TaxTMI 
TaxTMI 
2015 (7) TMI 1459
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....t")? 4. Brief facts which are relevant for the purpose of deciding this Petition are as under :- 5. By this Petition which is filed under Article 226 of the Constitution of India, Petitioner is seeking the following substantive reliefs :- "a. to hold and declare that regardless of the status of the assignor, if the assignee of a debt along with its underlying security is a bank or Financial Institution it is open to such bank of Financial Institution to adopt steps under the RDDB Act / or SARFAESI Act and /or Civil Law." "b. to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction calling for the records of the case in Appeal No.235 of 2014 and in Securitization Application No. 39 of 2014, from the Debts Recovery Appellate Tribunal, Mumbai and after considering the legality veracity and correctness of the impugned order dated 20th January, 2015 read with the Trial Courts order dated 28th November, 2014, this Hon'ble Court be pleased to quash and set aside the same or such part thereof as this Hon'ble Court deems fit and proper." 6. Petitioner No.1 is a Banking Company incorporated and re....
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....aised by Respondent Nos. 1 and 2 was that Respondent No.3 - Citi Financial Consumer Finance Ltd., being a Non-Banking Financial Corporation, was not entitled to invoke the provisions of SARFAESI Act and, secondly, its Assignee i.e. the Petitioner was also not entitled to invoke the provisions of the SARFAESI Act. 10. The Presiding Officer of Debt Recovery Tribunal-II, by his judgment and order dated 28/11/2014, held that since Respondent No.3 - Citi Financial Consumer Finance Ltd. was not a Financial Institution within the definition of "financial institution" under the SARFAESI Act, Petitioner, despite being a Bank, was not entitled to exercise any powers or authority as a Bank under the provisions of the said Act against Respondent No.4. The Securitization Application filed by Respondent Nos. 1 and 2 was allowed and the Petitioner was directed to handover possession of the secured assets to Respondent Nos. 1 and 2. The operation of the order was, however, stayed for a period of one month. 11. Petitioner, being aggrieved by the judgment and order passed by the Presiding Officer, DRT-II, filed an appeal being Appeal No.235 of 2014 on various grounds. It was inter alia contend....
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.... debt in favour of the Petitioner and, therefore, security interest was created in favour of the Petitioner as per the aforesaid definition and therefore the third parties such as Respondent Nos. 1 and 2 could not question such assignment. She submitted that as long as assignment is permitted as a lawful banking activity from anybody including NBFC in law then the assignment created in favour of the secured creditor, security interest which was capable of being enforced in accordance with the provisions of the said Act by the Petitioner. 14. The learned Senior Counsel appearing on behalf of the Petitioner further submitted that the assignment was a permitted banking activity in law. In support of the said submission, she invited our attention to the Notification of RBI dated 13/07/2005. She submitted that RBI had clearly, by virtue of the said Notification, permitted assignment of debt with or without security in the course of banking activity and, therefore, such an assignment was legally permissible and, therefore, enforceable. She submitted that, therefore, assignment of debt from NBFC was a permissible banking activity clearly falling within the definition of "debt" under RD....
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....nes of RBI dated 13/7/2005 on which reliance has been placed by the Senior Counsel for the Petitioner does not confer the bank with the powers of secured creditor as contemplated under the SARFAESI Act. He further submitted that such guidelines were in the nature of executive instructions. He invited our attention to the judgments of the Apex Court in Dr. Mahachandra Prasad Singh vs. Chairman, Bihar Legislative Council and Others [(2004) 8 SCC 747] and in Maharao Sahib Shri Bhim singhji vs. Union of India and Others [(1981) 1 SCC 166] [para 75]. He submitted that, in the present case, no debt secured by any security interest was created by any borrower in favour of the secured creditor as defined under the provisions of the SARFAESI Act. He then invited our attention to Section 17 of the SARFAESI Act and submitted that any person aggrieved by the measures under the SARFAESI Act could invoke the provisions of Section 17 of the said Act. He relied upon the following judgments :- 1. United Bank of India vs. Satyawati Tondon & Ors [(2010) 8 SCC 110] [para 42] 2. Authorised Officer, Indian Overseas Bank & Anr vs. Ashok Saw Mills [(2009) 8 SCC 366] [para 35] 3.....
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....ove faster. In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken towards Securitisation of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another expert committee was constituted then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary ....
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....dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy." "37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so. As a matter of fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 2001. It is mentioned in the said Circular as follows : "1.1 In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M.Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts." ....
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.... have been classified as NPA as per extant guidelines." From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non- performing asset as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non-performing asset." "42. Mainly it is to be considered as to whether there is absolute bar of any remedy to the borrower, before an action is taken under sub- section (4) of Section 13 of the Act in view of non-obstante clause under sub-section (1) of Section 13 and the bar of the jurisdiction of the civil court under Section 34 of the Act. Sub-section (1) of Section 13 begins with "Notwithstanding anything contained" under Section 69 of the Transfer of Property Act any secured interest can be enforced without intervention of the court or Tribunal. Section 69 of the Transfer of Property Act provides as follows : "69. Power of sale when valid .- (1) A mor....
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....ause (a) relates to English mortgage in which a mortgaged property is permitted to be sold without intervention of the court but in the stricto sensu cl. (a) would not be applicable to the present case as it contains many conditions which obviously are not fulfilled in case in hand. It is however, submitted that the provision for enforcing secured debt was made on the lines of the principle governing English mortgage. It is perhaps sought to be canvassed that if that kind of step namely enforcing the secured debt without intervention of the court is permissible in a case of English mortgage such a provision may legitimately be enacted in respect of mortgages like English mortgages. We find much has been argued on the point as to whether the transactions involved in the cases before us amount to English mortgage or not though none of agreements have been placed before us. Distinction between the two have also been tried to be shown and it has been submitted that English mortgage is in fact transfer of the property absolutely to the mortgagee with a term of retransfer. Section 58(e) pertaining to English mortgage is quoted below : "58. 'Mortgage', 'mortgagor'....
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....herewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." "43. It may, however, be worthwhile to mention here as to why and in what circumstances it had been thought necessary to provide a non-obstante clause in sub- section (1) of Section 13 of the Act. In a nutshell, the position as prevailed in 1882 when the Transfer of Property Act was enacted has undergone a sea-change. What was conceived correct in the situation then prevailing may not be so in the present day situation. Functions of different institutions including the banking and financial institutions have changed and new functions have been introduced for financing the industries etc. New economic and fiscal environment is around more than 100 years later after the enactment of the Transfer of Property Act. In this connection it has been pointed out on behalf of the respondents that Rajamannar Committee was appointed by Government of India which submitted its report in 1977 indicating the effect of the changed situation and the relevance of the provisions of the Transfer of Property Act in context thereof. Mr. Salve has drawn our attention to the R....
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....icient trade and commerce, especially for financial intermediation. Even the guidelines of the Reserve Bank of India in relation to classifying the NPA's while stressing the need of expeditious steps in taking a decision for classifying and identification of NPA's says, a system be evolved which should ensure that the doubts in asset classification are settled through specified internal channels within the time specified in the guidelines. It is thus clear that while recommending speedier steps for recovery of the debts it is envisaged by all concerned that within the legal framework, such provisions may be contained which may curtail the delays. Nonetheless dues or disputes regarding classification of NPAs should be considered and resolved by some internal mechanism. In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If there is any difficulty or any objection pointed out by the borrower by means of some appropriate internal mechanism it must be expeditiously resolved." "66. On behalf of the petitioners one of the contentions which has been forcefully raised is that existing rights of private partie....
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....nd they were granted the status of protected tenant, who had cultivated the land personally six years prior to the prescribed date. It was found that the legislation was with the object of improving the economic condition of the peasants and for ensuring full and efficient use of land for agricultural purpose. By a statutory provision special benefit was conferred upon the tenants in Madras City where they had put up a building for residential or non-residential purposes and were saved from eviction, it did though affect the existing rights of the landlords. See also 1963 (Supp.) 1 SCR p.282, Swami Motor Transports Pvt. Ltd. Vs. Shri Sankraswamigal Mutt and Raval & Co. Vs. K.G.Ramachandran, 1974 (1) SCC 424. Similarly it is also to be found that in the case reported in 2001 (5) SCC 546, Kanshi Ram v. Lachhman the law granting relief to the debtors protecting their property was upheld. Also see 1978 (2) SCC 1, Pathumma v. State of Kerala, 1977 (2) SCC 670, Fatehchand Himmatlal v. State of Maharashtra, 1962 (1) SCR 852, Ramdhandas v. State of Punjab." "67. It is well known that in different States Rent Control legislations were enacted providing safeguards to the sitting ten....
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.... "52. The short question under this head is whether recourse to take possession of the secured assets of the borrower under Section 13(4) of the NPA Act comprehends the power to take actual possession of the immovable property." "53. Mr. N.C. Sahni and Mr. Pankaj Gupta, learned advocates appearing on behalf of the respective borrowers submitted that Section 13(4) of the NPA Act empowers the secured creditor to take possession of the secured immovable assets of the borrower on expiry of sixty days and notice served under Section 13(2) of that Act. It is pointed out that in many cases, the banks/FIs have taken actual physical possession whereas in other cases they have taken only a symbolic possession. Learned advocates submitted that in Kalyani Sales Co., [AIR 2006 P & H 107] the High Court has rightly held that if physical possession is taken on expiry of sixty days, the remedy of application under Section 17 of the NPA Act by the borrower would become illusory and meaningless as the borrower or the person in possession would be dispossessed even before adjudication of the objections by the tribunal. Learned advocates further submitted that under Section 13(8), the ban....
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....ntervention of the courts/ tribunals." "56. Keeping the above conceptual aspect in mind, we find that Section 13(4) of the NPA Act proceeds on the basis that the borrower, who is under a liability, has failed to discharge his liability within the period prescribed under Section 13(2), which enables the secured creditor to take recourse to one of the measures, namely, taking possession of the secured assets including the right to transfer by way of lease, assignment or sale for realizing the secured assets. Section 13(4-A) refers to the word "possession" simpliciter. There is no dichotomy in sub-section (4-A) as pleaded on behalf of the borrowers. Under Rule 8 of the 2002 Rules, the authorised officer is empowered to take possession by delivering the possession notice prepared as nearly as possible in Appendix IV to the 2002 Rules. That notice is required to be affixed on the property. Rule 8 deals with sale of immovable secured assets. Appendix IV prescribes the form of possession notice. It inter alia states that notice is given to the borrower who has failed to repay the amount informing him and the public that the bank/FI has taken possession of the property under Secti....
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..... Under Section 13(8), if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the creditor before the date fixed for sale or transfer, the asset shall not be sold or transferred. The costs, charges and expenses referred to in Section 13(8) will include costs, charges and expenses which the authorised officer incurs for preserving and protecting the secured assets till they are sold or disposed of in terms of Rule 8(4). Thus, Rule 8 deals with the stage anterior to the issuance of sale certificate and delivery of possession under Rule 9. Till the time of issuance of sale certificate, the authorised officer is like a court receiver under Order XL Rule 1 CPC. The court receiver can take symbolic possession and in appropriate cases where the court receiver finds that a third party interest is likely to be created overnight, he can take actual possession even prior to the decree. The authorized officer under Rule 8 has greater powers than even a court receiver as security interest in the property is already created in favour of the banks/FIs. That interest needs to be protected. Therefore, Rule 8 provides that till issuance of t....
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....tion and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery of reconstruction." "2. It is now proposed to replace the Ordinance by a Bill, which, inter alia contains provisions of the Ordinance to provide for- (a) ........ (b) ........ (c) ........ (d) ........ (e) ........ (f) ........ (g) defining "security interest" as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution; (h) empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e., classification of the borrower'....
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.... (ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993); (iii) the International Finance Corporation Established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958); (iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act:" 2(v) "reconstruction company" means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;" "2(za) "securitisation company" means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation;" 2(zc) "secured asset" means the property on which security interest is created;" "2(zd) "secured creditor" means any bank or financial institution or any consortium or group of banks or financial institutions and include....
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....it can be seen that measures under section 13(4) against the borrower can be initiated by a bank or financial institution to whom it has given financial assistance or by reconstruction company or securitisation company which has acquired the financial assistance from any bank or financial institution. (Emphasis supplied). 22. Upon a conjoint reading of the definitions reproduced hereinabove alongwith Section 13 of the said Act read with Sections 17 and 18, it can be seen that though the word "debt" under section 2(ha) of the SARFAESI Act and section 2(g) of the RDDBFI Act is identical bringing within its fold any debt ...... whether secured or unsecured or assigned, ........ by virtue of the definitions quoted hereinabove under the SARFAESI Act and Sections 13, 17, 18 and 31 only the Bank who has assigned the debt to a Financial Institution and vice versa can take recourse to Section 13 sub-clause (2) and (4) of the said Act for the following reasons. Definition of "borrower" is defined under section 2(f) to mean a person who fulfills two criteria viz (1) who has been granted financial assistance by any Bank or Financial Institution, (2) who has given any guarantee or created....
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....section 2(m) reveals that it does not include a Non-banking Financial Institution nor the term "bank" defined in section 2(c) includes such NBFC. The term "secured creditor" under section 2(zd) is restricted to any Bank or Financial Institution or any consortium or group of Banks or Financial Institutions but does not include a Non-banking Financial Institution. The word "secured creditor", again, is used in the definition of the word "security interest" under section 2(zf) which restricts the meaning of "security interest" which is created in favour of any secured creditor which again means a Bank or a Financial Institution. The word appearing in section 2(zf) viz "assignment" other than those words specifically mentioned in Section 31 therefore will have to be given a restrictive meaning as an assignment by a Bank or Financial Institution and not the assignment made by NBFC. Lastly, Section 5 of the said Act deals with acquisition of rights and interest in financial assets. Sub-clause (5) of Section 5 was inserted by Amendment Act No.1 of 2013 with effect from 15/01/2013 and it permits the Securitisation Company or Reconstruction Company an acquisition of financial assets unde....
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....f the said judgment and order in ICICI Bank vs. APS Star Industries Ltd. [(2010) 10 SCC 1] reveals that the Apex Court was called upon to consider a question as to whether assignment of debts between Non-banking Financial Institutions and Banks was a permissible banking business. While deciding the said issue, the Apex Court, relying on RBI policy, held that it was a permissible banking business. In the said case, the question which fell for consideration and which had been reproduced in para 2 of the said judgment was as under :- "Whether inter se transfer of non- performing assets ("NPA", for short) by the banks is illegal under the Banking Regulation Act, 1949 ("the BR Act, 1949", for short) as held by the Gujarat High Court in the impugned judgment?" Answering the said question, after relying on RBI directives, the Apex Court held that guidelines issued by RBI dated 13/07/2005 have statutory force and are not ultra vires the BR Act, 1949 and it therefore held that assignment of debts of NBFC by one Bank to another Bank is permissible under 1949 Act and not violative of section 130 of the Transfer of Property Act, 1882. In our view, taking into consideration the fact....