2010 (7) TMI 277 - HC - Companies Law

Bank cannot bypass SARFAESI Act procedures; compliance with sections 13(2), 13(4), rule 8 mandatory before invoking section 14.

The court held that a bank cannot bypass section 13(4) of the SARFAESI Act and directly invoke section 14 without complying with the mandatory procedures ... Whether impugned order of the learned Chief Judicial Magistrate, Chengalpattu correct? Held that:- A perusal of the said order shows that the Chief Judicial Magistrate had merely directed the appointment of a Commissioner for the purpose of taking possession of the schedule mentioned property and to hand over the same to the secured creditor. There is nothing to indicate as to the compliance with the provisions of section 13(2), 13(4) and rule 8. As there is no reference to the compliance with the provisions by the secured creditor, it must be presumed that no materials were placed before the Chief Judicial Magistrate by the secured creditor in respect of the compliance. Further, the affidavit filed by the bank in support of the petition seeking for vacating interim order, nothing has been stated as to the compliance of the provisions of section 13(2), 13(4) and particularly rule 8. It does not also state that even after the advocate commissioner was directed to take possession, the above procedures have been followed. In that view of the matter, the impugned proceedings are unsustainable in the eye of law, as it would amount to arbitrary exercise of the powers conferred under section 14. Accordingly, the impugned order of the learned Chief Judicial Magistrate, Chengalpattu, dated December 14, 2009, is set aside. The writ petition is allowed. Issues Involved:1. Whether the bank can bypass section 13(4) of the SARFAESI Act and directly invoke section 14.2. Compliance with procedures under rule 8 of the Security Interest (Enforcement) Rules, 2002, before invoking section 14.Issue-Wise Detailed Analysis:1. Bypassing Section 13(4) and Directly Invoking Section 14:The petitioner argued that the bank cannot bypass section 13(4) of the SARFAESI Act and directly invoke section 14 without issuing a notice under section 13(4). This, according to the petitioner, would make the appeal provisions under section 17 illusory, as proceedings under section 14 cannot be questioned in any court or tribunal.The court examined the provisions of sections 13(2), 13(3A), 13(4), 14, and 17 of the SARFAESI Act. It noted that the secured creditor's right to resort to the Act's provisions arises only when the borrower's account is classified as a non-performing asset and a notice under section 13(2) is issued. The borrower can make a representation or objection under section 13(3A), which the secured creditor must consider and respond to within one week. If the borrower fails to discharge the liability within the period specified in section 13(2), the secured creditor may take measures under section 13(4), including taking possession of the secured assets.The court emphasized that the powers of the Chief Metropolitan Magistrate or District Magistrate under section 14 are ministerial and do not require adjudication. However, strict compliance with sections 13(2) and 13(4) is mandatory before invoking section 14. The court concluded that the secured creditor cannot bypass the procedures under section 13(4) and directly approach the Magistrate under section 14 without any justifiable cause.2. Compliance with Rule 8 Procedures Before Invoking Section 14:The petitioner contended that the procedures under rule 8 of the Security Interest (Enforcement) Rules, 2002, must be followed before invoking section 14. Rule 8 requires the authorised officer to deliver a possession notice to the borrower and publish it in two leading newspapers, one in a vernacular language.The court noted that rule 8 is mandatory and must be followed when taking possession of immovable secured assets. The authorised officer must deliver a possession notice prepared as nearly as possible in Appendix IV to the Rules. The notice should indicate that the borrower has failed to repay the amount and that the authorised officer has taken possession of the property. The notice must also be published in two leading newspapers.The court highlighted that the secured creditor's right to take possession under section 13(4) is subject to compliance with rule 8. If the secured creditor bypasses section 13(4) and directly invokes section 14, the procedures under rule 8 must still be followed. The court concluded that the secured creditor cannot bypass the safeguards provided under rule 8 by directly approaching the Magistrate under section 14.Judgment:The court set aside the impugned order of the Chief Judicial Magistrate, Chengalpattu, dated December 14, 2009, appointing an Advocate Commissioner to take possession of the property. The court found that the secured creditor had not complied with the provisions of sections 13(2), 13(4), and rule 8. The writ petition was allowed, and the connected miscellaneous petitions were closed.