RESTRICTIVE REMEDY UNDER SECTION 14 OF SARFAESI ACT

By Richa Saraf , (legal@vinodkothari.com)

In a recent Calcutta High Court (“Hon’ble High Court”) ruling of Union Bank of India & Anr. v. State of West Bengal & Ors. (01.09.2017), the object and intention behind Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) was discussed. The issue for consideration before the Hon’ble High Court was whether the District Magistrate can consider and dispose of an application under Section 14, subsequent to sale of the immovable property, over which security interest was claimed and the Hon’ble High Court answered in negative. Below, we discuss the ruling.

BRIEF FACTS OF THE CASE:

• The first petitioner had lent and advanced money to a borrower and as security the borrower had mortgaged the immovable property.

• The loan amount outstanding, the first petitioner had taken symbolic possession of the immovable property.

• The petitioners, thereafter, sold the immovable property and a sale certificate was issued. The petitioner further executed a deed of conveyance in respect of the immovable property and registered the same.

• The petitioners, as a secured creditor, then filed an application to the District Magistrate under Section 14 of the SARFAESI Act and pending the disposal of the case, the petitioners filed a writ petition in the Hon’ble High Court, where it had sought a direction upon the District Magistrate to consider and dispose of the application filed by it.

DISCUSSION ON LAW:

A. Section 13 vs. Section 14 of SARFAESI Act-

Section 13 provides for enforcement of security interest by a secured creditor without intervention of the court or tribunal. The procedure is laid down below:

(1) Any borrower, who makes any default in repayment of secured debt and his account in respect of such debt is classified by the secured creditor as non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 (sixty) days from the date of notice.

(2) If, on receipt of the notice, the borrower makes any representation, the secured creditor shall consider such representation and if the secured creditor comes to the conclusion that such representation is not tenable, he shall communicate within 1 (one) week of receipt of such representation the reasons for non-acceptance to the borrower:

(3) In case the borrower fails to discharge his liability in full within the specified period, the secured creditor may take recourse to one or more of the following measures to recover his secured debt:

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(c) appoint any person, to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor.

(4) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may also file an application to the Debts Recovery Tribunal or a competent court, as the case may be.

(5) The secured creditor shall be further entitled to proceed against the guarantors or sell the pledged assets without first taking any of the aforementioned measures.

On the contrary, Section 14 requires Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset. In this regard, Section 14(1) reads as-

“Where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him-

(a) take possession of such asset and documents relating thereto; and

(b) forward such assets and documents to the secured creditor.”

B. Judgments:

In the case of Kathikkal Tea Plantations v. State Bank of India , the Madras High Court had taken a view that for the purpose of interpretation of Section 14, the object of the Act should also be taken into consideration. The relevant extract of the judgment is reproduced as under:

“16. The submission made by the learned Counsel for the respondents that Section 14 cannot be read in isolation and has to be viewed in the context of all other provisions of the Act, such as Sections 13(4)(6)(8), 15, 17, 18 Rule 8(9) of SARFAESI Rules and Section 55 of the Transfer of Property Act is acceptable. These provisions are in conjunction with Section 14 for the purpose of interpretation, to be adopted, to achieve and sub-serve the object of the Act. Any other approach or interpretation will defeat the object of the Act. The object of the Act is only to enable the secured creditor, financial institutions to realise the long term assets, manage problems of liquidity, asset liability mis-match and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. Therefore, it could be understood that the Act was brought for recovering the amount in speedy manner in taking possession of the properties and in realizing the money. The third party, who comes forward to purchase the secured asset, must have a confidence that he would get the title to the property at the earliest. If the transferring of the property by way of title is going to be delayed endlessly, then the object of the Act which is meant for speedy recovery, would be defeated in whole. Therefore, as contended by the learned counsel for the banks, that if interpretation is given by taking the words in isolation from Section 14, it would defeat the whole object. Only on a combined reading of section 14 along with the other sections, it would give a clear picture of the object. In this regard, a useful reference could be placed on the decisions relied on by the learned counsel appearing for the impleaded party.”

Referring to the aforementioned ruling, the Hon’ble High Court, in the present case, stated that the right, title and interest of the secured creditor (the vendor) stands transferred to and vested with the purchaser upon the execution and registration of the deed of conveyance which is otherwise duly stamped. On and from the date of such document, the secured creditor ceases to have any interest in respect of the immovable property concerned. The legal or the deeming fiction of Section 13 ceases to operate upon such sale deed being registered. Therefore, the secured creditor does not retain any further right to meddle with the immovable property, under the provisions of the Act, in order to invoke Section 14, for the purpose of possession or otherwise.

ANALYSIS:

The object of the Act is to facilitate speedy recovery of dues. Every person is not entitled to invoke the provisions of the Act. Only a secured creditor having a security interest over an asset of the debtor or guarantor, as the case may be and as defined in the Act, is entitled to invoke Section 14. The Act recognizes that, a secured creditor may stand denuded of the security interest over a security asset and in such circumstances the secured creditor will not be able to invoke the Act in respect of such security asset or interest.

To apply under Section 14, a creditor has to establish that, on the date of making of such an application, it is a secured creditor, in respect of a secured asset, and has a security interest, in respect of such secured asset. After sale, the secured creditor can no longer claim a security interest over such immovable property, as such security interest stands dissolved by the issuance of the sale certificate. On the execution and registration of the deed of conveyance, the title to the immovable property stands transferred to and vested with the purchaser and the secured creditor does not retain any right, title or interest over and in respect of the immovable property sold.

Thus, the Hon’ble High Court rightly observed that after sale, the secured creditor can no longer claim a security interest over such immoveable property as such security interest stands dissolved by issuance of the sale certificate and ruled that a secured creditor cannot maintain an application under Section 14 of SARFAESI Act after issuance of a sale certificate, in order to obtain actual physical possession of the property.

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