Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 - Sections 14 & 17(4A) - the observations as made in the order impugned after paragraph 11 had been rather unnecessary and the learned Single Judge, with respect, has been in error in issuing generalised directions and that too, to the extent that the borrowers have a right to be heard in the proceedings under Section 14 of the SARFAESI Act.
IN
THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED
THIS THE 30TH DAY OF NOVEMBER, 2018
PRESENT
HON’BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE AND HON’BLE MR.JUSTICE
R.DEVDAS
WRIT APPEAL NOS.6330-6337/2017 (GM-RES)
HDB Financial Services v. Remo Software Pvt. Ltd.
Appellant by Sri. Suresh
V, Advocate
Respondents by Sri. Vedanth
Anand Chugh, Advocate for R4
J
U D G M E N T
1.
These intra-court appeals are directed against the order dated 08.08.2017 in
W.P.Nos.35597-35601/2017 and 35602- 35604/2017, whereby the learned Single
Judge, while disposing of the said writ petitions filed by the tenants/lessees of
the borrowers, has not only accepted the submissions of the parties that the
tenants were to be provided an opportunity to approach the Debts Recovery
Tribunal (‘DRT’) under Section 17(4A) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI
Act’), but has further proceeded to issue generalised directions, purportedly
to the effect that even the borrowers have a right to be heard under Section 14
of the SARFAESI Act.
2.
These
intra-court appeals were initially considered by a Division Bench of this Court
on 20.06.2018 and taking note of the submissions made on behalf of the
appellant with reference to the decisions of the High Courts of Gujarat,
Allahabad and Bombay, these appeals were admitted for consideration and the
part of order impugned, to the extent it holds that the borrowers are entitled
to be heard under Section 14 of the SARFAESI Act, was stayed.
3.
In
these appeals, service of notice to respondent Nos. 1, 3, 6, 11 and 12 was
dispensed with; notices have been served in relation to the respondent Nos. 2,
5 and 7 to 10 who have remained unrepresented; and only the counsel for
respondent No. 4/tenant has appeared before this Court.
4.
Only
the validity and correctness of the generalised directions in the impugned
order dated 08.08.2017 being the subject-matter of these appeals, dilation on
all the factual aspects is not necessary. Only a brief reference to the background
aspects would suffice.
5.
Put
in brief, the relevant background aspects of the matter are that the landlords
had secured a loan from the appellant-financial institution by mortgaging their
property. As the borrowers had defaulted in repayment of the loan amount, the
appellant-financial institution proceeded under Section 13(2) of the SARFAESI
Act by issuing notice dated 10.11.2016 towards recovery of the outstanding loan
amount. The appellant-financial institution also preferred Crl. Misc. No. 2022/2017
under Section 14 of the SARFAESI Act before the Court of VIII ACMM, Bengaluru
for taking over the possession of the secured asset, namely the building in
question, wherein the tenants are said to be in occupation. The Magistrate,
having considered the matter placed before it, passed the order dated 20.05.2017
(Annexure G) directing that no further notice was required to be given to any
other person/s in lieu of the general notice that was pasted on the walls of
the property; and further that the physical possession of the property be
handed over to the financial institution. Thereafter, notices dated 31.07.2017 (Annexure
E-1 to E4) came to be issued by the appellantfinancial institution to all the
tenants, asking them to vacate the premises within a period of 7 days from the
date of the receipt of the aforesaid notices, and on failure to do so, they
will be evicted from the premises with the assistance of the Police Department.
Being aggrieved by the aforementioned order passed by the Magistrate and
notices issued thereafter, the tenants preferred the aforesaid writ petitions,
being W.P. Nos.35597-35601/2017 and 35602-35604/2017.
6.
Upon
hearing the contentions of the parties, the learned Single Judge, in his detailed
impugned order dated 08.08.2017, took the view with reference to the decisions
of the Hon’ble Supreme Court in Harshad
Govardhan Sondagar vs. International Assets Reconstruction Company Limited and Ors:
(2014) 6 SCC 1 and Vishal N. Kalsaria vs. Bank of India
and Ors: (2016) 3 SCC 762,
that
the tenants were required to be heard in the matter. The learned Single Judge
observed that if the tenants were genuinely aggrieved by the action taken in
compliance with the provisions of Section 14 of the SARFAESI Act, they could
approach the DRT under Section 17(4A) of the SARFAESI Act, wherein one
opportunity of hearing could be afforded to them based on the evidence they would
place on record, before any order under Section 14 of the SARFAESI Act is
passed. In fact, on behalf of the appellant–financial institution, it was
submitted that the petitioners/tenants may be directed to approach the DRT in
the matter; and that the financial institution will not take precipitative action
or coercive measures to recover possession, provided the tenants not only
approach the DRT within a period of two weeks, but also deposit the rent
payable by them with the appellant. Such submissions were accepted by the
counsel for the tenants too. Hence, the parties were relegated to the proceedings
under Section 17(4A) of the SARFAESI Act. The learned Single Judge took note of
the submissions and observed as under:
“9.
The learned counsel for the Respondent – Financial Institution, therefore, has
submitted that the petitioners/tenants should be directed to approach the Debt
Recovery Tribunal in the matter.
10. He further submits that for a period
of two weeks the Respondent – Financial Institution will not enforce the
Security Interest by taking precipitative or other coercive measures to recover
the physical possession, provided the petitioners/tenants not only approach the
Debt Recovery Tribunal under Section 17(4-A) as extracted above, within the
said period of two weeks from today, but also deposit the arrears of rentals as
well as the current rentals payable by them to the Respondent
landlords/borrowers with the Respondent Financial Institution – Bank.
11. To the aforesaid submission of the
learned counsel for the Respondent-No.1, the learned counsel for the
petitioners fairly agrees.”
7.
However, thereafter, the learned Single Judge considered it appropriate to make
yet further observations with reference to the aforesaid decisions of the
Supreme Court. Such part of the observations in the order impugned is extracted
as under:-
“19.
Thus, as stated above, Section 14 does not exclude the principles of natural
justice and therefore, Magistrate should hold an enquiry in the matter. The
learned Magistrate cannot act simply on the basis of one sided Affidavit filed
by the Bank/Financial Institution under Proviso to Section 14(1) of the Act.
The borrowers have a right to controvert such Affidavit and the tenants in the
premises also have a right to be heard in the matter.
Secondly,
the tenanted premises cannot be directly vacated by such orders under Section 14
of the Act. It is for DRT to decide about the bona fide of the tenancy or
otherwise under Section 17(4A) of the Act. If tenancy is not bona fide and just
“created” as a sham defence, such occupants can
be evicted by an order under Section 17(4) of the Act by the DRT, but if the
tenancy is long pre-existing before the issuance of notice under Section 13(2)
of the Act and is found to be bona fide, such tenants and lessees cannot be
evicted, without adopting the due process of law for eviction under State Rent
Control Law, as held by Hon’ble Supreme Court in Vishal N. Kulsaria’s case (supra). It would for the auction
purchaser to adopt such due process of law, once he steps in the shoes of landlord/borrower
proceeded against under SARFAESI Act 2002. However, the lessees/ tenants cannot
object to the initiation and proceedings undertaken and continued against the
landlord or the defaulting borrower. The attornment of tenancy in favour of
auction purchaser under SARFAESI Act would be automatic by legal fiction and
DRT can direct payment of Rentals to the account of Bank directly.”
8.
Thereafter, the learned Single Judge concluded on the writ petition with the
following directions:
“20.Here,
since the petitioners have an effective, alternative remedy under Section 17 (4A) of the SARFAESI Act, 2002 now available to them, where the Debt
Recovery Tribunal can go into the question of validity of tenancy as per the
said provisions, this Court would not make any observation on the merits of the
contentions raised by the parties and the petitions are therefore disposed of
with a liberty and direction to the petitioners to file their Applications
before the concerned Debt Recovery Tribunal under Section 17(4-A) of the
SARFAESI Act, 2002, within a period of two weeks from today and for a period of
four weeks only from today, without any extension of time further by this Court,
it is directed that the Respondent – Financial Institution, in execution of the
impugned order under Section 14 of the SARFAESI Act, 2002, dated 20/05/2017 shall not take coercive measures for
seeking physical and vacant possession of the said tenanted portions of the
premises from the petitioners provided further that the petitioners will give
an Undertaking in writing to the Respondent No.1, Financial Institution/ Bank
that all arrears of rent and the current rentals due to be paid by them to the Respondent
lessors/landlords will be made over to the respondent No.1 –Financial Institution
within the aforesaid period of two weeks and they shall continue to deposit the
rent with the Respondent No.1 – Financial Institution till they hold the
possession of the said premises under their Lease/Rent Agreement. The operation
of impugned order under Section 14 of the Act would abide by the orders to be
passed by the DRT under Section 17(4A) of the Act.
21. The further course of action after
four weeks from today, will be subject to the further orders to be passed by
the Debt Recovery Tribunal as far as the petitioners tenants in the Secured
Asset/premises in question are concerned.
22. It is made clear that the present
order will govern only the case of the present lessees/tenants in the said
premises, for the time being and will not affect any other action of the
Respondent No.1 – Financial Institution against the principal borrowers/landlords/Respondents
in the present writ petitions.
23. Accordingly the writ petitions stand disposed
of. No costs.
Copy
of this order be sent to the concerned parties and the learned Court below
which passed the order under Section 14 of the SARFAESI Act, 2002 and the Debt Recovery
Tribunal, Bengaluru, as also to the Chief Secretary and District Judge for bringing
it to the notice of the concerned Chief Metropolitan Magistrates/District Magistrates,
who exercise the jurisdiction under Section 14 of the Act.”
9.
Questioning the order aforesaid, the learned counsel for the
appellant-financial institution has submitted in the first place that in fact,
the appellant did not even get proper opportunity of contesting the writ
petitions inasmuch as the notice was served at 12.30 p.m. on 08.08.2017 and on
that very date, the matter was taken up at 2.30 p.m. and disposed of. Learned
counsel would submit that even when the tenants of the mortgaged property were
held entitled to an opportunity of hearing in view of the decisions of the Hon’ble
Supreme Court in Harshad Govardhan
Sondagar and Vishal
N. Kalsaria (supra), there was absolutely no justification
that generalised directions were issued even to the extent that the borrowers
were also held having a right to be heard in the proceedings under Section 14 of
the SARFAESI Act. Such directions, according to the counsel, do not stand in
conformity with the law declared by the Supreme Court as also by this Court and
various other High Courts.
10.
Learned counsel for the respondent No.4 has essentially submitted that the
tenants are entitled to an opportunity of hearing and have rightly been allowed
such opportunity in the order impugned.
11.
Having
heard learned counsel for the parties and having perused the material placed on
record, we are clearly of the view that the observations as made in the order
impugned after paragraph 11 had been rather unnecessary and the learned Single
Judge, with respect, has been in error in issuing generalised directions and
that too, to the extent that the borrowers have a right to be heard in the
proceedings under Section 14 of the SARFAESI Act [as occurring in paragraph 19 of
the order impugned].
12.
In
fact, it is apparent from the order impugned that it was submitted on behalf of
the appellant–financial institution that the writ petitioners/tenants be
directed to approach the Debts Recovery Tribunal in the matter and it was also
submitted that for a period of two weeks, the financial institution will not enforce
the security interest by taking precipitative action or coercive measures to
recover the physical possession of the property. These submissions made on
behalf of the appellantfinancial institution were agreed to on behalf of the
petitioners, as recorded in paragraph 11 of the order impugned.
13.
In
our view, so far the writ petitions before the learned Single Judge were
concerned, with such submissions of the parties, the matter ought to have been
closed, of course, with necessary directions, as occurring in paragraph 20 to
22 of the order.
14.
With
respect, we are unable to endorse the other observations in the order impugned,
particularly those occurring in the first part of the paragraph 19 [as
reproduced hereinabove], wherein it is observed that the borrowers have a right
to controvert the affidavit submitted in the proceedings under Section 14(1) of
the SARFAESI Act. Such observations in paragraph 19 in the order impugned do
not stand in conformity with the law declared by the Supreme Court in the case
of Mardia
Chemicals Ltd. and Ors. vs. Union of India and Ors. : (2004) 4 SCC 311 as
also the decision of this Court in the case of Mrs.Sunanda
Kumari and Anr. vs. Standard Chartered Bank : ILR 2007 KAR 16. The Supreme
Court, in the cases of Harshad
Govardhan and Vishal
N. Kalsaria (supra), has not laid down the law that the borrower
may also be extended an opportunity of hearing in the proceedings under Section
14 of the SARFAESI Act.
15.
In
the case of Vishal N.
Kalsaria (supra) the relevant observations of the Supreme
Court read as under:
“35. The decision of this Court rendered in
the case of Harshad Govardhan Sondagar (supra) cannot be understood to have
held that the provisions of the SARFAESI Act override the provisions of the
Rent Control Act, and that the Banks are at liberty to evict the tenants residing
in the tenanted premises which have been offered as collateral securities for
loans on which default has been done by the debtor/landlord.
36. As far as granting leasehold rights
being created after the property has been mortgaged to the bank, the consent of
the creditor needs to be taken. We have already taken this view in the case of
Harshad Govardhan Sondagar (supra). We have not stated anything to the effect
that the tenancy created after mortgaging the property must necessarily be registered
under the provisions of the Registration Act and the Stamp Act.
37. It is a settled position of law that
once tenancy is created, a tenant can be evicted only after following the due
process of law, as prescribed under the provisions of the Rent Control Act. A
tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI
Act as that would amount to stultifying the statutory rights of protection given
to the tenant. A non obstante clause (Section 35 of the SARFAESI Act) cannot be
used to bulldoze the statutory rights vested on the tenants under the Rent
Control Act. The expression “any other law for the time being in force” as
appearing in Section 35 of the SARFAESI Act cannot mean to extend to each and
every law enacted by the Central and State legislatures. It can only extend to
the laws operating in the same field.”
16. In the case of Harshad Govardhan Sondagar (supra)
the Supreme Court has held as under:
“28.
…..When, therefore, a lessee becomes aware of the possession being taken by the
secured creditor, in respect of the secured asset in respect of which he is the
lessee, from the possession notice which is delivered, affixed or published in
sub-rule(1) and subrule( 2) of Rule 8 of the Security Interest (Enforcement)
Rules, 2002, he may either surrender possession or resist the attempt of the
secured creditor to take the possession of the secured asset by producing
before the authorised officer proof that he was inducted as a lessee prior to
the creation of the mortgage or that he was a lessee under the mortgagor in accordance
with the provisions of Section 65-A of the Transfer of Property Act and that
the lease does not stand determined in accordance with Section 111 of the
Transfer of Property Act. If the lessee surrenders possession, the lease even
if valid gets determined in accordance with clause (f) of Section 111 of the Transfer
of Property Act, but if he resists the attempt of the secured creditor to take possession,
the authorised officer cannot evict the lessee by force but has to file an
application before the Chief Metropolitan Magistrate or the District Magistrate
under Section 14 of the SARFAESI Act and state in the affidavit accompanying
the application, the name and address of the person claiming to be the lessee.
When such an application is filed, the Chief Metropolitan Magistrate or the
District Magistrate will have to give a notice and give an opportunity of hearing
to the person claiming to be the lessee as well as to the secured creditor,
consistent with the principles of natural justice, and then take a decision. If
the Chief Metropolitan Magistrate or the District Magistrate is satisfied that
there is a valid lease created before the mortgage or there is a valid lease
created after the mortgage in accordance with the requirements of Section 65-A
of the Transfer of Property Act that the lease has not been determined in
accordance with the provisions of Section 111 of the Transfer of Property Act,
he cannot pass an order for delivering possession of the secured asset to the
secured creditor. But in case he comes to the conclusion that there is in fact
no valid lease made either before creation of the mortgage or after creation of
mortgage satisfying the requirements of Section 65-A of the Transfer of
Property Act or that even though there was a valid lease, the lease stands
determined in accordance with Section 111 of the Transfer of Property Act, he
can pass an order for delivering possession of the secured asset to the secured
creditor.”
17. The observations aforesaid in no
manner provide that a borrower is also to be afforded an opportunity of hearing
in the proceeding under Section 14 of the SARFAESI Act. That no such
opportunity is envisaged in relation to the borrower remains a settled
principle and may not require much elaboration. Suffice it would be to refer to
the Division Bench decision of this Court in Mrs.Sunanda Kumari (supra), wherein this
Court rejected such contention seeking opportunity of hearing for the borrower
in the proceedings under Section 14 of the Act, while observing, inter alia, as
under:
“6. Regarding the
question whether the Magistrate is required to issue notice to the borrower
before passing an order under Section 14, we are of the view that, in the
absence of any provision in the Act or the Rules framed thereunder requiring
such notice, the Magistrate is not required to issue any notice to the borrower
before passing an order under Section 14. Learned Counsel for the petitioners
contended that even though there is no specific provision in the Act or the
Rules requiring such notice, principles of natural justice require that a
notice should be issued by the Magistrate before passing an order under Section
14. We are not inclined to agree with the above contention……”.
18.
Hence, the questioned observations in the order impugned cannot be approved and
deserve to be annulled.
19.
Accordingly,
and in view of the above, these appeals are allowed to the extent and in the
manner that the part of the order impugned to the extent it holds that the
borrowers are entitled to be heard under Section 14 of the SARFAESI Act is set
aside and annulled.
No costs.
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