Case: M/S HINDON FORGE PVT. LTD Vs. THE STATE OF UTTAR PRADESH THR. DISTRICT MAGISTRATE GHAZIABAD

2. These matters come to us from a Full Bench judgment of the Allahabad High Court dated 06.02.2018. By an order of reference dated 19.09.2017, a learned Single Judge noticed divergent opinions expressed by two different Benches of the Allahabad High Court on the question whether an application under section 17(1) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (hereinafter referred to as the SARFAESI Act or the Act), at the instance of a borrower, is maintainable even before physical or actual possession of secured assets is taken by banks/financial institutions in exercise of their powers under section 13(4) of the Act read with rule 8 of the Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as the 2002 Rules). After discussing the various provisions of the Act, the 2002 Rules and judgments of the Supreme Court, the Full Bench summarised the true legal position according to it as follows:29. The upshot of legal position that emerges from the judgments of the Supreme Court, insofar as the question referred to for our consideration is concerned, briefly stated, is as under:(a) The remedy of an application under Section 17(1) is available only after the measures under Section 13(4) have been taken by the Bank/FIs against the borrower.(b) The issue of notice under Section 13(2) to the borrower and communication contemplated by Section) stating that his representation/objection is not acceptable or tenable, does not attract the application of principles of natural justice. In other words, no recourse to an application under Section 17(1), at that stage, is available/maintainable.(c) The borrower/person against whom measures under Section 13(4) of the Act are likely to be taken, cannot be denied to know the reason why his application or objections have not been accepted, as a fulfilment of the requirement of reasonableness and fairness in dealing with the same.(d) One of the reasons for providing procedure under Section 13(4) read with Rule 8 for taking possession is that the borrower should have a clear notice before the date and time of sale/transfer of the secured assets, in order to enable him to tender the dues of the secured creditor with all other charges or to take a remedy under Section 17, at appropriate stage.(e) The time of 60 days is provided after the measures under Section 13(4) have been taken so as to enable the borrower to approach DRT and in such an eventuality, the DRT shall have a jurisdiction to pass any order/interim order, may be subject to conditions, on the application under Section 17(1) of the Act.(f) The scheme of relevant provisions of the Act and the Rules shows that the Bank/FIs have been conferred with powers to take physical (actual) possession of the secured assets without interference of the Court and the only remedy open to the borrower is to approach DRT challenging such an action/measure and seeking appropriate relief, including restoration of possession, even after transfer of the secured assets by way of sale/lease, on the ground that the procedure for taking possession or dispossessing the borrower was not in accordance with the provisions of the Act/Rules.(g) If the dues of the secured creditor together with all costs, charges and expenses incurred by them are tendered to them (secured creditors) before the date fixed for sale or transfer, the assets shall not be sold or transferred and in such an eventuality, possession can also be restored to the borrower.(h) If the possession is taken before confirmation of sale, it cannot be stated that the right of the borrower to get the dispute adjudicated upon is defeated. Thes right to get back possession even after the sale remains intact or stands recognised under the scheme of the provisions of the Act.(i) The borrower is not entitled to challenge the reasons communicated or likely measure, to be taken by the secured creditor under Section 13(4) of the Act, unless his right to approach DRT, as provided for under Section 17(1), matures. The borrower gets all the opportunities, at different stages, either to clear the dues or to challenge the measures under Section 13(4) or even to challenge the reasons rejecting his objections/not accepting the objections, after the measures under Section 13(4) have been taken.(j) While the banks have been vested with stringent powers for recovery of their dues, safeguards have also been provided for rectifying any error or wrongful use of such powers by vesting DRT with authority, after conducting an adjudication into the matters, to declare any such action invalid and also to restore even though the possession may have been made over to the transferee.(k) The safeguards provided under the scheme make it further clear that if the Bank/FIs proceeds to take actual possession of the assets that cannot be stalled by the interference of a Court.(l) If DRT after examining the facts and circumstances of the case and on the basis of evidence produced by the parties, comes to the conclusion that any of the measures referred to in Section 13(4), taken by the secured creditor is not in accordance with the provisions of the Act, it may by order declare that the recourse taken to any one or more measures is invalid and restore possession to the borrower.(m) Any transfer of secured asset after taking possession thereof by the secured creditor shall vest in the transferee all rights in, or in relation to the secured asset as if the transfer had been made by the owner of such secured assets.(n) No remedy under Section 17(1) can be taken by the borrower unless he loses actual (physical) possession of the secured assets. In other words, before losing actual possession or unless the secured creditor obtains physical possession of the secured asset under Section 13(4), it is not open to the borrower to take a remedy under Section 17(1) of the Act.The court then went on to hold:31. Section 13(4) of the Act provides that if the borrower fails to discharge his liability within the period prescribed under Section 13(2), the secured creditor can take recourse to one of the measures, such as taking possession of the secured assets, including the right to transfer by way of lease, assignment or sale for realising the secured asset. From the language of this provision, it is further clear that taking measure under Section 13(4)(a) would mean taking actual (physical) possession, and if we do not read it in the said provision to say so, the right and power of the secured creditor to transfer the assets by way of lease, assignment or sale for realizing the secured assets, as provided for therein, would render redundant. In other words, putting such an interpretation on the language of Section 13(4) of the Act would be atrocious and would defeat the very objective of bringing the legislation. It is, therefore, not possible to hold that taking measures under Section 13(4)(a) also means taking only symbolic possession and not physical possession. We record further reasons to say so in following paragraph. From the scheme of Section 13(4) and Sections 14 and 17 of the Act and the relevant Rules 8 and 9 of the Rules, it appears to us that unless physical possession is taken, the measure, contemplated under Section 13(4), cannot be stated to have been taken.31.1. One of the rights conferred on a secured creditor is to transfer by way of lease, the secured asset, possession or management whereof has been taken under clauses (a) or (b) ofn (4) of Section 13. We have already held that sale or assignment of the secured assets could only be undertaken if actual physical possession has been taken over by the bank/FIs. If we pose a question whether right to transfer the secured assets by way of lease could be exercised without taking actual physical possession of the secured asset or management of the business of the borrower, our answer would be obviously in the negative.31.2. The word lease has not been defined under the Act, but it has been used in the Act in the same sense as under the Transfer of Property Act, 1882. Thereunder, Section 105 defines lease as transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. Lease is a contract between the lessor and the lessee for the possession and profits of land, etc. on one side and the recompense by rent or other consideration on the other. The estate transferred to the lessee is called the leasehold. The estate remaining in the lessor is called the reversion.31.3. The absolute owner, who is under no personal incapacity can grant lease for any term he pleases. However, the limited owner like a tenant for life can grant lease but it would not endure beyond his death. The Supreme Court in Associated Hotels of India Ltd. v. R.N. Kapoor, AIR 1959 SC 1262  , while making a distinction between lease and license observed thus:—A lease is a transfer of an interest in land. The interested transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor.Under S. 52 if a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the permissive for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property. There is, therefore, clear distinction between the two concepts31.4. One of the essential indicia of lease is parting of exclusive possession by the lessor to the lessee with conferment of reciprocal right in the lessee to protect his possession during subsistence of the lease to the exclusion of the lessor. Although in some cases, a licensee may also be given exclusive possession of a property, but as observed above, parting of exclusive possession to the lessee is a sine qua non for creating a valid lease. Thus, where a person is not in physical possession of a property nor in a position to deliver physical possession in future, he is incompetent to create a valid lease. The reason being that he is not in a position to confer upon the lessee the right to enjoy the property to the exclusion of the lessor and everyone else.31.5. It thus necessarily follow that the ultimate object of taking possession of the secured asset or management of the business of the borrower would not be achieved unless the secured creditor is in a position to further exercise his right to transfer the same, inter alia, by way of lease or sale, which could be possible only if physical (actual) possession has been taken over and not constructive or symbolic possession. The language of Section 13(6) also supports our view. Thus, while there is no bar in first taking symbolic possession of the secured assets, but it is implicit inn (4) of Section 13 that the secured creditor has to thereafter proceed to take physical (actual) possession in order to exercise its right to transfer by way of lease, assignment or sale.34. Thus, the scheme of the provisions of Sections 13 and 17 of the Act, read with Rules 8 and 9 of the Rules, would show that the measure taken under Section 13(4)(a) read with Rule 8 would not be complete unless actual (physical) possession of the secured assets is taken by the Bank/Financial Institutions. In our opinion, taking measure under Section 13(4) means either taking actual/physical possession under clause (a) ofn (4) of Section 13 or any other measure under other clauses of this Section and not taking steps to take possession or making unsuccessful attempt to take measure under Section 13(4) of the Act. Similarly, following the procedure laid down under Section 14 and/or Rules 8 and 9, where the Bank meets with resistance, would only mean taking steps to seek possession under Section 13(4)(a) and the measure undern (4)(a) of Section 13 would stand concluded only when actual/physical possession is taken or the borrower loses actual/physical possession. It is at this stage alone or thereafter, the borrower can take recourse to the provisions of Section 17(1) of the Act. The transfer of possession is an action. Mere declaration of possession by a notice, in itself, cannot amount to transfer of possession, more particularly where such a notice meets with resistance. When the possession is taken by one party, other party also loses it. In the present case, adversial possession in being claimed by the secured creditor against the borrower. It is not possible that both will have possession over the secured assets. The possession of the secured creditor would only come into place with the dispossession of the borrower. We may also observe that in a securitisation application under Section 17(1), the borrower will have to make a categoric statement that he lost possession or he has been dispossessed and pray for possession.35. Issuance of possession notice, as observed earlier, gives borrower and the public in general an intimation that the secured creditor has taken possession of the property and at that stage, it is quite possible, may be in view of resistance or if the Banks chooses to take only symbolic possession, to state that the secured creditor has taken symbolic/constructive possession and not physical possession, but that by itself would not entitle the borrower to raise challenge under Section 17(1) of the Act, as held by the Supreme Court in Noble Kumar (supra). Unless the borrower loses actual (physical) possession, he cannot take recourse to provisions of Section 17(1). Even while taking steps under Section 13(4) of the Act read with Rule 8 of the Rules, in a given case, the bank may not physically dispossess the borrower and wait till it takes steps to conduct actual sale/auction of the secured assets i.e. till he issues notice under Rule 8(6) of the Rules. Even that by itself, from the scheme of the Act and the Rules, in the backdrop of the objective of the Act, in our opinion, does not confer any right to take recourse to Section 17(1). The borrower can file securitisation application under Section 17(1) only when he physically loses possession.40. We are, therefore, of the firm and considered opinion that taking symbolic possession or issuance of possession notice under Appendix IV of the Rules, meeting with any resistance, cannot be treated as measure/s taken under Section 13(4) of the Act and, therefore, the borrower at that stage cannot file an application under Section 17(1) before DRT. In other words, a securitisation application under Section 17(1) of the Act is maintainable only when actual/physical possession is taken by the secured creditor or the borrower loses actual/physical possession of the secured assets. Once the right to approach DRT matures and securitisation application under Section 17(1) is filed by the borrower, it is open to DRT to deal with the same on merits and pass appropriate orders in accordance with law. Thus, the question referred to for our consideration stands answered in terms of this judgment. The judgment of this Court in Aum Jewels (supra), in our opinion, does not enunciate the correct law.

Court's reasoning:
10. A reading of section 13 would make it clear that where a default in repayment of a secured debt or any instalment thereof is made by a borrower, the secured creditor may require the borrower, by notice in writing, to discharge in full his liabilities to the secured creditor within 60 days from the date of notice. It is only when the borrower fails to do so that the secured creditor may have recourse to the provisions contained in section 13(4) of the Act. Section) was inserted by the 2004 Amendment Act, pursuant to Mardia Chemicals (supra), making it clear that if on receipt of the notice under section 13(2), the borrower makes a representation or raises an objection, the secured creditor is to consider such representation or objection and give reasons for nonacceptance. The proviso to section) makes it clear that this would not confer upon the borrower any right to prefer an application to the Debts Recovery Tribunal under section 17 as at this stage no action has yet been taken under section 13(4).12. Section 19, which is strongly relied upon by Shri Ranjit Kumar, also makes it clear that compensation is receivable under section 19 only when possession of secured assets is not in accordance with the provision of this Act and rules made thereunder. 24 The scheme of section 13(4) read with rule 8(1) therefore makes it clear that the delivery of a possession notice together with affixation on the property and publication is one mode of taking possession under section 13(4). This being the case, it is clear that section 13(6) kicks in as soon as this is done as the expression used in section 13(6) is after taking possession. Also, it is clear that rule 8(5) to 8(8) also kick in as soon as possession is taken under rule 8(1) and 8(2). The statutory scheme, therefore, in the present case is that once possession is taken under rule 8(1) and 8(2) read with section 13(4)(a), section 17 gets attracted, as this is one of the measures referred to in section 13(4) that has been taken by the secured creditor under Chapter III.14. The argument made by the learned counsel for the respondents that section 13(4)(a) has to be read in the light ofs (b) and (c) is therefore incorrect and must be rejected. Undere (c), a person is appointed as manager to manage the secured assets the possession of which has been taken over by the secured creditor only under rule 8(3). Further, the rule of noscitur a sociis cannot apply.e (b) speaks of taking over management of the business of the borrower which is completely different from taking over possession of a secured asset of the borrower. Equally,e (d) does not speak of taking over either management or possession, but only speaks of paying the secured creditor so much of the money as is sufficient to pay off the secured debt. These arguments must therefore be rejected.17. Another argument made by learned senior counsel for the respondents is that if we were to accept the construction of section 13(4) argued by the appellants, the object of the Act would beAs has been pointed out hereinabove in the Statement of Objects and Reasons of the original enactment, paragraphs 2(i) and 2(j) make it clear that the rights of the secured creditor are to be exercised by officers authorised in this behalf in accordance with the rules made by the Central Government. Further, an appeal against the action of any bank or financial institution is provided to the concerned Debts Recovery Tribunal. It can thus be seen that though the rights of a secured creditor may be exercised by such creditor outside the court process, yet such rights must be in conformity with the Act. If not in conformity with the Act, such action is liable to be interfered with by the Debts Recovery Tribunal in an application made by the debtor/borrower. Thus, it can be seen that the object of the original enactment also includes secured creditors acting in conformity with the provisions of the Act to realise the secured debt which, if not done, gives recourse to the borrower to get relief from the Debts Recovery Tribunal. Equally, as has been seen hereinabove, the Statement of Objects and Reasons of the Amendment Act of 2004 also make it clear that not only do reasons have to be given for not accepting objections of the borrower under section, but that applications may be made before the Debts Recovery Tribunal without making the oneroust of 75% which was struck down by this Court in Mardia Chemicals (supra). The object of the Act, therefore, is also to enable the borrower to approach a quasijudicial forum in case the secured creditor, while taking any of the measures under section 13(4), does not follow the provisions of the Act in so doing. Take for example a case in which a secured creditor takes possession under rule 8(1) and 8(2) before the 60 days period prescribed under section 13(2) is over. The borrower does not have to wait until actual physical possession is taken (this may never happen as after possession is taken under rule 8(1) and 8(2), the secured creditor may go ahead and sell the asset). The object of providing a remedy against the wrongful action of a secured creditor to a borrower will be stultified if the borrower has to wait until a sale notice is issued, or worse still, until a sale actually takes place. It is clear, therefore, that one of the objects of the Act, as carried out by rule 8(1) and 8(2) must also be subserved, namely, to provide the borrower with instant recourse to al body in case of wrongful action taken by the secured creditor.18. Another argument that was raised by learned senior counsel for the respondents is that the taking of possession under section 13(4)(a) must mean actual physical possession or otherwise, no transfer by way of lease can be made as possession of the secured asset would continue to be with the borrower when only symbolic possession isargument also must be rejected for the reason that what is referred to in section 13(4)(a) is the right to transfer by way of lease for realising the secured asset. One way of realising the secured asset is when physical possession is taken over and a lease of the same is made to a third party. When possession is taken under rule 8(1) and 8(2), the asset can be realised by way of assignment or sale, as has been held by us hereinabove. This being the case, it is clear that the right to transfer could be by way of lease, assignment or sale, depending upon which mode of transfer the secured creditor chooses for realising the secured asset. Also, the right to transfer by way of assignment or sale can only be exercised in accordance with rules 8 and 9 of the 2002 Rules which require variouss to be met before sale or assignment can be effected. Equally, transfer by way of lease can be done in future in cases where actual physical possession is taken of the secured asset after possession is taken under rule 8(1) and 8(2) at a future point in time. If no such actual physical possession is taken, the right to transfer by way of assignment or sale for realising the secured asset continues. This argument must also, therefore, be rejected.19. Shri Ashish Dholakia, learned Advocate, appearing for the intervenor, State Bank of India, argued that if we were to upset the Full Bench judgment, there would be little difference between the Recovery of Debts Act and the SARFAESI Act as banks would not be able to recover their debts by selling properties outside the court process without constant interference by the Debts Recovery Tribunal.We are of the view that this argument has no legs to stand on for the reason that banks and financial institutions can recover their debts by selling properties outside the court process under the SARFAESI Act by adhering to the statutory conditions laid down by the said Act. It is only when such statutory conditions are not adhered to that the Debts Recovery Tribunal comes in at the behest of the borrower. It is needless to add that under the Recovery of Debts Act, banks/financial institutions could not recover their debts without intervention of the Debts Recovery Tribunal, which the SARFAESI Act has greatly improved upon, the only caveat being that this must be done by the secured creditor following the drill of the SARFAESI Act and rules made thereunder. Shri Dholakia then referred to and relied upon section 3 of the Transfer of Property Act, 1882. Under the said section, a person is said to have notice of a fact when he actually knows that fact, or when, but for willful abstention from an inquiry or search which he ought to have made, or gross negligence, he would have known it.We fail to understand what relevance Explanation II could possibly have for a completely different statutory setting, namely, that of the SARFAESI Act and the 2002 Rules thereunder. For the purpose of the Transfer of Property Act, a person acquiring immovable property shall be deemed to have notice of the title, if any, of any person who is for the time being in actual possession thereof. For the purpose of the SARFAESI Act read with the 2002 Rules, the taking of possession by a secured creditor of the secured asset of the borrower would include taking of possession in any of the modes prescribed under rule 8, as has been held by us hereinabove. This argument must also, therefore, be rejected.If the whole of paragraph 74 is read together with the extracted passage, it becomes clear that what is referred to in the extracted passage is the procedure provided by rule 8(3). It is clear that the authorised officers powers, once possession is taken under rule 8(3), include taking of steps for preservation and protection of the secured assets which is referred to in the extracted portion. Thus, the final conclusion by the Bench, though general in nature, is really referable to possession that is taken under rule 8(3) of the 2002 Rules. Whether possession taken under rule 8(1) and 8(2) is called symbolic possession or statutory possession, the fact remains that rule 8(1) and rule 8(2) specifically provide for a particular mode of possession taken under section 13(4)(a) of the Act. This cannot be wished away by an observation made by this Court in a completely different context in order to repel an extreme argument. This Court was only of the opinion that the extreme argument made, as reflected in paragraph 71 of the judgment, would have to be rejected. This judgment therefore does not deal with the problem before us: namely, whether a section 17(1) application is maintainable once possession has been taken in the manner specified under rule 8(1) of the 2002 Rules.24. This judgment also speaks of the taking over of symbolic possession under the SARFAESI Act. The judgment then goes on to discuss whether a creditor could maintain an application for possession under section 14 of the Act once it takes over symbolic possession before the sale of the property to the auction purchaser. The Court referred to various authorities and arrived at the conclusion that a secured creditor remains a secured creditor when only constructive or symbolic possession is given, as the entire interest in the property not having been passed on to the secured creditor in the first place, the secured creditor in turn could not pass on the entire interest in the property to the auction purchaser.Section 13(6) of the SARFAESI Act makes it clear that a different intention is so expressed by the Act, as any transfer of a secured asset after taking possession thereof, shall vest in the transferee all rights in the secured asset so transferred as if the transfer had been made by the owner of such secured asset. It is clear, therefore, that statutorily, under section 13(6), though only the lesser right of taking possession, constructive or physical, has taken place, yet the secured creditor may, by lease, sale or assignment, vest in the lessee or purchaser all rights in the secured asset as if the transfer had been made by the original owner of such secured asset. This aspect of the matter does not appear to have been noticed in the aforesaid judgment. The ultimate conclusion in the said judgment is, however, correct as a secured creditor remains a secured creditor even after possession is taken over as the fiction contained in section 13(6) does not convert the secured creditor into the owner of the asset, but merely vests complete title in the transferee of the asset once transfer takes place in accordance with rules 8 and 9 of the 2002 Rules.