IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 1.10.2010 CORAM: THE HONOURABLE MR.JUSTICE ELIPE DHARMARAO AND THE HONOURABLE MR.JUSTICE D.HARIPARANTHAMAN Writ Petition No.10594 of 2008, M.P.No.1 of 2008 and M.P.No.1 of 2009 1.M/s.Sathya Foundations Private, 7, Venkatesa Chowdhry Street, West Tambaram, Chennai-600045, rep.by its Director C.Sathya Samuel 2.C.Sathya Samuel 3.Mrs.Jancy Sathya ... Petitioners Vs. 1.Indbank Housing Limited, rep.by its Company Secretary/ Authorised Officer, Corporate Office at 480, Annasalai, III Floor, Nandanam, Chennai-35. 2.Union of India, rep.by the Secretary to Government, Ministry of Finance, Department of Economic Affairs (Banking Division) North Block, New Delhi. 3.The Manager, Government of India Press, Mayapuri Industrial Area, Ring Road, New Delhi. 4.K.K.Thirumurugan ... Respondents (R.4 has been impleaded as per the order of the Court dated 15.9.2009 in M.P.No.2/2009) https://hcservices.ecourts.gov.in/hcservices/ Writ Petition filed under Article 226 of the Constitution of India, praying to issue a Writ of Declaration, declaring that the Notification issued by the 2nd respondent bearing S.O.No.1083, dated 16.3.2006 as published in Part II, Section 3, Sub section (ii) in the Weekly Gazette of India, bearing date March 19 – March 25 of 2006 as illegal and unconstitutional and consequently issue a Mandamus by directing the first respondent not to invoke the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Enforcement Act 2002 as against the petitioners herein. For petitioners : Mr.Satish Parasaran For R.1 : Mr.Jayesh Dolia for M/s.Aiyar and Dolia For R.2 : Mr.M.Ravindran, Addl.Solicitor General of India assisted by Mr.J.Ravindran, Asst.Solicitor General of India For R.3 : Prof.M.Udhaya Bhanu For R.4 : Mrs.Narmada Sampath O R D E R ELIPE DHARMARAO, J. The first petitioner company is a builder and with a view to develop a housing project in the lands measuring about 78 cents at S.No.166/3B3, Kovilambakkam Panchayat, Tambaram Taluk, Chennai, the petitioners have approached the first respondent Bank and obtained a project loan of Rs.40 lakhs on 12.8.1995 for the construction and as security for the loan, the land owners S.Lakshmanan and S.Ramachandran have deposited the title deeds of the property with the first respondent Bank. The project site has been named as 'Sathya Gardens' and the cost of the total project was Rs.1.50 crores, even though it was shown as Rs.88.34 lakhs in the loan proposal submitted to the first respondent Bank. Thereafter, as per the petitioners, since the Tamil Nadu Slum Clearance Board sought to acquire the lands immediately abutting the land which was being developed by them, the proposed purchasers panicked and stopped making the payment towards the purchase of flats and hence the project came to a standstill. Since the petitioners failed to repay the loan amount, the first respondent Bank instituted a suit in C.S.No.230 of 1998 on the original side of this Court, seeking recovery of Rs.46,47,264/= with further interest and costs. During the pendency of the said suit, the petitioners were desirous of https://hcservices.ecourts.gov.in/hcservices/ settling the issue amicably and hence a tripartite agreement was entered into on 29.2.2000 between the first petitioner, the first respondent Bank and Sathya Gardens Flat Purchasers Association, as per which, the first petitioner proposed to complete the construction of the apartments and out of the total sale consideration of Rs.66,55,590/= to be received by the first petitioner from the purchasers of 22 flats, who have already booked, the first petitioner agreed to deposit the loan amount in an Escrow Account opened in Indian Bank, Nandanam Branch, Chennai in the name of Sathya Gardens Flat Purchasers Association, but no money was deposited by the purchasers so as to finish the project and hence the stalemate with respect to the project continued. 2. In the meantime, the first respondent Bank had agreed for a one time settlement, on 13.6.2005, agreeing to receive a sum of Rs.65 lakhs as full and final settlement of the project loan. As per the terms of the said one time settlement, the petitioners were required to pay the above amount within six months from the date of the first respondent's approval and the petitioners were required to make payment of Rs.16.25 lakhs being 25 % of the settlement amount as upfront money within 30 days from the date of the above settlement and it was also agreed that a consent decree may be passed in C.S.No.230 of 1998. But, subsequently, the petitioners addressed a letter to the first respondent Bank that payment of 25% as upfront money is not possible since the project has not been completed and offered to pay 10% as upfront money and sought for ten months time to pay the entire amount as accepted, since it would not be possible to complete all the 32 flats within a period of five months, for which there was no reply from the first respondent Bank. 3. Thereafter, a notice was issued by the first respondent Bank in 'Dinamalar' on 11.9.2005, intimating to the public that the project promoted by the first petitioner is the subject matter of mortgage and hence the public was cautioned not to deal with the property. According to the petitioners, the first respondent had projected a false picture in public as if the entire extent of 78 cents of land including plot Nos.13 to 15 situated at Survey No.166/3B3 in PMD Nagar Layout is the subject matter of security offered to the first respondent, even though only Plot Nos.16 to 23 measuring about 18,349 sq.ft. were alone offered as collateral security and not the entire 78 cents as alleged by the first respondent Bank. After the said advertisement, a letter was addressed to the first respondent by the petitioners on 19.9.2005, alleging falsity in the advertisement, for which a reply was received from the first respondent denying the contentions of the petitioners and thereafter, the petitioners again sent a legal https://hcservices.ecourts.gov.in/hcservices/ notice on 19.1.2006 calling upon the first respondent to issue a corrigendum so as to undo the loss caused to them, for which a reply was received from the first respondent reiterating their earlier stand. In these circumstances, the petitioners 1 to 3 have filed a suit in C.S.No.850 of 2006 on the original side of this Court against the first respondent Bank, claiming damages of Rs.20 lakhs. 4. While so, a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the 'SARFAESI Act') was issued by the first respondent Bank calling upon the petitioners to pay a sum of Rs.3,01,91,111/= as on 28.2.2006 with further interest. It is the claim of the petitioners that in the said demand notice, the first respondent once again reiterated its claim of mortgage over plot Nos.13 to 15, further marking copy of the notices to the purchasers of the flats which is mischievous and meant to undermine and defame the goodwill of the petitioners. Therefore, the petitioners filed W.P.No.10318 of 2006, challenging the notice issued under Section 13(2) of the SARFAESI Act. The said writ petition was dismissed by a Division Bench of this Court on 13.12.2006, following the judgment of the Honourable Apex Court in TRANSCORE vs. UNION OF INDIA [(2006) 5 CTC 753], wherein it was held that the parallel proceedings can be initiated by a secured creditor i.e. proceedings under the SARFAESI Act as well as the proceedings before a Civil Court or Debts Recovery Tribunal. While dismissing the said writ petition, the Division Bench of this Court granted leave to the petitioners to approach the Debt Recovery Tribunal and invoke Section 17(2) of the SARFAESI Act. Thereafter, the first respondent issued a possession notice under Section 13(4) of the SARFAESI Act on 15.12.2006 taking symbolic possession of the properties situated at S.No.166/3B3 at PMD Nagar Layout measuring 78 cents. The said notice was challenged by the petitioners by filing W.P.Nos.1784 and 1785 of 2007 before this Court, on the ground that the first respondent Bank has not been notified as an 'institution' under Section 2(1)(m)(iv) of the SARFAESI Act, 2002 and hence it is not a 'financial institution' within the meaning of the said Act and Section and hence the first respondent is incompetent to initiate any proceedings under the SARFAESI Act and the action already taken is illegal and unwarranted. Both the said writ petitions were dismissed. Against the dismissal order passed in W.P.No.1784 of 2007, the petitioners preferred W.A.No.761 of 2007. However, the petitioners did not prefer any appeal as against the dismissal of W.P.No.1785 of 2007 since the Ministry of Finance, Department of Economic Affairs, Banking Division has issued a notification prescribing fee to be paid for preferring an appeal against the measures under Section 13(4) of the SARFAESI Act. https://hcservices.ecourts.gov.in/hcservices/ 5. Thereafter, the first respondent once again issued a notification dated 23.9.2007 informing the public that the alleged secured interest created in favour of the first respondent Bank will be brought for sale and therefore, aggrieved, the petitioners filed S.A.No.227 of 2007 before the Debt Recovery Tribunal-II, Chennai. In this proceeding, the Debt Recovery Tribunal-II, Chennai has passed an interim order, permitting the first respondent to proceed with the auction sale on 23.10.2007, but, however,not to confirm the auction sale, pending disposal of the S.A.No.227 of 2007. But, the first respondent did not conduct the auction sale on 23.10.2007 and hence, the auction sale notice dated 23.9.2007 automatically expired. The first respondent, conducted the auction sale on 10.11.2007, by re-fixing the upset price at Rs.200 lakhs, by publishing the sale notice in the daily newspapers on 6.11.2007. 6. During the pendency of these proceedings, one of the flat purchasers of the property in question viz. Dr.S.Sathyanarayanan filed a memo. in S.A.No.227 of 2007, praying to implead him as a party to the said proceedings, but the DRT-II, Chennai declined to implead him as a party, but however, granted liberty for him to file a separate appeal under Section 17 of the SARFAESI Act. In pursuance of the said liberty, the said Dr.Sathyanarayanan also filed an appeal under Section 17(2) of the SARFAESI Act before the DRT-II, Chennai in S.A.No.64 of 2008, challenging the auction sale conducted by the first respondent on 10.11.2007 pursuant to the auction sale notice dated 23.9.2007. 7. On 14.8.2008, the above S.A.No.227 of 2007 filed by the petitioners herein was dismissed by the DRT-II, Chennai. Though the property was sold out during the pendency of these proceedings, the auction was not confirmed as per the orders of the DRT and as a result of the delay in the proceedings for confirming the sale, the auction purchaser withdrew the offer. Thereafter, S.A.No.64 of 2008 filed by the said Dr.Sathyanarayan before DRT-II was allowed in part, on 26.2.2009, setting aside the sale held on 10.11.2007, observing and holding that the mandatory 30 days statutory notice was not given. 8. In these circumstances, the first respondent Bank issued an auction sale notice dated 11.5.2009, which was also challenged by the petitioners by filing S.A.No.83 of 2009 before DRT-III, Chennai and the Tribunal, by the order dated 11.6.2009, though has not granted any stay for conducting the sale, however, has restrained the first respondent Bank from confirming the sale for ten days. Accordingly, auction sale was conducted on 11.6.2009 wherein the https://hcservices.ecourts.gov.in/hcservices/ impleaded fourth respondent became the highest bidder with an offer of Rs.1,76,40,000/= and he also remitted 25% of the bid amount. 9. While things stood thus, the petitioners have come forward to file this writ petition, challenging the notification issued by the Government of India, dated 16.3.2006, thereby declaring the first respondent Bank as a 'financial institution' under the SARFAESI Act. 10. Though, at the first instance, the matter was listed before a learned single Judge and the matter was also admitted by the order dated 25.4.2008, another learned single Judge, by the order dated 10.6.2009, has directed the matter to be posted before the appropriate Division Bench, since being a matter falling under SARFAESI Act. Accordingly, it was listed before a Division Bench and this Court, by the order dated 18.6.2009, taking into consideration the fact that by the time the order dated 11.6.2009 passed by the DRT-III, Chennai was communicated, the sale got confirmed in favour of the subsequent purchaser, has directed that the sale certificate shall not be issued and possession shall not be delivered until further orders. At this stage, the subsequent purchaser has come forward to file an impleadment petition in M.P.No.2 of 2009 and the same was allowed by this Court on 15.9.2009, thus, bringing him on record as the fourth respondent. While allowing the impleadment petition by the order dated 15.9.2009, this Court has ordered that confirmation of sale would be subject to the result of the writ petition and the sale certificate shall not be issued and possession shall not be delivered until further orders. 11. The contention of the impleaded party/the fourth respondent is that because of the interim order passed by this Court, his huge sum of Rs.62.50 lakhs got blocked for no fault of him and that he is willing to tender the balance amount immediately on confirmation of sale and taking over possession of the property, but the first respondent Bank is not in a position to do the same and hence he requested to vacate the order dated 18.6.2009 or in the alternative to direct the first respondent Bank to refund the amount of Rs.62,50,000/= paid by him immediately. He also undertook to pay the entire sale consideration of Rs.1,76,40,000/= within seven days from the date of sale being confirmed in his favour and vacant possession being handed over to him. 12. We have heard the learned counsel on either side and perused the materials placed on record. https://hcservices.ecourts.gov.in/hcservices/ 13. The learned counsel appearing for the petitioners would strenuously argue that the first respondent Bank is not at all a 'financial institution' within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act and the second respondent has committed a gross error in issuing the impugned notification, ignoring the notification dated 10.11.2003 and the fact that it is also not a 'financial institution' under Section 45-I(f) of the Reserve Bank of India Act, 1934. He would further submit that though only Plot Nos.16 to 23 are mortgaged with the first respondent Bank by the petitioners, with a mischievous and malicious intention of cheating the petitioners and marring the reputation of the petitioner's firm in the eye of the general public, the first respondent issued the notice dated 11.9.2005 in 'Dinamalar', mentioning all the plot numbers as the subject matter of mortgage. On such arguments, the learned counsel would pray to allow the writ petition. 14. On the contrary, the learned counsel appearing for the first respondent Bank would argue that the petitioners are the chronic defaulters and when the first respondent Bank, a subsidiary of the Indian Bank, has initiated legal proceedings to recover the dues, the petitioners are creating so many obstacles by initiating numerous litigations in various forums, thus adopting the dilatory tactics with the sole aim of swallowing the public money. He would further argue that the Government of India, taking into consideration all the facts and circumstances and considering the issue of recovery of huge public money from the defaulters of the Bank, has issued the impugned notification, to which no illegality could be attached. On such arguments, he would pray to dismiss the writ petition. 15. The learned Additional Solicitor General of India, by filing a statement before this Court, would argue that the impugned notification has been issued taking into consideration the problems being faced by a public bank in recovering its dues from the chronic defaulters. He would further submit that if such an action is not resorted to, it would become highly a typical task for the financial institutions to recover their dues, which would lead to financial crunch in the country. 16. Though the learned counsel appearing for the petitioner has vehemently argued about the notice issued by the first respondent on 11.9.2005 in 'Dinamalar', alleged to be mentioning all the plot numbers therein as the subject matter of mortgage, and the same has been stiffly refuted by the learned counsel appearing for the first respondent Bank, we do not propose to go into the said aspect, since https://hcservices.ecourts.gov.in/hcservices/ a civil suit in C.S.No.850 of 2006 on this issue is pending on the original side of this Court and the parties are left open to argue their respective cases in this behalf in the said suit. Therefore, the only issue which needs to be discussed and decided by us to settle the controversy in question is whether the impugned Notification, notifying the first respondent Bank as a 'financial institution' for the purpose of SARFAESI Act, is valid or not. 17. According to the petitioner, any Housing Finance company to be notified as financial institution, the criteria to be scrupulously followed is to see whether the said Housing Finance Company has got Tier-I capital of Rs.10 crore, as such a capital would ensure that housing financing companies with a sound financial base alone are notified so that the power of enforcement of security under SARFAESI Act is exercised prudently. 18. No doubt, this criteria of Tier-I capital of Rs.10 crore was stipulated by the Government of India by a notification dated 10.11.2003 to ensure that the power of enforcement of security under SARFAESI Act is exercised prudently and to further ensure that small companies with a low capital base and low level of operations, which may not be very professionally managed, are not given powers of enforcement. 19. It is seen from the materials placed on record that the Reserve Bank of India, has earlier rejected the request of the first respondent Bank to notify it as a 'financial institution' under the SARFAESI Act, considering the fact that the first respondent was not maintaining the minimum Tier-I capital of Rs.10 crore, by their communication dated 23.9.2005. But, the thing which should not be forgotten is that the first respondent is none other than the subsidiary of the Indian Bank, which is owned cent per cent by the Government of India and a 'secured creditor' for all purposes. It is also seen from the materials placed on record that the first respondent had an accumulated loss of Rs.89.18 crores as on 31.12.2005 and besides investing in the equity of the subsidiary as promoter, there were dues to Indian Bank from the first respondent Bank with an outstanding sum of Rs.58.71 crores apart from interest as on 31.12.2005 and thus all the recoveries made by the first respondent will go back to Indian Bank. Therefore, the Indian Bank was consistently requesting the Government of India and the Reserve Bank of India to consider all these aspects and notify the IndBank Housing Limited/the first respondent as a 'financial institution' under the SARFAESI Act since the Non-performing Assets (NPAs) of IndBank Housing Limited, in effect, reflect NPAs of Indian Bank. https://hcservices.ecourts.gov.in/hcservices/ 20. No doubt, as has already been stated, the notification dated 10.11.2003, issued by the Government of India stipulated the criteria of Tier-I capital of Rs.10 crore with a view to see that housing finance companies with a sound financial base are notified so that the power of enforcement of security under the SARFAESI Act is exercised prudently and the first respondent does not satisfy this requirement. But, the Reserve Bank of India, who is the regulator of the banking system in the country and in fact, a banker to banks, considering the fact that the object of enacting SARFAESI Act was to enable banks and financial institutions to realize long- term assets, manage problems of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce NPAs by adopting measures for recovery or reconstruction and further considering the fact that NPAs of the first respondent are virtually NPAs of Indian Bank and that the Indian Bank, by virtue of its status as a 'bank', qualifies for the definition of 'secured creditor' and the logic is to be extended to an entity whose NPAs create the NPAs of Indian Bank and that the inclusion of the first respondent in the notified institution category is for the purpose of recovering legitimate dues and not for further lending operations, has recommended to the Government of India, to examine the request of the Indian Bank. Based on this, the Government of India, has issued the impugned notification, notifying the first respondent, a subsidiary of Indian Bank, as 'financial institution' for the purposes of the SARFAESI Act. When, undoubtedly, the Government of India, has got the power to prescribe certain criteria for notifying any institution or non- banking financial company as 'financial institution' for the purposes of SARFAESI Act, it equally follows, undoubtedly, that it has also got the power to relax such criteria, depending upon the facts and circumstances of the claim. Until and unless public moneys lying with defaulters are recovered, the country's economy will get affected badly and only to prevent such situations and to arm the Banks and financial institutions with necessary teeth to recover such dues from the defaulters with no undue delay, SARFAESI Act has been enacted by the legislature. In the case on hand, as has been discussed supra, there has been complete application of mind on the part of the Reserve Bank of India and the Government of India, to the issue of protecting the public money and the need to notify the first respondent as a 'financial institution', by relaxing the criteria of Tier-I capital of Rs.10 crore. We are also informed that the first respondent is now recovering the legitimate dues and no lending operations are going on. Therefore, no illegality or irregularity has been committed by the Government of India and the Reserve Bank of India, in considering and issuing the impugned notification. https://hcservices.ecourts.gov.in/hcservices/ 21. To appreciate the other argument advanced on the part of the petitioner that the first respondent is not a financial institution under Section 2(1)(m)(v) of the SARFAESI Act, we shall now extract the said provision of law hereunder: "2(1)(m) "financial institution" means - (i) .... (ii) ..... (iii) .... (iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act." Section 45-I (f) of the Reserve Bank of India, 1934 reads as under: "45-I. Definitions.—In this Chapter, unless the context otherwise requires,— (a) ..... (b) ..... (c) ..... (d) .... (e) .... (f)“non-banking financial company” means— (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify." 22. A combined reading of both these provisions of law would make it clear that the Government of India has been vested with unfettered powers to notify any institution or non-banking financial company as a 'financial institution' for the purposes of the SARFAESI Act, by notification in the Official Gazette, which has been properly exercised by the Government of India in the case on hand solely with a view to protect the interest of a subsidiary of a National Bank, by relaxing the criteria of Tier-I capital of Rs.10 https://hcservices.ecourts.gov.in/hcservices/ crore . Therefore, the argument advanced on the part of the petitioner that the first respondent is not a financial institution and hence, the Government of India, ought not to have granted the first respondent the status of a 'financial institution' does not merit consideration, in view of the above discussed factual and legal aspect. 23. The inclusion of third respondent, who has no role to play in the entire issue of