*HON’BLE SRI JUSTICE P.S. NARAYANA +WRIT PETITION No.21099 of 2007 % 14-2-2008 # B.T.S. Estates Private Limited, Rep. by its Managing Director Sesham Rao Niranjan. … Petitioner And $ State Bank of India, Rep. by its Branch Manager, Dwarakanagar Branch, Visakhapatnam and 57 others. … Respondents <GIST: >HEAD NOTE: ! Counsel for petitioner : Sri V.L.N.G.K. Murthy ^ Counsel for respondent No.1: Sri Deepak Bhattarjee Counsel for respondent No.2: Sri R.Raghunandan Counsel for respondents 3 to 57 : Sri V.V.N. Narasimham ? CASES REFERRED : 1. A.I.R. 1939 Madras 202 2. A.I.R. 1934 Madras 713 3. A.I.R. 1939 Rajasthan 143 4. A.I.R. (38) 1951 Calcutta 398 5. (1974) 2 Supreme Court Cases 799 HON’BLE SRI JUSTICE P.S. NARAYANA WRIT PETITION No.21099 of 2007 Date: February 14, 2008 Between: B.T.S. Estates Private Limited, Rep. by its Managing Director Sesham Rao Niranjan. … Petitioner And 1. State Bank of India, Rep. by its Branch Manager, Dwarakanagar Branch, Visakhapatnam and 57 others. … Respondents * * * ORDER: The writ petition is filed for a writ of Mandamus declaring action of respondents 1 and 2 in invoking the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter, in short, referred to as ‘the Act’ for the purpose of convenience), as illegal and ultra vires and consequently declare the sales effected in favour of respondents 3 to 56 as null and void and pass such other suitable orders. 2. This Court ordered notice before admission on 06.10.2007 and directed status quo to be maintained for a limited period which is being extended from time to time. 3. Sri V.L.N.G.K. Murthy, learned counsel representing the writ petitioner had taken this Court thorough the respective stands taken by the parties in the affidavit filed in support of the writ petition, in the counter-affidavits, in the rejoinder, in the reply affidavit and would maintain that the terms and conditions of the agreement may have to be looked into. The ground of possession relied on by the banking institutions cannot be a sustainable contention. The learned counsel also would maintain that Sections 5 and 100 of the Transfer of Property Act, 1882, may be relevant for appreciating the legal rights of the writ petitioner. The writ petitioner is not a borrower and there was no notice to the writ petitioner. The learned counsel also would maintain that there is no contractual relationship between the writ petitioner and banking institutions. The banking institutions had taken agreement as security for advancement of loans. It is not as though the banking institutions had no knowledge about the rights of the writ petitioner. The counsel also would maintain that the flats did not come into existence on the date of loan. Hence, the learned counsel would conclude in the facts and circumstances of the case the writ petition to be allowed. 4. Sri Deepak Bhattacharjee, learned counsel representing R-1 had taken this Court through the contents of the counter-affidavit of R-1 and would maintain that the writ petitioner is having an alternative remedy. Even otherwise the writ petition itself is not maintainable. Further the counsel would submit that these factual controversies cannot be gone into in the present writ petition. 5. Sri R. Raghunandan, learned counsel representing R-2 had explained the cost of the flats and how the expenditure had been incurred and further pointed out to the relevant material papers and also the relevant portions of the counter-affidavit. The learned counsel would maintain that the agreement in question, it is stated, creates charge. When that being so, the said agreement suffers from the vice of non-registration by virtue of Section 17 of the Indian Registration Act and also vice of deficit stamp in the light of Section 35 of the Indian Stamp Act. Further the counsel would submit that even in relation to the particulars of Moyya Sangham, proper particulars had not been furnished. Atleast in the case of Moyya Sangham some particulars had been given, but in other cases absolutely no details had been furnished. Even otherwise the writ petition is not maintainable. The counsel also relied upon certain decisions in this regard. 6. Sri V.V.N. Narasimham, learned counsel representing several of the other respondents also had taken this Court through the contents of the counter-affidavit and would maintain that in the light of the facts and circumstances, the writ petition is not maintainable. The learned counsel also would point out to the un-dated letter and would maintain that the same had not been denied. It is also contended that the petitioner cannot contend that the petitioner is having charge over the property. Even otherwise the counsel would contend that by virtue of Section 17 of the Act, the petitioner is having an effective alternative remedy. 7. Heard the counsel. 8. The writ petitioner has stated that five persons, who had entered into individual agreement with the company for construction of flat Nos.111, 211, 311, 411, 511, had approached the first respondent bank and the purchasers of remaining 50 units, had approached second respondent bank, for loan to meet the cost of land, construction cost of the flat, stamp duty and registration charges and both the first and second respondent banks had sanctioned loans equivalent to 85% of the cost of land, construction cost of the flat, stamp duty and registration charges etc., on the condition of the borrower depositing the remaining 15% as margin money and also on the security of equitable mortgage created by the purchasers. The purchasers had deposited their respective sale deeds of undivided extents of land and also the construction agreements with the above banks. Further it is averred that since all the sale deeds and construction agreements pertaining to all the purchasers were common, the petitioner had placed before this Court a copy of sale deed and construction agreement for reference pertaining to one flat. It is also averred that the construction of all the flats was completed by 01.5.2004 and were made ready for giving delivery to the purchasers, but the petitioner did not deliver the flats to the purchasers because all the 55 purchasers committed default of payment of cost of construction of their respective units which ranges from Rs.35,000/- to Rs.70,000/- and the petitioner is entitled to retain possession of the flats till the purchasers discharge the liability of payment of the construction cost of their respective units fully. Further it is stated that the petitioner company saw the notice dated 27.5.2006 in The New Indian Express, English Daily, got issued by second respondent proclaiming that respondent No.2 had taken possession of the flats. As the petitioner was having charge over the units in the complex, towards unpaid construction cost and since the petitioner company did not hand over the flats to the purchasers, got issued a legal notice dated 06.8.2006 to respondent No.2 not to meddle with the flats. Respondent No.2 received the legal notice, got issued by the petitioner company, and gave a reply notice that respondent No.2 had no legal obligation to comply with the demand of the petitioner and that the bank was taking action and measures in accordance with the Provisions of the Act. After exchange of notices, there was some long silence and the petitioner company continued to be in possession of the flats in exercise of its right under the contracts that it entered into with the purchasers. While things stood thus, the officials of the second respondent bank, on 05.3.2007, when interfered with petitioner’s possession over flat No.210 of the building complex, the petitioner company filed a suit in O.S.No.396 of 2007 on the file of I Additional Senior Civil Judge, Visakhapatnam, for recovery of balance construction cost from the purchaser and the bank and for a permanent injunction restraining the second respondent bank from interfering with its possession and also filed I.A.No.290 of 2007 for ad-interim injunction against second respondent bank. The second respondent bank filed its written statement in the suit and counter in the I.A. contending that the second respondent sold the said flat to a third party and that the civil court had no jurisdiction under Section 34 of the Act. The said I.A. was dismissed on 24.4.2007 mainly on the ground that civil court had no jurisdiction. The petitioner company preferred C.M.A.No.48 of 2007 on the file of IV Additional District Judge, Visakhapatnam and the same is pending passing of orders. Further it is stated that on 10.8.2007 some persons claiming to be purchasers of the flats from respondent No.1 opened the office room of the complex, broke open the lock and threw the furniture belonging to the petitioner and the petitioner lodged a complaint with Bheemunipatnam P.S. against the said persons and the said persons also complained that the security persons of the petitioner company had obstructed them. It is also stated that again on 06.9.2007 when the security persons, employed by the petitioner company, and supervisor were at the building, Bheemunipatnam police had taken them and booked a case against the petitioner and its employees in crime No.352 of 2007 under Sections 452, 341, 506 read with Section 34 IPC allegedly on the complaint given by respondent No.26, who had purchased a flat from respondent No.2. It is also averred that the Act does not elevate the banks to any status higher than that of an ordinary mortgage and the banks are bound by all the provisions of the Transfer of Property Act, 1882, and the General Law except for the leverage that the banks can enforce the security interest by dispensing with the procedural requirement of approaching the civil court for enforcement of its existing substantive rights, but does not create any better substantive rights. The Act also had not given an overriding effect to the rights of the bank over the pre-existing rights of the prior creditors. The petitioner was not a borrower and had no privity of contract with the banks. The petitioner had not surrendered any of his contractual rights in favour of the banks. If any contrary construction is to be placed on the provisions of the Act, creditors would be at the mercy of their debtors. As per the terms of the construction agreement, the petitioner claims the following rights: (a) First lien and charge on the flats in respect of any amount remaining unpaid and liable to be paid by the owner vide clause (1); (b) The petitioner is entitled to retain possession till the payment of entire consideration by the owner vide clause (17); and (c) In addition to the contractual rights the petitioner has a common law charge in respect of the unpaid amount payable by the owners. In the case of a charge created by operation of law, law imputes notice to all persons dealing with the property. Further it is stated that as per Section 100 of the Transfer of Property Act all the provisions relating to a simple mortgage shall apply the charges. Since the purchasers of the flats created an equitable mortgage by deposit of documents, including the construction agreement, the banks had notice of the charge and therefore bound by the charge. Respondent Nos.3 to 56, who claim to be purchasers at the auction conducted by the banks, were equally bound by the charge. They had not purchased the flats directly from the owners at a voluntary sale. This was a sale without intervention of the court and there is no mortgage decree of the court for the intending purchasers to fall back upon. They must be deemed to have had notice of the charge within the meaning of Section 3 of the Transfer of Property Act. In addition to the notice, which the law imputes to them, the petitioner had issued newspaper publication notifying the general public the charge and the right to possession which the petitioner had by a public notice dated 16.9.2006 which is much prior to the execution of the sale deeds by the second respondent bank. The banks were mortgagees under the mortgages by deposit of title deeds and a mortgage by deposit of title deeds does not carry with it a right to possession as compared to a usufructuary mortgage. The provisions relating to simple mortgage apply both to a mortgage by deposit of title deeds and a charge. The right to take possession contemplated by sub-section 4 of Section 13 does not extend to the right to take possession from third parties, who had got an independent right to retain possession, particularly, when the mortgage in favour of the banks is with the express knowledge of the prior rights in favour of the petitioner. Further, the banks had not followed the procedure laid down by the rules for the purpose of taking possession. Respondent Nos.1 and 2 did not follow the procedure as laid down under the Security Interest (Enforcement) Rules, 2002 for enforcement of security interest. Exs.P1 to P-13 also had been referred to in the affidavit filed in support of the writ petition. 9. In the counter-affidavit filed by R-1 it is stated that Bokka David Raju, Baipalli Kesava Rao, Maddimsetti Krishna Kishore, Pulaparthy Venkata Radha Krishna and Padavala Sambasiva Rao had availed housing loan facility for purchasing flats. Bokka David Raju availed the loan facility on 15.3.2004 on the security of the flat purchased out of the loan amount i.e., flat No.511 with built up area admeasuring 1100 square feet in fourth floor of the building named and styled as B.T.S. Estates together with unspecified share in the land admeasuring 36 square yards out of 1660 square yards in survey No.26/1 (part), patta No.585, situated at Madhurawada, Visakhapatnam; Baipalli Kesava Rao availed the loan facility on 15.3.2004 on the security of the flat purchased out of the loan amount i.e., flat No.411 with built up area admeasuring 1100 square feet in third floor of Block-A of the building named and styled as B.T.S. Estates together with unspecified share in the land admeasuring 36 square yards out of 1660 square yards in survey No.26/1 (part), patta No.585, situated at Madhurawada, Visakhapatnam; Madimsetti Kiran Kishore availed the loan facility on 25.3.2004 on the security of the flat purchased out of the loan amount i.e., flat No.311 with built up area admeasuring 1100 square feet in second floor of Block-A of the building named and styled as B.T.S. Estates together with unspecified share in the land admeasuring 36 square yards out of 1660 square yards in survey No.26/1 (part), patta No.585, situated at Madhurawada, Visakhapatnam; Pulaparthy Venkata Radha Krishna availed the loan facility on 15.3.2004 on the security of the flat purchased out of the loan amount i.e., flat No.211 with built up area admeasuring 1100 square feet in first floor of Block-A of the building named and styled as B.T.S. Estates together with unspecified share in the land admeasuring 36 square yards out of 1660 square yards in survey No.26/1 (part), patta No.585, situated at Madhurawada, Visakhapatnam; Padavala Sambasiva Rao availed the loan facility on 25.4.2003 on the security of the flat purchased out of the loan amount i.e., flat No.111 with built up area admeasuring 1100 square feet in ground floor of Block-A of the building named and styled as B.T.S. Estates together with unspecified share in the land admeasuring 36 square yards out of 1660 square yards in survey No.26/1 (part), patta No.585, situated at Madhurawada, Visakhapatnam. The said borrowers/mortgagors committed default in repayment of loan and the accounts became non-performing assets. Notices under Section 13(2) of the said Act were sent to the said five borrowers/mortgagors on 14.12.2005 giving 60 days time to liquidate the liability. Since the borrowers did not come forward to liquidate the liability within the specified period, possession notices under Section 13(4) of the Act were issued and possession of flats as referred above mortgaged with the bank were taken over. After obtaining the physical possession of the mortgaged assets, a public notice was issued on 13.3.1996 and after duly complying with the Rules 8 and 9 of Securitization Rules framed under the Act, all the five flats mortgaged with the bank were sold by public auction and the realized sale proceeds were credited to the respective loan accounts. Since the generated sale proceeds were not sufficient to discharge the entire debt, the following civil suits were also filed before competent civil court for recovery of balance amount. Sl. No Suit No. Court Defendant’s name Suit claim (Rs.) 1 154/07 PSCJ, VSP B. Kesava Rao 1,47,129.46 2 155/07 I ASCJ, VSP B. David Raju 1,93,829.00 3 156/07 II ASCJ, VSP P. Sambasiva Rao 1,54,281.00 4 157/07 PSCJ, VSP P.V. Radha Krishna 1,42,237.81 5 376/07 I ASCJ, VSP M.K. Kishore 1,48,860.00 Further it is averred that respondent Nos.3 to 7 purchased the above mortgaged flats in public auction and possession of flats was delivered to the said respondents after receiving the entire consideration. The sale certificate was issued in terms of the procedure laid down under the Act and sale certificates were also registered with the Registrar of Assurances and the respondents 3 to 7 are in physical possession of their respective flats purchased in public auction. It is also stated that the petitioner was aware of availment of loan facility by the borrowers from the first respondent bank to the extent of five flats and the mortgage was inclusive of undivided share of land, structures, right in all common areas and facilities allotted to the mortgagor. The petitioner had executed sale deeds in favour of the borrowers which were deposited for creation of equitable mortgage in terms of Section 58(f) of the Transfer of Property Act and once the execution of sale deed was not denied, the question of petitioner claiming any right or interest in the property already sold would not arise. If the allegation of the petitioner that the borrowers in the instant case committed default in repayment of instalments as stipulated in the construction agreement executed between the borrowers and petitioners is true, the remedy for the petitioner is only to proceed against the original borrowers for recovery of amounts due and payable and not the bank. The right to proceed against the flats constructed by the petitioner for recovery of money due and payable by the original borrowers was subject to mortgage created in favour of the respondent No.1 bank. As the mortgage transaction between the original borrower and the petitioner herein was not disputed and it was also not disputed by the petitioner that the loan consideration released by the respondent No.1 bank was received by the petitioner, the petitioner is estopped from questioning the right of respondent No.1 bank in proceeding against the mortgaged assets for recovery of its dues. In relation to paragraphs 4 to 12 of the affidavit it is stated that the question of facts presented in the said paragraphs were not within the knowledge of respondent No.1 bank. It is also averred that since the properties in question mortgaged with respondent No.1 bank were sold by following the procedure laid down under Section 13 of the Act, any person aggrieved by the action of the bank in initiating proceedings under Section 13(4) of the said Act and the Rules framed thereunder, do have the remedy of appeal or filing of application under Section 17 of the said Act before the Debts Recovery Tribunal having jurisdiction. If any order passed by the Debts Recovery Tribunal under Section 17 of the Act against the petitioner, and the petitioner also had the remedy of second appeal before the Debts Recovery Appellate Tribunal, at Chennai. It is also stated that the right and the charge claimed on the flats by the petitioner was subject to the mortgage created in favour of respondent No.1 bank by the original borrowers or the flat purchasers. The mortgage was to the knowledge of the petitioner and hence the first lien and charge cannot be enforced against the secured creditor i.e., respondent No.1 bank. The terms and conditions of contract were settled between the original borrowers and bank and the petitioner was the contractor for construction of residential apartments. After having knowledge of the mortgage, the petitioner cannot claim superior charge over the charge of the bank i.e., the secured creditor. On the contrary, the terms and conditions settled between the parties under the construction agreement were subject to the mortgage created in favour of the respondent No.1 bank, as the mortgage transaction was to the knowledge of both the original borrowers and petitioner, and the petitioner received the loan consideration on the instructions of the original borrowers directly from the respondent No.1 bank by way of release of housing loan. The charge in respect of unpaid amount payable by the original borrowers was again subject to the right of the bank as secured creditor. The right of unpaid seller was recognized under the Sale of Goods Act and the said question of law cannot be applied in the instant case for claiming charge in the immovable assets. Respondent No.1 bank denied that by operation of Section 100 of Transfer of Property Act, the bank had notice of charge and bound by charge. Even if the bank had constructive notice of charge by implied contract and consent given by the petitioner, it cannot be denied by the petitioner that the charge of petitioner as an unpaid seller was subject to mortgage created in favour of the respondent No.1 bank. The proceedings were initiated under the Act which is a special statute and has overriding effect over any other statutes in force. Further it is averred that the cause of action of the writ petition and right claimed by the petitioner arose out of the realm of contract and hence the petitioner is not entitled to invoke the extraordinary jurisdiction of this Court under Article 226 of Constitution of India. In relation to averments made in paragraphs 13 to 15 of the affidavit filed in support of the writ petition it specifies that the said Act was upheld by the Supreme Court in Mardia Chemicals and others V. Union of India (AIR 2004 Supreme Court 2371) and (2004) 4 Supreme Court Cases at page 311. The observation of the Apex Court was implemented by bringing amendments and by incorporation of Section 13(3) (a) etc., in the said Act aforesaid. Further it is stated that the steps taken by respondent No.1 bank in proceeding against the secured assets were within the parameters of law and within four corners of the said Act and the present writ petition is filed only to defeat the proceedings initiated by respondent No.1 to reduce its non- performing assets to the extent of recovery made by sale of mortgaged assets. 10. W.V.M.P.No.153 of 2007 was filed by the second respondent, the State Bank of Indore. In the affidavit filed by the second respondent several of the averments were denied and in para 4 it is averred that the petitioner company had originally entered into an agreement for purchase of land in survey No.26/Petitioner, Madhurawada village, Visakhapatnam District. However, the deed of sale was executed in favour of 55 different persons, who had sought to purchase the flats proposed to be constructed by the petitioner. The petitioner, while stating that the purchaser of flat had negotiated for purchase of flat, had conveniently omitted the fact that the sale deeds in relation to the land had been executed and agreements of construction had been entered into separately. It is not correct that physical possession of the flats would be handed over only after full consideration was paid and in any event, it would be presently demonstrated before this Court that the entire sale consideration had in fact been received by the petitioner. Further in para 5 it was averred that adverting to the averments made in paras 4 and 5 of the affidavit it is stated that the cost of the flat was fixed at Rs.6,71,500/-. Out of which Rs.1,01,500/- was for the purpose of purchase of