Court Upholds Leases Despite Mortgage; Lessees' Rights Protected

HARSHAD GOVARDHAN SONDAGAR Versus INTERNATIONAL ASSETS RECONSTRUCTION CO. LTD & ORS

HARSHAD GOVARDHAN SONDAGAR Versus INTERNATIONAL ASSETS RECONSTRUCTION CO. LTD & ORS - 2014 (6) SCC 1, 2014 (5) JT 75, 2014 (4) SCALE 484 Issues Involved:
1. Whether the provisions of the SARFAESI Act affect the right of a lessee to remain in possession of the secured asset during the lease period.
2. The validity of leases made by the borrower before and after the mortgage.
3. The jurisdiction and powers of the Chief Metropolitan Magistrate or District Magistrate under Section 14 of the SARFAESI Act.
4. Remedies available to lessees under the SARFAESI Act and other tenancy laws.
5. The scope of judicial review of decisions made under Section 14 of the SARFAESI Act.

Detailed Analysis:

1. Effect of SARFAESI Act on Lessee's Right to Possession:
The court examined whether the SARFAESI Act impacts a lessee's right to remain in possession of a secured asset during the lease period. It was clarified that a 'secured asset' refers to the property on which the security interest is created. The court emphasized that a lease made before the creation of a mortgage remains valid and binding on the mortgagee. Section 65A of the Transfer of Property Act allows a mortgagor to lease the property while in lawful possession, and such leases are binding on the mortgagee unless expressly prohibited by the mortgage deed. The court concluded that the SARFAESI Act does not terminate valid leases made in accordance with the Transfer of Property Act.

2. Validity of Leases Made by the Borrower:
The court discussed the validity of leases made by the borrower before and after the mortgage. Leases created prior to the mortgage are valid and binding on the secured creditor. For leases made after the mortgage, they must comply with Section 65A of the Transfer of Property Act to be valid. The court noted that sub-section (13) of Section 13 of the SARFAESI Act prohibits the borrower from leasing the secured asset after receiving a notice under sub-section (2) of Section 13 without the secured creditor's consent. Thus, leases made after such notice are invalid.

3. Jurisdiction and Powers of Magistrates under Section 14:
The court analyzed the jurisdiction and powers of the Chief Metropolitan Magistrate or District Magistrate under Section 14 of the SARFAESI Act. It was held that these magistrates do not have the power to take possession of a secured asset from a lessee under a valid lease. The secured creditor must state in the affidavit accompanying the application that the secured asset is not in possession of a lessee under a valid lease. If the lease stands determined under Section 111 of the Transfer of Property Act, the magistrate may pass an order for delivering possession to the secured creditor.

4. Remedies Available to Lessees:
The court examined the remedies available to lessees under the SARFAESI Act and other tenancy laws. It was determined that lessees do not have a remedy under Section 17 of the SARFAESI Act to protect their lawful possession under a valid lease. The lessee's remedy lies in resisting the secured creditor's attempt to take possession and proving the validity of their lease before the magistrate. The court also clarified that civil courts cannot grant injunctions against actions taken under the SARFAESI Act.

5. Judicial Review of Decisions under Section 14:
The court held that decisions made by the Chief Metropolitan Magistrate or District Magistrate under Section 14 of the SARFAESI Act can be challenged before the High Court under Articles 226 and 227 of the Constitution. The statutory provision attaching finality to such decisions does not bar the constitutional jurisdiction of the High Court or the Supreme Court.

Orders and Directions:
1. Remand to Magistrate: Orders passed by the Chief Metropolitan Magistrate, Mumbai, for delivery of possession to secured creditors are set aside and remanded for fresh orders after hearing both parties.
2. Pending Applications: Magistrates to consider claims of lessees in pending applications and decide in accordance with this judgment.
3. Future Applications: Future applications under Section 14 to be decided in line with this judgment.
4. Time Frame: Final orders under Section 14 to be passed within four months from the date of filing the certified copy of this judgment.
5. Appeals Allowed: The appeals are allowed with parties bearing their own costs.