*THE HON’BLE SRI JUSTICE GHULAM MOHAMMED AND THE HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO + W.P.Nos.17716 OF 2009 % Date: 20-09-2009 Between: # Mr.Omeshwar Baldwa, Proprietor, M/s. Star Function Palace, R/o 5-9- 246, Abids, Hyderabad. … Petitioner and $ Vasadi Co-operative Urban Bank Limited (Scheduled Bank) Rep. By it’s Managing Director/Authorized Officer, 16-2-705/9/11, Malakpet, Hyderabad – 500 036. … Respondent ! Counsel for the petitioner: Mannikanti Laxmiprasad ^ Counsel for respondents: < GIST: >HEAD NOTE: ? Cases referred: 1. AIR 1964 SC 358 2. AIR 1998 SC 1537 3. Reg. V. Judge of the City of London Court [1892]1 QB 273, 290, per Lord Esher; followed in Vacher & Sons Ltd. V. London Society of Compositors [1913] AC 107, 122, per Lord Atkinson; Corpn of City of Victoria v. Bishop of Vancouver Island AIR 1921 PC 240, per Lord Atkinson; Mahommad Hayat v. Commr of Income-tax, Punjab ILR 12 Lah 129, AIR 1931 Lah 87 (FB); Logan v. Burslow : The Guina 4 Moo PCC 284, 13 ER 312; State of Manipur v. AN Singh AIR 1957 Mani 1. 4. Rajib v. Lakhan 27 Cal 11, 15; Wilkinson v. Wilkinson ILR 47 Bom 843, AIR 1923 Bom 321; Patara Singh v Mila Mal ILR 4 Lah 323, 325. 5. Pannalal Bansilal Pitti v. State of Andhra Pradesh (1996) 2 SCC 498 6. Veerappa v State of Mysore AIR 1965 Mys 227, 229 (FB), per Hegde,J 7. [1948] 1 All ER 21, 29-30; Kesavananda Bharati v. State of Kerala AIR 1973 SC 1461 (CJ); Punjab National Bank v. Laxmi Chand Sunder Das AIR 1982 P&H 48 (FB) 8. AIR 1997 Calcutta 125 THE HON’BLE SRI JUSTICE GHULAM MOHAMMED AND THE HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO WP No. 17716 of 2009 ORDER: (per NRR,J) This writ petition has been instituted questioning the legality and validity of the notice dated 30.4.2009 issued by the respondent bank in terms of sub-section (2) of Section 13 of the SEREFASI Act, 2002. The writ petitioner has availed a term loan facility with the respondent bank in a sum of Rs.1,75,00,000/- (Rupees One Crore and Seventy Five Lakhs only) on 20.11.2000. The loan is repayable in 60 monthly instalments at the rate of Rs.4,58,780/- per month. As per the abstract of the term loan account No. 296 furnished to the writ petitioner as of 19.11.2002, the writ petitioner was shown as due and payable in a sum of Rs.2,64,22,716/-. It is worthy to notice from this extract that a sum of Rs.1,75,00,000/- has been shown as the principal amount due and outstanding, thus signifying that the writ petitioner has not paid any amount by way of repayment of loan to the respondent bank. On 21.6.2004, the respondent bank invoked the provision available under sub-section (2) of Section 13 of the SEREFASI Act and called upon the writ petitioner to liquidate the entire liability of Rs.3,61,95,130/-, which has become due and payable as on 15.6.2004, within 60 days from the date of receipt of the said notice. The writ petitioner has not responded to the said notice. However, since the respondent bank is a cooperative society registered in accordance with the Andhra Pradesh Cooperative Societies Act, 1964, it has invoked the provision available under Section 62 of the said Act by seeking a reference for resolution of the dispute between the parties by way of arbitration. Thereafter, the Arbitrator had passed an award on 23.1.2003 holding the respondents as liable to be pay the bank a sum of Rs.2,20,24,114/- as on 31.12.2001 together with interest at 19.5% per annum from 16.3.2002, the date of seeking the reference till the amount is realized. Calling in question the correctness and legality of the award passed by the arbitrator, the writ petitioner along with four others, has carried the matter by way of appeal before the Andhra Pradesh Cooperative Tribunal, Hyderabad, instituting CPA No. 212 of 2003. The said appeal was allowed on 3.10.2008 and the matter was remanded to the Arbitrator for fresh consideration duly providing him an opportunity for leading evidence in the matter. Subsequently, the respondent bank filed a Memo before the Deputy Registrar of Cooperative Societies, before whom the arbitration proceedings were pending, to withdraw the said proceedings with liberty to avail alternative remedies available to the bank for recovery of the amount due and payable by the defendants therein, the writ petitioner being one amongst them. Accordingly, preserving the liberty for pursuing the alternative remedies for recovering the amounts due from the respondents therein, the arbitration proceedings have been dismissed as withdrawn by an order passed on 29.4.2009. Thereafter, the respondent bank has issued notice dated 30.4.2009 once again invoking the provision available under sub-section (2) of Section 13 of the SEREFASI Act calling upon the addressees, which included the writ petitioner herein, to liquidate the total liability of Rs.9,68,04,343/- as is due as on 31.3.2009, within 60 days from the date of receipt of the said notice. It is the validity and legality of this notice which is sought to be assailed in this writ petition. To complete the narration of facts, the writ petitioner through his counsel raised objections to the notice dated 30.4.2009. The objections were lodged on 10.7.2009. The said objections have been considered and negatived by the bank on 27.7.2009, holding them untenable. Learned counsel for the writ petitioner submits that when once a notice is issued under Section 13(2) of the SEREFASI Act, the bank has no choice except to proceed further in the matter and carry the same to it’s logical end. Since the respondent bank has issued such a notice on 21.6.2004, but failed to carry the same any further, it cannot now issue another notice under Section 13(2), after a lapse of nearly five years time. Learned counsel would further submit that the respondent bank has therefore forfeited its right to invoke any further the measures available under the SEREFASI Act and hence it must fall back upon the other options available for recovering the debt due by instituting the legal proceedings only before the appropriate civil court. Learned counsel would further submit that the 2nd notice issued now is intended to cause manifest injustice to the writ petitioner/borrower and it could never have been intendment of the Parliament to cause any such manifest injustice by enacting SEREFASI Act. Therefore, provisions of the SEREFASI Act are not intended to be invoked by such a defaulting banker. It was further contended that a disproportionate mischief is now sought to be caused to the writ petitioner by seeking to recover a huge amount,and hence by invoking the provisions available under Section 13 of the SEREFASI Act, no such disproportionate mischief should be allowed to be visited to a borrower. Elaborating this contention, the learned counsel for the petitioner would submit that when the notice was first issued on 21.6.2004, the writ petitioner was called upon to liquidate a liability of Rs.3,61,95,130/- as of 15.6.2004 and if only the bank had carried the matter to its logical conclusion by putting to sale the secured asset, the writ petitioner would have had the benefit of not only liquidating in its entirety the outstanding liability, but he would have also derived the benefit to the excess sale amount, which the secured asset is capable of fetching due to its location in a prime commercial area of Hyderabad city. Whereas by issuing the impugned notice, the respondent bank seeks to recover an amount of Rs.9,68,04,343/- due as of 31.3.2009, which amount is more than Rs.6 Crores than what was demanded through the 1st notice dated 21.6.2004. As an offshoot to this contention, the learned counsel for the writ petitioner would submit that by unnecessarily delaying the subsequent proceedings including liquidation of the secured asset pursuant to the notice dated 21.6.2004, the respondent bank is seeking to unjustly enrich itself by more than Rs.6 crores as of today. Learned counsel would also further submit that the guidelines in the form of prudential norms to be followed by every banker issued by Reserve Bank of India for purposes of classification of assets as non performing assets, have been followed by the respondent bank in the breach. Hence, it is contended that the action of the respondent bank is grossly unjust and iniquitous and therefore the respondent bank should not be permitted or allowed to proceed any further in the matter. Learned counsel for the respondent bank has drawn our attention to the material enclosed to the counter affidavit filed by the bank in the above matter. It is pointed out that the writ petitioner on 26.8.2002 informed the Deputy Registrar of Cooperative Societies/Arbitrator, in writing, that he is settling the matter out of court with the bank and sought for a month’s time. Hence time was accorded to the writ petitioner by the Arbitrator. But, however, no such steps and measures have been taken by the writ petitioner at all. That apart, the writ petitioner never showed up before the learned Arbitrator thereafter. In those circumstances, the award came to be passed on 23.1.2003. However, the writ petitioner has carried the matter in appeal before the Cooperative Tribunal and in that Cooperative Tribunal Appeal NO. 212 of 2003, an application has been taken out by the writ petitioner seeking stay of the auction of the secured asset slated for 16.6.2003 and he has submitted in that respect as follows: “5. I submit that the loan issued by the 2nd respondent is fully secured and there is no risk as prime immovable property situated in no less than Abids Road, Hyderabad, fulcrum of Hyderabad City, is offered as security, the 2nd respondent has hastily taken the impugned proceedings. The auction is fixed on 16.6.2003. In the above circumstances I request the Hon’ble Court to grant time of 60 days and I undertake to pay a sum of Rs.25,00,000/- (Rupees Twenty five lakhs only). Therefore I pray that the Hon’ble Tribunal to grant me stay for a period of 60 days for the payment of the above said amount.” But, however, the writ petitioner has not taken any measures or steps to liquidate even a part of his liability, once the threat of auction of the secured asset has receded. Thus, the learned counsel for the respondent – Bank would submit that it is the conduct of the writ petitioner, which prevented the respondent bank from realizing the amount due and payable by him by liquidating the asset by way of public auction. Before the rival contentions are taken up for consideration, the important circumstances that led the Parliament to enact SEREFASI Act, 2002 need to be kept in view. The statement of Objects and Reasons of the Enactment read as under: "The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non- performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas." In order to attain economic stability and to save the country from a possible economic crisis, certain reforms have been contemplated. Since banks and other financial institutions have come to play a major part in lending/providing financial assistance to various sectors, including trade, commerce and industry, some of the reforms are also needed in that sector. Thus, the Central Government after a thorough and proper consideration of various aspects relating to banking sector specific reforms, has enacted SEREFASI Act, 2002 duly taking into account the internationally prevailing practice of securitisation of the debts. Further, the fact that the other measures taken by enacting the Recovery of Debts due to Banks and Financial Institutions Act, 1993, has not substantially improved the quantum of recovery of debts due to banks, has also played it’s significant part in the policy frame work of the SEREFASI Act, 2002. The facts stated in the preamble and statement of objects and reasons appended to any legislation are evidence of any legislative judgment and offer the platform for the justification of the enactment. In the above backdrop, it would be appropriate to appreciate some of the important expressions found in the enactment. The expressions `borrower,’ `default’, `financial assistance’, `financial asset’, `non-performing asset’, `security agreement’ and `security interest’ have been defined in Clauses (f), (j), (k), (l), (o), (z), (za) and (zf) in Section 2 of SEREFASI Act, 2002 in the following manner: (f) "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance; (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; (k) "financial assistance" means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution; (l) "financial asset" means debt or receivables and includes— (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (vi) any financial assistance; (o) "non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,-- (a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank (zb) “security agreement” means an agreement, instrument of any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor; (zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31; Chapter III of the Act dealt with the enforcement of the Security Interest. Section 13 listed out the detailed procedure for enforcement of the `security interest’. Notwithstanding anything contained in Sections 69 and 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor was now rendered enforceable without the intervention of a court or a tribunal, by such creditor in accordance with the provisions of the SEREFASI Act. Thus, legitimacy has been accorded for enforcing the security interest by a creditor without the necessity of intervention of any court or tribunal. Sub- section (2) of Section 13 mandates the creditor to demand the defaulting borrower whose debt is classified as a `non-performing asset’, to discharge his full liability within 60 days from the date of the notice. Notice must contain the details of the amount payable by the borrower and also the secured assets intended to be enforced by the secured creditor in the event of non payment of the debt. Sub-section (4) of Section 13 conferred wide range of powers on to the secured creditor and since it will have considerable bearing upon the controversy canvassed before us, we deem it appropriate to extract the said provision hereinbelow: CHAPTER III - ENFORCEMENT OF SECURITY INTEREST - 13. Enforcement of security interest (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; (b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset: PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt. (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. A careful analysis of the above provision makes it clear that a secured creditor may take recourse to one or more of the following measures in the process of recovering the debt viz., (1) take possession of the secured assets including their right to transfer by way of lease, assignment or sale. (2) Take over the management of the secured assets with a similar right of transfer by way of lease, assignment or sale. (3) Appoint a Manager for managing the secured asset, upon taking over of its possession. (4) Call upon a third party who has acquired any of the secured assets from the borrower, to pay so much of money which would be sufficient to liquidate the debt. Therefore, a creditor is not invariably required to undertake transfer of the title over the secured assets, upon failure of the debtor to liquidate the liability even after expiry of 60 days period of time provided in the notice served in terms of sub-section (2) of Section 13. The statute has left the choice to the creditor for taking an appropriate measure that suits the occasion. If the value based judgment of the creditor impels him to lease out or assign the secured asset to any third party, which measure, according to him, would be sufficient to liquidate the liability of the borrower, then the creditor need not have to contemplate upon the issue of transfer of title of the asset by way of sale at all. Similarly, the creditor can take over the management of the secured asset and appoint a Manager for the said purpose. If within a reasonable period of time, by deploying such prudent measures of management, if the entire debt/liability can be liquidated, the secured asset need not be contemplated for transferring the same by way of sale, or lease or assignment. Therefore, the contention canvassed by the learned counsel for the petitioner that when once a notice is served by a creditor in terms of sub-section (2) of Section 13 of the SEREFASI Act, he must invariably carry it to its logical conclusion resulting in transfer of the secured asset by way of sale, is not liable to be accepted. When a statute has provided for various options, to be explored by a creditor, it is not liable to be inferred that one of them or all of them in the same serial order as they are specified in the enactment should be explored inevitably. The statute has therefore, to my mind, left enough room for play in the joints and conferred the necessary discretion to be exercised by the secured creditor. It is certainly open to him to quickly liquidate the secured asset by transferring it by way of sale at the very first instance itself. It is equally open to the secured creditor not to adopt such a measure as the first of the choices available and it is open to him, to explore the other options as well. This apart, when a statute like SEREFASI Act has not provided for any further time limit within which period, the steps or measures enumerated under sub-section (4) of Section 13 have got to be accomplished, it is not open for us to construe a time limit for accomplishing the said objectives. Advisedly, the Parliament has not contemplated fixation of any time table for achieving any or all of the steps and measures provided for, under sub-section (4) of Section 13 of SEREFASI Act. The reasons are not far to seek. In a given situation, if a commercial enterprise or an industrial concern, is considered as a viable one and if is properly managed by a competent manager, the prospects of liquidating the entire liability from out of the profits earned from such an enterprise, if be considered as a better option, then by appointing a qualified or competent manager, the creditor is bound to manage the secured asset for a while before the necessity to take any other decision afresh by him would arise. It is but reasonable for a viable commercial enterprise to be run for atleast two to three years and if the recovery process of the debt is really encouraging by such an enterprise, then perhaps the creditor may consider prolonging the same arrangement of managing the affairs of the secured asset by a further period, instead of liquidating it by way of transfer/sale. On the contrary, even at the end of a reasonable period of tenure and notwithstanding competent and skillful management of the affairs of the secured asset, the recovery prospects of the debt are not bright enough, then these additional inputs can impel the creditor to think on the lines of transfer of the asset by way of sale. Therefore, this very process, being a time consuming one, the statute might have advisedly not considered it appropriate to fix any time table for achieving any or of all the steps and measures provided for under sub- section (4) of Section 13. We have therefore no hesitation to reject the contention canvassed by the learned counsel for the petitioner that when once a notice is issued under sub-section (2) of Section 13, all or any of the steps provided for under sub-section (4) of Section 13 must invariably follow, after the expiry of the 60 days period of time provided for under the