S. A. BOBDE, J.
1. Leave granted.
2. The auction purchaser ITC Ltd. is before us in the appeals arisingout of SLP (C) Nos.10215-10217/2016. The sale of a five star luxuryhotel property purchased in a public auction was set aside by an order1of the Bombay High Court in favour of the debtor Blue CoastHotels Ltd.1
3. The circumstances under which the auction purchaser purchasedthe hotel property are as follows:-Industrial Financial Corporation of India (IFCI), [filed appealsarising out of SLP (C) Nos.10196-10198/2016 in this Court], thesecured creditor (hereinafter referred to as ‘the creditor’), in thecapacity of a financial institution entered into a corporate loanagreement2with Blue Coast Hotels (hereinafter referred to as ‘thedebtor’) for a sum of Rs.150 crores. The agreement included acreation of a special mortgage to secure the corporate loan. Themortgaged property comprised of the whole of the debtor’s hotelproperty- including the agricultural land on which the debtor was todevelop villas. The debtor defaulted in repayment of the loan and thedebtor’s account became a Non- Performing Asset (NPA)3.
4. Several notices intimating default in payment of the totaloutstanding amount of Rs.133.18 crores were sent by the creditor tothe debtor. Upon failure to remit the overdue amount despite thenotices, a notice4under Section 13(2) of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 (hereinafter referred to as“ the”) was sent bythe creditor calling upon the debtor to pay the amount overdue withina period of 60 days.2
5. In reply to the said notice, the debtor sent the creditor aproposal5for extension of time for the payment of the outstandingdues. The High Court held that the creditor’s failure to deal with thisrepresentation constituted a violation of Section 13 (3A) of the.Further, the High Court held that the notice issued under Section 13(2) by the creditor comprising of agricultural property despite the barunder Section 31 (i) of theis contrary to the law since the landwas not converted into non-agricultural land. The High Court also heldthat the auction/sale of the property based upon symbolic possessionof the property is contrary to the scheme of the and the Rules.
6. On 18.06.2013, a notice was issued under Section 13 (4)whereby symbolic possession of the hotel property was taken over bythe creditor. The debtor filed a securitization application6before theDebts Recovery Tribunal (hereinafter referred to as ‘the DRT’) againstthe taking over of the symbolic possession by the creditor. In themeanwhile, the creditor published the first auction sale notice7with areserve price of Rs. 403 crores which came to be postponed in view ofthe negotiations between the parties for the repayment of the dues.Upon default in the repayment of the outstanding amount, a secondsale notice was published on 09.01.2014 with the same reserve price.5Dated27.05.20136Dated 31.07.20137On 04.09.2013The DRT passed an interim order,8directing the creditor to defer theacceptance of bids and not to take any further steps for sale of theproperty for the next 60 days. Subsequently, no bids were receivedand the auction failed.
7. The creditor challenged the interim order passed by the DRTorder before Debts Recovery Appellate Tribunal (hereinafter referred toas ‘the DRAT’). In the challenge, the Appellate Tribunal directed for thesecond appeal to be disposed off within a month by the DRT.
8. The DRT disposed off the second appeal and set aside the noticeunder Section 13(2)9on the ground of non compliance with Section13(3A) and for issuance of the demand notice jointly for themortgaged land comprising of agricultural land to which the provisionsof the did not apply as per Section 31(i) of the.
9. The creditor filed an appeal to the order of the DRT10in the DRATwhich came to be allowed11and the validity of the notice issued underSection 13(2) was upheld. Against the order of the DRAT setting asidethe order of the DRT, the debtor filed the Writ Petitions leading up tothe present SLP, in the High Court.
The Auction Sale
10. On 04.09.2013, the creditor published a Notice of Sale by PublicAuction in the newspaper fixing the date of auction as 09.10.2013 at areserve price of Rs 403 crores. In view of this, the debtor sent aletter12to the creditor undertaking that it will pay all outstandinginstallments by 31.12.2013 and that the sale of assets be deferredupto the aforesaid date. The debtor further stated that they shall notproceed in respect of their Securitization Application13before the DRT.In pursuance of it, the creditor deferred the sale by issuing a publicnotice on 08.10.2013 and granted the debtor an opportunityto clear the loan, however, the creditor extended repayment onlyby 15-20 days.
11. Thereafter, on 25.11.2013, the debtor gave a letter ofundertaking accepting the schedule given by the creditor and alsoacknowledging the right of the creditor to sell the assets in case ofdefault as per the schedule.
12. On 30.12.2013, the debtor sought further time to repay the loanto which the creditor issued a notice taking over symbolic possession.
13. On 09.01.2014, the creditor published a second notice of sale atthe same reserved price of Rs. 403 crores. The DRT passed an nterim order directing the creditor to defer the acceptance of the bidsand not take any further steps with regard to the sale of the propertyfor 60 days.
14. On 08.10.2014 the creditor issued a third Notice of Sale bypublic auction fixing the auction on 12.11.2014 at a reserve price ofRs. 542.57 crores. Pursuant to the writ petitions filed by the debtor,the High Court15allowed the bids to be received for the sale of the GoaHotel to be held in a sealed cover till the next date of hearing whichwas fixed to be on 19.11.2014. However, no bids were receivedpursuant to the 3rdPublic Auction Notice.
15. In the meanwhile, the debtor wrote to the creditor stating thatthe corporate loan will be taken over by Hyatt who were the operatingservice provider for the hotel. Hyatt in turn wrote to the creditorstating that they will not be responsible for the repayment of the loan.On 31.12.2014, a fourth and fresh notice for conducting the auctionsale of the Goa Hotel was issued by the creditor setting the reserveprice at Rs. 515.44 crores. This notice led to the sale of the Goa Hotelto ITC Ltd. (hereinafter referred to as ‘the auction purchaser’).Findings of the High Court.
16. The parties eventually moved the High Court by way of writpetitions in its jurisdiction under Article 226 of the Constitution ofIndia. Three writ petitions were filed:-
(i) Writ Petition No. 2698 of 2014 (renumbered as 222 of2015) was filed on 04.10.2014 by the debtor challengingthe order of the DRAT.16
(ii) Writ Petition No. 1150 of 2015 was filed on 02.03.2015 bythe debtor against the order of handing over possessionpassed by the District Magistrate.17
(iii) Writ Petition No. 2486 of 2015 was filed on 19.03.2015 bythe debtor challenging the sale of the secured assets in anauction on 25.02.2015.
The writ petitions were filed before the Panaji Bench of the HighCourt at Goa, though eventually they were heard by the Bombay HighCourt. The High Court set aside the judgment of the DRT and held theentire proceedings for recovery and sale of the Goa Hotel to be illegalbeing in violation of the.
17. In brief the High Court held that:-
(i) The recovery proceedings were a breach of Section 13 (3A)for failure of the creditor to reply to the representation ofthe debtor and reject the same by a reasoned order.
(ii) That a portion of the land mortgaged by the debtor assecurity interest consisted of agricultural land to which the provisions of the do not apply. The land, therefore,could not have been recovered.
(iii) The proceedings under Section 14 were initiated by thecreditor who was not a secured creditor after having soldthe property in auction to the auction purchaser.
(iv) It was incumbent of the creditor to take physicalpossession of the property before putting it to sale in anauction.
(v) Lastly, having regard to the manner in which theproceedings of the auction sale were conducted, it washeld that they were vitiated by fraud and collusion.Section 13 (3A) and its True Construction
18. One of the main contentions on behalf of the debtor which foundfavour with the High Court was that after the creditor issued the noticeunder Section 13(2), the debtor made a representation asking for areschedulement of the loan which the creditor neither considered(constituting a breach of sub-section (3A) which is mandatory), norcommunicated the reasons for non-acceptance thereof. Thus, thesubsequent action of the creditor in resorting to a measure underSection 13(4) is liable to be annulled.
19. The statutory scheme in this regard has been enumerated under
Section 13 of the18.18
20. The Security Interest (Enforcement) Rules, 2002 (hereinafterreferred to as ‘the Rules’) framed under the19elaborate on themanner in which the representation of the borrower is required to bedealt with. Section 13 (4) enables any creditor to enforce any securityinterest without the intervention of a court or tribunal. The procedureprescribed is that after classifying the debt as a non-performing asset:
(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of PropertyAct, 1882 (4 of 1882), any security interest created in favour of any secured creditor may beenforced, without the intervention of court or tribunal, by such creditor in accordance with theprovisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a securityagreement, makes any default in repayment of secured debt or any instalment thereof, and hisaccount in respect of such debt is classified by the secured creditor as non-performing asset,then, the secured creditor may require the borrower by notice in writing to discharge in full hisliabilities to the secured creditor within sixty days from the date of notice failing which thesecured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
(3)…………….(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representationor raises any objection, the secured creditor shall consider such representation or objectionand if the secured creditor comes to the conclusion that such representation or objection is notacceptable or tenable, he shall communicate within fifteen days of receipt of suchrepresentation or objection the reasons for non-acceptance of the representation or objectionto the borrower:PROVIDED that the reasons so communicated or the likely action of the secured creditor at thestage of communication of reasons shall not confer any right upon the borrower to prefer anapplication to the Debts Recovery Tribunal under section 17 or the Court of District Judgeunder section 17A.
(4) In case the borrower fails to discharge his liability in full within the period specified insub-section (2), the secured creditor may take recourse to one or more of the followingmeasures to recover his secured debt, namely:--
(a) take possession of the secured assets of the borrower including the right to transfer by wayof lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transferby way of lease, assignment or sale for realising the secured asset: PROVIDED that the right totransfer by way of lease, assignment or sale shall be exercised only where the substantial partof the business of the borrower is held as security for the debt:PROVIDED FURTHER that where the management of whole of the business or part of thebusiness is severable, the secured creditor shall take over the management of such business ofthe borrower which is relatable to the security for the debt.
(c) appoint any person (hereafter referred to as the manager), to manage the secured assetsthe possession of which has been taken over by the secured creditor;
the creditor may, by a notice in writing require the debtor/borrower todischarge his liabilities within 60 days. On receipt of a notice, theborrower may make a representation or raise any objection Thecreditor is then bound to consider the representation or objection. Ifthe creditor comes to the conclusion that the representation is notacceptable or tenable, the creditor is required to communicate thereasons for the non-acceptance of the representation/ objection withinfifteen days. Where the borrower fails to discharge his liability in full,the creditor may take any of the actions under sub- section (4) whichinclude the taking over of possession of the secured assets et cetera.
(d) require at any time by notice in writing, any person who has acquired any of the securedassets from the borrower and from whom any money is due or may become due to theborrower, to pay the secured creditor, so much of the money as is sufficient to pay the secureddebt.
(5)………………
(6)………………
(7)………………
(8)………………
(9)………………
(10)…………….
(11)……………
(12)…………….
(13)…………….
193-A. Reply to Representation of the borrower.
(a) After issue of demand notice under sub-section (2) of section 13, if the borrower makesany representation or raises any objection to the notice, the Authorised Officer shall considersuch representation or objection and examine whether the same is acceptable or tenable.
(b) If on examining the representation made or objection raised by the borrower, the securedcreditor is satisfied that there is a need to make any changes or modifications in the demandnotice, he shall modify the notice accordingly and serve a revised notice or pass such othersuitable orders as deemed necessary, within fifteen days from the date of receipt of therepresentation or objection.
(c) If on examining the representation made or objection raised, the Authorized Officer comesto the conclusion that such representation or objection is not acceptable or tenable, he shallcommunicate within fifteen days of receipt of such representation or objection, the reasons fornon-acceptance of the representation or objection, to the borrower.
21. Rule 3A of the Rules requires the authorized officer who is anofficer specified by the Board of Directors of the secured creditor toconsider the representation and modify the notice of demand ifsatisfied of the need to do so in that regard. If the authorized officercomes to the conclusion that such representation or objection is nottenable or acceptable, he must communicate the reasons fornon-acceptance of the representation or objection within fifteen days.
22. The Act and the Rules thus provide for a locus poenitentiae. Theborrower may raise an objection or make a representation of anynature that the creditor must consider, and if found not acceptable,may reject the same before proceeding to resort to any of themeasures provided by Section 13(4) of the. The borrower maythus raise an objection against the proposed measures or make arepresentation explaining the circumstances in which he cannotdischarge his liabilities and propose reschedulement. This may result inreconsideration by the creditor of whether or not it would be prudentto carry out the proposed measures and may even result in arenovation of the contract.
23. Sub-section (3A) of Section 13 was introduced in the by theParliament in pursuance of the following observations of this Court inMardia20Chemicals:20(2004) 4 SCC 311 [LQ/SC/2004/496]
“45. …The purpose of serving a notice upon theborrower under sub-section (2) of Section 13 of theAct is, that a reply may be submitted by theborrower explaining the reasons as to why measuresmay or may not be taken under sub-section (4) ofSection 13 in case of non-compliance with noticewithin 60 days. The creditor must apply its mind tothe objections raised in reply to such notice and aninternal mechanism must be particularly evolved toconsider such objections raised in the reply to thenotice. There may be some meaningful considerationof the objections raised rather than to ritually rejectthem and proceed to take drastic measures undersub-section (4) of Section 13 of the. Once such aduty is envisaged on the part of the creditor it wouldonly be conducive to the principles of fairness on thepart of the banks and financial institutions in dealingwith their borrowers to apprise them of the reasonfor not accepting the objections or points raised inreply to the notice served upon them beforeproceeding to take measures under sub-section (4)of Section 13. Such reasons, overruling theobjections of the borrower, must also becommunicated to the borrower by the securedcreditor. It will only be in fulfillment of a requirementof reasonableness and fairness in the dealings ofinstitutional financing which is so important from thepoint of view of the economy of the country andwould serve the purpose in the growth of a healthyeconomy. It would certainly provide guidance to thesecured debtors in general in conducting the affairsin a manner that they may not be found defaultingand being made liable for the unsavoury stepscontained under sub-section (4) of Section 13. Atthe same time, more importantly, we must make itclear unequivocally that communication of thereasons for not accepting the objections taken bythe secured borrower may not be taken to giveoccasion to resort to such proceedings which are notpermissible under the provisions of the. Butcommunication of reasons not to accept theobjections of the borrower, would certainly be for thepurpose of his knowledge which would be a stepforward towards 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 theare likely to be taken cannotbe denied the right to know the reason ofnon-acceptance and of his objections. It is true, asper the provisions under the, he may not beentitled to challenge the reasons communicated orthe likely action of the secured creditor at that pointof time unless his right to approach the DebtsRecovery Tribunal as provided under Section 17 of the matures on any measure having been takenunder sub-section (4) of Section 13 of the.”
(emphasissupplied)
24. The Parliament transformed the observations of this Court into aprovision in the with a plain intention to introduce a pause for thecreditor to rethink and reconsider the action proposed by the debtor.It is a departure from the usual steps that an ordinary creditor isbound to take for recovering the loan i.e. through the intervention ofthe Court.
25. The question that arises for consideration before us is whetherthe Parliament intended for a total invalidity to result from the failureto reply and give reasons for the non-acceptance of the borrower’srepresentation. In other words, whether sub-section (3A) of Section 13is mandatory or directory in nature.
26. There is no doubt that if a reply with reasons is an integral andindispensable part of the statutory scheme, the Courts would notexcuse a departure from it. But, on the other hand, if the reply ismerely a direction and not of substance to the scheme, thenon-compliance may be excused.
27. This question must be answered upon a construction of thestatute according to its true intent by taking into account the languagein which the intent is clothed. In a passage from Crawford’s StatutoryConstruction, it is stated -
“The question as to whether a statute is mandatoryor directory depends upon the intent of theLegislature and not upon the language in which theintent is clothed. The meaning and intention of theLegislature must govern, and these are to beascertained not only from the phraseology of theprovision, but also by considering its nature, itsdesign, and the consequences which would followfrom construing it the one way or the other.”
the other; the impact of other provisions whereby the necessity ofcomplying with the provisions in question is avoided; the cir-cumstances, namely, that the statute provides for a contingency of thenoncompliance with the provisions; the fact that the non-compliancewith the provisions is or is not visited by some penalty; the serious orthe trivial consequences, that flow therefrom; and above all, whetherthe object of the legislation will be defeated or furthered".
28. We find the language of sub-section (3A) to be clearly impulsive.It states that the secured creditor“shall consider such representationor objection and further, if such representation or objection is notacceptable or tenable, he shall communicate the reasons fornon-acceptance”thereof. We see no reason to marginalize or dilute theimpact of the use of the imperative ‘shall’ by reading it as ‘may’. Theword ‘shall’ invariably raises a presumption that the particularprovision is imperative24.
29. There is nothing in the legislative scheme of Section 13 (3A)which requires the Court to consider whether or not, the word ‘shall’ isto be treated as directory in the provision. As the Section stoodoriginally, there was no provision for the above mentioned requirementof a debtor to make a representation or raise any objection to thenotice issued by the creditor under Section 13(2). As it was introduced via sub-section (3A), it could not be the intention of theParliament for the provision to be futile and for the discretion to ignorethe objection/representation and proceed to take measures, be leftwith the creditor. There is a clear intendment to provide for a locuspoenitentiae which requires an active consideration by the creditor anda reasoned order as to why the debtor’s representation has not beenaccepted.
30. Moreover, this provision provides for communication of thereasons for not accepting the representation/objection and therequirement to furnish reasons for the same. A provision whichrequires reasons to be furnished must be considered as mandatory.Such a provision is an integral part of the duty to act fairly andreasonably and not fancifully. We are not prepared in suchcircumstances to interpret the silence of the Parliament in notproviding for any consequence for non-compliance with a duty tofurnish reasons. The provision must nonetheless be treated as‘mandatory’.We agree with the view of this Court in this regard in MardiaChemicals Ltd. v. Union of India25, Transcore v. Union of India26andKeshavlal Khemchand & Sons (P) Ltd. v. Union of India. We also approve of the view of several High Courts in thisregard28.
31. It was submitted on behalf of the creditor that the conduct of thedebtor does not warrant an interference in this case. However, we areof the view that the construction of the should not be affected bythe facts of a particular case. For, indeed, where the remedy invokedis a discretionary remedy, the Court may deny relief if thecircumstances so warrant.
32. In the present case, it is a fact that the creditor has not repliedto the debtor’s representation29, and thus appears to be in breach ofSection 13 (3A), but the following attendant circumstances areimportant:
(i) On 26.03.2013, the creditor issued a notice under Section13(2) to the debtor to discharge his liabilities within 60days. On 27.05.2013 the debtor made a representation tothe creditor containing a proposal for reschedulement (which was the same as the one made as far back as on22.08.2012) and reserving the right to file a reply.
(ii) On 07.06.2013, the debtor again sent a proposal forextension of time for repayment, repeating its proposaldated 27.05.2013.
(iii) On 20.06.2013, the creditor issued the notice ofpossession under Section 13(4). The taking over ofpossession was purely symbolic. We are informed that thedebtor is in possession of the hotel till date and is runningits business without any noteworthy repayment.
(iv) On the next day 21.06.2013, the debtor wrote a letter tothe creditor seeking extension of time and enclosed sixcheques for upfront payment of Rs.33.16 crores withoutmaking any reference to the notice of taking over ofpossession. The cheques were dishonoured.
(v) On 04.09.2013, the creditor published a Notice of Sale byPublic Auction in the newspaper fixing the date of auctionas 09.10.2013 at a reserve price of Rs. 403 crores.
(vi) Following this the debtor sent a letter to the creditor on 19.09.2013 undertaking that it will repay all outstandinginstallments by 31.12.2013 and that the sale of assets bedeferred up to the said date. The debtor further statedthat it shall not proceed further in respect of theirSecuritization Application before the DRT.
(vii) On 08.10.2013, the creditor deferred the sale by issuing apublic notice while considering the debtor’s proposal.
(viii) On 29.10.2013, the creditor granted an opportunity to thedebtor to clear the debt as stated in the debtor’s letterdated 03.10.2013 wherein it sent forth another proposalfor extension of time for repayment stating that it willrepay a principal installment of the corporate loan of atotal of Rs. 89 crores by 31.12.2013. However, the creditoronly extended the time for repayment by 15-20 days.
(ix) On 25.11.2013,“A Letter of Undertaking”was given by thedebtor accepting the schedule given by the creditor on29.10.2013 and also acknowledging the right of thecreditor to sell the assets in case of default as per theabove mentioned schedule.
(x) The creditor wrote to the debtor on 08.01.2014 informingthe debtor that due to the default in repayment, thecreditor is proceeding with steps to recover the dues andaccordingly rejected the debtor’s request letter dated 30.12.2013 seeking further time to repay the outstandingdues.
33. From the above, it is clear that the creditor was induced by thedebtor not to take action against them through assurances andpromises. The creditor appeared to have entered into negotiations forthe settlement of the dues and even accepted cheques in repaymentmuch after the notice30under Section 13(2) and after the debtor’sletter of representation31. Many opportunities were granted by thecreditor to the debtor to repay the debt which were all met byproposals for extension of time. Eventually, the debtor even executed“A Letter of Undertaking32”acknowledging the right of IFCI to sell theassets in the case of default.
34. In these circumstances, we have no doubt that the failure tofurnish a reply to the representation is not of much significance sincewe are satisfied that the creditor has undoubtedly considered therepresentation and the proposal for repayment made therein and hasin fact granted sufficient opportunity and time to the debtor to repaythe debt without any avail. Therefore, in the fact and circumstances ofthis case, we are of the view that the debtor is not entitled to thediscretionary relief under Article 226 of the Constitution which isindeed an equitable relief.Letter of Undertaking“Without Prejudice”
35. Much was sought to be made of the words“without prejudice”in the letter33containing the undertaking that if the debt was not paid,the creditor could take over the secured assets. The submission onbehalf of the debtor that the letter of undertaking was given in the course of negotiations and cannot be held to be an evidence of theacknowledgement of liability of the debtor, apart from being untenablein law, reiterates the attempt to evade liability and must be rejected.The submission that the letter was written without prejudice to thelegal rights and remedies available under any law and therefore theacknowledgement or the undertaking has no legal effect must likewisebe rejected. This letter is reminiscent of a letter that fell forconsideration in Spencer’s34case as pointed out by Mr. Harish Salve,“as a rule the debtor who writes such letters has no intention to bindhimself further than is bound already, no intention of paying so longas he can avoid payment, and nothing before his mind but a desire,somehow or other, to gain time and avert pressure.”
It was argued in a subsequent case35that an acknowledgmentmade“without prejudice”in the case of negotiations cannot be used asevidence of anything expressly or impliedly admitted. The House ofLords observed as follows:
“But when a statement is used as acknowledgementfor the purpose of s. 29 (5), it is not being used asevidence of anything. The statement is not anevidence of an acknowledgement. It is theacknowledgement.”
Therefore, the without prejudice rule could have no application.It said:3
“Here, the respondent, Mr. Rashid was not offeringany concession. On the contrary, he was seeking onein respect of an undisputed debt. Neither an offer ofpayment nor actual payment.”
We, thus, find that the mere introduction of the words“withoutprejudice” have no significance and the debtor clearly acknowledgedthe debt even after action was initiated under the and even afterpayment of a smaller sum, the debtor has consistently refused topay up.
36. All in all, as the matter stands, the debtor did not repay the loan.The debtor managed to submit a letter purporting to be arepresentation, containing a proposal for reschedulement made muchearlier to the creditor’s notice and reserved a right to file a reply.Apparently, the debtor induced the creditor to enter into negotiationsto ward off the reply and avoid the taking over of possession. Thedebtor ignored the symbolic possession taken over by the creditor andcontinued to negotiate and even gave six cheques which weredishonoured. The debtor then gave a final letter of undertakingagreeing that the creditor could take over possession of the assets ifthe debt was not repaid. All along, the debtor’s response has been thatof seeking extension of time to pay, with the usual unfulfilled promiseof repayment. We see no reason why the debtor should not be stoppedfrom questioning the taking over of possession, particularly since,neither the debt nor the liability is in dispute. The debt has not beenrepaid in fact, and the objection raised is merely on the ground thatthe taking of assets is illegal because the creditor failed to reply to therepresentation.Inclusion of Agricultural Land as Security Interest in the Noticeof Recovery
37. One of the contentions raised on behalf of the debtor questionedthe correctness of the finding of the High Court on the ground that theinclusion of agricultural land as security interest could not have beenvalidly included in the notice for recovery of the secured loan. Thecorrectness of the finding of the High Court depends on the effect of
Section 31 (i) of the, which reads as follows:-
”31. Provisions of this Act not to apply in certaincases-The provision of this Act shall not apply to-
(a)….
(b)….
(c)….
(e)….
(f)….
(g)….
(h)….
(i) any security interest created in agricultural land;
(j)….”
38. The purpose of enacting Section 31(i) and the meaning of theterm“agricultural land”assume significance. This provision, like manyothers is intended to protect agricultural land held for agriculturalpurposes by agriculturists from the extraordinary provisions of thisAct, which provides for enforcement of security interest withoutintervention of the Court. The plain intention of the provision is toexempt agricultural land from the provisions of the. In otherwords, the creditor cannot enforce any security interest created in hisfavour without intervention of the Court or Tribunal, if such securityinterest is in respect of agricultural land. The exemption thus protectsagriculturists from losing their source of livelihood and income i.e. theagricultural land, under the drastic provision of the. It is alsointended to deter the creation of security interest over agricultural landas defined in Section 2 (zf)36. Thus, security interest cannot be createdin respect of property specified in Section 31.
39. In the present case, security interest was created in respect ofseveral parcels of land, which were meant to be a part of single uniti.e. the five star hotel in Goa. Some parcels of land now claimed asagricultural land were apparently purchased by the debtor from ;agriculturists and are entered as agricultural lands in the revenuerecords. The debtor applied to the revenue authorities for theconversion of these lands to non-agricultural lands which is pending tilldate due to policy decision.
40. It is undisputed that these lands were mortgaged in favour ofthe creditor under a deed dated 26.02.2010. Obviously, since nosecurity interest can be created in respect of agricultural lands and yetit was so created, goes to show that the parties did not treat the landas agricultural land and that the debtor offered the land as security onthis basis. The undisputed position is that the total land on which theGoa Hotel was located admeasures 182225 sq. mtrs. Of these, 2335sq. mtrs. are used for growing vegetables, fruits, shrubs and trees forcaptive consumption of the hotel. There is no substantial evidenceabout the growing of vegetables but what seems to be on the land aresome trees bearing curry leaves and coconut. This amounts to about 12.8 % of the total area.
41. The Corporate Loan Agreement37that deals with the mortgage inquestion in the relevant clause38reads as follows:-
“The Borrower shall create mortgage on Exclusivebasis on the ‘Park Hyatt Goa Resort and Spa” HotelProperty admeasuring 1, 82, 225 Sq Mtrs with a builtup area of 25182 Sq. Mtrs situated at 263 C,Arossim, Canasaulim Goa.”
The mortgage is thus intended to cover the entire property ofthe Goa Hotel. Prima facie, apart from the fact that the partiesthemselves understood that the lands in question are not agricultural,it also appears that having regard to the use to which they are put andthe purpose of such use, they are indeed not agricultural.
42. At the outset, it was argued on behalf of the debtor that Section31(i) is beyond the legislative competence of the Parliament since it isonly the State Legislature which is competent to legislate on landunder Entry 18 of List II. This contention appears to be completelyuntenable. Though Section 31(i) exempts agricultural land from theoperation of the it is not possible to construe such a provision as alegislation on agricultural land. In fact, it is quite the contrary.Moreover, Section 31 (i) is one of the provisions in the which hasbeen held by this Court as referable to Entry 45 of List I, in Union ofIndia and Another v. Delhi High Court Bar Association and Ors.39. TheCourt held that:-
“14……. Entry 45 of List I relates to“banking”.Banking operations would inter alia, include acceptingof loans and deposits, granting of loans and recoveryof the debts due to the bank. There can be little doubtthat under Entry 45 of List I, it is Parliament alonewhich can enact a law with regard to the conduct ofbusiness by the banks. Recovery of dues is anessential function of any banking institution. Inexercise of its legislative power relating to banking,Parliament can provide the mechanism by which monies due to the banks and financial institutions canbe recovered.”
In State Bank of India v. Santosh Gupta and Ors.40this Court concluded that the is referable to Entries 45 and 95 ofList I. It observed that:-
“43……. the entire Act, including Sections 17- A and18-B, would in pith and substance be referable toEntries 45 and 95 of List I,….”
43. The validity of Section 31(i) which in any case deals with securityinterest created over agricultural land and not agricultural land itself, isan integral part of the and cannot be questioned on the ground oflegislative competence.In A.S. Krishna and Ors. v. State of Madras41this Court observedas follows:-
“It would be quite an erroneous approach to thequestion to view such a statute not as an organicwhole, but as a mere collection of sections, thendisintegrate it into parts, examine under what headsof legislation those parts would severally fall, and bythat process determine what portions thereof areintra vires, and what are not.”
Thus, this contention on behalf of the debtor must be rejected.
44. In ‘Commissioner of Wealth Tax, Andhra Pradesh v.Officer-in-Charge (Court of Wards) Paigah42, this Court interpreted thedefinition of the term ‘Agricultural Land’ with respect to Section 2(e) of the Wealth Tax Act, 1957 that excluded the said term from thedefinition of assets. This Court observed:-
“We agree that the determination of thecharacter of land, according to the purpose forwhich it is meant or set apart and can be used,is a matter which ought to be determined on thefacts of each particular case. What is reallyrequired to be shown is the connection with anagricultural purpose and user and not the merepossibility of user of land, by some possiblefuture owner or possessor, for an agriculturalpurpose. It is not the mere potentiality, which willonly affect its valuation as part of "assets", but itsactual condition and intended user which hasto be seen for purposes of exemption fromwealth-tax. One of the objects of the exemptionseemed to be to encourage cultivation or actualutilisation of land for agricultural purposes. Ifthere is neither anything in its condition, noranything in evidence to indicate the intention of itsowners or possessors, so as to connect it with anagricultural purpose, the land could not be"agricultural land" for the purposes of earning anexemption under the. Entries in revenue recordsare, however, good prima facie evidence.”
(emphasis supplied)
Similarly, in the case of Kunjukutty Saheb v. State of Kerala43,this Court held as follows:
“We suppose that something or other can be, andoften is, grown on any vacant land, but that wouldnot necessarily make it agricultural land for our purposes. To give an example the possibility ofcultivating, or even the actual cultivation of, what isessentially a building site in the heart of a townwould not make it agricultural land. It is the purposefor which it is held that determines its character andthe existence of a few coconut trees or a vegetablepatch on the land cannot alter the fact that it is heldfor purposes of building and not for purposes ofagriculture.”
In any event, having regard to the character of the land and thepurpose for which it is set apart, we are of the view that the land inquestion is not an agricultural land. The High Court mis-directed itselfin holding that the land was an agricultural land merely because itstood as such in the revenue entries, even though the applicationmade for such conversation lies pending till date.Transfer of Security Interest by IFCI to ITC
45. As noticed earlier, the creditor took over symbolic possession ofthe property on 20.06.2013. Thereupon, it transferred the property tothe sole bidder ITC and issued a sale certificate for Rs.515,44,01,000/-on 25.02.2015. On the same day, i.e., 25.02.2015, the creditor appliedfor taking physical possession of the secured assets under Section 14of the.
46. According to the debtor, since Section 14 provides that anapplication for taking possession may be made by a secured creditor,and the creditor having ceased to be a secured creditor after theconfirmation of sale in favour of the auction purchaser, was notentitled to maintain the application. Consequently, therefore, the orderof the District Magistrate directing delivery of possession is a voidorder. This submission found favour with the High Court that held thatthe creditor having transferred the secured assets to the auctionpurchaser ceased to be a secured creditor and could not apply forpossession. The High Court held that the does not contemplatetaking over of symbolic possession and therefore the creditor could nothave transferred the secured assets to the auction purchaser. In anycase, since ITC Ltd. was the purchaser of such property, it could onlytake recourse to the ordinary law for recovering physical possession.
47. We find nothing in the provisions of the that renders takingover of symbolic possession illegal. This is a well- known device in law.In fact, this court has, although in a different context, held inM.V.S.Manikayala Rao v. M.Narasimhaswami44that the delivery ofsymbolic possession amounted to an interruption of adversepossession of a party and the period of limitation for the application ofArticle 144 of the Limitation would start from such date of thedelivery.
48. The question, however, whether the creditor could maintain anapplication of possession under Section 14 of the; even though it had taken over only symbolic possession before the sale of theproperty to the auction purchaser, depends on whether it remained asecured creditor after having done so.Section 2(d) of thedefines `secured creditor’ to mean a"banking company" having the meaning assigned to it in clause (c) ofsection 5 of the Banking Regulation Act, 1949;Clause 2(L)45includes debts or receivables and any right orinterest in the security whether full or part underlying such debt orreceivables or any beneficial interest in property vide (L)(i)(iv) & (v)46.Sub-section (6) of Section 1347posits that the transfer of thesecured asset by the secured creditor shall vest in the transferee allthe rights as if the transfer had been made by the owner of thesecured asset.
49. In Mulla’s the Transfer of Property 48:-
“The section (s.8) does not apply to court sales, forsuch sales effect a transfer by the operation oflaw. The principle of the section was, however,applied in a case decided by Madras High Courtwhere a debt for unpaid purchase money on a saleof land was attached and sold, and the auctionpurchaser was held entitled to the charge which thevendor had under s 55(4) (b) on the property in thehands of the buyer. The court, after observing thatthe present section did not apply to court sales,said: The effect of applying s 8 is to strengthen thesale certificate by transferring the lien along with it.”
This Court observed in Abdul Aziz49that a sale through court isdifferent from a sale inter parties:-
“What is sold at a court sale is the right, title andinterest of the judgment debtor, and the extent ofthat interest is a mixed question of fact and law tobe decided according to the circumstances of eachparticular case, and depends upon what the courtintended to sell, and the purchaser intended to buy.”
We note that even though the entire right, title and interest werepurported to have been transferred, all the rights, transfer and interestcould not be said to have been transferred since the possession of theproperty was not transferred to creditor. The possession was retainedby the debtor who continued to do business and receive rent from therooms on the property and has in fact continued to do sotill date. There is no doubt that after taking over the property fromdebtor, the creditor also acquired the right to receive the usufruct ofthe property i.e. the rent in this case. However, this was an interest in .the property which was not at any point of time transferred to theauction purchaser.
50. In this case, the creditor did not have actual possession of thesecured asset but only a constructive or symbolic possession. Thetransfer of the secured asset by the creditor therefore cannot beconstrued to be a complete transfer as contemplated by Section 8 ofthe Transfer of Property . The creditor nevertheless had a right totake actual possession of the secured assets and must therefore beheld to be a secured creditor even after the limited transfer to theauction purchaser under the agreement50. Thus, the entire interest inthe property not having been passed on to the creditor in the firstplace, the creditor in turn could not pass on the entire interest to theauction purchaser and thus remained a secured creditor in the.Findings of Fraud and Collusion by the High Court
51. Finally, the High Court in its judgment renders a finding thatthere was in fact fraud and collusion between the creditor and theauction purchaser. According to the High Court, since the measureswere taken in breach of all laws, the inference of manipulation andcollusion cannot be ruled out.
52. We fail to see how such a finding of manipulation and collusion issustainable on account of breach of law in the present case. A risk of this kind taken up by an intending purchaser cannot lead to aninference of collusion. Mainly, the finding is based on the fact that thesale is a collusion because the auction purchaser was aware that adispute between the parties was pending and still went ahead andmade a bid for the property. It is not unusual in the sale of immovableproperties to come across difficulties in finding suitable buyers for theproperty. We find that the property was eventually sold on the fourthauction, and all the auctions were duly advertised.
53. Another fact on the basis of which the High Court has observedan inference of collusion is that the property was sold and the sale wasconfirmed in favour of ITC Ltd. though a statement was made in themorning of 23.02.2015 before the DRT that the sale would not beconfirmed till the order is passed. This seems to be recorded in theorder of the DRT. However, what is overlooked is the fact that in thestatement on behalf of the creditor, the creditor only agreed to notconfirm the sale till 3 pm. In the absence of any finding as to whatactually transpired, it is not possible for us to infer manipulation andcollusion on this account. There is no dispute that the property wasactually purchased by ITC Ltd. in pursuance of a public auction andthat the entire amount of sale consideration has been deposited by it.
54. We have anxiously considered the entire matter and find that theundisputed facts of the case are that a loan was taken by the debtorwhich was not paid, the debtor did not respond to a notice of demandand made a representation which was not replied to in writing by thecreditor. The creditor, however, considered the proposals forrepayment of the loan as contained in the representation in the courseof negotiations which continued for a considerable amount of time.Several opportunities were in fact availed of by the debtor for therepayment of the loan after the proceedings were initiated by thesecured creditor. The debtor failed to discharge its liabilities andeventually undertook that if the debtor fails to discharge the debt, thecreditor would be entitled to take realize the secured assets.
55. As held, we are of the view that non-compliance of sub-section(3A) of Section 13 cannot be of any avail to the debtor whose conducthas been merely to seek time and not repay the loan as promised onseveral occasions.
56. This Court in the case of State of Maharashtra v. Digambar51observed as follows:-
“19. Power of the High Court to be exercised underArticle 226 of the Constitution, if is discretionary, itsexercise must be judicious and reasonable, admits ofno controversy. It is for that reason, a person’sentitlement for relief from a High Court under Article226 of the Constitution, be it against the State oranybody else, even if is founded on the allegation ofinfringement of his legal right, has to necessarilydepend upon unblameworthy conduct of the personseeking relief, and the court refuses to grant the discretionary relief to such person in exercise of suchpower, when he approaches it with unclean hands orblameworthy conduct.”
It relied on the judgment of the Privy Council in LindsayPetroleum Co. v. Hurd52, where the Privy Council observed:-
“…….Two circumstances, always important in suchcases, are, the length of the delay and the nature ofthe acts done during the interval, which might affecteither party and cause a balance of justice orinjustice in taking the one course or the other, so faras it relates to the remedy.”
57. Therefore, the debtor is not entitled for the discretionaryequitable relief under Articles 226 and 136 of the Constitution of Indiain the present case.
58. We accordingly, set aside the impugned judgment of the HighCourt and direct the debtor and its agents to handover possessionof the mortgaged properties to the auction purchaser within aperiod of six months from the date of this judgment along with therelevant accounts.
59. Appeals are allowed accordingly.
