Coffee Plantations under SARFAESI: A Bitter Brew

[Rahul Machaiah is a lawyer from Karnataka. He holds an LLM in Law & Development from Azim Premji University]

On 29 January, 2021, a Division Bench of the Karnataka High Court held in UM Ramesh Rao v Union Bank of India that a coffee plantation is not ‘agricultural land’ under section 31(i) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the “SARFAESI Act”). Section 31(i) stipulates that the legislation shall not apply to agricultural land and this verdict precludes defaulting planters in Karnataka from taking refuge under section 31.

Interestingly, the Madras High Court and the Kerala High Court have held that the SARFAESI Act does not apply to plantations, as the expression ‘agricultural land’ ought to include plantations as well. By adopting an intricate and unconventional method of interpreting a statute, the High Court of Karnataka in UM Umesh Rao seems to have forayed into the domain of the legislature, as elaborated below.

The case before the Karnataka High Court

Some of the petitioners in this case owned around 370 acres of coffee plantations in Karnataka. They had availed agricultural term loans, agricultural cash credit, mortgage loans and other credit facilities from the erstwhile Corporation Bank (now Union Bank) by mortgaging the plantations and hypothecating coffee crops. Another petitioner had mortgaged coffee plantations and availed loans from Allahabad Bank. When the petitioners defaulted, the banks sought to take over the plantations by invoking remedies under the SARFAESI Act. The notices issued by the banks and the measures taken by them were challenged before the High Court and in both the cases the single judge dismissed the writ petitions, as the petitioners had the alternative remedy of approaching the Debt Recovery Tribunal under section 17 of the Act. The aggrieved petitioners filed these writ appeals which were heard and disposed together as both pertained to the issue-whether a coffee plantation is ‘agricultural land’ under the SARFAESI Act.

How the Court interpreted ‘agricultural land’

It is pertinent to note that the SARFAESI Act does not define ‘agricultural land’. It merely stipulates that the legislation shall not apply to it. The Court proceeded on an assumption that Parliament did not define ‘agricultural land’ as agriculture falls within the legislative competence of the states (paragraph 55 of the judgment). The Court then went on to interpret ‘agricultural land’ by referring to state legislations such as the Karnataka Land Reforms Act, 1961, the Karnataka Land Revenue Act, 1964, the Karnataka Agricultural Income Tax Act, 1957, the Karnataka Agricultural Produce Marketing Committee Act 1966 and the Karnataka Town and Country Planning Act, 1961.

None of these legislations define agricultural land in a manner that excludes plantations. In fact, the Court notes (in paragraphs 59-63) that agriculture has been defined to include raising of crops and that ‘crops’ has been defined to include plantation crops such as coffee, tea, pepper, and the like. However, the Court went on to observe that ‘agricultural land’ must be interpreted ‘contextually’ and not ‘expansively’.

To do so, the Court analysed the Karnataka Land Reforms Act, 1961 in detail and opined that the restrictions on acquisition of agricultural land by non-agriculturists, alienation of agricultural land and holding of agricultural land by non-agriculturists do not apply to plantations. The Court stressed on the fact that the statute allows plantations to be mortgaged and also allows foreclosure. Terming this as ‘contextual interpretation’, the Court held that when plantations can be mortgaged and foreclosed, the SARFAESI Act ought to apply to plantations.

Critique of the reasoning

First, it is a settled principle of statutory interpretation that words must be interpreted according to their plain meaning, unless such an interpretation would result in an anomaly, patent injustice or absurdity. When plain and unambiguous words have been used, they ought to be interpreted in the ordinary sense. Referring to other statutes to interpret an expression amounts to using external aids of interpretation and they are to be used only when the literal interpretation would result in absurdity or when the words are ‘shrouded in mystery or clouded with ambiguity’. Furthermore, interpreting an expression used in a statute by referring to another statute is permissible only when the two statutes are pari materia with each other or when the statute makes a reference to some other statute.

This being the case, the High Court ought to have interpreted the expression ‘agricultural land’ according to its ordinary and plain meaning. The Supreme Court has authoritatively interpreted ‘agriculture’ according to its plain meaning in several judgments, and various High Courts have relied on these judgments to interpret expressions such as ‘agriculture’ and ‘agricultural land’. In these cases, ‘agriculture’ has been interpreted as the process of raising crops on land and hence the ordinary meaning of the term would suggest that growing crops in a plantation would qualify as agriculture. This is exactly what the Kerala High Court held when it had to decide whether rubber plantations are agricultural land under the SARFAESI Act. After referring to the Supreme Court judgments, it interpreted agriculture as follows: “Agriculture includes raising, on the land, of products which have some utility either for consumption or for trade and commerce. The term ‘agriculture’ cannot be defined or understood by the nature of the products cultivated”. It then held that agricultural land would mean land which is being used for agriculture and hence it would include rubber plantations.

However, the Karnataka High Court assumed that Parliament chose not to define agricultural land as it is a state subject. It further assumed that Parliament exempted agricultural land as it has no legislative competence over it (paragraphs 55, 57). This assumption is flawed as section 31 of the SARFAESI Act also exempts security interests in aircrafts and vessels though they fall within the legislative competence of the Parliament. Also, section 31 expressly declares that expressions such as aircrafts and vessels are to be interpreted according to the definitions contained in the Aircraft Act, 1934 and the Merchant Shipping Act, 1958. This clearly suggests that Parliament deliberately refrained from declaring that agricultural land ought to be interpreted according to state legislation.

Even if the Court found it necessary to refer to the state laws to interpret ‘agricultural land’, it ought to have confined itself to the definitions. Instead, despite being convinced that the definitions clearly suggested that agricultural land would include coffee plantations, the Court proceeded to examine whether plantations could be mortgaged. When even agricultural land other than plantations could be mortgaged to avail agricultural loans from financial institutions, it is unclear why the Court attached a great deal of importance to the fact that plantations can be mortgaged to avail agricultural and non-agricultural loans.  Also, in 2020, Karnataka amended the Land Reforms Act, 1961 to remove the restrictions imposed on the alienation of agricultural land and hence the distinction between plantations and agricultural land has been blurred significantly.

When Parliament in its wisdom sought to exempt agricultural land from the creditor-friendly SARFAESI Act and made no references to state legislation, the High Court should not have altered the scheme of the statute by virtually adding words to it. If an Act of Parliament is construed according to state legislations in the absence of such a direction, uniformity will be lost. The ease of taking possession of secured assets under section 13 of the SARFAESI Act can disrupt the maintenance of plantations and this, in turn, can adversely affect the crop yield and the crop quality. If the borrower eventually manages to reclaim the plantation, he or she may not be able to undo the damage easily.

The petitioners have filed an appeal before the Supreme Court and it will be interesting to see how the Court interprets ‘agricultural land’. The plantation sector in Karnataka has been adversely affected by price crashes, climate change and increased costs of production. An exemption from the operation of the creditor-friendly SARFAESI Act would come as a relief for the defaulting planters.

Rahul Machaiah

About the author

7 comments

  • Thank you for elaborating this our Rahul. This really helps understand the whole judgement and it’s flaws.
    Somehow, I feel that bringing areas in Western Ghats under Special Ecology Zone by implementing some of the recommendations in the Gadgil and Kasturirangan reports will help planters and the ecosystem at large including the people in Cities who depend on water from the catchment area.

  • As I I observe ,when a farmer realizes growing or cultivating paddy is a loosing proposition and for his living he opts to grow coffee or Arecanut without changing the tenure of the land which is mentioned as wetland even after changing the crop pattern the tenure of the land remain agricultural land but while availing crop loan it is shown as coffee crop loan .

  • Rahul, very interesting analysis. shows proper appreciation of material avaialable. the distinction brought out with regard to “Agriculture” and “Agricultural land” is apt and to the point. Such presentation could be made use of before the Supreme Court in appeal. Thank you for sharing.

  • If every rich Planter failed to pay back the borrowed loan, how he will get further loan from Bank? How will Bank operates in the uncertain situation? This is nothing but wilful default, and court should not favour such default to Bank, otherwise every one will default the loan and swindle money.

    • The so called PLANTER is a glorified reference to a person who plants crops to cultivate crop’s for his living and outside world puts too much glorification to refer a person planter ,but in reality about 80 to 90 percent of the so called planter’s are those who own less then five hector and they just struggle to survive.they donot intentionally try to not repay the loan they borrow from financial institutions but the vagaries of the nature make’s them defaulters.

      • I am not talking about small farmers who holds less than 5/10 acres of agricultural land. However, in the reference case the holding is of about 370 acres of coffee plantation and you can’t define them as a small planter. Moreover, when the borrower pledging the plantation as a security for a loan, and the borrower deliberately default the payment, how can anyone recover the outstanding amount? If you people support such loan default, then whole banking system will collapse and such financial mess is not at all good for country.

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