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2013 DIGILAW 1977 (ALL)

Midex Global Pvt. Ltd. v. State Bank of India

2013-07-30

R.K.GUPTA

body2013
JUDGMENT : R.K. GUPTA, J. (CHAIRPERSON) 1. This is an Appeal preferred by the appellant-borrowers under Section 18 of the SARFAESI Act, 2002. At the time when the appeal was preferred, the appellants challenged the order dated 27th February, 2012 passed by the Debts Recovery Tribunal in S.A. No. 199/2011. By the said order, the application for stay was rejected by the DRT. The facts leading to the present appeal are that the appellant company incorporated under the provisions of the Companies Act, 1956 is engaged in trading and export. The main turnover of the appellant company is from export of molasses. The other appellants are the guarantors and owners of the property in question. The Bank vide its sanction letter dated 19th January, 2006 advanced certain credit facilities in favour of the appellants and the relevant security documents were signed and executed by the appellants and equitable mortgage was also created in favour of the Bank. Subsequently, on 19th September, 2007 certain more facilities were also granted to appellants. Thereafter, the Bank has structured the terms for Formal and Derivative contracts of Rs. 16.00 crores and also a credit exposure limit of Rs. 4.40 crores on 9th October, 2007 for which ISDA Master Agreement has been executed by the Company on 10th April, 2008 and subsequently again the Bank vide sanction letter dated 9th February, 2009 again sanctioned/modified/enhanced credit facilities to the appellants and the outstanding amount against the Forex Derivative Transactions were parked in Working Capital Terms loan. The appellants defaulted in regularizing their accounts therefore, the Bank issued a demand notice dated 21st May, 2011, under Section 13(2) of SARFAESI Act, 2002 raising demand of Rs. 40,52,30,116.10 as on 30th April, 2011 and further interest from 1st May, 2011. The objections were raised by the appellants which were replied by the Bank and subsequently on 14th September, 2011, the Bank took the symbolic possession of the properties of the appellants at Indore and on 20th September, 2011 the properties at Village Vijaydurg, Distt. Sindhudurg (MS) under Section 13(4) of the SARFAESI Act, 2002, and served Sale Notice dated 26th September, 2011 for sale of the properties of the appellants. 2. Being aggrieved by the action taken under Section 13(4) of the SARFAESI Act, 2002 by the respondent Bank, the appellants preferred securitization application before the Debts Recovery Tribunal, Jabalpur which was registered therein as S.A. No. 199/11. 2. Being aggrieved by the action taken under Section 13(4) of the SARFAESI Act, 2002 by the respondent Bank, the appellants preferred securitization application before the Debts Recovery Tribunal, Jabalpur which was registered therein as S.A. No. 199/11. In the meantime, the auction notice was published in the newspaper dated 28th January, 2012, scheduling the auction for 28th February, 2012. The notice further provides to adjourn the date of auction to 12th March, 2012. Another sale notice was also published on 1st February, 2012 in newspaper edition published from Pune for sale of properties of the appellants situated at Vijaydurg, District Sindhudurg scheduling the auction for 3rd March, 2012 and second adjournment on 17th March, 2012. 3. The Counsel for the appellant submits that an application was moved on 11th November, 2011 on behalf of the appellants seeking a direction to the Bank to provide statement of accounts which was denied by the Bank on the ground that the statement of account has been provided with the O.A. No. 149/2011 and as per the appellants the entries shown in the statement of accounts are incorrect and erroneous. It is further submitted on behalf of the appellants that the guarantee executed by appellants was only for a sum of Rs. 12.00 crores and interest thereon only. It is further submitted that the demand notice dated 21st May, 2011, which shows an outstanding of Rs. 40,52,30,116.10 is bad ab initio because this includes Forex Derivative losses of Rs. 23,91,27,126/- which are not the part of the sanctioned and disbursed credit facilities and no security had ever been provided by the appellants for such Forex Derivative losses and in the absence of any security to secure the Forex Derivative losses, the same cannot be recovered from the sale of security provided to secure Working Capital facility. 4. It is further submitted on behalf of the appellant that the respondent Bank has violated the guidelines issued by the Reserve Bank of India. The Counsel for the appellants submits that the appellant Company had been sold by the respondent Bank various currencies as commodity at higher price and later on purchased at much lesser price using all influence and threat causing huge financial losses which has ultimately ruined the business of the appellant company. The Counsel for the appellants submits that the appellant Company had been sold by the respondent Bank various currencies as commodity at higher price and later on purchased at much lesser price using all influence and threat causing huge financial losses which has ultimately ruined the business of the appellant company. It is further submitted that the appellant company who was one of the best financially managed company in the year 2007-08 had reached at the verge of insolvency only because of the Bank's advice and selling of Forex Derivatives. He further submits that these Forex Derivative transactions were entered into by the appellant company with Ahmedabad Branch of the respondent Bank without utilizing Working Capital facility sanctioned and granted for trading activities. Thus, it is the respondent Bank which violated the R.B.I. guideline and persuaded the appellant to venture into Forex Derivative transaction and when loss have been suffered, the same has been debited to Working Capital account though from the perusal of the Forex Derivative contract it is clear that there is no relationship with the existing Working Capital facility granted to the appellants and in the said contracts there is no commitment that the amount to be received or paid be debited or credited to the Cash Credit Account of the appellants. It is further submitted that the appellants have never intended to create any fresh security or extend the benefit of already created security to cover any losses from Forex Derivative transactions. It is further submitted on behalf of the appellants that the Reserve Bank of India vide circular dated 13th October, 2008, and 29th October, 2008, directed the Banks to park the losses suffered by the borrowers due to Forex Derivative transactions in the separate account not affecting normal Banking transactions or credit facilities and the Reserve Bank of India has further directed the Banks not to classify any loan/credit facility as Non-Performing Asset (NPA), if the account has become irregular because of losses suffered by the borrower due to clean Forex Derivative transactions. 5. It is further submitted on behalf of the appellant that they were permitted to have Forex Derivative Contract entered with the Bank to the extent of Rs. 16.00 crores. To enter into contract and to expose certain limit does not amount to liability unless any loss has been suffered. To park any such loss to the extent of Rs. 5. It is further submitted on behalf of the appellant that they were permitted to have Forex Derivative Contract entered with the Bank to the extent of Rs. 16.00 crores. To enter into contract and to expose certain limit does not amount to liability unless any loss has been suffered. To park any such loss to the extent of Rs. 4.00 crores a limit was specifically provided. Therefore, under no circumstances, the credit exposure of the Bank to the appellant would have exceeded Rs. 4.00 crores. On the basis of the aforesaid, the Counsel for the appellants submits that the respondent Bank has no right or authority to recover any amount of loss on Forex Derivatives which were allowed by the Bank in total violation and defiance of the R.B.I., guidelines. Moreover, all the transactions being clean and without security do not give any authority to the respondent Bank to initiate proceedings under SARFAESI Act, 2002. It is further submitted that as per sanction letter dated 9th February, 2009, Working Capital Term Loan of Rs. 19.50 crores and existing Term Loan of Rs. 2.09 crores aggregating to Rs. 21.59 crores which were sanctioned for acquiring or further investment in equity share of SIPL Zimbabwe were payable from sale proceed of 74% holding of the Company MGPL in its overseas venture SIPL. 6. It is further submitted that the forward purchase of foreign exchange is a derivatives transaction. The Bank and the entity are two parties to transaction of purchase and sale. The Bank was acting as Seller of the Forex and the appellants were buyer of the Forex. Thus, there was relationship of buyer and seller between the appellants and the Bank. Secondly the Bank was acting in its capacity as a "Derivatives dealer", therefore, it is not a case of grant of financial assistance akin to a loan or credit facility and in order to establish that the derivative transaction is not financial assistance, Sections 2.0(k) and 2.1(zd) explaining the meaning of the financial assistance and secured creditor have been referred. Secondly the Bank was acting in its capacity as a "Derivatives dealer", therefore, it is not a case of grant of financial assistance akin to a loan or credit facility and in order to establish that the derivative transaction is not financial assistance, Sections 2.0(k) and 2.1(zd) explaining the meaning of the financial assistance and secured creditor have been referred. On the basis of the several judgments of Hon'ble High Courts and Supreme Court and circulars issued by the Reserve Bank of India, the Counsel for the appellant submits that the amount sought to be recovered by the Bank is not "debt" as the alleged liability has not arisen during the course of Banking business of the respondent Bank as in order to carry out a derivative transaction Bank or any other member of ISDA acts as dealer. It is further submitted that in the demand notice dated 21st May, 2011, the date of NPA was not mentioned and sanctioning of ad hoc EPC limit of Rs. 30.00 crores vide sanction letter dated 9th April, 2011 by the Bank, it may also be seen that the Term Loan has been prepaid as against the schedule provided for repayment of Term Loan. All other facilities namely cash credit, EPC were also in order and there was no irregularity in the account therefore, in the circumstances how and why as per recall notice dated 2nd February, 2011, the accounts of the appellants were classified as NPA on 30th June, 2009, and therefore, the Bank was not having any jurisdiction to proceed under the SARFAESI Act, 2002. 7. The Counsel for the appellant further submits that in the meantime two applications under Right to Information Act was submitted to the Bank and being aggrieved by the reply of the first authority, the appellants preferred two appeals before the appellate authority which were allowed. 7. The Counsel for the appellant further submits that in the meantime two applications under Right to Information Act was submitted to the Bank and being aggrieved by the reply of the first authority, the appellants preferred two appeals before the appellate authority which were allowed. He further submits that the Internal Note dated 9th July, 2007, provided with the R.T.I. Reply by the Bank clearly shows that this limit was approved in 2007 whereas the letter dated 18th October, 2006, is prior in time then how, it is possible that prior to approval a limit was sanctioned and as per Internal Note the limit was to be operative on execution of standard documents of the Bank, whereas pursuant to this approval no documents have ever been executed and the limit was non fund based limit and no security document or security interest was stipulated. 8. It is further submitted that the stay application was moved by the appellants before the Debts Recovery Tribunal and the Debts Recovery Tribunal after hearing has rejected the same therefore, the present appeal has been filed. 9. In rebuttal of the submission made by the Counsel for the appellants, the Counsel appearing for the Bank submitted that admittedly the appellant company was enjoying the credit facilities for its business activities from the Bank since 19th January, 2006 and as a security for the aforesaid credit facilities aggregating Rs. 23.25 crores, the appellant No. 2 had signed various security documents in favour of the Bank and the appellant Nos. 2 to 4 had jointly executed Deed of Guarantee for the repayment of the amount of Rs. 23.25 crores with interest, costs and other expenses in favour of the Bank and the appellants also created equitable mortgage of their respective properties. Apart from the Term Loan of Rs. 5.25 crores sanctioned by the Bank vide sanction letter dated 19th January, 2006, vide sanction letter dated 19th October, 2007 certain credit facilities were again sanctioned/modified by the Bank to the appellants which were accepted and signed by the appellants. Subsequently, at the request of the appellants, the Bank has structured the terms for Formal and Derivative contracts of Rs. 16.00 crores and also a credit exposure limit of Rs. Subsequently, at the request of the appellants, the Bank has structured the terms for Formal and Derivative contracts of Rs. 16.00 crores and also a credit exposure limit of Rs. 4.40 crores on 9th October, 2007 for which ISDA Master Agreement has been executed by the appellants on 10th April, 2008 and subsequently at the request of the appellants vide sanction letter dated 9th February, 2009, again credit facilities were sanctioned/modified/enhanced by the Bank and the appellants have accepted/signed the terms mentioned in the same. He further submits that the outstanding amount against the Forex Derivative Transactions were parked in Working Capital Term Loans (WCTL) and this amount is specifically mentioned in the sanction letter. He further submits that the sanction letter dated 19th January, 2006 is a part of sanction letter dated 9th February, 2009 which is duly signed by all the appellants which provides that all the facilities mentioned in the sanction letter are duly secured by the primary and collateral security of the properties mentioned therein as also the personal guarantees of the appellants and the details of the same have been given. 10. The Counsel for the Bank further submits that the Board of Directors of the appellant Company in their meeting held on 14th May, 2009 resolved to undertake and enter into foreign exchange transaction in all its legal forms, to transact derivative products including currency options, swaps to convert rupee liabilities into foreign currency liabilities to hedge currency and interest rate risks/fluctuations ("the Transactions") in respect of its export and import contracts, foreign currency loans and other foreign currency related matters as permitted by the Reserve Bank of India from time-to-time, with the State Bank of India in all its Branches in India and the Board of Directors were fully aware of the terms and conditions of Forex Derivative Contracts and its implications and passed a resolution for availing the said facility and after sanction of such facilities, ISDA Master Agreement was also executed between the Company and the Bank. 11. It is further submitted on behalf of the Bank that in the meeting of Board of Directors of the Company it was resolved that the Company shall obtain various credit facilities either in Indian or foreign currency to the tune of Rs. 11. It is further submitted on behalf of the Bank that in the meeting of Board of Directors of the Company it was resolved that the Company shall obtain various credit facilities either in Indian or foreign currency to the tune of Rs. 27.39 crores by way of Cash Credit, Export Credit Facilities, Terms Loans, Working Capital Term Loans, Opening of Letter of Credits, Issuing of Bank Guarantees including deferred payments guarantees and indemnities and such other facilities as may be agreed upon from time-to-time between the Bank and the Company secured by hypothecation of Company's entire goods, movables and other assets present and future including documents of title of goods and other assets such as book debts, outstanding money's receivables, claims, bills, invoices, documents, contracts, engagements, securities, investments and rights and all machineries present and future, pledge of shares and further secured by deposit of title deeds of existing immovable properties of the Company with intent to create a security thereon in favour of the Bank and guarantees of the appellant Nos. 2, 3 and 4 on such terms and conditions as may be specified by the Bank. It was further resolved in the said meeting that guarantors shall appear before the Bank and deposit their respective title deeds of their respective immovable properties offering as securities and to make declaration that such deposits have been made with an intent to create security by way of mortgage thereon in favour of the Bank. It is further submitted on behalf of the Bank that the appellants had made payment of stamp duty of an amount of Rs. 3,65,000/- for execution of various security documents and creation of equitable mortgage in favour of the Bank vide letter dated 14th May, 2009. On the basis of the aforesaid, the Counsel for the Bank submits that the action taken by the Bank by issuing notice dated 21st May, 2011 under Section 13(2) of the SARFAESI Act, 2002 requiring the appellants to make payment of Rs. 40,52,30,116.10 as on 30th April, 2011 with future interest at the stipulated rate since 1st May, 2011 is as per Act and legal. 12. 40,52,30,116.10 as on 30th April, 2011 with future interest at the stipulated rate since 1st May, 2011 is as per Act and legal. 12. The Counsel for the Bank further submits that the Forex Derivative Transactions were converted into Working Capital Term Loan vide sanction letter dated 9th February, 2009 at the request of the Company dated 12th January, 2009 which was duly accepted by the appellants and ratified by the Board of Directors and all necessary documents were executed in that behalf including the guarantee and creation of security. The Counsel for the appellant denied that the losses arising out of forex derivative transactions were not part of Working Capital facility and, therefore, the same cannot be clubbed with the Working Capital facility which is a secured loan as the forex derivative transactions were parked in Working Capital Term Loan and the same was duly secured by the primary and collateral security of immovable properties including hypothecation as also personal guarantee of the appellant Nos. 2 to 4. The Counsel for the appellants submits that the letter dated 24th September, 2010 submitted by the appellants to the Bank was, in fact, a proposal for One Time Settlement which is duly signed by all the appellants and their request for settlement was accepted by the Bank vide its sanction letter dated 28th March, 2011. He further submits that the account of the appellants was classified as NPA only on the event of irregularity in the account of the appellants. The Counsel for the Bank submits that the Bank has never violated any of the guidelines issued by the Reserve Bank of India and FEMA. He submits that the Forex Derivative Transactions were permitted by the Bank at the request of the appellants and the appellants further requested the Bank to route the Forex Derivative Transactions through its Cash Credit Account. Subsequently, outstanding arising out of Forex Derivatives Transaction were parked in separate account under the Working Capital Term Loan which was duly sanctioned at the request of the Company vide letter dated 9th February, 2009. He further submits that the Bank never persuaded the appellants to enter into the Forex Derivative Transaction. He further submits that the appellants have wrongly interpreted the Credit Exposure Limit of Rs. 4 crores sanctioned for derivative deals, as it means that the Bank may provide credit facility only to the extent of Rs. He further submits that the Bank never persuaded the appellants to enter into the Forex Derivative Transaction. He further submits that the appellants have wrongly interpreted the Credit Exposure Limit of Rs. 4 crores sanctioned for derivative deals, as it means that the Bank may provide credit facility only to the extent of Rs. 4 crores. It is not so. The fact is that as per RBI Master Circular on Exposure Norms for Financial Institutions dated 2nd July, 2007 (Paras. 4, 8.3), the Bank had sanctioned the said limit of Rs. 4 crores on the Future Forex Exposure of USD 50 million (INR Rs. 200 crores) of less than one year maturity at credit conversion factor rate of 2% and under the said Credit Exposure limit of Rs. 4 crores the appellants may make derivative transactions. He further submits that the equitable mortgage was created on 14th May, 2009 and the appellants under coming letter dated 14th May, 2009 submitted non-judicial stamps for Rs. 3,65,000/- for creation of hypothecation and equitable mortgage in favour of the Bank. It is further submitted that the appellants were under an obligation to sell their shares of SIPL and deposit the sale proceeds for liquidation of WCTL and Term Loan in a time-bound manner. But the appellants failed to do so. He further submits that various High Courts have already held that the Forex Derivative Transactions would fall within the definition of financial assistance. It is submitted that the Forex Derivative Transactions falls within definition of debt, as the Forex Derivative Transactions are arisen during the course of Banking business and the Forex Derivative Transactions is liability of the appellant which is due to the Bank. It is submitted that while issuing notice under Section 13(2) of the SARFAESI Act, 2002 it is not always necessary or obligatory on the part of the Bank to disclose the date of classification of account as NPA. He submits that the Cash Credit facilities were already irregular since 25th October, 2008 and the Term Loan account had also become irregular since 1st June, 2009. It is further submitted that there is no embargo on the Bank to regularize the NPA accounts or to sanction fresh credit facilities in respect of NPA accounts for improvement in their performance. He submits that the Cash Credit facilities were already irregular since 25th October, 2008 and the Term Loan account had also become irregular since 1st June, 2009. It is further submitted that there is no embargo on the Bank to regularize the NPA accounts or to sanction fresh credit facilities in respect of NPA accounts for improvement in their performance. The Bank had given one more opportunity to the appellants to regularize its account vide sanction letter dated 9th April, 2010 which it did not avail and the accounts continued to be NPA. 13. It is further submitted on behalf of the Bank that the reasons not mentioning for obtaining mortgage to secure Forex business is that Forex Derivative Transactions are always routed through the Cash Credit Account. It is submitted that the appellants cannot take objection about the mortgage of HUF property as collateral security for credit facilities advanced by the Bank to the appellants. 14. While filing the appeal, the appellants raised the question whether the provisions of SARFAESI Act, 2002 can be enforced against the appellants by taking recourse to Section 13(2) of the SARFAESI Act, 2002 and thereafter taking the appropriate steps under Section 13(4) of the Act. This appeal was admitted by the order dated 28th February, 2012. The Appeal was admitted on the ground that whether the Bank will have jurisdiction to proceed under the SARFAESI Act, 2002. Thereafter, on 27th September, 2012 again the question was reiterated with regard to the jurisdiction of the Bank to proceed under SARFAESI Act, 2002 and vide said order dated 27th September, 2012. Since the matter was pending before the Debts Recovery Tribunal therefore, this Tribunal by order dated 27th September, 2012 directed the Tribunal to decide the preliminary objection first. It was directed because the main question to be decided in the present appeal before this Tribunal was whether the Bank is having jurisdiction and authority to proceed with the Section 13(2) of the SARFAESI Act, 2002 and the matter was pending before the Tribunal, therefore, it was directed to the Tribunal to record a finding on the preliminary objection which was raised before the Debts Recovery Tribunal. Ultimately, vide order dated 9th April, 2013, the Tribunal recorded that it is applicable. 15. An application was moved before this Tribunal seeking permission of this Tribunal to challenge the order before the Hon'ble High Court. Ultimately, vide order dated 9th April, 2013, the Tribunal recorded that it is applicable. 15. An application was moved before this Tribunal seeking permission of this Tribunal to challenge the order before the Hon'ble High Court. The respondent Bank filed a writ petition before the Hon'ble High Court of Madhya Pradesh at Jabalpur which was registered as W.P. No. 17203/12 and the Hon'ble High Court vide order dated 11th October, 2012 while disposing of the writ petition has held that the order passed by this Tribunal to decide the preliminary objection is appropriate as to whether it was within the jurisdiction of the Bank to have taken recourse to the provisions of SARFAESI Act, 2002 and therefore, in the present case the initial order under challenge was dated 27th February, 2012 as well as the order dated 9th April, 2013 passed by the Debts Recovery Tribunal by which the Debts Recovery Tribunal held that the Bank has jurisdiction to take recourse to the provisions as contained in the SARFAESI Act, 2002 have been challenged. 16. On the basis of same, the question with regard to the applicability of the SARFAESI Act, 2002 to the facts and circumstances of the case is to be adjudicated upon. For the purpose of adjudicating the present appeal, the relevant facts are that the appellant was given facility under Foreign Exchange Derivative Transaction. Foreign Exchange Derivative Transaction is an agreement which is governed by International Swap and Derivative Association and the said agreement is placed on record by the appellants. There is no dispute between the parties that there is no agreement. 17. Normally, and agreement for advancing the facility of Foreign Exchange Derivative Transaction by the Bank to the borrower is to meet out the requirement of the Foreign Exchange and the Foreign Currency is purchased or sold in future and on the basis of the same in case in future the rates of the dollar fluctuates then the parties who have entered into an agreement suffers with consequences either in the term of loss or profit. It was the case of the appellants before the Tribunal that no security agreement was entered into by them with the Bank with reference to the Foreign Exchange Derivative Transaction. 18. It was the case of the appellants before the Tribunal that no security agreement was entered into by them with the Bank with reference to the Foreign Exchange Derivative Transaction. 18. Apart from the Foreign Exchange Derivative Transaction, the appellants were enjoying certain credit facilities on the following heads which were sanctioned by the Bank which were on 19th January, 2006, 19th September, 2007, 24th January, 2008 and 9th April, 2010. In the present case, there is no more sanction letter for granting the facility which were sanctioned by the Bank under letter dated 9th February, 2009. This sanction is in fact under dispute which is under consideration in the present appeal. The security interest was created by the appellants towards the aforesaid sanctions of facilities but the appellant submits that there is no security interest which was created under the sanction of facility under the letter of the Bank dated 9th February, 2009 which is in dispute and is to be adjudicated upon. The Bank sanction letter dated 9th February, 2009 is also to be decided whether there was security or not in the light of the letter of the Bank dated 12th January, 2009. 19. It is the case of the appellants that in the absence of any security agreement towards the sanction of the facilities under the sanction letter dated 9th February, 2009 the Bank cannot enforce any security by taking recourse to the provisions of SARFAESI Act, 2002. The said submission was made on behalf of the appellants on the ground that the Foreign Exchange Derivative Transaction was entered into but no security interest was created and the same was a separate sanction. It was the case of the appellants, that there was no irregularity in other accounts of the appellants under which the loan was sanctioned and the appellants further admitted that though, there was a default or irregularity in the Foreign Exchange Derivative Transaction but there was no default in other transactions and the appellants submitted that in the absence of any security interest the Bank cannot proceed with the matter by taking recourse to the provisions of SARFAESI Act, 2002. It was the case of the appellants that the irregularity or the default in relation to the Foreign Exchange Derivative Transaction, the amount which was due from them was wrongly transferred to Working Capital Facility and Cash Credit Facility which was sanctioned by the Bank therefore, it was submitted that the transfer of liability under Foreign Exchange Derivative Transaction was not in terms of the circular issued by the Reserve Bank of India dated 29th October, 2008. 20. The case of the Bank is that the appellants when applied for the loan through their application dated 12th January, 2009 then it was stated that there are irregularities and, therefore, a fresh loan was applied by the appellants to make the accounts of Foreign Exchange Derivative Transaction as regular. It was also submitted by the Bank that the transaction towards Foreign Exchange Derivative Transaction were rooted through cash credit limit which was sanctioned in favour of the appellants and since in the Cash Credit Account a security was created therefore, it is the case of the Bank that since the security interest already existed in favour of the Bank under Cash Credit Limit therefore, it was submitted that since the amount defaulted towards the Forex Exchange Derivative Transaction was deposited through Cash Credit Limit therefore, Bank has rightly initiated the proceedings under SARFAESI Act, 2002. 21. In view of the aforesaid factual scenario of the case, the question arises that whether the default of the amount towards the Forex Derivative Transactions has rightly been transferred by the Bank towards the liability in the Working Capital Term Loan and Cash Credit Account of the appellants. There is no dispute in the present case that there was a default in the Forex Derivative Transactions and the amount of default has been transferred to the Cash Credit Facilities and Working Capital Term Loan. The Reserve Bank of India has issued a circular dated 29th October, 2008 which is annexed at page No. 218 of the paper book filed by the appellant. The contents of circular issued by the Reserve Bank of India is reproduced as under: 2. In terms of Para. The Reserve Bank of India has issued a circular dated 29th October, 2008 which is annexed at page No. 218 of the paper book filed by the appellant. The contents of circular issued by the Reserve Bank of India is reproduced as under: 2. In terms of Para. 2.1(1) of the aforesaid Circular, any receivable representing positive mark-to-market value of a derivative contract, if overdue for a period of 90 days or more, is required to be treated as non-performing asset and also makes all other funded facilities granted to the client as non-performing asset, following the principle of borrower-wise classification. 3. On a review of the matter, it has now been decided to confine the applicability of the principle of borrower-wise asset classification to only the over dues arising from forward contracts and plain vanilla swaps and options. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallized or might crystallize in future and is/becomes receivable from the client, should be parked in a separate account maintained in the name of the client/counter-party. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. 22. On the basis of the said circular it is clear that the Reserve Bank of India after reviewing its earlier policy has directed all the Banks to confine the applicability of the principle of borrower-wise asset classification to only the over dues arising from forward contracts and plain vanilla swaps and options. 22. On the basis of the said circular it is clear that the Reserve Bank of India after reviewing its earlier policy has directed all the Banks to confine the applicability of the principle of borrower-wise asset classification to only the over dues arising from forward contracts and plain vanilla swaps and options. In the said circular it has also been directed that in future, accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) which were entered into during the period April, 2007 to June, 2008 and has already been crystallized or might crystallize and has become receivable from the client, should be parked in a separate account maintained in the name of the client/counterparty. It further directs that the amount as such, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. 23. There is no dispute in the present case that the aforesaid circular issued by the Reserve Bank of India has no application but contrary both the parties argued about the relevancy and applicability of this Circular. It was argued by the Counsel for the appellants that as per the circular of the Reserve Bank of India which has the force of law as laid down in the case of Sardar Associates v. Punjab & Sind Bank, VI (2009) SLT 473 : III (2009) BC 705 (SC) : III (2009) CLT 186 (SC) : AIR 2010 SC 218 , and the Circular states that the defaulted amount towards Forex Derivative Transactions is to be parked in a separate account maintained in the name of the client. The amount overdue for a period of 90 days or more, will not make other funded facilities provided to the client as irregular. The defaulted amount as per the circular issued by the Reserve Bank of India is to be kept separately and such overdue amount will not make other funded facilities provided to the client as irregular. 24. The amount overdue for a period of 90 days or more, will not make other funded facilities provided to the client as irregular. The defaulted amount as per the circular issued by the Reserve Bank of India is to be kept separately and such overdue amount will not make other funded facilities provided to the client as irregular. 24. In view of the aforesaid, the Cash Credit Facilities and Working Capital Terms Loan which were the funded facilities to the appellants by the Bank shall not be irregular even after there was a default in Forex Derivative Transactions and the said amount of Forex Derivative Transactions was to be parked in a separate account and it should not have been parked in the Cash Credit Facilities and Working Capital Terms Loan of the appellant which was done by the Bank in the present case which is contrary to the circular issued by the Reserve Bank of India which is source of law. 25. The Bank after when the amount was overdue towards the Forex Derivative Transactions had parked the said amount in other two accounts of the appellants where the security interest was created then only there is a default in the said accounts and the liability towards Forex Derivative Transactions was not covered by any security offered by the appellants. As stated above, the liability of the Forex Derivative Transactions could not have been parked towards the other facilities funded and should have been kept in separate account then the said amount should have been kept separately by the Bank rather than transferring the said liability to the Cash Credit Limit and Working Capital Term Loan accounts of the appellants. Now the question arises is that when there was no security interest created by the appellants towards the Forex Derivative Transactions then in absence of any security and also due to illegal transfer which was contrary to the Reserve Bank of India's Circular whether the provisions as contained under SARFAESI Act, 2002 can be said to be available to the respondent Bank to recover its dues. In this regard, the statement of Objects and Reasons for enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is relevant wherein it is stated that the SARFAESI Act, 2002 was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected thereto. The word "Security Interest" is defined in Section 2(zf) which reads as under: 2(zf) 'security interest' means a receipt or other security issued by a securitization Company or reconstruction Company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization. And the word 'default' has also been defined in Section 2(j) of the SARFAESI Act, 2002 which reads as under: 2(j) 'default' means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor. Similarly, the word "security asset" is also been defined in Section 2(zc) which reads as under: 2(zc) 'Secured asset' means the property on which security interest is created. The word "Security receipt" is also defined in Section (zg) which reads as under: 2(zg) 'Security receipt' means a receipt or other security, issued by a securitization Company or reconstruction Company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitization. 26. This is to be seen that in the present case the application for grant of loan was submitted by the appellants on 12th January, 2009 and under the sanction letter with regard to Working Capital Term Loan for Rs. 19.50 crores dated 9th February, 2009, it is stated under the terms and conditions of the said sanction letter that the validity of the said sanction would be for a period of 6 months up to 1st August, 2009. After sanction of the Working Capital Term Loan for Rs. 19.50 crores under the sanction letter dated 9th February, 2009 the amount as such of Rs. After sanction of the Working Capital Term Loan for Rs. 19.50 crores under the sanction letter dated 9th February, 2009 the amount as such of Rs. 19.50 crores was not utilized by the appellants and as per their Counsel the only transaction of the amount of Rs. 19.50 crores was made on 26th March, 2009 and 27th March, 2009 and other than this there is no utilization of the said sanction. The transfer of the amount on 26th March, 2009 and 27th March, 2009 was a defaulted amount of Forex Derivative Transaction. 27. So far as the application for grant of sanction moved on 12th January, 2009 which is placed on record along with the counter filed by the respondent Bank as Annexure No. 2 is concerned it reveals that the Bank was requested to provide Working Capital Term Loan (WCTL) of Rs. 18.00 crores for a period of 6 months by the appellants and the same was sanctioned on 9th February, 2009 and there is nothing in the letter dated 12th January, 2009 moved by the appellants to the Bank to show that the loan has been utilized and it further reveals that the said amount under the credit will be utilized by way of transfer to the fresh facilities under the Working Capital Term Loan though the letter dated 12th January, 2009 states that the appellants are aware that as on that day, their account has been irregular by almost Rs. 16.00 crores due to the currency and derivative losses, and that they had an immense burden of the same. Thus, the reason for applying the fresh facility by the appellants as apparent from the application for providing the Working Capital Term Loan is on account of currency and derivative losses but there is nothing in the said application dated 12th January, 2009 that the fresh credit shall be liable to be transferred towards the liability due to the derivative losses. The sanction letter also does not state that the fresh credit under letter dated 9th February, 2009 shall be transferred under the liability due to the derivative losses and that will be transferred to Working Capital Term Loan by way of fresh credit to regularize the account. The amount under sanction letter dated 9th February, 2009 was never utilized. It is only to have been utilized by way of transferring the amount of Rs. The amount under sanction letter dated 9th February, 2009 was never utilized. It is only to have been utilized by way of transferring the amount of Rs. 19.50 crores on 26th March, 2009 and 27th March, 2009 in the Cash Credit Limit which resulted into default. The question with regard to the permissibility of the transfer to the said account has already been discussed and it is found to be contrary to the circular of the Reserve Bank of India. The Board of Directors of the appellant Company though passed a resolution on 14th May, 2009 which is placed on record but in this reference, this is to be seen that this resolution was passed after the sanctioning of the loan on 9th February, 2009. In the resolution dated 14th May, 2009, the Board of Directors of the appellant company has passed a resolution authorizing its one of the Directors to execute the documents and security but no security as such was ever executed and the said resolution has been passed by the Company after sanction letter dated 9th February, 2009 in relation to the Forex Derivative Transactions and, thus, in the absence of any security the Bank would not be within its right to enforce the recovery under the provisions of the SARFAESI Act, 2002. 28. In the present case, no security documents are available and on the documents other than the security, the Bank cannot be permitted to proceed under SARFAESI Act, 2002. However, this shall not effect the right of the Bank to proceed to recover its dues through other forum. The Bank while serving the notices under Section 13(2) of the SARFAESI Act, 2002 included the defaulted amount which was parked in the Cash Credit Facility and Working Capital Term Loan account of the appellant and in the said defaulted amount in relation to the Forex Derivative Transactions there was no security enforcement available, therefore, the Bank cannot be permitted to proceed under the SARFAESI Act, 2002 as discussed hereinabove. 29. For the reasons stated hereinabove, the notice under Section 13(2) issued by the Bank is quashed and, consequently, all the actions taken by the respondent Bank against the appellants including auction are also set aside. The application preferred by the appellants before the Debts Recovery Tribunal in S.A. No. 199/2011 stands allowed and, accordingly, this appeal stands allowed. 29. For the reasons stated hereinabove, the notice under Section 13(2) issued by the Bank is quashed and, consequently, all the actions taken by the respondent Bank against the appellants including auction are also set aside. The application preferred by the appellants before the Debts Recovery Tribunal in S.A. No. 199/2011 stands allowed and, accordingly, this appeal stands allowed. The Bank is directed to return the money received from the auction purchaser and the money shall be returned to the Auction Purchaser along with the simple rate of interest @ 10%. The copies of this judgment be supplied to the parties as per law and a copy of this judgment along with records, if summoned earlier, be sent to the Debts Recovery Tribunal concerned, forthwith.