IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 06.09.2011 CORAM THE HONOURABLE MR.JUSTICE D.MURUGESAN AND THE HONOURABLE MR.JUSTICE K.K.SASIDHARAN W.P.No.6710 of 2011 1. Industrial Finance Corporation of India Limited (IFCI) represented by its Regional Manager at Continental Chambers No.142, Mahatma Gandhi Road Post Box No.3318, Chennai 600 034 2. Industrial Finance Corporation of India Limited (IFCI) represented by its Authorised Officer IFCI Tower, No.61, Nehru Place New Delhi 110 019 .. Petitioners -vs- 1. The Debts Recovery Appellate Tribunal Ethiraj Salai, Egmore Chennai 600 008 2. The Debts Recovery Tribunal-I Deva Towers, 6th Floor No.770-A, Anna Salai Chennai 600 002 3. Sterling Holiday Resorts (India) Limited represented by its Joint Managing Director Mr.S.Sidharth Shankar (Amalgamated with M/s Sterling Resorts & Hotels (India) Limited No.163, T.T.K.Road, Alwarpet Chennai 600 018 .. Respondents Petition under Article 226 of the Constitution of India, praying for the issue of a Writ of Certiorarified Mandamus, calling for the records of the first respondent with regard to the order dated 9.3.2011 passed in R.A.(S.A.) No.107 of 2010 on the file of the first respondent filed against S.A.No.189 of 2009 on the file of the second respondent and quash the same and consequently direct the petitioners to proceed with the auction sale of the properties mortgaged with the petitioners. https://hcservices.ecourts.gov.in/hcservices/ For Petitioners :: Mr.G.Masilamani Senior Counsel for Mr.Shivakumar For Respondents :: Mr.A.L.Somayaji Senior Counsel for Mr.G.Sundaram for R3 ORDER D.MURUGESAN, J. The question raised in this writ petition is (a) as to whether the secured creditor is bound to communicate within one week from the receipt of representation/objection made by the borrower, the reasons for its non-acceptance in terms of sub-section (3-A) of Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “the Act”) read with Rule 3-A(c) of the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as “the Rules”) and the compliance is mandatory? (b) To what relief the petitioner is entitled to? 2. We have heard Mr.G.Masilamani, learned Senior Counsel for the petitioners and Mr.A.L.Somayaji, learned Senior Counsel for the third respondent. 3. To answer the above questions, this Court must first consider the objects of the Act and the Rules made thereunder as well as the law laid down by the Supreme Court. Sub-section (3-A) of Section 13 of the Act and Rule 3-A of the Rules read thus: "S.13(3-A). If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower. Provided 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. R.3-A. Reply to representation of the borrower.--(a) After issue of demand notice under sub-section (2) of section 13, if the borrower makes any representation or raises any objection to the notice, the Authorised Officer shall https://hcservices.ecourts.gov.in/hcservices/ consider such representation or objection and examine whether the same is acceptable or tenable. (b) If on examining the representation made or objection raised by the borrower, the secured creditor is satisfied that there is a need to make any changes or modifications in the demand notice, he shall modify the notice accordingly and serve a revised notice or pass such other suitable orders as deemed necessary, within seven days from the date of receipt of the representation or objection. (c) If on examining the representation made or objection raised, the Authorised Officer comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection, the reasons for non- acceptance of the representation or objection, to the borrower." 4. In Mardia Chemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, the Supreme Court considered the scope of the Act and upheld its validity and held in paragraphs 35 and 36 as follows:- "35. The Narasimhan Committee was constituted in the year 1991 relating to the Financial System prevailing in the country. It considered wide ranging issues relevant to the economy, banking and financing etc. Under Chapter V of the Report under the heading 'Capital Adequacy, Accounting Policies and other Related Matters', it was opined that a proper system of income recognition and provisioning is fundamental to the preservation of the strength and stability of banking system. The Committee also suggested for reconstruction of assets saying: "The Committee has looked at the mechanism employed under similar circumstances in certain other countries and recommends the setting up of, if necessary by special legislation, a separate institution by the Government of India to be known as 'Assets Reconstruction Fund (ARF) with the express purpose of taking over such assets from banks and financial institutions and subsequently following up on the recovery of dues owed to them from the primary borrowers." While recommending for setting up of special Tribunals, the Committee observed: "Banks and financial institutions at present face considerable difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delay in the legal processes. A significant portion of the funds of banks and financial institutions is thus blocked in unproductive assets, the values of which keep deteriorating with the passage of time. Banks also incur substantial amounts of expenditure by https://hcservices.ecourts.gov.in/hcservices/ way of legal charges which add to their overheads. The question of speeding up the process of recovery was examined in great detail by a committee set up by the Government under the Chairmanship of the late Shri Tiwari. The Tiwari Committee recommended, inter alia, the setting up of Special Tribunals which could expedite the recovery of process...." The Committee also suggested some legislative measures to meet the situation. 36. In its Second Report, the Narasimhan Committee observed that NPAs in 1992 were uncomfortably high for most of the public sector banks....... One of the measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the asset without intervention of the court and for reconstruction of the assets. It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions had been attracting the attention and the matter was considered in depth by the committees specially constituted consisting of the experts in the field. The Committee also opined that in the prevalent situation where the amount of dues were huge and hope of early recovery was less, it could be said that a more effective legislation for the purpose was uncalled for or that it could not be resorted to." 5. After the above report of the Narasimham Committee, yet another Committee was constituted headed by Mr.Andhyarujina for bringing about the needed steps within the legal framework. By referring to the above recommendations, the Apex Court in Mardia Chemicals case observed as follows:- "Considering the totality of circumstances the financial climate world over, if it was thought as a matter of policy, to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy." In order to come to the above conclusion, the Court observed that some facts which need to be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. As a large sum of amount remains unrecovered, normal process of recovery of debts through courts is lengthy and time taken is not suited for recovery of such dues. For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill-effects. https://hcservices.ecourts.gov.in/hcservices/ 6. Considering all the above, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the governments in creating Debt Recovery Tribunals and appointing Presiding Officers, for a long time. Even after leaving that margin, it is to be noted that things in the concerned spheres are desired to move faster. In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. It cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another expert committee was constituted then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. 7. The enforcement of security interest is governed by Chapter III. Sub-section (1) of Section 13 empowers a secured creditor, notwithstanding anything contained in Section 69 or 69-A of the Transfer of Property Act, 1882, to enforce any security interest created in accordance with the provisions of the Act. In the event the borrower makes any default in repayment of the secured debt or any instalment thereof, the secured creditor would be entitled to classify his account in respect of such debt to be a Non-Performing Asset. Thereafter, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice, failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). 8. By the above provision, the declaration of a debt as non- performing asset is a pre-condition for issuance of notice under Section 13(2). This law has been laid down by this Court in the judgment in Signal Apparels Pvt.Ltd., rep.by its Director and Signal Export rep.by its Partner v. Canara Bank, P.N. Road Branch rep.by its Authorised Officer-Chief Manager and another, 2010 (5) CTC 337. After the debt is classified as Non-Performing Asset, the borrower will get an opportunity to discharge in full his liabilities to the secured creditor within sixty days. There is no opportunity for the borrower at that stage to approach the secured creditor and point out that the classification of the debt as Non-Performing Asset was not correct with reference to the factual statement of accounts. https://hcservices.ecourts.gov.in/hcservices/ 9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary. 10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to civil Court for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely, (i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13; (ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules. (iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price. 11. In the above background, the question raised in the writ petition must be considered. In Mardia Chemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows: "45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons https://hcservices.ecourts.gov.in/hcservices/ as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non- compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub- section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided https://hcservices.ecourts.gov.in/hcservices/ under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act. 46.We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc. 47.This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act." 12. The very same question again came up for consideration before the Supreme Court in Transcore v. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows: "24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non- payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961. After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons https://hcservices.ecourts.gov.in/hcservices/ for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub- standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt. 25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act." 13. Most recently in Kanaiyalal Lalchand Sachdev v. State of Maharashtra, (2011) 2 SCC 782, the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :- "16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or https://hcservices.ecourts.gov.in/hcservices/ acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same." 14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act. (a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :- "69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be