Points to be raised in a SARFAESI Appeal and getting relief?

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.

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:

1. The borrower is not a willful defaulter.

2. The classification of Account as ‘Non-performing Asset (NPA)’ is incorrect.

3. The interested charged is exorbitant.

4. No notice or caution is issued by the Bank before classifying the Account as ‘NPA’.

5. The outstanding claimed by the Bank is incorrect.

6. The value of the ‘secured asset’ mortgaged with the Bank is much more than the outstanding loan.

7. The Bank has not issued any notice or demand notice under section 13 (2) or 13 (4) of the Act etc.

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.

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.

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.

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.

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.  

Note: the views expressed are my personal.

Approaching DRAT in SARFAESI matters appears to be very costly?

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.

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.

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 Apex Court has upheld the validity of section 18 meaning that only Apex Court 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.   

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.

A two member Bench headed by Hon’ble Justice Dr.D.Y.Chandrachud & Justice Mr.Anoop V.Mohta of Bombay High Court in W.P.No.4231 of 2011 reported in 2011 (4) AIR(Bom) R 763, 2011 (4) BCR 503, 2011 AIR(Bom) 132, CDJ 2011 BHC 774, was pleased to deal with the issues and scope of section 18 of SARFAESI Act, 2002 as follows:

“3. The Petitioners have challenged the constitutional validity of the provisions of the first and second provisos to section 18 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 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.

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.

5. The constitutional challenge to the provisions of the second and third provisos of section 18 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:

“The financial sector has been one of the key “drivers in India’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 India 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, inter alia, 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.”

6. The second and third provisos to sub section (1) of section 18 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 inMardiaChemicals Ltd. v. Union of India (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.

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 R.V. Saxena v. Union of India AIR 2006 DELHI 96 .Chief Justice Makandeya Katju (as His Lordship then was) speaking for the Division Bench held thus :

“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 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.”

8. The Division Bench of the Delhi High Court inter alia relied upon the decisions of the Supreme Court in Gujarat Agro Industries Co. Ltd. v. Municipal Corporation of the City of Ahmedabad (1999) SCC 468 , Vijay Prakash D. Mehta v. Collector of Customs (Preventive)(1988) 4 SCC 402 , AnantMills Ltd. v. State of Gujarat 1975 (2) SCC 175.andShyamKishore v. Municipal Corporation of Delhi (1993) 1 SCC 22.

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.

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 has been considered and determined in NarayanChandra Ghosh v. UCO Bank (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:

“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.”

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.

 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 Transcorev. Union of India 2007(2) Bankers’ Journal 303.

“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.”

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 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 section 18(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 section 18(1).”

Conclusion:

The constitutional validity of section 18 is upheld by the Apex Court. 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.

I feel that the DRAT must have been given the right to completely waive the pre-deposit condition in exceptional cases.

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.

Note: the views expressed are my personal. 

Why High Courts are now burdened with DRT/SARFAESI matters?

Constitution of DRTs & DRATs:

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 Civil Court 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.

Criticism:

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.

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:

“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, Coimbatore, on 27 March 2012. The application was taken on file and allowed by the Debts Recovery Tribunal, Coimbatore 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.

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, Coimbatore. 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 Madras and file appropriate applications to challenge such orders. This also would cause considerable expenses to the poor litigants.

17. There is no doubt that the Debts Recovery Tribunal, Coimbatore, 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.

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:-

“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, Coimbatore. In fact, we have been witnessing many such orders passed by the Presiding Officer, Coimbatore 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.

11. The impugned order clearly shows that the Debts Recovery Tribunal, Coimbatore 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.”

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.

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, Coimbatore, to the Debts Recovery Tribunal, Coimbatore, to the Debts Recovery Tribunal II, Chennai.

21. The Registry is directed to transfer the records received from the Debts Recovery Tribunal, Coimbatore, 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.

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, Coimbatore, 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, Coimbatore, 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.

23. The Secretary, Ministry of Finance, New Delhi, and Ministry of Law and Justice, are directed to conduct an enquiry and take appropriate action the matter.”

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.

Why High Courts are burdened with DRT/SARFAESI matters now?

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’.

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.

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.

Note: the views expressed are my personal.

Author:

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

"SARFAESI" proceeding - the Jurisdiction of High Court?

Despite the effort made by the legislature to keep the recovery of debts by the Bank very simple and clear when the debt is secured, there exist few complications in law dealing with the recovery of secured debt under SARFAESI Act, 2002. The constitutional validity of the provisions of the SARFAESI Act were challenged before the Constitutional Courts and the courts have made it very clear that SARFAESI Act, 2002 is constitutionally valid though certain provisions required a re-look. Initially, when the act came to force, many writ petitions were filed challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002 and even a notice under section 13 (2) of the Act was challenged before the High Court in many cases. But, slowly, the practice has changed and the constitutional courts now exercise restraint when a writ petition is filed challenging the action initiated by the Bank under SARFAESI Act, 2002.

Despite the dismissal of many writ petitions pertaining to SARFAESI proceedings on the ground of alternative remedy before the Debt Recovery Tribunals, we used to see the High Court coming so heavily on the Bank at times commenting upon their illegality in proceeding against the borrower using the provisions of SARFAESI Act, 2002. I have personally seen some cases where the borrower is left with no effective remedy before the Debt Recovery Tribunal compelling the borrower to approach the High Court under Article 227 of the Constitution of India more often and under Article 226 of the Constitution of India at times. Obviously, the SARFAESI Act is meant to provide for speedy recovery of debt and even the adjudication of debt is conferred on the Bank or Bank officials unusually. The only justification, in my opinion, justifying the tough provisions under SARFAESI Act, 2002 in favour of the Bank is the delay and technicalities before the Civil Courts.

Nobody can support an action by the borrower to evade the payment to the Bank or to delay the payment unreasonably. But, at the same time, the Bank can be reasonable to the borrower in recovering the due, but, it is seen at times where the Bank scrupulously follow the technicalities in classifying the account of the borrower as NPA. The strict action by the Bank while recovering the debt despite knowing the commercial realities and the bonafides of the borrower at times, leads the borrower to find ways to technically attack the Bank and to litigate the issue. I personally support the provisions of SARFAESI Act, 2002 as it can be useful for the Bank to effectively deal with the borrowers with malafide intention. It can never be said that the Bank is always right though it can be right in most of the times. As the Bank is also run by human beings, they tend to make mistakes and there can also be malafides on the part of the Bank or the Bank officials. In many cases, there were serious allegations on the Bank or the Bank officials while dealing with the secured asset and many feel that the Bank officials at times, side with the real estate people or the investors.

There are so many complicated issues in a SARFAESI proceeding. It is very difficult to adjudicate the correctness of the debt and the Bank will have an upper hand when it comes to adjudication. There were cases where the Bank attempts to take physical possession of the secured asset by approaching the concerned court under section 14 of the SARFAESI Act, 2002 even without issuing a notice under section 13 (4) of the Act. I don’t understand as to why the Bank or the Bank officials should find ways to misuse the provisions of the SARFAESI Act, 2002 completely ignoring the need of fairness. In most of the cases, it is very difficult for the borrower to question the validity of the action taken by the Bank under the provisions of SARFAESI Act, 2002. The borrower may have to take lot of risk while challenging the action taken by the Bank under section 13 (4) of the Act or the further steps. The challenge to the Bank action before the Debt Recovery Tribunal is costly for the borrower and it is usual to see the Tribunal impose a condition to deposit some money while granting stay. It is also alleged that the borrower is not heard effectively by the Tribunal or by the Appellate Tribunal. I have interestingly observed some cases before the Debt Recovery Appellate Tribunal where it is claimed by the borrower that they had to pay the entire debt amount to the Bank through deposits or the statutory deposits and it speaks volumes about the cost involved in challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002.

I had to focus so much on section 14 of the SARFAESI Act, 2002 which provides that the Bank can seek the assistance of the concerned officials in taking physical possession of the secured asset. If the permission is granted by the Magistrate under section 14, then, the Bank will immediately take physical possession of the property. A proceeding under section 14 is considered ministerial and the Magistrate need to do an inquiry though it has to look as to whether the Bank has issued a notice under section 13 (2) etc. Again, the Magistrate dealing with an application by the Bank under section 14 of SARFAESI Act, 2002 need not even give a notice to the borrower. This is an interesting provision in my opinion. In my opinion, a proceeding under section 14 is in the nature of an execution proceeding before the Civil Court which follows Civil Procedure Code. In an ordinary Civil Suit, the filing of an execution petition need to provide many details to the Court and especially it has to convey to the Court that the judgment-debtor did not file an appeal; the limitation for filing statutory appeal has expired etc. There is no such requirement under section 14 of the SARFAESI Act, 2002 which in my opinion requires a change really. Again, there is a specific bar that the no court or the authority should entertain a challenge to the order of the Magistrate under section 14 of the Act. It is really confusing as to where to go when the order of the Magistrate under sect6ion 14 is wrong on the face of it.

I have seen a case in the recent past. The Debt Recovery Tribunal has granted an unconditional stay in favour of the borrower and the stay was vacated by the Tribunal suo motu and the borrower wanted to challenge the order of the Debt Recovery Tribunal before the Debt Recovery Appellate Tribunal. Practically, the filing of appeal before the Debt Recovery Appellate Tribunal may consume some time and what if the Bank gets an order under section 14 in the meanwhile while the borrower is entitled to prefer an appeal and the limitation to file an appeal doesn’t expire. This is only an example. In another case, the Debt Recovery Appellate Tribunal keeps adjourning the Appeal and the application seeking stay and in the meanwhile the Bank proceeds further. This situation compels the borrower to move the High Court under section 227 seeking for a direction and in my opinion, it is unavoidable.

Thus, it is very clear that though the object of SARFAESI Act, 2002 is laudable, still, the act requires a re-look from the angle of providing a reasonable and effective remedy to the borrower. Given the complications and the rights of the borrower, in my personal opinion, the High Court may feel it reasonable to entertain a writ petition in respect of a SARFAESI proceeding though it exercises the writ jurisdiction in respect of SARFAESI proceedings sparingly. I have seen the trend where the High Court had entertained writ petitions in respect of a SARFAESI proceeding, seen the trend where the High Court dismissed the writ petitions in respect of SARFAESI proceeding on the ground of alternative remedy, and in my opinion, now the law is settled. It is very difficult to lay a proposition that the High Court can not entertain a writ petition in respect of a SARFAESI proceeding under all circumstances. Situations may warrant the High Court to deal with a SARFAESI proceeding at times though the writ jurisdiction is to be exercised by the High Court in respect of SARFAESI proceedings sparingly.

Note: the views expressed are my personal and no intention to insult the system.