Section 14, SARFAESI Act: Settling A Jurisdictional Conundrum

[KV Kailash Ramanathan is a 4th year B.A., LL.B. (Hons.) student at the National University of Advanced Legal Studies (NUALS), Kochi]

Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (“SARFAESI Act” or “Act”) provides for judicial assistance to creditors in enforcing their security interest as envisaged under section 13 of the Act. A recent ruling of the Supreme Court of India in R.D. Jain and Co v. Capital First Ltd (27 July 2022) dealt with the issue of whether additional district magistrates (“ADMs”) and additional chief metropolitan magistrates (“ACMMs”) are authorities who can exercise powers conferred under section 14, given that it explicitly mentions the District Magistrate (“DM”) or Chief Metropolitan Magistrate (“CMM”) alone as authorities the creditor shall approach in requesting for assistance to take possession of the security.

A catena of High Court judgements sought to settle this question with varying stances leaving room for ambiguity and variance in application of this law across states. The impugned case arises out of an appeal against the Bombay High Court’s verdict answering the above issue in the affirmative. The Supreme Court finally set the law at rest by concurring with the Bombay High Court in holding that the ADM and ACMM are on the same footing for the purpose of section 14, and thereby overruling three High Court judgements to the contrary.

This post seeks to analyse the judgement by discussing the nature of powers under section 14, the position of ACMMs vis-a-vis the CMMs, the issues that are bound to arise under section 14 moving forward, and what the legislature needs to draw from this verdict.

Factual Background

The respondent was a secured creditor who instituted proceedings under the SARFAESI Act for recovery of the amount due and payable by the appellant borrower. Under the said proceedings he sought to take possession of the secured asset, which the borrower refused to hand over. The creditor then filed an application under section 14 seeking the CMM’s assistance in securing possession. The matter was repeatedly adjourned, causing it to last beyond the deadline of 30 days mandated by section 14(1) for disposal. The creditor filed a fresh application for advancement, which was dismissed this time by the CMM, inter alia on the ground that it was a fresh application and that many previous applications were pending. Therefore, the creditor filed a writ petition in the Bombay High Court and successfully obtained a direction to the concerned CMM to try and dispose of the application under section 14 (1) within the mandated deadline.

The CMM then brought to the notice of the High Court the inordinate quantum of cases under section 14 of the SARFAESI Act pending before it, also pointing out that as per the orders of the court older cases are to be given first preference in disposal. The High Court then, realising that it would not be practically possible to follow the statutory deadlines under section 14 and in the interest of reducing pendency, interpreted the law to permit filing of the same petition before the ACMM. Reliance was placed on the principle laid down in State of Maharashtra v. Shanti Prasad Jain to treat the ACMM and CMM on an equal footing. An appeal was preferred against the order of the high court.

Nature of Powers under Section 14

The purport of section 14 is to enable the DM/CMM to obtain possession of the secured asset and document after verifying that the formalities to be complied with are met. Section 13 provides for the right of the creditor to take possession of the secured asset in case of default, while section 14 provides for the DM/CMM to assist the creditors in taking over possession upon refusal by the borrower to hand it over.

Such possession is to be obtained within the stipulated time under the Act. It could be taken by the DM/CMM or through any officer subordinate, including the advocate commissioner who is considered to be an officer of the court. Section 14 does not oblige the DM/CMM to go personally and take possession of the secured assets and documents relating thereto. Therefore, nature of the powers vested in the DM/CMM under section 14 of the Act, as held by the Supreme Court in NKGSB Cooperative Bank Limited v. Subir Chakravarthy, are ministerial and not adjudicatory.

While disposing of the application under section 14 of the Act, no element of quasi-judicial function or application of mind would be required. The Magistrate has to adjudicate and determine the correctness of the information given in the application and nothing more. Therefore, section 14 does not involve an adjudication qua issues raised by the borrower against the secured creditor taking possession of secured assets. Even the requirements under section (14)(1A) are explanatory and do not amount to a new conferment of judicial powers. The nature of the magistrate’s functions under the section are executionary.

Position of the Additional Chief Metropolitan Magistrate vis a vis the Chief Metropolitan Magistrate

While the Court clarified that no judicial powers are exercised under section 14, it went on to consider the position of the ACMM vis a vis the CMM and whether the former can be considered the subordinate of the latter. In considering the question the Court pored over sections 11,12,15-17,19 and 35 of the Code of Criminal Procedure (“CrPC”).  Section 17 of the CrPC provides for the High Court to appoint a metropolitan magistrate to the position of both CMM and ACJM. Both of them are subordinate to the sessions judge. The CrPC provides for parity between them insofar as judicial functions are concerned and they are on the same level. The ACMM is not subordinate to the CMM. The CMM may however have some additional administrative functions and tasks.

Therefore, given the parity found in the CrPC between the two authorities in performing judicial functions, the Court thought it fit to deem that ‘Chief Metropolitan Magistrate’ appearing under section 14 of SARFAESI includes ‘Additional Chief Metropolitan Magistrate’.

Analysis and Conclusions

Burgeoning Load under SARFAESI

The verdict is a welcome development that interpreted the Act in furtherance of its conceived objective. The SARFAESI Act was enacted to facilitate quick securitisation of financial assets of banks and financial institutions. The power to take possession of the secured asset is key to this and it was to this end that the maximum 60-day time period was provided. The CMM courts in cities like Mumbai found themselves unable to dispose off such applications within the stipulated time period owing to the classic challenge of pendency. Such a status quo would defeat the purpose of having such a legislation itself. Timely resolution is indispensable and the intent of the legislature was to ensure just that. This verdict would help relieve some of the load from DMs and CMMs who in any case have a multitude of tasks and obligations to perform under various statutes.

The verdict has interpreted the law in consonance with commercial expediency and objectives of the Act rather than strictly construe the provision in a limited sense. However, this is only a temporary fix. The cases under SARFAESI Act are bound to rise in the years to come, thereby causing a problem that the legislature cannot ignore.

Including ACMM within the Ambit of Section 14

It is worth noting that, even though the Court examined the performance of judicial functions under the CrPC to assess the relative position of the two authorities and establish that equal status exists qua judicial authorities, the functions under section 14 are ministerial and not judicial. The Court uses judicial parity to permit equal treatment in performing a ministerial function. The logic behind this appears sound considering that a judicial function of a court occupies a more crucial position in its priorities than administrative or other functions. If two forums are deemed similar for performing judicial functions, there is no harm in applying the same logic for performance of ministerial functions such as those under section 14, unless  other enforcement mechanisms are exclusively available to one forum over another, which is not the case here.

Need for Judicial Impact Assessment

India does not have a mandatory practice of conducting legislative or judicial impact assessments either prior to or post enactment of a law. The rare assessments done have often been at the behest of courts, as in the case of increasing pecuniary jurisdictions under the Consumer Protection Act 2019. When legislative apathy towards this issue was palpable, the judiciary itself stepped in and issued directions to the Government in Salem Advocates Bar Association v. Union of India \. Pursuant thereto the Task Force on Judicial Assessments was formed, which recommended the establishment of a ‘Judicial Impact Office’ at the Central and State levels to estimate the extra case load and expenditure on account of new laws to be introduced. However, the directions in the aforementioned judgement and recommendations of the Task Force on Judicial Assessments remain unfulfilled. It is time India works towards implementing these recommendations in the legislative process. The quick fix interpretations from courts to ease judicial burden on a particular forum, or suo motu action like that seen in dealing with matters under section 138 of the Negotiable Instruments Act, are mere band aids and do not address the crux of the issue. Hopefully in the future we will witness India carry out a comprehensive legislative and judicial impact assessment while legislating.

– KV Kailash Ramanathan