Industrial Finance Corporation of India Limited (IFCI) v. The Debts Recovery Appellate Tribunal

For Petitioners::Mr.G.MasilamaniSenior Counsel forMr.ShivakumarFor Respondents::Mr.A.L.SomayajiSenior Counsel forMr.G.Sundaram for R3ORDERD.MURUGESAN, J.The question raised in this writ petition is (a) as to whetherthe secured creditor is bound to communicate within one week from thereceipt of representation/objection made by the borrower, the reasonsfor its non-acceptance in terms of sub-section (3-A) of Section 13 ofthe Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (hereinafter referred toas “the Act”) read with Rule 3-A(c) of the Security Interest(Enforcement) Rules, 2002 (hereinafter referred to as “the Rules”)and the compliance is mandatory?(b) To what relief the petitioner is entitled to?2. We have heard Mr.G.Masilamani, learned Senior Counsel for thepetitioners and Mr.A.L.Somayaji, learned Senior Counsel for the thirdrespondent.3. To answer the above questions, this Court must first considerthe objects of the Act and the Rules made thereunder as well as thelaw laid down by the Supreme Court. Sub-section (3-A) of Section 13of the Act and Rule 3-A of the Rules read thus:"S.13(3-A). If, on receipt of the noticeunder sub-section (2), the borrower makes anyrepresentation or raises any objection, thesecured creditor shall consider suchrepresentation or objection and if the securedcreditor comes to the conclusion that suchrepresentation or objection is not acceptable ortenable, he shall communicate within one week ofreceipt of such representation or objection thereasons for non-acceptance of the representationor objection to the borrower.Provided that the reasons so communicated orthe likely action of the secured creditor at thestage of communication of reasons shall not conferany right upon the borrower to prefer anapplication to the Debts Recovery Tribunal undersection 17 or the Court of District Judge undersection 17-A.R.3-A. Reply to representation of theborrower.--(a) After issue of demand notice undersub-section (2) of section 13, if the borrowermakes any representation or raises any objectionto the notice, the Authorised Officer shall https://hcservices.ecourts.gov.in/hcservices/ consider such representation or objection andexamine whether the same is acceptable or tenable.(b) If on examining the representation madeor objection raised by the borrower, the securedcreditor is satisfied that there is a need to makeany changes or modifications in the demand notice,he shall modify the notice accordingly and serve arevised notice or pass such other suitable ordersas deemed necessary, within seven days from thedate of receipt of the representation orobjection.(c) If on examining the representation madeor objection raised, the Authorised Officer comesto the conclusion that such representation orobjection is not acceptable or tenable, he shallcommunicate within one week of receipt of suchrepresentation or objection, the reasons for non-acceptance of the representation or objection, tothe borrower."4. In Mardia Chemicals Ltd., and others v. Union of India andothers, (2004) 4 SCC 311, the Supreme Court considered the scope ofthe Act and upheld its validity and held in paragraphs 35 and 36 asfollows:- "35. The Narasimhan Committee was constituted in theyear 1991 relating to the Financial System prevailing inthe country. It considered wide ranging issues relevantto the economy, banking and financing etc. Under ChapterV of the Report under the heading 'Capital Adequacy,Accounting Policies and other Related Matters', it wasopined that a proper system of income recognition andprovisioning is fundamental to the preservation of thestrength and stability of banking system. The Committeealso suggested for reconstruction of assets saying: "The Committee has looked at the mechanismemployed under similar circumstances in certainother countries and recommends the setting up of,if necessary by special legislation, a separateinstitution by the Government of India to be knownas 'Assets Reconstruction Fund (ARF) with theexpress purpose of taking over such assets frombanks and financial institutions and subsequentlyfollowing up on the recovery of dues owed to themfrom the primary borrowers."While recommending for setting up of special Tribunals, the Committeeobserved: "Banks and financial institutions at presentface considerable difficulties in recovery of duesfrom the clients and enforcement of securitycharged to them due to the delay in the legalprocesses. A significant portion of the funds ofbanks and financial institutions is thus blockedin unproductive assets, the values of which keepdeteriorating with the passage of time. Banksalso incur substantial amounts of expenditure by https://hcservices.ecourts.gov.in/hcservices/ way of legal charges which add to their overheads.The question of speeding up the process ofrecovery was examined in great detail by acommittee set up by the Government under theChairmanship of the late Shri Tiwari. The TiwariCommittee recommended, inter alia, the setting upof Special Tribunals which could expedite therecovery of process...."The Committee also suggested some legislative measures to meet thesituation.36. In its Second Report, the Narasimhan Committeeobserved that NPAs in 1992 were uncomfortably high formost of the public sector banks....... One of the measuresrecommended in the circumstances was to vest the financialinstitutions through special statutes, the power of saleof the asset without intervention of the court and forreconstruction of the assets. It is thus to be seen thatthe question of non-recoverable or delayed recovery ofdebts advanced by the banks or financial institutions hadbeen attracting the attention and the matter wasconsidered in depth by the committees speciallyconstituted consisting of the experts in the field. TheCommittee also opined that in the prevalent situationwhere the amount of dues were huge and hope of earlyrecovery was less, it could be said that a more effectivelegislation for the purpose was uncalled for or that itcould not be resorted to."5. After the above report of the Narasimham Committee, yetanother Committee was constituted headed by Mr.Andhyarujina forbringing about the needed steps within the legal framework. Byreferring to the above recommendations, the Apex Court in MardiaChemicals case observed as follows:-"Considering the totality of circumstancesthe financial climate world over, if it wasthought as a matter of policy, to have yetspeedier legal method to recover the dues, such apolicy decision cannot be faulted with nor it isa matter to be gone into by the courts to testthe legitimacy of such a measure relating tofinancial policy."In order to come to the above conclusion, the Court observed thatsome facts which need to be taken note of are that the banks and thefinancial institutions have heavily financed the petitioners andother industries. As a large sum of amount remains unrecovered,normal process of recovery of debts through courts is lengthy andtime taken is not suited for recovery of such dues. For financialassistance rendered to the industries by the financial institutions,financial liquidity is essential failing which there is a blockade oflarge sums of amounts creating circumstances which retard theeconomic progress followed by a large number of other consequentialill-effects. https://hcservices.ecourts.gov.in/hcservices/

6. Considering all the above, the Recovery of Debts Due to Banksand Financial Institutions Act was enacted in 1993 but as the figuresshow it also did not bring the desired results. Though it issubmitted on behalf of the petitioners that it so happened due toinaction on the part of the governments in creating Debt RecoveryTribunals and appointing Presiding Officers, for a long time. Evenafter leaving that margin, it is to be noted that things in theconcerned spheres are desired to move faster. In the present dayglobal economy it may be difficult to stick to old and conventionalmethods of financing and recovery of dues. It cannot be said that astep taken towards securitisation of the debts and to evolve meansfor faster recovery of the NPAs was not called for or that it wassuperimposition of undesired law since one legislation was alreadyoperating in the field namely the Recovery of Debts due to Banks andFinancial Institutions Act. It is also to be noted that the idea hasnot erupted abruptly to resort to such a legislation. It appearsthat a thought was given to the problems and Narasimham Committeewas constituted which recommended for such a legislation keeping inview the changing times and economic situation whereafter yet anotherexpert committee was constituted then alone the impugned law wasenacted. Liquidity of finances and flow of money is essential forany healthy and growth oriented economy. But certainly, what must bekept in mind is that the law should not be in derogation of therights which are guaranteed to the people under the Constitution.The procedure should also be fair, reasonable and valid, though itmay vary looking to the different situations needed to be tackled andobject sought to be achieved. 7. The enforcement of security interest is governed by ChapterIII. Sub-section (1) of Section 13 empowers a secured creditor,notwithstanding anything contained in Section 69 or 69-A of theTransfer of Property Act, 1882, to enforce any security interestcreated in accordance with the provisions of the Act. In the eventthe borrower makes any default in repayment of the secured debt orany instalment thereof, the secured creditor would be entitled toclassify his account in respect of such debt to be a Non-PerformingAsset. Thereafter, the secured creditor may require the borrower bynotice in writing to discharge in full his liabilities to the securedcreditor within sixty days from the date of notice, failing which thesecured creditor shall be entitled to exercise all or any of therights under sub-section (4). 8. By the above provision, the declaration of a debt as non-performing asset is a pre-condition for issuance of notice underSection 13(2). This law has been laid down by this Court in thejudgment in Signal Apparels Pvt.Ltd., rep.by its Director and SignalExport rep.by its Partner v. Canara Bank, P.N. Road Branch rep.by itsAuthorised Officer-Chief Manager and another, 2010 (5) CTC 337.After the debt is classified as Non-Performing Asset, the borrowerwill get an opportunity to discharge in full his liabilities to thesecured creditor within sixty days. There is no opportunity for theborrower at that stage to approach the secured creditor and point outthat the classification of the debt as Non-Performing Asset was notcorrect with reference to the factual statement of accounts. https://hcservices.ecourts.gov.in/hcservices/

9. On classification of the debt as Non-Performing Asset, noticeunder Section 13(2) is issued giving sixty days time to the borrowerfor repayment of the debt or in instalment thereof. The notice underSection 13(2) is not appealable under Section 17 of the Act, as thatsection provides an appeal only against the measures taken underSection 13(4) of the Act. In the event the borrower fails todischarge in full his liabilities within sixty days from the date ofnotice, the secured creditor is entitled to issue possession noticeunder Section 13(4) of the Act. Again it has been settled that thepossession under Section 13(4) may be physical or symbolic and thesecured creditor would be entitled to bring the secured asset forsale. The secured creditor can also file an application underSection 14 before the Chief Metropolitan Magistrate/DistrictMagistrate to assist the secured creditor in taking possession of thesecured asset. Considering the application filed under Section 14,the Chief Metropolitan Magistrate/District Magistrate, as the casemay be, discharges only ministerial function, as there is noadjudication process involved, and in that context, even no notice tothe respondent in the petition is necessary. 10. Keeping the above law in mind, the rights of the securedcreditor vis-a-vis the borrower should be considered. As the Act isintended to enable the secured creditor for speedy recovery of thedebt from the borrower, the provisions are made very stringentbypassing the normal rule of relegating the parties to civil Courtfor recovery of the debt. While such stringent provisions areintended, some minimum safeguards are also made available to theborrower to ensure fairness on the part of the secured creditor whiletaking measures for recovery of the debt. In this regard, threeprovisions can be referred to, namely, (i) an opportunity to make representation or to raise objectionin terms of sub-section (3-A) to the notice under sub-section (2) ofSection 13; (ii) the secured creditor could settle between the parties inwriting the terms for sale in the event the secured creditor choosesto sell the immovable property by private treaty as envisaged underRule 8(5)(d) of the Rules. (iii) The Authorised Officer shall obtain the consent of theborrower and the secured creditor if he fails to obtain a price otherthan the reserve price and intends to effect the sale at a lowerprice.11. In the above background, the question raised in the writpetition must be considered. In Mardia Chemicals Ltd., and others v.Union of India and others, (2004) 4 SCC 311, wherein the SupremeCourt, in paragraphs 45 to 47, has held as follows:"45. In the background we have indicatedabove, we may consider as to what forums orremedies are available to the borrower toventilate his grievance. The purpose of serving anotice upon the borrower under sub-section (2) ofSection 13 of the Act is, that a reply may besubmitted by the borrower explaining the reasons https://hcservices.ecourts.gov.in/hcservices/ as to why measures may or may not be taken undersub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditormust apply its mind to the objections raised inreply to such notice and an internal mechanismmust be particularly evolved to consider suchobjections raised in the reply to the notice.There may be some meaningful consideration of theobjections raised rather than to ritually rejectthem and proceed to take drastic measures undersub-section (4) of Section 13 of the Act. Oncesuch a duty is envisaged on the part of thecreditor it would only be conducive to theprinciples of fairness on the part of the banksand financial institutions in dealing with theirborrowers to apprise them of the reason for notaccepting the objections or points raised in replyto the notice served upon them before proceedingto take measures under sub-section (4) of Section13. Such reasons, overruling the objections ofthe borrower, must also be communicated to theborrower by the secured creditor. It will onlybe in fulfillment of a requirement ofreasonableness and fairness in the dealings ofinstitutional financing which is so important fromthe point of view of the economy of the countryand would serve the purpose in the growth of ahealthy economy. It would certainly provideguidance to the secured debtors in general inconducting the affairs in a manner that they maynot be found defaulting and being made liablefor the unsavoury steps contained under sub-section (4) of Section 13. At the same time, moreimportantly we must make it clear unequivocallythat communication of the reasons not acceptingthe objections taken by the secured borrower maynot be taken to give an occasion to resort tosuch proceedings which are not permissible underthe provisions of the Act. But communication ofreasons not to accept the objections of theborrower, would certainly be for the purpose ofhis knowledge which would be a step forwardtowards his right to know as to why hisobjections have not been accepted by the securedcreditor who intends to resort to harsh steps oftaking over the management/business of viz.secured assets without intervention of the court.Such a person in respect of whom steps underSection 13(4) of the Act are likely to be takencannot be denied the right to know the reason ofnon-acceptance and of his objections. It istrue, as per the provisions under the Act, he maynot be entitled to challenge the reasonscommunicated or the likely action of the securedcreditor at that point of time unless his rightto approach the Debt Recovery Tribunal as provided https://hcservices.ecourts.gov.in/hcservices/ under Section 17 of the Act matures on any measurehaving been taken under sub-section (4) ofSection 13 of the Act.46.We are holding that it is necessary tocommunicate the reasons for not accepting theobjections raised by the borrower in reply tonotice under Section 13(2) of the Act moreparticularly for the reason that normally in theevent of non-compliance with notice, the partygiving notice approaches the court to seekredressal but in the present case, in view ofSection 13 (1) of the Act the creditor isempowered to enforce the security himself withoutintervention of the Court. Therefore, it goes withlogic and reason that he may be checked tocommunicate the reason for not accepting theobjections, if raised and before he takes themeasures like taking over possession of thesecured assets etc. 47.This will also be in keeping with theconcept of right to know and lender's liability offairness to keep the borrower informedparticularly the developments immediately beforetaking measures under sub-section (4) of Section13 of the Act. It will also cater the cause oftransparency and not secrecy and shall beconducive in building an atmosphere of confidenceand healthy commercial practice. Such a duty, inthe circumstances of the case and the provisionsis inherent under Section 13(2) of the Act." 12. The very same question again came up for considerationbefore the Supreme Court in Transcore v. Union of India and another,(2008) 1 SCC 125, wherein the Supreme Court has held as follows:"24. Section 13(3) inter alia states thatthe notice under Section 13(2) shall give detailsof the amount payable by the borrower as also thedetails of the secured assets intended to beenforced by the bank/FI. In the event of non-payment of secured debts by the borrower, noticeunder Section 13(2) is given as a notice ofdemand. It is very similar to notice of demandunder Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a lastopportunity is given to the borrower of sixtydays to repay the debt. Section 13(3-A) insertedby amending Act 30 of 2004 after the judgment ofthis Court in Mardia Chemicals (supra), wherebythe borrower is permitted to make representation/objection to the secured creditor againstclassification of his account as NPA. He can alsoobject to the amount due if so advised. UnderSection 13(3-A), if the bank/FI comes to theconclusion that such objection is not acceptable,it shall communicate within one week the reasons https://hcservices.ecourts.gov.in/hcservices/ for non-acceptance of therepresentation/objection. A proviso is added toSection 13(3-A) which states that the reasons socommunicated shall not confer any right upon theborrower to file an application to the DRT underSection 17. The scheme of sub-sections (2), (3)and (3-A) of Section 13 of NPA Act shows that thenotice under Section 13(2) is not merely a showcause notice, it is a notice of demand. Thatnotice of demand is based on the footing that thedebtor is under a liability and that his accountin respect of such liability has become sub-standard, doubtful or loss. The identification ofdebt and the classification of the account as NPAis done in accordance with the guidelines issuedby RBI. Such notice of demand, therefore,constitutes an action taken under the provisionsof NPA Act and such notice of demand cannot becompared to a show cause notice. In fact, becauseit is a notice of demand which constitutes anaction, Section 13(3-A) provides for anopportunity to the borrower to makerepresentation to the secured creditor. Section13(2) is a condition precedent to the invocationof Section 13(4) of NPA Act by the bank/FI. Oncethe two conditions under Section 13(2) arefulfilled, the next step which the bank or FI isentitled to take is either to take possession ofthe secured assets of the borrower or to takeover management of the business of the borroweror to appoint any manager to manage the securedassets or require any person, who has acquiredany of the secured assets from the borrower, topay the secured creditor towards liquidation ofthe secured debt.25. Reading the scheme of Section 13(2) withSection 13(4), it is clear that the notice underSection 13(2) is not a mere show-cause notice andit constitutes an action taken by the bank/FI forthe purposes of the NPA Act."13. Most recently in Kanaiyalal Lalchand Sachdev v. State ofMaharashtra, (2011) 2 SCC 782, the Supreme Court once again indicatedthe scope of Section 13(3-A) of the SARFAESI Act in the followingwords :-"16. Section 13(3-A) of the Act was inserted byAct 30 of 2004 after the decision of this Court inMardia Chemicals and provides for a lastopportunity for the borrower to make arepresentation to the secured creditor against theclassification of his account as a non-performingasset. The secured creditor is required toconsider the representation of the borrowers, andif the secured creditor comes to the conclusionthat the representation is not tenable or https://hcservices.ecourts.gov.in/hcservices/ acceptable, then he must communicate, within oneweek of the receipt of the communication by theborrower, the reasons for rejecting the same."14. In Mardia Chemicals Ltd., two substantial contentions wereraised on behalf of the borrowers before the Supreme Court, the firstbeing the absence of an adjudicatory mechanism available to theborrowers and the second relates to the denial of an opportunity tostate their case before issuance of a notice under Section 13(2) ofSARFAESI Act.(a) The first contention was opposed by the Union of India onthe ground that the transaction in question was essentially one inthe contractual field involving two contracting parties and as such,there was no question of compliance with the principles of naturaljustice. The said contention was negatived by the Supreme Court. TheSupreme Court said :-"69. On behalf of the respondents time andagain stress has been given on the contention thatin a contractual matter between the two privateparties they are supposed to act in terms of thecontract and no question of compliance with theprinciples of natural justice arises nor thequestion of judicial review of such actions needsto be provided for. However, at the very outset,it may be pointed that the contract between theparties as in the present cases, is no more asprivate as sought to be asserted on behalf of therespondents. If that was so, in that event partieswould be at liberty to seek redressal of theirgrievances on account of breach of contract orotherwise taking recourse to the normal process oflaw as available, by approaching the ordinarycivil courts. But we find that a contract whichhas been entered into between the two privateparties, in some respects has been superseded bythe statutory provisions or it may be said thatsuch contracts are now governed by the statutoryprovisions relating to recovery of debts and barof jurisdiction of the civil court to entertainany dispute in respect of such matters. Hence, itcannot be pleaded that the petitioners cannotcomplain of the conduct of the banking companiesand financial institutions for whatever goes onbetween the two is absolutely a matter of contractbetween private parties, therefore, noadjudication may be necessary.(b) The second contention pertaining to the violation of theprinciples of natural justice was answered by the Supreme Courtthus :-"77. It is also true that till the stage ofmaking of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for bythe borrower. But looking to the stringent natureof measures to be taken without intervention of https://hcservices.ecourts.gov.in/hcservices/ court with a bar to approach the court or anyother forum at that stage, it becomes onlyreasonable that the secured creditor must bear inmind the say of the borrower before such a processof recovery is initiated so as to demonstrate thatthe reply of the borrower to the notice underSection 13(2) of the Act has been consideredapplying mind to it. The reasons, howsoever briefthey may be, for not accepting the objections, ifraised in the reply, must be communicated to theborrower. True, presumption is in favour ofvalidity of an enactment and a legislation may notbe declared unconstitutional lightly more so, inthe matters relating to fiscal and economicpolicies resorted to in the public interest, butwhile resorting to such legislation it would benecessary to see that the persons aggrieved get afair deal at the hands of those who have beenvested with the powers to enforce drastic steps tomake recovery. (emphasis supplied).15. The judgments of the Supreme Court in Transcore andKanaiyalal Lalchand Sachdev also proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submittheir case and the secured creditor was expected to consider theobjection and it should result in a reply before initiating furtherproceedings under Section 13(4) of the Act.16. The provisions of the Code as it stood originally do notcontain a provision to give opportunity to the borrower to make anyrepresentation or raise any objections before the secured creditor totake measures under Section 13(4) of the Act. As per the thenexisting provisions, Section 13(2) was followed by action underSection 13(4) in case the borrower failed to discharge hisliabilities in full within the period prescribed under sub section(2) of Section 13. 17. SARFAESI Act was challenged in Mardia Chemicals Ltd.,primarily on the ground that Banks and Financial Institutions havebeen vested with arbitrary powers without any guidelines for theirexercise and also without providing any appropriate and adequatemechanism to decide the disputes relating to the correctness of thedemand, its validity and the actual amount sought to be recoveredfrom the borrowers. The basic contention in Mardia Chemicals Ltd.,was that the offending provisions as contained under the Act, aresuch that, it all has been made a one-sided affair while enforcingdrastic measures of sale of the property or taking over themanagement or the possession of the secured assets without affordingany opportunity to the borrower. The challenge made to the SARFAESIAct was considered by the Supreme Court in the said background. TheSupreme Court found that the borrowers were not given any opportunitybefore taking the extreme step of taking possession or management asprovided under Section 13(4) of the Act. The Supreme Court also foundthat the purpose of serving a notice under Section 13(2) was toenable the borrower to submit a reply, explaining the reasons as to https://hcservices.ecourts.gov.in/hcservices/ why measures may or may not be taken under sub section (4) of Section13. The Supreme Court wanted an internal mechanism at the Bank levelto consider the objections filed by the borrowers and to submit areply to the borrowers with reference to such objections beforetaking the drastic measures under Section 13(4) of the Act. 18. The decision of the Supreme Court in Mardia Chemicals Ltd.,was made on 8th April, 2004. It was only to give effect to theobservation made by the Supreme Court in the said judgment, theSARFAESI Act was amended and Section 13(3-A) was inserted by way ofAct 30/2004 with effect from 11th November, 2004.19. The statement of objects and reasons appended to theAmendment Act 30/2004 shows that it was virtually to give effect tothe valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing theimportance of the issue, originally, an ordinance was promulgated on14th November, 2004 as the Parliament was not in session andsubsequently, it was replaced by Act 30/2004.20. The Supreme Court in Mardia Chemicals Ltd., very clearlystated that before proceeding to take measures under Section 13(4) ofthe Act, the borrower should be apprised of the reasons for notaccepting their objections or points raised in their reply to thenotice served upon them under Section 13(2) of the Act. Theobservation made by the Supreme Court with respect to the reply hasto be considered in the light of the challenge made by the borroweragainst taking drastic measures under Section 13(4) without anopportunity to submit their version. Therefore, the Supreme Courtvery categorically stated that before proceeding to take measures,the reply notice must be served. Parliament by prescribing a shortperiod of seven days to give a reply, wanted the Banks to Act swiftlyso as to enable them to take further proceedings under Section 13(4)of the Act. 21. In Mardia Chemicals Ltd., the Supreme Court also stated thatreasons given by the Banks for not accepting the objections raised bythe borrower would not be a ground to challenge the proceedings. Thesaid observation was also taken note of by the Parliament andaccordingly, a proviso was appended to sub- section (3-A) of Section13, whereby it was made clear that the reasons communicated or thelikely action of the secured creditor at the stage of communicationof reasons shall not confer any right upon the borrower to prefer anapplication to the Debts Recovery Tribunal under Section 17 of theAct.22. The learned senior counsel for the petitioners contendedthat the very fact that the Parliament denied the right to theborrowers to challenge the reasons stated in the communication sentby the Bank by way of reply to the objections submitted to the noticeunder Section 13(2) shows that no right would accrue to the borrowerin case reply is not given as prescribed under Section 13(3-A).23. The Parliament wanted the Banks and Financial Institutionsto recover the dues after giving a reasonable opportunity to theborrowers. It was only with that purpose, proviso was added to sub- https://hcservices.ecourts.gov.in/hcservices/ section (3-A) of Section 13, barring legal action, to challenge thereasons given in the reply notice sent by the Banks. The Parliamenthas prescribed a period of one week to the Banks and FinancialInstitutions to send a reply to the objection filed by the borrowerspursuant to Section 13(2) of the Act. The fact that the Act is silentabout the consequences of not sending a reply would not show that thedirection is not mandatory. The requirement of sending a reply to thenotice within a period of one week has to be considered in the lightof the proviso to sub-section (3-A) of Section 13 of the Act. It isonly against the reasons which are found in the reply notice, noaction is possible. The absence of any provision in the Actindicating the consequences for not sending a reply cannot be takenas a ground to contend that the requirement to send a reply is notmandatory in nature and it is rather optional.24. The SARFAESI Act being made with the sole intention ofspeedy recovery of the debts to the Banks and Financial Institutionscontains only very few provisions giving a right to the borrowers tosubmit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of theirobjections. The other two provisions are Rule 8(8) and the secondproviso to Rule 9(2) of the SARFAESI Rules. The requirement asprovided under Section 13(3-A) cannot be treated as an emptyformality. The borrowers must be in a position to know the reasonswhich made the Bank to reject their objections on proposals. Thequestion of compliance of the requirement as indicated in the noticeunder Section 13(2) would arise only in case the Bank intimates theborrower about the disposal of his objection made to the noticeissued by the Bank. Section 13(3-A) if considered in the light and inthe factual background of the judgment in Mardia Chemicals Ltd.,would lead to no other conclusion than the requirement of sending areply within a period of one week is mandatory in nature.25. The Supreme Court in Transcore case held that issuance ofnotice under Section 13(2), consideration of objections andintimating the decision on such objections to the borrower underSection 13(3-A) and taking possession under Section 13(4) allconstitute action taken by the Banks and Financial Institutions forthe purpose of the SARFAESI Act.26. Section 17 provides that any person [including a borrower]aggrieved by any of the measures referred to in sub-section (4) ofSection 13, taken by the secured creditor can approach the DebtsRecovery Tribunal within forty five days from the date on which suchmeasures had been taken. Section 17(2) mandates that the RecoveryOfficer should consider as to whether any of the measures referred toin sub-section (4) of section 13 taken by the secured creditor forenforcement of the security are in accordance with the provisions ofthe Act and the rules made thereunder.27. The Supreme Court in Transcore, while considering thejurisdiction of the Debts Recovery Tribunal, observed that the schemeof Section 13(4) read with Section 17(3) shows that if the borroweris dispossessed not in accordance with the provisions of the Act,then Debts Recovery Tribunal is entitled to put the clock back byrestoring the status quo ante. Since the measures taken under Section https://hcservices.ecourts.gov.in/hcservices/ 13(4) would include the action commencing from issuance of noticeunder Section 13(2) and reply under Section 13(3-A), it is wellwithin the jurisdiction of the Debts Recovery Tribunal to consider asto whether there was compliance of the condition enumerated underSection 13(3-A) of the Act. In short, the consideration of thecorrectness and legality of the measures taken by the Bank underSection 13(4) would include all the proceedings commencing fromsection 13 (2) and therefore, necessarily, the Tribunal has toconsider the compliance of section 13(3-A) also. 28. The observation of the Supreme Court in Transcore, afterextracting Section 13(2) and 13(3-A), is that once two conditionsunder Section 13(2) are fulfilled, the next step for the Banks andFinancial Institutions is either to take possession of the securedassets of the borrower or to take over management of the business ofthe borrower or to appoint any manager to manage the secured assetsor require any person, who has acquired any of the secured assetsfrom the borrower, to pay the secured creditor towards liquidation ofthe secured debt, also supports the view that sending a reply to theborrower under Section 13(3-A) is a mandatory condition to befulfilled by the Bank before taking possession under Section 13(4)of the Act.29. A similar question came up for consideration before aDivision Bench of the Karnataka High Court in Mrs.Sunanda Kumari v.Standard Chartered Bank represented by its Authorised Officer, 2006(4) KCCR 2216, wherein the Division Bench observed as follows:"It is not disputed that even though thepetitioners had submitted Annexure 'C' reply toAnnexure 'B' notice issued under sub-section (2)of Section 13, the respondent bank had not sentany communication to the petitioners as requiredunder sub-section (3A) of Seciton 13. Annexure'D' application was filed before the ChiefMetropolitan Magistrate only on 27.1.2005 i.e,,after sub-section (3A) was inserted in Section 13.Sub-section (3A) casts a duty on the securedcreditor to consider the representation made orobjection raised by the borrower and if thesecured creditor comes to the conclusion that suchrepresentation or objection is not acceptable ortenable, he is bound to communicate to theborrower the reasons for non-acceptance within oneweek of receipt of the representation orobjection. Thus, sub-section (3A) confers on theborrower a right to know the reasons for the non-acceptance of his representation or objection bythe secured creditor. Hence the secured creditoris statutorily bound to consider the borrower'srepresentation or objection and if therepresentation or objection is not tenable oracceptable, he is bound to communicate the reasonsfor such non-acceptance. If the borrower does notreceive any communication from the securedcreditor conveying the reasons for non-acceptanceof the objection, he is entitled to presume that https://hcservices.ecourts.gov.in/hcservices/ the secured creditor has found the representationacceptable and the objection tenable. Since therespondent-bank failed to discharge its statutoryobligations under sub-section (3A) of Section 13of the Act, the action initiated by the respondentunder sub-section (4) of Section 13 and Section 14is illegal and irregular...."30. A learned Judge of the Gujarat High Court in Tensile SteelLtd., and another v. Punjab and Sind Bank and Others, AIR 2007Gujarat 126(1), has observed as follows:"21.....It is not denied that the said replyhad been received by the Bank. However, the Bankdid not consider and decide the same. Sub-section(3-A) of Section 13 of the Act of 2002 enjoinsthe Bank to consider and decide suchreply/objection and to communicate the decisionthereof. Unless and until the said exercise iscompleted, the Bank is not authorised to proceedfurther and take any of the measures under sub-section (4) of the said Section 13. In thepresent case, it is indisputable that the Bank,without complying the mandatory requirement undersub-section (3-A) of the said Section 13,proceeded further under sub-section (4) of thesaid Section 13, took the assistance of theDistrict Magistrate under Section 14 of the Actof 2002; and took over the possession of thesecured assets. The action of the Bank iscertainly contrary to the statutory mandate. Thesame requires to be quashed and set aside on thatground alone."31. The aforesaid judgment has been quoted with approval by aDivision Bench of the Orissa High Court in Krushna Chandra Sahoo v.Bank of India and others, AIR 2009 Orissa 35 and the Division Benchobserved as follows:"7. A conjoined reading of both theprovisions referred to hereinabove makes it clearthat it is obligatory on the part of the authorityfirst to consider and dispose of the objection bya speaking and reasoned order and communicate theorder to the person aggrieved i.e, theborrower/guarantor. It is a condition precedentfor issuance of notice under Section 13(4) of theAct. The authority cannot ignore the statutoryprovisions treating them merely to be a decorationpiece in the statutes rather they require strictadherence for the simple reason that the financialinstitutions have been conferred with certainprivileges for making expeditious recovery fromthe borrowers by-passing the onerous and lengthyprocedure of civil suits."32. Mr.A.L.Somayaji, learned senior counsel for the thirdrespondent would rely upon a Division Bench judgment of this Court in https://hcservices.ecourts.gov.in/hcservices/ V.Nobelkumar v. The Authorised Officer, Standard Chartered Bank andothers, 2011 (1) CTC 513 to contend that this Court has already heldthat the reply to the representation/objection made by the borrowerunder Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the sameview we are taking in this writ petition, we may add that the saidobservation was made in the context of considering the power of theChief Metropolitan Magistrate/District Magistrate to pass ordersunder Section 14 only and not on any detailed discussions on theissue. 33. For all the above reasons, we hold that the right conferredon the borrower to make a representation is a valuable right and inthe event the borrower either chooses to make his representation orraises objection, in the event the secured creditor comes to theconclusion that such representation/objection is not acceptable ortenable, the secured creditor shall communicate the reasons for suchnon-acceptance of the representation/objection to the borrower withinseven days of the receipt of such representation/objection. Hence,the requirement to reply is mandatory.34. This takes us to the next question as to whether the entireproceedings initiated by the secured creditor are liable to bequashed on the sole ground of non-compliance of Section 13(3-A) ofthe Act and Rule 3-A of the Rules, as a general rule. In order toapply the legal position under Section 13(3A) read with Rule 3-A, thefacts of the case must also be considered. 35. The writ petition, at the instance of Industrial FinanceCorporation of India Limited (shortly known as "IFCI"), is filedquestioning the order of the Debts Recovery Appellate Tribunal,Chennai dated 9.3.2011 passed in R.A.(S.A.) No.107 of 2010. The factsgiving rise to the present writ petition show that the thirdrespondent-M/s Sterling Holiday Resorts (India) Limited, presentlyamalgamated with M/s Sterling Resorts & Hotels (India) Limited,availed certain credit facilities from M/s Industrial FinanceCorporation of India, the petitioners herein as well as from M/sTourism Finance Corporation of India Limited on 4.12.91 for thepurpose of setting up Three Star Hotels in Kodaikkanal and Ooty underthe project finance participation scheme and necessary deeds ofmortgage were created in respect of the immovable properties situateat FernHill, Ooty. As the third respondent committed default inrepayment, the petitioners filed Original Application No.277 of 2000before the Debt Recovery Tribunal, New Delhi for recovery of a sum ofRs.8,87,36,938/- with pendente lite and future interest from31.5.2000 under the Recovery of Debts Due to Banks and FinancialInstitutions Act. Pending such application, the petitioners issued anotice dated 23.6.2003 under sub-section (2) of Section 13 of the Actto the third respondent claiming a sum of Rs.67,312,785/- withfurther interest from 15.4.2003. The third respondent did not makeany representation or raised any objection. The said notice came tobe challenged before the Debts Recovery Tribunal, New Delhi inO.A.No.11 of 2004 and the same was dismissed for default. In spite ofthe above order, the secured creditor also did not take measures torecover the dues by issuing possession notice under Section 13(4) ofthe Act. https://hcservices.ecourts.gov.in/hcservices/

36. Subsequently, talks for one time settlement were commenced.Thereafter, on obtaining consent from M/s Tourism Finance Corporationof India Limited for taking action under the Act, the petitionersonce again issued a notice dated 30.12.2007 under sub-section (2) ofSection 13 claiming a sum of Rs.17,71,78,492/- with further interestfrom 31.10.2007. Pursuant to the same, the third respondent by theirletter dated 26.12.2007 offered to settle the dues and it wasfollowed by a further offer dated 28.7.2009. The petitioners bytheir letter dated 13.8.2009 rejected the offer made by the thirdrespondent and issued the possession notice dated 21.8.2009 undersub-section (4) of Section 13 of the Act and an inventory was takenby the Authorised Officer in respect of the movables as per Rule 4(2)of the Security (Interest) Enforcement Rules. Aggrieved by the saidnotice as well as the rejection of the offer, the third respondentfiled S.A.No.189 of 2009 before the Debts Recovery Tribunal-I,Chennai seeking to set aside the demand and possession notices aswell as the letter of rejection and to award compensation and alsoprayed for an ad-interim injunction restraining the petitioners fromproceeding further and also from interfering with the management ofthe hotel affairs. The Tribunal, without going into the merits of thematter, by order dated 26.8.2009, granted interim injunction subjectto payment of Rs.1.70 crores by the third respondent on or before5.00 p.m., on 28.8.2009 and a further payment of Rs.1.70 crores on orbefore 26.10.2009 and failing compliance of the order, thepetitioners were permitted to proceed further. The said order wasquestioned by the petitioners before the Debts Recovery AppellateTribunal, Mumbai, which was incharge of the Debts Recovery AppellateTribunal, Chennai and the order of the Tribunal was modified topayment of Rs.4.00 crores in two instalments vide order dated8.9.2009. 37. In the meantime, the Debts Recovery Tribunal, New Delhiallowed the O.A.No.277 of 2000 filed by the petitioners and passed adecree for recovery as prayed for by order dated 23.10.2009.Thereafter, the third respondent settled the dues of M/s TourismFinance Corporation of India Limited. Questioning the order of theDebts Recovery Appellate Tribunal dated 8.9.2009, the petitionersfiled W.P.No.24396 of 2009 and the said writ petition was disposed ofon 27.11.2009 by directing the Debts Recovery Tribunal-I, Chennai todispose of the S.A.No.189 of 2009 within a period of two months fromthe date of receipt of a copy of the order. Ultimately, the DebtsRecovery Tribunal-I, Chennai by order dated 5.3.2010 disposed of theS.A.No.189 of 2009 on the following terms:"It is ordered that the measures taken bythe respondent upto the issuance of PossessionNotice dated 21.08.2009 as enclosed at Page-50 ofthe Memorandum of Appeal, in so far as it relatesto the taking of symbolic possession of thedescription of the property mentioned in the saidnotice, is sustainable under the law andconsequently, liberty is granted to Respondent totake fresh further measures under SARFAESI Act inaccordance with the SARFAESI Act and Rules madethereunder. At the same time it is ordered thatthe Respondent has not taken actual possession or https://hcservices.ecourts.gov.in/hcservices/ management of the Appellate Company being arunning unit or appointed the Manager as per thespecific provisions of SARFAESI and Rules madethereunder or issued sale notice dated 24.8.2009in accordance with provisions of SARFAESI Act andRules and therefore the said measures taken by theRespondent are set aside. At the same time it ismade clear that it is left open to the Respondentto take proper and appropriate action from thestage of Possession Notice in so far as it relatesto symbolic possession is concerned in accordancewith the provisions of SARFAESI Act and Rules. Theappeal is ordered accordingly without cost due tocircumstances of the case stated above."38. In the meantime, as against the final order passed by theDebts Recovery Tribunal, New Delhi in O.A.No.277 of 2000, the thirdrespondent filed Appeal No.67 of 2010 for reduction in the rate ofinterest and Appeal No.112 of 2010 was filed by the petitionersseeking enhancement of the rate of interest and contractual rate ofinterest. By order dated 6.8.2010, the Tribunal disposed of both theappeals by directing the third respondent to pay the petitionerssimple interest @ 16% per annum. 39. Aggrieved by the final order in S.A.No.189 of 2009 dated5.3.2010, the third respondent preferred R.A.No.107 of 2010 beforethe Debts Recovery Appellate Tribunal, Chennai. The Debts RecoveryAppellate Tribunal by order dated 9.3.2011 allowed the appeal on thefollowing terms:"Therefore from the fact that the AuthorisedOfficer has failed to comply with Sec.13(3A) ofthe SARFAESI Act and from the fact that the takingof the physical possession of the movables of thecompany is in contravention of the provisions ofthe SARFAESI Act and from the fact that it hasbeen categorically held by the Ld.PresidingOfficer that there was a contravention of theprovisions of the SARFAESI Act by the AuthorisedOfficer and from the fact that the respondent haschosen not to challenge the finding of theLd.Presiding Officer that the Authorised Officerhas contravened the provisions of the SARFAESI Actand from the fact that serious prejudice has beencaused to the appellant by aforestatedcontraventions of the provisions of the SARFAESIAct and the Rules made thereunder by theAuthorised Officer this Tribunal is compelled bySec.17(3) of the SARFAESI Act to hold that theorder of the Ld.Presiding Officer is liable to beset aside and further compelled to proceed to holdthat the proceedings taken by the AuthorisedOfficer under the provisions of the SARFAESI Actare liable to be set aside. Accordingly, theproceedings of the Authorised Officer underSection 13(4) of the SARFAESI Act is hereby setaside and the Authorised Officer is directed to https://hcservices.ecourts.gov.in/hcservices/ handover possession of all the movables of whichhe had taken possession through the inventoriesdated 21.8.2009 to the appellant or to itsrepresentative within three days of the receipt ofa copy of this order."40. The above order of the Debts Recovery Appellate Tribunal isquestioned by the petitioners in this writ petition. 41. The credit facility was extended to the third respondentduring the year 1991. The secured creditor initiated recoveryproceedings far back in the year 2000 when they filed O.A.No.277 of2000 before the Debts Recovery Tribunal, New Delhi for recovery ofdues. While the said application was pending, the petitioners issuednotice under Section 13(2) dated 23.6.2003. The third respondentneither paid the dues nor raised any objection, but chose to questionthat notice by filing O.A.No.11 of 2004 before the Debts RecoveryTribunal, New Delhi and allowed the same to be dismissed for default.However, the secured creditor did not take action immediately toissue notice under Section 13(4) of the Act. From the facts narratedabove, it was only subsequently and long after, statutory proceedingsunder the SARFAESI Act were once again initiated and notice underSection 13(2) was issued on 30th October, 2007. The third respondentdid not pay the dues as demanded and made a proposal dated 26thDecember, 2007 for one time settlement. It is also a matter of recordthat there was neither any reply to the said proposal nor any actionwas taken by the secured creditor under Section 13(4). Subsequently,the third respondent made a fresh proposal on 28th July, 2009 and thesaid proposal was considered by the petitioners and it was rejectedby the communication dated 13th August, 2009. Though a notice was senton 30th October, 2007, the fact remains that possession notice underSection 13(4) was issued only after the rejection of the OTS proposedby the third respondent by their letter dated 28th July, 2009. Theproposal made by the third respondent on 28th July, 2009 was in thenature of One Time Settlement. Reply dated 26th December, 2007 sent bythe third respondent to the notice under Section 13(2) was also inthe nature of OTS. The third respondent as per proposal dated 28thJune, 2009 agreed to pay a sum of Rs.225 lakhs in full and finalsatisfaction of the claim made by the petitioners. The said proposalwas not considered by the petitioners. The subsequent proposal wasmade to settle the claim for Rs.111.86 lakhs. The said proposal wasrejected by the petitioners on 13th August, 2009. The letters dated26th December, 2007 and 28th July, 2009 sent by the third respondentdid not contain any other representation or objection for thepetitioners to consider and reply. Possession notice was issued onlythereafter. In the above factual backdrop, it cannot be now said thatthere was non-compliance of the provisions of Section 13(3-A) of theAct and Rule 3-A(c) of the Rules.42. Further, it is also contended that the revised proposal wassubmitted on 28th July, 2009 and the same was rejected by letter dated13th August, 2009, which was posted at Delhi on 17th August, 2009 andin that event, the reply was beyond the period of seven days.However, it is not clear on which date the above proposal of thethird respondent dated 28th July, 2009 was acknowledged by thepetitioners to contend that it has not been replied in a period of https://hcservices.ecourts.gov.in/hcservices/ seven days. Hence, the contention that the reply has been sentbeyond a period of seven days also cannot be accepted. Therefore,factually there was substantial compliance of Section 13(3A) of theAct and Rule 3-A(c) of the Rules.43. The facts of the subject case show that the proposal made bythe third respondent through their reply dated 26th December, 2007 andthe revised proposal made through their letter dated 28th July, 2009were all in the nature of OTS, the only difference being the totalamount agreed to be paid. The third respondent has no case thatimmediately after issuance of notice under Section 13(2), thepetitioners have issued possession notice under Section 13(4) of theAct. Admittedly, possession notice was issued only after the disposalof the subsequent proposal made by the third respondent by way ofOTS. The idea behind Section 13(3-A) is to apprise the borrower ofthe consideration of the objections and the stand of the securedcreditor in respect of such objections. The Debts Recovery AppellateTribunal proceeded on the basis that failure on the part of thepetitioners to send a reply within a week vitiated the entireproceedings notwithstanding the consideration of the very sameproposal before taking measures under Section 13(4) of the Act.Hence, on the facts of this case, we hold that there was substantialcompliance of Section 13(3-A) of the Act and Rule 3-A(c) of the Rulesby the petitioners. The above facts were not taken into considerationby the Debts Recovery Appellate Tribunal while setting aside theorder of the Debts Recovery Tribunal. Hence, for our own reasons, theorder of the Debts Recovery Appellate Tribunal in quashing the entireproceedings cannot be sustained and is liable to be set aside.44. For all the above reasons, the order dated 9th March, 2011 onthe file of the Debts Recovery Appellate Tribunal is set aside andthe writ petition is allowed. No costs. Sd/ Deputy Registrar /true copy/ Sub Asst.RegistrarSs/tarTo1. The Registrar Debts Recovery Appellate Tribunal Ethiraj Salai, Egmore Chennai 600 0082. The Registrar Debts Recovery Tribunal-I Deva Towers, 6th Floor No.770-A, Anna Salai Chennai 600 002 https://hcservices.ecourts.gov.in/hcservices/

3. The Regional Manager Industrial Finance Corporation of India Limited (IFCI) Continental Chambers No.142, Mahatma Gandhi Road Post Box No.3318 Chennai 600 0344. The Authorised Officer Industrial Finance Corporation of India Limited (IFCI) IFCI Tower, No.61, Nehru Place New Delhi 110 0192 ccs To Mr.G.Sundaram, Advocate, SR.546161 cc To M/s.Shivakumar, Advocate, SR.54699Order in W.P.No.6710 of 2011SGL(CO)RH (16.9.11)