M/s. Ramco Super Leathers Limited Represented By Its Director, Mr.s.ramaswamy 'sethu House' Chennai And Others v. Uco Bank Represented By Its Authorised Officer International Banking Branch And Another

(Writ Petition filed for the issuance of a writ of certiorarified mandamus calling for the records relating to the order of the 2nd respondent in S.A. Application No.158/07 dated 9.4.2007, quash the same and consequently restrain the respondents from taking any steps whatsoever in respect of the properties of the petitioners as stated therein.

Civil Revision Petition filed under Art. 227 of the Constitution of India praying this Court to set aside the order of the 2nd respondent in S.A. No.158 of 2007 dated 9.4.07 on the file of the Debts Recovery Tribunal II, Chennai, as stated therein.)

Common Order: (S.J. Mukhopadhaya, J.)

In both these cases as common order dated 9th April, 2007, passed by the Debt Recovery Tribunal II (hereinafter referred to as DRT), Chennai, in S.A. Application No.158/07 is under challenge, they were heard together and are disposed of by this common judgment.

2. The first petitioner of W.P. No.21096/07, M/s.Ramco Super Leathers Ltd., a company registered under the Companies Act, 1956, (hereinafter referred to as Company), is the borrower, who had taken loan from the first respondent, UCO Bank (hereinafter referred to as the Bank), who is the petitioner of connected CRP No.1184/07. Petitioners 2 to 5 of W.P. No.21096/07 are the guarantors before the bank for loans given in favour of the first petitioner-company. The account of the company with the bank was classified as non-performing asset. Therefore, after notice u/s 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (hereinafter referred to as the SARFAESI Act) issued on 9th May, 2003, the bank took measures u/s 13 (4) of the SARFAESI Act on 15th Dec., 2004.

3. O.A. No.127/03 was filed by the Bank before DRT, Chennai, against the company and guarantors. On the other hand, a writ petition, W.P. No.38331/03 was filed by the borrower-company and guarantors with a plea that the bank cannot take parallel action where original application has already been filed. The said case was not decided on merit and was disposed of along with batch of cases with observation that the DRT may decide such question whether the bank could take parallel proceeding where an original application has been filed by the bank.

Another writ petition, W.P. No.32830/05 was filed by borrower-company and guarantors challenging the action of the bank in proceeding without withdrawing the original petition. The said case was dismissed on 2nd March, 2007, liberty was given to the petitioner to approach the Debt Recovery Tribunal.

A third writ petition, W.P. No.11068/07 was preferred by borrower-company and guarantors challenging Section 17 (3) and 17 (4) of the SARFAESI Act. Initially, the operation of Sections 17 (3) and (4) of the SARFAESI Act were stayed, but, subsequently, the writ petition was dismissed on 11th June, 2007.

4. In the meantime, the Bank, having taken possession of secured asset, issued sale notice on 24th Sept., 2005. It was not given effect due to interim stay, but stay having been vacated, the bank issued readvertisement on 13th March, 2007, fixing 16th April, 2007 as the date for re-auction. This time, the borrower preferred an application u/s 17 of the SARFAESI Act before the DRT, Chennai, registered as S.A. No.158/07. On the request of the borrower & guarantor applicants, impugned conditional order was passed on 9th April, 2007. The Tribunal having noticed that there are two items for auction to the tune of Rs.8 Crores and 10% of such amount was fixed for depositing the earnest money, directed the borrower & guarantors applicants to deposit a sum of Rs.60 lakhs to the bank within eight weeks and the bank was directed to defer the auction sale. Notice was also issued on the bank.

5. The borrower-company & guarantors have challenged the conditional order of stay dated 9th April, 2007, in their writ petition, mainly on two grounds:-

a) The Tribunal has no jurisdiction to pass conditional interim order ;

b) All proceedings u/s 13 (4) shall stand automatically stayed on filing of an application u/s 17 of the SARFAESI Act.

The Bank challenged the said order dated 9th April, 2007, by filing a civil revision application under Article 227 of the Constitution of India on the ground that the ex-parte conditional stay order is perverse; a meagre amount of Rs.60 Lakhs having been ordered to be deposited.

6. The civil revision petition was earlier taken up by the learned single Judge of this Court, who, vide interim order dated 16th April, 2007, considering the facts and circumstances of the case, passed the interim order, relevant portion of which is extracted hereunder :-

"2. Considering the facts and circumstances of the case and also the fact that for the proposed auction, various parties have come from various places in the country and if the auction is stayed, it would result in huge expenses for taking further proceedings in the collection of the dues to the bank. The amount of Rs.60,00,000/= (Rupees Sixty Lakhs only), ordered to be deposited in eight weeks is only a small fraction, when considering the huge amount payable by the first respondent to the petitioner-bank.

3. In the above circumstances, I am of the opinion that the auction posted today (i.e., 16.04.2007) may proceed with. But the auction sale shall not be confirmed until further orders of this Court. Therefore, the order of the DRT-II, Chennai, dated 10.04.2007 is stayed."

7. The borrower-company has been impleaded as party respondent to the civil revision petition as first respondent, but the guarantors, who were also applicants before the Tribunal, i.e., 2 to 5 writ petitioners of the analogous writ petition, having not been impleaded as party, they have intervened. It is alleged by the counsel appearing on behalf of borrower-company & guarantors that the civil revision petition was moved on 16th April, 2007, during lunch motion and interim order, which is final in nature, was obtained without impleading the guarantors as respondents and without giving reference to the writ petition preferred by the parties.

Learned counsel appearing on behalf of the bank informed that they received copy of impugned order dated 9th April, 2007, passed by Tribunal in S.A. No.158/07 on 13th April, 2007. In the order sheet, which was served on the bank, against name of petitioner, only one petitioner, i.e., the borrower-company was shown and neither the name of the guarantors were shown in the cause title of the said order sheet served on the bank nor any other petitioner was shown therein. 16th April, 2007, being the date of auction, having received the copy on 13th April, 2007, and 14th and 15th April, 2007, being non-working days of the High Court, i.e., Saturday and Sunday, the earliest the petition was preferred on 16th April, 2007, and in lunch motion it was moved.

Counsel appearing on behalf of the borrower-company & guarantors submitted that though the matter was moved during lunch motion, but auction had taken place, at 10.00 a.m., which was the time fixed for auction.

8. In the present case, while deciding the question of legality and propriety of order dated 9th April, 2007, passed by DRT, Chennai, in S.A. No.158/07, two questions to be determined are :-

i) Whether the DRT has jurisdiction to pass interim order in an application u/s 17 of the Act ; and

ii) Whether all proceedings u/s 13 (4) shall stand automatically stayed on filing an application u/s 17.

9. For determination of issues, it is desirable to discuss relevant provisions of SARFAESI Act, particularly Section 17 of the said Act.

In the case of MARDIA CHEMICALS LTD. - VS UNION OF INDIA reported in (2004) 4 SCC 311 [LQ/SC/2004/496] : AIR 2004 SC 2371 [LQ/SC/2004/496] , the Supreme Court upheld the validity of Section 17 of the said Act, except sub-section (2) of Section 17, which was declared ultra vires of Article 14 of the Constitution. Under sub-section (2), for preferring an appeal, the borrowers were supposed to deposit 75% of the claim amount within a specified period. In view of the Supreme Court judgment, to enable an aggrieved person to prefer an application (appeal) without compulsion of deposition of any percentage of the claim amount, the relevant amendments were made. As per sub-section (1) to Section 17, any person aggrieved by any measures referred to in sub-section (4) of Section 13 taken by the secured creditor can make application along with requisite fee to the DRT within 45 days from the date on which such measures had been taken. Under sub-section (2) to Section 17, the DRT, in its turn, is to consider whether any of the measures referred to in sub-section (4) of Section 13 taken by secured creditor are in accordance with the provisions of the Act and rules. After examination of facts and circumstance and evidence produced by parties, if the DRT comes to a conclusion that any of the measures referred to in sub-section (4) of Section 13 taken by secured creditor are not in accordance with the provisions of the Act and rules and require restoration of the management of the business to the borrower or restoration of possession of secured assets to the borrower, it may do so by declaring such action as invalid and may pass appropriate and necessary order. Under sub-section (4) to Section 17, if the DRT declares the course taken by the secured creditor under sub-section (4) to Section 13 is in accordance with the Act and the rules, in such case, the secured creditor is entitled to take recourse to one or more of the measures prescribed in sub-section (4) to section 13 to recover his secured debts.

10. Learned counsel for the borrower & guarantors relied on sub-section (4) to Section 17 and submitted that the secured creditor is entitled to take recourse to one or more of the measures specified in sub-section (4) to Section 13 to recover its secured debts only when the Tribunal declares such recourse taken by secured creditor is in accordance with the Act and the Rules. It was suggested that in absence of such declaration given by the DRT, as to whether the action taken under sub-section (4) of Section 13 is not in accordance with the Act and Rules, no recourse could be taken to take one or other measures under sub-section (4) to Section 17 to recover the secured debts. Therefore, according to him, on mere filing of an application u/s 17, the proceeding under sub-section (4) to Section 13 automatically stands stayed and, thereby, it is not open to the Tribunal to pass any conditional interim order. Learned counsel referring to sub-section (5) to Section 17, submitted that makers of law as intended to stay all action under sub-section (4) to Section 13 immediately on filing of application u/s 17, it has prescribed a time limit of 60 days for DRT to dispose of such application under Section 17. For the same reason, in case of non-disposal, DRAT has been empowered, under sub-section (6) to Section 17 to pass order for expeditious disposal of the application.

On the other hand, according to the counsel for the bank, in absence of any specific provision, it cannot be presumed that a judicial or quasi-judicial proceeding stands automatically stayed. In support of such submission, learned counsel referred to Section 36 of the Arbitration and Conciliation Act, 1996, pursuant to which an award can be enforced only after expiry of period for making an application u/s 34 or, if such application have been made, till it is refused by the Court.

11. In the present case, admittedly, the bank has taken action under sub-section (4) to Section 13 giving rise to a cause of action for the borrower & guarantors to file petition u/s 17 of the SARFAESI Act. Under sub-section (7) to Section 17 of the said Act, the DRT has been empowered to dispose of such application in accordance with the provisions of the Recovery of Debts due to Banks and Financial Institutions Act (hereinafter referred to as the RDDB & FI Act) and Rules made thereunder, if otherwise not provided under the SARFAESI Act.

There is no specific provision made u/s 17 or any other provision of SARFAESI Act empowering the Tribunal to make an interim order, but under sub-section (12) to Section 19 of the RDDB & FI Act, the Tribunal has been so empowered to pass interim order, as evident from the relevant portion and quoted hereunder :-

"19. Application to the Tribunal. - (1) * * *

* * * * * * * *

(12) The Tribunal may make an interim order (whether by way of injunction or stay or attachment) against the defendant to debar him from transferring, alienating or otherwise dealing with, or disposing of, any property and assets belonging to him without the prior permission of the Tribunal."

Rule 7 of the Debt Recovery Tribunal (Procedure) Rules, 1993, relates to application fee. At serial No.4 of the table attached to Rule 7, amount of fee payable along with application for interlocutory order has been prescribed.

If sub-section (7) of Section 17 of SARFAESI Act is read along with sub-section (12) of Section 19 of the RDDB & FI Act and Rule 7 framed thereunder (Debt Recovery Tribunal (Procedure) Rules, 1993), it will be evident that the DRT has also jurisdiction to pass interim order u/s 17 of the SARFAESI Act in appropriate cases.

12. The Supreme Court in the Mardia Chemicals case (supra), while dealing with measures as may be taken u/s 13 (4) of the SARFAESI Act and the mechanism provided u/s 17 of the said Act, while observed that the provisions are for the purpose of giving some reasonable protection to the borrower, the Court held as follows :-

"80. Under the Act in consideration, we find that before taking action a notice of 60 days is required to be given and after the measures under Section 13 (4) of the Act have been taken, a mechanism has been provided under Section 17 of the Act to approach the Debts Recovery Tribunal. The abovenoted provisions are for the purpose of giving some reasonable protection to the borrower. Viewing the matter in the above perspective, we find what emerges from different provisions of the Act, is as follows :-

1. Under sub-section (2) of Section 13 it is incumbent upon the secured creditor to serve 60 days notice before proceeding to take any of the measures as provided under sub-section (4) of Section 13 of the Act. After service of notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower. In connection with this conclusion we have already held a discussion in the earlier part of the judgment. The reasons so communicated shall only be for the purpose of the information/knowledge of the borrower without giving rise to any right to approach the Debts Recovery Tribunal under Section 17 of the Act, at that stage.

2. As already discussed earlier, on measures having been taken under sub-section (4) of Section 13 and before the date of sale/auction of the property it would be open for the borrower to file an appeal (petition) under Section 17 of the Act before the Debts Recovery Tribunal.

3. That the Tribunal in exercise of its ancillary powers shall have jurisdiction to pass any stay/interim order subject to the condition as it may deem fit and proper to impose.

4. In view of the discussion already held in this behalf, we find that the requirement of deposit of 75% of the amount claimed before entertaining an appeal (petition) under Section 17 of the Act is an oppressive, onerous and arbitrary condition against all the canons of reasonableness. Such a condition is invalid and it is liable to be struck down.

5. As discussed in this judgment, we find that it will be open to maintain a civil suit in civil court, within the narrow scope and on the limited grounds on which they are permissible, in the matters relating to an English mortgage enforceable without intervention of the court."

The finding of the Supreme Court at clause (4) of paragraph-80 aforesaid, is the answer to the question raised by the writ petitioner, wherein the Supreme court held that the Tribunal, in exercise of its ancillary power, shall have jurisdiction to pass any stay/interim order, subject to the condition as it may deem fit and proper to impose. The corollary is that, there is no automatic stay or prohibition on the secured creditor to take recourse to one or more measures under sub-section (4) to Section 13 of the SARFAESI Act to recover its secured debts, till an interim order is passed by the Tribunal.

13. From a plain reading of sub-section (1) to Section 17, it will be evident that a person, including borrower, could make an application u/s 17 to the DRT, if aggrieved by any of the measures referred to in sub-section (4) to Section 13 as taken by the secured creditor. That means, only if one or other measure is taken by the secured creditor, a cause of action arises for any person or the borrower to prefer appeal (application) u/s 17.

Under sub-section (2), the Tribunal is bound to consider whether any of the measures referred to under sub-section (4) to Section 13 taken by the secured creditors are in accordance with the provisions of this Act. Under sub-section (3) to Section 17, after examining the facts and circumstances of the case, and evidence produced by the parties, if the Tribunal comes to a conclusion that any of the measures referred to under sub-section (4) to Section 13 taken by the secured creditor are not in accordance with the provisions of the Act and the rules and require restoration of the management of the business to the borrower, or restoration of possession of the secured assets to the borrower, it may declare such action as invalid and restore possession of secured assets to the borrower or restore the management of the business to the borrower, as the case may be.

From the aforesaid Section 17, it will be evident that any person, including borrower, could file an appeal (application) u/s 17 at any stage, including the stage when management of business is taken or possession of secured assets of the borrower, including right to transfer is taken over by the secured creditor. In such case, the Tribunal has power to restore possession in favour of the borrower, if such action taken under sub-section (4) to Section 13 is declared invalid. Merely because a secured creditor has taken possession of secured asset, or issued notice inviting application for sale of secured asset, or issued a sale certificate in favour of one or other auction purchaser, will not render the Tribunal powerless to restore possession in favour of the borrower, if such action taken under sub-section (4) to Section 13 is found not in accordance with the Acts and the Rules framed thereunder, and is declared invalid.

14. We have already noticed that the Tribunal passed the impugned interim order on 10th April, 2007 and stayed the auction subject to the condition imposed on the borrower-company and the guarantors. The said order was passed on an application preferred by the petitioner. The auction having actually taken place on 16th April, 2007, pursuant to interim order passed by this Court in CRP (PD) No.1184/07, it is now academic to decide the question whether the order passed by the Tribunal on 10th April, 2007, was legal and proper. We have already held that the Tribunal has jurisdiction to pass appropriate interim order in the facts and circumstances of each case. In view of the aforesaid finding, the question of granting any relief against the order dated 10th April, 2007, as impugned in the writ petition, does not arise at this stage. Borrower-company & Guarantors may pursue the application u/s 17, as pending before DRT-2, Chennai, and if any declaration is given that action taken by the bank under sub-section (4) to Section 13 is not in accordance with the Acts and Rules framed thereunder, and thereby invalid, the borrower-company & guarantors, may request for restoration of possession of the assets in question, as auction sale having been made during the pendency of such appeal (application) before DRT, which is always subject to the decision of the appeal.

So far as the civil revision petition is concerned, even if we hold that there was no error of jurisdiction and the interim order passed by the Tribunal on 10th April, 2007, was well within its jurisdiction and not perverse, mere dismissal of the civil revision petition will not meet the ends of justice, till the auction already taken place on 16th April, 2007, is invalidated.

15. As we have already held that the Tribunal has jurisdiction to restore possession of secured assets in favour of borrower & guarantors, if action taken by the secured creditor under sub-section (4) of Section 13 of the SARFAESI Act is found not in accordance with the Act and the Rules, and thereby declared invalid, we leave this question open for the Tribunal to decide, which, if decides the case in favour of the borrower & guarantors, may restore possession. However, as we find that the sale has not been confirmed, we are of the opinion that the auction sale of secured assets as taken place on 16th April, 2007, be not confirmed till the Tribunal decides the issue in its proceeding pending u/s 17.

16. We, therefore, do not grant any relief for the present and dispose of the writ petition as also the civil revision petition without deciding the claim on merits, which has to be determined by the Tribunal, with observation as made above. Both the writ petition and the civil revision petition stands disposed of with the aforesaid observations. But there shall be no order as to costs.