MAINTAINABILITY OF SECURITISATION APPLICATION-WHETHER LOSING POSSESSION OF IMMOVABLE PROPERTY IS A MUST?[*]
INTRODUCTION
The Debts Recovery Tribunals (DRTs), in some recent cases, have dismissed certain Securitisation Applications (SAs) on a peculiar ground of prematurity- ‘no loss of possession of the secured asset’. In the opinion of these DRTs, where neither the symbolic nor the actual physical possession of the immovable property/secured asset was taken by the secured creditor, but only intimation notices to take physical possession of such property were issued by the court receiver appointed under Section 14 of the SARFAESI Act, 2002, the SAs challenging such intimation notices were premature.
These DRTs have held that an SA under Section 17(1) of the SARFAESI Act, 2002 is maintainable only after a borrower has lost its possession, be it constructive/symbolic possession or actual/physical possession. The present article attempts to find answer to, “whether losing possession of the secured asset a pre-requisite to maintaining an SA under Section 17(1) of the SARFAESI Act?”
RELEVANT STATUTORY PROVISIONS-SARFAESI ACT, 2002
To respond to the abovementioned questions, it is necessary to refer to Sections 13(4), 17(1), and 17(3) of the Act. On a cursory perusal of these provisions, it emerges that, in terms of Section 17(1) of the Act, any person, including a borrower, who is aggrieved by any of the measures referred to in Section 13(4) taken by the secured creditor or his authorized officer under Chapter III (Enforcement of Security Interest) of the Act, may make an application to a DRT having jurisdiction in the matter, within forty-five days from the date on which such measure had been taken. Further, in terms of Section 17(3), the DRT has been empowered to check the legality of measures taken by a secured creditor only under Section 13(4) and take suitable action thereafter.
It is relevant to point out that the bare language of the Act itself stipulates that action be taken and mere intimation of any probable action that may be taken, is not amenable to challenge before the DRT by any person aggrieved including the borrower.
RELEVANT JUDICIAL PRONOUNCEMENTS
The first relevant judgment which dealt with the question involved in the present article is Mardia Chemicals Limited & others v. Union of India & others, MANU/SC/0323/2004: (2004) 4 SCC 311. The Hon’ble Supreme Court inter alia considered the question, of whether the remedy available under Section 17 of the Act is illusory for the reason it is available only after the action is taken under Section 13(4) of the Act. While answering the said question, the Hon’ble Supreme Court observed that an appeal under Section 17(1) would lie only after some measure has been taken under Section 13(4) and not before the stage of taking any such measure.
The next judgment in this line is Transcore v. Union of India (UOI) & Others, MANU/SC/8844/2006 wherein the Hon’ble Supreme Court has dealt with the issue, of whether recourse to take possession of the secured asset of the borrower in terms of Section 13(4) of the Act comprehends the power to take actual possession of the immovable property. In answer to this question, the Hon’ble Supreme Court observed that the word ‘possession’ is a relative concept and not an absolute concept. The Hon’ble Court further observed that the dichotomy between symbolic and physical possession does not find a place in the SARFAESI Act, 2002 and held that inter alia, the secured creditor may take actual physical possession of the immovable property in the exercise of powers vested under Section 13(4) of the Act.
However, the most relevant judgment which has dealt with the issue of possession is Standard Chartered Bank v. V. Noble Kumar, MANU/SC/0874/2013:(2013) 9 SCC 620, wherein the Hon’ble Supreme Court made the following observations:+
“…27. 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 creditor. 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 along with 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. We are of the opinion that 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. (emphasis added)
28. It can be noticed from the language of the proviso to Section 13(3A) and the language of Section 17 that an “appeal” under Section 17 is available to the borrower only after losing possession of the secured asset. The employment of the words “aggrieved by…taken by the secured creditor” in Section 17(1) clearly indicates the appeal under Section 17 is available to the borrower only after losing possession of the property. To set at naught any doubt regarding the interpretation of Section 17, the proviso 16 to Sub-section (3A) of Section 13 makes it explicitly clear that either the reasons indicated for rejection of the objections of the borrower or the likely action of the secured creditor shall not confer any right under Section 17. (emphasis added)
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37. In this connection, it is material to refer to the judgment in Mardia Chemicals [Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311] wherein the Court was concerned with the legality and validity of the SARFAESI Act. The Court held the Act to be valid except Section 17(2) thereof as it then stood. In paras 59, 62 and 76 of the judgment the Court in terms held that in remedy under Section 17 of the Act was essentially like filing a suit in a civil court though it was called an appeal. It is also relevant to note that in the ultimate conclusions in para 80 of the judgment this Court held in sub-para (2) thereof as follows: (SCC p. 362)
“80. (2) As already discussed earlier, on measures having been taken under sub-section (4) of Section 13 and before the date of sale/auction of the property it would be open for the borrower to file an appeal (petition) under Section 17 of the Act before the Debts Recovery Tribunal.”
The grievance of the respondent that it will be left with no remedy is, therefore, misplaced. As held by a Bench of three Judges in Mardia Chemicals [Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311], it would be open to the borrower to file an appeal under Section 17 any time after the measures are taken under Section 13(4) and before the date of sale/auction of the property. The same would apply if the secured creditor resorts to Section 14 and takes possession of the property with the help of the officer appointed by the Magistrate…” (emphasis added)
Thus, the Hon’ble Supreme Court while placing reliance on the bare language of the statute and considering the ambit of the powers of a secured creditor while exercising its rights under the Act, has held that it is only upon loss of possession of a secured asset, that a right to appeal under Section 17 of the Act arises and not before that.
The question of whether an application under Section 17(1) of the SARFAESI Act is maintainable even before physical or actual possession of secured assets is taken by banks/financial institutions was also considered by the Full Bench of Hon’ble Allahabad High Court in the matter of N.C.M.L. Industries Ltd. and Others v. Debts Recovery Tribunal, Lucknow and others, MANU/UP/0754/2018. The Hon’ble Full Bench held that an SA is maintainable only when physical possession is taken by the secured creditor or the borrower loses the physical possession of the secured asset. This restricted interpretation given by the Hon’ble Full Bench became a subject matter of appeal before the Hon’ble Supreme Court in Hindon Forge Private Limited & Another v. State of Uttar Pradesh & Another, (2019) 2 SCC 198.
The Hon’ble Supreme Court after considering all the relevant provisions and judicial precedents clarified that Rule 8(1) and 8(2) of the Security Interest (Enforcement) Rules, 2002 (the Rules) read with Section 13(4)(a) of the Act provides for taking symbolic possession, while Rule 8(3) of the Rules read with Section 13(4)(a) of the Act provides for taking physical possession. It was held by the Hon’ble Court that whether possession is taken under Rule 8(1) and 8(2), or under Rule 8(3), an application under Section 17(1) of the Act would be maintainable. The Hon’ble Court also observed that the measures were taken under Section 13(4)(a) and Section 14 of the Act are separate and distinct modes of exercise of powers by a secured creditor, under the Act. The Hon’ble Court held that while Sections 14 and 15 have to be read by themselves, Section 13(4)(a) has to be read with Rule 8 of the Rules.
In the recent judgment passed by the Hon’ble Bombay High court in the case of CA Manisha Mehta and Ors. Versus The Board of Directors Represented by its Managing Director of ICICI Bank and Ors., MANU/MH/1377/2022, the Hon’ble High Court has gone a step further and held that even the principles of natural justice are available to a limited extent and not beyond what is expressly provided. The Court has held that,
“…Decision by a quasi-judicial authority (see section 17) upon compliance with natural justice stands deferred till such time possession, either symbolic or physical, is taken. The SARFAESI Act does not remotely suggest compliance with natural justice at the stage when section 13(4) or 14 operates. Paragraph 36 of V. Noble Kumar (supra) explains that there are 3 (three) methods for taking possession of a secured asset. In view thereof, section 14 cannot stand independent of section 13(4). If a borrower has no right of hearing when the secured creditor takes possession under section 13(4), a fortiori, no hearing can be demanded by a borrower when he succeeds in resisting possession being gained over by the authorized officer of the secured creditor or does not on his own surrender possession, and thus compels such officer to work out the remedy by seeking assistance of the District Magistrate/Chief Metropolitan Magistrate, as the case may be, under section 14. Only a post-possession right to approach the tribunal is conferred on a borrower in terms of section 17, nothing more and nothing less…”
Thus, the position of law enunciated by the Hon’ble Supreme Court in the case of Noble Kumar (supra), Transcore (supra), and the Hindon Forge (supra), was reiterated by the Hon’ble Bombay High Court, but with an added clarification on the applicability of principles of natural justice to the provisions of the SARFAESI Act, 2002.
Placing reliance on these judgments of the Hon’ble Supreme Court, a few DRTs have held that a borrower can approach DRT under Section 17(1) of the Act only after he/she has lost either symbolic possession or physical possession of the secured asset.
AUTHORS’ ANALYSIS
The SARFAESI Act, 2002 was enacted for quick recovery of secured debts without much interference from judicial/quasi-judicial authorities.
Section 13(4) of the Act enunciates the various measures which a secured creditor can resort to in case the borrower fails to discharge his liability as mentioned under Section 13(2) of the Act. Section 13(4)(a) empowers a secured creditor to take possession of the secured assets of the borrower with the right to transfer by way of lease, assignment, or sale for realizing the secured asset. Rule 8(1) and 8(2) of the Rules provide the manner in which symbolic possession of secured assets is to be taken by the secured creditor. Further, where the secured asset is actually taken over by the authorized officer, Rule 8(3) casts upon the authorized officer a duty to keep the secured asset in his own custody or any other authorized person and take care of such asset as an owner of the said asset. In addition to Section 13(4)(a) read with Rule 8(3), actual physical possession of a secured asset can also be taken with the assistance of the District Magistrate/Chief Metropolitan Magistrate under Section 14 of the Act.
In terms of the provisions of the SARFAESI Act and as held by the Hon’ble Supreme Court in the Noble Kumar case (supra), recourse to Section 14 of the Act can be directly taken by the secured creditor without first complying with Section 13(4)(a) of the Act read with Rule 8(1) and 8(2) of the Rules. In exercise of the authority conferred upon the District Magistrate/Chief Metropolitan Magistrate by virtue of Section 14(1-A), when an order under Section 14 is passed by such an authority, a receiver is appointed to take the actual physical possession of the secured asset and handover the same to the authorized officer/secured creditor.
Though there is no provision for advance notice to be given to the occupant/owner of the secured asset before taking physical possession, in terms of the practice developed by various courts and recognized by superior courts, advance notice of at least 15 days is generally served upon the occupant before taking such possession. After receipt of such notice from the receiver, the borrower/occupant of the secured asset challenge the same before the DRT by filing an SA under Section 17(1) of the Act.
In cases where constructive possession of the secured asset is taken by the secured creditor under Section 13(4)(a) of the Act read Rule 8(1) and 8(2) of the Rules, before obtaining the order for taking physical possession under Section 14 from a District Magistrate, an SA challenging the receiver’s notice before the DRT is maintainable. The justification for the same is that since the borrower has already lost symbolic possession of the secured asset, he/she may challenge that action as well as subsequent actions taken thereafter, including the receiver’s notice.
However, in cases where the secured creditor does not take symbolic possession of the secured asset but proceeds directly under Section 14 of the Act and obtains an order for appointment of a receiver, an SA challenging the receiver’s notice and/or an order under Section 14 of the Act, before losing the physical possession of the secured asset does not appear to be maintainable. It is because mere passing of an order under Section 14 or issuance of a notice by the receiver for taking physical possession of a secured asset is not a measure referred to under Section 13(4) of the Act.
Pertinently, Section 17(1) of the Act does not provide for the filing of an appeal against an order passed under Section 14 of the Act, however, the Hon’ble Supreme Court in the matter of Kanaiyalal Lalchand Sachdev and others Vs. State of Maharashtra and others, MANU/SC/0103/2011:(2011) 2 SCC 782 has held that an action under Section 14 of the Act constitutes an action taken after the stage of Section 13(4) and, therefore, the same would fall within the ambit of Section 17(1) of the Act. The same position of law has been reiterated by various High Courts across the country.
However, contrary to the judgment in Kanaiyalal Lalchand (supra), the Hon’ble Supreme Court in Harshad Govardhan Sondagar vs. International Assets Reconstruction Company Limited and Others MANU/SC/0377/2014:(2014) 6 SCC 1, has held that in view of Section 14(3) of the Act, a finality has been attached to the decision passed by DM/CMM under Section 14 of the Act and this decision cannot be challenged before any court or any authority except High Court under Article 226/227 of the Constitution and before the Hon’ble Supreme Court. It is pertinent to note that the Hon’ble Supreme Court has taken this view without considering its earlier judgment in Kanaiyalal Lachand (supra) and therefore, in our humble opinion, this observation of the Hon’ble Supreme Court in Harshad Govardhan (supra) is not the correct view.
In our view, the observations of the Hon’ble Supreme Court in Kanaiyalal Lalchand (supra) that an order passed under Section 14 of the SARFAESI Act can be challenged under Section 17(1) of the SARFAESI Act has left a grey area in as much as the observations do not clarify or specify the stage at which an order passed by the DM/CMM or notice issued by the receiver pursuant to that order can be challenged before DRT.
A careful perusal of Section 17(1) makes it clear that the cause of action in favor of an aggrieved person including the borrower, arises only after a measure under Section 13(4) has been taken by the secured creditor or his authorized officer. The legislature has deliberately used the phrase ‘taken’ instead of ‘intends to take’ or ‘to be taken’ in Section 17(1) which again shows that the legislature intended to confer the right to file an appeal under Section 17(1) only after a measure under Section 13(4) has been taken and not before that. A composite reading of the judgments passed in Kanaiyalal Lalchand (supra) and Hindon Forge (supra) makes it clear that while these measures under Section 13(4)(a) and under Section 14 are separate and independent but taking actual physical possession of the secured asset under Section 14 would be one of the measures referred to in Section 13(4)(a) of the SARFAESI Act and therefore, once the physical possession of the secured asset is taken over by the receiver and handed over to the secured creditor/authorized officer, an SA before the DRT is maintainable.
Another reason why an SA against Section 14 order or receiver’s notice issued pursuant to a Section 14 order, filed before losing possession is not maintainable, is the mandate of Section 13(4)(a) read with Rule 8(1) and 8(2) of the Rules. In terms of the law as settled by the Hon’ble Supreme Court in Hindon Forge (supra), a borrower, after receipt of the notice under Rule 8(1), can challenge the same before the DRT by filing a SA. Thus, an SA is not maintainable before the receipt of the symbolic possession notice. Once the notice under Rule 8(1) is served upon the borrower, the symbolic possession of the secured asset is lost by the borrower concerned and a cause of action arises in their favor.
Furthermore, why in our view, an SA filed against an order passed under Section 14 or a receiver’s notice issued in pursuance of the same, is not maintainable before losing possession of the secured asset, is the power enshrined under Rule 8(3). Rule 8(3) empowers the authorized officer to take actual possession of the secured asset without resorting to the District Magistrate. In a case where the authorized officer instead of taking recourse to Rule 8(1) & 8(2) or Section 14, takes recourse to Rule 8(3) and directly takes actual/physical possession of the secured asset, then in that case also, the borrower would be entitled to challenge the said action of the authorized officer under Section 17(1), only after losing possession of the secured asset and not before that.
As stated earlier, Section 14 is another way of taking actual possession of the secured asset. When in terms of Rule 8(1)/8(2) and 8(3), a borrower can file an SA only after losing constructive possession and physical possession respectively, then there is no reason why an SA against an order passed under Section 14 or receiver’s notice would be maintainable before the physical possession of the secured asset is actually taken and handed over to the authorized officer. This reasoning is supported by the observations made by the Hon’ble Supreme Court in the matter of Standard Chartered Bank (supra) wherein it has been observed that Section 14 authorizes the Magistrate only to take possession of the property and forward the asset along with 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 possession is to be obtained directly by the secured creditor or by resorting to the procedure under Section 14. Thus, by whichever method the secured creditor obtains possession of the secured asset, either by the process stipulated under Section 14 or without resorting to such a process, taking over of the possession of a secured asset is always a measure against which a remedy under Section 17 is available.
Furthermore, as held by the Hon’ble Punjab & Haryana High Court in the CA Manisha Mehta case (supra), if a borrower has no right of hearing when the secured creditor takes possession under section 13(4), a fortiori, no hearing can be demanded by a borrower when he succeeds in resisting possession being gained over by the authorized officer of the secured creditor or does not on his own surrender possession, and thus compels such officer to work out the remedy by seeking the assistance of the District Magistrate/Chief Metropolitan Magistrate, as the case may be, under section 14. Thus, only a post-possession right to approach the tribunal is conferred on a borrower in terms of Section 17 of the SARFAESI Act, 2002.
CONCLUSION
We are therefore of the view that an SA under Section 17(1) is maintainable only after a borrower has lost possession of the secured asset, whether it is symbolic or actual physical possession. We also believe that mere passing of an order under Section 14 of the SARFAESI Act or issuance of a notice for taking actual physical possession of the secured asset by a court receiver does not ipso facto give rise to a cause of action in favor of the borrower to file an SA under Section 17(1) of the SARFAESI Act.
Thus, in all cases where the secured creditor through its authorized officer takes direct recourse to Section 14 of the SARFAESI Act, without first taking recourse to Rule 8(1) and 8(2) of the Rules, an SA is maintainable only after the receiver appointed by the District Magistrate/Chief Metropolitan Magistrate takes actual physical possession of the secured asset and hands over it to the authorized officer/secured creditor.
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[*] Authors-Prashant Tripathi & Sampanna Pani, Advocates and Partners, Pani & Tripathi Law Offices, New Delhi. Views are personal.
