IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD PRESENT : : THE HON’BLE SRI JUSTICE N.V.RAMANA AND THE HON’BLE SRI JUSTICE P. DURGA PRASAD W.P.No.7026 of 2011 Dated:28-09-2011 Between: Paladugu Tharakeshwari ….Petitioner. And The Authorised Officer, Axis Bank, Warrangal. ….Respondent. The Court made the following: THE HON’BLE SRI JUSTICE N.V.RAMANA AND THE HON’BLE SRI JUSTICE P. DURGA PRASAD W.P.No.7026 of 2011 ORDER: (per the Hon’ble Sri Justice P.Durga Prasad) This Writ Petition is filed for issuance of writ of Mandamus declaring by declaring the notice dated 07.01.2011 issued under Section 13 (2) of the SARFAESI Act by the respondent bank as illegal, arbitrary and without jurisdiction. According to the petitioner her late husband P.Ram Mohan Rao was engaged in the business of Seed processing in the name and style of M/S Paladugu Seeds, having its Head Office at Govindaraopet and IDA Rampur, Warangal District. During the course of his business, he approached the respondent bank for certain credit facilities and the respondent bank has granted cash credit facility of Rs.120 lakhs by their letter dated 15.05.2009, Rs.100.08 and Rs.37.58 lakhs towards Commodity loan as against the collateral securities of immovable properties situated in Warangal belonging to her husband and the residential property situated at 11Vijayawada belonging to their relatives as 3rd party guarantee. The said loan facilities are also secured by way of Hypothecation of stocks of raw materials, semi finished goods, consumable stores and such other movables including book debts, outstanding monies receivable etc. Her husband died on 08.06.2009 intestate and the assets and liabilities are devolved upon his legal heirs i.e. herself, her minor son and her mother-in- law and she was forced to take charge of the business and repaid the amounts within two months to the respondent bank to a tune of Rs.220 lacks as against the total limit of Rs.260 lakhs. The respondent bank also addressed a letter dated 31.08.2009 requesting her that the present account cannot be operated due to her husband’s death and instructed her to open a new account either in the capacity of sole proprietor of the firm or a partnership concern. She has brought to the notice of the respondent bank vide letter dated 30.01.2011 that the assets and liabilities of the said firm were distributed among the legal heirs of late P.Ram Mohan Rao and requested the respondent bank to initiate steps for recovery of the balance outstanding by disposing of the stocks available in godown. But the bank without exercising the rights over the hypothecated assets initiated steps for recovery under SARFAESI Act and got issued a notice under Section 13 (2) of the SARFAESI Act dated 07.01.2011 contending that the petitioner firm account has become NPA on 29.06.2010 and demanded an amount of Rs.32,62,628/- alleging to be an outstanding as on 28.12.2010. She gave a reply to the said notice contending that the liability cannot be fastened upon her in view of the fact that the appropriate stocks are available to set off the liability. Respondent bank having failed to initiate steps for disposal of the hypothecated stocks which stood as primary security, cannot resort to the provisions of the SARFAESI Act for the alleged recovery. The respondent bank has not followed the provisions of Section 13 (2) of SARFAESI Act and issuance of the said notice under the said Section is without jurisdiction. She further pleaded that the amount outstanding is less than 20% of the entire credit limit; as such the respondent bank is not entitled to invoke the provisions of the SARFAESI Act as per Section 31 (j) of the said Act. The respondent bank opposed the said application by filing counter denying the allegations made by the petitioner. According to them, the petitioner’s husband late P.Ram Mohan Rao, who is the proprietor of M/s. Paladugu Seeds, during the course of its seeds processing business availed following financial assistance from respondent bank, which are independent of each other and are treated as separate loan account or transaction. They are (a) Commodity loan of Rs.100.80 lakhs (based on warehouse stocks receipts) availed from Warangal branch of the respondent bank – which was cleared by the borrower by 11.08.2009. (b) Commodity loan of Rs.37.58 lakhs (based on warehouse stocks receipts) availed from Nandyal branch of the respondent bank – which was cleared by the borrower by 05.09.2009, and (c) Cash Credit loan (working capital facility) of Rs.120.00 lakhs sanctioned 30.03.2009 vide sanction letter bearing reference No.AXISB/WGL/CC/2008-09 (Cash Credit Facility) and was accepted by the late P.Ram Mohan Rao (proprietor and husband of the petitioner herein) and guarantor (Smt. Vemulapalli Krishna Kumari), out of which an amount of Rs.32,62,628/- as on 28.12.2010 together with interest was outstanding and payable to the respondent bank. They also created equitable mortgage on the immovable properties situated at Warangal and Vijayawada owned by them towards security for due repayment of the aforesaid Cash Credit Facility along with interest and other charges as and when due and payable. The above sanctioned facility of Rs.120 lakhs was availed by the borrower from time to time. Since the petitioner and her minor son and her mother-in-law have succeeded to the properties of the deceased P.Ram Mohan Rao, they are liable to discharge all the debts or liabilities of late P.Ram Mohan Rao, who is the proprietor of M/s. Paladugu Seeds from out of the properties of the deceased. Since the other loans obtained by late P.Ram Mohan Rao were cleared off and the only outstanding amount is under cash credit facility of Rs.120 lakhs, which was classified as ‘NPA’ by the respondent bank as per the guidelines of RBI. Since 20% is only Rs.24,00,000/-, the contention of the petitioner that the outstanding amount demanded in the Section 13 (2) notice under challenge in the present writ proceeding is in violation of Section 31 (j) of SARFAESI Act is absolutely wrong. The securities against which the cash credit facility was advanced by the respondent bank are secured assets within the meaning of Section 2 (1) (zc) of SARFAESI Act. The petitioner without disclosing the correct facts and deliberately clubbed different loan facilities availed by the petitioner firm and projected the total credit limit as Rs.260 lakhs so as to show the outstanding cash credit facility amount is less than 20% of the total outstanding amount due to avoid legal proceedings under SARFAESI Act. The respondent bank has issued the notice by following the guidelines issued by the RBI under Section 13 (2) of the SARFAESI Act by declaring the loan account of the borrower as ‘NPA’. Therefore, the writ petitioner is not entitled for any relief and the writ petition is liable to be dismissed. The writ petitioner has filed a reply to the counter filed by the respondent bank, pleading that herself and her son are not the borrowers of the respondent bank as defined under the Act. Secured creditor can initiate steps for recovery of the alleged outstandings if any by enforcing its securities under the Act against the borrower and its guarantor only and in the present case the demand is made against her without any privity between her and the bank. Thus, the notice under Section 13 (2) of the Act is liable to be set aside in limini. The respondent bank has no right to proceed against her and her minor son under SARFAESI Act. The writ petitioner’s counsel has pleaded that the writ petitioner is not a borrower as defined under Section 2 (1) (f) of the SARFAESI Act and as the amount outstanding is less than 20% of the total sanction limit, the provisions of SARFAESI Act are not applicable as per Section 31 (j) of the Act. As such the notice under Section 13 (2) of the SARFAESI Act is liable to be set aside. He further pleaded that the respondent bank can proceed against the hypothecated stock, which stood as a primary security as the same is sufficient to set off the liability, which is outstanding and payable by the borrower. The respondent’s counsel on the other hand has pleaded that late P.Ram Mohan Rao has availed 3 different loans and they cannot be clubbed together and the outstanding amount is under cash credit facility of Rs.120 lakhs and which is more than 20% of the total credit limit, as such the provisions of 31 (j) of the Act are not applicable. He further pleaded that since the petitioner, her minor son and her mother-in-law succeeded to the estate of late P.Ram Mohan Rao, they are liable to discharge the debts of the said P.Ram Mohan Rao and they cannot claim that they are not the borrowers as per Section 2 (1) (f) of the Act. The late P.Ram Mohan Rao as a proprietor of M/s Paladugu Seeds has obtained 3 loan facilities, out of which, according to the respondent bank the commodity loan of Rs.100.80 lakhs and another commodity loan of Rs.37.58 lakhs, were cleared off by the borrower. The said late P.Ram Mohan Rao also availed cash credit facility of Rs.120.00 lakhs, and outstanding amount under the said account is Rs.32,62,628/- as on 28.12.2010. In the impugned notice issued under Section 13 (2) of the Act dated 07.01.2011 also the respondent bank has shown the sanction limit as Rs.120 lakhs and outstanding as on 28.12.2010 is Rs.32,62,628/- plus applicable interest from 01.06.2009. Section 31 of the Act deals with provisions of this Act not to apply in certain cases. Under class (j) of Section 31, the provisions of the Act shall not apply to any case in which the amount due is less than 20% of the principal amount and interest thereon. According to the petitioner, the loan facilities availed by the late P.Ram Mohan Rao is Rs.260 lakhs and outstanding is less than 20%, as such the provisions of the Act are not applicable. The impugned notice was issued only for recovery of the amount due under cash credit facility of Rs.120 lakhs and the outstanding is Rs.32,62,628/-, which is more than 20% of the principal amount. The other loans facilities availed by the late P.Ram Mohan Rao were already cleared off. Therefore, the said loan facilities cleared off by the borrower cannot be clubbed with the cash credit facility since all the loans are different loans. As the outstanding amount under the cash credit facility is more than 20% of the principal amount, the provisions of 31 (j) of the Act, are not applicable to the facts of the present case. The next contention of the writ petitioner’s counsel is that the writ petitioner and her minor son are not the borrowers as defined under Section 2 (1) (f) of the Act. Section 2 (1) (f) deals with the borrower, which refers to principal borrower. In the present case, the principal borrower of the loan is late P.Ram Mohan Rao, proprietor of M/s.Paladugu Seeds. Admittedly, the petitioner and her minor son and her mother-in-law inherited the properties of deceased P.Ram Mohan Rao. As admitted by the writ petitioner in her affidavit that she has taken charge of the business, thereby she has stepped into the shoes of the principal borrower, as such she is liable to pay the outstanding amount due under the loan taken by the principal borrower. Therefore, the contention of the writ petitioner that she is not the borrower and there is no privity of contract between her and respondent bank cannot be accepted. The next contention of the writ petitioner is that there is sufficient hypothecated stocks available, which were given as a primary security for the recovery of the outstanding amount, which is in the custody of her mother-in-law and the respondent bank without proceeding against the primary security, proceeding against other securities given by late P.Ram Mohan Rao, is illegal. Admittedly, the loan was sanctioned on hypothecation of stocks also creating equitable mortgage of the immovable properties situated at Warangal and Vijayawada owned by him and also by the guarantor. Since the schedule of properties attached to Section 13 (2) notice dated 07.01.2011 shows the entire current assets of the firm i.e. stocks of raw material, semi finished goods and such other movables including book debts etc, and also immovable properties. Admittedly, all the properties shown in the schedule are furnished as security for repayment of the loan availed by late P.Ram Mohan Rao. Therefore, the respondent bank is at liberty to proceed against the said secured properties for realization of the outstanding amount. The writ petitioner could not point out any violation of legal provision in issuing notice under Section 13 (2) of the Act by the respondent bank. When the respondent bank has not violated any of the provisions in issuing the notice under Section 13 (2) of the Act, it cannot be said that the said notice is illegal, arbitrary and without jurisdiction. Hence, the writ petitioner is not entitled for any relief. In the result, the writ petition is dismissed without costs. _______________________ JUSTICE N.V.RAMANA. _____________________________ JUSTICE P. DURGA PRASAD Dated:28-09-2011 Ksp