SARFAESI Orders

Balkrishna Rama Tarle Dead Thr LRS & Anr. VsPhoenix ARC Private Limited & Ors. SC

Section 14 of the SARFAESI Act does not involve any adjudicatory process qua points raised by Borrowers against Secured Creditor taking possession of the Secured Assets and CMM/DM is not required to adjudicate disputes between Borrower and Secured Creditor and/or between any other third party and Secured Creditor – Balkrishna Rama Tarle Dead thr LRS & Anr Vs. Phoenix ARC Pvt. Ltd. & Ors. – Supreme Court

Fact of the case

After initiation of the proceedings and taking steps under Section 13(2) and 13(4) of the SARFAESI Act, the secured creditor has approached the District Magistrate by submitting an application under Section 14 of the SARFAESI Act and has requested the District Magistrate/Additional District Magistrate to assist the secured creditor in obtaining the possession of the secured assets. It is required to be noted that neither the original borrowers nor even the petitioners who are claiming to be a tenant of the secured assets have initiated any proceedings before Debt Recovery Tribunal under Section 17 of the SARFAESI Act. The proceedings before the District Magistrate were under Section 14 of the SARFAESI Act. In the said application under Section 14 of the SARFAESI Act instead of passing any final order to assist the secured creditor in getting the possession of the secured assets and while keeping the said application, the Additional District Magistrate has passed an order that only after the termination of the tenancy rights of the petitioner by the finance company (secured creditor) by following due procedure of law the further orders regarding possession of the mortgage property, the said application shall be decided. The aforesaid order passed by the Additional District Magistrate has been set aside by the High Court which is the subject matter of the present Special Leave Petition.

Question before Supreme Court

The short question which is posed for consideration of Hon’ble Supreme Court is whether while exercising the powers under Section 14 of the SARFAESI Act, the District Magistrate/designated authority could have passed such an order that unless and until the secured creditor terminates the tenancy rights of the third person by following due procedure of law and further orders regarding possession of the mortgaged property then and then only an application under Section 14 of the SARFAESI Act will be decided?

Decision of the Supreme Court

Hon’ble Supreme Court held that : The statutory obligation enjoined upon the CMM/DM is to immediately move into action after receipt of a written application under Section 14(1) of the SARFAESI Act from the secured creditor for that purpose. As soon as such an application is received, the CMM/DM is expected to pass an order after verification of compliance of all formalities by the secured creditor referred to in the proviso in Section 14(1) of the SARFAESI Act and after being satisfied in that regard, to take possession of the secured assets and documents relating thereto and to forward the same to the secured creditor at the earliest opportunity. As observed and held by this Court in the case of NKGSB Cooperative Bank Limited Vs. Subir Chakravarty & Ors. (2022) ibclaw.in 13 SC, the aforesaid act is a ministerial act. It cannot brook delay. Time is of the essence and this is the spirit of the special enactment. In the recent decision in the case of M/s R.D. Jain and Co. Vs. Capital First Ltd. & Ors. (2022) ibclaw.in 93 SC, this Court had an occasion to consider the powers exercisable by District Magistrate/Chief Metropolitan Magistrate under Section 14 of the SARFAESI Act.

Thus, the powers exercisable by CMM/DM under Section 14 of the SARFAESI Act are ministerial step and Section 14 does not involve any adjudicatory process qua points raised by the borrowers against the secured creditor taking possession of the secured assets. In that view of the matter once all the requirements under Section 14 of the SARFAESI Act are complied with/satisfied by the secured creditor, it is the duty cast upon the CMM/DM to assist the secured creditor in obtaining the possession as well as the documents related to the secured assets even with the help of any officer subordinate to him and/or with the help of an advocate appointed as Advocate Commissioner. At that stage, the CMM/DM is not required to adjudicate the dispute between the borrower and the secured creditor and/or between any other third party and the secured creditor with respect to the secured assets and the aggrieved party to be relegated to raise objections in the proceedings under Section 17 of the SARFAESI Act, before Debts Recovery Tribunal.

Under the circumstances in the present case no error has been committed by the High Court in setting aside the order dated 27.08.2021 passed by the designated authority keeping the application pending till the secured creditor initiates the legal proceedings for eviction of the tenant cannot get the possession in an application under Section 14 of the SARFAESI Act. The High Court has rightly directed the designated authority to proceed further with the application under Section 14 of the SARFAESI Act, and to dispose of the same in accordance with the provisions of Section 14 of the SARFAESI Act.

Ratio of other judgments

Now so far as the reliance placed upon the decision of this Court in the case of Harshad Govardhan Sondagar v. International Vs. Assets Reconstruction Co. Ltd. and Ors. (2017) ibclaw.in 36 SC by the learned counsel appearing on behalf of the petitioner is concerned, the same shall not be applicable to the facts of the case on hand, what is observed by this Court in the aforesaid case is the DM/CMM has to give a notice and opportunity of hearing to the person in possession of the secured assets claiming to be a “Class (1) or (2)” lessee of mortgagor/borrower, as well as to secured creditor, consistent with principles of natural justice, and then take a decision. In the said decision, it is not observed that the DM/CMM has to adjudicate the rights between the parties.(p6)

Now so far as the reliance placed upon the decision of this Court in the case of Vishal N. Kalsaria Vs. Bank of India & Ors. (2017) ibclaw.in 37 SC by the learned counsel appearing on behalf of the petitioner is concerned, the said decision shall also not be applicable to the facts of the case on hand. In the said decision, the question before this Court was of conflict of claim under the Maharashtra Rent Control Act, 1999 and the provisions of the SARFAESI Act, and which law will prevail. The scope and ambit of the powers to be exercised under Section 14 of the SARFAESI Act were not directly in question before this Court. Even as observed and held by this Court in the aforesaid decision, a judgment cannot be interpreted and applied to fact situations by reading it as a statute. One cannot pick up a word or sentence from a judgment to construe that it is the ratio decidendi on the relevant aspects of the case.(p7)

The Hon’ble Court concluded that in view of the above and for the reasons stated above, we are of the opinion that the High Court has not committed any error in passing the judgment and order and directing the designated authority to dispose of the application under Section 14 of the SARFAESI Act. We are in complete agreement with the view taken by the High Court. The Special Leave Petition stands dismissed.(p8)

R.D. Jain and Co. Vs. Capital First Ltd. & Ors.

The expression District Magistrate/Chief Metropolitan Magistrate as appearing in Section 14 of the SARFAESI Act shall deem to mean and include Additional District Magistrate/Additional Chief Metropolitan Magistrate for the purposes of Section 14 of the SARFAESI Act – M/s R.D. Jain and Co. Vs. Capital First Ltd. & Ors. – Supreme Court

Hon’ble Supreme Court has upheld decision of Bombay High Court and held that Section 14(2) is an enabling provision and permits the CMM/DM to take such steps and use force, as may, in his opinion, be necessary. Sub¬-Section (1A) is in the nature of an explanatory provision and it merely restates the implicit power of the CMM/DM in taking services of any officer subordinate to him. The powers exercised by the CMM/DM is a ministerial act. He cannot brook delay. Time is of the essence. This is the spirit of the special enactment. While disposing of the application under Section 14 of the SARFAESI Act, no element of quasi-¬judicial function or application of mind would require. The Magistrate has to adjudicate and decide the correctness of the information given in the application and nothing more. Therefore, Section 14 does not involve an adjudicatory process qua points raised by the borrower against the secured creditor taking possession of secured assets. The steps to be taken by the Chief Metropolitan Magistrate under Section 14 of the SARFAESI Act as observed hereinabove are ministerial in nature and does not involve any adjudicatory process and there is no element of any quasi¬-judicial function. The expression “Chief Metropolitan Magistrate” as appearing in Section 14 of the SARFAESI Act shall deem to mean and include Additional Chief Metropolitan Magistrate for the purposes of Section 14 of the SARFAESI Act. Similarly, when the Additional District Magistrates are conferred with the powers to be exercised by the District Magistrates either by delegation and/or by special orders and the Additional District Magistrates are exercising the same powers which are being exercised by the District Magistrates, the same analogy can be applied, more particularly, when the powers exercisable under Section 14 of the SARFAESI Act, are ministerial steps. The Court also held that the contrary view taken by the other High Courts, namely, Gujarat High Court in the case of Pushpa Devi B Jain W/o Bhawarlal M Jain Vs. Indian Overseas Bank in Special Civil Application No. 19102/2015; Calcutta High Court in the case of Shri Chellaperumal & Anr. Vs. The Authorised Officer & Ors. in M.A. No. 26/2014 and Kerala High Court in the case of Aseena Vs. Sub¬-Divisional Magistrate and Ors. in W.P. (C) No. 3331/2007, is not a good law and are specifically overruled.

NKGSB Cooperative Bank Ltd. Vs. Subir Chakravarty & Ors.

Landmark judgment – Whether the CMM/DM can appoint an advocate in exercise of powers under Section 14(1A) of the SARFAESI Act, 2002? – NKGSB Cooperative Bank Ltd. Vs. Subir Chakravarty & Ors. – Supreme Court

Hon’ble Supreme Court holds that once the order is passed, the statutory obligation cast upon the CMM/DM stands discharged to that extent. The next follow-up step is of taking possession of the secured assets and documents relating thereto. The same is ministerial step. It could be taken by the CMM/DM himself/herself or through any officer subordinate to him/her, including the Advocate Commissioner who is considered as an officer of his/her court. It is well established that an advocate is a guardian of constitutional morality and justice equally with the Judge. Sub-Section (1A) of Section 14 of the 2002 Act is no impediment for the CMM/DM to engage services of an advocate (an officer of the court)- only for taking possession of secured assets and documents relating thereto and to forward the same to the secured creditor in furtherance of the orders passed by the CMM/DM under Section 14(1) of the 2002 Act in that regard. If an advocate is appointed as commissioner for execution of the orders passed by the CMM/DM under Section 14(1) of the 2002 Act, that responsibility and duty will be discharged honestly and in accordance with rules of law. In our view, in law, an advocate is an officer of the court and, thus, subordinate to the CMM/DM.

Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai, & Anr.

Bombay High Court Larger Bench decision on priority in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act and Section 26E in the SARFAESI Act or section 31B of the RDDB Act – Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai, & Anr. – Bombay High Court

Following substantial questions of law for answers: a. Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/MVAT Act/MGST Act] to appropriate the amount realized by the sale of a secured asset? b. Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of ‘first charge’ created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor? c. Are the provisions, inter alia, according ‘priority’ in payment of dues to a secured creditor for enforcing its security interest under the provisions of the SARFAESI Act prospective? d. Whether section 31B of the RDDB Act can be pressed into service for overcoming the disability that visits a secured creditor in enforcing its security interest under the SARFAESI Act upon such creditor’s failure to register the security interest in terms of the amendments introduced in the SARFAESI Act? e. Whether the priority of interest contemplated by section 26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? Depending on the answer to this question, whether correct proposition of law has been laid down (extracted infra) in paragraph 21 of the Division Bench decision reported in ASREC (India) Limited vs. State of Maharashtra and Ors. (2021) ibclaw.in 117 HC and in paragraph 35 of the Division Bench decision, reported in 2021 (2) Mh. LJ 721 (State Bank of India vs. the State of Maharashtra and Ors.)? f. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A in the SARFAESI Act from 24th January 2020? and g. Whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on “as is where is and whatever there is basis”?

Claim of two banks on same goods

1. Dena bank Vs. M/s Siddharth Pulses through Proprietor and others

12 WP 4221.19.odt It is not in dispute that Applicant Bank has entered into Hypothecation Agreement only on 05.12.2007. Advocate for Applicant contended when Applicant Bank called for some information and details in the format, Defendant No. 4 has not furnished full details and suppressed details of pledge. Though Advocate for Applicant Bank contended that information is not furnished in the format, no material is placed to show that format relied on by Defendant No. 4 is not a recognized format and in the absence of such material we have to go by format by which information is furnished. According to this format information relating to nature of Bank Accounts is required to be furnished, for which Defendant No. 4 gave Current Account details and pledge of goods loan Account. If really Applicant Bank is not satisfied with the information furnished in the format it should have immediately responded by pointing out the correct format, or at least seeking clarification of further details relating to pledge of goods. Applicant Bank has not sought any clarification nor replied to the letter dated 18.10.2007 but proceeded with loan transaction. When Applicant Bank has got sufficient time i.e. from 18.10.32007 to 05.12.2007 it ought to have enquired to confirm that goods offered as hypothecation are free from encumbrances. Normally any bank is expected to make a physical verification of stock even before entering into any agreement. But here, bank has not placed any material to show that one of its officers has physically verified the stock before accepting the offer of the Borrower. Though Advocate for Applicant Bank submitted that as per their records an inspection was conducted on 06.12.2007, but there is no pleading to that effect in the O.A., or there is any evidence produced, therefore, that submission at the stage of Appeal without pleading and evidence cannot be considered. According to Advocate for Applicant Bank, Dena Bank is satisfied with the Stock Statements furnished by borrowers for creating hypothecation. But, I am not in agreement with submission of Ld. Counsel for Applicant because some further check is required to be done with the offer of the Borrower before accepting such offer for hypothecation. One of the contentions of the Advocate for Applicant Bank is that primary burden is on the Defendant No. 4 to lead evidence to prove that there is a pledge prior to hypothecation. When Defendant No. 4 informed to the Applicant Bank by way of letter dated 18.10.2007 about pledge of goods, it is for the Applicant Bank to prove and establish that there was no pledge in favour of Defendant No. 4 on the goods hypothecated to Applicant Bank. This burden is heavy on the Applicant Bank because of its 13 WP 4221.19.odt admission through letter dated 31.05.2008 wherein it is clearly stated that Defendant No. 1 has lodged stock at warehouse and obtained advance from Defendant No. 4 against warehouse receipts and requested Defendant No. 4 bank to mark lien of Applicant Bank on stock and if sale of stock is taken place residual amount to be credited to Applicant Bank. In this letter there is no ambiguity, on the other hand clarifies that Defendant No. 4 has advanced money to M/s Siddharth Pulses on the stock which was at warehouse and the claim of the Applicant Bank is only towards residual amount. Referring to this letter, Advocate for Applicant Bank tried to argue that it is not binding on the Bank because of it is issued without any authorization. This submission cannot be accepted because nothing is placed in the O.A. about this letter, if really this letter is issued without any authorization, the Applicant Bank ought to have taken action against erring officer, but admittedly till now no such action is initiated. It is very easy to say something to disown document which is against the party. When the said letter dated 31.05.2008 is from one of the Branches of the Applicant Bank i.e. Jalgaon Branch without any convincing evidence, same cannot be discarded for the simple reason submitted as an argument.

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