AJN 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CRIMINAL APPELLATE JURISDICTION CRIMINAL WRIT PETITION NO.2767 OF 2006 1. M/s. TRADE WELL, a Proprietorship firm, carrying on business at 95/1, Shiv Kailash Co-operative Housing Society Limited, Sion (West), Mumbai – 400 022. ) ) ) ) ) 2. Mr. Suniel K. Mehta, Proprietor of M/s. Trade Well, Adult, Indian Inhabitant, residing at 95/1, Shiv Kailash Co- operative Housing Society, Sion (West), Mumbai – 400 022. ) ) ) ) ) ... Petitioners Versus 1. Indian Bank, a Body corporate consulted Under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, having its Head Office at 86, Rajaji Road, Chennai – 600 001 and Circle Office at Maker Tower “F”, 18th Floor, Cuffe Parade, Mumbai 5 and one of its Branch Office at 11/12, Radha Krishna Niwas, N.C. Kelkar Road, Dadar (West), Mumbai – 400 028, through its Chief Manager, Mr. Vilas Vinayak Jinturkar. ) ) ) ) ) ) ) ) ) ) ) ) 2. The State of Maharashtra. ) ... Respondents Mr. R.D. Soni with Mr. G.R. Kinkhabwalla i/b M/s. Ram & Co. for the petitioner (s). Ms. Rathina Maravarman with Mr. P.G. Kinikar for respondent 1. Mr. S.R. Borulkar, Public Prosecutor with Mr. M.S. Mhambrey, A.P.P. for the State. AJN 2 ALOGN WITH CRIMINAL WRIT PETITION NO.27 OF 2007 Mr. R.D. Soni with Mr. G.R. Kinkhabwalla i/b M/s. Ram & Co. for the petitioner (s). Mr. Vishal Khanavkar & Kedar Dighe for respondent 1. Mr. S.R. Borulkar, Public Prosecutor with Mr. M.S. Mhambrey, A.P.P. for the State. ALONG WITH CRIMINAL WRIT PETITION NO.124 OF 2007 Mr. R.D. Soni with Mr. G.R. Kinkhabwalla i/b M/s. Ram & Co. for the petitioner (s). Mr. Harinder Toor i/b Mr. N.K. Kamath for respondent 1. Mr. S.R. Borulkar, Public Prosecutor with Mr. D.S. Mhaispurkar, A.P.P. for the State. ALONG WITH CRIMINAL WRIT PETITION NO.343 OF 2007 Mr. Subhash Zha i/b M/s. Law Global for the petitioner(s) Mr. S.R. Borulkar, Public Prosecutor with Ms. A.S. Pai, A.P.P. for the State. Mr. A.H. Punwani for respondent 2. CORAM : SMT. RANJANA DESAI, & ANOOP V. MOHTA, JJ. DATE ON WHICH THE JUDGMENT RESERVED : 13TH MARCH, 2007. DATE ON WHICH THE JUDGMENT PRONOUNCED : 2ND APRIL, 2007. JUDGMENT:- (Smt. Ranjana Desai, J.) AJN 3 1. The question which arises in these writ petitions is whether while dealing with a written request made by a secured creditor under section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (for short, “the NPA Act”), the Chief Judicial Magistrate or the District Magistrate as the case may be is required to give notice to the borrower or any person who may be in possession of secured asset and give him a hearing. 2. For the sake of convenience we propose to deal with Criminal Writ Petition No.2767 of 2006. Our judgment in this petition on the main issue will be applicable to all petitions. We have heard the learned counsel appearing for the petitioners in Criminal Writ Petition Nos.2767 of 2006, 27 of 2007 and 124 of 2007. We have also heard Mr. Subhash Zha, the learned counsel appearing for the petitioners in Criminal Writ Petition No.343 of 2007. Senior counsel Mr. Dwarkadas and Mr. D'Vitre and the learned counsel Mr. J.P. Shah have also made submissions. We have heard them on their request, though the petitions in which they are appearing have been disposed of by separate orders. 3. We have also heard Mr. Borulkar, the learned Public Prosecutor who appears for the respondent-State. Mr. Toor, Ms. Rathina Maravarman and Mr. Punwani, who appear for the respondent-banks or financial institutions in these writ petitions have also made submissions. We have also heard Mr. Collabawalla. AJN 4 4. We may briefly refer to the facts averred in Criminal Writ Petition No.2767 of 2006. Petitioner 1 is a proprietary concern of petitioner 2. Petitioner 3 is a guarantor for the debt of petitioners 1 and 2. 5. According to the petitioners, they were banking with respondent 1, the Indian Bank. Respondent 1 vide their sanction letter dated 24/1/2002 sanctioned open cash credit facility (stock and book debts) to the petitioners. Thereafter, the said facility was increased to Rs.50 lakhs on the terms and conditions set out in the sanction letter dated 27/8/2002. The petitioners mortgaged Flat No.1, Ground floor, Shiv Kailash Co-op. Housing Society, Plot No.95, Sion (West), Mumbai – 400 022, (for convenience, “the said flat”). The said flat is thus the secured asset of respondent 1. 6. According to the petitioners, respondent 1 filed Original Application No.127 of 2005 before the Debt Recovery Tribunal (for short, “the DRT”) against the petitioners. On 10/11/2006, the DRT passed a decree against the petitioners. 7. It appears that since the petitioners failed to repay the debt, respondent 1 issued a notice dated 27/8/2003 under section 13(2) of the NPA Act and called upon the petitioners to pay sum of Rs.62,47,919/- within sixty days from the date of the notice. AJN 5 8. According to the petitioners, vide their letter dated 24/11/2005, they sent a reply to the said notice. It is the case of the petitioners that respondent 1 did not communicate to them the reasons for not accepting the said reply. According to the petitioners, therefore, in the light of the judgment of this court to which we shall soon advert, the notice dated 27/8/2003 must be quashed. 9. The case of the petitioners further is that respondent 1 filed an application in the Court of the Chief Metropolitan Magistrate, Esplanade, Mumbai, under section 14 of the NPA Act, praying for assistance to take possession of the said flat. By order dated 27/9/2006, the learned Chief Metropolitan Magistrate allowed the said application. The petitioners have challenged the said order in this writ petition. 10. Before we deal with the attack on the impugned order, we must note that affidavit has been filed by petitioner 2 reiterating that the notice sent by respondent 1 under section 13(2) of the NPA Act has been duly replied by the petitioners on 24/11/2005. However, respondent 1 has failed to comply with section 13(3A) of the NPA Act i.e. the reasons for not accepting the petitioners' reply have not been communicated to the petitioners. Affidavit in reply has been filed on behalf of respondent 1 by Mr. R. Ganesan, Asstt. Manager, Dadar (West) Branch. It is asserted in this affidavit that respondent 1 has not received any letter from the petitioners and, in any event, the said letter is sent after expiry of 60 days from the date of receipt of the notice under section 13(2). AJN 6 11. Mr. Soni, the learned counsel for the petitioners first took us to section 14 of the NPA Act. Mr. Soni submitted that this section which speaks of the power of the Chief Metropolitan Magistrate / District Magistrate (for convenience, “the CMM/DM”) to assist the secured creditor in taking possession of secured asset begins with the words “where the possession of secured assets is required to be taken by the secured creditor .....”. Mr. Soni contended that it is implicit in this sentence that the CMM/DM has to apply his mind as to whether possession is required to be taken or not. 12. He then took us to Rule 8(3) of the Security Interest (Enforcement) Rules, 2002 (for short, “the said Rules”) and contended that this Rule speaks about what the authorised officer is supposed to do if possession of immoveable property is actually taken. He submitted that therefore this provision contemplates a situation where the CMM/DM need not order taking possession. There could be cases where after due application of mind, it may appear to the CMM/DM that it is not necessary to take possession. 13. Mr. Soni submitted that while exercising jurisdiction under section 14, the CMM/DM must see whether there is compliance of section 13(3A). In fact, argues Mr. Soni, compliance of section 13 with all its sub-clauses is mandatory before power under section 14 can be invoked. Mr. Soni contended that section 13(3A) requires that if on receipt of the notice under sub-section (2), the borrower makes any representation or raises any AJN 7 objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection, the reasons for non- acceptance of the representation or objection to the borrower. 14. In this connection, Mr. Soni took us to the judgment of the Supreme Court in Mardia Chemicals Limited v. Union of India, AIR 2004 SC 2371. He pointed out that the Supreme Court has observed that the secured creditor must bear in mind the say of the borrower before process of recovery is initiated and so as to demonstrate that the reply of the borrower to the notice under section 13(2) of the NPA Act has been considered applying mind to it, the reasons however brief that may be for not accepting the objections if raised in the reply must be communicated to the borrower. Mr. Soni pointed out that the Supreme Court has also expressed that while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. Mr. Soni submitted that therefore it is obligatory for the CMM/DM to find out whether the reply of the borrower has been considered by the secured creditor. 15. To emphasise this point, Mr. Soni took us to the judgment of the Nagpur Bench of this court in M.R. Gawai Enterprises v. Vidharbha Urban Co-opeartive Bank Limited & Anr. (2005) 1 BCR 276. In that case, it was AJN 8 argued that though the petitioner therein had filed objection to the notice under section 13(2) of the NPA Act, that objection was not considered by the secured creditor. No reasoned reply was given to the secured creditor. Mr. Soni pointed out that relying on the judgment of the Supreme Court in Mardia Chemicals' s case (supra), the action under sub-section (4) of section 13 was quashed and the secured creditor was directed to consider the objections afresh and if the objections are rejected, communicate the rejection to the petitioner therein. Mr. Soni contended that therefore the importance of the reply or objections can hardly be underestimated. That is a minimum safeguard afforded to the debtor under this stringent statute. It's importance is emphasised by the Supreme Court in Mardia Chemicals' s case (supra). Therefore, the CMM/DM must find out whether objection of the debtor is considered or not. 16. Mr. Soni then contended that section 14(3) states that no act of the CMM/DM in pursuance of this section shall be called in question in any court or before any authority. Therefore, it is all the more necessary for the CMM/DM before exercising power under section 14 to apply his mind as to whether possession is required to be taken. He must find out whether the property is in fact mortgaged or not, if there is a tenant whether tenancy is lawful or not. His attention must be focussed on such and other related aspects. Such a drastic power cannot be exercised without application of mind. The borrower or the person in possession must be heard. Mr. Soni contended that section 14 is not in aid of section 13(4). It is a separate AJN 9 provision. Remedy of appeal is provided in section 17 against measures in section 13(4). It is not an appeal against power exercised under section 14. 17. Mr. Soni contended that it is true that the NPA Act is enacted keeping in view mounting levels of non-performing assets of banks and financial institutions and for reducing non-performing assets by adopting measures for recovery and reconstruction. Mr. Soni contended that nature of mischief sought to be prevented can never be the reason for putting a harsh interpretation on the provisions of the NPA Act. He submitted that because section 14 does not expressly provide for hearing, it cannot be said that the borrower or person in possession is not to be given hearing while taking possession. 18. He submitted that while acting under section 14, the CMM/DM is exercising judicial powers. At any rate, he is exercising quasi-judicial powers. Therefore, notice has to be read in section 14. Principles of natural justice cannot be ignored. He submitted that even while exercising administrative powers, principles of natural justice have to be followed. More so, while exercising judicial or quasi judicial power. In this connection, he relied on the judgments of the Supreme Court in State Bank of India v. Rajendra Kumar Singh & Ors. AIR 1969 SC 401, Amery Pharmaceuticals & Anr. v. State of Rajasthan, 11 (2001) CCR-8 SC, Rajesh Kumar & Ors. v. D.C.I.T. & Ors., JT 2006(10) SC 76, Smt. Maneka Gandhi v. Union of India and Anr. AIR AJN 10 1978 SC 597 and the judgment of this court in Bhikaji S/o. Tukaram Darode v. State of Maharashtra, 1994 (2) BCR 518. 19. Mr. Soni contended that proceedings contemplated under section 14 are original proceedings. Hence, hearing provided under section 17, assuming objections can be raised to order passed under section 14 therein, is not sufficient. Hearing must be given while ordering possession being taken under section 14. Mr. Soni contended that assuming that the remedy of appeal is available to the petitioner, it is not sufficient. Mr. Soni further submitted that even if it is said that section 14 is in the nature of execution proceedings even in execution proceedings hearing is contemplated. 20. Mr. Soni then contended that by resorting to the NPA Act what is not permissible in law cannot be done. The NPA Act does not override the Transfer of Property Act. In this connection, Mr. Soni took us to the judgment of the Full Bench of this court in Anjali Patil v. Raghu Patil & Anr., AIR 1973 Bom. 75. Mr. Soni contended that in most of the cases the borrower creates a simple mortgage. A simple mortgage consists of a personal obligation express or implied, to pay and the transfer of a right to cause the property to be sold. The right transferred to the mortgagee is not ownership right. The ownership and possession of the property continues with the mortgagor. Mr. Soni submitted that therefore, in case of simple mortgage, the mortgagor can even transfer possession. All that the mortgagee is entitled to is an obligation to pay. He can cause the property to be sold and recover his AJN 11 money. But he cannot take possession because the ownership rights are not transferred. Mr. Soni submitted that if in case of simple mortgage, this is allowed to be done, it will mean changing or improving the contract. It will be against the provisions of the Transfer of Property Act. 21. Mr. Soni also relied on the judgment of the Supreme Court in Dev Raj Dogra & Ors. v. Gyan Chand Jain & Ors. (1981) 2 SCC 675. Referring to Rule 95 and 96 of Order XXI of the Code of Civil Procedure, (for short, “the C.P.C.”), he submitted that if tenants are in occupation of the mortgaged property, auction purchaser is not entitled to recover physical possession from the tenants. The auction purchaser is entitled to symbolic possession in terms of the provisions contained in Order XXI Rule 96 of the C.P.C. The question of validity or otherwise of the tenancy may have to be considered and determined in appropriate proceedings. It is clear therefore that if the tenants are in occupation of the property, without hearing them, the CMM/DM cannot order their dispossession. That will be contrary to law. 22. Mr. Soni submitted that the CMM/DM while acting under section 14 is exercising a judicial power. If it is held to be not a judicial power, it is at least a quasi judicial power and, therefore, application of mind to the material questions such as as to whether the asset is secured or not, whether there is a simple mortgage or not, whether the tenant is lawful or not, etc. is a must and for that, consistent with the principles of natural justice, a notice to the person in occupation is a must. AJN 12 23. Mr. Soni also placed reliance on the judgment of the Supreme Court in SBP & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618. In that case, the Supreme Court was considering the nature of power exercised by the Chief Justices of the High Courts or the Chief Justice of India under section 11(6) of the Arbitration & Conciliation Act, 1996 (for short, “the Arbitration Act”). Mr. Soni pointed out that the Supreme Court has observed in this judgment that normally any tribunal or authority conferred with a power to act under a statute, has the jurisdiction to satisfy itself that the conditions for the exercise of that power existed and that the case calls for the exercise of that power. The Supreme Court observed that such an adjudication relating to its own jurisdiction, which could be called as decision on jurisdictional facts, is not generally final, unless it is made so by the Act constituting the tribunal. The Supreme Court observed that sub-section (7) of section 11 has given a finality to the decisions taken by the Chief Justice or any person or institution designated by him in respect of matters falling under sub-sections (4), (5) and (6) of section 11 of the Arbitration Act. The Supreme Court observed that once a statute creates an authority, confers on it power to adjudicate and makes its decision final on matters to be decided by it, normally, such a decision cannot be said to be a purely administrative decision. It is really a decision on its own jurisdiction for the exercise of the power conferred by the statute or to perform the duties imposed by the statute. The Supreme Court further observed that unless the authority satisfies itself that the conditions for exercise of its power exist, it could not AJN 13 accede to a request made to it for the exercise of the conferred power. The Supreme Court then observed that while exercising the power or performing the duty under section 11(6) of the Arbitration Act, the Chief Justice has to consider as to whether the conditions laid down by the section for the exercise of that power or for the performance of that duty exist and, therefore, while functioning under section 11(6) of the Arbitration Act, the Chief Justice or the person or institution designated by him, is bound to decide whether he has jurisdiction, whether there is an arbitration agreement, whether the applicant before him is a party, whether the conditions for exercise of the power have been fulfilled, and if an arbitrator is to be appointed, who is the fit person, in terms of the provision. The Supreme Court noted that section 11(7) of the Arbitration Act makes his decision on the matters entrusted to him, final. Mr. Soni contended that in this case also the CMM/DM has to decide whether the preliminary facts enabling him to exercise jurisdiction under section 14 of the NPA Act exist. This is more so, because sub-section (3) of section 14 of the NPA Act makes the order of the CMM/DM final. He submitted that the present case is clearly covered by the judgment of the Supreme Court in SBP & Co.' s case (supra). Mr. Soni submitted that in the circumstances, this court should hold that the CMM/DM acting under section 14 of the NPA Act must give notice to the borrower or a third person who is in possession, as the case may be. 24. Learned counsel Mr. Joshi has adopted all arguments of Mr. Soni. He submitted that the CMM/DM acting under section 14 cannot do something AJN 14 which a secured creditor cannot do. Under the NPA Act, a secured creditor is not given power to dispossess anybody. Possession can never be taken by dispossessing anybody. He referred to Order XXI, Rules 95 and 96 of the C.P.C. and contended that sale of the immoveable property in occupation of the judgment debtor takes place before taking possession. Thereafter auction purchaser applies to the court for taking possession. If there is a tenant, the auction purchaser takes symbolic possession. Then he may have to file a suit for possession. Mr. Joshi submitted that on similar analogy, borrower or third party cannot be dispossessed physically by a secured creditor via section 14 even before the lawfulness or otherwise of their possession is considered. 25. Mr. Joshi also referred to section 13(4)(d) which states that the secured creditor may require by notice in writing, from any person who has acquired any of the secured assets from the borrower and from whom any money may become due to the borrower, to pay him as much of the money as is sufficient to pay the secured debt. This according to Mr. Joshi is reflection of the principle that the secured creditor has a right only in sale proceeds. It is saleable interest which is mortgaged. 26. Mr. Joshi took us to Rules 8(3)(6) and (6-a), Rules 9(7), (8), (9) and (10) of the said Rules. He submitted that these Rules lay down the procedure for sale of secured asset. He submitted that Rule 8(3) begins with the words “in the event of possession of immoveable property is actually taken by the authorised officer”. He submitted that the words physical possession are AJN 15 absent in the NPA Act or the said Rules and Rule 8(3) contemplates a situation where possession of immoveable property may not be taken. He pointed out that under Rule 8(6)(a), the notice which the authorised officer has to serve on the borrower must include the description of the immoveable property to be sold, including the details of the encumbrances known to the secured creditor. Rule 9(7) speaks of a case where the immoveable property is sold subject to any encumbrances. In such cases, the authorised officer may if he thinks fit allow the purchaser to deposit with him the money required to discharge the encumbrances. Under Sub-Rule 8 on such deposit for discharge of encumbrances, the authorised officer may issue notice to the person entitled to the money deposited and take steps to make the payment accordingly and under Sub-Rule 9, the authorised officer shall deliver the property to the purchaser free from encumbrances. Therefore, the person in occupation of secured asset as a tenant who has caused the encumbrance cannot be physically ousted. He submitted that the legislature has used the word “shall” in Rule 8(1). Therefore, that is the mandatory procedure. No other procedure can be followed for sale of immoveable secured asset. Mr. Joshi contended that if there is obstruction the secured creditor can approach the CMM/DM and the CMM/DM can only order that constructive possession of the property be taken. 27. Mr. Joshi contended that the secured creditor is bound by the contract and the NPA Act does not override the Transfer of Property Act. He referred to paragraph 71 of the judgment of the Supreme Court in Mardia Chemicals' AJN 16 case (supra) where the Supreme Court has held that the borrowers cannot be left remedy-less in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defence deficiencies on the part of the banks and financial institutions. Mr. Joshi contended that therefore, while exercising power under section 14, the CMM/DM must give hearing to the person in occupation of the property. He must, inter alia, find out whether there is a valid and subsisting