they themselves would unilaterally determine that there has been a default and proceed to execute their own decision by taking possession of the hypothecated vehicle through their own appointed agencies, which may be muscle men. Adopting such a recourse would clearly be a blatant violation of the mandate of Hon’ble Supreme Court.

In case of default in repayment of its loan, it is always open for the Banks to get the agreement with its borrower enforced through the process of law. Even the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which gives special power to the bank for realization of its dues also provides for certain safeguards. Section 13(2) of the act of 2002 has been interpreted by the Apex Court in the case of Mardia Chemicals Ltd. V. Union of India, (2004) 4 SCC 311 : AIR 2004 SC 2371 that the borrower has a right to submit his reply to the said notice. Pursuant to the decision of the Apex Court, sub-section (3-A) of Section 13 has been inserted making it obligatory on the financial institutions (including banks) to pass an order after considering the reply submitted by the borrower. It is only thereafter that proceedings for taking over possession can be initiated under Section 13(4) of the Act of 2002.”

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