Restrictive Remedy under Section 14 of the SARFAESI Act

[Guest post by Richa Saraf, Assistant Legal Advisor, Vinod Kothari & Co.]

In a recent ruling of the Calcutta High Court in Union Bank of India & Anr. v. State of West Bengal & Ors. (September 1, 2017), the object and intention behind section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the “Act”) was discussed. The issue for consideration before the Court was whether the District Magistrate can consider and dispose of an application under section 14 (extracted below) subsequent to a sale of the immoveable property over which security interest was claimed. The Court answered in the negative. This post discusses the ruling and its implications.

Brief Facts of the Case

The first petitioner, United Bank of India (“UBI”) had lent and advanced money to a borrower, against which the borrower had mortgaged the immovable property. With the loan amount being outstanding, UBI had taken symbolic possession of the immovable property. The creditors thereafter sold the immoveable property and a sale certificate was issued. UBI further executed a deed of conveyance in respect of the immovable property and registered the same. The petitioners, as secured creditors, then filed an application before the District Magistrate under section 14 of the Act and, pending the disposal of the case, they filed a writ petition in the High Court, wherein they had sought a direction to the District Magistrate to consider and dispose of the application filed by it. 

Discussion of the Law

Section 13 vs. Section 14 of the Act

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

(1)        If a borrower makes any default in repayment of secured debt and its 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 its 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, it 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 its liability in full within the specified period, the secured creditor may take recourse to one or more of the following measures to recover its 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.

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.

(4)          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 the Chief Metropolitan Magistrate or District Magistrate to assist the secured creditor in taking possession of the secured asset. In this regard, section 14(1) reads:

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-

– take possession of such asset and documents relating thereto; and

– forward such assets and documents to the secured creditor.”

Judgments

In the case of Kathikkal Tea Plantations v. State Bank of India (2009), 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 deal 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 make an application 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 the 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. Upon 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 High Court rightly observed that, after the 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 it ruled that a secured creditor cannot maintain an application under section 14 of the Act after issuance of a sale certificate, in order to obtain actual physical possession of the property.

– Richa Saraf