2013 (9) TMI 940 - HC - Companies Law

Court quashes orders, emphasizes notice requirements before asset possession.

KR. Krishnegowda Versus Chief Manager/Authorised Officer, Kotak Mahindra Bank

The court allowed the writ petition, quashing the orders of the Deputy Commissioner and the DRAT, and restoring the DRT's order. The respondent-bank was ... Non-Repayment of the Loan - Proper Procedure - the petitioners had failed to repay the debt thus the Department Invoked the provisions of sections 13(4) and 14 of the Act and the notice was issued u/s 13(2) of the Act - The issue was related of the requisite procedure to be followed prior to taking possession of a secured asset under the provisions of the SARFAESI Act, 2002 - Whether the borrower ought to know as to when exactly possession of the secured asset would be taken, when once the demand u/s 13(2) was not complied with by the borrower - Held that:- Indubitably no notice had been issued under sub-rule (1) or any publication had been made under sub-rule (2) of rule 8 of the Rules, informing the petitioners on which date possession of the secured asset would be taken - Instead section 14 had been directly resorted to by the respondent, which was clearly without the mandate of the law and was an infraction of the same - There had been violation of the principles of natural justice in the case - Hence, the order passed on December 27, 2008 by the Deputy Commissioner was quashed. Consequently, the order passed by the DRAT was also quashed and the order of the DRT was restored - The department was directed to comply with sub-rules (1) and (2) of rule 8 by indicating the date on which possession of the secured assets would be taken and thereafter proceed in accordance with law. The receipt of notice under sub-section (2) results in a virtual attachment of the secured asset - If the demand made in section 13(2) was not complied with and the representation as well as the objections filed by the borrower were also not accepted and communicated to the borrower, then in that case, steps could be initiated u/s 13(4) – 13(6) enabled a secured creditor to transfer the secured asset after taking possession would imply that the possession of the secured asset vests with the secured creditor prior to any such transfer - The procedure for taking possession or control of the secured asset by the secured creditor was envisaged in section 14 after the date mentioned in the possession notice at which stage, it was not necessary to actually inform or indicate to the borrower, the taking of possession by the secured creditor - Section 14 in fact does not prescribed an opportunity of hearing the borrower before an order was passed with regard to taking of possession - Relying upon Mardia Chemicals Ltd. v. Union of India [2004 (4) TMI 294 - SUPREME COURT OF INDIA ] and Transcore v. Union of India [2006 (11) TMI 349 - SUPREME COURT OF INDIA ] and United Bank of India v. Satyawati Tondon [2010 (7) TMI 829 - SUPREME COURT ] The mandatory requirement under the Act read with the Rules, that in order to enabled the borrower to know the date on which possession would be taken by the secured creditor, sub-rules (1) and (2) of rule 8 would have to be complied with by issuance of notices indicating the date on which possession would be taken - There was another purpose for issuing the notice prior to taking possession and that was to enable the borrower to discharge the liability to the secured creditor. The issuance of notice in terms of rule 8 of the Rules was a mandatory requirement having regard to the purpose of following the principles of natural justice so as to prevent miscarriage of justice and so as to ensure fair play in action - Issuance of notice prior to initiation of action u/s 13 was a mandatory processual requirement, the non-observance of which would invalidate the exercise of power - The taking of possession of a secured asset of a borrower under sub-section (4) of section 13 was a drastic measure and the exercise of such a power would definitely visit the borrower with civil consequences. Requirement of Issuing Notice - Whether the Magistrate was required to issue notice to the borrower before passing an order u/s 14 – Held that:- In the absence of any provision in the Act or the Rules framed thereunder requiring such notice, the Magistrate was not required to issue any notice to the borrower before passing an order under section 14 - the borrower had sufficient notice regarding the steps being initiated, the amount sought to be recovered and the consequences of not discharging the liability within the period stipulated in the notice under sub-section (2) - the safeguards satisfied the principles of natural justice and no further notice by the Magistrate was required before passing an order under section 14 - Decided in favour of Assessee. Issues Involved1. Compliance with the procedure under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, before taking possession of a secured asset.2. Violation of principles of natural justice.3. Interpretation and application of Sections 13(2), 13(4), 14, and 17 of the Act.4. Compliance with Rules 4 and 8 of the Security Interest (Enforcement) Rules, 2002.5. Validity of the orders passed by the Debts Recovery Tribunal (DRT) and the Debts Recovery Appellate Tribunal (DRAT).Detailed Analysis1. Compliance with the Procedure under the ActThe petitioners argued that the respondent-bank did not comply with the mandatory procedure under Section 13(4) of the Act before taking possession of the secured asset. Specifically, the bank failed to issue a notice as required by Rules 4 and 8 of the Security Interest (Enforcement) Rules, 2002. The court examined Sections 13, 14, and 17 of the Act, emphasizing that the issuance of a notice under Rule 8 is a mandatory requirement. The notice must inform the borrower of the date on which possession will be taken. The court concluded that the respondent-bank's direct recourse to Section 14 without issuing the required notice was a violation of the Act.2. Violation of Principles of Natural JusticeThe petitioners contended that the respondent-bank's actions violated the principles of natural justice. The court agreed, noting that the failure to issue a notice under Rule 8 deprived the petitioners of the opportunity to know the exact date of possession and to discharge their liabilities before such action. The court emphasized that compliance with the principles of natural justice is essential to prevent miscarriage of justice and ensure fair play in action.3. Interpretation and Application of Sections 13(2), 13(4), 14, and 17 of the ActThe court analyzed the relevant sections of the Act in detail. Section 13(2) requires the issuance of a notice granting 60 days for repayment before any action under Section 13(4) can be taken. Section 14 allows the secured creditor to seek assistance from the Chief Metropolitan Magistrate or District Magistrate to take possession of the secured asset, but only after compliance with the notice requirements under Rule 8. Section 17 provides the right to appeal against measures taken under Section 13(4). The court held that the respondent-bank's actions were not in accordance with these provisions, as they bypassed the mandatory notice requirement.4. Compliance with Rules 4 and 8 of the Security Interest (Enforcement) Rules, 2002The court emphasized the importance of compliance with Rules 4 and 8, which outline the procedure for taking possession of a secured asset. Rule 8(1) requires the issuance of a possession notice to the borrower, and Rule 8(2) mandates the publication of this notice in two leading newspapers. The court found that the respondent-bank failed to comply with these requirements, rendering their actions invalid.5. Validity of the Orders Passed by the DRT and DRATThe court examined the orders passed by the DRT and DRAT. The DRT had granted the petitioners three months to regularize the loan account and directed the respondent-bank to issue a fresh possession notice in accordance with the law. The DRAT, however, set aside the DRT's order and allowed the bank to invoke Section 14 without issuing a prior notice. The court quashed the orders of the DRAT and the Deputy Commissioner, restoring the DRT's order. The court directed the respondent-bank to comply with the notice requirements under Rule 8 before proceeding further.ConclusionThe court allowed the writ petition, quashing the order passed by the Deputy Commissioner and the DRAT, and restoring the DRT's order. The respondent-bank was directed to comply with the mandatory notice requirements under Rule 8 of the Security Interest (Enforcement) Rules, 2002, before taking possession of the secured asset. The court emphasized the importance of adhering to the principles of natural justice and the procedural requirements under the Act to ensure fairness and transparency in the enforcement of security interests.