tag:blogger.com,1999:blog-56233848258449855592024-03-26T23:38:25.487-07:00Indian Company LawThe blog provides information on company law in india and issues touching the corporate world. The intention is to provide information and to serve the needy in the course.V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.comBlogger137125tag:blogger.com,1999:blog-5623384825844985559.post-73396150102977844052013-03-08T05:57:00.002-08:002013-03-08T05:57:37.026-08:00RBI guidelines & SARFAESI proceedings?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "Bookman Old Style";">It
is very clear that the Banks should follow RBI guidelines on
Asset-Classification before classifying any loan account as <b>‘Non-performing Asset (NPA)’</b>. There
were judgments saying that it is mandatory for the Banks to follow RBI
guidelines while classifying an account as ‘Non-Performing Asset (NPA)’ and any
deviation in this regard can vitiate the proceedings initiated under SARFAESI
Act, 2002. While RBI guidelines are detailed when it comes to Asset Classification
and related issues; the Bank officials or the Banks may have to make a
subjective assessment of certain issues. It is understood from the reading of
RBI guidelines on Asset-Classification that genuine borrowers facing temporary
difficulties may be treated separately and based on reasonable assurance of
recovery. Guideline 4.2.4 of RBI guideline deals with the issue of <b>‘accounts with temporary deficiencies’</b>
and narration of few of the temporary deficiencies in the said guideline appear
to be ‘inclusive’ in nature allowing the Bank to make certain subjective
assessments on case-to-case basis. Obviously, no creditor and especially
secured creditor want to harass a genuine borrower having a good track-record
with the Bank for a considerable time. However, with constant emphasis on the
issue of reduction of NPAs, it seems that the Banks are very strict while
getting the accounts classified as ‘NPAs’. The most important thing about the
issue of recovery by the Bank is that they are allowed to proceed against the
borrower for default in any of the facilities availed by him when a borrower
avails multiple credit facilities. Banks are asked to initiate recovery
proceedings ‘Borrower-Wise’ and not ‘Facility-Wise’ and it is very clear in the
RBI guideline </span><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">4.2.7</span><span style="font-family: "Bookman Old Style";">. Again, Banks
are not supposed to lay complete focus on the value of the security available
with the Bank as such while initiating the recovery proceedings and it is very
clear in RBI guideline </span><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">4.2.3</span><span style="font-family: "Bookman Old Style";">.
The extract of the said RBI guidelines are as follows:<o:p></o:p></span></div>
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<b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">4.2.7 Asset
Classification to be borrower-wise and not facility-wise:<o:p></o:p></span></b></div>
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<span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">i) It is difficult to envisage a situation when
only one facility to a borrower/one investment in any of the securities issued
by the borrower becomes a problem credit/investment and not others. Therefore,
all the facilities granted by a bank to a borrower and investment in all the
securities issued by the borrower will have to be treated as NPA/NPI and not
the particular facility/investment or part thereof which has become irregular.<o:p></o:p></span></div>
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<br /></div>
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<b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">4.2.3
Availability of security / net worth of borrower/ guarantor:<o:p></o:p></span></b></div>
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<span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">The availability of security or net worth of
borrower/ guarantor should not be taken into account for the purpose of
treating an advance as NPA or otherwise, except to the extent provided in Para
4.2.9, as income recognition is based on record of recovery.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">Again, dealing with the issue of temporary deficiencies in adhering to
the terms of the loan agreement, RBI guideline 4.2.4 says as follows:<o:p></o:p></span></div>
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<div class="MsoNormal" style="margin-left: .5in; mso-layout-grid-align: none; text-autospace: none;">
<b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">4.2.4
Accounts with temporary deficiencies</span></b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">:<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">The classification
of an asset as NPA should be based on the record of recovery. Bank should not
classify an advance account as NPA merely due to the existence of some deficiencies
which are temporary in nature such as non-availability of adequate drawing power
based on the latest available stock statement, balance outstanding exceeding
the limit temporarily, non-submission of stock statements and non-renewal of
the limits on the due date, etc. </span><span style="font-family: "Century Schoolbook";"><o:p></o:p></span></div>
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<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">The
problems for many borrowers or the Small Businessmen availing the loan
facilities from the Bank comes from the issue that the Banks are asked to
initiate recovery proceedings ‘borrower-wise’ and not ‘facility-wise’.
Borrowers availing facilities from the Bank with the complex commercial
arrangements and agreements face problems with this discretion available with
the Banks or the Bank Officials. Many complain that there is no effective
redressel mechanism to raise all these issues even when the borrower has a very
good case for restructuring or for questioning the judgment of the Bank in
classifying a particular account as a ‘Non-Performing Asset’. In most cases,
the borrowers are driven either to approach the High Court under Article 226 of
Constitution of India challenging the classification of an account as NPA or the
borrower may have to inevitably file an Appeal before the Debt Recovery
Tribunal under section 17 of SARFAESI Act, 2002. Even-though Banks can consider
the proposal for restructuring of a loan account upon certain conditions and
re-negotiating the terms, Banks do exercise great discretion in this regard. Coupled with this situation, as the Banks can
argue that the value of security has got nothing to do while classifying an
account as NPA, genuine borrowers or borrowers/small businessmen with temporary/genuine/understandable
problems face lot of pressure and problems. For example, an industry may have a
very valuable property lying with the Bank as a security and may be facing some
problems in its business with the obvious reasons which are beyond its control,
and in such cases also, if the Bank is not convinced, the borrower becomes
remediless. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Emphasis
has always been laid on the issue of recovery and establishing an efficacious
internal system by the Banks and Guideline 4.2.2 of RBI guidelines says as
follows:<o:p></o:p></span></div>
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<b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">4.2.2.</span></b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;"> Banks
should establish appropriate internal systems to eliminate the tendency to
delay or postpone the identification of NPAs, especially in respect of high
value accounts. The banks may fix a minimum cut off point to decide what would constitute
a high value account depending upon their respective business levels. The
cutoff point should be valid for the entire accounting year. Responsibility and
validation levels for ensuring proper asset classification may be fixed by the
banks. The system should ensure that doubts in asset classification due to any
reason are settled through specified internal channels within one month from
the date on which the account would have been classified as NPA as per extant
guidelines.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">RBI guidelines on ‘Asset Classification’ are well-balanced and the Banks
are asked to make many subjective decisions and RBI guidelines do focus on the
issue of not harassing genuine borrowers while emphasizing at the need of
speedy and efficacious recovery. Along with the provisions dealing with the
restructuring of loans or advances, RBI guidelines also deal with the issue of
up-gradation of loan accounts classified as NPAs and the relevant RBI guideline
in this regard is as follows:<o:p></o:p></span></div>
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<div class="MsoNormal" style="margin-left: 27.0pt; mso-layout-grid-align: none; text-autospace: none;">
<b><span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">4.2.5
Upgradation of loan accounts classified as NPAs:<o:p></o:p></span></b></div>
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<br /></div>
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<span style="font-family: "Century Schoolbook"; mso-bidi-font-family: Arial;">If arrears of interest and principal are paid by
the borrower in the case of loan accounts classified as NPAs, the account
should no longer be treated as nonperforming and may be classified as
‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled
account which is classified as NPA contents of paragraphs 11.2 and 14.2 in the
Part B of this circular will be applicable.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">On certain issues, RBI guidelines are very clear as to when an account
should be treated as NPA. But, with regard to providing relaxation or
understanding the temporary difficulties of the borrower while considering
upgradation of loan account or regularizing the loan account, Banks do exercise
lot of discretion. If at all the borrower feels that the Secured Creditor or
the Banks are unfair in dealing with his loan account or loan accounts, he can
do nothing except approaching superior officers, approaching Banking ombudsmen
or approaching High Court under Article 226 of Constitution of India. Though,
even the DRT (Debt Recovery Tribunal) can consider all objections raised by the
borrower while entertaining an Appeal under section 17 of SARFAESI Act, 2002,
DRT may not have power to analyze a particular case in the light of RBI
guidelines in its entirety though DRT can certainly look into the guideline
dealing with the criteria for classifying a particular loan account or accounts
as ‘Non-performing Assets’. Normally, Banks do not commit any mistakes in
classifying an Account as NPA applying the RBI guidelines strictly. Apart from
the criteria, the DRT can look into the issue of ‘debt’, objections regarding
debt and the correctness of the procedure followed by the Bank under SARFAESI
Act, 2002. Normally, Banks do not commit mistakes in the procedure and the borrower
will have objection to the classification on the basis that he is not a
willful-defaulter and the deficiency in making payment is temporary in nature.
However, these things are not considered by the DRT normally as I think and
they may not have power to consider all these issues in-spite of various
judgments of the Constitutional Courts from time to time emphasizing at the
powers of the Tribunal under section 17. Only due to the judgments of the
Courts, the borrowers are allowed to question every measure initiated by the
Banks under SARFAESI Act, 2002 now and technicalities are normally ignored
while entertaining appeals under section 17. It is also clear that they can
look into all objections pertaining to the loan account or even raised by the
third-party if he is connected. The <st1:street w:st="on"><st1:address w:st="on">Civil
Court</st1:address></st1:street> may be having limited jurisdiction to look
into the issues connected to the SARFAESI proceedings and the jurisdiction of
the High Court under Article 226 of Constitution of India is largely dependent
on the facts of the case, and the discretion of the Court. <o:p></o:p></span></div>
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<span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">Now, if the Bank takes a decision to classify an account as NPA and
rejects the objections or the request by the borrower, then, apart from writ
remedy, the remedy available to the borrower is to file an appeal under section
17 of the SARFAESI Act, 2002. Based on the merits of the case, the DRT will
grant interim relief and finally, only when it is established that there is a
procedural irregularity, the DRT will allow the SARFAESI Appeal and can order
the restoration of property if the physical possession has already been taken
by the Bank pursuant to steps taken under section 13 (4) or by taking
assistance of the police etc. using the mechanism provided under section 14 of
SARFAESI Act, 2002. In many cases, DRT can insist on payment of some deposit
while granting an interim-relief when the borrower approaches the Tribunal
under section 17 of the Act challenging the proceedings initiated by the Bank
under SARFAESI Act, 2002. If the Bank proceeds with the proceedings even during
the pendency of the Appeal under section 17, then, it becomes further more
complicated to the borrower and it is very often heard that the borrower is
asked to file another appeal literally instead of looking into all developments
in the pending Appeal itself by way of entertaining affidavits or petitions in
the pending Appeal. Filing an Appeal against the order of the DRT to the DRAT
under section 18 is another big process and many normally get discouraged to do
this in-view of pre-deposit condition. In each and every step, the borrower is
discouraged and made to run from pillar to post even in cases with some merit
and it is the view of many of the professionals or the borrowers facing
SARFAESI proceedings. There is no reason as to why Appeals can’t be speeded-up,
additional Tribunals can’t be set-up. If Appeals are speeded-up and if
sufficient Tribunals and Appellate Tribunals are constituted, then, at-least
genuine borrowers seeking remedy may feel protected and at-present, every case
of so-called default is treated in a same way. <o:p></o:p></span></div>
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<span style="font-family: "Bookman Old Style"; mso-bidi-font-family: Arial;">The SARFAESI Act, 2002 (</span><span style="font-family: "Bookman Old Style";">The
Securitisation and Reconstruction of Financial Assets & Enforcement of
Security Interest Act, 2002) seems to be proceeding on the basis that the Banks
or the Bank officials do not commit any mistakes. It is quite possible to
ensure speedy recovery through special legislations like SARFAESI Act, 2002 and
also giving confidence to the borrower that he will be heard fairly especially
when the borrower has got a very good track-record and long standing relation
with the Bank along with having valuable and marketable security lying with the
Bank. It is quite possible. Now, it seems that there is an amendment or the
provision allowing the Authorized Officers to bid for the property when there
were no bidders initially and the reason given for this step is that it will
allow the Banks to clean-up their balance-sheets. But, this kind of provisions
can harm the borrowers and already it has become extremely difficult for the
borrowers to establish or state his case and coordinating with the Banks. If
there is too much pressure from the Banks when the businesses are not doing
well for the reasons beyond their control, then, small business may be
suffering irreparable loss if the Bank doesn’t understand their concerns
reasonably and sympathetically. Normally, at-times, taking note of industry
specific problems, the Finance Ministry may come-up with some kind of
directions to the Bank to be lenient or understandable while insisting on the
speedy recovery in-respect of some specific industries and Banks also are asked
at-times to post-phone the recovery process also. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Bookman Old Style";">Instead of
discouraging the borrower to get any remedy or forum to advocate his problems,
the legal frame-work governing recovery of secured loans can still be very
fair, few more Tribunals and Appellate Tribunals can be constituted and
well-drafted powers are to be conferred on the Tribunals to even give
directions to the Bank when needed and in-favour of the borrower. For example,
if the loan to be recovered is only 10 lakh and the security lying with the
Bank is worth 50 lakh admittedly, and if the borrower seeks for payment of
outstanding loan amount with interest and charges seeking regularization, then,
DRT should be able to give direction to the Bank to accept the proposal. Delays
in adjudication can certainly be curtailed and technicalities can be ignored
while entertaining pleas from the Borrower. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; text-align: justify; text-autospace: none;">
<span style="font-family: "Bookman Old Style";">Admittedly,
on the issues of reduction of interest, acceptance of OTS etc., Banks will have
their own internal systems and DRT may have little role in this regard. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; text-align: justify; text-autospace: none;">
<span style="font-family: "Bookman Old Style";">With many
more stringent provisions like allowing the Banks to file Caveats before
Tribunals under SARFAESI Act, 2002, allowing the Banks to bid for the
properties; discretion of the Banks or the Bank officials has grown like
anything and the borrower increasingly feels that he can not state his case and
get remedy. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Bookman Old Style";">RBI keeps
updating or modifies the guidelines governing ‘Asset Classification’, but,
borrowers feel that it has become so difficult for them to establish or
advocate their case even when they are not clearly willful defaulters and even
when a valuable and marketable security is lying with the Bank. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="mso-layout-grid-align: none; text-align: justify; text-autospace: none;">
<span style="font-family: "Bookman Old Style";">Whether it
is a Public Sector Bank or Private Sector Bank, borrowers should have a forum
providing speedy, effective and efficacious remedy. <o:p></o:p></span></div>
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<br /></div>
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<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> the views expressed are my personal, my own understanding
and I can be wrong in my views.<o:p></o:p></span></div>
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</div>
V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com220tag:blogger.com,1999:blog-5623384825844985559.post-90282381948101832942013-02-25T09:21:00.003-08:002013-02-25T09:21:29.663-08:00SARFAESI Act & sorrows of Borrower?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">There
is every need for the Government to enable/assist the Banks in reducing their
NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well
assisted/equipped through the legal frame-work in recovering their dues. The
provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of
Financial Assets & Enforcement of Security Interest Act, 2002), judicial
pronouncements from time to time and amendments to the SARFAESI Act, 2002
enable the Banks to recover their dues speedily. While there should be emphasis
on the need and urgency of the Banks in reducing their NPAs, the rights of the
borrower can never be ignored. It is to be commended that the judiciary has
maintained a great balance between the rights of the Banks on the one hand and
rights of the borrowers on the other hand while interpreting the provisions of
SARFAESI Act, 2002. The Act talks of a right of appeal available to the
borrower/guarantor/aggrieved person against the possession notice issued by the
Bank under section 13 (4) of the Act. Time limit is prescribed to prefer an
appeal. If the appeal provision is interpreted in <i>stricto senso</i>, then, the borrower has to confine himself to the
issue of demand notice issued by the Bank under section 13 (2), the issue of
classification of an Account as NPA based on RBI guidelines, the issue of
objections raised by the Borrower, the reply given by the Bank if any etc.
issues and nothing more than that. If the provisions are seen strictly, then,
the Bank may not even be questioned when it fixes the reserve price and sells
the property for a very low price affecting the borrower and also the Bank at
times. Addressing these concerns, the judiciary has maintained that all actions
initiated by the Bank under the provisions of SARFAESI Act, 2002 can be
challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002.
Technically, if the borrower is silent in questioning the possession notice
issued by the Bank under section 13 (4) of the Act and chooses to question the
Sale Notice, then, the borrower has to confine himself to the procedure
followed by the Bank after the issuance of notice under section 13 (4) and the
issues pertaining to Sale of Secured Asset. When the borrower questions the
sale notice and did not question the notice under section 13 (4) within the
prescribed period, the borrower has to explain as to why he has failed to
question the notice under section 13 (4) within the prescribed period. In the
absence of satisfactory explanation as to why the borrower has failed to
question the possession notice under section 13 (4), his position to raise all
kinds of objections to the Bank’s demand becomes untenable. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">However,
the system has become liberal and courts have also liberally interpreted the
provisions dealing with the ‘right of appeal’ provided to the borrower and the
borrower can question every action initiated by the Bank under the provisions
of SARFAESI Act, 2002. The borrower or any person aggrieved can approach the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> in a
very limited situation where actually there is fraud or serious dispute with
regard to the title of the ‘secured asset’/property mortgaged. Though there can
be no bar on the jurisdiction of High Courts under Article 226 in dealing with
the grievances of the borrower against the Bank when the Bank initiates action,
the High Courts do desist in being alternative to the remedy available before
the DRT normally. As such, there is enough support to the Banks through
legal-framework in recovering their dues from the borrowers. It is true that in
the absence of a special legislation like SARFAESI Act, 2002, it would have
been very difficult for the Banks in recovering their dues and reducing their
NPAs. From the borrowers’ point of view, the borrowers allege that they do not
have an effective remedy against the illegal action being initiated by the Bank
using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT
can look into all allegations while entertaining an appeal under section 17 of
the Act and it includes the issue of disputes pertaining to the actual ‘debt’.
Then, it is also settled that the DRT can order re-possession of the ‘secured
asset’ when it is found that the Bank has illegally taken the possession of the
‘secured asset’. It is very important to look into various stages and issues
when the borrower prefers an appeal under section 17 of the SARFAESI Act, 2002
and those are as follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">When
the borrower prefers an Appeal under section 17 against the Bank, the DRT can
grant ex-parte stay of proceedings against the Bank if there is sufficient
ground to that affect from the averments in the ‘Grounds of Appeal’ and
also the documents produced. If there is a caveat, then, the procedure
differs. Normally, the DRT orders notice to the Bank irrespective of the
fact as to whether it grants stay or not in-favour of the borrower. The DRT can also ask the borrower to
make some deposit while granting stay and it is also reasonable as the borrower
has to make the payments towards installments to the Bank in any case and
there can be some time lapse between the demand notice issued by the Bank
under section 13 (2) and the appeal.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="2" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
Bank files its reply pursuant to the notice ordered by the DRT and they
normally justify their action and say that the action initiated by the
Bank is legal and the Appeal is liable to be dismissed. The Bank also can
ask for vacating the interim order and can pray for allowing the Bank to
continue with the further proceedings like <st1:city w:st="on"><st1:place w:st="on">Sale</st1:place></st1:city>. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="3" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">If
there is no interim order against the Bank while the Appeal is pending and
the Bank is allowed to proceed with the sale proceedings, the issue gets
complicated. The borrower should be allowed to raise any point and
additional grounds by way of additional affidavit in the pending Appeal
and there is nothing wrong in it and technicalities are to be ignored. For
example, the borrower might have chosen to challenge the possession notice
issued by the Bank under section 13 (4) and during the pendency of Appeal,
if the Bank initiates the Sale Proceedings, the borrower should be allowed
to question the Sale Proceedings in the same Appeal instead of bringing
technicalities and asking the borrower to challenge the Sale proceedings
separately. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="4" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Obviously,
during the pendency of SARFAESI Appeal, if the Bank proceeds with the sale
of ‘Secured Asset’, it is likely that the property may not fetch the
actual market value as the bidder discounts all the possible risks
associated with the bidding. If the Bank is able to raise the money and
can get the entire debt recovered through the sale consideration, then,
the Bank is safe and appeal under section 17 literally becomes meaningless
though it is usual to see an order where DRT says that ‘sale confirmation
is subject to the final disposal of Appeal’. Or DRT can allow the Bank to
proceed with the sale of Secured Asset and can say that the ‘sale
confirmation’ is to be stayed until further orders. Instead of doing this,
the DRT can dispose of the SARFAESI Appeal itself as it can ascertain the
facts so fast based on the averments in the SARFAESI Appeal, the documents
filed and the reply presented by the Bank.
Once the SARFAESI Appeal is finally disposed off then, it is not
easy to prefer an appeal against the final order of DRT as the borrower
will have to make pre-deposit with the DRAT which can vary from 50% to 75%
depending upon the discretion of the DRAT. Now, with the provision
enabling the Banks/secured creditors to bid for the property when the sale
is post-phoned for want of bidders, it has become much easy for the Banks
to deal with the ‘secured asset’ and claim recovery. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="5" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
proceedings before DRT can not be compared to the proceedings before <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
and adjudication process before the DRT is simple and can be fast.
However, it is also true that DRT requires time to look into the facts and
read the documents apart from hearing the oral submissions from the Bank.
Additional DRTs and DRATs can be constituted if required rather allowing
the borrower to suffer and feel that the remedy before the DRT and DRAT is
not effective. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="6" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Again,
the DRT can either allow the Appeal filed by the borrower under section 17
or dismiss the same finally. If the DRT allows the Appeal filed by the
borrower under section 17, then, it can order re-possession of the
‘secured asset’ if the physical possession of the ‘secured asset’ is
already taken. The Appeal can be allowed or dismissed either with costs or
without costs. More than this, I don’t think that the DRT can do anything
else or can give any direction to the Bank. For example, the borrower may
be entitled for getting his loan restructured at the given point of time
pursuant to some notification from the ministry of finance or RBI and the
Bank must have ignored it. Even then, the DRT can not direct the Bank to
restructure the loan of the borrower while disposing off the appeal. This
is where the borrower feels remediless at times. If the Bank is to be
asked to do something as per law, where can the borrower go?. The borrower
can give a representation to the Bank officials, can write to the superior
authorities and may approach the High Court under Article 226 of
Constitution of India seeking direction. However, even the High Court may
direct the Banks to consider the representation and with all the might and
luxury, the Bank can make the borrower to run from pillar to post. This
happens in many cases though the factor of habitual litigants can not be
ignored. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="7" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Very
rarely, the Appeal filed by the borrower gets allowed and even then, the
Bank will again be initiating the proceedings correcting the lacunae. For
example, during the pendency of Appeal under section 17, the borrower may
say that he is willing to regularize his account and abide by the loan
terms and the market value of the ‘secured asset’ can be intact. In such
cases, the Bank is in no way gets effected by regularizing the loan as it
collects the interest and also the legal expenses for initiating the
proceedings. However, the DRT can not give such a direction to the Bank
though it can orally ask the Banks to consider the proposal of the
borrower. Now with the recent amendments, the Secured Creditor is enabled
with the right of filing ‘Caveat’ and it presents many difficulties to the
borrower and it becomes now literally impossible to get an ‘ex-parte stay
order’ against the Bank. And also, it has become very easy for the Banks
to sell the ‘secured asset’ as there is no need of following separate
procedure of Sale if the ‘Sale’ is postponed for want of bidders etc.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
is quite possible to ensure a system or practice under the provisions of
SARFAESI Act, 2002 which is fair and also effective. If the ‘secured asset’ is
valuable, then, there can not be any worry to the Bank at all as it can recover
the dues with interest and expenses. If the ‘secured asset’ is not valuable in
comparison to the dues recoverable, then, the officials of the Bank are to be
blamed as to how they have sanctioned the loan in the first place. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Emphasis
is always laid as to how to enable the Banks to speed-up their recovery, but,
little emphasis is laid as to how the borrower feels remediless in some cases. Even
while providing the best possible legal-framework enabling the Banks to recover
their dues, the concerns of the borrower can certainly be addressed and it is
very much possible. From the borrowers’ point of view, the following issues
need to be considered. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">a.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The Appeal mechanism under the
provisions of SARFAESI Act, 2002 can be liberal and the borrower should be
allowed to question every action initiated by the Bank under SARFAESI Act, 2002
without raising any technicalities like condonation of delay etc. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">b.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">It should be mandatory on the part of
the Banks to mention marketability and market price/price of the ‘secured
asset’ in its reply to the appeal of the borrower under section 17 among other
things.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">c.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">There should be time-limit for the
Banks in filing their reply in an appeal under section 17 of the Act and in the
absence of filing the reply within the specific period, the proceedings of the
Bank under SARFAESI Act against the borrower should automatically be stayed. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">d.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">Though there is a time-limit for
disposing the Appeals under section 17 in the Act, the disposal normally takes
time. If work-load in the DRTs and DRATs is the main cause for the delay, then,
additional DRTs and DRATs can be constituted and so that, Appeals under section
17 and under section 18 of the Act can be disposed of as quickly as possible. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">e.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The scope of powers of the presiding
officer of DRT under section 17 should be expanded further and it should
include giving suitable directions to the Bank from time to time keeping the
need of ‘recovery of dues’ in mind. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">With
the system aimed at speedy recovery and balanced heavily towards the Bank,
genuine borrowers who are not willful or habitual defaulters also get affected.
The borrowers feel remediless now and even if the remedy is provided, most of
the borrowers feel that the remedy provided is ineffective. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">While
it is important to improve the financial health of the Banks/Financial
Institutions, there is no justification for a completely one-sided draconian
legal system where the borrower is harassed like anything. Bank officials
exercise great discretion and the Bank officials must be extremely happy with
the legal provisions now governing the recovery of ‘secured loans’ under
SARFAESI Act, 2002. It has become totally one-sided affair now and ordinary
citizens & small businesses may feel it better to approach the private
money leaders for their financial needs rather approaching Banks and Financial
Institutions in this country. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">I
expect constitutional courts to entertain certain important issues under
SARFAESI Act, 2002 in public interest rather supporting every view of the
government. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> the views expressed are my personal.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com32tag:blogger.com,1999:blog-5623384825844985559.post-86837902305266806562013-02-25T09:21:00.001-08:002013-02-25T09:21:22.805-08:00SARFAESI Act & sorrows of Borrower?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">There
is every need for the Government to enable/assist the Banks in reducing their
NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well
assisted/equipped through the legal frame-work in recovering their dues. The
provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of
Financial Assets & Enforcement of Security Interest Act, 2002), judicial
pronouncements from time to time and amendments to the SARFAESI Act, 2002
enable the Banks to recover their dues speedily. While there should be emphasis
on the need and urgency of the Banks in reducing their NPAs, the rights of the
borrower can never be ignored. It is to be commended that the judiciary has
maintained a great balance between the rights of the Banks on the one hand and
rights of the borrowers on the other hand while interpreting the provisions of
SARFAESI Act, 2002. The Act talks of a right of appeal available to the
borrower/guarantor/aggrieved person against the possession notice issued by the
Bank under section 13 (4) of the Act. Time limit is prescribed to prefer an
appeal. If the appeal provision is interpreted in <i>stricto senso</i>, then, the borrower has to confine himself to the
issue of demand notice issued by the Bank under section 13 (2), the issue of
classification of an Account as NPA based on RBI guidelines, the issue of
objections raised by the Borrower, the reply given by the Bank if any etc.
issues and nothing more than that. If the provisions are seen strictly, then,
the Bank may not even be questioned when it fixes the reserve price and sells
the property for a very low price affecting the borrower and also the Bank at
times. Addressing these concerns, the judiciary has maintained that all actions
initiated by the Bank under the provisions of SARFAESI Act, 2002 can be
challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002.
Technically, if the borrower is silent in questioning the possession notice
issued by the Bank under section 13 (4) of the Act and chooses to question the
Sale Notice, then, the borrower has to confine himself to the procedure
followed by the Bank after the issuance of notice under section 13 (4) and the
issues pertaining to Sale of Secured Asset. When the borrower questions the
sale notice and did not question the notice under section 13 (4) within the
prescribed period, the borrower has to explain as to why he has failed to
question the notice under section 13 (4) within the prescribed period. In the
absence of satisfactory explanation as to why the borrower has failed to
question the possession notice under section 13 (4), his position to raise all
kinds of objections to the Bank’s demand becomes untenable. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">However,
the system has become liberal and courts have also liberally interpreted the
provisions dealing with the ‘right of appeal’ provided to the borrower and the
borrower can question every action initiated by the Bank under the provisions
of SARFAESI Act, 2002. The borrower or any person aggrieved can approach the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> in a
very limited situation where actually there is fraud or serious dispute with
regard to the title of the ‘secured asset’/property mortgaged. Though there can
be no bar on the jurisdiction of High Courts under Article 226 in dealing with
the grievances of the borrower against the Bank when the Bank initiates action,
the High Courts do desist in being alternative to the remedy available before
the DRT normally. As such, there is enough support to the Banks through
legal-framework in recovering their dues from the borrowers. It is true that in
the absence of a special legislation like SARFAESI Act, 2002, it would have
been very difficult for the Banks in recovering their dues and reducing their
NPAs. From the borrowers’ point of view, the borrowers allege that they do not
have an effective remedy against the illegal action being initiated by the Bank
using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT
can look into all allegations while entertaining an appeal under section 17 of
the Act and it includes the issue of disputes pertaining to the actual ‘debt’.
Then, it is also settled that the DRT can order re-possession of the ‘secured
asset’ when it is found that the Bank has illegally taken the possession of the
‘secured asset’. It is very important to look into various stages and issues
when the borrower prefers an appeal under section 17 of the SARFAESI Act, 2002
and those are as follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">When
the borrower prefers an Appeal under section 17 against the Bank, the DRT can
grant ex-parte stay of proceedings against the Bank if there is sufficient
ground to that affect from the averments in the ‘Grounds of Appeal’ and
also the documents produced. If there is a caveat, then, the procedure
differs. Normally, the DRT orders notice to the Bank irrespective of the
fact as to whether it grants stay or not in-favour of the borrower. The DRT can also ask the borrower to
make some deposit while granting stay and it is also reasonable as the borrower
has to make the payments towards installments to the Bank in any case and
there can be some time lapse between the demand notice issued by the Bank
under section 13 (2) and the appeal.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="2" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
Bank files its reply pursuant to the notice ordered by the DRT and they
normally justify their action and say that the action initiated by the
Bank is legal and the Appeal is liable to be dismissed. The Bank also can
ask for vacating the interim order and can pray for allowing the Bank to
continue with the further proceedings like <st1:city w:st="on"><st1:place w:st="on">Sale</st1:place></st1:city>. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="3" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">If
there is no interim order against the Bank while the Appeal is pending and
the Bank is allowed to proceed with the sale proceedings, the issue gets
complicated. The borrower should be allowed to raise any point and
additional grounds by way of additional affidavit in the pending Appeal
and there is nothing wrong in it and technicalities are to be ignored. For
example, the borrower might have chosen to challenge the possession notice
issued by the Bank under section 13 (4) and during the pendency of Appeal,
if the Bank initiates the Sale Proceedings, the borrower should be allowed
to question the Sale Proceedings in the same Appeal instead of bringing
technicalities and asking the borrower to challenge the Sale proceedings
separately. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="4" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Obviously,
during the pendency of SARFAESI Appeal, if the Bank proceeds with the sale
of ‘Secured Asset’, it is likely that the property may not fetch the
actual market value as the bidder discounts all the possible risks
associated with the bidding. If the Bank is able to raise the money and
can get the entire debt recovered through the sale consideration, then,
the Bank is safe and appeal under section 17 literally becomes meaningless
though it is usual to see an order where DRT says that ‘sale confirmation
is subject to the final disposal of Appeal’. Or DRT can allow the Bank to
proceed with the sale of Secured Asset and can say that the ‘sale
confirmation’ is to be stayed until further orders. Instead of doing this,
the DRT can dispose of the SARFAESI Appeal itself as it can ascertain the
facts so fast based on the averments in the SARFAESI Appeal, the documents
filed and the reply presented by the Bank.
Once the SARFAESI Appeal is finally disposed off then, it is not
easy to prefer an appeal against the final order of DRT as the borrower
will have to make pre-deposit with the DRAT which can vary from 50% to 75%
depending upon the discretion of the DRAT. Now, with the provision
enabling the Banks/secured creditors to bid for the property when the sale
is post-phoned for want of bidders, it has become much easy for the Banks
to deal with the ‘secured asset’ and claim recovery. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="5" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
proceedings before DRT can not be compared to the proceedings before <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
and adjudication process before the DRT is simple and can be fast.
However, it is also true that DRT requires time to look into the facts and
read the documents apart from hearing the oral submissions from the Bank.
Additional DRTs and DRATs can be constituted if required rather allowing
the borrower to suffer and feel that the remedy before the DRT and DRAT is
not effective. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="6" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Again,
the DRT can either allow the Appeal filed by the borrower under section 17
or dismiss the same finally. If the DRT allows the Appeal filed by the
borrower under section 17, then, it can order re-possession of the
‘secured asset’ if the physical possession of the ‘secured asset’ is
already taken. The Appeal can be allowed or dismissed either with costs or
without costs. More than this, I don’t think that the DRT can do anything
else or can give any direction to the Bank. For example, the borrower may
be entitled for getting his loan restructured at the given point of time
pursuant to some notification from the ministry of finance or RBI and the
Bank must have ignored it. Even then, the DRT can not direct the Bank to
restructure the loan of the borrower while disposing off the appeal. This
is where the borrower feels remediless at times. If the Bank is to be
asked to do something as per law, where can the borrower go?. The borrower
can give a representation to the Bank officials, can write to the superior
authorities and may approach the High Court under Article 226 of
Constitution of India seeking direction. However, even the High Court may
direct the Banks to consider the representation and with all the might and
luxury, the Bank can make the borrower to run from pillar to post. This
happens in many cases though the factor of habitual litigants can not be
ignored. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="7" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">Very
rarely, the Appeal filed by the borrower gets allowed and even then, the
Bank will again be initiating the proceedings correcting the lacunae. For
example, during the pendency of Appeal under section 17, the borrower may
say that he is willing to regularize his account and abide by the loan
terms and the market value of the ‘secured asset’ can be intact. In such
cases, the Bank is in no way gets effected by regularizing the loan as it
collects the interest and also the legal expenses for initiating the
proceedings. However, the DRT can not give such a direction to the Bank
though it can orally ask the Banks to consider the proposal of the
borrower. Now with the recent amendments, the Secured Creditor is enabled
with the right of filing ‘Caveat’ and it presents many difficulties to the
borrower and it becomes now literally impossible to get an ‘ex-parte stay
order’ against the Bank. And also, it has become very easy for the Banks
to sell the ‘secured asset’ as there is no need of following separate
procedure of Sale if the ‘Sale’ is postponed for want of bidders etc.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
is quite possible to ensure a system or practice under the provisions of
SARFAESI Act, 2002 which is fair and also effective. If the ‘secured asset’ is
valuable, then, there can not be any worry to the Bank at all as it can recover
the dues with interest and expenses. If the ‘secured asset’ is not valuable in
comparison to the dues recoverable, then, the officials of the Bank are to be
blamed as to how they have sanctioned the loan in the first place. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Emphasis
is always laid as to how to enable the Banks to speed-up their recovery, but,
little emphasis is laid as to how the borrower feels remediless in some cases. Even
while providing the best possible legal-framework enabling the Banks to recover
their dues, the concerns of the borrower can certainly be addressed and it is
very much possible. From the borrowers’ point of view, the following issues
need to be considered. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">a.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The Appeal mechanism under the
provisions of SARFAESI Act, 2002 can be liberal and the borrower should be
allowed to question every action initiated by the Bank under SARFAESI Act, 2002
without raising any technicalities like condonation of delay etc. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">b.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">It should be mandatory on the part of
the Banks to mention marketability and market price/price of the ‘secured
asset’ in its reply to the appeal of the borrower under section 17 among other
things.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">c.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">There should be time-limit for the
Banks in filing their reply in an appeal under section 17 of the Act and in the
absence of filing the reply within the specific period, the proceedings of the
Bank under SARFAESI Act against the borrower should automatically be stayed. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">d.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">Though there is a time-limit for
disposing the Appeals under section 17 in the Act, the disposal normally takes
time. If work-load in the DRTs and DRATs is the main cause for the delay, then,
additional DRTs and DRATs can be constituted and so that, Appeals under section
17 and under section 18 of the Act can be disposed of as quickly as possible. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l1 level1 lfo2; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">e.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The scope of powers of the presiding
officer of DRT under section 17 should be expanded further and it should
include giving suitable directions to the Bank from time to time keeping the
need of ‘recovery of dues’ in mind. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">With
the system aimed at speedy recovery and balanced heavily towards the Bank,
genuine borrowers who are not willful or habitual defaulters also get affected.
The borrowers feel remediless now and even if the remedy is provided, most of
the borrowers feel that the remedy provided is ineffective. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">While
it is important to improve the financial health of the Banks/Financial
Institutions, there is no justification for a completely one-sided draconian
legal system where the borrower is harassed like anything. Bank officials
exercise great discretion and the Bank officials must be extremely happy with
the legal provisions now governing the recovery of ‘secured loans’ under
SARFAESI Act, 2002. It has become totally one-sided affair now and ordinary
citizens & small businesses may feel it better to approach the private
money leaders for their financial needs rather approaching Banks and Financial
Institutions in this country. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">I
expect constitutional courts to entertain certain important issues under
SARFAESI Act, 2002 in public interest rather supporting every view of the
government. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> the views expressed are my personal.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com9tag:blogger.com,1999:blog-5623384825844985559.post-81350945656252691192012-08-22T23:59:00.003-07:002012-08-23T00:00:31.278-07:00Can a Bank go back from the promise of ‘Settlement of Default of Debt’ or ‘Settlement of Debt’?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
is known that while some loan transactions with the Bank like Housing Loan,
Educational Loan etc. are very simple, some commercial loan transactions are
very complex in nature. The Bank may provide various loan facilities to the
Borrower and most of these commercial loans are complex to understand and these
loans infact involve many complexities. When a Businessmen or a Corporate gets
various loan facilities and if there is a default or allegation of default with
regard to a particular loan facility, the Bank proceeds against the borrower
and claims for the settlement of entire outstanding debt in respect of all
facilities. The Banks use the provisions of “Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act)” which appear to be draconian in some cases while the Act is justified
from another angle. Irrespective of the
long standing relation of creditor and borrower, in some cases, the Bank may be
unreasonable towards a borrower and may insist for recovery of the entire
outstanding dues even if the borrower commits a default in respect of only one
facility among many other facilities extended to the same borrower. The Bank
may say that they will proceed ‘borrower-wise’ in classifying any Account as
‘Non-performing Asset’ and proceed with the recovery process under the provisions
of SARFAESI Act, 2002. Banks or the officers concerned do exercise some
discretion in this regard while the Bank or the officers are left with no
discretion in respect of few other cases. The Bank has to follow the RBI
guidelines and the RBI circulars having binding nature from to time. It is
known that the Banks should follow the guidelines of ‘Asset Classification’
prescribed by the Reserve Bank of <st1:country -region="-region" w:st="on"><st1:place w:st="on">India</st1:place></st1:country> in classifying any loan
account as ‘Non-performing Asset’. The guidelines never intended to unnecessarily
and unreasonably harass the borrowers. The guidelines refers to the
significance of looking at ‘risk factor’, the ‘value of security’, track record
of the borrower and even getting the loan Account updated though Bank usually
follows their internal guidelines. <o:p></o:p></span></div>
<br />
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">In
some cases, the borrowers do not want to litigate the issues with the Bank and
may try their level best to get the default rectified and may try to get the
account settled finally under ‘One-time Settlement Scheme’. The Bank or the
officers concerned in most of the cases maintain written or oral communication
with the borrowers when there is default. The borrowers, in-turn, explains
their difficulties in view of their long standing relationship with the Bank
and may seek some relaxation and may seek indulgence of the Bank to rectify the
default in repayment. This communication or negotiation happens before
classifying any loan Account as “Non-performing Asset” and even after the
classification of account as NPA and before initiating the proceedings under
the provisions of SARFAESI Act, 2002. In some cases, the borrowers negotiate
with the Bank for rectifying the default or for a ‘final settlement’ even after
the issuance of demand notice by the Bank under section 13 (2) of the Act. This
is the reason as to why there is delay on the part of the Bank in proceeding with
the recovery under the provisions of SARFAESI Act, 2002 even after the issuance
of demand notice under section 13 (2). When a borrower intends to avoid
litigation, he may listen or act upon the oral understanding with the
officials. Sometimes, the understanding for ‘rectification of default’ or ‘settlement
of loan’ can be in writing also. While the ‘rectification of default’ is oral
in most of the cases, the ‘final settlement of the account’ is in writing
normally. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">‘Settlement of Default of
Debt/Regularisation’:</span></b><span style="font-family: "Bookman Old Style";"><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
is frequently alleged now-a-days by the borrowers that the Bank or the officers
of the Bank agrees for the ‘settlement for rectification of default’, receives
the money from the borrower and later-on, insists for the full settlement of
the outstanding due. Inspite of updating the loan account, the Bank may choose
to proceed under the provisions of SARFAESI Act, 2002 and may say that they are
acting on the basis of classification and they never agreed for ‘regularizing
the loan account’. This happens even after the demand notice issued under
section 13 (2). Even after the demand notice, the borrower can negotiate with
the Bank and the Bank may receive some substantial amount of money in-between
and even then, suddenly may choose to proceed with the issuance of notice under
section 13 (4). These are the usual allegations from the borrowers against the
Bank when it comes to ‘regularization of loan accounts’. The allegation in some cases is that the
Banks goes back from their promise and in some cases, the Bank is not
co-operating for regularization as even the RBI guidelines refer to the
regularization if other factors like the track-record, risk-factor, value of
security etc. are justified. Another thing is that the intention behind giving
notice to the borrower under section 13 (2) of the Act is to invite objections
if any. Law mandates the Bank to give a reasoned reply to the objections raised
by the borrower under section 13 (3A). But, what happens is that the Banks
agree for some kind of settlement either orally or in writing even after the
issuance of notice under section 13 (2). Later on, after a gap of some one year
and when the borrower makes the substantial payment, the Bank acts upon the
demand notice and issues a possession notice under section 13 (4) of the Act.
This is infact incorrect. If something notable has taken place with regard to
the recovery of loan after the issuance of notice under section 13 (2) and if
the Bank is silent in acting on section 13 (2) for a considerable time in view
of the payments made by the borrower, then, it is incumbent upon the Bank to
issue the demand notice afresh taking note of subsequent developments and this
fresh demand notice under section 13 (2) of SARFAESI Act can give an
opportunity to the borrower to include his objections afresh without taking a
direct recourse to an appeal to Debt Recovery Tribunal (DRT) or without having
to approach the High Court seeking intervention at times. But, this is not
happening. In most of the cases, unless the Debt Recovery Tribunal sets the
SARFAESI proceedings aside, the Banks do not issue demand notice twice under
section 13 (2) and instead acts upon the demand notice issued earlier irrespective
of time gap or lapse. These are the usual problems being faced by the borrowers
in getting his or their account regularized or updated. The borrowers are
infact left with no remedy in these cases as the scope of powers of DRT under
section 17 of the Act does not include the power to give direction to the Banks
to agree for regularization. These kinds of cases mostly come to High Court and
the High Courts usually issues suitable directions noting the interests of the
Bank and the rights and plight of the borrower. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">‘Settlement of Debt/One-time
Settlements’:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">The
second issue is with regard to ‘final settlement of debts’. In many cases,
Banks are going back from their promise of ‘one-time settlement’. The Banks
agree for ‘final settlement of account’ with the borrower. The Banks may ask
the borrower to give an offer letter in a format and with some averments and
then, the Banks will agree for settlement. When the substantial amount is paid,
the Banks may say and are saying in most of the cases that the RBI guidelines
do not allow them to get the account settled under ‘One-time Settlement’.
Again, the Banks may say that the borrower has not disclosed all the facts with
the Bank while coming forward with the ‘One-time Settlement Proposal’. Once the
settlement proposal is agreed, the Banks will be very silent till the
substantial amount is deposited with the Bank and finally, they can say that
they do not have right to go for ‘settlement’ or can blame the borrower that he
has not disclosed the whole facts. These
things do happen regularly now-a-days. The DRT normally do not look into these
issues and the DRT may at best, look at the procedural irregularities if any
and even the disputes pertaining to outstanding are not entertained as such
though the DRT can look into those issues. The DRT normally goes with the stand
taken by the Bank unless the Bank is apparently wrong in their approach. Public
Sector Banks should concentrate on the recovery of money and at the same time,
can not harass the borrowers who are willing to get their accounts regularized
or willing to get their account finally settled. Even, the RBI guidelines hint
at this. When there is security lying with the Bank and when original documents
are with the Bank, the Banks pressurize the borrowers with all kinds of things
and using the provisions of SARFAESI Act, 2002 to their advantage. The DRT in
these cases proves to be ineffective and the borrower is not entitled to
approach the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
in these cases in view of the bar under section 34 of SARFAESI Act, 2002.
Though there is a scope for the Civil Court to entertain even the SARFAESI
related matters in some cases in a limited sense pursuant to the Mardia
Chemical’s case, it is very difficult to persuade the Civil Court with regard
to its jurisdiction in SARFAEI matters and this can be attributed to the lack
of expertise on the part of the Civil Courts with the Securitisation Law. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Conclusion:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">When
there is a borrower willing to get his account regularized and willing for
settlement, the Banks can not harass those borrowers. In most of the cases,
where the borrowers allege wrong treatment or breach of promise on the part of
Banks with regard to ‘settlement for regularization’ and ‘final settlement of
outstanding due’, the borrowers do approach the High Court and in most of the
cases, High Courts do justice to the Petitioner or the borrower keeping the
interests of the Bank and borrowers in view. High Courts are very careful in
interfering with the SARFAESI proceedings initiated by the Banks as it can not
be seen as an alternative to the Debt Recovery Tribunals (DRTs). But, in fit
cases, the High Courts may not agree with the arguments of the Banks with
regard alternative forum and may exercise the jurisdiction under Article 226 of
Constitution of India. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">The
issue as to whether the Banks can go back from the ‘settlement of default’ or
‘settlement of loan’ will depend upon the facts of the case and especially the
contents of written offer and agreement by the Banks. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> the views expressed are my personal.</span></div>
</div>
V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com15tag:blogger.com,1999:blog-5623384825844985559.post-45383708405998777552012-08-22T04:26:00.001-07:002012-08-22T04:26:30.417-07:00Points to be raised in a SARFAESI Appeal and getting relief?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
has almost settled and become like a regular practice for the borrowers to
question the proceedings initiated by the Banks at the last stage under the
provisions of “Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. In fact, the law
mandates that the aggrieved can approach the Debt Recovery Tribunal under
section 17 of the SARFAESI Act, 2002 within 45 days from the date of issuance
of notice under section 13 (4) of the Act. However, as the process of recovery
of money do not end at the issuance of section 13 (4) of the Act and as it is
likely that the Bank can commit mistakes in the process and process even after
the issuance of notice under section 13 (4), it is settled that the borrower is
entitled to question all steps initiated by the Bank under the provisions of
SARFAESI Act, 2002. The borrowers have started questioning the Sale Process
conducted by the Bank and also started questioning the order of the Magistrate
under section 14 of the Act before the High Court regularly and as a result,
the Courts have consistently held that the borrower is entitled to question all
the steps initiated by the Bank under the provisions of SARFAESI Act, 2002. There
is another point in this. If the borrower is silent even after the receipt of
notice under section 13 (4) and do not prefer any appeal, there can be an
argument from the Bank that there is nothing wrong in the proceedings initiated
by the Bank till the notice under section 13 (4). If such an argument is
accepted and if the borrower is silent even after the receipt of notice under
section 13 (4) of the Act, then, the scope of Appeal preferred by the borrower
at a subsequent stage gets narrowed-down. If the Borrower challenges the Sale
Process only, the borrower may have to confine himself to the illegalities
committed by the Bank in the Sale Process. However, if the borrower could offer
some kind of explanation as to why he could not challenge the proceedings
initiated by the Bank under section 13 (4) of the Act, then, he must be allowed
to raise all the points in his Appeal under section 17 of SARFAESI Act, 2002. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">When
an Appeal is prepared or preferred under section 17 of the SARFAESI Act, 2002,
there will be usual grounds with the intention of getting some time to repay
the loan. The usual grounds are vague and are like:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="1" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
borrower is not a willful defaulter.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="margin-left: .25in; text-align: justify;">
<br /></div>
<ol start="2" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
classification of Account as ‘Non-performing Asset (NPA)’ is incorrect.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="3" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
interested charged is exorbitant. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="4" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">No
notice or caution is issued by the Bank before classifying the Account as
‘NPA’.<o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="5" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
outstanding claimed by the Bank is incorrect. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="6" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
value of the ‘secured asset’ mortgaged with the Bank is much more than the
outstanding loan. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<ol start="7" style="margin-top: 0in;" type="1">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Bookman Old Style";">The
Bank has not issued any notice or demand notice under section 13 (2) or 13
(4) of the Act etc. <o:p></o:p></span></li>
</ol>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">These
are the usual grounds in any SARFAESI Appeal preferred by the borrower under
section 17 of the Act. As the law is settled that the procedure prescribed
under the provisions of SARFAESI Act, 2002 is mandatory, the Debt Recovery
Tribunal has to give a serious thought to the averment made in the Appeal that
no demand notice is received by the borrower under section 13 (2) or 13 (4). If
that is established, then, the Appeal deserves to be allowed straight-away and
without any further enquiry. But, for knowing this, the DRT may give notice to
the Bank to file their counter and to ascertain the truth. This process will
take time as there will be a procedure for the paper work done legally in any
Public Sector Bank. At times, it may take few months also. In view of the averments in the Appeal that
no notice is issued under section 13 (2) or 13 (4), the DRT may consider
granting relief to the Appellant or the borrower. While doing so, the Debt
Recovery Tribunal will consider the outstanding payable, the security and the
averments with regard to the value of security mortgaged with the Bank. In view of these practical and procedural
difficulties, the DRT may be forced to grant an interim-stay of further
proceedings initiated by the Bank and the DRT may insist that the borrower
remits some deposit and usually it can be from 10% to 30% depending upon the
discretion of the DRT. It all depends upon the averments made in the Appeal. It
would be extremely difficult for the DRT to ascertain the facts by looking at
the averments in the Appeal and if the DRT refrains from granting any
interim-order, then, there is a possibility that the Bank proceeds with the
process and even can complete the Sale Process at times creating some third
party interest which will further complicate issues.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">But,
when a borrower is serious in raising objections in his appeal under section
17, those objections to be in detail and specific. If the grounds in an Appeal
under section 17 of SARFAESI Act, 2002 are mechanical and vague, then, it is
very much possible for the DRT to come to an easy conclusion that the Appeal is
preferred only to drag the proceedings and nothing more. In those
circumstances, as soon as the Bank files its counter affidavit answering all
the allegations in the Appeal preferred under section 17, the DRT may dismiss
the Appeal. If the Appeal grounds are so vague and mechanical, it would be very
difficult for the borrower to bring any new or additional facts in any further
appeal proceedings before the DRAT or to the High Court subsequently. However,
if the borrower chooses to file an appeal challenging the possession notice
issued by the bank under section 13 (4) and while the Appeal is pending if the
Bank goes ahead with further process with infirmities and illegalities, then,
the Borrower is entitled to bring those further infirmities and illegalities in
the form of an additional affidavit in the Appeal. As such, when the borrower
is serious in his attempt to fight with the Bank challenging the SARFAESI
proceedings under section 17 of the Act, pleadings to be detailed and perfect
rather mechanical and vague. Even the DRT may not give much weight to the
Appeal and the equities beyond a certain point if the grounds raised in the
Appeal under section 17 are so vague and mechanical. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">There
may be instances where the borrower is not interested to fight with the Bank
and instead may want to update the loan account and he must even have taken
steps to do that. Under such circumstances, if the Bank is unreasonable and
proceeds with their proceedings, then, the borrower can very well stick to his
stand very firmly that he is not willful defaulter, has a fairly good track
record in repayment issues, has the valuable security lying with the Bank and
can continue to insist that the Bank is illegal in not agreeing to update the
Account. It is a very interesting point if this stand is taken before the DRT.
The DRT is empowered with certain powers under section 17 while entertaining an
appeal from the borrower or any aggrieved person. Initially, the function of
the DRT is to look into the procedural lapses committed by the Bank and nothing
more. Later-on, the Courts have expanded the scope of powers of DRT and held
that the DRT can look into the disputes pertaining to the outstanding claimed
and all other issues and the DRT is even empowered to restore the possession
back to the borrower if the physical possession of the property is taken by the
Bank already. However, the DRT continues to exercise very limited powers and
due this also; many Writ Petitions are filed to the High Court and even on
SARFAESI issues, the High Courts issue directions to the Bank very frequently.
While the DRT exercises some limited powers, there can not be any limitation on
the powers or the power to issue directions by the High Court from time to time
under Article 226 of Constitution of India. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Irrespective
of the powers of the DRT under section 17 of SARFAESI Act, 2002, the borrowers
should take-up all possible legal points in detail to the extent possible. Only
due to the confusion with regard to the powers of DRT under section 17, the borrowers
continue to approach Civil Courts at times and continue to approach the High
Court very regularly. There can be a case where the borrower admits the minor
default in repayment, he must have been other-wise good in repayment issues and
must have expressed his willingness to update his account without raising any
kind of litigation. If such is the attitude of the borrower, then, the borrower
may prefer to approach the High Court seeking a suitable direction to allow him
to get his account updated as even the RBI guidelines permit that and cautions against
unnecessary harassment to the borrowers using technicalities. If this kind of
cases are taken to DRT, then, apart from the expenses involved, the procedure
before the DRT is different and the procedure delays the efforts of the
borrower to get his account updated and the DRT may finally choose to look into
the issue as to whether there is any procedural irregularity on the part of the
Bank under the Act. An account which should have been updated very easily, may
end-up as ‘Non-performing Asset’ forcibly and can lead to long litigation with
the DRT, DRAT, High Court and Supreme Court and more interim applications
in-between. It will not benefit either the borrower or the Bank and the Bank
must be with the intention that they can recover the legal expenses incurred
from the borrower finally.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">As
such, the borrowers should be very clear in their approach and should be
careful in raising objections in their Appeal under section 17 of the SARFAESI
Act, 2002. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> the views expressed are my personal. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com7tag:blogger.com,1999:blog-5623384825844985559.post-8843216582945857852012-07-20T02:25:00.001-07:002012-07-20T02:25:35.294-07:00Simultaneous proceedings under section 397/398?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">It
is known that section 399 of the Companies Act, 1956 entitles minority
shareholders, subject to the qualification prescribed, to approach the Company
Law Board (CLB) under section 397/398 of the Companies Act, 1956 seeking relief
against the ‘oppression and mis-management’ from the majority shareholders in
the Company. As majority shareholders effectively controls the Board through
their say in General Body Meetings, the protection to the majority is not
envisaged though even the majority can approach the Company Law Board under
section 397/398 of the Companies Act, 1956 when they become artificial minority
under certain circumstances. There were several principles and precedents
developed over the time on the scope of section 397/398 of the Companies Act,
1956 and these proceedings are seen as most complex usually. Though even the
liquidation proceedings exercised by the High Court are complex at times, the
proceedings under section 397/398 of the Companies Act, 1956 are really complex
as the Board would be exercising its power to ‘put an end to the matters
complained of’. Dealing with the scope of the provisions dealing with the
‘oppression and mismanagement’ under Companies Act, 1956, the Hon’ble Bombay
High Court in <i>Mauli Chand Sharma and another Vs. Union of India and others,
(1977) 47 Com Cases 92, </i>has held
that:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">“chapter
II of the Act, which includes section 255, deals with corporate management of
the company through directors in normal circumstances, while Chapter VI, which
contains sections 397, 398 and 402, deals with emergent situations or
extraordinary circumstances where the normal corporate management has failed
and has run into oppression or mismanagement and steps are required to be taken
to prevent oppression and/or mismanagement in the conduct of the affairs of the
company. In the context of this scheme having regard to the object that is
sought to be achieved by sections 397 and 398 read with sections 402, the
powers of the court under can not be read as subject to the provisions
contained in the other chapters which deal with normal corporate management of
a company. Further, an analysis of the sections contained in Chapter VI of the
Act will also indicate that the powers of the court under sections 397 and 398
read with section 402 can not be read as being subject to the other provisions
contained in sections dealing with usual corporate management of a company in
normal circumstances. The topic or subjects dealt with by sections 397 and 398
are such that it becomes impossible to read any such restriction or limitation
on the powers of the court acting under section 402. Without prejudice to the
generality of the powers conferred on the court under these sections, section
402 proceeds to indicate what types of orders the court could pass. Under
clause (a) of section 402, the court’s order may provide for the regulation of
the conduct of the company’s affairs in future and under clause (g) the courts
order may provide for any other matter for which in the opinion of the court it
is just and equitable that provision should be made. An examination of the
aforesaid sections brings out two aspects; first, the very wide nature of the
power conferred on the court, and secondly, the object that is sought to be
achieved by the exercise of such power, with the result that the only
limitation that could be impliedly read on the exercise of the empower would be
that nexus must exist between the order
that may be passed thereunder and the object sought to be achieved by those
sections and beyond this limitation which arises by necessary implication it is
difficult to read any other restriction or limitation on the exercise of the
court’s power. Further, section 397 and 398 are intended to avoid winding up of
the company if possible and keep it going while at the same time relieving in
minority shareholders from acts of oppression and mismanagement or preventing
its affairs being conducted in a manner prejudicial to public interest and, if
that be the objective, the court must have power to interfere with he normal
corporate management of the company, and to supplant the entire corporate
management, or rather, mismanagement, by resorting to non-corporate management
which may take the form of appointing an administrator or a special officer or
a committee of advisers, etc., who would be in charge of the company”. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Though
I am not going to deal with many issues under section 397/398 of the Companies
Act, 1956, it is very important to understand two important pre-requisites to
maintain a petition under section 397/398 and those are as follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: 54.75pt; mso-list: l1 level1 lfo2; tab-stops: list 54.75pt; text-align: justify; text-indent: -18.75pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(1)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">Minority shareholders approaching CLB
should establish clearly that they hold the requisite qualification under
section 399. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: 54.75pt; mso-list: l1 level1 lfo2; tab-stops: list 54.75pt; text-align: justify; text-indent: -18.75pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(2)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">Minority shareholders approaching the
CLB should establish a prima-facie case though no case gets dismissed
now-a-days on the issue of ‘non-establishment’ of prima-facie case as it can
amount to giving a finding on the main petition itself at times. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">If
we keep the qualification issue apart, it is long been settled that ‘an
isolated incident’ can not entitle the minority shareholders to approach the
Board under section 397/398 of the Act. There are several precedents on the
issue though a lenient view is taken now-a-days on the issue of ‘continuity of
acts’. Even isolated incident in the Company can lead to the intervention of
the CLB under section 397/398 of the Companies Act, 1956 depending on as to how
the Board considers the effect of that incident. It establishes a point that
there can be issues between the minority and majority which can be settled
before any other forum like Civil Court etc. without invoking the jurisdiction
of Company Law Board under section 397/398. There can be an issue of
enforcement of an agreement between two groups in the Company and that dispute
can be settled through a <st1:street w:st="on"><st1:address w:st="on">Civil
Court</st1:address></st1:street> or by an Arbitrator if the agreement
contains an Arbitration Clause. Thus, if the disputes erupt between the groups
in the Company, then, one group may file a Criminal Complaint on the other group,
may file a Civil Suit and even can ask for an appointment of arbitrator to look
into the disputes if the cause for the dispute is with regard to the
‘enforcement of any specific agreement’. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Res-subjudice &
Res-judicata:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">The
point is as to what is the effect of pending or concluded legal proceedings to
the proceedings under section 397/398 of the Companies Act, 1956. Can the Board
ignore the findings of concluded proceedings? Can the Board give a different
finding on the issue concluded by other forum?. Can the Board ignore the
pending legal proceedings between the minority and majority? Etc. The issue of
approaching two forums with the same relief and seeking the same relief
concluded by the competent forum are dealt-with under section 10 and 11 of
Civil Procedure Code, 1908 and those are reproduced below without explanations.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">“10. Stay of Suit –</span></b><span style="font-family: "Bookman Old Style";"> No court shall proceed with the trial
of any suit in which the matter in issue is also directly and substantially in
issue in a previously instituted suit between the same parties, or between
parties under whom they or any of them claim litigating under the same title
where such suit is pending in the same or any other Court in India having
jurisdiction to grant the relief claimed, or in any court beyond the limits of
India established or continued by the Central Government and having like
jurisdiction or before the Supreme Court.”<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">“11. Res Judicata –</span></b><span style="font-family: "Bookman Old Style";"> No court shall try any suit or issue
in which the matter directly or substantially in issue has been directly or
substantially is in issue in a former suit between the same parties, or between
the parties under whom they or any of them claim, litigating under the same
title, in a court competent to try such subsequent suit or the suit in which
such issue has been subsequently raised, and has been heard and finally decided
by such court.” <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">These
two principles are so important in a proceeding under section 397/398 of the
Companies Act, 1956 though now-a-days it is rare to see a litigation pending in
a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
between the minority shareholders and majority or the Company. Certain settled
legal principles like <i>Res subjudice </i>and
<i>Res judicata</i> are to be followed by
any judicial authority or quasi-judicial authority as it is supported by sound
logic. This is similar to the ‘principle of natural justice’. However,
application of these principles to the proceedings under section 397/398 of the
Companies Act, 1956 are most complex and the Board exercises lot of discretion
in this regard making a balance between the settled legal principles and the
object of section 397/398. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Simultaneous
jurisdiction:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Explaining
a to how the shareholders are entitled to approach Civil Court or Arbitrator at
times and as to how the CLB too has power to look into the issue, the Court in <i>CDS Financial Services (Mauritius) Limited
Vs. BPL Communications Limited and others, (2004) 121 Comp Cases 375, </i>has
held that:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">“when
there is no express provision excluding the jurisdiction of the civil courts,
such exclusion can be implied only in cases where a right itself is created and
the machinery of enforcement of such right is also provided by the statute. If
the right is traceable to the general law of contracts or it is a common law
right, it can be enforced through the civil court, even though the forum under
the statute also will have jurisdiction to enforce that right. Sections 397,
398 and 408 of the Companies Act, 1956, do not confer exclusive jurisdiction on
the company court to grant reliefs against oppression and mismanagement. The
scope of these sections is to provide a convenient remedy for minority
shareholders under certain conditions and the provisions therein are not
intended to exclude all other remedies”. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Possible misuse:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">With
the simultaneous jurisdiction and shareholders having a scope to approach <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> or
Arbitrator and also approach CLB at times, there is a possibility for
converting the jurisdiction of CLB under section 397/398 to that of a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>. It is
very much possible as even isolated incidents are considered under section
397/398 of the Companies Act, 1956 though it depends upon as to how the CLB
views it. Though it was a case of
exercise of powers by Company Court, dealing with the similar issue, the Court <i>in B.Ramachandra Adityan Vs. Educational
Trustee Co. (P) Ltd and another, (2003) 5 Comp LJ 413 (Mad</i>), has held that:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">“It
is, no doubt, true that the scope of the civil suit is different as the
proposed suit is one under the general law and the scope of the company
petition is different. But, it will not be open to convert the proceedings in
the company Court, which are summary in nature and to use the finding arrived
at in the summary proceeding, if it is favourable to the petitioner, in the
civil proceeding. It is in the sense that the proceedings under the company law
are an abuse of the process of the court and it is well settled that the
proceeding herein can not be used for some oblique or some extraneous purpose”.<b><o:p></o:p></b></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-family: "Bookman Old Style";">Striking a balance:<o:p></o:p></span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Dealing
with the issue, the Company Law Board in <i>RDF
Power Projects Ltd. and others Vs. M.Murali Krishna and others, (2005) 4 Comp
LJ 97 (CLB</i>),<b> </b>has held that: <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><i><span style="font-family: "Bookman Old Style";"> </span></i></b><span style="font-family: "Bookman Old Style";">“the
object of section 10 of the Code of Civil Procedure 1908, is to avoid
conflicting decisions of two competent courts over the same matter and save the
time of the court, where the subsequent proceedings are initiated in the same
matter. By virtue of section 10, a court shall not proceed with the trail of a
suit in which the matter is directly and substantially the same as the one in
issue in a previously instituted pending between the same parties or parties
under whom they claim to litigate under the same title. The following are
essential conditions for application of the provisions of section 10:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: 55.5pt; mso-list: l0 level1 lfo1; tab-stops: list 55.5pt; text-align: justify; text-indent: -19.5pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(a)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">There must be two pending suits on the
same matter.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 55.5pt; mso-list: l0 level1 lfo1; tab-stops: list 55.5pt; text-align: justify; text-indent: -19.5pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(b)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">These suits must be between the same
parties or parties under whom they or any of them claim to litigate under the
same title.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 55.5pt; mso-list: l0 level1 lfo1; tab-stops: list 55.5pt; text-align: justify; text-indent: -19.5pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(c)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The matter in issue must be directly
and substantially the same in both the suits.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 55.5pt; mso-list: l0 level1 lfo1; tab-stops: list 55.5pt; text-align: justify; text-indent: -19.5pt;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">(d)<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The suits must be pending before the
competent court or courts.”<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style";">Further,
the Board has observed that “in the light of the provisions of section 10, the
subject matter involved both in the <st1:street w:st="on"><st1:address w:st="on">Civil
Court</st1:address></st1:street> and the Company Law Board must be examined”.
Further, the Board went on observing that “a careful analysis of the issues
both before the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
and the Company Law Board would indicate that the whole of the subject matter
in these proceedings is not identical. Section 10 is not attracted if one or
some of the issues are in common as held by the courts in a number of
decisions. The entire subject-matter of the company petition is not covered by
the previously instituted suit. It is free from doubt that there is no
substantial identity of the subject-matter before the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> and the Company Law Board. The
only issue before the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
is in regard to the right of the second applicant to continue in the office of
the managing director of the company. As a result the petitioners shall not
interfere in the functioning of the company. Thus, none of the other
contentious issues raised in the company petition is before the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>.
Therefore, the decision of the <st1:street w:st="on"><st1:address w:st="on">Civil
Court</st1:address></st1:street> will not definitely affect the decision in
the present company petition, save the continuance of second applicant as the
managing director, in which case it can not be said that the matter in issue is
directly and substantially is the same in both the proceedings. Section 10
would only apply, in my view, where the decision in previous suit will
definitely affect the decision in the later proceedings. Moreover, sections 397
and 398 provide adequate relief to the aggrieved members on account of the
possible oppression by the majority and a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> can not usurp the powers of a
<st1:street w:st="on"><st1:address w:st="on">Company Court</st1:address></st1:street>,
whose jurisdiction brings from an enactment of Parliament and adjudge common
law rights on a prior</span> <span style="font-family: "Bookman Old Style";">consideration”.</span>
</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Conclusion:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l2 level1 lfo3; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">1.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The CLB can certainly look into the
concluded proceedings, but, can not give a different finding on the same issue
concluded by a <st1:street w:st="on"><st1:address w:st="on">Competent Court</st1:address></st1:street>.
<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l2 level1 lfo3; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">2.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">The Petitioners approaching the CLB can
refer to the concluded proceedings; however, the petitioners may not be able to
get a relief with the similar or same grievances raised in the concluded
proceedings. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l2 level1 lfo3; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">3.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">Irrespective of pendency of any
proceedings between the majority and the minority, the CLB can entertain a
petition under section 397/398 of the Act and the CLB will take an appropriate
decision as to the issue of grant of relief or the maintainability of a
petition under those circumstances. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l2 level1 lfo3; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: "Bookman Old Style"; mso-bidi-font-family: "Bookman Old Style"; mso-fareast-font-family: "Bookman Old Style";">4.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><!--[endif]--><span style="font-family: "Bookman Old Style";">When it comes to the issue of applicability
of settled legal principles like <i>Res
Judicata</i> or <i>Res Judice</i>, the CLB
will exercise its discretion based on the facts of the case and no hard and
fast rule can be laid in this regard. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: "Bookman Old Style";">Note:</span></b><span style="font-family: "Bookman Old Style";"> The views expressed are my personal. <o:p></o:p></span></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com50tag:blogger.com,1999:blog-5623384825844985559.post-81516585973988881012012-07-16T04:26:00.001-07:002012-07-16T04:26:21.978-07:00Petition under section 397/398 - Subsequent events - Scope?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Section 397/398 of the Companies Act, 1956
provides relief to the minority shareholders against the oppressive actions of
the majority and the mis-management in the company. Section 399 of the
Companies Act, 1956 deals with the issue as to who can approach the Company Law
Board (CLB) seeking relief under section 397/398 and other connected provisions.
Section 399 of the Companies Act, 1956 is reproduced below:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">“Sec. 399
- Right to apply under sections 397
and 398.</span></b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"> <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(1) The following members
of a company shall have the right to apply under section 397 or 398: <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(a) in the case of a
company having a share capital, not less than one hundred members of the
company or not less than one-tenth of the total number of its members,
whichever is less, or any member or members holding not less than one-tenth of
the issued share capital of the company, provided that the applicant or
applicants have paid all calls and other sums due on their shares;<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(b) in the case of a
company not having a share capital, not less than one-fifth of the total number
of its members.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(2) For the purposes of
sub-section (1), where any share or shares are held by two or more persons
jointly, they shall be counted only as one member.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(3) Where any members of
a company are entitled to make an application in virtue of sub-section (1), any
one or more of them having obtained the consent in writing of the rest, may
make the application on behalf and for the benefit of all of them.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(4) The Central
Government may, if in its opinion circumstances exist which make it just and
equitable so to do, authorise any member or members of the company to apply to
the Company Law Board under section 397 or 398, notwithstanding that the
requirements of clause (a) or clause (b), as the case may be, of sub-section
(1) are not fulfilled.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">(5) The Central
Government may, before authorising any member or members as aforesaid, require
such member or members to give security for such amount as the Central Government
may deem reasonable, for the payment of any costs which the Company Law Board
dealing with the application may order such member or members to pay to any
other person or persons who are parties to the application.”<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">Though oppression and mis-management have been dealt-with
separately under section 397/398 of the Act, those are inter-connected and it
is settled that a composite petition is maintainable under section 397/398 of
the Companies Act, 1956. In a petition under section 397/398 of the Companies
Act, 1956, petitioners usually seek relief under section 111A and also under
section 237 of the Companies Act, 1956 seeking investigation into the affairs
of the Company. Section 402 of the Act details as to the powers of the Company
Law Board under section 397/398 of the Act, however, it is settled that section
402 can not limit the powers of the Company Law Board under section 397/398. In
the light of the fact that it is very difficult for anyone or even the minority
shareholders to get a relief from a Civil Court on disputes between the
majority and minority shareholders in view of the inordinate delay in courts
and lack of expertise, CLB is the only hope for the minority shareholders to
get their interests in the Company protected. Minority shareholders can
approach the Central Government seeking intervention, but, the Government
rarely entertains such pleas. There is criticism from various stake-holders at
powers being exercised under section 397/398 of the Act and the criticism, in
brief, is as follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">From
minority:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></b></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">The relief provided under section 397 and 398 is not
effective. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">CLB too insists on technicalities.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">There is a delay in conduct of proceedings even before
CLB.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">There are problems with the execution of orders.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">From
majority:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></b></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">Section 397/398 of the Companies Act, 1956 is often
mis-used and a false petition can have disastrous effect on the growth and
survival of the Company at times. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">The minority shareholders take advantage of
technicalities and gets relief even though equity is not in their side. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; font-size: 12.0pt; mso-bidi-font-family: Symbol; mso-bidi-language: TA; mso-fareast-font-family: Symbol;">·<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><!--[endif]--><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">As the CLB entertains petitions under section 397/398
loosely without looking at the merits and keeps the petition pending, the
majority or the company can suffer irreparable damage. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">Despite criticism, one should understand that the CLB
performs very difficult functions under section 397/398 of the Companies Act,
1956 and the CLB should balance the interests of the minority with the rights
of the majority to have a say in the administration of the Company. The delay
in disposal of petitions is caused due to the complexity of proceedings under
section 397/398 of the Companies Act, 1956 and it would be very difficult to
dismiss the petition prima-facie without ascertaining the facts as section
397/398 is meant to protect the interests of the minority shareholders. According
to me, if we look at the precedents earlier and the orders of the Board, too
much technicalities were stressed and followed. I think that it is not the case
anymore and the CLB is guided with the ‘principles of natural justice’ and it
will endeavor to ascertain the actual state of affairs in the Company and try to
put an end to the matters complained of if oppression or mis-management is
proved. <o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">We usually see petitions under section 397/398 of the
Companies Act, 1956 in-respect of closely held companies or companies
substantially owned by three or four groups. Listed companies are supposed to
follow many more guidelines of SEBI as everyone knows in addition to the
provisions of the Companies Act, 1956 and also listed companies are mandated to
do many things periodically in view of the detailed listing-agreement with the
concerned stock-exchange/s. Once disputes erupt between the groups in the
company, it would be extremely difficult for them to go-back to the earlier
trust-mode. That’s why, many petitions under section 397/398 of the Companies
Act, 1956 are settled with one group coming out of the company during the
proceedings before the Board itself. Otherwise, one group may be requesting the
Board to direct the majority to buy the shares of the minority on a fair value
and the valuation is also a bigger exercise before the Board. <o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Taking note of
subsequent events:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-language: TA;">If we come-back to the issue, petitioners approaching the
Company Law Board under section 397/398 of Companies Act, 1956 are supposed to
provide full particulars in their petition. The High Court of Calcutta in </span><i><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Clive Mills Co. Ltd, (1964) 34 Com Cases 731</span></i><span style="font-family: "Bookman Old Style"; font-size: 12.0pt; mso-bidi-font-style: italic;">, has held that<i> </i></span><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">“in an application under sections 397 and 398 where fraud,
mismanagement, misappropriation or other improper conduct is alleged, full
particulars must be set out in order to enable the party charged to understand
what he is charged with and also to enable him to answer such charges”.<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Once
the trust-deficit comes between or among the shareholders and especially in
closely-held or family companies, one group tries to out-smart other through
various tactics and in most of the cases, this tendency is continued
irrespective of the pendency of petition under section 397/398 of the Companies
Act, 1956 before the Board. It may be difficult to everyone to play with the
order of CLB, but, the majority can continue with their oppressive actions
against the majority even when the minority pleads relief before the Board.
Under these circumstances, if the minority is asked to follow the
technicalities by amending the petition which involves further procedure and
which delays the relief, it is possible that the minority shareholders may
suffer irreparable loss. It may also not possible for the minority shareholders
to opt for amendment of the petition again and again, if that is the procedure,
the minority shareholders can only be focusing on amending the petitions when
their rights or interests in the company are being seriously compromised in the
hands of majority. It may be enough for the petitioner to file a detailed
affidavit before the CLB bringing the developments to the notice of the Board
and the Board may take note of it and pass orders immediately in the interests
of the minority or may ask clarification from the majority shareholders. It is
very important for the CLB to take note of even the subsequent developments in
the company as ultimately the interests of the minority should be protected and
the CLB is supposed to put an end to the matters complained of if the
allegations are proved to be right.
According to me, the CLB can take note of all subsequent events upto the
date of final hearing or disposal of the petition. However, taking a contrary
view, the Calcutta High Court, in <i>Mohta Bros.(P) Ltd. and others Vs.
Calcutta Landing and Shipping Co. Ltd. and others,(1970) 40 Com Cases 119</i></span><i><span style="font-size: 12.0pt;">, </span></i><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">has held that “when
dealing with a petition for relief from oppression or mismanagement made under
sections 397 and 398 of the Companies Act, 1956, the court must confine itself
to the case as made out in the petition and to the allegations made therein and
the supporting affidavits and not look at other evidence with regard to events
that might have happened subsequent to the petition”. <o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Similarly,
making a distinction between the contents in the main petition and the
subsequent events brought on-record, the Company Law Board in <i>Karedla
Suryanarayan and othes Vs. Sri ram Dass Motor Transport (P) Ltd. and others
(1998) 1 Com LJ 342 (CLB),</i> has held that “a section 397/398 petition has to
stand on its own on the basis of the allegations contained in the petition.
Subsequent events brought on record alone, in case the main petition fails on
merits, can not entitle a person to any relief. In case, the allegations in the
main petition are proved, then the subsequent events may be taken into
consideration by the Company Law Board in moulding suitable reliefs. Since, on
most of the occasions, when subsequent events are sought to be brought on
record either through an amendment to the main petition or through an
application, certain interim reliefs are also sought for, as happened in this
application. Since in such cases, the main petition itself would be pending and
that there would have been no occasion for us to find out whether the petitioners
have made out a case for grant of relief thereof, any interim relief prayed for
in such applications containing subsequent events could only be related to
maintenance of status quo in
regard to the affairs of the company. No relief which would upset the status quo can be granted when the
allegations in the main petition are yet to be assessed by the Company Law
Board. Thus, on the issue of subsequent events, it is held that there is no bar
in subsequent events being brought on record and being considered by the
Company Law Board also, but such consideration would be only to mould the
relief to be granted in case the petitioner succeeds in the main petition and
that any interim relief granted, based on subsequent events, would be limited
to status quo being maintained in regard to the affairs of the company”. <o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">In
<i>Jer Rutton Kavasmaneck and others Vs. Gharda Chemicals Ltd. and others,
(2001) 106 Com Cases 24</i>, the Court
has held that<i> “</i>in a petition for relief under section 397 of the
Companies Act, 1956, it is permissible to bring on record by amendment not only
the facts pertaining to the events up to the filing of the petition but also
subsequent events. Once the court comes to the conclusion that the petition is
maintainable then subsequent events can also be considered in order to do
complete justice between the parties and to make appropriate orders for
removing the oppression”. This is a case where the Court has made it clear that
the subsequent events can be brought on-record in a proceeding under section
397/398 of the Companies Act, 1956, however, refers to ‘amendment’.<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Supporting
the point that subsequent events should also be looked into under section
397/398 of Companies Act, 1956, the Calcutta High Court in <i>Promode Kumar
Mittal and Others Vs. Southern Steel Ltd. and others, (1980) 50 Com Cases 555, </i>has held that “the court is to take notice of all the
subsequent events to grant reliefs finally after trial in a company matter, and
the interim orders passed from time to time by the court in all applications,
the meetings held under the chairman appointed by the court, and the
resolutions passed by majority shareholders and directors present therein are
all relevant”.<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">In
this connection, we should also look at Regulation 24 of Company Law Board Regulations,
1991 and the same is reproduced below:<o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">“24. Power of Bench to call for further
information/evidence –</span></b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"> The Bench may, before passing orders on the petition,
require the parties or any one or more of them, to produce such further
documentary or other evidence as the Bench may consider necessary -<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"> (a) for the purpose of satisfying itself as to
the truth of the allegations made in the petition; or<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"> (b) for ascertaining any information which, in
the opinion of the Bench, is necessary for the purpose of enabling it to pass
orders on the petition.”<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Conclusion:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></b></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">The
reason for the establishment of Tribunals like Company Law Board is to do away
with the cumbersome procedure like C.P.C followed by the Court though each
provision in the C.P.C is supported by a sound logic. The amendment procedure
may be good even before an Arbitrator or Arbitral Tribal which deals with a
specific relief. But, under section 397/398 of the Companies Act, 1956, the CLB
can pass any reasoned order in the interests of the Company, in the interests
of the minority and in order to put an end to the matters complained of. The
CLB may pass suitable orders keeping in-view the object of section 397/398 of
the Act and it can not confine itself simply to the admission or the rejection
of the relief sought in the petition. As such, events subsequent to the filing
of petition under section 397/398 of the Companies Act, 1956 should be
considered by the Board without insisting too much on technicalities as
otherwise, the entire purpose of section 397/398 would be defeated according to
me. <o:p></o:p></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"><br /></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; text-align: justify;">
<b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;">Note:</span></b><span style="font-family: "Bookman Old Style"; font-size: 12.0pt;"> the views expressed
are my personal. <o:p></o:p></span></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com2tag:blogger.com,1999:blog-5623384825844985559.post-49088458255695212582012-07-08T06:15:00.001-07:002012-07-08T06:16:46.346-07:00Approaching DRAT in SARFAESI matters appears to be very costly?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">Under
the provisions of ‘Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ in short), the Bank
can invoke the process of recovery of money on its own without any adjudicatory
process. The Banks can proceed with the enforcement of ‘security’ under the
provisions of SARFAESI Act, 2002. If any borrower or any person is aggrieved
with the action initiated by the Bank under the provisions of SARFAESI Act,
2002, then, he can approach the Debt Recovery Tribunal (DRT) under section 17
of the Act by paying the prescribed fee. Irrespective of the wording in section
17 with regard to the powers of the Tribunal and irrespective of the initial
proposition that the DRT is only supposed to look at the procedural
irregularity, in view of the subsequent judgments of the Apex Court and other
High Courts, the DRT can look into all objections and provide relief to the
borrower or any person aggrieved. However,
in many cases, the Debt Recovery Tribunals may ask the borrower to make some
deposit for asking the Bank to exercise restraint pending the disposal of the
Appeal. Unless there is an apparent mistake on the part of the Bank in
following the procedure, in most of the cases, the Appeals filed by the
borrowers will get dismissed finally. The Appeal filed by the borrower under
section 17 may be decided at the first hearing itself or it may take a maximum
of one year in most of the cases. If the borrower has got any objection to the
order of the DRT mandating the borrower to make some deposit, then, the option
left with the borrower is to file an appeal with the DRAT or approaching High
Court. If the borrower fails to comply with the order mandating him to deposit
some amount, then, the Bank will proceed with the process and can even auction
the property pending ‘SARFAESI Appeal’ and it means, the appeal becomes
meaningless unless the DRT allows the Appeal and gives relief to the borrower
taking all subsequent events also into consideration. Though there exist many
technical, deeper and practical issues in filing Appeal under section 17 and
getting relief, this is normally what happens if the borrower files an appeal
under section 17 challenging the action initiated by the Bank under the
provisions of SARFAESI Act, 2002. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">It
is very much possible that even before the decision on a ‘SARFAESI Appeal’
under section 17, the borrower could have deposited or paid some 20% of the
outstanding amount claimed by the Bank.
We should remember that the Bank can exercise lot of discretion in
providing relief or relaxation to the borrower when it comes to making payments
towards installments. RBI guidelines give some room for the Banks to exercise
some discretion. However, in many cases, the officials concerned may hesitate
to take risk and exercise discretion and it results in classifying an account
as Non-Performing Asset (NPA). If the borrower fails to adhere to monthly
payment conditions consecutively for three months, the Bank can classify the
Account as NPA. There are other considerations for classifying an account as
‘NPA’. The point to be noted is that the
borrowers have to face the proceedings under SARFAESI Act, 2002 for even minor
default or negligible default which requires a sympathetic view. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">While
the Banks can get interest, penal interest and legal expenses incurred from the
borrower, the borrower has to fight everything on his own. Supposing that the
borrower looses the Appeal under section 17 of SARFAESI Act, 2002, then, section
18 of the Act provides a right of Appeal for the borrower. However, the
borrower has to pay 50% of the amount claimed as a pre-deposit for maintaining
an appeal and this pre-deposit amount can only be reduced to 25% for the
reasons recorded in writing by the judge or the presiding officer of DRAT. It is complained that section 18 is very
unreasonable and it curtails the right of the borrower to maintain an Appeal.
However, the <st1:street w:st="on"><st1:address w:st="on">Apex Court</st1:address></st1:street>
has upheld the validity of section 18 meaning that only <st1:street w:st="on"><st1:address w:st="on">Apex Court</st1:address></st1:street> can again deal with the issues
under section 18. At times, the borrower
may feel that he is forced to pay the full amount or at-least 75% of the outstanding
amount claimed by the borrower even before his appeal before DRAT gets disposed
of. As such, they complain that section 18 of SARFAESI Act, 2002 is
meaningless. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">While
the High Court entertains Writ Petitions now-a-days in appropriate cases and
provide relief to the borrower, it is very difficult to straight away challenge
the order of the DRT in the High Court and the High Court may not entertain
such Writ Petitions as it can pave way to escape the pre-deposit condition with
the DRAT. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">A
two member <b>Bench headed by Hon’ble
Justice Dr.D.Y.Chandrachud & Justice</b> <b>Mr.Anoop V.Mohta of Bombay High Court in W.P.No.4231 of 2011 reported
in </b></span><b><span style="background-color: white; font-family: 'Bookman Old Style';">2011
(4) AIR(Bom) R 763, 2011 (4) BCR 503, 2011 AIR(Bom) 132, CDJ 2011 BHC 774, </span></b><span style="background-color: white; font-family: 'Bookman Old Style';">was pleased to deal with the issues and scope of section 18
of SARFAESI Act, 2002 as follows:</span><span style="font-family: 'Bookman Old Style';"><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="background-color: white; font-family: 'Bookman Old Style';"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">“3. The
Petitioners have challenged the constitutional validity of the provisions of
the first and second provisos to section 18<span class="apple-converted-space"> </span>of
the Act on the ground that they are discriminatory. The submission is based on
a comparison with the provisions of Section 21 of the Recovery of Debts due to
Banks and Financial Institutions Act 1993. According to the Petitioners while
the Act of 1993 confers discretion upon the Appellate Tribunal to allow a
complete waiver of the pre-deposit, the discretion of the Appellate Tribunal,
while entertaining an appeal under section 18<span class="apple-converted-space"> </span>of
the Securitisation Act is curtailed. By the first proviso to section 18(1) an
appeal cannot be entertained unless the borrower has deposited an amount of 50%
of the debt due as claimed by the secured creditor, or as determined by the
Tribunal, whichever is less. By the second proviso, the Appellate Tribunal is
empowered for reasons to be recorded in writing to reduce the amount to not
less than 25% of the debt referred to in the second proviso.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">4.
Notice was issued to the Attorney General of India in view of the
constitutional challenge. The learned Additional Solicitor General of India has
appeared in the proceedings.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">5. The
constitutional challenge to the provisions of the second and third provisos of
section 18<span class="apple-converted-space"> </span>must fail. An appeal,
it is well settled, is a statutory creation. A statute which confers a right of
appeal can condition the exercise of that right on the observance of conditions
which the legislature may consider appropriate to impose. The Securitisation
Act is an act to regulate securitisation and reconstruction of financial assets
and enforcement of security interests. The Statement of objects and reasons
accompanying the introduction of the Bill in Parliament sets out the background
in which the law was enacted as follows:<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">“The
financial sector has been one of the key “drivers in <st1:country-region w:st="on"><st1:place w:st="on">India</st1:place></st1:country-region>’s efforts to achieve success
in rapidly developing its economy. While the banking industry in India is
progressively complying with the international prudential norms and accounting
practices, there are certain areas in which the banking and financial sector do
not have a level playing field as compared to other participants in the
financial markets in the world. There is no legal provision for facilitating
securitisation of financial assets of banks and financial institutions.
Further, unlike international banks, the banks and financial institutions in <st1:country-region w:st="on"><st1:place w:st="on">India</st1:place></st1:country-region> do not
have power to take possession of securities and sell them. Our existing legal
framework relating to commercial transactions has not kept pace with the
changing commercial practices and financial sector reforms. This has resulted
in slow pace of recovery of defaulting loans and mounting levels of
nonperforming assets of banks and financial institutions. Narasimham Committee
I and II and Andhyarujina Committee constituted by the Central Government for
the purpose of examining banking sector reforms have considered the need for
changes in the legal system in respect of these areas. These Committees, <i>inter alia</i>, have suggested enactment of
a new legislation for securitisation and empowering banks and financial
institutions to take possession of the securities and to sell them without the
intervention of the Court. Acting on these suggestions, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance, 2002 was promulgated on the 21 June, 2002 to regulate securitisation
and reconstruction of financial assets and enforcement of security interest and
for matters connected therewith or incidental thereto. The provisions of the
Ordinance would enable banks and financial institutions to realise long-term
assets, manage problem of liquidity, asset liability mismatches and improve
recovery by exercising powers to take possession of securities, sell them and
reduce nonperforming assets by adopting measures for recovery of
reconstruction.”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">6. The
second and third provisos to sub section (1) of section 18<span class="apple-converted-space"> </span>were inserted by Amending Act 30 of
2004. The reasons for the amendment are explained in the Statement of objects and
reasons. The statement adverts to the judgment of the Supreme Court in<strong>MardiaChemicals
Ltd. v. Union of India</strong><span class="apple-converted-space"><b> </b></span>(2004)
4 SCC 311which had declared as ultra vires a provision under which a deposit of
75% of the amount claimed was necessary before an appeal could be entertained.
The amendment was brought about in view of the judgment of the Supreme Court
and with a view to discourage borrowers from postponing the repayment of their
dues and to enable secured creditors to speedily recover their debts, if required
by enforcement of security or other measures specified in sub section (4) of
Section 13 of the Act.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">7. The
constitutional validity of the provisions of section 18 (1) have been upheld by
a judgment of a Division Bench of the Delhi High Court in<span class="apple-converted-space"> </span><strong>R.V. Saxena v. Union of India</strong><span class="apple-converted-space"><b> </b></span>AIR 2006 DELHI 96 .Chief
Justice Makandeya Katju (as His Lordship then was) speaking for the Division
Bench held thus :<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">“The
right of appeal is not an inherent right “ butis a creature of the statute. The
Legislature can impose conditions under which this is to be exercised.
Moreover, the proviso to section 18<span class="apple-converted-space"> </span>does
not require the entire amount to be deposited, but only 50% thereof which can
be reduced to a minimum of 25% of the sum. We see no illegality in this
proviso. There are similar provisions in many enactments and they are being
upheld by the Supreme Court. For example, in the second proviso under Section
15(1) of the Foreign Trade (Development and Regulation) Act, 1992, it is
provided that the appeal against an order imposing a penalty or redemption
charges shall not be entertained unless the amount of the penalty or redemption
charges have been deposited by the appellant. Similarly in many other statutes,
there are such similar provisions.”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">8. The
Division Bench of the Delhi High Court inter alia relied upon the decisions of
the Supreme Court in<span class="apple-converted-space"> </span><strong>Gujarat Agro
Industries Co. Ltd. v. Municipal Corporation of the City of Ahmedabad</strong><span class="apple-converted-space"><b> </b></span>(1999) SCC 468 ,<span class="apple-converted-space"> </span><strong>Vijay Prakash D. Mehta v. Collector of Customs
(Preventive)</strong>(1988) 4 SCC 402 ,<span class="apple-converted-space"> </span><strong>AnantMills Ltd. v. State of Gujarat</strong><span class="apple-converted-space"><b> </b></span>1975 (2) SCC 175.and<strong>ShyamKishore
v. Municipal Corporation of Delhi</strong><span class="apple-converted-space"><b> </b></span>(1993) 1 SCC 22.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">9.
Counsel appearing on behalf of the Petitioner, however, submitted that the
object of both the Act of 1993 as well as of the Securitisation Act is the same
viz. to ensure the speedy recovery of debts due to banks and financial
institutions. Hence, it was urged that it would be plainly discriminatory and
violative of Article 14 for Parliament to legislate, that while the Debts
Recovery Appellate Tribunal, when it considers an appeal under the Act of 1993,
can grant a complete waiver of predeposit, the same Tribunal is precluded from
granting a waiver in the entirety, when it considers an appeal under the
Securitisation Act.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">10.
This argument is not open to the Petitioner to urge, in any event before this
Court, in view of the fact that by a recent judgment of the Supreme Court the
rationale for the provisions of section 18<span class="apple-converted-space"> </span>has
been considered and determined in<span class="apple-converted-space"> </span><strong>NarayanChandra
Ghosh v. UCO Bank</strong><span class="apple-converted-space"><b> </b></span>(2011)
4 SCC 548. A Bench of two learned Judges of the Supreme Court while construing
the provisions of the second and third provisos noted that the Appellate
Tribunal has the power to reduce the amount, for reasons to be recorded in
writing, to not less than 25% of the debt, referred to in the second proviso.
The judgment of the Supreme Court lays down that the right of appeal being a
creation of statute, it was open to Parliament to condition that right subject
to an order of deposit and to restrict the discretion of the Appellate Tribunal
in the matter of granting a waiver. The Supreme Court held as follows:<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">“The
language of the said proviso is clear “and admits of no ambiguity. It is
well-settled that when a Statute confers a right of appeal, while granting the
right, the Legislature can impose conditions for the exercise of such right, so
long as the conditions are not so onerous as to amount to unreasonable
restrictions, rendering the right almost illusory. Bearing in mind the object
of the Act, the conditions hedged in the said proviso cannot be said to be
onerous.”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">11. The
mandate of the third proviso has thus been held by the Supreme Court not to be
onerous in its nature or character. These observations were undoubtedly not
made in the context of a constitutional challenge. Nonetheless, they are
significant because the Supreme Court in holding that the requirement is not
onerous has indicated a view on the fairness and reasonableness of the
provision.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"> 12.
There is a fundamental reason why the submission of the Petitioner cannot be
accepted. The object and purpose of the Securitisation Act was to facilitate a
recovery of the dues of the banks and financial institutions by a
non-adjudicatory process. The Securitisation Act enables banks or financial
institutions to enforce their security interests expeditiously without being
required to move a Court or Tribunal. This was emphasized in the following
observations of the Supreme Court in<span class="apple-converted-space"> </span><strong>Transcorev. <st1:place w:st="on">Union</st1:place> of India</strong><span class="apple-converted-space"><b> </b></span>2007(2) Bankers’ Journal 303.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">“Basically,
the Securitisation Act is enacted “ toenforce the interest in the financial
assets which belong to the bank / financial institution by virtue of the
contract between the parties or by operation of common law principles or by
law. The very object of Section 13 of Securitisation Act is recovery by
non-adjudicatory process. A secured asset under Securitisation Act is an asset
in which interest is created by the borrower in favour of the bank / financial
institution and on that basis alone the Securitisation Act seeks to enforce the
security interest by non-adjudicatory process. Essentially, the Securitisation
Act deals with the rights of the secured creditor. The Securitisation Act
proceeds on the basis that the debtor has failed not only to repay the debt,
but he has also failed to maintain the level of margin and to maintain value of
the security at a level is the other obligation of the debtor. It is this other
obligation which invites applicability of Securitisation Act. It is for this
reason, that Section 13(1) and 13(2) of the Securitisation Act proceed on the
basis that security interest in the bank / financial institution needs to be
enforced expeditiously without the intervention of the Court / Tribunal; that
liability of the borrower has accrued and on account of default in repayment,
the account of the borrower in the books of the bank has become nonperforming.
For the above reasons, Securitisation Act states that the enforcement could
take place by nonadjudicatory process and that the said Act removes all fetters
under the above circumstances on the rights of the secured creditor.” <o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;">13.
These observations of the Supreme Court emphasize at more than once place that
the Securitisation Act allows enforcement by a non-adjudicatory process. The
Act removes fetters on the rights of the secured creditor. The Securitisation
Act has therefore been held to create an additional remedy. Consistent with the
object of Parliament of facilitating the enforcement of security interests by a
non-adjudicatory process, Parliament could conceivably impose a condition by
which it could require the making of a deposit as a condition precedent to the
maintainability of an appeal under section 18. Such a condition has been
imposed under the second proviso to sub section (1) of section 18<span class="apple-converted-space"> </span>by which an appeal cannot be
entertained unless the borrower has deposited with the Appellate Tribunal 50%
of the amount debt due as claimed by the secured creditor, or as determined by
the Tribunal, whichever is less. Parliament conferred upon the Appellate
Tribunal a discretion to reduce the amount required to be deposited, but while
conferring that discretion on the Appellate Tribunal restricted it by
stipulating that the Appellate Tribunal may reduce the amount to not less than
25% of the debt referred to in the second proviso. This is consistent with the
parliamentary intent of ensuring that basically the Securitisation Act must
follow an efficacious non-adjudicatory process for the enforcement of a
security interest. The interposition of an adjudicatory function in the
Securitisation Act must, therefore, be confined to those areas as legislated
upon by Parliament and subject to the restrictions imposed by the Parliament
while so legislating. Therefore, we find that there were valid reasons why Parliament
made a different provision in the Securitisation Act in the matter of the
discretion of the Appellate Tribunal under<span class="apple-converted-space">
section 18</span>(1) in dispensing with the requirement of pre-deposit. It was
open to Parliament, while conferring discretion on the Appellate Tribunal to
restrict the exercise of the discretion to reduce the quantum of deposit to not
less than 25% of the debt due under the second proviso to<span class="apple-converted-space"> section 18</span>(1).”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Bookman Old Style'; font-size: 11pt;"><br /></span></div>
<div style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';"><u>Conclusion:</u><o:p></o:p></span></b></div>
<div style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';"><br /></span></b></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">The constitutional validity of section
18 is upheld by the <st1:street w:st="on"><st1:address w:st="on">Apex Court</st1:address></st1:street>.
However, when the borrower is aggrieved with the order of DRAT to the request
for depositing the minimum 25% as pre-deposit in appropriate cases, such an
order can be taken to High Court and the High Court can provide relief to the
borrower or the Appellant. However, even the High Court may not be able to
direct the DRAT to accept a pre-deposit which is lesser than 25% of the
outstanding. <o:p></o:p></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';"><br /></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">I feel that the DRAT must have been
given the right to completely waive the pre-deposit condition in exceptional cases.
<o:p></o:p></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';"><br /></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">There can be cases where the
pre-deposit condition under section 18 can appear to be very draconian while in
other cases, it may be justified in the interests of the Banks or Public
Financial Institutions. <o:p></o:p></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';"><br /></span></div>
<div style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';">Note:</span></b><span style="font-family: 'Bookman Old Style';">
the views expressed are my personal. <o:p></o:p></span></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com6tag:blogger.com,1999:blog-5623384825844985559.post-3144327133569114772012-07-07T05:24:00.000-07:002012-07-07T05:25:20.694-07:00Why High Courts are now burdened with DRT/SARFAESI matters?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-family: 'Courier New', Courier, monospace;">Constitution of DRTs
& DRATs:<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">After
the constitution of Debt Recovery Tribunals (DRT) and Debt Recovery Appellate
Tribunals (DRAT) under ‘The Recovery of Debts due to Banks and Financial
Institutions Act, 1993” and after conferring the authority to entertain appeals
from the aggrieved persons under section 17 of SARFAESI Act, 2002, Banks have
gained an upper-hand in the course of recovery of their dues. It is hard to see a Bank now going to <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> or
facing a Civil Proceeding in-respect of recovery of their dues. Even Consumer Courts are discouraged or not
entertaining complaints from the borrowers against the Banks seeking
stay-orders or discourage borrowers initiating consumer proceedings
anticipating some kind of recovery proceeding by the Bank. With a great object of speeding-up the
Bank’s recovery process and to reduce their NPAs, Special Tribunals called
‘Debt Recovery Tribunals’ were constituted.
There was great opposition from the legal fraternity against the
continuance of creation of Special Tribunals like National Company Law Tribunal
etc. At the same time, there are professionals supporting the creation of
Special Tribunals as the matters like Tax, Company issues etc. requires speedy
disposal and specialist approach. It’s
a deeper issue to look at as to why Special Tribunals are not functioning as
expected making the judiciary to intervene constantly either under Article 226
or 227 of Constitution of India. While some Special Tribunals are functioning
well and justified, some are criticized most often. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-family: 'Courier New', Courier, monospace;">Criticism:<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">While
the Banks or the Public Financial Institutions must be very happy with the
constitution of ‘Debt Recovery Tribunals’, there are many complaints from the
borrowers against the functioning of ‘Debt Recovery Tribunals’ and ‘Appellate
Tribunal’. It is also true that even
unscrupulous litigants tend to comment on the functioning of ‘Tribunals’ to
their advantage. Again, it all mostly depends upon the mind-set or the ability
of the Presiding Officer presiding a particular Tribunal. While some Presiding
Officers presiding the ‘Debt Recovery Tribunal’ are appreciated, some are
criticized most often. There is a
perception that the ‘Debt Recovery Tribunal’ functions as an agent institution
for the Bank in the course of their recovery of dues. It is most often
criticized that the Debt Recovery Tribunals support Banks irrespective of their
mistakes and do not support the borrowers despite having merit in their
contention. The DRTs are not supposed to
follow an elaborate procedure and they are guided by the principles laid-down
by the High Courts and Supreme Court from time to time. It is alleged that this helps the Banks to
use the procedure before DRT to their advantage. It is also known that the Bank Officials do
maintain very good relation with the staff attached with the Debt Recovery
Tribunals and Appellate Tribunals. There
is a glaring difference between the normal Court System and procedure; and DRT
set-up. It is also alleged that the
office attached to the ‘Debt Recovery Tribunals’ try to delay the numbering of
appeal papers etc. being filed by the borrowers. Infact, the Tribunals are supposed to be
public friendly as opposed Courts. The
Tribunals are not supposed to rely so much on technicalities like Courts.
Looking at the practice, often, one gets an impression that Courts are public
friendly now-a-days than Tribunals. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Courier New', Courier, monospace;">Dealing with the
functioning of a particular Presiding Officer in a Case, a Bench of Madras High
Court headed by Hon’ble Justice D.Murugesan & Hon’ble Justice
K.K.Sasidharan, in W.P.No.11113 of 2012, reported in CDJ 2012 MHC 2971, was
pleased to observe as follows:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Courier New', Courier, monospace;"><br /></span></b></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">“15. The appeal in question was
preferred by the petitioner and it was numbered as Appeal No.1/2009. The third
respondent was not a party to the proceeding. The third respondent in her
capacity as auction purchaser filed an application in I.A.No.278/2012 to
implead her as a party to the proceeding. The application was filed by Ms. Sankaran
Latha, Advocate, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>,
on 27 March 2012. The application was taken on file and allowed by the Debts
Recovery Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>
even without ordering notice to the writ petitioner or Bank. The application in
I.A.No.278/2012 does not contain any indication that before filing the said
application, copy has been served on the petitioner. We are not in a position
to understand as to how in a pending matter, an application could be moved by a
third party without giving notice to the other side whether it be the
petitioner or the respondent. Though the petitioner was not given notice in the
impleading petition in I.A.No.278/2012, he was given notice in I.A.No.285/2012
filed to review the order in I.A.No.522 of 2009. The Presiding Officer ought to
have issued notice to the petitioner before passing orders in the interlocutory
application to implead the third respondent as a party to the appeal. There is
no dispute that it is the discretion of the Court to implead a party to a
pending matter, in case, for an effective adjudication of the matter, presence
of such party is absolutely necessary. Even in such a case, before deciding the
issue, the petitioner who was instrument in filing the application should have
given due audience. The presiding officer appears to have ignored basic
principles of justice.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">16. This Bench has been dealing with
Debts Recovery Tribunal cases for the last one year. We have come across
several such illegal orders passed by the Presiding Officer, Debts Recovery
Tribunal, <st1:place w:st="on"><st1:city w:st="on">Coimbatore</st1:city></st1:place>.
Writ petitions and Civil Revision Petitions have been preferred not only by the
borrowers but also by the Banks and other financial institutions. In some
cases, the Bank settled the matter with the principal borrower or guarantor.
The Presiding Officer was not in favour of such settlement. This made the
Presiding Officer to pass orders directing Chairman and Managing Director of
the Bank to submit a report, detailing the circumstances under which the local
officials settled the matter with the principal debtor. In some of the matters
involving Indian Overseas Bank, the Presiding Officer permitted the borrower to
auction and sell machineries and to pay the amount even without notice to the
Bank. This made the Bank to file writ petitions before this Court and we have
already stayed such orders. Bank would be in a position to engage a counsel at
Chennai and file writ petitions and civil revision petitions. It is only the
poor borrowers who have to pay the amount, ultimately along with the litigation
expenses incurred by the Bank. In case the borrowers and the guarantors are
affected, necessarily, they have to engage a counsel here at <st1:city w:st="on"><st1:place w:st="on">Madras</st1:place></st1:city> and file appropriate applications to
challenge such orders. This also would cause considerable expenses to the poor
litigants.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">17. There is no doubt that the Debts
Recovery Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>,
is entitled to pass discretionary orders, in accordance with law. The problem
is on account of passing orders violating the mandatory provisions of law. The
petitioner in the present writ petition and the petitioners in other writ
petitions as well as the Standing Counsel for different banks jointly made
allegations against the Presiding Officer stating that he has been supporting a
particular counsel and whenever the said counsel is engaged, the officer would
pass favourable orders to please that counsel, flouting the legal provisions.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">18. M/s Canara Bank, Kongu Nagar,
Tiruppur, filed a writ petition before this Court in W.P.No.9775 of 2012
challenging the order passed by the very same Presiding Officer restraining the
Bank from proceeding under the SARFAESI Act. The said order was challenged by
the borrower in W.P.No.2103/2012 complaining that the original application was
allowed even without permitting the borrower to file his statement. During the
course of hearing of those two writ petitions, the learned counsel for the
petitioner as well as the Bank made similar allegations against the Presiding
Officer. While disposing of those writ petitions, we have expressed our strong
displeasure in passing such orders in a hasty manner. The relevant paragraph or
the order reads thus:-<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">“10. There is nothing on record to show
that the borrowers have filed their counter in O.A.No.72 of 2011. In fact, the
first hearing itself was only on 14 September, 2011. We are not in a position
to understand the logic in passing such hasty orders by the Debts Recovery
Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>.
In fact, we have been witnessing many such orders passed by the Presiding
Officer, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>
in a hasty manner and in violation of the mandatory previsions of the statute.
The members of the legal fraternity time and again complained across the Bar
that the Presiding Officer, Debts Recovery Tribunal, Coimbatore is in the habit
of keeping the records with him till the appeal time is over and never issues
the certified copy of the order before the statutory period for filing appeal.
We do not want to comment anything n this, at this point of time, without
giving an opportunity to the Presiding Officer to offer his remarks.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">11. The impugned order clearly shows
that the Debts Recovery Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>
violated all the canons of justice in his attempt to dispose of matters. We are
not in a position to appreciate the course of conduct adopted by the Debts
Recovery Tribunal to dispose of the original application without giving an
opportunity to the parties either to file their statement or to make
submissions.”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">19. Factual matrix of the present case
clearly indicates that the Presiding Officer allowed the impleading application
filed by the third respondent without even issuing notice to the petitioner.
The factum of impleading coupled with the appearance of a particular counsel
made the petitioner to entertain a reasonable doubt that he would not get
justice from the Presiding Officer. We are not here to examine the said issue
in extensor more on account of the fact that we have not called for a report
from the Presiding Officer with regard have not called for a report from the
Presiding Officer with regard to such allegations. In any case, the parties
have now expressed their consent to transfer the matter to Debts Recovery
Tribunal, Chennai.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">20. We are, therefore, of the view that
interest of justice would be sub-served in case the appeal preferred by the
petitioner in Appeal No.1/2009 is transferred from the file of Debts Recovery
Tribunal, <st1:city w:st="on">Coimbatore</st1:city>, to the Debts Recovery
Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>,
to the Debts Recovery Tribunal II, Chennai.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">21. The Registry is directed to
transfer the records received from the Debts Recovery Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>, directly to
the Debts Recovery Tribunal II, Chennai, along with a copy of this order so as
to enable the Tribunal to take up the matter and dispose of the same in
accordance with law.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">22. We have already extracted the
submissions made before us by the counsel on either side in the present writ
petition and the members of the Bar. In fact, the Bar was unanimous while
making submission that the Presiding Officer, Debts Recovery Tribunal, <st1:city w:st="on"><st1:place w:st="on">Coimbatore</st1:place></st1:city>, has been
showing undue favour to a particular counsel and that appearance of that
counsel would tilt the balance in favour of the party who has engaged the said
counsel. Litigants should have a feeling that their cases are heard by the
Presiding Officer without bias. Judiciary would lose its name in case parties
entertain a reasonable doubt, about the integrity of the Presiding Officer. We
have been seeing many such orders passed by the Presiding Officer, Debts
Recovery Tribunal, <st1:place w:st="on"><st1:city w:st="on">Coimbatore</st1:city></st1:place>,
taking contradictory stand and passing orders in violation of the settled legal
principles. Therefore, we are of the view that the matter requires
consideration by the concerned authorities.<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">23. The Secretary, Ministry of Finance,
<st1:city w:st="on"><st1:place w:st="on">New Delhi</st1:place></st1:city>, and
Ministry of Law and Justice, are directed to conduct an enquiry and take
appropriate action the matter.”<o:p></o:p></span></div>
<div style="margin-left: 27.0pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">This is only a
small reference of the functioning of a particular Presiding Officer. But,
infact, there were serious issues and serious allegations most often. <o:p></o:p></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<b><u><span style="font-family: 'Courier New', Courier, monospace;">Why High Courts are burdened with DRT/SARFAESI matters now?<o:p></o:p></span></u></b></div>
<div style="line-height: 15.75pt; text-align: justify;">
<b><u><span style="font-family: 'Courier New', Courier, monospace;"><br /></span></u></b></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">Initially, High
Courts used to entertain Writ Petitions in-respect of SARFAESI proceedings.
Later-on, it is complained that Bank’s recovery process gets hampered due to
filing of Writ Petitions in High Courts and High Courts passing stay or adverse
orders. Pursuant to the complaint or taking note of the situation at that time,
there were many judgments and the judgment of Supreme Court that the High
Courts should exercise restraint in respect of entertaining Writ Petitions
pertaining to SARFAESI matters. During this period, many Writ Petitions were
dismissed or disposed of at the admission stage itself and the High Courts were
not granting any relief or stay orders as prayed by the borrowers. This
practice has continued for a while though it was maintained that there can
never be a complete bar on the jurisdiction of High Courts under Article 226 of
Constitution of India in respect of Writ Petitions challenging SARFAESI
proceedings. It was termed as ‘self-imposed restriction’. <o:p></o:p></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">However, in the
recent past, in many cases as alleged, Banks took advantage of the powers under
SARFAESI Act, 2002 and the functioning of DRTs and DRATs. As a result, borrowers were struggling to get
justice or advocate their case properly. They complain as to how the numbering
of appeal papers gets delayed with the DRT, how the presiding officers will be
on-leave without any effective alternative arrangement, how the Bank proceeds
with the SARFAESI proceeding despite filing or pendency of an appeal under
Section 17, the practice of mandating the borrowers to deposit substantial
amount as a pre-condition for the grant of any stay-order, the delay and the
pre-deposit condition with the DRAT. There are several issues or complaints
with the SARFAESI proceedings and the functioning of DRTs and DRATs. When a
borrower fails to find a place to advocate his case properly and fairly, he
will have no option except approaching High Courts under Article 226 of
Constitution of India. According to me, understanding the plight of borrowers
in some cases in SARFAESI matters, the abuse of powers under SARFAESI Act, 2002
and the functioning of Debt Recovery Tribunals and Debt Recovery Appellate
Tribunals, the High Courts do interfere with SARFAESI proceedings or the DRT
proceedings now in appropriate cases. No High Court interferes with the
SARFAESI proceedings initiated by the Bank or the proceedings pending before
the DRT or DRAT unless there is a strong case and justification. <o:p></o:p></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">All these issues
make the High Courts burdened with the DRT/SARFAESI matters despite having
Special Tribunals called ‘Debt Recovery Tribunal’ and ‘Debt Recovery Appellate
Tribunal’. It is a result of misuse or improper use of powers under SARFAESI
Act, 2002 or the failure of DRTs and DRATs to provide an effective relief to
the borrowers in appropriate or deserved cases. <o:p></o:p></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><b>Note:</b> the views expressed are my personal. <o:p></o:p></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><br /></span></div>
<div style="line-height: 15.75pt; text-align: justify;">
<b><span style="font-family: 'Courier New', Courier, monospace;">Author:<o:p></o:p></span></b></div>
<div style="line-height: 15.75pt; text-align: justify;">
<b><span style="font-family: 'Courier New', Courier, monospace;"><br /></span></b></div>
<div style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;">V.DURGA RAO, Advocate, <st1:place w:st="on"><st1:city w:st="on">Madras</st1:city></st1:place> High Court.<o:p></o:p></span></div>
<div style="text-align: justify;">
<span style="font-family: 'Courier New', Courier, monospace;"><b>Email:</b>
vdrao_attorney@yahoo.co.in</span><span style="font-family: 'Bookman Old Style';"><o:p></o:p></span></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com8tag:blogger.com,1999:blog-5623384825844985559.post-28169017914932167182012-06-09T02:36:00.002-07:002012-06-09T02:38:07.353-07:00Company Law Board & SARFAESI proceedings?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">Company
Law Board exercises very important functions under section 397/398 of the
Companies Act, 1956 providing relief to the shareholders against ‘oppression
and mis-management’ in the Company. When a group of shareholders are oppressed
in any company or the company is mis-managed causing loss to the interests of
the shareholders, shareholders very frequently exercise the option of
approaching the Company Law Board under section 397/398 of the Companies Act,
1956 if they are qualified to do so under section 399. The shareholders have
the option and can even approach the High Court seeking to wind-up the Company
on ‘just and equitable cause’. In appropriate cases, the shareholders do
approach even the Civil Courts seeking some relief against the Company though
there always remains a confusion about the jurisdiction of Civil Court in
dealing with the cases of ‘oppression and mis-management’ and also there is a
strong belief that it is extremely difficult to get speedy relief from a Civil
Court. In the cases of ‘oppression and mis-management’, the affected
shareholders expect immediate relief in order to get their interests in the
Company protected and this is the reason why the shareholders approach the
Company Law Board under section 397/398 of the Companies Act, 1956 where the
CLB is supposed to ignore technicalities and is supposed to ‘put an end to the
matters complained of’. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">In
the process of adjudication under section 397/398 of the Companies Act, 1956
and where mis-management in the Company is alleged, the applicant shareholders
can even make many other group companies or third parties etc., as parties to
the petition and can be seeking to get certain transactions cancelled. This
happens when the majority group in the Company or the directors in actual
control of the Company, deal with the properties and funds of the company in an
illegal manner and with the ultimate intention of siphoning off funds of the
Company. These things are very frequently alleged in respect of ‘closely-held
companies’ and rarely seen in-respect of ‘Listed Public Limited Companies’ in
view of the shareholding-pattern and the authority of the SEBI to look into
certain issues and the authority of the stock-exchanges where the shares are listed
if it is a listed Company. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">In
appropriate cases, the Company Law Board can be passing suitable orders under
section 397/398 of the Companies Act read-with section 402 of the Act and these
orders can affect even the third parties including Banks at times in my
opinion. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';">Competency of Company Law
Board to interfere with SARFAESI proceedings:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act) is meant to enable the Banks to
speedily recover their ‘secured dues’ without approaching any Court or Tribunal
and even when there exists a grievance to any person affected, he can only file
an appeal under section 17 of SARFAESI Act, 2002. It is settled that when a
Bank initiates proceedings against a Company under SARFAESI Act, 2002, the
aggrieved party can give their objections to the Bank, can seek mandatory reply
from the Bank under section 13 (3A) and if they are not satisfied at the reply
given by the Bank, the aggrieved party can file an appeal under section 17 of
the SARFAESI Act, 2002. There is a specific provision under section 34 of
SARFAESI Act, 2002 that no Civil Court can interfere with SARFAESI proceedings
and even the High Court exercises caution in interfering SARFAESI proceedings
though there can never be a complete bar on the jurisdiction of High Court
under section 226 and 227 of Constitution of India with regard to the
proceedings initiated by Public Sector Banks or Banks. However, in view of the
perceived failure of the Debt Recovery Tribunals in providing speedy and
effective relief, High Courts can entertain challenge to the SARFAESI
proceedings in appropriate cases as otherwise; there will not be any relief to
the aggrieved even when the Bank proceeds illegally and unreasonably. Though,
Civil Court’s jurisdiction is not completely barred in respect of SARFAESI
proceedings in view of the scope established with Mardia Chemicals Case and
other subsequent cases, it is highly difficult to convince any Civil Court and
get the relief against the Bank. Again, aggrieved are often afraid to approach
the Civil Courts in view of the lack of expertise on the part of Civil Courts
in dealing with SARFAESI issues, the technicalities, the expenses and the delay
involved. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">As
such, though section 34 of the SARFAESI Act, 2002 specifically deals with the
jurisdiction of <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>,
it is implied that no court or the forum can interfere with the proceedings
initiated by the Bank under SARFAESI Act, 2002. This is established even when
the liquidation proceedings are pending against a Company and the Bank will be
proceeding against the ‘Secured Assets’ even when the liquidation proceedings
are taking place against the Company. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">Under
these circumstances, it would be interesting to look into the jurisdiction of
Company Law Board to pass any order or orders under section 397/398 of the
Companies Act, 1956 affecting the proceedings initiated by the Bank against the
Company. Two things are very important in this regard and those are as follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: 87.0pt; mso-list: l1 level1 lfo2; tab-stops: list 87.0pt; text-align: justify; text-indent: -51.0pt;">
<span style="font-family: 'Bookman Old Style';">a.<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><span style="font-family: 'Bookman Old Style';">One
is that the power of the Company Law Board to pass orders section 402 of the
Companies Act, 1956 affecting the third party transactions and agreements.</span></div>
<div class="MsoNormal" style="margin-left: 87.0pt; mso-list: l1 level1 lfo2; tab-stops: list 87.0pt; text-align: justify; text-indent: -51.0pt;">
<span style="font-family: 'Bookman Old Style';"><br /></span></div>
<div class="MsoNormal" style="margin-left: 87.0pt; mso-list: l1 level1 lfo2; tab-stops: list 87.0pt; text-align: justify; text-indent: -51.0pt;">
<span style="font-family: 'Bookman Old Style';">b.<span style="font-family: 'Times New Roman'; font-size: 7pt;">
</span></span><span style="font-family: 'Bookman Old Style';">Second
is that the relief provided to the affected person under section 17 of the
SARFAESI Act, 2002.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">Though
it is frequently referred that the Debt Recovery Tribunal can look into all
issues under section 17 of the Companies Act, 1956, the Tribunal may not be
able to effectively look into certain issues. For example, there is a precedent
now that the rights of Tenants under the Tenancy Laws made by the State
Governments will prevail over the rights of the Bank under SARFAESI Act, 1002;
and if the Bank wants to get any tenant vacated from the premises; it has to
mandatorily approach the Rent Control Tribunals. Same is the case, where the
Bank can not claim the complete ownership of the ‘Secured Asset’ and these
issues arise when the property mortgaged is a ‘Joint Family Property’ and the
Bank was negligent in accepting the property as a security. In these cases, the
appropriate authority to look into the rights of the members of a family in the
property is the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
and the Debt Recovery Tribunal may not be competent enough to look into
partition and related property issues. These are the complications with which
there was a precedent initially with regard to SARFAESI proceedings that the
Debt Recovery Tribunal is supposed to only look into the fact as whether the
Bank has followed the procedure under SARFAESI Act, 2002 or not. But, this
precedent now has changed and the authority of the Debt Recovery Tribunal under
section 17 of the Act is expanded at-least as a matter of principle
irrespective of practical issues and difficulties. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">Like-wise,
a group of shareholders in a Company may allege mis-management in the Company
and can oppose any proceedings initiated by the Bank against the Company under
the provisions of SARFAESI Act, 2002. If it is established that the Bank is
negligent and is also at fault while sanctioning the loan to the Company, the
minority shareholders can definitely be opposing the proceedings initiated by
the Bank against the Company. For example, if the Bank grants loan to the
Company upon certain terms without bothering at the regulations under Companies
Act, 1956 and without looking into the fact as to whether the people processed
the loan transaction with the Company are authorized to do so or not, then,
certainly, the minority shareholders would even be questioning the Bank and the
Bank can not say that they are not supposed to look into any rules and
regulations; and they will only look into the security provided. This argument
may not be accepted always. There may be a contention here that even the
minority shareholders or a shareholder of a Company can approach the Debt
Recovery Tribunal under section 17 of the Companies Act, 1956 and as such,
Company Law Board can do nothing with regard to the proceedings initiated by
the Bank against the Company under SARFAESI Act, 2002. It is true that the
shareholders can approach the Debt Recovery Tribunal under section 17 of the
SARFAESI Act, 2002 according to me if they could establish that their interests
in the Company are affected and the Bank is wrong in sanctioning the loan
without looking into the required issues. However, the Debt Recovery Tribunal
may not be competent enough to look into the corporate rights of the
shareholders and the Company Law principles. The Debt Recovery Tribunal can say
that the affected shareholders can only proceed against the Company or the
management and they can approach the High Court seeking winding-up and can
approach the Company Law Board alleging mis-management. The Debt Recovery
Tribunal may be right in its contention and it’s a very complicated issue and I
don’t think that these issues would arise frequently, but, there is a
possibility. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">The
issues of Bank negligently sanctioning loans to the Company and the interests
of the shareholders, is very important when the Bank intends to proceed against
the Company beyond the security provided.
Even when the Company gives security, if it is wrongful on the face of
it and if the minority group or the shareholders are affected because of it,
then, the minority group or the shareholders can definitely be questioning even
the loan transactions with the Bank. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Bookman Old Style';">If
any individual guarantees the repayment of loan given to the Company and
individual properties were mortgaged, then, the mortgagor may have no option if
he feels aggrieved, except to approach the Debt Recovery Tribunal or the High
Court in appropriate cases seeking relief. The issue is when the Bank proceeds
against the Company assets and the Company and the interests of the
shareholders in the Company are affected. This is certainly a very complicated
issue to deal-with.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';">Few important points to
be noted:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">1.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">It can not be said that the Company Law
Board can not pass orders under section 397. 398 and 402 of Companies Act
affecting the SARFAESI proceedings initiated against the Company. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-left: .5in; text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">2.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">Even if there is a mis-management in
the Company, if the Bank has taken due and reasonable care while sanctioning
the loan to the Company, then, the CLB may hesitate to interfere with any
SARFAESI proceedings initiated by the Bank against the Company. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">3.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">Though the Debt Recovery Tribunal can
look into all objections under section 17 of the SARFAESI Act, 2002, it may not
be competent enough to deal with the issues of ‘oppression &
mis-management’ requiring expertise and there can be a clear link at times
between the SARFAESI proceedings against the Company and the interests of the
minority group as protected under Companies Act, 1956.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">4.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">Though every shareholder is entitled
for certain rights in the Company and for the relief at times, it is certainly
complicated to say that the shareholder/s not qualified to approach High Court
seeking liquidation etc. and shareholders not qualified under section 397/398
of the Companies Act, 1956, can approach the Debt Recovery Tribunal under
section 17 of the SARFAESI Act, 2002. It is important in the light of a single
shareholder alleging that his interests in the Company are affected with the Bank
proceeding against the Company. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">5.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">If the Bank’s sanction of loan to the
Company is clear and independent of other issues in the Company, then, the
allegations of mis-management in the Company may not affect the rights of the
Bank in proceeding against the Company or the security provided. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">6.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">The Bank’s interests can in no way be
affected by any orders of the Company Law Board when the loan sanctioned to the
Company is guaranteed with the sufficient assets of individuals and the CLB in
those cases, may hesitate to interfere with the SARFAESI proceedings initiated
by the Bank. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">7.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">Except the issues of fraud, gross
negligence and the interests of the minority group in the Company, no other
issues can be raised against the Bank if Bank is involved in a proceeding under
section 397, 398 and 402 of Companies Act, 1956.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="margin-left: .75in; mso-list: l0 level1 lfo1; tab-stops: list .75in; text-align: justify; text-indent: -.25in;">
<span style="font-family: 'Bookman Old Style';">8.<span style="font-family: 'Times New Roman'; font-size: 7pt;"> </span></span><span style="font-family: 'Bookman Old Style';">There are no established precedents so
far on these issues, but, these issues are very significant and real with the
routine commercial transactions between the Banks and Companies. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Bookman Old Style';">Note:</span></b><span style="font-family: 'Bookman Old Style';"> the views expressed are my personal
only. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal">
<br /></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com8tag:blogger.com,1999:blog-5623384825844985559.post-61839711670553633022012-04-20T09:44:00.001-07:002012-04-30T04:35:18.270-07:00Critical issues under SARFAESI Act, 2002?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">It
is always welcome to enable the Banks to recover their dues using the
provisions of SARFAESI Act, 2002. It is known that it is very difficult for the
Banks to approach <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
asking for a decree and getting that decree executed. With the intention of
enabling the Banks to reduce their NPAs through faster recovery of dues, ‘The
Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ was
enacted. Despite constituting ‘Debt Recovery Tribunals’ under the RDDBI Act,
1993 and providing special procedure to be followed before the Tribunal, Banks
could not reduce their NPAs as expected and it has led the legislature to enact
‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002’. It is all appreciable as the Banks deal with the public
money and public interest is obviously involved in reducing the Banks’ NPA
Accounts. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">However,
no one in this country should be denied of an effective remedy and the criticism
is that the provisions of SARFAESI Act, 2002 are being misused by the Banks at
times and it is draconian. The issue went to Supreme Court and the
constitutional validity of SARFAESI Act, 2002 was upheld, however, the
judiciary was very much cautious of the interests of the borrowers and
providing them an effective remedy. From
then, judiciary in this country has made every effort to ensure that the object
of the SARFAESI Act, 2002 is not diluted and at the same time, the interests of
the borrowers are also protected. <st1:place w:st="on">Lot</st1:place> of
confusion was there initially as to how certain provisions of SARFAESI Act,
2002 are to be interpreted; however, many issues are settled now with judiciary
taking consistent stand on many issues.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">We
can not simply brush aside the concerns of the borrowers and the interest of
the borrowers in the property mortgaged with the Bank. Though right to property
is not a fundamental right, the Supreme Court has highlighted the significance
of right to property as it is a Constitutional Right and the relevant
observation of the Supreme Court in <b>Karnataka
State Financial Corporation Vs. N.Narasimahaiah
(2008 (5) SCC 176), </b>is as follows:-<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: 'Book Antiqua';"><br />
</span></i><i><span style="font-family: Georgia;">"40. Right to property, although no longer a
fundamental right, is still a constitutional right. It is also human right. In
the absence of any provision either expressly or by necessary implication,
depriving a person therefrom, the Court shall not construe a provision leaning
in favour of such deprivation."<o:p></o:p></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: Georgia;">"In
a case where a Court has to weigh between a right of recovery and protection of
a right, it would also lean in favour of the person who is going to be deprived
therefrom. It would not be the other way round."<o:p></o:p></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">In-spite
of the clarifications and the efforts of the judiciary in providing guidance as
to how the provisions of SARFAESI Act, 2002 are to be interpreted and followed,
many still believe that certain issues are still to be addressed under SARFAESI
Act, 2002. Some of the critical issues under SARFAESI Act, 2002 are dealt-with
hereunder.<b><o:p></o:p></b></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><u><span style="font-family: 'Book Antiqua';">1: NPA classification & settlement of
issues at an early stage itself<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Many
borrowers feel that they are being harassed by the Bank officials unreasonably
and using the provisions of SARFAESI Act, 2002. They claim that they are not
‘willful defaulters’ and even if there is some kind of default, they are
willing to correct the same and honour the commitments agreed upon. While in some cases, the Bank Officials
rightly show some kind of interest in helping the borrowers within the legal
frame-work, in some cases, the Bank Officials act unreasonably and invoke the
provisions of SARFAESI Act, 2002 by classifying the account as ‘Non-performing
Asset’ even if there is a possibility of regularizing the loan account.
Obviously, the Bank should follow the guidelines issued by the Reserve Bank of <st1:country-region w:st="on"><st1:place w:st="on">India</st1:place></st1:country-region> in
classifying any loan account as ‘Non-performing Asset’. But, it is a question
of interpretation largely and as to how the Bank Officials want to use the
guidelines. Normally, the issue of classification of account as ‘Non-performing
Asset’ is not dealt with by the Tribunal or the Courts and they tend to support
the classification of any loan account as NPA if there is a default in payments
as agreed. But, the guidelines issued by the Reserve Bank of <st1:country-region w:st="on"><st1:place w:st="on">India</st1:place></st1:country-region> with
regard to Asset Classification are not one-sided and it all depends upon
interpretation of those guidelines in respect of a particular ‘loan account’ or
borrower. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Dealing
with the subject, the High Court of Andhra Pradesh in </span><span class="apple-style-span"><b><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">M/s. Sri Srinivasa Rice and Floor Mill Vs. State Bank of India
(2007 (4) ALT 317: 2007 (4) ALD 649: 2007 AIR(AP) 252) </span></b></span><span class="apple-style-span"><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">was pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“There is, as considered earlier in the judgment, no
statutory format, express or by necessary implication, that requires the
respondent bank to follow a particular or formal procedure or requires a formal
declaration as a condition precedent to classification of debt as NPA. From the
scheme of the Act in general and the provisions of Sec.13 (2) in particular the
conclusion is compelling that the legislature has consecrated the power,
authority and discretion (to classify a debt as a NPA) to the secured creditor
within the generic guidelines to be ascertained from the definition of a non
performing asset [Sec.2(o)].<o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: Georgia;"><br />
<span class="apple-style-span">A wide margin of discretion is available to the
respondent bank as the secured creditor, within the legislative presents of the
Act, to assess and classify a debt but within the legislative framework. This
Court is not constituted an appellate authority over the bank’s exercise of
discretion in this area. The respondent bank, as legislatively recognized is an
institution having the requisite expertise to form a commercial judgment on
known principles of banking practices and procedures fertilized by R.B.I
directions and guidelines to assess and classify a debt as NPA. From the wealth
of material pleaded in the counter-affidavit the bank had assessed the debt as
non-performing asset. On facts, the petitioners have miserably failed to
establish that such assessment by the bank is perverse or irrational to a
degree warranting oversight and correction in judicial review.”<o:p></o:p></span></span></i></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><span style="font-family: 'Book Antiqua';">My view:<o:p></o:p></span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Many
loan accounts infact can be settled at the stage of classifying the account as
NPA if the Bank is accommodative and willing to regularize the loan accounts if
the value of the asset has not gone down and if there is no problem with the
quality of asset mortgaged. It is known that it is not mandatory for the Bank
to intimate the borrowers informing about the classification of account as NPA
and the consequences. It is also not correct to say that the borrower is
unaware of the consequences of default. In some cases, the Bank Officials do follow an
amicable route and get their accounts regularized upholding the need of good
relations with the borrower. But, it is not so in some cases and the movement
the Bank issues a demand notice under section 13 (2) of the Act, they tend to
take the proceedings further, though at any stage, the Bank can consider the
proposal for regularization of accounts if there are no other disputes between
the Bank and the borrower in relation to that particular loan transaction or
transactions. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-family: 'Book Antiqua';">2: Powers of DRT<o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Section
17 of SARFAESI Act, 2002 provides a right of appeal against the action
initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrower
or any one aggrieved can challenge the possession notice issued under section
13 (4) of SARFAESI Act, 2002 and there is a time-limit prescribed for
preferring an appeal. However, as the Courts have rightly made it clear that the
borrower is entitled to question all measures initiated by the Bank pursuant to
the possession notice under section 13 (4) and with this interpretation, there
is no much relevance to the time-limit prescribed to prefer an appeal though it
will be in the interests of the borrower to prefer an appeal as early as
possible if there is a genuine grievance with the Bank. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">While
the rights of the borrowers or the persons aggrieved to prefer an appeal under
section 17 of SARFAESI Act, 2002 is almost settled, the issue of powers of Debt
Recovery Tribunal under section 17 of the Act are still debated. From the stage
of maintaining that ‘the DRT is supposed to only look into the procedural
issues’, with the interpretation of Courts, the scope of powers of DRT under section
17 of SARFAESI Act, 2002 is significantly expanded though certain issues still requires consideration. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Emphasizing
that the Debt Recovery Tribunal is empowered to set-aside a sale conducted
under the provisions of the SARFAESI Act, 2002, the Hon’ble Supreme Court of
India in </span><span class="apple-style-span"><b><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">CIVIL APPEAL NO. 4429 OF 2009 (2009 (8) SCC 366, 2009 (8)
MLJ 897; 2009 (8) SCJ 979) </span></b></span><span class="apple-style-span"><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">was pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“23. The intention of the legislature is, therefore, clear
that while the Banks and Financial Institutions have been vested with stringent
powers for recovery of their dues, safeguards have also been provided for
rectifying any error or wrongful use of such powers by vesting the DRT with
authority after conducting an adjudication into the matter to declare any such
action invalid and also to restore possession even though possession may have
been made over to the transferee. The consequences of the authority vested in
DRT under Sub-Section (3) of Section 17 necessarily implies that the DRT is
entitled to question the action taken by the secured creditor and the
transactions entered into by virtue of Section 13(4) of the Act. The
Legislature by including Sub-Section (3) in Section 17 has gone to the extent
of vesting the DRT with authority to even set aside a transaction including
sale and to restore possession to the borrower in appropriate cases.</span></i></span><span class="apple-converted-space"><i><span style="font-family: Georgia;">”<o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-converted-space"><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">Emphasizing that the Debt Recovery
Tribunal can look into the issue of claims and counter-claims under section 17,
the Madras High Court in </span></span><span class="apple-style-span"><b><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">Misons Leather Ltd. Vs. Canara
Bank (2007 (4) MLJ 245), </span></b></span><span class="apple-style-span"><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">was pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“In a given case, the claim of the Bank/Financial
Institutions may be barred by limitation or there may be cases, where the
adjustment of the amount paid is not reflected in the notice or the calculation
of interest may not be in accordance with the contract between the parties.
Needless to say that all such grounds, which render the action of the
Bank/Financial Institutions illegal can be raised in the proceedings under
Section 17 of the Act before the Debt Recovery Tribunal.”</span></i></span><span class="apple-converted-space"><i><span style="font-family: Georgia;"> <o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-converted-space"><span style="font-family: 'Book Antiqua';">Dealing with the issue straight away, the Hon’ble Calcutta
High Court earlier in </span></span><span class="apple-style-span"><b><span style="font-family: 'Book Antiqua';">Star Textiles and Industries Ltd Vs.
Union of India (2008 (3) WBLR 385), </span></b></span><span class="apple-style-span"><span style="font-family: 'Book Antiqua';">was pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“(14.) THE legislature having conferred power on the Debts
Recovery tribunal to decide as to whether measure (s) taken by the secured
creditor in terms of Section 13 (4) of the Act is/are in accordance with the
provisions of the Act or not, it necessarily has to decide whether pre-conditions
for issuance of notice under Section 13 (2) existed or not. That would involve
a determination as to whether there has been default on the part of the
borrower to repay the secured debt or not and further, as to whether
classification of the account as non-performing asset has been made in
accordance with the directions or guidelines as referred to in Section 2 (o) of
the Act or not. If the Debts Recovery tribunal is satisfied that recourse has
been taken to measures specified in section 13 (4) of the Act not in accordance
with the provisions contained in sections 13 (2) read with 2 (o) of the Act, it
has the authority to declare the action of the secured creditor as invalid. At
the same time, the Debts Recovery tribunal may in a given situation find no
fault and uphold the action of the secured creditor. Also, in the exercise of
power conferred by Section 17 of the act, the Debts Recovery Tribunal may
uphold partially the action of the secured creditor by pronouncing that amount
"x" is not the correct computation of liability, but it is "x -
y" which is the liability. That would amount to determination of the exact
amount of debt due and payable by the borrower.”<o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><b><span style="font-family: 'Book Antiqua'; font-size: 11.5pt;">My view:<o:p></o:p></span></b></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">Though
the Debt Recovery Tribunal is empowered to deal with the issues of quantum of
debt and the related claims under section 17 of SARFAESI Act, 2002, there is a
criticism that the Debt Recovery Tribunal avoids adjudication on certain issues
and helps the Bank by allowing the Appeal filed by the borrowers under section
17 on technical grounds and enabling the Banks to further deal with the
borrower. If this is the case, the borrower is forced to approach Tribunal many
times and he is made to run from pillar to post. Logically, the borrower can
insist the Debt Recovery Tribunal to deal with the issues raised by him in his
appeal and if there is an observation in the order against the Bank and for the
borrower, then, that is like a decree unless reversed and the observations do
matter and have binding nature on Banks. This is what is supposed to happen if
the borrower has a really good case with regard to the quantum of amount
demanded by the Bank, but, it is very rare to see issues proceeding this way as
many allege. If the DRT is hesitant or not effective in addressing all the issues
raised by the borrower in his appeal under section 17, then, the borrower will
be left with no remedy and he can not also approach the Civil Court in view of
section 34 and even if he approaches the Civil Court, it is very difficult to
convince and maintain a Civil Suit in respect of a loan transaction where the
Bank has initiated SARFAESI proceedings. </span></span><span class="apple-converted-space"><span style="font-family: 'Book Antiqua';"><o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b><u><span style="font-family: 'Book Antiqua';">3: <st1:city w:st="on"><st1:place w:st="on">Sale</st1:place></st1:city>
of Assets under SARFAESI Act<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Sale
of Assets by the Bank under the provisions of SARFAESI Act, 2002 is often
criticized by the borrowers. In some cases, the auction process is hurriedly
completed and it would be extremely difficult for the borrowers to get the
transaction set-aside though the DRT is empowered to do so under section 17. It
is the responsibility of the Bank to ensure that they get the maximum possible
price for the property in Public Auction as they are the trustees of the
property and as the balance sale consideration, after adjustments, goes to the
borrower. There is lot of complication in this process and it is very difficult
for the borrowers at times to fight with the Banks and it has something to do
with the issue of lack of proper understanding of procedures and law under
SARFAESI Act, 2002. Not only while auctioning the properties under SARFAESI
Act, 2002, the Bank exercise enormous amount of discretion when many properties
are available for auction and the disposal of a property chosen by the borrower
clears the debt. Even from the point of
view of the bidder or purchaser, there can be issues. There may be cases where
the bidder or the purchaser paid the entire sale consideration and litigation
coming to Courts leading to non-conferment of complete ownership right. If the
delay between the payment of sale consideration and actual conferment of clear
title is more, the bidder or purchaser is also in trouble as he will only get a
minimum interest over his investment if the <st1:city w:st="on"><st1:place w:st="on">Sale</st1:place></st1:city> is finally set-aside and the Bank is
asked to repay the Sale Consideration to the auction-purchaser.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Dealing
with the rights of the borrower in getting maximum possible price to the
property in a public auction conducted by the Bank and the vis a vis
responsibility of the Banks, the Hon’ble Madras High Court in <b>K.
Raamaselvam & Others Vs. Indian Overseas Bank, 2009 (5) CTC 385, 2009 (5)
LW 127, 2010 (1) MLJ 313, 2010 AIR (Mad) 93, </b>was pleased to observe as
follows:<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: Georgia;">“For example, if the secured
creditor, on the basis of the relevant materials, comes to a conclusion that
the highest bid offered, even though higher than the reserve price, does not
reflect the true market value and there has been any collusion among the
bidders, the secured creditor in its discretion may refuse to confirm such
highest bid notwithstanding the fact that the highest bid is more than the
upset price. This is because the secured creditor is not only interested to
realise its debt, but also expected to act as a trustee on behalf of the
borrower so that the highest possible amount can be generated and surplus if
any can be refunded to the borrower. The first proviso in no uncertain terms
makes it clear that no sale can be confirmed by the authorised officer, if the
amount offered is less than the reserve price specified under the Rule 8(5).
However, the subsequent proviso gives discretion to the authorised officer to
confirm such sale even if the bid is less than the reserve price, provided the
borrower and the secured creditor agree that the sale may be effected at such
price which is not above the reserve price. This is obviously so because the
property belongs to the borrower and as security for the secured creditor and
both of them would be obviously interested to see that the property is sold at
a price higher than the reserve price. However, if both of them agree that the
property can be sold, even it has not fetched a price more than the reserve price;
the authorised officer in its discretion may confirm such auction.”<o:p></o:p></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Book Antiqua';">My view:<o:p></o:p></span></b></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">Though
it is settled that the Bank is supposed to mandatorily follow the procedure
prescribed for conduct of a public auction under SARFAESI Act, 2002, it all
depends upon the facts and circumstances of the case and the underlying issue
is getting the maximum possible price for the property. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><b><u><span style="font-family: 'Book Antiqua';">4. High Court’s Jurisdiction in a proceeding
under SARFAESI Act, 2002<o:p></o:p></span></u></b></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">Though
High Courts used to entertain writ petitions under Article 226 of Constitution
of India challenging the notice under section 13 (2) of SARFAESI Act even
initially, there was a considerable amount of restraint and the emphasis was
always to ensure that the borrower raises all his issues under section 17 of
the Act by preferring an Appeal. The
jurisdiction under Article 226, 227 and Article 32 of Constitution of India are
untouchable and the Courts can only take a decision as to when to exercise such
a jurisdiction or not. It is laudable that the High Courts have not proceeded
in diluting the provisions of SARFAESI Act, 2002 and the Courts have
strengthened the process in public interest and in the interests of the Bank. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">However,
considering the effectiveness of remedy available before the Debt Recovery
Tribunal and clear arbitrariness in dealing with the borrowers under SARFAESI
Act, 2002, many feel that there is no wrong if the High Court entertains Writ
Petitions under Article 226 and as the High Court will also pass reasoned order
as, now a days, it is not taking much time to get a Writ Petition disposed of.
Again, the Courts understand the need of early disposal of Writ Petitions in
SARFAESI matters and great caution is exercised in this regard as I feel. Many believe that the borrowers are
unnecessary made to approach the Debt Recovery Tribunal where the process is
slow for the borrowers and where the borrowers are made to deposit substantial
amount of outstanding due for getting any interim stay. Once the borrower
approaches the Debt Recovery Tribunal and if he is aggrieved of the proceedings
of the DRT or any order, the next remedy available for him is to file an appeal
before the DRAT which is again a very slow process and not effective. Again, if it is a challenge against the final
order in an appeal under section 17 of SARFAESI Act, 2002, the borrower has to
deposit substantial amount and it can even be 75%. Thus, the borrower is made
to deposit the entire money or forget his property even when his grievance is
not adjudicated. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">Emphasizing
that ordinarily the borrower is not allowed to knock the jurisdiction of High
Court under Article 226 in SARFAESI matters, the Calcutta High Court, in<b> Annapurna Vs. State of West Bengal, 2009
(4) CalLT 557, 2009 AIR(Cal) 236</b>,<b> </b>was
pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“25. The overriding provision in Section 35 of the Act and
the intent thereof apparent from Section 37 thereof that provides that the Act
is in addition to, and not in derogation of, certain other regulatory and
general statutes, conceives of a single window redress before the Debts
Recovery Tribunal. The jurisdiction under Article 226 of the Constitution
cannot be taken away by such a statute but a grievance capable of being
redressed by the tribunal under the said Act should ordinarily not be allowed
to proceed in the High Court.” <o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">On
the same lines and in support of exercise of extraordinary jurisdiction under
Article 226 even in matters where SARFAESI Act is invoked and dealing with the
argument of availability of alternative remedy, the Hon’ble Madras High Court
in <b>Sheeba Philominal Merlin &
Another Vs. The Repatriates Co-op Finance & Development Bank Ltd., Chennai
& Others, 2010 (4) LW 497, 2010 (5) CTC 449, 2010 (7) MLJ 882, </b>was
pleased to observe as follows:<o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><i><span style="font-family: Georgia;">“35. With regard to alternative remedy, it is seen that
there is a statutory violation by not issuing notice under Section 13(2) and
13(4) as per the Rule 3 of the Security Interest (Enforcement) Rules 2002.
There is contravention of statute and violation of principles of natural justice
and also violation of constitutional right to hold property as per Article 300A
of the Constitution of <st1:country-region w:st="on"><st1:place w:st="on">India</st1:place></st1:country-region>.
It has been held by the Honourable Supreme Court in Vimala Ben Ajith Bhai Patel
-Vs- Vatsala Ben Ashok Bhai Patel reported in 2008 (4) SCC 649 that the right
to property can be taken away only as per law and right to hold the property
has been glorified as "Human Right".</span></i></span><span class="apple-converted-space"><i><span style="font-family: Georgia;"> <o:p></o:p></span></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: Georgia;"><br />
<span class="apple-style-span">36. That apart, it is well settled law that
availability of an alternative remedy is not an absolute bar for exercising the
writ jurisdiction and it is only a self-imposed restraint on its power. This
has been held so in the judgment in State of Uttar Pradesh -Vs- Mohammad Nooh
reported in AIR 1958 SC 86, in Whirlpool Corporation -Vs- Registrar of Trade
Marks, Mumbai and others reported in AIR 1999 SC 22, and in Mariamma Roy -Vs-
Indian Bank and others reported in 2009 AIR SCW 654. Therefore the plea of
availability of alternate remedy miserably fails. The petitioners cannot
approach the Tribunal, as the measures taken by the Bank were belatedly known
to the petitioners and by that time the time prescribed under the Act was over.
The Judgement in Hongo India (P) Ltd relied upon by Mr.K.M.Vijayan, in fact,
justifies the contention of the petitioners. As per the judgement, Courts
cannot extend the time limit prescribed by the Statute. As such the only remedy
for the petitioners is to file a writ petition which has been rightly done by
them.</span><span class="apple-converted-space"> <o:p></o:p></span></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<i><span style="font-family: Georgia;"><br />
<span class="apple-style-span">37. The Tribunal is not competent to look into
violation of fundamental rights and constitutional rights and this Court being
a custodian of Constitutional rights is entitled to examine the matter. A
Constitution Bench of the Honourable Supreme Court in its judgment in State of
West Bengal and others -Vs- The Committee For Protection of Democratic Rights,
West Bengal and others reported in 2010(2) Scale 467 held that Article 226 of
the Constitution of India can be exercised for enforcing any legal right
conferred by a statute and it is further held that under Article 226 of the
Constitution of India, the High Court has got more wider power than the
Honourable Supreme Court. In Secretary Cannanore Muslim Educational
Association, <st1:city w:st="on">Kanpur</st1:city> vs. State of <st1:state w:st="on"><st1:place w:st="on">Kerala</st1:place></st1:state> reported in 2010
(5) SCALE 184, the <st1:street w:st="on"><st1:address w:st="on">Apex Court</st1:address></st1:street>
held that the High Court is conferred with wide power to " reach injustice
whenever it is found". Therefore as injustice is writ large and glaring,
necessarily the judicial arm of this court has to reach there and it cannot be
prevented by plea of availability of alternative remedy.”<o:p></o:p></span></span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><b><span style="font-family: Georgia; font-size: 11.5pt;">My view:<o:p></o:p></span></b></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span class="apple-style-span"><span style="font-family: 'Book Antiqua';">If there
is clear unfairness or arbitrariness on the part of the Bank in invoking the
provisions of SARFAESI Act or in the process, in my view, the High Court should
provide relief to the borrower without laying much emphasis on the issue of
availability of alternative remedy under section 17 of SARFAESI Act, 2002.
Banks are in no way impacted with this as the High Courts are always concerned
with the public interest and as they will be disposing of the Writ Petitions
under Article 226 so early, on request, in respect of SARFAESI matters.</span></span><i><span style="font-family: Georgia; font-size: 11.5pt;"> </span></i></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<st1:street w:st="on"><st1:address w:st="on"><span class="apple-style-span"><b><u><span style="font-family: 'Book Antiqua';">5.
Civil Court</span></u></b></span></st1:address></st1:street><span class="apple-style-span"><b><u><span style="font-family: 'Book Antiqua';">’s
jurisdiction:<o:p></o:p></span></u></b></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">There
is a clear Bar under section 34 of SARFAESI Act, 2002 on Civil Courts in
dealing with SARFAESI related issues. It is also very difficult to convince a
particular <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
that it has jurisdiction to entertain a particular suit against the Bank
irrespective of Bank referring to the provisions of SARFAESI Act. <st1:street w:st="on"><st1:address w:st="on">Civil
Court</st1:address></st1:street>’s jurisdiction is not completely barred and
infact can not be barred even in cases where the Bank has invoked the provisions
of SARFAESI Act, 2002. If the DRT is not clearly empowered to deal with certain
issues raised by the borrower or to be raised by the borrower or the aggrieved
person, the borrower or the aggrieved can certainly approach <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> and it is settled. But, when
a borrower is entitled to approach the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> depending upon the facts of
that particular case, then, it is certain that it is not easy to convince a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> that it
has jurisdiction to entertain a particular suit against the Bank when the Bank
has invoked the provisions of SARFAESI Act, 2002. If the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> is convinced of entertaining
a particular suit against the Bank, then, obviously, there can be an injunction
against the Bank in proceeding under the provisions of SARFAESI Act and there
is nothing to worry on this as only very few negligible cases qualify to be
maintained before a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>.
There is nothing to worry for the Banks too with regard to <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>’s jurisdiction and they are
entitled to immediately seek redressel under Article 227 if they feel that the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street> is
exercising the jurisdiction which is not vested. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: 'Book Antiqua';">There
can really be genuine cases which can be and should be decided by the <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>.
However, with some borrowers trying to stall the SARFAESI proceedings by filing
a suit in <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
and High Courts coming heavily, it is often felt that the borrower has no
remedy before a <st1:street w:st="on"><st1:address w:st="on">Civil Court</st1:address></st1:street>
if the Bank invokes the provisions of SARFAESI Act once. It is a misconception and a Civil Suit before
a Civil Court against the Bank is maintainable in appropriate cases
irrespective of whether the Bank has invoked the provisions of SARFAESI Act or
not. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<b><span style="font-family: 'Book Antiqua';">Note:</span></b><span style="font-family: 'Book Antiqua';"> the views expressed are my personal.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com11tag:blogger.com,1999:blog-5623384825844985559.post-35587276451090436592012-04-14T02:50:00.003-07:002012-04-14T02:52:40.991-07:00Powers of Company Law Board to ascertain information under section 397/398?<p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Georgia; ">Shareholders qualifying under section 399 of Companies Act, 1956 can approach the Company Law Board under section 397/398 seeking preventive and remedial measures against the oppression and mis-management in the Company. Though, section 397/398 is meant to provide relief to the minority shareholders against the actions of the majority, even the majority can approach under section 397/398 of the Companies Act, 1956 and at times, the majority may not be in actual control of the company or the majority becomes artificial minority. It is settled that the petitioner under section 397/398 of the Companies Act, 1956 has to establish a case of ‘oppression & mis-management’ and these events to be continuous and an isolated incident can not entitle the petitioner to maintain a petition under section 397/398 of the Companies Act, 1956. There were many cases which went up to Supreme Court on the issue of maintainability; however, the interpretation on ‘maintainability’ has significantly changed. Even an isolated incident prejudicial to the interests of the minority shareholders can be agitated under section 397/398 of the Companies Act, 1956 now. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Georgia; ">The foremost important thing for the minority shareholders approaching CLB under section 397/398 is to prove that there is a <i>prime facie</i> case of ‘oppression and mismanagement’ and other required things are pleaded technically. Any action by the majority in the Company which is prejudicial to the interests of the minority be seen as ‘oppression and mismanagement’ in the Company. In many cases, it is very difficult to establish the case of ‘oppression and mismanagement’ as the minority will not be having any control in the company, access to books of accounts and the information. The minority normally makes-out a case of ‘oppression and mismanagement’ against the majority on the basis of allotment of shares diluting the existing shareholding and on the basis of figures shown in the ‘financial statements’. The minority shareholders normally also depend on the ‘non-filing of returns’ and the required documents with the ‘Registrar of Companies’ in order to make a point that the activity of the management in the Company is suspicious and prejudicial to the interests of the minority. It is very easy for the minority shareholders approaching Company Law Board under section 397/398 to prove their case when the Company is not adhering to the principles of ‘corporate governance’ or due compliance of company regulations. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Georgia; ">Even after establishing the <i>prime facie</i> case of ‘oppression and mis-management’, it is the responsibility of the Petitioner approaching CLB to prove the case against the majority in order to get the relief sought. It is very difficult for the minority shareholders to technically establish their point to the CLB as the minority shareholders normally allege that the figures given in the financial statements are not true and are not supported by any documentary proof. It is difficult for the Company Law Board to ascertain the veracity of the figures given in the financial statements unless those are verified by the competent and independent professionals. The majority can be raising many technical objections if the minority wants to further look into the audited accounts. However, unless facts are established and unless the CLB facilitates the minority shareholders to get the required information from the majority, it would be highly difficult for the petitioners to establish their case. Despite all the technical objections, there is no bar on the powers of Company Law Board to pass any order under section 397/398 and under section 403 of the Companies Act, 1956 in order to ascertain the facts and pending the disposal of main Company Petition. Normal rules of Civil Procedure have no application to the proceedings of Company Law Board and the CLB is entitled to pass any order under section 397/398 in order to prevent the continuance of ‘oppression and mismanagement’. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Georgia; ">Dealing with a case of order of ‘investigative audit’ in the light of section 237 (b) in a case under section 397/398 of the Companies Act, 1956, in a judgment dated 21.2.2011 in <b><i>Company Appeal No.6 of 2009 </i>in<i> K.Muthusamy vs S.Balasubramanian</i></b>, the Hon’ble <b>Madras High Court</b> has observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><i><span style="font-family: Georgia; ">“84. A careful consideration of the statutory provision and the decisions discussed in the previous paragraphs, make it clear (i) that the power under Section 237(b) is administrative in nature, in view of the observations of the Apex Court in paras 10 and 61 of the judgment in Barium Chemicals and in para 3 of the decision in Rohtas Industries; (ii) that the power conferred by the provisions can be exercised even suo motu by the Company Law Board and (iii) that while testing the correctness of an order of the Company Law Board, directing investigation, the powers of the Company Court are restricted to the parameters laid down in the above decisions.<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:18.0pt;background:white"><i><span style="font-family: Georgia; ">85. Once it is seen that the power is administrative and can be exercised even suo motu, there is no merit in the contention that in a petition under Sections 397 and 398, the Company Law Board was not entitled to appoint an Auditor to conduct an investigative audit. The Company Law Board, before appointing an Auditor, has taken note of the existence of the circumstances, as stipulated by clauses (i), (ii) and (iii) of Section 237 (b). In view of the decision of the Apex Court in Rohtas Industries, I have also examined independently, whether the circumstances pointed out by the Company Law Board existed or not and I am satisfied that they did. Therefore, the fourth contention on the scope of the power under Section 237(b) cannot be sustained.<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:18.0pt;background:white"><i><span style="font-family: Georgia; ">86. In any case, the Company Law Board has not exercised the power to direct an investigative audit, suo motu in this case. It has done so only on a petition filed by the respondents 1 to 5 herein. The company petition filed by the respondents 1 to 5 herein was not only under Sections 397 and 398, but also under Sections 402 and 403 read with Sections 235 and 237 and Schedule XI. Therefore, all that was required of the Company Law Board was to see whether there were circumstances suggesting the existence of the contingencies stipulated in clauses (i) to (iii), warranting the Board to form an opinion under Section 237 (b). It is clear from the materials on record (i) that the Board actually formed an opinion; and (ii) that the opinion was based upon the parameters prescribed in the three clauses under Sections 237 (b). Since this Court has the power, in view of the decision in Rohtas Industries, to satisfy itself about the existence of those circumstances, I have also independently analysed under question No.3, the existence of those circumstances. Therefore, the contention based on the scope of Section 237 (b) is not well founded.”<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:18.0pt;background:white"><b><span style="font-family: Georgia; ">The Court has further observed that:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:18.0pt;background:white"><i><span style="font-family: Georgia; ">“89. Moreover, the powers of the CLB have to be understood in the light of various provisions of the Act. By virtue of Section 406, the provisions of Sections 539 to 544 are made applicable to proceedings under Sections 397 and 398, in the modified form as set out in Schedule XI. The difference in the language employed is not very substantial. While Section 539 as found in the body of the Act, uses the expression ‘contributory of a company’; Section 539 in Schedule XI, uses the expression ‘member of a company’; Section 539 as found in the body of the Act, applies to a company ‘which is being wound up’; while the corresponding Section in Schedule XI applies to a company in respect of which an application under Section 397 or 398 has been made. Similarly, Section 540 as contained in the body of the Act, applies to a company which is subsequently ordered to be wound up or which subsequently passes a resolution for voluntary winding up. But the corresponding provision in Schedule XI, applies to a company in respect of which an order under Section 397 or 398 is made subsequently.<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:18.0pt;background:white"><i><span style="font-family: Georgia; ">90. Therefore, it is clear that the powers conferred upon the winding up Court, in relation to ‘antecedent offences’ under Sections 539 to 544, have been extended to proceedings under Sections 397 and 398, by virtue of Section 406, in a modified form as found in Schedule XI. Since the modifications are only cosmetic in nature, it is clear that the Company Law Board has similar powers in relation to proceedings under sections 397/398. In such circumstances, the impugned order passed by the Company Law Board, cannot be said to be vitiated by any error of jurisdiction.”<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:18.0pt;background:white"><b><span style="font-family: Georgia; ">Note:</span></b><span style="font-family: Georgia; "> the views expressed are my personal. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com2tag:blogger.com,1999:blog-5623384825844985559.post-63347543784531584942012-04-04T23:46:00.001-07:002012-04-04T23:48:32.353-07:00Getting relief from DRT under SARFAESI Act, 2002?<p style="text-align:justify;line-height:15.75pt"><span style="font-family: Georgia; ">It would be clueless for the professionals at times in answering the queries of the borrowers facing proceedings under <i>‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’</i>. If the Bank initiates proceedings under the provisions of SARFAESI Act, 2002, then, in view of section 34, no <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> shall have jurisdiction to entertain any suit or legal proceeding in respect of the same subject matter. Though there can not be any such restriction in any act when it comes to High Court exercising jurisdiction under Article 226 of Constitution of India, the High Courts too may hesitate to look into the infirmities committed by the Bank under SARFAESI Act, 2002 and the Court may lay emphasis on the availability of ‘alternative remedy’ to the borrowers under section 17 of the SARFAESI Act, 2002. Section 34 of the Act is as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><i><span style="font-family: Georgia; ">“34. Civil Court not to have jurisdiction.- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”<o:p></o:p></span></i></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family: Georgia; ">Relief before DRT under section 17:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Georgia; ">Initially, it is held by the Courts and followed by the Debt Recovery Tribunals that the Tribunal, under section 17, can only see as to whether there is any procedural irregularity in the action initiated by the Bank. However, now, it is settled, atleast as a legal principle, that the Debt Recovery Tribunal can look into all allegations or issues while entertaining an Appeal under section 17 and it extends to the issue of looking at the correctness of the amount/outstanding amount demanded by the Bank in its notice under section 13 (2). Courts have further held that the DRT has the power to restore the possession of the ‘secured asset’ back to the borrowers in appropriate cases. It all may appear good as a principle of law, but, the reality is different. If the borrower files any appeal under section 17, then, the DRT will look at the outstanding amount in the notice under section 13 (2) and insists for the deposit of 20 or 30% of the outstanding before granting any interim relief and this interim relief can only be for some time or till the disposal of the Appeal in some cases. It is alleged that the DRT emphasis on the amount demanded by the Bank rather the grievance of the borrower or borrowers. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family: Georgia; ">What if borrower succeeds?<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Georgia; ">Again, even if borrower succeeds in his Appeal under section 17 of the SARFAESI Act, 2002, the borrower may not be happy. It is interesting. Because, the borrower might have clearly alleged or established that the Bank was at fault in adhering to the terms and conditions of the sanction and might have wanted the DRT to force the Bank to act upon the agreed terms. But, it will not happen and the DRT may simply set-aside the possession notice issued by the Bank under section 13 (4) of the Act and the Bank impliedly have an opportunity to start the proceedings afresh. There may not be any difficulty for a Public Sector Bank or the officers of the Bank to initiate proceedings against the borrower again and again. Like-wise, on some technical grounds, the borrower may succeed in his Appeal under section 17 of the SARFAESI Act, 2002, but, it would be interesting to understand as to what that means. That may be nothing at times unless the borrower is interested only in getting some time to repay the outstanding amount. It is felt that the Debt Recovery Tribunal can grant no relief to the borrowers under section 17 except asking the Bank to start the proceedings afresh. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><st1:street st="on"><st1:address st="on"><b><span style="font-family: Georgia; ">High Court/Civil Court</span></b></st1:address></st1:street><b><span style="font-family: Georgia; ">’s jurisdiction:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Georgia; ">In view of the Bar under section 34 of SARFAESI Act, 2002 and in view of the composition of Tribunal, the Tribunal should have all powers to adjudicate the claim and to issue suitable directions to the Bank or suitable relief to the borrowers. The High Court can be issuing various directions to the Bank in a SARFAESI proceeding if it chooses to entertain any Writ Petition under Article 226 of Constitution of India. Why can’t it be done by the Tribunal also? In view of the settled practice, as many say, before the Debt Recovery Tribunals and in view of the fact that the borrower needs a forum to agitate his grievance, it is impossible according to me to say that ‘no civil court shall have jurisdiction’ or impossible to confine the jurisdiction of Civil Court in cases only when there exists ‘fraud’ etc. <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> shall have jurisdiction in deciding disputes between the Bank and the borrower unless there exists an ‘Arbitration Clause’. Just because, the Bank initiates the proceedings under the provisions of SARFAESI Act, 2002, it can not be a Bar on the Civil Court or the High Court under Article 226 and it all depends upon the facts and circumstances of the case. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family: Georgia; ">Why there can’t be suitable compensation:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Georgia; ">There exists a provision in the SARFAESI Act, 2002 that the borrower should be compensated if it is proved that the Bank is at fault in a proceeding under the provisions of SARFAESI Act, 2002. While section 19 of the Act deals with the issue of payment of costs and compensation to the borrowers; section 32 of the Act protects the action taken in good faith. Section 19 and section 32 of the Act are as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><i><span style="font-family:Georgia">19. Right of borrower to receive compensation and costs in certain cases. – If the Debt Recovery Tribunal or the Court of District Judge, on an application made under section 17 of section 17A or the Appellate Tribunal or the High Court on an appeal preferred under section 18 or section 18A, holds that the possession of secured assets by the secured creditor is not in accordance with the provisions of this Act and rules made thereunder and directs the secured creditors to return such secured assets to the concerned borrowers, such borrower shall be entitled to the payment of such compensation and costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal or the High Court referred to in section 18B. <o:p></o:p></span></i></p> <p style="text-align:justify"><em><span style="font-family: Georgia; ">32. Protection of Action taken in Good Faith- No suit, prosecution or other legal proceeding shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditors or borrower for anything done or omitted to be done in good faith under this Act.</span></em><span style="font-family: Georgia; "><o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Georgia">When there exists a fault on the part of the Bank, the borrower should suitably be compensated under section 19, but, in reality, it is not happening and it should happen. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Georgia"><br /></span></p> <p class="MsoNormal"><span style="font-family:Georgia"> </span></p> <p class="MsoNormal"><b><span style="font-family:Georgia">Courts to the rescue of borrowers:<o:p></o:p></span></b></p><p class="MsoNormal"><b><span style="font-family:Georgia"><br /></span></b></p> <p class="MsoNormal"><b><span style="font-family:Georgia"> </span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Georgia">While resisting to entertain the Writ Petitions under Article 226 and 227 in respect of SARFAESI matters as many believe, the Courts have always tried to make the proceedings before the Debt Recovery Tribunal meaningful. The Courts made it clear that the Bank should apply its mind in disposing of the objections raised by the borrower under section 13 (3). The Courts have held that the DRT has all powers under section 17 and the DRT can entertain appeals challenging any proceeding of the Bank pursuant to the issuance of notice under section 13 (4) of the Act. Thus, Courts have done its best to make the Debt Recovery Tribunals really effective. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Georgia"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Georgia"> </span></b></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Georgia">Unless there is a course correction as to how the Tribunals deal with the Appeals of the borrowers under section 17, it is very difficult to stick to the principle that the Civil Courts and the High Courts should avoid interfering in SARFAESI proceedings initiated by the Bank. <o:p></o:p></span></b></p><p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Georgia"><br /></span></b></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Georgia"> </span></b></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Georgia">Note: </span></b><span style="font-family:Georgia">the views expressed are my personal. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Georgia"> </span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com4tag:blogger.com,1999:blog-5623384825844985559.post-47977258762934941992012-03-14T23:35:00.001-07:002012-03-14T23:39:22.162-07:00DRT & SARFAESI: How High Court’s intervention in SARFAESI matters justified?<p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>No one can defend a willful defaulter and no one can possibly object to the need of providing a special legislation to enable the Banks to recover their dues speedily and thus reduce their ‘Non-performing Assets’. Constitutional validity of ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (in short ‘SARFAESI’) was upheld by the Supreme Court and the Courts have given guidelines from time to time as to how to interpret various provisions of SARFAESI Act, 2002. The Apex Court and even the High Courts have discouraged borrowers in approaching High Courts in SAFAESI matters. Initially, the borrowers used to question even the notice under Section 13 (2) of SARFAESI Act, 2002 in High Court under Article 226 of Constitution of India and there were cases where the proceedings of the Bank were stayed even in those cases. Thereafter, the Courts were very strict in entertaining challenge to demand notice issued by the Bank under section 13 (2) of the Act. Instead, the Courts have, from time to time, extended the scope of enquiry of the Debt Recovery Tribunals under Section 17 of the Act and also gone to the extent that every action initiated or taken by the Bank pursuant to section 13 (4) of the Act can be challenged under Section 17 of the Act. Despite so many guidelines and exercise of restraint of jurisdiction under Article 226 of Constitution of India, it is of the concern of many borrowers or bona fide borrowers or guarantors that the relief before Debt Recovery Tribunal under section 17 is not effective. It is increasingly felt that the Debt Recovery Tribunal is a forum to support the Bank irrespective of its mistakes and it is not for the borrowers or guarantors at all. The Tribunal is now being seen by many as an organization working under the control of Finance Ministry with a specific objective rather than a ‘Special Court or Tribunal’ dealing specifically with the recovery matters as the Banks may find it difficult to get this process completed in Civil Courts. There can not be any major difference between a ‘Tribunal’ and ‘Court’ except that even a non-judicial member can be a part of Tribunal and the Tribunal need not follow the ‘Civil Procedure Code’. Tribunals are normally created with a specific objective and through a special legislation and follows a different kind of procedure as prescribed and the object is to reduce the burden in Courts and making a specialized body to decide the issues in accordance with law. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; text-align: justify; "><span>In this background, it is worth noting the observation of a Constitution Bench of the <b>Supreme Court</b> in the case of <b>Associated Cement Companies Ltd. V. P.N.Sharma, AIR 1965SC1595</b>, speaking through <b>Gajendragadkar, C.J</b>., while holding that the appellate authority under the Punjab Welfare Officers Recruitment and Conditions of Service Rules, 1952, is a Tribunal, observed:</span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i>“…Special matter and questions are entrusted to them for their decision and in that sense, they share with the courts one common characteristic; both the courts and the Tribunals are ‘constituted by the State and are invested with judicial as distinguished from purely administrative or executive functions…’ They are both adjudicated bodies and they deal with and finally determine disputes between parties which are entrusted to the jurisdiction….As in the case of courts, so in the case of Tribunals, it is the State’s inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial function which they discharge. Judicial functions and judicial powers are one of the essential attributes of a sovereign State, and on considerations of policy, the state transfers its judicial functions and powers mainly to the courts established by the Constitution; but that does not affect the competence of the State, by appropriate measures, to transfer a part of its judicial powers and functions to Tribunals by entrusting to them the task of adjudicated upon special matters and disputes between parties. It is really not possible or even expedient to attempt to describe exhaustively the features which are common to the Tribunals and the courts, and features which are distinct and separate. The basis and the fundamental feature which is common to both the courts and the Tribunals is that they discharge judicial functions and exercise judicial powers which inherently vest in a sovereign state.”</i></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; text-align: justify; "><span>In a landmark judgment of <b>R.Gandhi Vs. Union of India</b>, the Apex Court has upheld the judgment of Madras High Court to a great extent and with the result, the establishment of ‘National Company Law Tribunal’ and ‘Appellate Tribunal’ has not taken place till today. The Madras High Court has dealt with the issue clearly and the Supreme Court has given the final verdict on the issue and the Companies Bill is, now, as I think, pending before the Standing Committee. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>It was infact was a very serious issue and in the same judgment of R.Gandhi Vs. Union of India, the Madras High Court has extracted the judgment of Delhi High Court on the same issue and it is as follows:</span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i>“In the case of Union of India V. Delhi High Court Bar Association (2002) 110 Comp Case 141; (2002) 4 SCC 275, a two-judge Bench of the court held that the Debt Recovery Tribunals through it may not strictly fall within the concept of judiciary as envisaged by article 50, it is nevertheless an effective part of the justice delivery system. It was also held therein that the creation of such Tribunals in the place of a civil court to decide civil disputes relating to debt recovery matters does not interfere with the independency of judiciary. The court held that nobody has an absolute right to demand that the disputes be adjudicated upon only by a civil court under the Code of Civil Procedure.</i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i><br /></i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i>The court observed at paragraphs 24 and 25 of that judgment (page 157):</i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i><br /></i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i>The manner in which a dispute is to be adjudicated upon is decided by the procedural laws which are enacted from time to time. It is because of the enactment of the Code of Civil Procedure that normally all disputes between the parties of a civil nature would be adjudicated upon by the civil courts. There is no absolute right in anyone to demand that his dispute is to be adjudicated upon only by a civil court. The decision of the Delhi High Court proceeds on the assumption that there is such a right. As we have already observed, it is by reason of the provisions of the Code of Civil Procedure that the civil court had the right, prior to the enactment of the Debt Recovery Act, to decide the suits for recovery filed by the banks and financial institutions. This forum, namely, that of a civil court, now stands replaced by a Banking Tribunal in respect to of the debts due to the bank. When in the Constitution articles 233A and 323B contemplate establishment of a Tribunal and that does not erode the independence of the judiciary, there is no reason to presume that the Banking Tribunals and the Appellate Tribunals so constituted would not be independent, or that justice would be denied to the defendants or that the independence of the judiciary would stand eroded.</i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i><br /></i></span></p><p class="MsoNormal" style="font-weight: normal; text-align: justify; "><span><i>Such Tribunals, whether they pertain to income-tax or sales tax or excise and customs or administration, have now become an essential part of the judicial system in this country. Such specialized institutions may not strictly come within the concept of the judiciary, as envisaged by article 50, but it cannot be presumed that such Tribunals are not an effective part of the justice delivery system, like courts of law. It will be seen that for a person to be appointed as a Presiding Officer of a Tribunal, he should be one who is qualified to be a District Judge and, in case of appointment of the Presiding Officer of the Appellate Tribunal he is, or has been, qualified to be a judge of a High Court or has been member of the Indian Legal Service who has held a post in Grade I for at least three years or has held office as the Presiding Officer of a Tribunal for at least three years. Persons who are so appointed as Presiding Officers of the Tribunal or of the Appellate Tribunal would be well versed in law to be able to decide cases independently and judiciously. It has to be borne in mind that the decision of the Appellate Tribunals is not final, in the sense that the same can be subjected to judicial review by the High Court under articles 226 and 227 of the Constitution.”</i></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; text-align: justify; "><span><b>Why many say that the relief before Debt Recovery Tribunal is not effective?</b></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>1.<span class="Apple-tab-span" style="white-space:pre"> </span>The ‘section office’ attached to these Tribunals appears to be implementing directives of the Bank or Bank officials rather acting as officers of a Court or Tribunal. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>2.<span class="Apple-tab-span" style="white-space:pre"> </span>On mere technical grounds, the ‘section office’ attached to these Courts or Tribunals return or reject papers making the Borrower/Appellant to run from pillar to post. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>3.<span class="Apple-tab-span" style="white-space:pre"> </span>While the Borrower or the Appellant struggles to express his grievance and seek justice from Tribunal, the Bank proceeds with their action under SARFAESI Act and even completes the sale of ‘Sale of Secured Asset’.</span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>4.<span class="Apple-tab-span" style="white-space:pre"> </span>There may not be presiding officers to the Tribunal at times without having an effective alternative arrangement.</span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>5.<span class="Apple-tab-span" style="white-space:pre"> </span>The Tribunal keeps the matters pending without passing any orders and the Bank will not stay their proceedings and takes every opportunity to effectively use the provisions of SARFAESI Act, 2002. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>Like-wise, borrowers or the litigants attribute several reasons as to why the relief provided before the Debt Recovery Tribunal under Section 17 of SARFAESI Act, 2002 is not effective. If the borrower approaches the High Court under Article 226 questioning the clear arbitratory exercise of power, the High Court will be asking the borrower as to why he can not avail the remedy provided under Section 17 of the Act. The borrower can not approach the Civil Court. If the borrower looses his case on technical grounds and despite having a good ground, he will have to make substantial deposit for maintaining an appeal before Debt Recovery Appellate Tribunal. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>As lot of people will have exposure to Banks, the misuse of provisions of SARFAESI Act, 2002 by the Banks, at times, is being constantly discussed. The voice against Banks when the Bank initiates SARFAESI proceedings is increasing day-by-day. There are serious allegations very often against Banks when they proceed with the sale of ‘Secured Asset’. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span>Now, it should become a regular practice that when there is a good case and clear arbitrariness on the part of the Bank in proceeding under SARFAESI Act, 2002, the High Court can interfere and the reasons for exercise of power be stated in brief while granting relief to the borrowers. There are cases where the High Courts have come heavily on the Banks and their actions under SARFAESI Act, 2002. This exercise is likely to continue and the High Courts may be forced to listen to the grievance of the borrowers in SARFAESI matters despite the argument of the Bank that “anyone aggrieved can approach Debt Recovery Tribunal under Section 17”. </span></p><p class="MsoNormal" style="font-style: normal; font-weight: normal; text-align: justify; "><span><br /></span></p><p class="MsoNormal" style="font-style: normal; text-align: justify; "><span><b>Note:</b> the views expressed are my personal. </span></p><div style="font-weight: normal; text-align: justify; font-family: Georgia, serif; font-size: 100%; font-style: normal; font-variant: normal; line-height: normal; "><br /></div><p style="font-style: normal; font-weight: normal; "></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com1tag:blogger.com,1999:blog-5623384825844985559.post-75321601448113807292012-03-12T01:43:00.001-07:002012-03-12T01:46:50.343-07:00SARFAESI Act: Can the Bank adopt unfair/illegal methods to recover its due?<p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">Recovery of its due has been a hectic exercise for the Banks in the absence of a special legislation. ‘Non-performing Assets’ were growing and a need was felt to reduce the ‘Non-performing Assets’ of the Banks drastically. As the recovery through Courts was a difficult exercise for the Banks, initially, a special legislation called ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’ was enacted creating a Special Tribunal called ‘Debt Recovery Tribunal’. Under the Act, the Banks are entitled to approach the Tribunal by filing an ‘Original Application’ which is similar to filing a suit in <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> proceedings. However, unlike the ‘<st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street>’ which is supposed to follow the ‘Civil Procedure Code’, a special and simple procedure has been prescribed under ‘The Recovery of Debts due to Banks and Financial Institutions Act, 1993’. At the end of adjudication, the Tribunal is supposed to grant a certificate called ‘Recovery Certificate’ infavour of the Bank crystallizing the amount to be recovered from the borrower and it is like a ‘Decree’ granted by a Civil Court. There was a mechanism attached to the Debt Recovery Tribunal to conduct execution proceedings pursuant to the grant of ‘Recovery Certificate’. Thus, with ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’, the Banks were enabled to recover their dues speedily through the proceedings before the Special Tribunal called ‘Debt Recovery Tribunal’.<o:p></o:p></span></p><p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">However, the object of reducing ‘Non-performing Assets’ could not be achieved even after enacting ‘Recovery of Debts due to Banks and Financial Institutions Act, 1993’ and as a result, another legislation on the similar field was enacted and it is ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Called ‘SARFAESI Act’ in short)’. Under SARFAESI Act, 2002, the Bank can determine the outstanding due after noting the objections from the borrower/guarantor if any and can proceed against the ‘secured asset’ by taking physical possession of the same and initiating auction proceedings in accordance with the provisions and the SARFAESI rules. Under SARFAESI Act, the Bank need not approach the Courts for getting the due crystallized as it will do everything on its own and the only occasion for the Bank to approach Court is under Section 14 of the Act seeking police assistance etc. while taking physical possession of the ‘Secured Asset’. The borrower or any person aggrieved is provided with a right to question the action of the Bank under SARFAESI Act, 2002 by filing an appeal to the Debt Recovery Tribunal under Section 17 of the Act. On different provisions of SARFAESI Act, 2002, the Courts have passed some land-mark judgments making good balance between the object of SARFAESI Act, 2002 and the interests of the borrower. <o:p></o:p></span></p><p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">Few brief points, pursuant to the judgments of Constitutional Courts on SARFAESI Act, 2002, are as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="font-family: Georgia, serif; margin-top: 0in; " start="1" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l1 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">While upholding the constitutional validity of ‘SARFAESI Act, 2002’, Courts have made it very clear that the Bank is supposed apply its mind to the objections raised by the Bank and the reply to the Borrower has been made as ‘mandatory’ and subsequent to the intervention of direction from the Court, section 13 (3A) was inserted. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 0.25in; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 0.5in; text-align: justify; "><b><span style="font-family:Tahoma">Criticism: </span></b><span style="font-family:Tahoma">While appreciating the concern of the Courts in the interests of the borrowers, many also continuously criticize as to how the Banks follow the directions or implement the provisions. There are critics arguing that the it is very difficult to know as to whether the Bank has applied its mind or not while replying the objections raised by the borrower under section 13 (3). There is also a criticism that the reply from the Bank may not have any value, though the object is good theoretically. Because, the reply from the Bank to the borrower, will not enable the borrower to question the same in any Court unless the Bank issues a notice to the borrower under Section 13 (4) which is normally referred as ‘Possession Notice’.<o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="font-family: Georgia, serif; margin-top: 0in; " start="2" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l1 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">The Courts have made it very clear that the borrower can raise all his objections before the Debt Recovery Tribunal in an appeal under section 17 of the Act. The scope of enquiry has literally been expanded by the Courts and the ‘Debt Recovery Tribunal’ can not confine its enquiry only to the procedural issue as to whether the Bank is right in following the procedure. Consequent to the expansion of scope of enquiry, the scope of powers of ‘Debt Recovery Tribunal’ were also expanded to some extent. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="font-family: Georgia, serif; margin-top: 0in; " start="3" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l1 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Courts have come very heavily, from time to time, on procedural irregularities committed by the Bank as each provision was backed with certain object. This is very laudable. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="font-family: Georgia, serif; margin-top: 0in; " start="4" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l1 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Initially, it is understood that the Borrower can only question the possession notice issued by the Bank under Section 13 (4) of the Act. However, the Courts have consistently held that all measures taken by the Bank under Section 13 (4) of the Act are appeallable before the Tribunal. This is very important issue and Bank is in no way gets prejudiced if the borrower is given a right to question all measures taken by the Bank. In the absence of such a provision pursuant to Court’s intervention, the borrower is left with no remedy when his property worth 1 crore is sold for a meager sum of 10 lakhs by the Bank. In no stretch of imagination, it can be said that the Bank always acts fairly as it is a Public Sector Undertaking and which may not have any motives.</span></li> </ol><div style="text-align: justify; "><span ><br /></span></div> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">The most important thing to be discussed is as to whether the Bank can act unfairly or illegally in the course its recovery of money. It may be true in some cases where the borrower tries to trouble the Bank in getting or recovering the outstanding due. No action of the borrower can trouble the Bank if it holds a right over ‘Secured Asset’ and if there is ‘Secured Asset’. Banks are provided with a special legislative set-up, though drastic, to recover its dues. Banks can not complain at the special legislation enabling it to recover its due and the borrower keep complaining at this special legislation and they keep calling it as ‘draconian’. <o:p></o:p></span></p><p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">With this back-ground, the Banks are not entitled to act unfairly or illegally in the course of recovery of money. The delay tactics, at times, adopted by the borrower is no excuse for the Banks as to why it has not acted fairly as every Public Sector Bank is supposed to act fairly and strictly in accordance with law. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">I would like to give an example as to how the Banks too can trouble the borrowers using the stringent provisions of SARFAESI Act, 2002 and it is as follows:<o:p></o:p></span></p><p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><u><span style="font-family:Tahoma">Facts</span></u></b><b><span style="font-family:Tahoma">: <o:p></o:p></span></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">A borrower avails various loan facilities including an agricultural loan from a Bank and the various loan facilities are extended to many family members. Only one member of the family oversees all these credit facilities from the Bank. It was a ‘secured loan’. The sole member/borrower who has maintained all the loan accounts from the Bank has expired and other family members are not aware of the loan facilities granted by the Bank fully. However, the family members came to know about the existence of loans with the Bank. The Bank has also sent demand notices under section 13 (2) while main borrower was alive. The family has also realized that the ‘secured asset’ was already transferred or sold without any knowledge to the Bank. The family members have conveyed all facts to the Bank and wanted to settle all ‘loan accounts’ and they have requested the Bank for a ‘One-Time Settlement’. The Bank has agreed for a ‘One-Time Settlement’ and receives the full amount under OTS. After the receipt of money from the borrowers, the Bank sends a communication to the borrowers saying that the ‘OTS acceptance’ is cancelled as the OTS was not in accordance with the regulations. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">After canceling the OTS, the Bank issues notices under section 13 (4) of the Act clubbing all loan facilities, however, splitting all loan facilities, into two sets. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">The family members of the borrowers are literally shocked. Now, the Bank proceeds under section 13 (4) without referring anything as to what has happened in-between and balance outstanding is claimed under section 13 (4).<o:p></o:p></span></p><p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><u><span style="font-family:Tahoma">Analysis:<o:p></o:p></span></u></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 21pt; text-align: justify; text-indent: -0.25in; "><!--[if !supportLists]--><span style="font-family:Tahoma;mso-fareast-font-family:Tahoma">1.<span style="font-family: 'Times New Roman'; font-size: 7pt; "> </span></span><!--[endif]--><span style="font-family:Tahoma">Bank is supposed to take every-care while accepting the OTS and it can not cancel the OTS after receipt of money substantial money from the borrower. Its an unfair practice unless the facts are such that the OTS cancellation is justified. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 3pt; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 21pt; text-align: justify; text-indent: -0.25in; "><!--[if !supportLists]--><span style="font-family:Tahoma;mso-fareast-font-family:Tahoma">2.<span style="font-family: 'Times New Roman'; font-size: 7pt; "> </span></span><!--[endif]--><span style="font-family:Tahoma"> Bank will be clubbing all loan facilities, but issue notices as it likes. Sometimes, there can be one notice and there can be separate notices also despite the fact that the ‘Secured Asset’ is one and the same. When it issues ‘separate notices’, the borrower will be finding it extremely difficult while approaching the Courts or the Tribunal and they may be asking the borrower to file different Appeals or Cases though the entire transaction is same in substance. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 21pt; text-align: justify; text-indent: -0.25in; "><!--[if !supportLists]--><span style="font-family:Tahoma;mso-fareast-font-family:Tahoma">3.<span style="font-family: 'Times New Roman'; font-size: 7pt; "> </span></span><!--[endif]--><span style="font-family:Tahoma">The object of giving demand notice and seeking objections from the borrower is in line with the principles of natural justice and fair play. If much water is flown in between the notice under section 13 (2) and section 13 (4), the Bank is supposed to start the proceedings again under section 13 (2) and so that the borrower can raise his objections. But, this remains a complicated issue again. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; margin-left: 21pt; text-align: justify; text-indent: -0.25in; "><!--[if !supportLists]--><span style="font-family:Tahoma;mso-fareast-font-family:Tahoma">4.<span style="font-family: 'Times New Roman'; font-size: 7pt; "> </span></span><!--[endif]--><span style="font-family:Tahoma">The Borrower is entitled to ask for a ‘Specific Performance’ of OTS terms, however, it can be done in Civil Courts. DRT can say that it is not concerned with the OTS issues and even the High Court may ask the borrower to approach the Tribunal under section 17. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma">Like-wise, the borrower may also be facing lot of difficulties if the Bank misuses the provisions of the SARFAESI Act or intends to trouble the borrower. Irrespective of the object of SARFAESI Act, there is no justification whatsoever for the Banks or Public Sector Banks to act unfairly or act in a manner which is prejudicial to the borrower. <o:p></o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="font-family: Georgia, serif; text-align: justify; "><b><span style="font-family:Tahoma">Note:</span></b><span style="font-family:Tahoma"> the views expressed are my personal. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com1tag:blogger.com,1999:blog-5623384825844985559.post-42335630672680543262011-12-10T22:37:00.000-08:002011-12-10T22:40:08.573-08:00Oppression & Mismanagement: Many Interim Applications & dismissals and orders?<p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">It is known that proceedings under section 397/398 of the Companies Act, 1956 are always complicated. There will often be criticism that the jurisdiction of Company Law Board (CLB) under section 397/398 of the Companies Act, 1956 is being misused. At the same time, there is criticism on the effectiveness of the jurisdiction being exercised by the CLB in order to prevent oppression and to put an end to the matters complained of. In many cases, the CLB may not be able to come to a quick conclusion as to what is going-on in the Company and the CLB may hesitate to pass drastic orders against the Company unless it is convinced of the issues after listening to the Company or the majority in the Company. Any adverse order against the Company will have its own implications and the functioning of the Company and the business prospects may also come to standstill at times with the proceedings of the Company Law Board. While the non-adherence to corporate governance and the technical issues are pitched against the Company, the CLB may not be able to pass any orders based on mere non-compliance of statutory provisions of law. The CLB often looks at equity and in some cases; the CLB may have to look at complicated legal issues and variety of arrangements among shareholders or the groups in the Company. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">When a group comes to Company Law Board alleging oppression and mismanagement against the majority in the Company, and if the two groups see no scope for compromise, then, there will be hectic and continuous litigation in-respect of the affairs of the Company. When the issue of oppression and mismanagement is contested strongly, then, the minority or the petitioners may be presenting several interim applications praying the Company Law Board to direct the majority not to exercise any powers which will affect interests of the minority pending litigation. Under section 397/398 of the Companies Act, 1956, any number of interim applications can be filed and in order to put an end to the matters complained of, the CLB is empowered to pass any orders within the purview of settled legal principles with regard to the powers of Company Law Board under section 397/398 of Companies Act, 1956. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">There may be a case where the minority presents the petition with limited facts and the minority may come to know several issues after filing of the Company Petition and it is very much possible. As and when the information comes, the minority can also be changing their stand and may want to take advantage of the fresh details. This ground reality in respect of many closely-held companies or the family companies, makes the functioning of Company Law Board very complicated. It is very difficult for the Board, at times, to pass orders in a proceeding under section 397/398 of the Companies Act, 1956. In most of the cases, the Company Law Board encourages the warring groups for an amicable settlement and in some cases, the effort will be on convincing a group to buy another group and so that the deadlock ends.<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">It would also be extremely difficult for the Company Law Board to go through all the facts presented, the counter statements, and the proceedings. Thus, except in simple cases, the disposal of company petition under section 397/398 of the Companies Act, 1956 takes time. Again, an interim order passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is an appeallable order on some grounds under section 10 (F) of the Act. Rather the final proceedings of the Board in a petition under section 397/398 of the Companies Act, 1956, the interim proceedings will often leads to much litigation. There is no bar on the petitioners to present interim applications from time to time though the interim applications were dismissed initially saying that there is no <i>prima facie</i> case. Nothing prevents the Company Law Board to take any new facts presented in the course of the proceeding and pass orders. There may be a technical thing that if the petitioners want to plead any additional facts, the main Company Petition should accordingly be amended. In my opinion, all these technicalities can be ignored by the Company Law Board under section 397/398 of the Companies Act, 1956. Technicalities are time consuming and in my opinion, technicalities can be ignored in a proceeding under section 397/398 of the Companies Act, 1956 to the extent possible. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><b><u><span style="font-family: Tahoma; ">Case Study:<o:p></o:p></span></u></b></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">Below is the extract of a judgment rendered by the Calcutta High Court and it is a wonderful case for consideration. In this case, some interim applications were dismissed by the Company Law Board initially saying that there is no <i>prima facie</i> case. Thereafter, the petitioner has also brought certain fresh details to the knowledge of the Company Law Board and sought further interim orders. The CLB, at the second instance, convinced of passing a detailed interim order or directions and the same is challenged to the High Court and there the Appeal is partly allowed. The main issue discussed in the following judgment is like:<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"><b><span style="font-family: Tahoma; ">“Can the Board allow interim applications and give directions to the Respondents if the Board initially rejects all the interim applications filed by the Petitioners under section 397/398 of Companies Act?”<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:18.0pt;background:white"><span style="font-family: Tahoma; ">The extract of the judgment delivered by the <b>Calcutta High Court</b> on 16.09.2011, in <b>ACO No. 71 of 2011</b>, between <b>BIRLA CORPORATION LTD vs. BIRLA EDUCATION TRUST & ORS,</b> is as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt;background:white"> “6. The proceeding before me is at the interim stage only and on behalf of the appellant, that is the company, prayer has been made as an interim measure, for stay of operation of Paragraph 85(vi) of the order, pending final decision in the appeal. On behalf of the appellant, it has been submitted that the transactions of the company under the CBLO and MIBOR were all valid transactions. It has been argued that the CLB has committed jurisdictional error in passing the order under Section 402 of the Act, as the scope of interim order under Act is required to be passed in terms of Section 403 of the Act only. The other ground on which I have been addressed is that in the order passed on 9th February 2011 the CLB had come to a finding that there was no prima facie case of mismanagement, and no subsequent event had taken place which required the CLB to take a diametrically opposite stand in <st1:country-region st="on"><st1:place st="on">C.A.</st1:place></st1:country-region> No 302 of 2011. In this regard, the learned Counsel for the appellants sought to attract the principle of res judicata.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">7. On behalf of the respondent no.7, supporting the appellants, it was contended that it was impermissible on the part of the applicants to come with an interlocutory application with the factual allegations at variance with the pleadings that form foundation of the original complaint contained in the main company petition. The main case of the respondent nos. 1 to 6 being the applicants before the CLB is that when the company petition was filed, the notice for postal ballot seeking to drastically alter the main business line of the company was not in existence, and the annual report of the company containing the accounts for the year 2010-2011 was also not available. It was contended that the applicants came to learn the details of CBLO and MIBOR transactions subsequent to 9th February 2011. Further submission on behalf of the respondents/applicants has been that these subsequent acts on the part of the company formed part of a chain of activities resulting in mismanagement of the affairs of the company which were oppressive to the minority shareholders, and such subsequent facts could be brought to the notice of the CLB by filing an interlocutory application in the subsisting proceeding, and for each of these acts, filing of a fresh petition was not necessary.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">8. On the latter point, that is whether a new petition was required to be filed or not, the CLB, in the last paragraph of the order, i.e. paragraph 85(vii) has issued direction which is in the nature of direction for amendment of the original company petition. On behalf of the appellant, the legality of such a direction was questioned. But that issue I propose to deal with at the stage of final hearing of the appeal. In this order, I shall confine my scrutiny to the directions contained in paragraph 85(vi) of the order impugned, by which investigation of the dealings of the company to ascertain profits made through such dealings by the company and Lodha Capital Markets Ltd., PLC Securities Pvt. Ltd. and others through whom such transactions were done, has been directed by an outside audit firm, Ernst & Young. The appellant has questioned the choice of the audit firm also, on the ground that the said firm does audit work for several companies belonging to different branches of the Birla Group, being the industrial house having presence in several areas in the corporate sector of this country. This issue was raised as there are several proceedings pending in different forums in which the members or associates of the said family and the respondent no.7 are involved over a dispute relating to grant of probate of the will of Priyamvada Devi Birla (since deceased), who had controlling interest in several companies and other entities of a branch of Birla Group known as the M.P. Birla group. The appellant company also belongs to the said M.P. group. Though in the main company petition the authority or power of the respondent no.7 over the estate of said Priyamvada Devi Birla, which includes 62.9% of the shareholding of the appellant company has been questioned, before me at this stage arguments have been primarily presented on behalf of the applicants as minority shareholders having grievance over the acts of the majority, which they consider oppressive and prejudicial to their interest, interest of the company as also public interest.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">9. As I have already discussed in the earlier part of this order, there have been interlocutory proceedings in the past among the same parties on the allegations of mismanagement and oppression and plea for various interim reliefs was turned down by the CLB in the order passed on 9th February, 2011. The instant application, i.e. C.A. No.302 of 2011 was filed on the ground of occurrence of certain subsequent events to which I have also referred to earlier in this order. So far as proposal for alteration of the memorandum of association of the company is concerned, if the resolution was carried through, that might have had resulted in unalterable situation so far as the activities of the company is concerned, and I shall test the legality of that issue at the stage of final hearing of this proceeding. But the CLB has already directed not to give effect to the said notice for postal ballot and stay of operation of that part of the order has not been pressed before me at the interim stage by the appellant. If the postal ballot notice is not given effect to, in the light of the earlier order of the CLB and its observations made in the said order passed on 9th February 2011, can the order for audit investigation in the manner directed be justified?<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">10. In my opinion, within such a short span of time the Company Law Board ought not to have come to an altogether different finding at the prima facie stage so far as it directed investigation into the dealings of the company in the money market. In my opinion, the events subsequent to 9th February 2011 would not have justified formation of fresh opinion, even at prima facie level, requiring investigation into the financial dealings of the company. Such financial transactions seemed to be going on since 2008-09. Substantial argument was advanced on the legality of the transactions conducted through CBLO and MIBOR. The other complaint made was rapid frequency of the transactions in relation to the investments of the funds of the company, which according to the applicants did not constitute investments made by a company of its surplus funds in normal course, but constituted trading in financial products. But the CLB has not come to any finding that such transactions are impermissible or cannot be entered into by the company on the ground that such dealings would constitute dealing in financial products, at present not mandated by its memorandum of association. As transactions of this nature had been going on when the earlier order was passed by the CLB, in the absence of there being any fresh finding that these transactions were illegal, I do not think, prima facie, an investigation by an outside agency is warranted at this stage.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">11. On behalf of the applicants, it was submitted that the order passed on 9th February 2011 was not sustainable in law and the observations and comments made in the said order ought not to be given credence to by this Court. The appeal against that order has also been assigned before me and I am hearing that appeal. I am not making any observation in this order as regards the legality of the order passed on 9th February 2011. But so far as the CLB is concerned, I do not think subsequent facts justified directing investigation into the dealings of the company when the Board itself had opined earlier that the applicants had not made out any prima facie case.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">12. It was brought to my notice in course of hearing that the order passed by the CLB on 9th February 2011 and 17th June 2011 were by different members of the Board. But I do not think on a subsisting set of facts the CLB ought to take different view through different members in different interlocutory proceedings arising out of a single company petition.<o:p></o:p></p> <p style="text-align:justify;line-height:18.0pt;background:white">13. It was also submitted on behalf of the applicants that such investigation would not in any way prejudice the company. Mere fact that a particular direction would not prejudice a company would not justify passing an order directing something to be done which in normal course would not be permissible.” <o:p></o:p></p> <p class="MsoNormal"><b>Source:</b> <a href="http://www.indiankanoon.org/">www.indiankanoon.org</a>.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><b>Note:</b> the views expressed are my personal and a view point only.</p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com1tag:blogger.com,1999:blog-5623384825844985559.post-42897105459079225572011-10-12T02:08:00.000-07:002011-12-11T04:26:55.006-08:00Oppression & Mismanagement – 397/398: Complicated legal principles – a case study?<p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">The Constitutional Courts have laid-down many important principles with regard to a proceeding of ‘Oppression and Mismanagement’ under section 397/398 of the Companies Act, 1956.<span> </span>Of late, there is a change as to how a petition under section 397/398 of the Companies Act, 1956 to be decided. Earlier, there used to be much emphasis on technical issues under section 397/398 of the Companies Act, 1956 rather the object of the provision.<span> </span>Now-a-days, while some principles can never be ignored under section 397/398 of the Companies Act, 1956, the emphasis is more on the object of the provisions and towards putting ‘an end to the matters complained of’. <span> </span>In each case, there are certain issues being raised by the parties or professionals dealing with a case under section 397/398 of the Companies Act, 1956. Few points normally raised in a proceeding under section 397/398 of the Companies Act, 1956 are as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family:Tahoma;color:black;background:white">For majority:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">1.The majority would be taking an argument that the petition under section 399 of the Companies Act, 1956 is not maintainable and this will come where the minority alleges ‘oppression’ like issuance of further share-capital resulting a group’s holding go below 10% of the share-capital. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">This issue of maintainability is not being decided at the initial stage now unless there is a clear case for majority.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">2. The majority will also be taking a stand that there is no case of ‘oppression and mis-management’ even <i>prima facie</i>. They argue that when there is no case of ‘oppression and mismanagement’ even <i>prima facie</i>, the petition is liable to dismissed as not maintainable. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">This is a very complex issue to decide. Petitions are at times filed to harass the majority shareholders. But, it would be very difficult to give a finding that the petition is not maintainable at the initial stage itself and in most of the cases, the Company Law Board will keep the matter pending for final disposal and it may restrain granting any ‘interim orders’ except interim orders requiring transparency in the functioning of the Company. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">3. The majority shareholders or the Company will also be taking a stand at times that the issues raised by the minority shareholders can only be decided by Civil Courts.<span> </span>This argument will often come when the minority shareholders question an agreement or arrangement entered into by the company with third parties or sister concerns.<span> </span>This argument will also come when the minority enters into company through an understanding or agreement to bring additional investment and subsequent allotment of equity. Then, respective parties will be arguing based on the clauses in the agreement or the understanding. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">4. When the minority questions the decisions taken by the majority in the Board and the decisions like induction of new directors and even business related decisions. The majority then arguing that their decisions are prudent and in the interest of the company and such decisions can never be questioned. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family:Tahoma;color:black;background:white">For minority:<o:p></o:p></span></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">a. The minority will be defending the maintainability of their petition under section 397/398 of the Companies Act, 1956 and their argument of maintainability is accepted in most of the times. The minority will be pleading for interim measures towards the protection of their interest pending the disposal of the main company petition.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">b. The minority will always be pleading that the Company Law Board can exercise enormous powers in order to ‘put an end to the matters complained of’ and in the ‘public interest’. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">c. The minority will be emphasizing at their interest in the Company and oppose the removal of directors etc. and induction of new directors. This argument is accepted in most of the cases and removal or an effort to remove a particular director is normally stayed when there is a <i>prima facie</i> case of ‘oppression and mismanagement’.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">d. The minority will also be demanding transparency in the functioning of the Company and will demand for production of books and records of the Company in most of the Cases. The minority will also take advantage of the internal issues of the Company like not maintaining proper books and negligence in adhering to usual ‘corporate governance’. The minority will be linking the functioning of the Company to ‘mis-management’ though the actually mis-management is difficult to establish in most of the cases. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">e. The minority will also be emphasizing on taking the full control of the company or selling their shares to majority and coming-out of the Company. In most of the cases, company disputes get settled through an arrangement of ‘buying or selling’ shares during the pendency of the Company Petition. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">While the above are the usual points pleaded by the parties before the Company Law Board, several other issues are also pleaded in the course. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><u><span style="font-family:Tahoma;color:black;background:white">Case Study:<o:p></o:p></span></u></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">In a recent appeal decided by the Supreme Court on section 397/398 of the Companies Act, 1956, the submissions of the prominent corporate lawyers in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region> are note-worthy to note. The prominent Counsels are like <b>Mr.Desai, Mr.Dushyant Dave, Mr.Altaf Ahmed, Mr.K.K.Venugopal, Mr.Anil Diwan & Mr.Sundaram</b>. This is a case where there was an agreement to invest into the Company and thereafter, the Company allegedly breaches that agreement and enters into a new agreement with other investors.<span> </span>It is all linked to allotment of equity and the party to the first agreement to invest into the Company, approaches the Company Law Board under section 397/398 of the Companies Act, 1956 and whereas the Company takes a stand that the petitioner should not be treated as a shareholders of the Company as equity was never allotted. <span> </span>The jurisdiction of Company Law Board to pass orders under section 402 is also raised.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">All usual legal principles under section 397/398 of the Companies Act, 1956 are pleaded by the prominent lawyers’ on-behalf of their clients.<span> </span>The extract of the judgment delivered by Hon’ble <b>Supreme Court of India</b> in </span><b><span style="font-family:Tahoma;color:black">Chatterjee Petrochem (I) Pvt. Ltd. Vs. Haldia Petrochemicals Ltd.& Others</span></b><span style="font-family:Tahoma; color:black"> reported in <b>CDJ 2011 SC 1072</b>, is as follows:<span style="background:white"><o:p></o:p></span></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">“60. Mr. Desai submitted that all the aforesaid submissions made were misconceived and that in order to file a complaint under<span class="apple-converted-space"> Section 397 </span>of the above Act, the complainant had to be a Member (emphasis supplied) of the Company, having the requisite standing under Section 399 of the Act. It was also urged that the conduct complained of had to be such as to be oppressive to the complainant/complainants as shareholders/members. Inasmuch as, CP (I) PL was not a member of HPL, it could not have filed and maintained the complaint under Section 397<span class="apple-converted-space"> </span>before the Company Law Board. Mr. Desai submitted that it was no doubt true that upon transfer of the shares, the transferee became the beneficial owner thereof, but till the shares were registered in the Company's Share Register and subsequently, in the records of the Registrar of Companies, the transferee did not acquire the right to vote at a meeting of the Company on the basis of acquisition of the said shares. Mr. Desai submitted that for all practical purposes the transferor remained in control of the transferred shares and also enjoyed the right to vote on the strength thereof. The failure of the transferor to have the shares registered with the Company, did not amount to an act of oppression of the Company, but was an area of dispute between the transferor and the transferee and it could not be said that the inaction of the transferor amounted to oppression within the meaning of<span class="apple-converted-space"> Section 397 </span>of the Companies Act. Mr. Desai also submitted that the oppression complained of should be such as would lead to a conclusion that it would be just and equitable to wind up the Company under Section 433(f) of the above Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">61. Referring to the decision of this Court in Shanti Prasad Jain's case (supra), Mr. Desai submitted that in the said decision it had been emphasized that the oppression complained of had to be shown as having been brought about by a majority of members exercising a predominant voting power in the conduct of the Company's affairs and must relate to the manner in which the affairs of the Company were being conducted. Such conduct must also be shown as being oppressive to a minority of the members in relation to the shareholding in the Company. It was also emphasized that although, the facts disclosed might appear to furnish grounds for the making of a winding up order under the “just and equitable” principle, such facts must be relevant in disclosing that the winding up order would unfairly prejudice the minority members in relation to the shareholders. Referring to the use of the expression “legitimate expectation” by Lord Justice Hoffmann sitting in the Court of Appeal, in the decision rendered in Ebrahimi's case (supra), Mr. Desai submitted that subsequently in the case of Saul D Harrison & Sons Plc (1995) 1 BCLC 14, after referring to the decision in Ebrahimi's case (supra), Lord Justice Hoffmann held that such an expression had been borrowed from public law to describe the correlative right in the shareholder to which such a relationship might give rise.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">62. Mr. Desai also urged that the decision in Kalinga Tubes Ltd.'s case (supra) was also relied upon by this Court in the Needle Industries case (supra), wherein it was held that on a true construction of<span class="apple-converted-space"> Section 397,</span> an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that Section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. As to the findings of both the Company Law Board and the High Court in relation to the applicability of Section 398 of the above Act, Mr. Desai submitted that since both the Courts had held that the same was not attracted, there was really little to add to the observations of both the forums that there was absolutely no reason to say that GoWB and WBIDC with their associates were conducting the affairs of HPL in any manner prejudicial to HPL's interests. The allotment made in favour of IOC was, in fact, in the interest of the Company and the allotment of shares to IOC was part of the terms and conditions of the debt restructuring package.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">63. Regarding the failure of WBIDC to register the 155 million shares in favour of CP(I)PL, Mr. Desai submitted that, in fact, there was no pleading in that regard in the Company Petition filed by CP(I)PL. Accordingly, neither could CP(I)PL maintain the Company Petition, not being a member of HPL, nor could any prayer have been made for a direction upon the Company to register the said shares in the name of CP(I)PL. Mr. Desai pointed out that though such a pleading was subsequently included in the Rejoinder Affidavit, no application was ever made for amendment of the pleadings and the prayers in the Company Petition.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">64. To support his submissions, Mr. Desai referred to the decision of the Calcutta High Court in Re. Bengal Luxmi Cotton Mills Ltd. [1969 CWN 137], Sangramsingh P. Gaekwad & Ors. Vs. Shantadevi P. Gaekward & Ors. [(2005) 11 SCC 314], R. Ramanathan Chettiar Vs. A & F Harvey Ltd. & Ors. [967 (37) Comp. Case 212], wherein the principles laid down in the Needle Industries case (supra) had been followed. Mr. Desai submitted that the 155 million shares transferred to CP(I)PL by WBIDC continued to be held by WBIDC and were never lodged with the Company.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">65. Lastly, on the question of allotment of 150 million shares to IOC, Mr. Desai referred to the observations of the Company Law Board which recorded that such allotment could not be questioned by the Chatterjee Group, since the same was neither clandestine nor surreptitious and was under contemplation from 2000 itself and the idea of inducting IOC was initiated by Dr. Chatterjee himself, as would be evident from the letter dated 24th March, 2000, addressed to the Chief Minister, as the Company was in dire need of funds. Mr. Desai pointed out that the said view was endorsed by the learned Single Judge of the High Court by observing that the Chatterjee Group had failed to produce any evidence with regard to the allegations that the allotment of shares to IOC was pursuant to a clandestine agreement to permit IOC to participate in the management of HPL.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">66. Mr. Desai submitted that the case made out by the appellants before the Company Law Board was not only devoid of substance, but was entirely misconceived, since the same was not maintainable at the instance of CP(I)PL which was not a member of HPL. Even the allegations of oppression remained unproved, since the entire content related to the transaction between WBIDC and CP(I)PL, which was not the act of the Company, as contemplated in Section 397, but a private dispute between two groups of shareholders. Mr. Desai submitted that the appeals were liable to be dismissed with appropriate costs.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">67. Mr. Dushyant Dave, learned Senior Advocate, appearing for the Industrial Development Bank of India (IDBI) pointed out that a loan agreement had been entered into between HPL and IDBI for a sum of Rs.12,500 lakhs and in the event the borrower defaulted on the loan, the Bank would have the right to convert upto 20% of the loan into fully paid up equity of the Company. The Bank was also given the right to appoint a Nominee Director on the Board of HPL. Mr. Dave submitted that in 2003 the question of restructuring of the debt came up for consideration and in its meeting held on 8th August, 2003, the Company agreed to allow IDBI to refer the Company to the Corporate Debt Restructuring (CDR) Cell with a debt restructuring proposal. Subsequently, on a 22nd January, 2004, at a meeting of the Empowered Group, Dr. Chatterjee agreed for conversion of debt to equity to the extent of Rs.140 crores. Thereafter, on 23rd March, 2004, the Board of Directors of HPL approved a CDR package and Dr. Chatterjee's proposal to convert debt to equity. Dr. Chatterhee was, in fact, interested to give effect to the same. Mr. Dave submitted that subsequently the debt restructuring plan failed to fructify and the Bank was informed by the Principal Secretary, Government of West Bengal, on 27th July, 2005, that the permission which had been granted in the credit restructuring package, be treated as annulled.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">68. In the pending proceeding before the CLB, Chatterjee Petrochemicals Ltd. had got an interim order in its favour staying further allotment of shares of Rs.135 crores to IDBI. However, IDBI was neither a party to the proceedings nor was any relief, either final or interim in nature sought against IDBI. But by virtue of the interim order of injunction passed by the CLB, the allotment of shares to IDBI was stayed, as that would have reduced the Chatterjee Group to a minority. Mr. Dave submitted that the application filed by IDBI before the CLB was kept in abeyance and no order was passed thereupon as it was likely to hamper the progress of negotiation. Mr. Dave submitted that the writ petition filed by IDBI against the said order before the Delhi High Court was dismissed by the learned Single Judge and the appeal preferred therefrom was also dismissed by the Division Bench. Ultimately, in its final judgment dated 31st January, 2007, the CLB gave directions to the effect that Chatterjee Group would purchase 155 million shares from GoWB/WBIDC at a minimum price of Rs.28.80 per share. It was also directed that the 155 million shares transferred to the Chatterjee Group would be dematerialized and registered and that the allotment to the IOC would remain.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">69. Mr. Dave submitted that the question of CP(I)PL having any legitimate expectation did not arise and such a case was not also pleaded before the Board. Furthermore, since nothing had been proved before the Board that the conduct of GoWB and WBIDC was such as to justify an order of just and equitable winding up, no order could have been passed by the Board on the Company Petition filed by the appellants and the learned Single Judge of the High Court rightly allowed the appeals preferred against the order of the Board.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">70. Appearing for the Respondent No.16, Mr. Altaf Ahmed, learned Senior Advocate, submitted that nowhere in the Company Petition had any allegation been made against the Managing Director as to his involvement in any manner in the acts of oppression alleged to have been committed against the complainant. Accordingly, as had been held by the CLB in its final order dated 31st January, 2007, the Company Petition, though filed under Sections 397 and 398 of the Companies Act, was essentially one under Section 397<span class="apple-converted-space"> </span>of the aforesaid Act. Mr. Ahmed submitted that the said finding of the CLB had been duly upheld by the High Court.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">71. Mr. Ahmed submitted that the question raised by the Chatterjee Group with regard to the employment of Mr. Bhowmik as the Managing Committee was without any basis whatsoever, since he was appointed unanimously by the Board of Directors consisting of the nominees of the different shareholders. Mr. Ahmed also pointed out that the Respondent No.16 had been responsible for the resurrection of HPL from the brink of financial disaster which had been occasioned by the failure of the promoters to infuse equity into the Company. It was only after assessment of his performance during the initial two year period of his tenure that the Board of HPL reappointed him for a further period of 3 years, inspite of the objection from the Chatterjee Group.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">72. Mr. Ahmed submitted that the Respondent No.16 has moved I.A.Nos.25-28 of 2009 for a direction upon the Company to pay his arrears of salary as per the resolution passed by the Board of Directors on 28th May, 2008, for the period covering 29th March, 2005 to 31st March, 2007. A further prayer has also been made to fix the pay of the said Respondent for the period from 1st April, 2007, till 31st March, 2010, at a rate as might be deemed just, proper and reasonable.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">73. As far as the Tatas are concerned, it was submitted that the Tata Group was one of the original promoters of HPL and continues to hold more than 2% of the shares in the Company. It was submitted that the Tatas were keen to see HPL flourishing and had, accordingly, between 1994 and 2000 made significant infusion of funds into HPL, including a sum of Rs.11.89 crores which was given as an interest free loan. Even in 2000 when the Company was in dire financial straits, the Tatas brought in their share of Rs.35.71 crores along with other shareholders, except for the Chatterjee Group which failed to bring in its share of Rs.107.14 crores. It was made clear that the Tata Group had no faith in the Chatterjee Group since from the very inception of HPL the Chatterjee Group wanted control of HPL, without making any effective contribution at times when such contribution was most needed and had, therefore, worked against the interest of the Company, its shareholders and the public at large.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">74. Mr. K.K. Venugopal, learned Senior Advocate, who appeared for the Government of West Bengal and its officials, urged that the relief prayed for in the Company Petition for specific relief, could not be granted under Section 397<span class="apple-converted-space"> </span>of the<span class="apple-converted-space"> Companies Act</span>.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">Since the said question had been adequately dealt with on behalf of WBIDC, Mr. Venugopal chose to deal with the directions given by the CLB to the GoWB to disinvest its entire shareholding in HPL, which was a Company set up in public interest and for which a huge extent of land had been acquired for the public purpose of maintaining supplies and services essential to the life of the community, by setting up a Petro Chemical Complex at Haldia. Mr. Venugopal contended that it was settled law that the decision of the Government to disinvest or not to disinvest was not in the realm of public law and was not, therefore, amenable to challenge or interference, unless it amounted to an abuse of power by the Government.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">75. Mr. Venugopal submitted that the order and directions of the CLB would exclude the State Government from having any future role to play in the running and management of HPL. Learned counsel submitted that in a matter of this nature, the public interest should have been considered first before such directions are given. Mr. Venugopal submitted that the proceedings under Section 397<span class="apple-converted-space"> </span>of the Companies Act<span class="apple-converted-space"> </span>should not have been allowed to be made a vehicle for relief which was available to the Chatterjee Group under the provisions of the Specific Relief Act, 1963. It was also submitted that the Company Law Board erred in applying the principles of private law in the exercise of its jurisdiction under Sections 397/398 and 402 of the Companies Act, since the decision of the State Government not to disinvest would have to be decided by applying the public law in appropriate proceedings. In this regard, Mr. Venugopal referred to the decision of this Court in BALCO Employees' <st1:place st="on">Union</st1:place> (Regd.) Vs. Union of India & Ors. [(2002) 2 SCC 333], wherein it was observed that it is neither within the domain of the courts nor the scope of judicial review to embark upon an enquiry as to whether a particular public policy is wise or something better could be evolved. This Court also observed that the courts are not inclined to strike down a policy merely because it has been urged that a different policy was fairer or wiser or more scientific or more logical. This Court went on to observe that the procedure of disinvestment is a policy decision involving complex economic factors and the courts have consistently refrained from interfering with economic decisions, unless it was demonstrated that economic expediency was so violative of constitutional or legal limits on power or is so abhorrent to reason, that such interference was necessary. The Courts would in given cases interfere if it could be demonstrated that the policy was contrary to any statutory provision or the provision of the Constitution or there was illegality in the decision itself.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">76. Mr. K.K. Venugopal submitted that from the very inception, GoWB had played a major role in conceptualizing and setting up of HPL with the primary object of industrial development of the region in particular, and the State in general and subserving the underlying public interest. Mr. Venugopal submitted that HPL had been conceived as a showcase project of the GoWB. It was only because of the active role of the State Government that it was also possible to acquire a total of 1031.305 acres of land for the project at Haldia, without any trouble and disturbance, from the year 1973 onwards. Mr. Venugopal submitted that the direction given by the CLB would be against the very grain of the concept of a Joint Venture between WBIDC, which was owned by GoWB, and the R.P. Goenka Group (RPG) and subsequently, with the exit of the RPG Group, the Tata Group as well as the CP(M)C. It was also submitted that even the financial institutions, namely, IDBI and SBI, etc., who had a total stake of Rs.2989 crores in HPL, drew great comfort from the continued presence of the State Government and its active participation in the management of HPL. On the other hand, on several occasions the very same financial institutions had expressed their concern regarding the capability and intentions of the Chatterjee Group in managing the Company and inducting funds as necessary for the growth and development thereof. Mr. Venugopal submitted that the acts of oppression alleged by the Chatterjee Group and the relief claimed by them, apart from being based on alleged breach of contract, aimed at invoking the jurisdiction of the CLB under Section 397<span class="apple-converted-space"> </span>read with Section 402 of the Companies Act, 1956, to compel the Government to disinvest its shareholding in HPL. Mr. Venugopal submitted that the CLB did not have the jurisdiction to grant such relief and, in any event, in view of the overriding public interest, no relief should be granted to the appellant in the instant appeals.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">77. Mr. Anil Dewan, learned Senior Advocate, who appeared for Mr. Tarun Das, who was functioning as the Chairman of HPL, adopted the submissions made by Mr. Desai and Mr. Venugopal and urged that the Company Petition itself was not maintainable as it had been filed by a Company which was not a member of HPL, despite being the owner of 155 million shares thereof. Mr. Dewan submitted that instead of assisting the Company in meeting its financial liabilities, the appellants not only failed to infuse equity into the Company but also confined their focus on acquiring only 51% of the shareholding in order to maintain its control over the management of the Company. Mr. Dewan submitted that the judgment of the High Court did not call for any interference in the instant proceedings.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">78. In continuation of Mr. Desai's submissions, Mr. C.A. Sundaram, learned Senior Advocate appearing for the Respondent No.2, reiterated the factual aspect of the case as portrayed by Mr. Desai. Mr. Sundaram, however, urged that the stand now being taken by the Chatterjee Group that the induction of IOC into HPL had adversely affected their interest and had reduced the Chatterjee Group to a minority shareholder in the Company, it was, in fact, Dr. Chatterjee himself, who had initiated the idea of allotting 150 million shares to IOC. Dr. Chatterjee was the Chairman of the Committee which prepared and sent the offer of allotment to IOC which was accepted by its return letter enclosing a cheque for Rs.150 crores in favour of HPL. Between April, 2005 and July, 2005, eight draft Share Purchase Agreements were exchanged between the Chatterjee Group and the GoWB regarding sale of the shares held by WBIDC to CP(M)C. However, the Chatterjee Group never seemed to be in a position to complete the transaction and repeatedly asked for the inclusion of fresh conditions, such as a pre-condition that IOC should not be allotted any shares of HPL. In the meantime, having accepted the offer of allotment of 150 million shares and having sent the price for the same to HPL, IOC sent legal notices to HPL calling upon the Company to issue and allot the said 150 million shares to IOC and to credit the same to the account of IOC after dematerialization.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">79. Mr. Sundaram submitted that in the aforesaid cauldron of events, the GoWB wrote to the Chatterjee Group on 27th July, 2005, stating that it had decided to defer its proposal to disinvest shares in favour of the Chatterjee Group as it was not in a position to conclude matters. On account of the severe financial crunch being faced by HPL and in view of the stand of IOC, which was the main supplier of Naphtha to HPL, on 2nd August, 2005, HPL allotted 150 million shares to IOC and a return of allotment was also filed with the Registrar of Companies in respect thereof. On 3rd August, 2005, the cheque given to IOC for Rs.150 crores was encashed by HPL.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">80. Mr. Sundaram submitted that it was no doubt true that at the initial stages it had been the intention of GoWB and WBIDC to involve Dr. Chatterjee and his Group of Companies as the prime stakeholders in HPL with management control, but at crucial times when support in the form of equity was required, the Chatterjee Group failed to provide the same. Mr. Sundaram submitted that even when on 3rd June, 1996, GoWB wrote to Dr. Chatterjee that on account of HPL's financial crunch, all promoters had been requested to induct 50% of the equity and the last date for such infusion was 18th June, 1996, the Chatterjee Group failed to make such investments, although, both the Tatas and WBIDC brought in their respective equity contributions of Rs.35.5 crores and Rs.117 crores. Once again, since the Lenders were insisting on immediate infusion of Rs.581 crores into HPL and HPL was on the threshold of becoming a Non- Performing Asset, a Rights Issue Offer was made by HPL to the existing shareholders for subscription of 34,99,99,988 shares at the rate of Rs.10/- per share. Despite Dr. Chatterjee's assurance to bring in Rs.53.5 crores immediately along with additional fund of Rs.53.5 crores and a further sum of Rs.300 crores, the Chatterjee Group did not subscribe to the Rights Issue, thereby depriving the Company of Rs.107 crores at a very crucial time. In order to re-assure HPL, the Chatterjee Group on 12th January, 2002, agreed to induct a minimum of Rs.500 crores and such other further funds towards equity and equity-like instruments to effectuate the Corporate Debt Restructuring. However, despite such commitment, till today, the Chatterjee Group has not brought in the amount of Rs.500 crores committed by it. On the other hand, acting on the assurance given by the Chatterjee Group, WBIDC agreed to transfer shares worth Rs.360 crores to the Chatterjee Group to ensure that it controlled 51% of paid-up equity to enable it to remain in the majority. Mr. Sundaram submitted that out of the said number of shares, 155 million shares were, in fact, transferred to CP(I)CL to maintain a shareholding of 51%. However, WBIDC even agreed to transfer shares beyond the said 155 million shares to ensure that the 51% shareholding of CP(M)C was maintained. It was also agreed that the transfer would be effected within 10 days of the acceptance of Letter of Comfort by WBIDC. Mr. Sundaram submitted that although the shares were transferred in the name of CP(I)CL, the said transfers were never completed as they were not registered either in the Company's books or with the Registrar of Companies and WBIDC continued to have voting rights on the said 155 million shares. Mr. Sundaram submitted that to cap it all, instead of bringing in equity of an amount of Rs.53.5 crores, as promised as per the decision taken by the Company on 3rd June, 1996, to induct 50% of its equity, the Chatterjee Group brought in only Rs.61.5 crores and that too as debt and not equity, despite the fact that post-dated cheques issued to vendors were still bouncing and other commitments were not met. In addition, the Corporate Debt Restructuring could not be implemented since CP(M)C could not induct a strategic investor. Ultimately, out of sheer compulsion in order to save the Company from becoming a Non-Performing Asset, a decision had to be taken to induct IOC as a portfolio investor, though there may have been discussion to bring in IOC as a strategic investor.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">81. Mr. Sundaram submitted that one of the questions which arise in these proceedings is whether the Company Law Board, acting under Sections 397 and 398, read with Section 402 of the Companies Act, could direct sale of shares in the absence of a finding that there had been oppression by one body of shareholders against another or mismanagement of the Company. According to Mr. Sundaram, the second question, which is directly connected with the first, is whether in the absence of such a finding the Company Law Board could direct sale of shares in the absence of a further finding that such sale of shares was necessary in the interest of the Company. The third question posed by Mr. Sundaram was whether in addition to the findings indicated above, the Company Law Board could direct sale of shares under Sections 397 and 398 read with Section 402 of the above Act in the absence of a finding that without giving such a direction it might be just and equitable to wind-up the Company.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">82. On the aforesaid issues, Mr. Sundaram reiterated the submissions made by Mr. Desai that the said questions have been answered by this Court in Shanti Prasad Jain's case (supra) and in the subsequent decisions in Sangramsinh P. Gaekwad (supra), M.S.D.C. Radharamanan (supra), V.S. Krishnan (supra), the Needle Industries (supra) and in the case of Hanuman Prasad Bagri Vs. Bagress Cereals Pvt. Ltd. [(2001) 4 SCC 420].<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">83. Mr. Sundaram submitted that the next issue involved the question as to whether the concept of legitimate expectation of a body of shareholders would be applicable to a large public limited company or only in quasi partnerships and family companies and whether in those situations also the sale of shares could be directed in order to break a deadlock. In this regard, reference was made to the decision of this Court in Kilpest Pvt. Ltd. & Ors. Vs. Shekhar Mehra [(1996) 10 SCC 696] and Hind Overseas Pvt. Ltd. Vs. Raghunath Prasad Jhunjhunwalla & Anr. [(1976) 3 SCC 259]. In Hind Overseas Pvt. Ltd.'s case, this Court had held that when more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are excluded from management, the principles of dissolution of partnership cannot be liberally invoked. It was further observed that it is only when shareholding is more or less equal and there is a case of a complete deadlock in the running of the company on account of lack of probity in the management and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, a case for winding up may arise. However, in a given case, the principles of dissolution of partnership may apply if the apparent structure of the company is proved not to be the real structure and on piercing the veil it is found that in reality it is a partnership. Mr. Sundaram submitted that, in any event, the application of the just and equitable clause would depend upon the facts and circumstances of each case. A note of caution was also introduced that even admission of a petition could prejudice and cause immense injury to a company in the eyes of the investors, if ultimately the petition is dismissed. Mr. Sundaram urged that in a petition under Section 397/398 of the Companies Act, it was not always incumbent on the CLB to order the winding up of a company on the just and equitable principle, but in order to pass any order under Section 397, the Company Law Board would have to arrive at a specific finding that there was just and equitable reason to order such winding up.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">84. The next issue canvassed by Mr. Sundaram is that the Court would have to examine as to whether the direction given for sale of shares was in order to maintain the status quo which was being disturbed on account of the oppressive measures taken. In this regard, Mr. Sundaram referred to the decisions of this Court in Dale & Carrington Invt. (P) Ltd. Vs. P.K. Prathapan & Ors. [(2005) 1 SCC 212] and M.S.D.C. Radharamanan's case (supra), along with the decision in Allianz Securities Ltd. Vs. Regal Industries Ltd. [2002 (11) CC 764 = (2000) 25 SCL 349 (CLB)]. On the concept of legitimate expectation, Mr. Sundaram submitted that it has to be considered whether the same should be restricted to maintaining the state of affairs at the time when the parties became shareholders or whether any subsequent understanding arrived at by private treaty between the shareholders would fall under the purview of the Company Law Board to enable it to deal with such questions between private shareholders.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">85. Mr. Sundaram repeated that in this regard it would have to be decided as to whether the CLB could direct sale and transfer of shares to a group to give it majority control on an application under Section 397/398 read with Section 402 of the Companies Act<span class="apple-converted-space"> </span>and to enforce specific performance of agreement between the parties whether legitimate or not, especially when such specific performance was not necessary in the interest of the company, or to prevent winding up of the company. Another question of equal importance in this connection was whether specific performance could be directed at the instance of a party whose own conduct had been inequitable in failing to carry out its promises, to the severe prejudice of the company.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">86. Another issue raised by Mr. Sundaram, which has a direct bearing to the facts of this case, is whether a Company can effect transfer of shares in the absence of transfer deeds and a request for transfer, and whether the transfer of shares is complete only when such transfers are duly registered and entered in the Register of Members of the Company. In this regard, Mr. Sundaram referred to the decisions of this Court in Howrah Trading Company Vs. CIT [AIR 1959 SC 775]; Life Insurance Corporation of India Vs. Escorts Ltd. [(1986) 1 SCC 264], Mannalal Khetan Vs. Kadarnath Khetan [(1977) 2 SCC 424], Claude Lila Parulekar (Smt.) Vs. Sakal Papers (P) Ltd. [(2005) 11 SCC 73], J.P. Srivastava & Sons Pvt. Ltd. Vs. Gwalior Sugar Co. Ltd. [(2005) 1 SCC 172], Mathrubhumi Printing & Publishing Co. Ltd. Vs. Vardhman Publishers Ltd. [(1992) 73 CC 80] and several other decisions to which we shall shortly refer as they have a bearing on the issue involving the rights acquired by the Chatterjee Group on the transfer of 155 million shares by WBIDC, which were not, thereafter, registered in the name of the Chatterjee Group in the Register of Members of the Company, nor was the factum of such transfer communicated to the Registrar of Companies.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">87. Mr. Sundaram also raised another question as to why on failure of reciprocal promises in a contract on account of non-performance of the promises made by one of the parties, the benefits accrued to such party through part performance should not be restituted to the other party. In this regard, reference was made to Sections 51 to 54 of the Contract Act and the decision of the Privy Council in Satgur Prasad Vs. Harnarayan Das [(AIR 1932 PC 89] and the decision of the Delhi High Court in Suit No.1481 of 1996, to which reference may be made, if required.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">88. Lastly, on the question of allotment of the 150 million shares by WBIDC to IOC, Mr. Sundaram submitted that on account of the failure of the Chatterjee Group to bring in equity when the Company was in dire need of funds, such allotment was fully justified under the doctrine of Indoor Management. However, even if a legitimate dispute could be raised in regard to such transfer, such transaction could not be avoided by the Company Law Board as the same was in the interest of the Company, which would otherwise have been converted into a Non Performing Asset.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">89. What emerges from the materials on record and the submissions made on behalf of respective parties is that HPL was incorporated in 1985 by the West Bengal Industrial Development Corporation and the R.P. Goenka Group, and their nominees were the subscribers to the Memorandum of Association. Soon thereafter, in 1990, the Goenka Group left the Company and Tata Chemicals and Tata Tea were inducted into the project between 1990 and 1993. However, since the TATAs were not very keen to continue with the Project, in June 1994, Dr. Purnendu Chatterjee, a Non-Resident Indian industrialist and financier, evinced his interest in implementing the project. Accordingly, a Memorandum of Understanding was entered into between WBIDC and the Chatterjee Petrochem (<st1:country-region st="on"><st1:place st="on">Mauritius</st1:place></st1:country-region>) Company and the Tatas on 3rd May, 1994. Certain assurances were given to Dr. Chatterjee that the Company would remain a private enterprise with the Chatterjee Group in control of the management thereof. A further assurance was given to the effect that WBIDC/GoWB would transfer their entire shares in the Company to the Chatterjee Group, which would then acquire a complete majority for the purposes of management and control of the Company.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">90. In addition to the above, certain duties and obligations to be performed by the Chatterjee Group were also indicated, mainly confined to the question of bringing in equity in an otherwise cash-strapped situation then prevailing in relation to the Company's finances. It also appears that the assurances given by WBIDC/GoWB were on account of the aforesaid assurances given by the Chatterjee Group to bring in equity. Inasmuch as, the Chatterjee Group failed to abide by its commitments, the Company had no other alternative, but to bring in IOC by selling and transferring 150 million shares to the said Company.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">91. The parties also agreed that they would be entitled to seek specific performance of the terms and conditions of the Agreement in accordance with the provisions of the Specific Relief Act, 1963.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">Various other terms and conditions were included with the intention of guaranteeing that CP(M)C would acquire a controlling interest to the extent of at least 51% shares which would also give it complete control over the day-to-day affairs of the Company. In addition, it was agreed that in future the composition of the Board would be altered to reflect the revised shareholding structure and WBIDC would vote along with CP(M)C on all issues in the shareholders meeting and its nominee would also vote along with the nominee Directors of the CP(M)C.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">92. Despite the concessions given and/or afforded to the Chatterjee Group, it had failed to take advantage of the same and a subsequent Agreement dated 8th March, 2002, had to be entered into for recording the fact that in terms of the Agreement dated 12th January, 2002, 155,099,998 equity shares of WBIDC had been transferred/delivered to CP (I) PL on the same day. It was also indicated in the Agreement that all the aforesaid shares which had been transferred and delivered to the Petitioner No.4 would be pledged with WBIDC and, accordingly, their shares had been duly lodged along with their share certificates with WBIDC and such pledge had been acknowledged.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">93. It is in the aforesaid background that we have to consider the Petition filed by the Chatterjee group before the Company Law Board under Sections 397, 398, 399, 402, 403 and 406 of the Companies Act, 1956, and the reliefs prayed for therein.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">94. The law relating to grant of relief on a petition under Sections 397, 398 and 402 of the Companies Act, 1956, has been crystallised in various decisions of this Court, including those cited on behalf of the parties. The common refrain running through all these decisions is that in order to succeed in an action under Sections 397 and 398 of the Companies Act, the complainant has to prove that the affairs of the Company were being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. For better appreciation of the above,<span class="apple-converted-space"> Section 397 </span>of the above Act is extracted herein below :<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">“397. Application to [Tribunal] for relief in cases of oppression.--<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">1) Any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">(2) If, on any application under sub- section (1), the Court is of opinion--<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">However, as was observed by this Court in Shanti Prasad Jain's case (supra) the law has not defined as to what would amount to “oppressive” for the purposes of Section 397<span class="apple-converted-space"> </span>and it is for the Courts to decide on the facts of each case as to whether such oppression exists which would call for action under Section 397. It was also emphasized that the conduct of the majority shareholders should not only be oppressive to the minority, but must also be burdensome and operating harshly upto the date of the petition.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">95. The main grievance of the Appellants appears to be that having been induced into investing large sums of money in establishing the petrochemical complex on various promises, particularly that the Company would continue to retain its private character and the Chatterjee group would have control over its management, such promises, although, reduced into writing in the form of agreements, not only remained unfulfilled, but even the character of the Company was altered with the transfer and sale of 150 million shares by the Company in favour of IOC. Coupled with the above, is the other grievance that despite having transferred 155 million shares in favour of CP(I)PL, and having received the full price therefor, the Company had not registered the same in the Company's Register of Share-holders, thereby depriving the Chatterjee Group from exercising its right to vote in respect of the said shares. The third grievance of the Chatterjee Group is that by not registering the transfer of the 155 million shares in their favour, but, on the other hand, transferring 150 million shares in favour of IOC, the character of the Company was altered from a Private Company into a Government Company and also reduced the Chatterjee Group to a minority, despite the promises held out earlier and as incorporated in the Agreements dated 20th August, 1994, 12th January, 2002 and 8th March, 2002.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">96. Let us examine as to whether any of the complaints contained in the Company Petition before the CLB make out a case that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, which was sufficient to justify the passing of a winding-up order on the ground that it was just and equitable that the Company should be wound-up, but that to wind-up the Company would prejudice such member or members. In Shanti Prasad Jain's case (supra), referred to hereinabove, in a similar situation, it was observed by this Court as follows:-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">“It is not enough to show that there is just and equitable cause for winding up the Company though that must be shown as a preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful, and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the Company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.” It will be evident that in order to pass orders under Section 397<span class="apple-converted-space"> </span>of the Companies Act, 1956, the CLB has to be satisfied that the Company's affairs are being conducted in a manner oppressive to any member or members and that the facts would justify the making of a winding-up order on the just and equitable principle, but that such an order would unfairly prejudice the Applicant before the CLB.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">As was discussed by this Court in the Needle Industries case (supra), unwise, inefficient or careless conduct of a Director cannot give rise to claim for relief under Section 397<span class="apple-converted-space"> </span>of the Act. For relief under this Section, the Applicant would have to prove that the conduct of the majority of the shareholders lacked probity and was unfair so as to cause prejudice to the Applicant in exercising his legal and proprietary rights as a shareholder. This, in fact, is the golden thread of the various decisions in relation to petitions under Section 397, 398 and 402 of the above Act. All the various decisions cited by the learned counsel for the various parties are ad idem on this issue and applying the said principles, each complaint under Section 397<span class="apple-converted-space"> </span>will have to be judged on its own merit for the CLB to arrive at a conclusion as to whether the ingredients of Section 397<span class="apple-converted-space"> </span>were satisfied and pass appropriate orders thereafter.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">97. As has been indicated in some of the cases cited, the language of Section 397<span class="apple-converted-space"> </span>suggests that the oppressive manner in which the Company's affairs were being conducted could not be confined to one isolated incident, but that such acts would have to be continuous as to be part of a concerted action to cause prejudice to the minority shareholders whose interests are prejudiced thereby.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">98. In the aforesaid context, what do the facts reveal in the instant case and do they bring the acts of oppression complained of within the purview of Section 397<span class="apple-converted-space"> </span>for grant of relief under Section 402 of the<span class="apple-converted-space"> Companies Act</span>?<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">99. The case of the Chatterjee Group is woven around two particular issues, namely, that it had been induced to invest in HPL so as to make it a successful commercial enterprise on the promise that the Company would always retain a private character and the Chatterjee Group would have control over its management, but such a promise had not been adhered to and, on the other hand, negotiations were undertaken by WBIDC to induct IOC, a Central Government Company, with the intention of ultimately handing over the management of the Company to IOC. The aforesaid case of the Chatterjee Group is also based on the grievance that while keeping the Chatterjee Group under the impression that it intended to ensure that the Chatterjee Group had the requisite number of shares to allow it to have a majority shareholding and thereby control of the Company's management, the Company carried on clandestine negotiations with WIBDC to transfer all the shares held by it in the Company to IOC to give it management and control over the Company's affairs.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">100. The second ground, as made out by the Chatterjee Group, was that despite having transferred 155 million shares in favour of CP(I)PL on 8th March, 2002, it did not register the same in the name of CP(I)PL, which remained the beneficial owner, the right to vote on the basis thereof remained with WBIDC. This was done despite the fact that the price for the said shares had been received by way of a private arrangement and the Lenders and financial institutions had given their consent to the same. According to the Chatterjee Group, this one act of omission on the part of the Company was sufficient to attract the provisions of Section 397<span class="apple-converted-space"> </span>of the Companies Act<span class="apple-converted-space"> </span>and for the CLB to pass appropriate orders on account thereof. It is on account of the second ground on which the Company Petition was filed that a prayer had been made therein for a direction upon WBIDC and IOC to immediately register the transferred 155 million shares in the name of CP(I)PL.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">101. From the facts as revealed, it is clear that when Dr. Purnendu Chatterjee expressed his interest in setting up of the Haldia Petrochemicals Ltd., various incentives had been offered to him by the GoWB and WBIDC to invest in the Company and to make it a successful commercial enterprise. Such investments were, however, contingent upon Dr. Chatterjee's bringing in sufficient equity to set up and run the Company. As would be seen, at the very initial stage all the understanding between Dr. Chatterjee and GoWB & WBIDC, both WBIDC and the Chatterjee Group were to hold 433 million shares each, while Tata was to hold 144 million shares. The promise extended by WBIDC and GoWB to the Chatterjee Group to provide at least 60% of the shares held by WBIDC at Rs.14/- per share to the Chatterjee Group so as to give the Chatterjee Group the majority shareholding in the Company, as was indicated in the Agreements dated 12th January, 2002, 8th March, 2002 and 14th January, 2005, did not ultimately materialise and, on the other hand, the Chatterjee Group was reduced to a minority on account of its decision not to participate in the Rights Issue, and, thereafter, by transfer of 150 million shares by WBIDC in favour of IOC.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">102. Although, the Chatterjee Group has complained of the manner in which it had been reduced to a minority in the Company, it is also obvious that when the Company was in dire need of funds and the Chatterjee Group also promised to provide a part of the same, it did not do so and instead of bringing in equity, it obtained a loan from HSBC through the Merlin Group, which only increased the debt equity ratio of the Company. Furthermore, while promising to infuse sufficient equity in addition to the amounts that would have been brought in by way of subscription to the Rights Issue, the Chatterjee Group imposed various pre-conditions in order to do so, which ultimately led GoWB and WBIDC to terminate the agreement to transfer sufficient number of shares to the Chatterjee Group to enable it to have complete control over the management of the Company and also to retain its private character. It is at a stage when there was a threat to the supply of Naphtha, which was the main ingredient used by HPL for its manufacturing process, that it finally agreed to induct IOC into the Company as a member by transferring 150 million shares to it. It may not be out of place to mention that it was on Dr. Chatterjee's initiative that it had been decided to induct the IOC as a member of the Company at meetings of the Directors which were chaired by Dr. Chatterjee himself. Of course, as explained on behalf of the Chatterjee Group, even the induction of the IOC as a member of the Company is concerned, was part of a conspiracy to deprive the Chatterjee Group of control of the Company since GoWB and WBIDC never intended to keep its promise regarding transfer of at least 60% of its shareholdings in favour of the Chatterjee Group. Such a submission has to be considered in the context of the financial condition of the Company and the response of the Chatterjee Group in meeting such financial crunch. In our view, if in the first place, the Chatterjee Group had stood by its commitment to bring in equity and had subscribed to the Rights Issue, which was a decision taken by the Company to infuse equity in the running of the Company, it would neither have been reduced to a minority nor would it perhaps have been necessary to induct IOC as a portfolio investor with the possibility of the same being converted into a strategic investment.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">103. The failure of WBIDC and GoWB to register the 155 million shares transferred to CP(I)PL could not, strictly speaking, be taken to be failure on the part of the Company, but it was the failure of one of the parties to a private arrangement to abide by its commitments. The remedy in such a case was not under Section 397<span class="apple-converted-space"> </span>of the Companies Act. It has been submitted by both Mr. Nariman and Mr. Sarkar that even if no acts of oppression had been made out against the Company, it would still be open to the learned Company Judge to grant suitable relief under Section 402 of the Act to iron out the differences that might appear from time to time in the running of the affairs of the Company. No doubt, in the Needle Industries case, this Court had observed that the behaviour and conduct complained of must be held to be harsh and wrongful and in arriving at such a finding, the Court ought not to confine itself to a narrow legalistic view and allow technical pleas to defeat the beneficial provisions of the Section, and that in certain situations the Court is not powerless to do substantial justice between the parties, the facts of this case do not merit such a course of action to be taken. Such an argument is not available to the Chatterjee Group, since the alleged breach of the agreements referred to hereinabove, was really in the nature of a breach between two members of the Company and not the Company itself. It is not on account of any act on the part of the Company that the shares transferred to CP(I)PL were not registered in the name of the Chatterjee Group. There was, therefore, no occasion for the CLB to make any order either under Section 397<span class="apple-converted-space"> </span>or 402 of the aforesaid Act. If, as was observed in M.S.D.C. Radharamanan's case (supra), the CLB had given a finding that the acts of oppression had not been established, it would still be in a position to pass appropriate orders under Section 402 of the Act. That, however, is not the case in the instant appeals.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: "Book Antiqua";mso-bidi-font-family:Tahoma;color:black;background:white">104. In our view, the appellants have failed to substantiate either of the two grounds canvassed by them for the CLB to assume jurisdiction either under Section 397<span class="apple-converted-space"> </span>or 402 of the Companies Act, 1956, and it could not, therefore, have given directions to WBIDC and GoWB to transfer 520 million shares held by them in HPL to the Chatterjee Group and the High Court quite rightly set aside the same and dismissed the Company Petition.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><u><span style="font-family:Tahoma;color:black;background:white">Conclusion:<o:p></o:p></span></u></b></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">This is a wonderful case where the Supreme Court has disposed of the matter based on facts rather dealing with the legal principles extensively pleaded before the Court. It is very difficult to deal with the importance of settled legal principles under section 397/398 of the Companies Act, 1956 in the light of a proposition that the Board can pass orders in a petition under section 397/398 of the Companies Act, 1956 even when a case of ‘oppression and mismanagement’ is not established in <b><i>strict senso.</i></b> <span> </span>On the same footing, emphasis was laid on the principle that an unfair decision of a director can not be seen as ‘oppressive’ so as to give room to the minority to approach the Board under section 397/398 of the Companies Act, 1956. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">This is happening now and most of the cases under section 397/398 of the Companies Act, 1956 are decided based on the facts of the case and towards the objective of ‘putting an end to the matters complained of’. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-family:Tahoma;color:black;background:white">Note:</span></b><span style="font-family:Tahoma;color:black;background:white"> the views expressed are my personal. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com4tag:blogger.com,1999:blog-5623384825844985559.post-42977509865435915392011-10-04T02:15:00.002-07:002011-10-04T02:20:47.636-07:00DRT & SARFAESI: SARFAESI proceedings - rights of the Borrowers - related complications?<p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Many argue that the provisions of SARFAESI Act, 2002 are draconian in nature. Borrowers do often refer to their good relations with the Bank for a considerable time and they express angst at the Bank’s action under the provisions of the SARFAESI Act, 2002. The borrowers do often question as to why the Bank should not consider the reputation of the customer, understand the temporary difficulties and grant time rather proceeding against the ‘Secured Asset’ using the provisions of the SARFAESI Act, 2002 mechanically. <span> </span>The situation of the borrowers may be sympathetic to the officials of the Bank at times, but, they too can do nothing when an account becomes a ‘Non-performing Asset’. The officials of the Bank are bound to act against the ‘Non-performing Assets’ in accordance with their internal guidelines and in accordance with the provisions of the Act. <span> </span>The argument that the provisions of the SARFAESI Act are draconian was set-aside by the Constitutional Courts while giving guidelines and clarifying the legal position from time to time. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The problem comes to the borrowers in ascertaining the clear legal position under the provisions of the SARFAESI Act, 2002 and it’s a very complicated thing. Even when the borrower approaches a professional asking for an advice, the professional may not be in a position to give clear suggestion to the borrowers. There is an example.<span> </span>In SARFAESI proceedings, the barrower and the Bank officials may communicate with each other and at the same time, they think about defending their respective rights in accordance with law. In many cases, the borrowers approach a professional asking for an advice based on the communication or the oral communication from the officials of the Bank concerned. The Bank officials may ask the borrowers to deposit some amount and may promise that the action under SARFAESI Act may be deferred based on the payment. It will be very difficult for a professional to opine on the Bank’s offer. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal based on the request made by the borrower under Section 17 of the Act, but, there is decrease in this tendency, of late.<span> </span>Earlier, based on the grounds in the Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.<span> </span>The usual grounds of an appeal under section 17 of the Act can be as follows:<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">1. The Bank has grossly erred in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">4. The Borrower has not received any notice under section 13 (2) of the Act and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">5. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">6. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">7. The Bank has failed to proceed against the borrower and instead harassing the guarantor. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">8. The Bank is not right in not proceeding against the property of the borrower and it is illegal to proceed against the property of the guarantor without proceeding against the borrower. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">9. There was no ‘valid mortgage’ with the Bank at all.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">10. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">11. The Auction process is unfair and illegal. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above are the few grounds and there can be many more grounds to file an appeal under section 17 of the SARFAESI Act, 2002. No purpose will be served by filing an appeal mechanically unless the intention of the borrower is <i>bonafide </i>and unless there is arguable case against the Bank. It can never be said that the Bank or Bank officials are always right and the borrower is always a ‘willful defaulter’. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers. I would like to give one example as to why borrowers/guarantors/public feels this way and the example is as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><u><span style="font-family:Tahoma">Facts & Proceedings:<o:p></o:p></span></u></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="1" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">A person named ‘AB’ wants purchase a property from a person named ‘BC’.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="2" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While intending to purchase the property, Mr.AB wanted to inspect the original title deeds of the property of ‘BC’ and also wanted to check encumbrance over the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="3" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As the Original Deeds are available with ‘BC’ which are in order and as there is no encumbrance over the property, Mr.AB has purchased the property for a valuable considerable after paying requisite Stamp Duty and registration charges. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="4" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="5" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While the property is in possession of Mr.AB, suddenly a Bank named ‘DE’ has affixed a notice under section 13 (4) at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="6" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="7" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Bank has replied saying that the property is mortgaged with the Bank with due registration by Mr.AB and he has defaulted to repay loan. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="8" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Further enquiry has revealed that the Bank is at fault while getting the property mortgaged from Mr.AB and there is no reason as to why they have not insisted for the Deposit of Title Deeds. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="9" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As there is no option, Mr.AB has filed an appeal under Section 17 of the SARFAESI Act, 2002 alleging everything as to how he is a <i>bonafide</i> purchaser. He also leveled clear allegations against the Bank and their negligent attitude. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="10" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Appeal is dismissed by the Debt Recovery Tribunal vaguely saying that the Bank has followed the procedure correctly under the provisions of SARFAESI Act, 2002 and without noting or dealing with the allegation pertaining to mortgage and without noting that the Bank has not replied to the charges made by the Appellant. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="11" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB, as there is no option, has filed an Appeal with the DRAT. While the Appeal is pending, the Bank has brought the property for auction and while the proceeding is going on, the Bank has completed the Auction and says that it has confirmed the auction infavour of the ‘only bidder’ who bid the property on a particular date. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="12" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB is being asked now to get the details of the bidder, implead him as party to the proceedings and also asked to challenge the act of <st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> afresh.</span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above case is an example as to how borrowers/guarantors and public get troubled with this recovery system. It may be true that that the Bank is supposed to defeat the unfair attitude of the borrower, but, there is a law and if the borrower raises a considerable legal point, the same is to be considered. Law is always supported by logic, and it can not be said that the legal point or right being raised by the borrower/person can be ignored without any reason. Against this background, of late, even the High Courts coming heavily against the Bank and High Court is setting-aside the proceedings of DRT or DRAT. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Tahoma">Complications in finding the remedy or granting the remedy:<o:p></o:p></span></b></p><p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Tahoma"><br /></span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Due to the reasons mentioned above, it is most often difficult for the borrowers/guarantors/public to find-out the appropriate remedy against the Bank if there is a good ground to challenge the Bank’s action. It is also difficult and complicated for the DRT and DRAT to grant relief to the borrowers and the adjudicating authority shall not purely depend upon the technicalities if it suits the Bank and can not ignore the legal principles raised by the borrower as a ‘delay tactic’. Just because, the Bank says a particular thing against a particular person, the same can not be the gospel truth. It all depends upon the facts and circumstances of the case. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Referring to the legal background under SARFAESI Act, 2002, dealing with the mandatory nature of Section 13 (3-A) and emphasizing as to the complications while granting relief as we can assume, the <b>Madras High Court</b> in </span><b><span style="font-size:11.0pt;font-family:Tahoma;color:black">W.P.No.6710 of 2011</span></b><span style="font-size:11.0pt;font-family:Tahoma;color:black"> reported in <b>CDJ 2011 MHC 4916</b>, is observed as follows:</span><span style="font-family:Tahoma"><o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">“9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">11. In the above background, the question raised in the writ petition must be considered. In MardiaChemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">12. The very same question again came up for consideration before the Supreme Court in Transcorev. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">13. Most recently in KanaiyalalLalchand Sachdev v. State of <st1:state st="on"><st1:place st="on">Maharashtra</st1:place></st1:state>, (2011) 2 SCC 782,the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">15. The judgments of the Supreme Court in Transcoreand Kanaiyalal Lalchand Sachdevalso proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">18. The decision of the Supreme Court in MardiaChemicals Ltd. was made on 8<sup>th</sup><span class="apple-converted-space"> </span>April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11<sup>th</sup><span class="apple-converted-space"> </span>November, 2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14<sup>th</sup><span class="apple-converted-space"> </span>November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under Section 17 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.SunandaKumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"It is not disputed that even though the petitioners had submitted Annexure 'C' reply to Annexure 'B' notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure 'D' application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular...."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. <st1:place st="on">Punjab</st1:place> and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"21.....It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in KrushnaChandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumarv. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is</span><span style="font-size:11.5pt;font-family:Tahoma;color:black;background:white"> </span><span style="font-size:11.0pt;font-family:Tahoma;color:black;background:white">mandatory.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-size:11.5pt;font-family:Tahoma;color:black; background:white">Note</span></b><span style="font-size:11.5pt;font-family: Tahoma;color:black;background:white">: the views expressed are my personal. <o:p></o:p></span></p> <p class="MsoNormal"><span style="font-family:Tahoma"><o:p> </o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com1tag:blogger.com,1999:blog-5623384825844985559.post-35440460708225761812011-10-04T02:15:00.001-07:002011-10-04T02:19:05.110-07:00DRT & SARFAESI: SARFAESI proceedings - rights of the Borrowers - related complications?<p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Many argue that the provisions of SARFAESI Act, 2002 are draconian in nature. Borrowers do often refer to their good relations with the Bank for a considerable time and they express angst at the Bank’s action under the provisions of the SARFAESI Act, 2002. The borrowers do often question as to why the Bank should not consider the reputation of the customer, understand the temporary difficulties and grant time rather proceeding against the ‘Secured Asset’ using the provisions of the SARFAESI Act, 2002 mechanically. <span> </span>The situation of the borrowers may be sympathetic to the officials of the Bank at times, but, they too can do nothing when an account becomes a ‘Non-performing Asset’. The officials of the Bank are bound to act against the ‘Non-performing Assets’ in accordance with their internal guidelines and in accordance with the provisions of the Act. <span> </span>The argument that the provisions of the SARFAESI Act are draconian was set-aside by the Constitutional Courts while giving guidelines and clarifying the legal position from time to time. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The problem comes to the borrowers in ascertaining the clear legal position under the provisions of the SARFAESI Act, 2002 and it’s a very complicated thing. Even when the borrower approaches a professional asking for an advice, the professional may not be in a position to give clear suggestion to the borrowers. There is an example.<span> </span>In SARFAESI proceedings, the barrower and the Bank officials may communicate with each other and at the same time, they think about defending their respective rights in accordance with law. In many cases, the borrowers approach a professional asking for an advice based on the communication or the oral communication from the officials of the Bank concerned. The Bank officials may ask the borrowers to deposit some amount and may promise that the action under SARFAESI Act may be deferred based on the payment. It will be very difficult for a professional to opine on the Bank’s offer. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal based on the request made by the borrower under Section 17 of the Act, but, there is decrease in this tendency, of late.<span> </span>Earlier, based on the grounds in the Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.<span> </span>The usual grounds of an appeal under section 17 of the Act can be as follows:<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">1. The Bank has grossly erred in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">4. The Borrower has not received any notice under section 13 (2) of the Act and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">5. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">6. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">7. The Bank has failed to proceed against the borrower and instead harassing the guarantor. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">8. The Bank is not right in not proceeding against the property of the borrower and it is illegal to proceed against the property of the guarantor without proceeding against the borrower. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">9. There was no ‘valid mortgage’ with the Bank at all.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">10. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.<o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">11. The Auction process is unfair and illegal. <o:p></o:p></span></p><p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><br /></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above are the few grounds and there can be many more grounds to file an appeal under section 17 of the SARFAESI Act, 2002. No purpose will be served by filing an appeal mechanically unless the intention of the borrower is <i>bonafide </i>and unless there is arguable case against the Bank. It can never be said that the Bank or Bank officials are always right and the borrower is always a ‘willful defaulter’. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers. I would like to give one example as to why borrowers/guarantors/public feels this way and the example is as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><u><span style="font-family:Tahoma">Facts & Proceedings:<o:p></o:p></span></u></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="1" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">A person named ‘AB’ wants purchase a property from a person named ‘BC’.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="2" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While intending to purchase the property, Mr.AB wanted to inspect the original title deeds of the property of ‘BC’ and also wanted to check encumbrance over the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="3" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As the Original Deeds are available with ‘BC’ which are in order and as there is no encumbrance over the property, Mr.AB has purchased the property for a valuable considerable after paying requisite Stamp Duty and registration charges. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="4" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="5" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While the property is in possession of Mr.AB, suddenly a Bank named ‘DE’ has affixed a notice under section 13 (4) at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="6" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="7" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Bank has replied saying that the property is mortgaged with the Bank with due registration by Mr.AB and he has defaulted to repay loan. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="8" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Further enquiry has revealed that the Bank is at fault while getting the property mortgaged from Mr.AB and there is no reason as to why they have not insisted for the Deposit of Title Deeds. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="9" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As there is no option, Mr.AB has filed an appeal under Section 17 of the SARFAESI Act, 2002 alleging everything as to how he is a <i>bonafide</i> purchaser. He also leveled clear allegations against the Bank and their negligent attitude. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="10" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Appeal is dismissed by the Debt Recovery Tribunal vaguely saying that the Bank has followed the procedure correctly under the provisions of SARFAESI Act, 2002 and without noting or dealing with the allegation pertaining to mortgage and without noting that the Bank has not replied to the charges made by the Appellant. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="11" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB, as there is no option, has filed an Appeal with the DRAT. While the Appeal is pending, the Bank has brought the property for auction and while the proceeding is going on, the Bank has completed the Auction and says that it has confirmed the auction infavour of the ‘only bidder’ who bid the property on a particular date. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="12" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB is being asked now to get the details of the bidder, implead him as party to the proceedings and also asked to challenge the act of <st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> afresh. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above case is an example as to how borrowers/guarantors and public get troubled with this recovery system. It may be true that that the Bank is supposed to defeat the unfair attitude of the borrower, but, there is a law and if the borrower raises a considerable legal point, the same is to be considered. Law is always supported by logic, and it can not be said that the legal point or right being raised by the borrower/person can be ignored without any reason. Against this background, of late, even the High Courts coming heavily against the Bank and High Court is setting-aside the proceedings of DRT or DRAT. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Tahoma">Complications in finding the remedy or granting the remedy:<o:p></o:p></span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Due to the reasons mentioned above, it is most often difficult for the borrowers/guarantors/public to find-out the appropriate remedy against the Bank if there is a good ground to challenge the Bank’s action. It is also difficult and complicated for the DRT and DRAT to grant relief to the borrowers and the adjudicating authority shall not purely depend upon the technicalities if it suits the Bank and can not ignore the legal principles raised by the borrower as a ‘delay tactic’. Just because, the Bank says a particular thing against a particular person, the same can not be the gospel truth. It all depends upon the facts and circumstances of the case. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Referring to the legal background under SARFAESI Act, 2002, dealing with the mandatory nature of Section 13 (3-A) and emphasizing as to the complications while granting relief as we can assume, the <b>Madras High Court</b> in </span><b><span style="font-size:11.0pt;font-family:Tahoma;color:black">W.P.No.6710 of 2011</span></b><span style="font-size:11.0pt;font-family:Tahoma;color:black"> reported in <b>CDJ 2011 MHC 4916</b>, is observed as follows:</span><span style="font-family:Tahoma"><o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">“9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">11. In the above background, the question raised in the writ petition must be considered. In MardiaChemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">12. The very same question again came up for consideration before the Supreme Court in Transcorev. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">13. Most recently in KanaiyalalLalchand Sachdev v. State of <st1:state st="on"><st1:place st="on">Maharashtra</st1:place></st1:state>, (2011) 2 SCC 782,the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">15. The judgments of the Supreme Court in Transcoreand Kanaiyalal Lalchand Sachdevalso proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">18. The decision of the Supreme Court in MardiaChemicals Ltd. was made on 8<sup>th</sup><span class="apple-converted-space"> </span>April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11<sup>th</sup><span class="apple-converted-space"> </span>November, 2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14<sup>th</sup><span class="apple-converted-space"> </span>November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under Section 17 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.SunandaKumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"It is not disputed that even though the petitioners had submitted Annexure 'C' reply to Annexure 'B' notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure 'D' application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular...."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. <st1:place st="on">Punjab</st1:place> and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"21.....It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in KrushnaChandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumarv. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is</span><span style="font-size:11.5pt;font-family:Tahoma;color:black;background:white"> </span><span style="font-size:11.0pt;font-family:Tahoma;color:black;background:white">mandatory.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-size:11.5pt;font-family:Tahoma;color:black; background:white">Note</span></b><span style="font-size:11.5pt;font-family: Tahoma;color:black;background:white">: the views expressed are my personal. <o:p></o:p></span></p> <p class="MsoNormal"><span style="font-family:Tahoma"><o:p> </o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com0tag:blogger.com,1999:blog-5623384825844985559.post-89795695250712619762011-10-04T02:15:00.000-07:002011-10-04T02:17:35.266-07:00DRT & SARFAESI: SARFAESI proceedings - rights of the Borrowers - related complications?<p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Many argue that the provisions of SARFAESI Act, 2002 are draconian in nature. Borrowers do often refer to their good relations with the Bank for a considerable time and they express angst at the Bank’s action under the provisions of the SARFAESI Act, 2002. The borrowers do often question as to why the Bank should not consider the reputation of the customer, understand the temporary difficulties and grant time rather proceeding against the ‘Secured Asset’ using the provisions of the SARFAESI Act, 2002 mechanically. <span> </span>The situation of the borrowers may be sympathetic to the officials of the Bank at times, but, they too can do nothing when an account becomes a ‘Non-performing Asset’. The officials of the Bank are bound to act against the ‘Non-performing Assets’ in accordance with their internal guidelines and in accordance with the provisions of the Act. <span> </span>The argument that the provisions of the SARFAESI Act are draconian was set-aside by the Constitutional Courts while giving guidelines and clarifying the legal position from time to time. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The problem comes to the borrowers in ascertaining the clear legal position under the provisions of the SARFAESI Act, 2002 and it’s a very complicated thing. Even when the borrower approaches a professional asking for an advice, the professional may not be in a position to give clear suggestion to the borrowers. There is an example.<span> </span>In SARFAESI proceedings, the barrower and the Bank officials may communicate with each other and at the same time, they think about defending their respective rights in accordance with law. In many cases, the borrowers approach a professional asking for an advice based on the communication or the oral communication from the officials of the Bank concerned. The Bank officials may ask the borrowers to deposit some amount and may promise that the action under SARFAESI Act may be deferred based on the payment. It will be very difficult for a professional to opine on the Bank’s offer. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal based on the request made by the borrower under Section 17 of the Act, but, there is decrease in this tendency, of late.<span> </span>Earlier, based on the grounds in the Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some ‘nominal amount’.<span> </span>The usual grounds of an appeal under section 17 of the Act can be as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">1. The Bank has grossly erred in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Had the Bank informed the borrower about classification, the borrower should have taken appropriate steps.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">4. The Borrower has not received any notice under section 13 (2) of the Act and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">5. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">6. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">7. The Bank has failed to proceed against the borrower and instead harassing the guarantor. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">8. The Bank is not right in not proceeding against the property of the borrower and it is illegal to proceed against the property of the guarantor without proceeding against the borrower. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">9. There was no ‘valid mortgage’ with the Bank at all.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">10. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bank is colluding with the bidders.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma">11. The Auction process is unfair and illegal. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above are the few grounds and there can be many more grounds to file an appeal under section 17 of the SARFAESI Act, 2002. No purpose will be served by filing an appeal mechanically unless the intention of the borrower is <i>bonafide </i>and unless there is arguable case against the Bank. It can never be said that the Bank or Bank officials are always right and the borrower is always a ‘willful defaulter’. The borrower may be genuine in his grievance against the Bank and he may simply want to fight for his rights against the Bank. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers. I would like to give one example as to why borrowers/guarantors/public feels this way and the example is as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><u><span style="font-family:Tahoma">Facts & Proceedings:<o:p></o:p></span></u></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="1" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">A person named ‘AB’ wants purchase a property from a person named ‘BC’.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="2" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While intending to purchase the property, Mr.AB wanted to inspect the original title deeds of the property of ‘BC’ and also wanted to check encumbrance over the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="3" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As the Original Deeds are available with ‘BC’ which are in order and as there is no encumbrance over the property, Mr.AB has purchased the property for a valuable considerable after paying requisite Stamp Duty and registration charges. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="4" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="5" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">While the property is in possession of Mr.AB, suddenly a Bank named ‘DE’ has affixed a notice under section 13 (4) at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="6" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="7" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Bank has replied saying that the property is mortgaged with the Bank with due registration by Mr.AB and he has defaulted to repay loan. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="8" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Further enquiry has revealed that the Bank is at fault while getting the property mortgaged from Mr.AB and there is no reason as to why they have not insisted for the Deposit of Title Deeds. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="9" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">As there is no option, Mr.AB has filed an appeal under Section 17 of the SARFAESI Act, 2002 alleging everything as to how he is a <i>bonafide</i> purchaser. He also leveled clear allegations against the Bank and their negligent attitude. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="10" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">The Appeal is dismissed by the Debt Recovery Tribunal vaguely saying that the Bank has followed the procedure correctly under the provisions of SARFAESI Act, 2002 and without noting or dealing with the allegation pertaining to mortgage and without noting that the Bank has not replied to the charges made by the Appellant. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="11" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB, as there is no option, has filed an Appeal with the DRAT. While the Appeal is pending, the Bank has brought the property for auction and while the proceeding is going on, the Bank has completed the Auction and says that it has confirmed the auction infavour of the ‘only bidder’ who bid the property on a particular date. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-size:11.0pt; font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="12" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-size:11.0pt;font-family:Tahoma">Mr.AB is being asked now to get the details of the bidder, implead him as party to the proceedings and also asked to challenge the act of <st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> afresh. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above case is an example as to how borrowers/guarantors and public get troubled with this recovery system. It may be true that that the Bank is supposed to defeat the unfair attitude of the borrower, but, there is a law and if the borrower raises a considerable legal point, the same is to be considered. Law is always supported by logic, and it can not be said that the legal point or right being raised by the borrower/person can be ignored without any reason. Against this background, of late, even the High Courts coming heavily against the Bank and High Court is setting-aside the proceedings of DRT or DRAT. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Tahoma">Complications in finding the remedy or granting the remedy:<o:p></o:p></span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Due to the reasons mentioned above, it is most often difficult for the borrowers/guarantors/public to find-out the appropriate remedy against the Bank if there is a good ground to challenge the Bank’s action. It is also difficult and complicated for the DRT and DRAT to grant relief to the borrowers and the adjudicating authority shall not purely depend upon the technicalities if it suits the Bank and can not ignore the legal principles raised by the borrower as a ‘delay tactic’. Just because, the Bank says a particular thing against a particular person, the same can not be the gospel truth. It all depends upon the facts and circumstances of the case. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Referring to the legal background under SARFAESI Act, 2002, dealing with the mandatory nature of Section 13 (3-A) and emphasizing as to the complications while granting relief as we can assume, the <b>Madras High Court</b> in </span><b><span style="font-size:11.0pt;font-family:Tahoma;color:black">W.P.No.6710 of 2011</span></b><span style="font-size:11.0pt;font-family:Tahoma;color:black"> reported in <b>CDJ 2011 MHC 4916</b>, is observed as follows:</span><span style="font-family:Tahoma"><o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">“9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.<o:p></o:p></span></p> <p style="line-height:15.75pt"><span style="font-size:11.0pt;font-family:Tahoma; color:black;background:white">(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">11. In the above background, the question raised in the writ petition must be considered. In MardiaChemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">12. The very same question again came up for consideration before the Supreme Court in Transcorev. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">13. Most recently in KanaiyalalLalchand Sachdev v. State of <st1:state st="on"><st1:place st="on">Maharashtra</st1:place></st1:state>, (2011) 2 SCC 782,the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">15. The judgments of the Supreme Court in Transcoreand Kanaiyalal Lalchand Sachdevalso proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">18. The decision of the Supreme Court in MardiaChemicals Ltd. was made on 8<sup>th</sup><span class="apple-converted-space"> </span>April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11<sup>th</sup><span class="apple-converted-space"> </span>November, 2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14<sup>th</sup><span class="apple-converted-space"> </span>November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under Section 17 of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.SunandaKumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"It is not disputed that even though the petitioners had submitted Annexure 'C' reply to Annexure 'B' notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure 'D' application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular...."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. <st1:place st="on">Punjab</st1:place> and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"21.....It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in KrushnaChandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumarv. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is</span><span style="font-size:11.5pt;font-family:Tahoma;color:black;background:white"> </span><span style="font-size:11.0pt;font-family:Tahoma;color:black;background:white">mandatory.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-size:11.5pt;font-family:Tahoma;color:black; background:white">Note</span></b><span style="font-size:11.5pt;font-family: Tahoma;color:black;background:white">: the views expressed are my personal. <o:p></o:p></span></p> <p class="MsoNormal"><span style="font-family:Tahoma"><o:p> </o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com0tag:blogger.com,1999:blog-5623384825844985559.post-84751292304309660962011-10-03T02:45:00.000-07:002011-10-03T02:46:31.336-07:00DRT & SARFAESI: ‘SARFAESI Auctions’ & the need of fairness?<p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">It may be true that Banks do face numerous difficulties in recovering the dues despite having ‘security’. But, there can not be any difficulty for the Banks in recovering their dues under SARFAESI Act, 2002. <span> </span>It is alleged that even the Debt Recovery Tribunals and Appellate Tribunal do favour Banks and keep on insisting on making substantial payment to the Bank without looking into the merits or demerits in the Appeal filed by the borrower under the Act. According to me, earlier, the High Courts used to discourage the borrowers filing Writ Petitions and Civil Revision Petitions under Article 227 either during the pendency of the Appeal before the Tribunal or before filing the Appeal. The High Courts say that the borrower can avail the alternative remedy before the Debt Recovery Tribunal. In pending cases, there used to be directions for disposal of a particular application or appeal in a prescribed time.<span> </span>But, there will be difficulties in prescribing the time-frame for the DRT or DRAT to dispose of a particular application or Appeal.<span> </span>It is true that some borrowers do approach the Tribunal in order to delay the recovery process and in some cases, there can be genuine grievance and each case should depend upon its own merits. Only with this spirit, the Courts held that the Debt Recovery Tribunals can go into all issues in the Appeal and the Tribunals can even restore the possession of the ‘Secured Asset’ back. In a proceeding like an appeal under section 17 of SARFAESI Act, 2002, if the Debt Recovery Tribunal relies on technicalities, then, the borrower need not even approach the Tribunal seeking justice and that can not be the object or spirit behind SARFAESI Act, 2002.<span> </span>It is complicated for the borrower to pursue his remedy under section 17 of the SARFAESI Act, 2002 and there are issues like:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">1. The borrower may be talking to the Bank for settlement even when the Bank proceeds under the provisions of SARFAESI Act, 2002.<span> </span>At this stage, the borrower will be under dilemma as to whether to file an Appeal antagonizing the Bank or the Bank Manager or to pursue the talks of settlement. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">2. The borrower will be having a right to object to the demand or the notice issued by the Bank under Section 13 (2) of the Act. But, the borrower may choose not to raise any objections considering his relations with the Bank or Bank Manager and considering settlement talks. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">3. Even when it comes to settlement, in many cases, the Bank Manager may orally say something and believing that the borrower may make some deposit and then, the Bank turns around and will say that the entire outstanding is to be cleared. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">4.The law prescribes a time limit for filing an appeal pursuant to the notice issued by the Bank under section 13 (4) of the Act. However, in view of the continuous talks, assurances from the Bank or the Manager concerned, the borrower may not choose to exercise his right of Appeal. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">5.Though it is now settled that all actions of the Bank pursuant to Section 13 (4) of the Act are appeallable, the borrower may have to explain to the Tribunal as to why there is a delay in filing the Appeal and there can be insistence for filing ‘condonation of delay’ application. It is really illogical in the context that even the ‘Auction Sale’ can be challenged under Section 17. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">6. It is often alleged that the Debt Recovery Tribunal insists for ‘substantial deposit’ while granting a temporary stay of Bank’s proceedings. In many cases, this temporary relief ends even without looking at the allegations in the Appeal seriously. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">7. The Bank keeps on proceeding under SARFAESI Act, 2002 even when an Appeal is pending. If there is some development during the pendency of the Appeal, the Bank will contend that the original Appeal becomes infructuous. This is illogical. The Debt Recovery Tribunal shall consider all issues pertaining to the Bank’s action when the Appeal is pending. Even where the borrower only challenges the notice under section 13 (4) and if the property is sold pending the Appeal, then, the DRT shall consider setting aside the sale also if it is found that the <st1:city st="on"><st1:place st="on">Sale</st1:place></st1:city> is illegal. There can’t be any logic in asking the borrower to file an appeal afresh and at the best, the borrower may be asked to file additional affidavit if there are further allegations about the ‘Sale Proceedings’.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">Like-wise, there are several issues if the borrower wants to pursue his case against the Bank through an appeal under section 17 of the SARFAESI Act, 2002. There can not be any problem if the Debt Recovery Tribunal takes quick decisions instead of keep-on adjourning the issues. In the recent past, there are several serious allegations against the Bank as to how it conducts the ‘Auction Sale’. In one case, an Appeal is pending before the DRAT and as the Bank is proceeding with the auction, the borrower has mentioned the urgency and wanted to look into the issue on urgent basis as there will be ‘third party interest’ if the auction is proceeded to.<span> </span>While the proceeding is ‘on’, the Bank says that the ‘Auction’ is going-on and then says that the ‘Auction’ is over as there is one ‘bid’ and it is confirmed also. How come this be termed as a fair ‘Auction Sale’.<span> </span>The DRAT should have decided the issue ‘then and there’ instead of keeping the matter pending and adjourning the matter without recording anything on merits and submissions of the parties concerned. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">These genuine difficulties of the borrowers and the reality as to how the provisions of SARFAESI Act, 2002 are misused, there is a merit in the argument that the High Court can interfere under Article 226 of the Constitution in ‘SARFAESI proceedings’. Now, the argument will be against the ‘judicial restraint’ in this regard. If the borrower is not genuine, then, he can be handled straight-away and even if the borrower is not genuine on one issue, that can not be a ground for the Bank to be ‘unfair’ to him while using the provisions of SARFAESI Act, 2002. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black;background:white">In the recent past, the Madras High Court has passed several judgments coming heavily against the Banks and their action. It is laudable and the Banks and their officers should be taken to task in appropriate cases.<span> </span>The extract of a recent wonderful judgment of <b>Madras High Court </b>in </span><b><span style="font-family:Tahoma;color:black">W.P.No.21987 of 2010 & M.P.No. 1 of 2010,</span></b><span style="font-family:Tahoma;color:black;background:white"> reported in <b>CDJ 2011 MHC 5036,</b> emphasizing as to how the ‘Auction process’, is to be fair is as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">“18. The course of conduct adopted by the Bank clearly gives an indication that the market rate was deliberately reduced in the subsequent valuation report. The forced/distress value was shown only for the purpose of fixing a lesser amount as reserve price. In case there were no bidders during the second auction, the Authorised Officer in all fairness should have postponed the auction. It is not the case of the Bank that several attempts were made earlier to dispose of the property. Given the location of the property, there would be no difficulty to get higher price as indicated in the earlier valuation report.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">19. It is true that the there is no provision akin to that of Order XXI Rule 72 of the Code of Civil Procedure in SARFAESI Act dis-entitling the decree holder from participating in the auction without the express permission of Court. However, in a matter like this, when there were no bidders, the Bank should not have knocked down the property for a paltry sum.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">20. The petitioner is still liable to pay the balance amount to the Bank, in spite of losing the property.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">21. The Bank is a responsible body. The SARFAESI Act gives wide powers to the Bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to Court. Therefore the Bank is expected to conduct the procedure in a bona fide manner. The dealings of the Bank should be fair and transparent. When the amount due from the borrower is more than Rs.4 cores, the attempt of the Bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">22. The Authorised Officer is none other than the officer of the Bank. The auction was conducted at the premises of the respondent Bank. Admittedly there were no other bidders. In case the Bank was having an idea to purchase the property, they should have given prior intimation to the borrower. The fact that there is no statutory prohibition against the secured creditor taking part in the auction, will not enable them to purchase the property by re-fixing the market price as well as the reserve price and to purchase the property at such reduced rate. This is absolutely not the intention of the law makers while enacting the SARFAESI Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">23. In Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 the Supreme Court found that there were no rules or guidelines framed by the Kerala Financial Corporation for sale of properties. Therefore, the Supreme Court indicated certain guidelines in the matter of sale of properties owned by the Corporation till such formation of rules, guidelines or orders. The relevant norms are extracted below :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">(vi) The essential ingredients of sale are correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">24. In Eureka Forbes Ltd., vs. Allahabad Bank and ors. [2010(6) SCC 193], the Supreme Court while considering the concept of public accountability and performance, indicated that the same would apply to the banks as well. The Supreme Court observed :-<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">"82. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision-making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance."<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">25. There is no dispute that judicial review is concerned only with the decision making process. Courts and Tribunals are not expected to sit in appeal over the decisions taken by the authorities including banks. However, when a case of grave miscarriage of justice is made out, necessarily, the Court has to come to the rescue of the affected party. The Court of equity is expected to advance justice. When it is made out that substantial injustice has been done to a party, the Court should not shirk its responsibility. Technicality has no say in such matters.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">26. The authority given to the Bank to recover the dues without recourse to legal proceedings will not give them the right to snatch away the property from the borrower. The very fact that in spite of the steep rise in land value, the market value was shown at a low rate after a period of about two years itself shows the mala fides in the matter. The subject sale effected by the Authorised Officer of the Bank cannot be treated as a valid public sale. Therefore we are constrained to set aside the sale made in favour of the Bank.<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-size:11.0pt; font-family:Tahoma;color:black;background:white">27. The Authorised Officer is directed to issue fresh auction notice and conduct the auction as per statute in a fair and transparent manner, without giving room for complaints.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b><span style="font-size:11.0pt;font-family:Tahoma;color:black; background:white">Note:</span></b><span style="font-size:11.0pt;font-family: Tahoma;color:black;background:white"> the views expressed are my personal. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com6tag:blogger.com,1999:blog-5623384825844985559.post-59579973191931069552011-09-22T05:40:00.000-07:002011-09-22T05:41:19.439-07:00Need of correcting our ‘Indian Legal System’?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4hKYSrWl-ea-k-gS3Y_u54zr0fh4eZHZGKoAvT9N9FnEMYa2vLETFywNRmlnC7unrGc4pt-LvEohloVQ6qcTc15Y6ioNanoOrT36zM3yNGR5HcgHPWO6GSasvqnlD7VksAl0AtO49TtPG/s1600/law+symbol.jpg" onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}"><img style="float:left; margin:0 10px 10px 0;cursor:pointer; cursor:hand;width: 320px; height: 225px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4hKYSrWl-ea-k-gS3Y_u54zr0fh4eZHZGKoAvT9N9FnEMYa2vLETFywNRmlnC7unrGc4pt-LvEohloVQ6qcTc15Y6ioNanoOrT36zM3yNGR5HcgHPWO6GSasvqnlD7VksAl0AtO49TtPG/s320/law+symbol.jpg" border="0" alt="" id="BLOGGER_PHOTO_ID_5655162951576076370" /></a><p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">We may very often say great things about Indian Judiciary or legal system. It is true that we have had great legal luminaries, who played a very important role in our democracy defending the Fundamental Rights of the people, expanding the scope of Part-III of Indian Constitution and who played a very important role in preserving and upholding the Constitutional Principles. People with no exposure to Courts, may appreciate our legal system and Indian Judiciary when they look at the intervention of High Courts and Supreme Courts in the matters of public importance. People may appreciate the intervention of the Supreme Court with the issue of appointment of ‘CVC’ recently and monitoring the ‘2G Case’. The exercise of jurisdiction under Article 226 and Article 32 of Constitution of India should be appreciated despite criticism and even our judiciary lays emphasis on exercising judicial restraint. While Public Interest Litigations are entertained by the Constitutional Courts in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region>, the common man may not have much work with the Constitutional Courts except approaching High Courts by filing Writ Petitions where there is a problem with the Government or the Government machinery. Or a common man may approach the High Court by filing traditional Writ Petitions like Habeas Corpus or may seek a direction to the Police Authorities seeking to register FIR etc. <span> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">What concerns the common man the most is the ‘Justice Delivery Mechanism’ at the lower level.<span> </span>We need not even discuss much about the ‘Criminal Justice Delivery Mechanism’ in this country as it is directly related to the Police Department or the State Government as most of the offences are treated ‘against the state or the society’.<span> </span>It is alleged that the Police Department is one of the most corrupt departments and they violate the fundamental rights of the people day-in and day-out. They can dilute charges, they can refuse to register an FIR saying that the preliminary investigation proves otherwise and they can implicate innocent people in the Crime. They will delay the filing of Charge-Sheet so as to delay the grant of Bail and if they are managed, they will instantly present the Charge-Sheet in Court without thinking too much as to whether they will be able to prove the case finally or not. These are all facts and allegations as many allege about our Police Department. As the grant of bail is the discretion of the Magistrate concerned unless the prosecution delays the filing of Charge-Sheet beyond 90 days, as the Magistrate can exercise discretion while concluding that the offence is proved or not proved ‘beyond reasonable doubt’ etc., people allege that there is corruption in the judiciary at the lower level in most of the cases and corruption at the Higher Level is also alleged.<span> </span>It is also true that the Police Department do face so many problems in proving a case by securing witness and many of the Criminal cases gets weakened due to the attitude of the witness though the Police are strong to prove their case. Even when it comes to Bail, if the <st1:street st="on"><st1:address st="on">Magistrate Court</st1:address></st1:street> rejects the Bail, the accused can approach the District Court or the High Court and the High Courts, according to me, are lenient in granting Bails unless there is strong opposition from the prosecution. In most of the cases as I believe, the High Court may not even listen to any arguments in Bail Petitions and they will be looking at the antecedents of the accused, the section under which the accused is charged with and the objections from the prosecution. <span> </span>Though, there are so many issues with the ‘Criminal Justice Delivery Mechanism’, the rights of the accused are well protected under in our system in accordance with the Constitutional Principles. <span> </span>When it comes to ‘Criminal Justice Delivery Mechanism’, everyone is concerned at the ‘Police Department’ than the ‘judicial mechanism’ though there are serious allegations of corruption in Lower Judiciary especially when it comes to grant of ‘Bails’ and entertaining ‘Private Complaints’. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Most people are worried at the inordinate delay and technicalities in our Civil Courts. Whenever we talk of delay in Courts, we will listen to an emphasis on ‘Alternative Dispute Resolution Mechanism’. While the ‘Alternative Dispute Resolution Mechanism’ is to be encouraged, it can not be a substitute to ‘Traditional Dispute Resolution Mechanism’. If we see the logic as to why ‘Alternative Dispute Resolution Mechanism’ is encouraged, the logic is of two fold. One is that there is work pressure on our Courts and the second one is that the Arbitrator need not follow ‘Civil Procedure Code’ though he should be adhering to ‘Principles of Natural Justice’, ‘Substantive law’ and the settled legal principles. Even there are critics that injustice is being done using the provisions of ‘Arbitration and Conciliation Act’ and even the Arbitration proceedings are delayed with the attitude of the parties concerned, the lawyers, the Arbitrator and there are issues like frequently filing applications under section 34 of Arbitration & Conciliation Act. I believe that the ‘Alternative Dispute Resolution Mechanism’ through Arbitration works well if certain issues are focused and other Alternative Modes like Conciliation and Mediation succeeds based on the planning and co-operation of the parties concerned. It is also there that the dispute resolution through Arbitration is costly and it is better suited to commercial disputes. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">When a common man had to approach the Civil Courts in this Country, the justice delivery process can be as follows:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="1" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Depending upon the stakes and capacity to pay fee, he may be able to find a good lawyer who can pursue the matter.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="margin-left:.25in;text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="2" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Assuming that a Civil Suit is to be presented in a <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street>, the lawyer knows as to what happens with the registry for getting the Suit numbered and brought to Court for hearing. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="3" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">In most of the Civil Suits, there will be Interim Applications praying for interim relief and the Court may hear the applications seeking Interim Relief ex-parte or may choose to give notice to the opposite parties. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="4" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">There are modes as to how to give notice, but, the problem comes with the Court ordering notice without trying to find as to what happened to the notice earlier sent etc. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="5" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Assuming a case that the Court grants an Interim Relief in a Civil Suit, then, the opposite party can file an application seeking to ‘vacate the interim relief’ or alternatively, he may choose to challenge the interim order with the next Appellate Court if it is appellable order or may even approach the High Court under Article 227 or may file a Civil Revision Petition under the provisions of the Civil Procedure Code if the Interim Order is not an appeallable order. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="6" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">If the Interim Order is appealed against, it is likely that the High Court may grant a stay and may keep the ‘Civil Revision Petition’ pending and in the meanwhile, the <st1:street st="on"><st1:address st="on">Lower Court</st1:address></st1:street> will keep adjourning the Civil Suit saying that the ‘appeal is pending’.<o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="7" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">In order to delay the process of justice delivery, any number of Interim Applications can be filed at any stage and the even judges too entertain the same. In many cases, the judges lack the required expertise in assessing the legal position quickly and the issue of competence of the lawyers is also there. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="8" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Against all interim orders, an appellate remedy is available and there are so many ways to delay the process of a Civil Suit.<span> </span>Advocates will be coming to Courts with many precedents with them and argue their case based on the interpretation of a single order/rule under Civil Procedure Code. But, the clients will be coming to courts and waiting endlessly thinking that the Court will pass orders in their favour. They will loose interest in the process slowly. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="9" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">Court papers often go missing and the adjudication on a particular day in a particular case is not provided on-line and Lower Courts in this country are not computerized as required. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <ol style="margin-top:0in" start="10" type="1"> <li class="MsoNormal" style="text-align:justify;mso-list:l0 level1 lfo1; tab-stops:list .5in"><span style="font-family:Tahoma">If anyone wants to fight with the system or corruption in the system, he can do nothing except writing a complaint to the Registrar concerned, or the Registrar of High Court and in some cases, the complaint is lodged with the Chief Justice of the concerned High Court.<span> </span>No legal professional dares to question the system as the official concerned will be prejudiced against that particular Advocate continually and in future. <o:p></o:p></span></li> </ol> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">There is no transparency, accountability and fear of action when it comes to the Lower Courts and these issues are to be addressed at any cost. If there are issues with the Higher Judiciary or the High Court, those can easily be corrected. High Courts very loosely entertain Civil Revision Petitions in a pending Civil Suit and the delay in disposal of Civil Revision Petitions will obviously delay the disposal of a Civil Suit. In many Civil Cases, the litigant dies, before the judgment comes from the <st1:street st="on"><st1:address st="on">Lower Court</st1:address></st1:street> itself. <span> </span>Even when a particular litigant has deliberately ignored the judicial process, the Courts are lenient in entertaining applications seeking ‘condonation of delay’ in doing a particular thing by imposing a simple fine of Rs.500 etc. It is alleged that the discretion is often misused. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">When it comes to High Court, it is alleged that Article 226, the discretion is often misused and there is no fear of action for misdeeds or misdemeanor with Constitutional Protection. Many Writ Petitions are simply admitted and kept pending and I don’t know as to why those Writ Petitions are pending except pleasing a particular lawyer as he should answer his client. Even when a Writ Petition can easily be disposed of at the admission stage itself, it is delayed emphasizing on procedure. Again, the ability of the advocates in assisting the Courts is also very important and Advocates play a very important role in ‘speedy justice’. Advocates are supposed to assist the judges well, but, the judges often criticize the lawyers even in open courts for their tardy work, lack of preparedness and at times, even a very talented and able young lawyer is also been criticized for some other reasons known to only judges and courts. All these are allegations and perceptions. There are really good judges and they may also do nothing with the system even if they are angry as to how the judiciary functions. I support the exercise of jurisdiction Article 226 against State and other officials and only through this, even a common man gets justice against the mighty government and government officials. On some important issues of public importance, some courageous judges take courageous decisions in Public Interest and the Government may not act in some cases due to political reasons even if they are convinced at something. This is the good thing about ‘Indian Judiciary’. On the agitation of ‘jats’ seeking reservations, no political party can take positions, but, the judiciary comes frankly in Public Interest. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">While there should be talent in the legal profession, many young and able lawyers are opting out of legal profession and rather they prefer to serve only rich clients or may pursue their career by joining some corporate group. The systematic problem will have direct impact on the standards in the legal profession though the issue of standards in legal profession is to be related to the standards and functioning of our law colleges in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region>. Even if there is an attempt to correct the system, few people will join together and oppose that. There is an opposition to the simple move of ‘Bar Council of India’ recently for conducting an ‘eligibility test’ and even it is opposed. When few amendments are sought to be made to ‘Civil Procedure Code’, even those are opposed. <span> </span>Even if the Government has all the will to correct the system, it is not easy to correct the system now unless there is co-operation among State Government, the High Courts, the Supreme Court and the Central Government and the opposition parties especially. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Though everyone talk of the problems in our legal system and even great judges like Justice Krishna Iyer talks of these issues frequently, it has become very difficult to correct the system. But, a solution needs to be found otherwise, there will be revolution and lawlessness in the society. There will be reduction in crime rate if our judiciary functions as it should function. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The High Courts can do certain things by having internal guidelines, by supervising the lower judiciary and by taking steps to correct the issues at lower level. The Chief Justice of the High Court concerned and the Supreme Court should interfere when something is going wrong with any particular judge and there should not be any compromise in this regard. The Bar Council of India, the Bar Councils of State, the Law Department should think at correcting the functioning of law colleges in our Country on urgent basis.<span> </span>The Central Government should focus on simplifying the procedures in Courts and should deal with ‘Civil Procedure Code’ and ‘Criminal Procedure Code’. A lot of exercise is to be done as to how to correct our legal system and it is must now. Already we have seen an agitation where many pleaded that the judiciary should be under the supervision of a body called ‘Lokpal’. If there is Public pressure, even the courts can do nothing. What can Courts do when even Government could not prevent the anger? It is a wake-up call and the judiciary and the Government should be worried at the issues with our legal system and there should be sincere attempt to correct this system. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is not enough just focusing on Constitution of ‘Fast Track Courts’, asking for guidelines for entertaining ‘Public Interest Litigations’ and the role of State Governments or the Government as a litigant.<span> </span>Many things should be done beyond. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">I have had the privilege of reading a wonderful <span class="apple-style-span"><b><span style="color:#190033;background:#F0F7FF">14th Law Commission headed by Shri M.C.Setalvad</span></b></span> and it is available with our Law Commission Website. In 60’s itself, there was a great emphasis on the functioning of legal system and there was focus as to how to correct our system. That report still holds good though certain new ideas can be invited now. Who can do such a great exercise now even if Government wants to appoint a ‘Committee’ to look into the action to be taken to correct our system? It may not be correct to completely rely on ‘Law Commission of India’ though it does a good job.<span> </span>An enthusiastic and a committed Judge should head a committee of experts to look into these issues and there should be enough funding for the Committee to carry-out their job and come-out with very specific proposals as to how to correct our legal system. Those proposals should be implemented and public supports any exercise towards correcting our legal system.<span> </span>A judge like Justice Sri Krishna or any retired judge should graciously take-up this marathon and complicated exercise of looking into our system and giving specific and workable solutions to the Government to reform our legal system. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">If young talent is not interested in our legal system, then, it is not good for the system. These young brains should take the responsibility to the extent possible in the interest of the society and they should not compromise and sail with the existing system. Atleast they should think and should have an understanding of these important issues. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><b><span style="font-family:Tahoma">Note:</span></b><span style="font-family:Tahoma"> the views expressed are my personal, no disrespect to any judge or court. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com3tag:blogger.com,1999:blog-5623384825844985559.post-13628816110536055292011-09-20T04:27:00.000-07:002011-12-11T04:27:58.382-08:00Oppression & Mismanagement: Proceeding against subsidiaries under section 397/398 of Companies Act, 1956?<p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"></span></p><p class="MsoNormal" style="text-align:justify"><span class="Apple-style-span"><span style="font-family:Tahoma">It is very frequently alleged that the remedy available to shareholders under section 397/398 of the Companies Act, 1956 is not effective. There are several issues to say as to why the remedy available to the shareholders under section 397/398 of the Companies Act, 1956 is not effective. Execution of orders passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is always complex and many times, the parties defy the orders and defend their actions in the course of the proceeding. While the shareholders mention urgency while seeking some interim measures or the disposal of the Company Petition under section 397/398 of the Companies Act, 1956, the Company Law Board often emphasizes the ‘principle of natural justice’ and will also say that the disposal of Company Petition will be done priority-wise. <span> </span>Apart from these usual issues, there are several complicated issues under section 397/398 of the Companies Act, 1956. Now, the issue of maintainability of the petition, at the initial stage, is not encouraged. Earlier, there were several cases where the question of maintainability and dismissal of Company Petition on technical grounds went up to Supreme Court.<span> </span>Another complicated area under section 397/398 of the Companies Act, 1956 is about the powers of Company Law Board to decide the validity of certain actions and the remedial measures. There are several cases where the majority can make the Company a shell Company slowly and through various deeds and it is to deny the benefit to the minority shareholders. This is a very complex issue to deal with under section 397/398 of the Companies Act, 1956. If the Company Law Board is not effective in providing the remedial measures to the minority shareholders and it can only provide protective measures, the minority shareholders can only approach the <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> seeking remedial measures and the <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> lacks the expertise in dealing with these issues.<span> </span>Again, if the shareholders seek preventive measures and the limited remedial measures under section 397/398 of the Companies Act, 1956; and also approach the Civil Court seeking remedial measures against the Company like cancellation of agreements or contracts etc., then, the issue of ‘simultaneous proceedings’ would normally be pleaded by the majority. Like-wise, several issues are there as to why corporates or the shareholders usually term the proceedings under section 397/398 of the Companies Act, 1956 ineffective. <span> </span>As there is so much emphasis on ‘Corporate Governance’ which intended to safeguard the interests of the shareholders and public, there should be due emphasis in providing an effective remedy to the shareholders under section 397/398 of the Companies Act, 1956 as otherwise; the proceedings before the ‘National Company Law Tribunal’ under the proposed ‘new Companies Act’, will also be ‘ineffective’.<o:p></o:p></span></span></p><span class="Apple-style-span"> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">As there is no effective alternative, as the winding-up proceedings are discouraged normally if the Company is a going concern and in view of the stakes involved, there is no option for the minority shareholders in most of the cases except to approach the Company Law Board when there is ‘oppression’ and ‘mismanagement’ in the Company. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The interesting issue under section 397/398 of the Companies Act, 1956 is about dealing with subsidiary companies. It is true that the ‘holding company’ and ‘subsidiary company’ are two distinct legal personalities.<span> </span>It is also true that the ‘subsidiary company’ may not have frequent business transactions with the holding company or vise versa and the holding company may only comply with the regulations by providing with the particulars of the subsidiary companies in its financial statements or may comply with the regulations of Stock Exchanges or the SEBI regulations if the Company is a Listed Company. It is also true that that the subsidiary companies have close and frequent business transactions with the holding company or vise versa apart from the apparent investment and the control over the management. When the companies are closely held and when the holding company constitutes subsidiary companies with a specific objective, then, there tend to the frequent business or commercial dealings between or among the companies leaving allegations of diversion in many cases. It is a reality and it happens. If there are diversion of funds or unfair advantage by the holding company to the subsidiary companies and if the minority in the holding company wants to challenge such a mis-management, then, the minority shareholders may not directly question the mis-deeds in the subsidiary companies though an investigation can be sought under section 235 of the Companies Act, 1956. In <i>strict senso</i>, the shareholders of the holding company can not ask for all measures under section 397/398 of the Companies Act, 1956 against the subsidiary companies. This is a very complex issue and it is unfair and illogical to lay a principle that the shareholders of the holding company should wait for years before a main company petition asking for investigation decided and then, expecting the Central Government to step-in to investigate into the affairs and suggest the measures to be taken. <span> </span>It should depend upon the facts and circumstances of the case and logic should also be seen in these cases rather applying the sections of the Companies Act, 1956 technically. Despite the restricted wording under section 402 of the Companies Act, 1956 in deciding the validity of the transactions entered into between the Company and the outsiders, the Company Law Board is looking into those issues by adhering to the ‘principles of natural justice’ and by listening to all the parties concerned. If the logic applied that the shareholders of the Company can also ask the relief against a particular company under section 397/398 of the Companies Act, 1956, then, literally, there will not be any relief to the minority shareholders in the Company and they will be forced to approach Civil Court seeking appropriate remedy and a Civil Proceeding will take several years. <o:p></o:p></span></p> <p class="MsoNormal"><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">In view of the functioning of Civil Courts in this country, in view of stakes involved, in view of difficulties with simultaneous proceedings and in view of the tendency of discouraging the Civil Courts to deal with the Company disputes as is being specially mentioned in the new Companies Bill, the scope of section 397/398 of the Companies Act, 1956 and the powers of the Company Law Board can not be restrictive. It is true that the Company Petitions with vague allegations under section 397/398 of the Companies Act, 1956 can not be encouraged and at the same time, when there is a strong case of ‘oppression’ and ‘mis-management’, the Company Law Board or the National Company Law Tribunal in future should be in a position to provide remedy to the aggrieved shareholders. <b><o:p></o:p></b></span></p> <p class="MsoNormal"><b><span style="font-family:Tahoma"><o:p> </o:p></span></b></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Interpreting the provisions so strictly about proceeding against the subsidiaries, the Madras High Court, in <b><span style="color:black">Amalgamations Limited (Now Amalgamations (P) Ltd) & Others Vs. Shankar Sundaram & Others</span> CDJ 2011 MHC 4938</b>, was pleased to observe as follows:<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt"><span style="color:black">“39. In fact, the Company Law Board relied upon the decision reported in Hungfordcase and rightly arrived at a conclusion that it will be improper and illegal to join subsidiaries in the company application on facts and circumstance of the case. But the Company Law Board has held that the main company petition under<span class="apple-converted-space"> section 397 </span>of the Act is not demurable or objectionable in the absence of subsidiary companies and their directors and share holders and in approprate case, they would come under the expression affairs of the company meaning the affairs of the holding company" Further, it was also held that "Therefore, when a person is not a member of a company, his alleging oppression and invoking the provisions of<span class="apple-converted-space"> section 397 </span>against that company does not arise. Therefore, a shareholder of a holding company cannot complaint of oppression by a subsidiary in which he is not a member as there is no legal relation between him and the subsidiary company."<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt"><span style="color:black">40. Therefore, the proposition of law that the affairs of the company would mean the affairs of the subsidiaries also cannot be accepted as it creates a legal fiction to treat the members of the holding company as members of the subsidiary company. This section can be implemented only in so far as Section 235 of the Act invoking Section 214 (2) of the Act and not for section 397 and 398 of the Act. When the intention of the legislature is clear to include only one company simplicitor, we cannot put our own words into that. In fact, for this proposition also, the learned Senior Counsel relied on the decision reported in (Vijay Narayan Thatte and others vs. State of Maharashtra and others (2009) 9 SCC 92 wherein the Honourable Supreme Court held that when a plain gramatical meaning of law and literal rule of interpretation is very clear and when there is a conflict between law and equity, law as such must prevail.<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt">41. The company Law Board has rightly held that "Thus, notwithstanding our findings that the affairs of a company do not include the affairs of its subsidiaries, we find that the petitioner has not has not even prima facie established that the inclusion of the subsidiaries either as necessary or proper parties to adjudicate his allegations against the holding company. Therefore, we are of the view that the prayer of the respondent subsidiaries and their directors to delete their names from the array of parties should be granted."</p> <p style="text-align:justify;line-height:18.0pt"><span style="color:black">48. The Company Law Board has rightly concluded that the company petition is essentially a petition against the holding company. Therefore the Company Law Board found that without even going into the merits of the case and ordering investigation into the affairs of the holding company, the Court cannot definitely order for investigation into the affairs of the subsidiary companies. In fact, if it is found, after hearing the petition that the order of investigation can be made into the affairs of the holding company, then the provisions of Section 239 would come into play and it is for the inspectors, to be appointed by the Central Government, to decide as to whether the business of the subsidiary also required to be investigated. In fact, this has been held by the Division Bench of this Court in the decision reported in (MicromeriticsEngineers Pvt Ltd., and others vs. S. Munusamy) 2004 122 Company Cases 150 also, which is mentioned supra. Therefore, we hold that the Company Law Board has rightly stated that there need not be any direction and gave liberty to the respondent in case the respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary company, it is always open to him to file separate applications in terms of Section 214 (2) read with Section 235 of the Act. When this safeguard was given by the company Law Board, it is not open for the respondent, at this stage, to contend that because the company application filed by him is a combined application, it has to be taken up together along with the main company petition when he has not complied with Section 399 (4) of the Act.<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt"><span style="color:black">49. In any view of the matter, as we have found that the respondent has not even made any allegations against the subsidiary company or claimed any relief against most of the subsidiary companies in the main company petition and as per the decisions of the Honourable Supreme Court mentioned supra, the subsidiary companies cannot be included in the Company Petition. Hence, the order passed by the learned single Judge, setting aside the order of the Company Law Board deleting the subsidiary companies from the array of parties, is not correct. Inasmuch as the subsidiary company cannot be made as a party to the company petition, we are inclined to allow LPA Nos. 129 and 131 of 2002.”<o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt"><span style="font-family:Tahoma; color:black">In the above case, the issue was deletion of names of the subsidiaries in a petition under section 397/398 of the Companies Act, 1956. If, on fact, there is no prima facie allegation of diversion etc. against the subsidiaries, then, there can be justification in ordering the deletion of the names of the subsidiaries in a petition under section 397/398 of the Companies Act, 1956. The Company Law Board has dealt with the issue both on facts and on law. While dealing with the issue legally, the Company Law Board has highlighted the difference between section 397/398 and the provisions of investigation under section 235 of the Act. In fact, cumulative proceedings before the Board are encouraged and it is very usual to seek relief under section 397/398 and also under section 235 of the Act etc. However, in the above case, a restrictive scope is given to section 397/398 of the Companies Act, 1956 and it may not be correct.<span> </span>If such an interpretation is drawn where there is <i>prima facie</i> illegality in transactions between holding company and the subsidiary company, then, there will not be any effective remedy to the minority shareholders under section 397/398 of the Companies Act, 1956 and the in fact, the section becomes meaningless. <o:p></o:p></span></p> <p style="text-align:justify;line-height:18.0pt"><b><span style="font-family:Tahoma;color:black">It all depends upon the facts and circumstances of the case; however, giving a restrictive meaning to section 397/398 of the Companies Act, 1956 is not in the interests of the minority shareholders. It is also equally true that the frivolous litigation misusing section 397/398 of the Companies Act, 1956 is to be discouraged at the initial stage itself considering the market dynamics and the impact. <o:p></o:p></span></b></p> <p style="text-align:justify;line-height:18.0pt"><b><span style="font-family:Tahoma;color:black">Note:</span></b><span style="font-family:Tahoma;color:black"> the views expressed are my personal. <o:p></o:p></span></p></span><p></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com0tag:blogger.com,1999:blog-5623384825844985559.post-86533481930079883012011-07-13T07:16:00.001-07:002011-12-11T04:28:47.565-08:00397/398: When to grant Interim Injunction in conducting ‘General Body Meetings’ and implementing Resolutions?<p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black">Section 397/398 of the Companies Act, 1956 guarantees a right to the minority to approach the Company Law Board or the Tribunal seeking preventive and some remedial measures against the majority in the Company when there is an ‘Oppression and Mis-management’ in the Company.<span style="mso-spacerun:yes"> </span>Only shareholders who are qualified under section 399 can approach the Company Law Board (CLB) under section 397/398 of the Companies Act, 1956.<span style="mso-spacerun:yes"> </span>Though Constitutional Courts have tried to define as to what constitutes ‘oppression’ and ‘mis-management’, infact, it is subjective always. But, the Courts have laid-down broad guidelines which are to be followed.<span style="mso-spacerun:yes"> </span>Certain issues are settled under section 397/398 of the Companies Act, 1956 despite the trend of granting relief or interim relief to the Petitioners even when there was no ‘Oppression and Mis-management’ in <b style="mso-bidi-font-weight:normal"><i style="mso-bidi-font-style:normal">stricto senso</i></b>. <span style="mso-spacerun:yes"> </span>In view of the stakes involved in most of the times, it is highly complicated exercise to deal with a petition under section 397/398 of the Companies Act, 1956. It is often criticized that the Company Law Board (CLB) is not effective in addressing the concerns of the minority shareholders. It is also been criticized that the jurisdiction of the Company Law Board is misused in most of the times and a negligent minority tries to stall the functioning of the Company at times. As such, every effort is normally made in making a good balance between the rights of the minority against the oppression and the rights of the majority shareholders in taking decisions without any hindrance and in the interests of the Company. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black">There were judgments on section 397/398 of the Companies Act, 1956 relying on technicalities even at the final stage. Now, in my opinion, technicalities are ignored and the substance is keenly noted in a petition under section 397/398 of the Companies Act, 1956. For example, there were many decisions on the issue of ‘consent’ under section 399 of the Act and there were judgments saying that disputed facts can not be decided by the Company Law Board and those require Trial. <span style="mso-spacerun:yes"> </span>In the recent past, there were no such pronouncements. <o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black">But, it is very often seen where the shareholders approach the Company Law Board asking for injunction in conducting AGM’s, against the proposed removal from Directorship and against a particular resolution sought to be passed. It is true that unless the trust between the groups is lost, shareholders will not go for litigation and will not approach the Company Law Board. But, is it justified granting injunctions preventing conduct of meetings and granting injunction against a particular resolution?. It is again subjective and there can not be any straight-jacket formula in this regard as courts have laudably noted. The most important thing is that the materials placed before the Board and the averments should establish a <i style="mso-bidi-font-style:normal">prima facie </i>case of ‘oppression’. But, unless there is a <i style="mso-bidi-font-style:normal">prima facie</i> case of oppression or an action which is prejudicial to public interest, no interim order or injunction can be granted. Noting on the same lines, the Hon’ble High Court of Madras in <b style="mso-bidi-font-weight:normal">N.Ram & others Vs. N.Ravi & others, </b>reported in<b style="mso-bidi-font-weight:normal"> CDJ 2011 MHC 1037, </b>was pleased to observe as follows:<b style="mso-bidi-font-weight: normal"><o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>“44. On consideration, I find force in the contention raised by the learned Senior Counsel appearing on behalf of the appellants. The Hon'ble Company Law Board cannot issue injunction in implementing the decision to be taken by the shareholders in its meeting, unless the prima facie finding is recorded, that the decision is prejudicial to the public interest or the company at large.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>45. This view was taken by the Hon'ble Company Law Board on an earlier occasion while rejecting the relief claimed against the decision to do away with family succession and it was left to the Board of Directors and shareholders, to consider this issue. It was always open to the shareholders to take a decision, in view of the earlier order.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>46. The Hon'ble Company Law Board also failed to take note of the fact that the respondents were yet to file their counter, it was stated that the decisions to be taken in the EGM were likely to take sometime, therefore, there was no urgency to pass impugned order on 18th May itself, specially when the order could be made subject to the final decision to be taken by the Hon'ble Company Law Board.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>47. The Hon'ble Supreme Court in the case of Life Insurance Corporation of <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region> vs. Escorts Ltd and others(supra) had categorically laid down that it is not open to the Company Law Board to issue injunction with regard to functioning of the company.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>48. As already observed above, in the order passed, no finding has been recorded regarding the resolution of the Board of Directors, that the matter placed before the EGM was prima facie prejudicial to the public interest or functioning of the company.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>49. It is also well settled that the shareholders can only watch the proprietary interest in the company and cannot object to the day to day decision and functioning of the Company.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>50. In this case, by placing the matter before the shareholders, the Board of Directors were seeking consent of the shareholders. If any civil rights of the parties were likely to be affected, then that can be subject matter of civil suit, but certainly will not be falling under Sections 397 and 398 of the Companies Act.<o:p></o:p></b></span></p> <p style="text-align:justify;line-height:15.75pt"><span style="font-family: Tahoma;color:black"><b>51. The resolution also prima facie cannot be said to be against the earlier order of the Hon'ble Company Law Board, as the relief with regard to succession, was specifically declined, leaving it open to the Board of Directors and its shareholders to take a final decision.”</b><o:p></o:p></span></p> <p style="text-align:justify;line-height:15.75pt"><b style="mso-bidi-font-weight: normal"><span style="font-family:Tahoma;color:black">Note:</span></b><span style="font-family:Tahoma;color:black"> the views expressed are my personal and a point of view only. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com1tag:blogger.com,1999:blog-5623384825844985559.post-77229648566201910792011-06-27T05:55:00.000-07:002011-12-11T04:29:41.038-08:00397/398: Joint Venture disputes leading to litigation – a case study?<p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">It is often been criticized that section 397/398 of the Companies Act, 1956 is being used as a forum to settle personal disputes between or among the shareholders.<span style="mso-spacerun:yes"> </span>Taking advantage of the proposition that the Company Law Board has elaborate powers under section 397/398 of the Companies Act, 1956 read-with section 402, the shareholders/minority shareholders/petitioners approach the Company Law Board for the disputes which ought to have settled before other forums like <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> or the <st1:street st="on"><st1:address st="on">Magistrate Court</st1:address></st1:street>. <span style="mso-spacerun:yes"> </span>This is a constant criticism on the exercise of jurisdiction by the Company Law Board under section 397/398 of the Companies Act, 1956. Litigation is resorted often under section 397/398 of the Companies Act, 1956 so as to stall a proceeding before the Debt Recovery Tribunal and at times to get a transaction entered into between the Company and an outsider is set-aside. The Constitutional Courts have constantly maintained as to what constitutes ‘Oppression’ and what constitutes ‘Mismanagement’. <span style="mso-spacerun:yes"> </span>Initially, there was so much emphasis on the definition of ‘Oppression’ and ‘Mismanagement’ and it is settled that an action of the majority should be ‘harsh and burdensome’ if it had to qualify for any remedial or preventive measures under section 397/398 of the Companies Act, 1956. <span style="mso-spacerun:yes"> </span>But, now, there are judgments of Constitutional Courts laying emphasis on the ultimate objective of section 397/398 of the Companies Act, 1956 and the Courts held now that any preventive and remedial measures can be passed by the Company Law Board under section 397/398 of the Companies Act, 1956 even when there is no ‘Oppression and Mismanagement’ in <i style="mso-bidi-font-style:normal">strict senso.</i></span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The very interesting thing under section 397/398 of the Companies Act, 1956 is as to when the disputes arise between the parties to a ‘Joint Venture Agreement’ or understanding and raising these Joint Venture disputes pertaining to two separate legal entities in the ‘Joint Venture Company’ which is called ‘Special Purpose Vehicle’ very often.<span style="mso-spacerun:yes"> </span>The Joint Venture disputes and these disputes leading to a petition under section 397/398 of the Companies Act, 1956 is always complicated and also interesting. <span style="mso-spacerun:yes"> </span>I am of the opinion that the understanding between the two separate legal entities to the Joint Venture Agreement can be looked into in respect of a petition filed in the ‘Joint Venture Company’ which is constituted as a ‘Special Purpose Vehicle’ often. Infact, looking into the Joint Venture Agreements or the understanding and interpretation therefor is so difficult. At times, the clauses in the Joint Venture Agreement may have several meanings leaving huge scope for litigation. Again, it is complicatedness of corporate dealings that the business is done or the clauses in the Joint Venture Agreement is dealt with in the e-mail communications and acted upon. Even when the ‘Joint Venture Understanding’ is completely changed, it can happen through E-mail Communications too and it is possible. This corporate practice and the reality of corporate world makes it difficult for any one and especially the Company Law Board to understand the background of the ‘Joint Venture Understanding’ when it has to look into these business understandings in a Petition under section 397/398 of Companies Act, 1956.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The another significant point about the Joint-Venture understanding is that it can also substantially deal with the ‘Joint Venture Company’ or the separate legal entity which is often established as a ‘Special Purpose Vehicle’. This Company or the ‘Special Purpose Vehicle’ carries-out the Joint Venture Understanding. The understanding may refer as to the investment to be made in the ‘Special Purpose Vehicle Company’, the representation in the Board etc. While any company in India should be incorporated and run as per the provisions of the Companies Act, the Articles of Association etc., a conflict may come when the clause in the Joint-Venture Agreement comes in contrast to the express provision in the Companies Act, 1956. The Companies Act, 1956 may deal with the proportionate representation to the Board and other issues pertaining to appointment of Directors etc, and the Joint Venture Agreement may have an interesting arrangement when it comes to the representation in the ‘Special Purpose Vehicle Company’ which can only be a Private Limited Company or a Public Limited Company constituted under the provisions of the Companies Act, 1956.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">I would like to deal with a hypothetical case study in this regard and it is as follows:</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><b style="mso-bidi-font-weight: normal"><span style="font-family:Tahoma">Facts of the Case:</span></b><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">A Company has know-how in respect of a particular thing and it is a Foreign Company being the research and development as its strength.<span style="mso-spacerun:yes"> </span>It wanted to expand its activity in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region> upon an understanding and using the Indian policy of Foreign Direct Investment. It has found-out a Private Limited Company in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region> which has expertise in manufacturing. Both Companies have come together and held thorough discussions and decided to form a separate company to act upon the understanding. Accordingly, a separate ‘Special Purpose Vehicle Company’ has been constituted in <st1:country-region st="on"><st1:place st="on">India</st1:place></st1:country-region>.<span style="mso-spacerun:yes"> </span>The foreign partner or the Company to the Joint-venture is interested in getting their ‘intellectual property’ carefully guarded and it keeps a watch as to the leakage of its secrets or the know-how. <span style="mso-spacerun:yes"> </span>Thus, there was a detailed business understanding between the Foreign Company and the Indian Company and another Company as a ‘Special Purpose Vehicle Company’ has thus been constituted. The main Joint Venture Agreement has got an Arbitration Clause to get the disputes settled through Arbitration.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Even after the constitution of the ‘Special Purpose Vehicle Company’, the communications went on between the Foreign Company and the Indian Company constantly and it refers to the business being carried-out by the separate ‘Special Purpose Vehicle Company’.<span style="mso-spacerun:yes"> </span>There were misgivings at times as to the implementation of the Joint-Venture Agreements, there were complaints, there were explanations and even the accommodations were made when it comes to complying with the clauses in the Joint Venture Agreement. The business is carried-out this way for few years and suddenly, the confidence between the two major groups has lost and the foreign player has become aggressive and wanted to have a much more stake in the ‘Special Purpose Vehicle Company’. The Foreign players insisted for an expansion of activity and wanted an additional investment into the ‘Special Purpose Vehicle Company’. As another group could not make an additional investment in the Company as required, the Foreign Company has brought the additional investment into the ‘Special Purpose Vehicle Company’, got the authorized share capital increased and its equity in the Company has thus been substantially increased.<span style="mso-spacerun:yes"> </span>Now, the other partner holds only a minimal equity in the ‘Special Purpose Vehicle Company’. There is a complication in this entire issue regarding the representation to the Bard of ‘Special Purpose Vehicle Company’. While the initial Joint Venture Agreement has elaborately dealt with the representation issue, the Articles say a different thing that the directors in the ‘Special Purpose Vehicle Company’ are to be re-elected every year. Despite this clause in the Articles, the Joint Venture Agreement or the understanding was acted upon for some time and after the additional investment, the Foreign Player wants a complete say in the ‘Special Purpose Vehicle Company’ and insists that it should be run as a separate Company without giving too much priority as to how the Company was constituted and the main and initial understanding. Even when it comes to the initial and main understanding, there was enough and countless communication in-between.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Now, referring to the additional investment and allotment of equity and referring as to how the Joint-Venture clauses are violated, the other Indian partner having a negligible stake files a Petition under section 397/398 of the Companies Act, 1956 seeking various relief against the majority in the ‘Special Purpose Vehicle Company’ and it meant that the Indian player to the Joint Venture is questioning the Foreign Company literally.</span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The entire narration in the petition under section 397/398 of the Companies Act, 1956 deals with all business issues, complaints etc. from the past so many years and despite these issues and complaints, the Joint Venture Agreement was acted upon substantially and the business was as usual for sometime.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">Now, the petition is filed in respect of the ‘Special Purpose Vehicle Company’ and it is very difficult to allege ‘Oppression and Mis-management in respect of this Company. This Company is professionally run though it carries-out the substance of the business understanding between the foreign player and the Indian Company.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The Joint Venture Agreement or the understanding contains an Arbitration Agreement. There can be an argument that the issues under Joint Venture Agreement can be raised separately before the Arbitrator or the <st1:street st="on"><st1:address st="on">Civil Court</st1:address></st1:street> and these disputes can not constitute an act of ‘Oppression’ and ‘Mis-management’. There can be counter argument that the ‘Special Purpose Vehicle Company’ was constituted solely based on the ‘Joint Venture Understanding’ and as such those disputes should also be looked into while dealing with a petition by the minority in the Company under section 397/398 of the Companies Act, 1956.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><span style="font-family:Tahoma">The above narration of a hypothetical case is only an example as to how difficult it is to deal with litigation based on a ‘Joint Venture Agreement’ under section 397/398 of the Companies Act, 1956.</span><span class="Apple-style-span" style="font-family: Tahoma; "> </span></p> <p class="MsoNormal" style="text-align:justify"><b style="mso-bidi-font-weight: normal"><span style="font-family:Tahoma">Note:</span></b><span style="font-family:Tahoma"> the views expressed are my personal and a view point only. <o:p></o:p></span></p>V.D.RAOhttp://www.blogger.com/profile/07078529507247053909noreply@blogger.com7