* THE HONOURABLE SRI JUSTICE N.V. RAMANA & · THE HONOURABLE SRI JUSTICE P. DURGA PRASAD + W.P. NO. 27220 OF 2011 % Dated 14-12-2011 # 1. M/s. Sesha Saila Power and Engineering Pvt. Ltd., a company incorporated under the provisions of Companies Act, having its registered office at Plot No.16, R & D, Defence Enclave, Sikh Village, Secunderabad, rep., by its Managing Director and others. …. PETITIONERS Vs. $ 1. State Bank of India, Raipur (C.G.) rep., by its Chief Manager and others. …. RESPONDENTS ! Counsel for the Petitioners: Sri A.P. Venugopal ^ Counsel for the Respondents: Sri S. Surya Prakash Rao &Sri Ambadipudi Satyanarayana <GIST: > HEAD NOTE: ? Cases referred 1. AIR 2007 Madras 173 2. AIR 2009 Madras 10 3. AIR 2009 Gujarat 100 4. Judgment dated 20.1.2011 of the Bombay High Court 5. AIR 2010 SC 3413 6. Judgment dated 7.2.2011 of the Supreme Court in SLP (Crl.) 4436- 4438 of 2009. THE HON’BLE SRI JUSTICE N.V. RAMANA AND THE HON’BLE SRI JUSTICE P. DURGA PRASAD W.P. No. 27220 of 2011 O r d e r: (Per N.V. Ramana, J.) The petitioners, who are five in number, have invoked the extraordinary jurisdiction of this Court under Article 226 of the Constitution of India, praying for grant of the following relief: To declare (a) the action of respondents 3 & 4 in not issuing notices to respondents 5 and 6 under the provisions of Section 13(2) of SARFAESI Act, 2002 as being illegal and contrary to the provisions of the SARFAESI Act, especially Section 13(4)(d) and Section 13(9) and consequently direct them to issue notices to respondents 5 and 6 also; (b) Direct the respondents to accept the payments being made by respondent 5 in pursuance to their admission; (c) Direct respondents 3 and 4 not to take coercive steps in pursuance of the demand notices dated 02.07.2011 and 27.07.2011 of respondents 3 and 4 respectively; and (d) pass such other and further order or orders as this Hon’ble Court deems fit and proper in the circumstances of the case. Briefly stated, the facts of the case, as pleaded by petitioner No.1, namely M/s. Sesha Saila Power and Engineering Private Limited, represented by its Managing Director, in the affidavit filed in support of the writ petition are: Petitioner No.1 is a company incorporated under the provisions of the Indian Companies Act, 1956, to carry on the business of power generation, including ancillary works. Petitioner No.1 to meet its business objectives, approached respondent No.1, namely State Bank of India, for sanction of credit limits. Acceding to the offer, respondent No.1, namely State Bank of India, in the year 2006, sanctioned term loan credit limit of Rs.10.60 lakhs. Petitioner No.1 availed the said loan facility. Petitioner No.1 again in 2007, approached respondent No.3, namely Bank of India, which sanctioned term loan limit of Rs.865.00 lakhs, additional loan of Rs.2.20 crores and FITL (finance on interest term loan) Rs.1.05 crores, repayable in monthly instalments of Rs.9.6 lakhs per month and 11 monthly instalments at the rate of Rs.12.20 lakhs and the balance in the last instalment, commencing from January, 2009. Subsequently, in the year 2009, respondent No.1 sanctioned cash credit limit of Rs.1,80,00,000/- to petitioner No.1. Petitioner No.1 availed the loan facility with respondent Nos. 1 and 3 by mortgaging their very same its properties situated at Chattisgarh. Petitioner Nos. 2 to 5 stood as guarantors and offered their properties situated at Visakhapatnam and Chennai, as security for the loan availed by petitioner No.1. Petitioner No.1 having availed the loans, obtained necessary clearances and licences for commencing its operations, and as they were not granted in time, delay in execution of the project occurred, which resulted in cost escalation. Petitioner No.1 therefore, entered into a joint venture agreement with respondent No.6, namely M/s. Ekta Ispat and Power Limited, to the extent of 35% of its share capital, and received substantial amounts from them. Though petitioner No.1 started commercial production in October, 2009, due to non-cooperation of Nos. 1 and 3, petitioner No.1 became sick. Petitioner No.1, therefore, was constrained to enter into share purchase agreement for their balance share of 65% with respondent No.6. Petitioner No.1 states that respondent Nos. 1 and 3 are aware of the joint venture agreement and share purchase agreement entered into by it with respondent Nos. 5 and 6 and that respondent Nos. 1 and 3 also co-ordinated with respondent Nos. 5 and 6 and participated in the discussions for regularization of EMIs, and the shifting of liability of payment of the loan amount by petitioner No.1 to respondent Nos. 5 and 6 under the joint venture agreement and the share purchase agreement. The account of petitioner No.1 was declared as NPA by respondent No.1 w.e.f. 31.01.2011 due to non-payment of EMIs. Respondent No.5 initiated proceedings under Section 9 of the Arbitration & Conciliation Act, 1996 against the petitioner seeking interim relief, while respondent No.6 approached the Company Law Board, Bombay, seeking to restrain the petitioners from changing the share pattern. While so, respondent No.3, namely the Chief Manager and Authorized Officer, and respondent No.4, namely the Chief Manager and Authorized Officer, claiming to be nominees of respondent Nos. 1 and 3 respectively, issued notices dated 02.07.2011 and 27.07.2011 under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘the SARFAESI Act’) calling upon the petitioners to pay the amounts demanded under the said notices, within one week and 60 days respectively. Petitioner No.1 submitted its representation/objection to the said notices on 03.08.2011 stating that respondent Nos. 2 and 4 are not competent to issue the notices. Pursuant thereto, respondent No.3 passed orders on 18.08.2011, while respondent No.4 did not respond to the representation made/objection taken by petitioner No.1. Thereafter, No. 1, issued notice dated 12.10.2011 under Section 13(4) of the SARFAESI Act, and took possession of the properties of the petitioners. Questioning the said action of respondent Nos. 1 and 3, the petitioners filed the present writ petition raising several grounds, praying for the relief, as already noted in the introductory paragraph. The learned counsel for the petitioners mainly urged the following grounds: (1) The notices dated 02.07.2011 and 27.07.2011, issued by respondent Nos. 2 and 4 under Section 13(2) of the SARFAESI Act, are without jurisdiction and bad in law, because respondent Nos. 2 and 4 having not been nominated by respondent Nos. 1 and 3, are not authorized and competent to issue such notices. (2) The orders dated 18.08.2011 and 30.09.2011, passed by respondent Nos.2 and 4, on the representation made/objection taken by petitioner No.1 on 03.08.2011 to their notices dated 02.07.2011 and 27.07.2011, cannot be looked into because they are not passed within one week of receipt of the representation/objection, as required under Section 13(3A) of the SARFAESI Act, which is mandatory. (3) Since respondent Nos. 1 and 3 are aware of the joint venture agreement and share purchase agreement entered into by petitioner No.1 with respondent Nos. 5 and 6, and as respondent Nos. 5 and 6 have acquired the properties of petitioner No.1 with the knowledge of respondent Nos. 1 and 3, notice under Section 13(2) of the SARFAESI Act, as required by Section 13(4)(d), have to be issued to respondent Nos. 5 and 6 also. (4) The notices dated 02.07.2011 and 27.07.2011, issued by respondent Nos. 2 and 4 under Section 13(2) of the SARFAESI Act, are contrary to the provisions of Section 13(9) thereof, because before issuing notices under Section 13(2) of the SARFAESI Act, respondent Nos. 1 to 4, as required under Section 13(9) have to agree to proceed jointly as against the petitioners so as to be binding upon them. Therefore, taking of possession of the properties by respondents No. 1 and 3, by issuing notice dated 12.10.2011 under Section 13(4) of the SARFAESI Act, is illegal and arbitrary. Hence he submitted that respondent Nos. 1 and 3 be directed not to take any coercive steps against petitioner No.1 pursuant to the notices dated 02.07.2011 and 27.07.2011 issued by respondent Nos. 2 and 4. Respondent Nos. 1 and 3 in spite of granting sufficient time did not file counter. It is only when this Court directed their appearance, did respondent Nos. 1 and 3 filed counter, supported by material papers. While respondent Nos. 2 and 4 filed chronological events supported by material papers. The learned counsel for respondent Nos. 1 to 4 reiterating the counter averments made the following submission: (1) As petitioner No.1 being the borrower of loan amount and petitioner Nos. 2 to 5 being the guarantors, did not repay the loan amount, on behalf of respondent Nos. 1 and 3, their authorized officers, namely respondent Nos. 2 and 4, issued notices dated 02.07.2011 and 27.07.2011 under Section 13(2) of the SARFAESI Act, calling upon them to repay the amount demanded thereunder, which they did not do. (2) Passing of orders by the secured creditor on the representation made or objection taken by the borrower to the notice under Section 13(2), within one week of receipt of notice, as provided under Section 13(3A) of the SARFAESI Act, is not mandatory. It is merely directory and no prejudice would be caused to the borrower if no order is passed or communicated within one week. Hence, passing of orders by respondent Nos.2 and 4, under Section 13(3A) of the SARFAESI Act, on the representation/objection of petitioner No.1, to the notices under Section 13(2) of the SARFAESI Act, on 18.08.2011 and 30.09.2011, after one week, would not in any manner cause prejudice to the petitioners. In this context, he relied on the judgments in I.D.B.I. Ltd. V. Kamaldeep Synthetics Ltd.[1], Indian Overseas Bank v. M/s. Sree Aravindh Steels Ltd.[2], Kirandevi Bansal v. D.G.M. Small Industries Development Bank of India[3], W.P. No. 8893 of 2010[4], Union Bank of India v. Satyawati Tandon[5], and Kanaiyalal Lalchand Sachdev v. State Bank of Maharashtra[6]. (3) Respondent Nos. 1 and 3 have nothing to do with the joint venture agreement and share purchase agreement entered into by petitioner No. 1 with respondent Nos. 5 and 6. Petitioner No.1 being the borrower, and petitioner Nos. 2 to 5 being the guarantors, are liable to repay the loan amount, and if any amounts are paid by respondent Nos. 5 and 6 and accepted to by respondent Nos. 1 and 3, it is on behalf of petitioner No.1 only and not on behalf of respondent Nos. 5 and 6. (4) The provisions of Section 13(9) of the SARFAESI Act are applicable with respect to the measures taken by the secured creditor under Section 13(4) of the SARFAESI Act, and they are not applicable to the demand notice issued by the secured creditor under Section 13(2) of the SARFAESI Act. As petitioner No.1 being the borrower and petitioner Nos. 2 to 5 being the guarantors, in spite of receipt of notices under Section 13(2) of the SARFAESI Act, did not repay the loan amount, respondent Nos. 2 and 4, have taken possession of the mortgaged properties, by issuing notice under Section 13(4) of the SARFAESI Act, on 12.10.2011. Hence, he prayed that the writ petition be dismissed. Heard the learned counsel for the petitioners and the learned Standing Counsel for respondent Nos. 1 to 4. In the light of the arguments advanced by the parties, the following questions arise for consideration: (1) Whether the notices dated 02.07.2011 and 27.02.2011 issued by respondent Nos. 2 and 4 on behalf of respondent Nos. 1 and 3 are without jurisdiction? (2) Whether it is mandatory for the secured creditor to pass orders on the representation of the borrower to the objection taken by him to the notice under Section 13(2) of the SARFAESI Act, within one week from the date of its receipt? (3) Whether respondent Nos. 1 and 3 are under an obligation to issue notices under the SARFAESI Act, to respondent Nos. 5 and 6 with whom petitioner No.1 entered into joint venture agreement and share purchase agreement, for realization of their dues? (4) Whether unless and until respondent Nos. 1 and 3 agree to proceed jointly, as required under Section 13(9) of the SARFAESI Act, respondent Nos. 1 and 3 are not entitled to issue notices to the petitioners under the SARFAESI Act? Before proceeding to answer the questions, the undisputed facts may be noted. Petitioner No.1 admittedly is a borrower of loan from respondent Nos. 1 and 3, for which respondent Nos. 3 to 5 stood as guarantors. They have mortgaged their properties with respondent Nos. 1 and 3 as security for the loan amount. It is the case of respondent Nos. 1 to 4 that petitioner No.1 was sanctioned term loan facility on 17.08.2006 repayable in 87 monthly instalments, divided into three instalments of Rs.11.55 lakhs, 83 instalments of 12,19,158/- lakhs and last instalment of Rs.13,44,486/- plus interest, commencing from January, 2008. That on the request of petitioner No.1, the term loan was rescheduled on 03.10.2007, and the loan amount was payable by petitioner No.1 in 87 instalments divided into 75 instalments of Rs.11,73,150/-, 11 instalments of Rs.14,89,565/- and last instalment of Rs.16,28,535/- plus interest commencing from January, 2009. Again at the request of petitioner No.1, the term loan was rescheduled on 06.04.2009, and the loan amount was repayable by petitioner No.1 in 87 instalments, divided into 81 instalments of Rs.11,73,150.-, five instalments of Rs.14,50,790/- and last instalment of Rs.15,75,900/- plus interest commencing from July, 2009. Even though the loan account of petitioner No.1 was rescheduled from time to time, it is the case of respondent Nos. 1 to 4 that petitioner No.1 having taken the loan amount, did not repay the loan amount. As petitioner No.1 failed to repay four monthly instalments continuously under term loan, failed to service the interest, and failed to get the limits renewed before expiry of the period of sanction of cash credit limit, the loan account of petitioner No.1, as per the RBI guidelines, was classified as NPA on 31.01.2011. Thereafter, for realization of the loan amount, respondent Nos. 2 and 4 issued notices dated 02.07.2011 and 27.02.2011 under Section 13(2) of the SARFAESI Act, to the petitioners, namely to petitioner No.1, who is the borrower and petitioner Nos. 2 to 5, who are the guarantors, calling upon them to repay the amount demanded thereunder. As on the date of issuance of possession notice dated 12.10.2011, petitioner No. 1 was due and liable to pay to respondent Nos. 1 and 3 an amount of Rs.10,54,37,712.63 ps. In re question No.1: The contention of the petitioners that since respondent Nos. 2 and 4 are not authorized by respondent Nos. 1 and 3 for issuing notices under the SARFAESI Act, the notices dated 02.07.2011 and 27.02.2011 issued by them are without jurisdiction, cannot be accepted, because it is the specific case of respondent Nos. 1 and 3 that they have designated and authorized respondent Nos. 2 and 4, to issue notices under the SARFAESI Act, and to evidence that, they also filed authorizations. In view of the authorizations, it cannot be said that the notices dated 02.07.2011 and 27.02.2011 issued by respondent Nos. 2 and 4 on behalf of respondent Nos. 1 and 3 under the SARFAESI Act, are without jurisdiction. In re question No.2: The contention of the petitioner No.1 that respondent Nos. 1 and 3 are required to pass orders on their representation/objection to the notices under Section 13(2) of the SARFAESI Act, within one week from the date of receipt of representation/objection, as required under Section 13(3A) of the SARFAESI Act, which is mandatory, and since respondent Nos. 1 and 3 have passed orders on 18.08.2011 and 30.09.2011, i.e. long after lapse of more than one week from the date of receipt of representation/objection, the said orders cannot be looked into, cannot be accepted, because the law on this aspect is no more res integra. A Division Bench of the Gujarat High Court in Kirandevi Bansal v. D.G.M. Small Industries Devl. Bank of India, held as under: Only when the Bank proceeds to take further action under Section 13(4) of the Act, without communication any reasons for rejection of representation/objection of the borrower to the notice issued under Section 13(2) of the Act, it can be said that any prejudice or loss is caused to the borrower. Failure to communicate reasons for rejection of the representation/objections within one week’s time as stipulated in sub-section (3A) of Section 13 would not cause any prejudice or loss to the borrower. But, in a given case suppose no action is being taken by the secured creditor is not desirous of proceeding further on the notice issued under sub-section (13) of Section 13, no borrower shall, after the receipt of notice under sub-section (2) of Section 13, transfer by way of sale, lease any of his secured assets, without prior consent of the secured creditor. It is, therefore, imperative that the secured creditor shall not unduly delay the proceedings once action has been initiated by issuing notice under Section 13(2) the Legislation has fixed the time limit of one week in sub-section (3A) of the Act to see that the proceedings initiated under Section 13 of the Act be expedited. Every prescription of a period within which an act must be done is not the prescription of a period of limitation, with painful consequence, if the act is not done within that period. Therefore, the time limit of one week prescribed under Section 13(3A) is to expedite the matters so that there maybe some finality in the action initiated for enforcement of security interest under sub-section (2) of Section 13 the period of one week stipulated in sub-section (3A) of Section 13 is only a director provision, and non-compliance of time limit as such, will not vitiate the proceedings initiated under Section 13(4) provided reason for rejection of objection is communicated to borrower, before taking action under Section 13(4) of the Act. I n I.D.B.I. Ltd. v. Kamaldeep Synthetic Ltd., the Madras High Court held that issuance of possession notice by the secured creditor under Section 13(4) before communicating reasons for non- acceptance of objections raised by the borrower, will not cause prejudice to the borrower, particularly when he failed to show the loss that has been caused to him. In Indian Overseas Bank v. Sree Aravindh Steels Ltd., a learned Judge of the Madras High Court held that even assuming the Bank had not complied with the provisions of Section 13(3A) by not communicating reasons for non-acceptance of objections of borrower, is no ground to refuse relief under Section 14 and the remedy available to the borrower is to prefer appeal under Section 17 before the Debts Recovery Tribunal. The Bombay High Court, by order passed in W.P. No. 8893 of 2010, quoted with approval the judgment of the Gujarat High Court in Kirandevi Bansal v. D.G.M. Small Industries Devl. Bank of India, and held as under: We are in respectful agreement with the judgment of the Gujarat High Court which holds that every prescription of a period within which an act has to be done does not constitute a prescription of a period of limitation, a failure of compliance with which would render the action invalid. The object of sub-section (3A) is to provide an expeditious method for the disposal of objections in order to ensure that the action of the secured creditor is not held up for an unduly long period of time. The period of one week that is prescribed in sub-section (3A) is clearly directory. That apart, the petitioners have not established that any prejudice was caused to them by the delay on the part of the Bank in responding to the representation submitted to the notice under Section 13(2). That submission must therefore fail. This apart, the reasons that are required to be communicated by the secured creditor to the borrower are not justiciable, because the proviso to Section 13(3A) specifically states that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under Section 17 or the Court of District Judge under Section 17-A (See judgment of the Supreme Court in Union Bank of India v. Satyawati Tandon). Be that as it may, petitioner No.1 having admitted its liability to repay the loan amount, and they having not shown the prejudice that is said to have caused to them by not communicating the non- acceptance of their representation/ objection within one week, no exception can be taken to the action of respondent Nos. 1 and 3 in passing orders on the representation/objection of petitioner No.1 after one week from the date of their receipt. In re question No. 3: Though petitioner No.1 contends that they have entered into joint venture agreement and share purchase agreement with respondent Nos. 5 and 6 and that respondent Nos. 1 and 3 are also aware of the same, since they have accepted the payments made by respondent Nos. 5 and 6, and as such, respondent Nos. 1 and 3 have to issue notices under Section 13(2) of the SARFAESI Act, to respondent Nos. 5 and 6 and recover the loan dues from them, as required under Section 13(4)(d) of the SARFAESI Act, the fact remains, it is the specific case of respondent Nos. 1 and 3 that they are not aware of the joint venture agreement and share purchase agreement entered into by petitioner No.1 with respondent Nos. 5 and 6 and that they have nothing to do with respondent Nos. 5 and 6, who are not party to the loan transaction. That the payments, if any, received by respondent Nos. 1 and 3 from respondent Nos. 5 and 6, was on behalf of petitioner No.1 towards their loan liability. Now the question whether respondent Nos. 1 and 3 are under an obligation to issue notices under Section 13(2) of the SARFAESI Act, to the person, who is said to have acquired the properties of the borrower, may be considered. To consider this question, it would be appropriate to refer to the provisions of Section 13(4)(d) of the SARFAESI Act, which reads: (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 realizing 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. From a reading of the above, it becomes clear that if the borrower fails to discharge his liability in full within the period specified in Section 13(2), the secured creditor is at liberty