PROCEEDINGS UNDER SARFAESI ACT AND RECOVERY OF DEBTS AND BANKRUPTCY ACT,1993 ARE SEPARATE AND DISTINCT AND CANNOT BE CLUBBED

Recovery of debt

The banks give loans to any person including business entities. If the loan amount is not paid either in full or in part, the bank may declare the same as Non-Performing Asset after 3 years from date of taking the loan.  The bank may file an application before the Debts Recovery Tribunal (‘DRT’ for short) for dues proving the claim. The DRT after adjudication will issue Recovery certificate.  This certificate then empowers a Recovery Officer to attach borrower assets, arrest defaulters, or sell property to recover the specified amount, acting as a final executive order for the debt. 

SARFAESI Act provides a streamlined, extra-judicial path for lenders to tackle NPAs by directly realizing value from pledged assets, balancing speed with some borrower safeguards through the tribunal system. 

The RDB Act and SARFAESI Act interlink by providing complementary, parallel remedies for banks to recover secured debts, with the RDB Act focusing on adjudication and the SARFAESI Act on faster enforcement, allowing creditors to use either or both concurrently for different aspects, though the DRT handles appeal for SARFAESI actions and exercises RDB powers. While RDB is for debt recovery orders, SARFAESI empowers direct asset seizure, but their procedures integrate, with the DRT having jurisdiction over SARFAESI challenges.

Even though the said two acts can be interlinked they cannot be clubbed. Each Act is separate, different and distinct. Both cannot be clubbed together. This has been confirmed by the DRAT in Canara Bank Versus M/s Maruti Nandan Foods Products Pvt. Ltd., Abhimanyu Kumar Singh, Arjun Singh, Bimla Devi and Abhijeet Kumar Singh, Ara - 2026 (1) TMI 773 - DEBTS RECOVERY APPELLATE TRIBUNAL, ALLAHABAD.

In the above said case, the respondent No. 1 company obtained various credit facilities from the appellant bank. The said loan was secured by personal guarantee of respondents 2 and 5. The respondent No. 1 and 5 gave movable properties as collateral security.  Since the respondent No. 1 did not repay the loan regularly, the bank declared the loan as Non-Performing Asset. The bank filed an application before the Debt Recovery Tribunal under Section 19 of the RDB Act to the tune of Rs.22.98 crores. The said application was decreed and the recovery certificate was issued.

The appellant bank also initiated the recovery under SARFAESI by issuing demand notice under Section 13(2) of the said Act. Since the respondent No. 1 did not pay any amount, the bank issued possession notice on 13.03.2018 and 14.03.2018 under Section 13(4) of SARFAESI. On 19.01.2021 the said properties were put to auction for which sale notice was issued to the respondent No. 1 on 14.12.2020.

The respondents challenged the demand notice, possession notice and sale notice before the Tribunal by filing an application under Section17 of the SARFAESI Act. In the said application it was alleged that the bank was attempting to sell all the properties on by one without the permission of the Tribunal. The Tribunal allowed the said application on 29.11.2021 and also granted status quo the properties in question.

Then the Bank proceeded further before the Recovery Officer against which the borrowers raised objection. The borrowers alleged that since status quo order has been issued by the Tribunal the Recovery Officer should not proceed for sale of the properties in question. The said objections were rejected by the Recovery Officer on 23.12.2021. The Recovery Officer ordered for issuance of notice for settling a sale proclamation. The same was challenged by the borrowers alleging that the proceedings are parallel to each other and the Recovery Officer has violated the status quo order. The borrowers prayed the Tribunal to restrain the Recovery Officer from proceeding under the RDB Act. The Tribunal directed the Recovery Officer to keep the orders for issuance of notice for proclamation of sale in abeyance till status quo is in operation. The bank, being aggrieved against the order, filed the present appeal before the Debts Recovery Appellate Tribunal.

The appellant submitted the following before the Appellate Tribunal-

• The bank has filed an application for the recovery of Rs.27.35 crores against the borrowers which was decreed on 10.10.2018.
• The bank initiated the proceedings under SARFAESI which was challenged by the borrowers and status quo was granted vide order dated 29.11.2021.
• The Recovery Certificate was issued which was instituted as RP case No. 727 of 2018. In this case the borrowers filed objections.
• Despite the said objections the Recovery Officer on 23.12.2021 disposed of the objections of the borrowers.
• There is an alternative remedy for the borrowers by filing appeal under Section 30 of the RDB Act.
• The proceedings under the SARFAESI Act and RDB Act are separate and distinct and cannot be clubbed together.  Therefore, the proceedings of the Recovery Officer cannot be stayed in the proceeding of the SARFAESI Act.
• The order passed by the Tribunal is not sustainable in the eyes of law.
• Therefore, the impugned order may be set aside and the appeal may be allowed.

The respondent Nos. 1 and 2 submitted the following before the Tribunal-

• The proceedings under SARFAESI and RDB are in the nature of enforcement proceeding for realizing the debt, therefore, the order of the status quo against the bank in respect of the same properties in enforcement proceedings under SARFAESI mean that the bank should maintain the existing position and state of affairs in respect of the properties in question.
• The appellant bank was fully aware of the consequences of the status quo order that it could not sell the properties without permission of the Tribunal.
• In spite of that the appellant bank filed an application before the Tribunal for selling the properties in question, which is against the status quo order passed by the Tribunal.
• The provisions of the SARFAESI are over riding the provisions of RDB Act and the same are prevailing.
• The appellant bank disobeyed the status quo order of the Tribunal by directing the Advocate Commissioner to assist in taking the steps for selling the properties.
• Therefore, the Tribunal rightly set aside the order of recovery officer vide the impugned order.
• On the above said ground the appeals ought to be dismissed.

The Appellate Tribunal considered the submissions of the parties and also perused the documents available on record. The Tribunal analyzed the facts of the entire case. The Tribunal observed that the borrowers challenged the order of Recovery Officer on 23.12.2021for issuance of sale proclamation. The said order was challenged by the borrowers. The Tribunal analyzed the provisions of Section 30 of RDB Act. The said section provides that any person aggrieved by an order of the Recovery Officer may prefer an appeal before the Tribunal. In the present case, instead of filing the appeal, the borrowers filed interim application before the Tribunal in the pending application filed under SARFAESI Act. The Supreme Court held that the bank can proceed simultaneously in both the RDB Act and SARFAESI Act. But both the proceedings cannot be clubbed as the proceedings under both the Acts are separate and distinct.

The Appellate Tribunal observed that if the borrowers had filed an appeal under Section 30 of the RDB Act, then Section 30-A would be applicable by which the borrowers had to deposit 50% of the debt due as determined by the Tribunal. The borrowers cleverly filed the said application despite having alternative remedy under Section 30 of the Act. If any order is passed under the wrong Act, then the same will be considered to be null and void as well as without jurisdiction. The Tribunal entertained the application filed by the borrowers under SARFAESI Act knowingly that there was alternative remedy available for the borrowers to file the appeal under Section 30 of the RDB Act. Thus, the impugned order is passed without jurisdiction.

Therefore, the Tribunal set aside the impugned order.