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2011 DIGILAW 80 (GUJ)

IDBI BANK LIMITED v. HYTAISUN MAGNETICS LIMITED

2011-02-09

K.M.THAKER, SUDHANSU JYOTI MUKHOPADHAYA

body2011
JUDGMENT: This writ petition has been preferred by IDBI Bank Ltd. (hereinafter referred to as “the bank”) against the order dated 21.9.2010 passed by the District Magistrate, Mehsana in MCC Case No. 1 of 2010. 2. By the impugned order, the District Magistrate, Mehsana held that the bank failed to prove that it is a secured creditor and thereby came to the conclusion that the application filed under Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “the Securitization Act”) is not tenable and thereby rejected the application. 3. The case of the bank is that respondent Nos. 1 and 2 – borrowers have taken financial assistance from the petitioner – bank on 15.9.1990 and executed necessary documents on 26.11.1991 to secure the credit facility taken by them. On 31.3.1996, the respondent – borrowers having defaulted in repaying the outstanding dues, their account was classified as Non-performing Assets (NPA). The bank moved before the Debt Recovery Tribunal under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which is registered as O.A. No. 99 of 1998 and is pending. Meanwhile, the bank took steps under the Securitization Act and issued notice to the respondent – borrowers on 5.11.2009 under Section 13(2) of the said Act, which the borrowers refused. The said notice was also published in two daily newspapers on 2.12.2009. The respondent – borrowers raised objections on 9.1.2010 and the bank decided the same on 18.1.2010. Since the respondent – borrowers failed to repay the dues, the bank demanded peaceful physical possession of the mortgaged property which having refused, the bank filed an application under Section 14 of the Securitization Act before the District Magistrate, Mehsana seeking police assistance to take possession of the mortgaged property. The District Magistrate, Mehsana on 21.9.2010, after notice to the parties, held that the bank has failed to prove that it is a secured creditor and refused to assist the bank. 4. The learned counsel for the petitioner would submit that the District Magistrate has no jurisdiction to adjudicate the dispute while the assistance is sought for under Section 14 of the Securitization Act. 5. The respondent – borrowers have appeared and supported the stand taken by the District Magistrate. 4. The learned counsel for the petitioner would submit that the District Magistrate has no jurisdiction to adjudicate the dispute while the assistance is sought for under Section 14 of the Securitization Act. 5. The respondent – borrowers have appeared and supported the stand taken by the District Magistrate. Mr Mihir Thakore, learned Senior Advocate appearing on behalf of the respondent – borrowers would contend that the District Magistrate had not made any adjudication or decision on merit, but merely required the bank to produce the original title deeds for simply verifying the existence of the fact of secured assets claimed by the bank. He referred to two judgments delivered by a learned Single Judge of this Court in two different cases in support of his case, viz. (i) unreported decision dated 3.3.2008 passed in the case of Dena Bank vs. The District Magistrate in SCA No. 3943 of 2008 and (ii) the decision in the case of Authorized Officer, Canara Bank vs. Sulay Traders through Bipin Kantilal Vakta, reported in 2010 (1) GLR 770 . It is stated that the judgment in the case of Dena Bank was also affirmed by a Division Bench of this Court by order dated 10.7.2009 passed in Letters Patent Appeal No. 877 of 2008. 6. We have heard the learned counsel for the parties and perused the record. 7. From the affidavit in reply filed by the respondent – borrowers, it will be evident that they have not disputed the fact of having taken financial assistance from the bank. In the affidavit, though it is stated that the bank has failed to produce any document to show the existence of equitable mortgage and/or the original title deeds, but there is no specific denial made that the property in question is not a secured property. Only in the written submissions, a plea has been taken that the bank is not holding any original title deeds of the property in question and thus has no security interest in the property which is a sine qua non for enforcement of the mortgage under the Securitization Act. Therefore, the counsel for the respondent – borrowers would contend that the bank cannot take possession of the property under the guise of the Securitization Act. Therefore, the counsel for the respondent – borrowers would contend that the bank cannot take possession of the property under the guise of the Securitization Act. It has not been disputed by the respondent – borrowers that the bank has taken measures under Section 13(4) of the Securitization Act and having a right, the respondent – borrowers have preferred Securitization Application No. 32 of 2010 under Section 17 of the Act before the Debts Recovery Tribunal, Ahmedabad. 8. Previously, there was no legal provision for facilitating securitization of financial assets of the banks and financial institutions. The recourse could have been made only through a Court of law or the Debts Recovery Tribunal. Unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Existing legal framework relating to commercial transactions was not keeping pace with the changing commercial practices and financial sector reforms. The same resulted in slow place of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. In this background, taking into consideration the reports of the Narasimhan Committee and Andhyarujina Committee constituted by the Central Government for the purpose of examining the banking sector reforms to consider the need for changes in the legal system in respect of such areas, with a view to take possession and recover the assets without taking recourse of the Court of law, the banks and financial institutions were empowered and with such Statement of Objects and Reasons, the Securitization Act, 2002 was enacted. [emphasis added] 9. Chapter III of the Securitization Act deals with ”Enforcement of Security Interest”. Under Section 13(1), any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal, by such creditor in accordance with the provisions of the Act. For that, the secured creditor, on default in repayment of secured debt by installments thereof and if the debt is classified by the secured creditor as non-performing assets, is liable to issue notice under Section 13(2) asking the borrower to discharge in full his liability to the secured creditor within sixty days. For that, the secured creditor, on default in repayment of secured debt by installments thereof and if the debt is classified by the secured creditor as non-performing assets, is liable to issue notice under Section 13(2) asking the borrower to discharge in full his liability to the secured creditor within sixty days. Under Section 13(3), the details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower, are to be mentioned. On receipt of such notice, opportunity is given to the borrower to make a representation or objection under Section 13(3A) of the said Act. The bank or the financial institution, if does not accept the representation or objection, is supposed to communicate the reasons to the borrower. In case the borrower fails to discharge his liability in full within the period specified in sub-section (2) of Section 13, the secured creditor may take recourse to one or more measures as mentioned in Section 13 (4) which reads as follows :- “13(4). In case the borrower fails to discharge his liability in full within the period specified in sub-section (2) of Section 13, the secured creditor may take recourse to one or more measures as mentioned in Section 13 (4) which reads as follows :- “13(4). In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely :- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset; (b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset : Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held for the debt : Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt; (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.” If any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor for enforcement of security interest is not in accordance with the provisions of the Securitization Act or the Rules made thereunder, any person aggrieved by any measures referred to in sub-section (4) of Section 13 may prefer an appeal (application) under Section 17 to the Debts Recovery Tribunal having jurisdiction in the matter. 10. 10. From the aforesaid provisions, particularly Section 13(1), it will be evident that the measures can be taken by the bank or the financial institution under Section 13(4) without the intervention of the Court or Tribunal. The Court or the Tribunal has no role to play till the measure is taken. Once the measure is taken under Section 13(4), the only forum to move against such order is the Debts Recovery Tribunal having jurisdiction over the matter under Section 17 of the Securitization Act. 11. Clause (a) of Section 13(4) empowers the bank or the financial institution to take possession of the secured assets of the borrower. Under said Clause (a), the bank or the financial institution has right to transfer by way of lease, assignment or sale for realizing the secured asset. Under Clause (b) of Section 13(4), even the management of the business of the borrower can be taken by the bank or the financial institution including the right to transfer by way of lease, assignment or sale for realizing the secured asset. 12. Rule 8 of the Security Interest (Enforcement) Rules, 2002 deals with “Sale of immovable secured assets”. Under the said Rule, where the secured asset is an immovable property, the Authorized Officer of the bank or the financial institution can take or cause to be taken possession, by delivering a possession notice. It prescribes the procedure for taking possession by the bank or the financial institution of its own. It does not require any decision or order of any Court of law or Tribunal. 13. From the aforesaid provisions, it will be evident that for taking possession by the bank of the secured assets, the bank or the financial institution is not required to take help of any Court or Tribunal and can take it of its own following the procedure prescribed under the Act and the Rules framed thereunder. If any person aggrieved against such measure, which amounts to a measure under Section 13(4), the aggrieved person can move before the Tribunal, namely the Debts Recovery Tribunal of concerned jurisdiction under Section 17. 14. Now if the borrower or any person obstructs the bank or the financial institution, what steps can be taken by the bank or financial institution ? 14. Now if the borrower or any person obstructs the bank or the financial institution, what steps can be taken by the bank or financial institution ? With a view to see that such possession is taken by the bank or the financial institution, if necessary by help of police, the provisions have been made under Section 14 whereunder the secured creditor, the bank or the financial institution, can take assistance of the Chief Metropolitan Magistrate or the District Magistrate, as evident from the said provision as quoted hereunder :- “14. Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset.- (1) Where the possession of any secured asset is required to be taken by the secured creditor or it any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him - (a) take possession of such asset and documents relating thereto; and (b) forward such assets and documents to the secured creditor. (2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may taken or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary. (3) No act of the Chief Metropolitan Magistrate or the District Magistrate done in pursuance of this section shall be called in question in any court or before any authority.” We have already noticed that for taking possession of the secured assets by the secured creditor (the bank or the financial institution) under Section 13(1), no intervention of the Court or Tribunal is required. Section 14 only directs the Chief Metropolitan Magistrate or District Magistrate to assist the secured creditor in taking possession of the secured assets, if a request is made and on such request, is not only liable to take possession of such assets, but also the documents relating thereto and is duty bound to forward such assets and documents to the secured creditor. Therefore, it will be evident that Section 14 does not empower the Chief Metropolitan Magistrate or the District Magistrate to adjudicate a dispute nor empower it to decide the question whether the claim of the secured creditor is genuine or not. 15. The provisions of Section 14 fell for consideration before the Courts from time to time. In the case of Bank of India vs. Pankaj Dilipbhai Hemnani, reported in 2007 (2) GLR 1810 , a learned Single Judge of this Court held that the Magistrate while considering the application of a secured creditor under Section 14 of the Securitization Act has limited powers and observed as follows :- “9. Hence, the Authority who is called upon to act under Section 14 of the Securitisation Act can only assist, nay, is bound to assist the secured creditor in taking possession of the secured asset. Any dispute between the parties regarding the secured asset raised before the Authority cannot be gone into by the Authority; the Authority has to relegate the aggrieved person to seek statutory remedy under the Securitisation Act after taking possession and handing over to the secured creditor. The Authority cannot be permitted to read anything beyond this is Section 14 of the Securitisation Act.” Contrary, in the case of Authorized Officer, Canara Bank vs. Sulay Traders through Bipin Kantilal Vakta, reported in 2010 (1) GLR 770 , another learned Single Judge of this Court held as follows:- “7. After the aforesaid details are submitted, the learned Magistrate would be required to examine the same and verify the aspects being condition precedent for exercise of the power under Section 13(4) of the Act. After the aforesaid details are submitted, the learned Magistrate would be required to examine the same and verify the aspects being condition precedent for exercise of the power under Section 13(4) of the Act. If the learned Magistrate has any doubt about the genuineness of the statement or the reliability of the statement made, or about the compliance of any condition precedent for exercise of the power under Section 13(4) of the Securitisation Act, he has two options; one is that, he may call upon the Bank itself to supply the necessary details on any aspects, if he is not satisfied about the condition precedent for exercise of the power under Section 13(4) of the Securitisation Act; the second is that he may issue the notice to the borrower for verification of the existence of any fact which is required to be verified by him. Thereafter, he may proceed for exercise of the power under Section 14 of the Securitisation Act. 8. Be it noted that the Magistrate while exercising power under Section 14 of the Securitisation Act is required to verify the existence of the facts attracting power under Section 13(4) of the Securitisation Act, and he is not required to examine or adjudicate the rights of the parties, if it is demonstrated before him that certain facts do exist. It is the only factual verification to be made by the learned Magistrate. For example, the existence of equitable mortgage wherein he will be required to verify whether there is a document of equitable mortgage and whether the original Title Deeds are deposited with the Bank or not. Similarly, whether notice under Section 13(2) of the Securitisation Act has been served upon the person concerned or not, whether any reply or objection is raised or not and if yes, whether decision is taken or not and whether such decision is communicated or not and whether any payment is made or not after the notice under Section 13(2) of the Securitisation Act and if yes, any amount outstanding, etc. There cannot be any exhaustive list of the verification of facts, but suffice it to state that he would only be required to verify the existence of the fact which are relevant to have condition precedent for exercise of the power under Section 13(4) of the Securitisation Act. There cannot be any exhaustive list of the verification of facts, but suffice it to state that he would only be required to verify the existence of the fact which are relevant to have condition precedent for exercise of the power under Section 13(4) of the Securitisation Act. But he will not be required to adjudicate on the aspects of illegality and validity of such facts or the rights flowing therefrom. 16. The learned counsel for the respondent – borrowers referred to an unreported decision of the learned Single Judge dated 3.3.2008 in the case of Dena Bank vs. The District Magistrate in Special Civil Application No. 3943 of 2008. But that case is not directly on the point as the District Magistrate had not acted upon because of a prohibitory order issued by a Civil Court restraining the eviction of the plaintiff from the premises. 17. When Section 14 of the Securitization Act fell for consideration before a Division Bench of this Court in the case of Union Bank of India vs. Chief Metropolitan Magistrate, by its decision dated 6.7.2010 in Special Civil Application No. 6753 of 2010, the Division Bench held as follows :- “As the Chief Metropolitan Magistrate and the District Magistrate under Section 14 is not empowered to decide the question of legality and propriety of any of the actions taken by the secured creditor under Section 13(4), which can be assailed under Section 17 of the Act by the aggrieved person, under subsection (3) of Section 14, the act of the Chief Metropolitan Magistrate or District Magistrate done in pursuance of the said Section cannot be called in question in any Court or before any authority. From the aforesaid provisions of law and observations made by us, it will be evident that Chief Metropolitan Magistrate or District Magistrate while bound to assist the secured creditor in taking possession of the secured asset and to take possession of the documents relating thereto and forward such assets and documents to the secured creditor, he is not empowered to decide the question of genuinety or propriety of such document including the documents signed or agreed between the borrower and the secured creditor.” 18. A Division Bench of this Court in the case of Bharatbhai Ramniklal Sata, Prop. of Satyajeet Trading Co. A Division Bench of this Court in the case of Bharatbhai Ramniklal Sata, Prop. of Satyajeet Trading Co. vs. Collector & District Magistrate, reported in 2010 (2) GLR 985 , relying on the decision of the Supreme Court in the case of Transcore vs. Union of India, reported in (2008) 1 SCC 125 , held and observed as follows :- “11. From the aforesaid provisions of law and the decision of the Supreme Court, it will be clear that for taking possession, one of the measures for recovery of secured debts under sub-section (4) to Section 13 of the Act includes the measures taken by secured creditor under Section 14 and therefore, if any order is passed under Section 14, though it cannot be challenged before any Court of law in view of sub-section (3) to Section 14, but one can raise the legality and propriety of such measures of taking possession under Section 17, if such measure is against the Securitisation Act or Rules framed thereunder.” 19. Another Division Bench of this Court in the case of Bombay Mercantile Co-op. Bank Ltd. vs. Bharatkumar Nyalchand Shah, Partners of Western Enterprise, by its judgment dated 18.10.2010 passed in Special Civil Application No. 9623 of 2010 and an analogous case, held as follows :- “7. From the above it can be seen that with limitation of powers, the Magistrate had under Section 14 of the Securitisation Act, it was not open for him to take into account rival claims and to come to the conclusion that since tax dues of the Corporation of the property were also outstanding, application of the bank under Section 14 of the Securitisation Act was required to be rejected. If at all, Municipal Corporation should have been left to avail its legal remedies. It was not open to the learned Magistrate to adjudicate on such rival claims particularly, the Municipal Corporation did not claim to be a secured creditor as no security interest was created in its favour.” 20. In view of the Division Bench decisions as referred to above, the provisions of law as already cited and the observations already made by us, we hold as follows :- (i) Under Chapter III of the Securitization Act, a secured creditor has right to enforce security interest without the intervention of the Court or Tribunal in accordance with the provisions of the said Act. [Section 13(1)] (ii) The borrower, who is under liability to the secured creditor under a secured agreement, is entitled to take a notice under Section 13(2) of the said Act. (iii) The secured creditor who intends to enforce the secured asset is bound to give details of amount payable by the borrower and the secured assets intended to be enforced. [Section 13(3)] (iv) Under Section 13(3A), the borrower has right to make representation or raise objection. If any objection is there with regard to the secured asset, that can be raised only at the stage of Section 13 (3A). Under the said provision, only the secured creditor will determine the objection and not any Court or Tribunal. (v) No cause of action takes place even after the decision taken by the secured creditor under Section 13(3A) till the secured creditor takes recourse of one or more measures including the measure to take possession of the secured asset of the borrower under Section 13(4) of the Act. (vi) The secured creditor is competent to take possession of all the secured assets of its own following the procedure laid down under Rule 8 of the Security Interest (Enforcement) Rules, 2002. (vii) Only when the secured creditor finds difficulty to take possession of the secured asset, it may take assistance of the Chief Metropolitan Magistrate or the District Magistrate under Section 14 of the Act. (viii) The measures taken under Section 14 amounts to measures taken under Section 13(4) of the Act. (ix) As the measures taken under Section 14 amount to measures taken under Section 13(4) of the Act, under Section 14(3) such measures cannot be called in question before any Court or Tribunal. (x) If such measures taken under Section 14 which amount to measures taken under Section 13(4) is not in accordance with the Securitization Act or the Rules framed thereunder, including the objection, if any, raised that the asset is not a secured asset to be taken under Section 13(4), the aggrieved person has a remedy under Section 17 before the Debts Recovery Tribunal to show that the measures taken are against the Act [Section 13(4)] or the Rules framed thereunder. (xi) All such determination is to be made by the Debts Recovery Tribunal including the question whether the asset is a secured asset or not and the Chief Metropolitan Magistrate or the District Magistrate has not been empowered to adjudicate such dispute, but is directed only to assist the secured creditor in taking possession of the secured asset. If they are not empowered to adjudicate the dispute, they cannot also call for the secured creditor to produce any document to decide whether the asset is secured asset or not, which will be futile exercise in absence of power to adjudicate such issue. Under Clauses (a) and (b) of Section 14(1), the Chief Metropolitan Magistrate or the District Magistrate and on request, are bound to take possession of the secured assets as also the documents relating thereto. If the documents are to be obtained by them, the question of asking the secured creditor to produce the document in all cases does not arise. Therefore, they do not have jurisdiction even to call for the documents. 21. In view of the aforesaid findings, we hold that the judgments delivered by the learned Single Judge in the case of Authorized Officer, Canara Bank vs. Sulay Traders through Bipin Kantilal Vakta, reported in 2010 (1) GLR 770 and the unreported decision dated 3.3.2008 in the case of Dena Bank vs. The District Magistrate in Special Civil Application No. 3943 of 2008 do not lay down good law. 22. For the reasons aforesaid, the District Magistrate, Mehsana having no jurisdiction to call for the record or to adjudicate the matter, we hold that the order passed by the District Magistrate, Mehsana dated 21.9.2010 in MCC Case No. 1 of 2001 is illegal. We set aside the same. The case is remitted to the District Magistrate, Mehsana to assist the petitioner – bank in taking possession of the secured assets and documents thereto. It must be made within a fortnight. However, the findings on this case will not affect the case preferred by the respondent – borrowers before the Debts Recovery Tribunal, Ahmedabad under Section 17 of the Securitization Act. 23. The writ petition is allowed with the aforesaid observations and directions, but there shall be no order as to costs.