M/S HINDON FORGE PVT. LTD & Anr. v. THE STATE OF UTTAR PRADESH THROUGH DISTRICT

11 S.C.R. 1019 1019 M/S HINDON FORGE PVT. LTD. & ANR. v. THE STATE OF UTTAR PRADESH THROUGH DISTRICT MAGISTRATE GHAZIABAD & ANR. (Civil Appeal No. 10873 of 2018) NOVEMBER 01, 2018 [R. F. NARIMAN AND NAVIN SINHA, JJ.] Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002: s.17(1) – Whether an application under s.17(1) of the SARFAESI Act at the instance of a borrower, is maintainable even before physical or actual possession of secured assets is taken by banks/financial institutions in exercise of their powers under s.13(4) of the Act r/w r.8 of the Rules, 2002 – Held: The scheme of s.13(4) r/w r.8(1) makes it clear that the delivery of a possession notice together with affixation on the property and publication is one mode of taking “possession” under s.13(4) – Once possession is taken under rr.8(1) and 8(2) r/w s.13(4)(a), s.17 gets attracted, as this is one of the measures referred to in s.13(4) that is taken by the secured creditor under Chapter III – Thus, borrower/debtor can approach the Debts Recovery Tribunal under s.17 of the Act at the stage of the possession notice referred to in rr. 8(1) and 8(2) of the 2002 Rules – Security Interest (Enforcement) Rules, 2002 – rr.8(1) and 8(2). Allowing the appeals, the Court HELD: 1.1 A reading of section 13 would make it clear that where a default in repayment of a secured debt or any instalment thereof is made by a borrower, the secured creditor may require the borrower, by notice in writing, to discharge in full his liabilities to the secured creditor within 60 days from the date of notice. It is only when the borrower fails to do so that the secured creditor may have recourse to the provisions contained in section 13(4) of the Act. [Para 10] [1054-B-C] Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311 : [2004] 3 SCR 982 – relied on. 1019

1.2 Rule 8(1) makes it clear that “the authorised officer shall take or cause to be taken possession”. The expression “cause to be taken” only means that the authorised officer need not himself take possession, but may, for example, appoint an agent to do so. What is important is that such taking of possession is effected under sub-rule (1) of rule 8 by delivering a possession notice prepared in accordance with Appendix IV of the 2002 Rules, and by affixing such notice on the outer door or any other conspicuous place of the property concerned. Under sub-rule (2), such notice shall also be published within 7 days from the date of such taking of possession in two leading newspapers, one in the vernacular language having sufficient circulation in the locality. Appendix IV provides the format of possession notice wherein the borrower in particular, and the public in general is cautioned by the said possession notice not to deal with the property as possession of the said property has been taken. From this stage on, the secured asset is liable to be sold to realise the debt owed, and title in the asset is divested from the borrower and complete title given to the purchaser, as is mentioned in section 13(6) of the Act. There is, thus, a radical change in the borrower dealing with the secured asset from this stage. At the stage of a section 13(2) notice, section 13(13) interdicts the borrower’s from transferring the secured asset (otherwise than in the ordinary course of his business) without the prior written consent of the secured creditor. But once possession notice is given under rule 8(1) and 8(2) by the secured creditor to the borrower, the borrower cannot deal with the secured asset at all as all further steps to realise the same are to be taken by the secured creditor under the 2002 Rules. [Para 11] [1054-E-H; 1055-A-B]

1.3 The scheme of section 13(4) read with rule 8(1) therefore makes it clear that the delivery of a possession notice together with affixation on the property and publication is one mode of taking “possession” under section 13(4). This being the case, it is clear that section 13(6) kicks in as soon as this is done as the expression used in section 13(6) is “after taking possession”. Also, it is clear that rule 8(5) to 8(8) also kick in as soon as “possession” is taken under rule 8(1) and 8(2). The statutory scheme, therefore, in the present case is that once possession is taken under rule 8(1) and 8(2) read with section M/S HINDON FORGE PVT. LTD. v. STATE OF U. P. THR.DISTRICT MAGISTRATE GHAZIABAD 1021 13(4)(a), section 17 gets attracted, as this is one of the measures referred to in section 13(4) that can be taken by the secured creditor under Chapter III. Rule 8(3) begins with the expression “in the event of”. These words make it clear that possession may be taken alternatively under sub-rule (3). The further expression used in sub-rule (3) is “actually taken” making it clear that physical possession is referred to by rule 8(3). Thus, whether possession is taken under either rule 8(1) and 8(2), or under rule 8(3), measures are taken by the secured creditor under section 13(4) for the purpose of attracting section 17(1). [Paras 12, 13] [1055-C-G]

2.1 The argument for the respondents that section 13(4)(a) has to be read in the light of sub-clauses (b) and (c) is incorrect and must be rejected. Under sub-clause (c), a person is appointed as the manager to manage the secured assets, the possession of which has been taken over by the secured creditor only under rule 8(3). Further, the rule of noscitur a sociis cannot apply. Sub- clause (b) speaks of taking over management of the business of the borrower which is completely different from taking over possession of a secured asset of the borrower. Equally, sub-clause (d) does not speak of taking over either management or possession, but only speaks of paying the secured creditor so much of the money as is sufficient to pay off the secured debt. These arguments must therefore be rejected. [Para 14] [1055- G; 1056-A-B]

2.2 Section 17(3) is a provision which arms the Debts Recovery Tribunal to provide certain reliefs when applications are made before it by the borrower. One of the reliefs that can be given is restoration of possession. Other reliefs can also be given under the omnibus section 17(3)(c). Merely because one of the reliefs given is that of restoration of possession does not lead to the sequitur that only actual physical possession is therefore contemplated by section 13(4), since other directions that may be considered appropriate and necessary may also be given for wrongful recourse taken by the secured creditor to section 13(4). [Para 16] [1056-F-G]

2.3 In the Statement of Objects and Reasons of the original enactment, paragraphs 2(i) and 2(j) make it clear that the rights of the secured creditor are to be exercised by officers authorised in this behalf in accordance with the rules made by the Central Government. Further, an appeal against the action of any bank or financial institution is provided to the concerned Debts Recovery Tribunal. It can thus be seen that though the rights of a secured creditor may be exercised by such creditor outside the court process, yet such rights must be in conformity with the Act. If that is not the case, such an action is liable to be interfered with by the Debts Recovery Tribunal in an application made by the debtor/borrower. Thus, it can be seen that the object of the original enactment also includes secured creditors acting in conformity with the provisions of the Act to realise the secured debt which, if not done, gives recourse to the borrower to obtain relief from the Debts Recovery Tribunal.

Equally, the Statement of Objects and Reasons of the Amendment Act of 2004 also makes it clear that not only do reasons have to be given for not accepting objections of the borrower under section 13(3-A), but that applications may be made before the Debts Recovery Tribunal without making the onerous pre-deposit of 75% which was struck down by this Court in Mardia Chemicals. The object of the Act, therefore, is also to enable the borrower to approach a quasi- judicial forum in case the secured creditor, while taking any of the measures under section 13(4), does not follow the provisions of the Act in so doing. Take for example a case in which a secured creditor takes possession under rule 8(1) and 8(2) before the 60 days’ period prescribed under section 13(2) is over. The borrower does not have to wait until actual physical possession is taken (this may never happen as after possession is taken under rule 8(1) and 8(2), the secured creditor may go ahead and sell the asset).

The object of providing a remedy against the wrongful action of a secured creditor to a borrower will be stultified if the borrower has to wait until a sale notice is issued, or worse still, until a sale actually takes place. It is clear, therefore, that one of the objects of the Act, as carried out by rule 8(1) and 8(2) must also be subserved, namely, to provide the borrower with instant recourse to a quasi-judicial body in case of a wrongful action being taken by the secured creditor. [Para 17] [1056-H; 1057-A-G]

3.1 Another argument for the respondents is that the taking of possession under section 13(4)(a) must mean actual physical M/S HINDON FORGE PVT. LTD. v. STATE OF U. P. THR.DISTRICT MAGISTRATE GHAZIABAD 1023 possession or otherwise, no transfer by way of lease can be made as possession of the secured asset would continue to be with the borrower when only symbolic possession is taken. This argument also must be rejected for the reason that what is referred to in section 13(4)(a) is the right to transfer by way of lease for realising the secured asset. One way of realising the secured asset is when physical possession is taken over and a lease of the same is made to a third party. When possession is taken under rule 8(1) and 8(2), the asset can be realised by way of assignment or sale. This being the case, it is clear that the right to transfer could be by way of lease, assignment or sale, depending upon which mode of transfer the secured creditor chooses for realising the secured asset. Also, the right to transfer by way of assignment or sale can only be exercised in accordance with rules 8 and 9 of the 2002 Rules which require various pre-conditions to be met before sale or assignment can be effected. Equally, transfer by way of lease can be done in future in cases where actual physical possession is taken of the secured asset after possession is taken under rule 8(1) and 8(2) at a future point in time. If no such actual physical possession is taken, the right to transfer by way of assignment or sale for realising the secured asset continues. This argument must also, therefore, be rejected. [Para 18] [1057-G-H; 1058-A-D]

3.2 Banks and financial institutions can recover their debts by selling properties outside the court process under the SARFAESI Act by adhering to the statutory conditions laid down by the said Act. It is only when such statutory conditions are not adhered to that the Debts Recovery Tribunal comes in at the behest of the borrower. Under the Recovery of Debts Act, banks/ financial institutions could not recover their debts without intervention of the Debts Recovery Tribunal, which the SARFAESI Act has greatly improved upon, the only caveat being that this must be done by the secured creditor following the drill of the SARFAESI Act and rules made thereunder. [Para 19] [1058-E-G]