Sarfaesi - as interpreted in ITC versus BLUE COAST HOTELS LTD

(2018)1 SCeJ 613

SUPREME COURT OF INDIA in ITC versus BLUE COAST HOTELS LTD. decide d on 19th March, 2018 has put at rest various issued relating to the SARFAESI Act,

Whether Section 13 (3A) is mandatory or directory in nature

Violation of Section 13 (3A) cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan

Effect of Inclusion of Agricultural Land as Security Interest

Symbolic Possession

Whether the creditor could maintain an application of possession under Section 14 of the Act, even though it had taken over only symbolic possession before the sale of the property to the auction purchaser

The issue involved taking over of a property under section 14 where the property had already been sold after taking over the symbolic possession thereof by the bank.

While dealing with the Security Interest (Enforcement) Rules, 2002, Rule 3A , the apex court held that Rules framed under the Act elaborate on the manner in which the representation of the borrower is required to be dealt with. Rule 3A requires the authorized officer who is an officer specified by the Board of Directors of the secured creditor to consider the representation and modify the notice of demand if satisfied of the need to do so in that regard. If the authorized officer comes to the conclusion that such representation or objection is not tenable or acceptable, he must communicate the reasons for non-acceptance of the representation or objection within fifteen days.

With reference to Section 13(3A) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the court has held that the borrower may raise an objection against the proposed measures or make a representation explaining the circumstances in which he cannot discharge his liabilities and propose reschedulement. This may result in reconsideration by the creditor of whether or not it would be prudent to carry out the proposed measures and may even result in a renovation of the contract. The borrower may raise an objection or make a representation of any nature that the creditor must consider, and if found not acceptable, may reject the same before proceeding to resort to any of the measures provided by Section 13(4) of the Act. The Parliament transformed the observations of this Court in Mardia Chemicals, into a provision in the Act with a plain intention to introduce a pause for the creditor to rethink and reconsider the action proposed by the debtor. It is a departure from the usual steps that an ordinary creditor is bound to take for recovering the loan i.e. through the intervention of the Court .

Whether Section 13 (3A) is mandatory or directory in nature

Further the court has held while dealing with Whether Section 13 (3A) is mandatory or directory in nature it held that we find the language of sub-section (3A) to be clearly impulsive. It states that the secured creditor “shall consider such representation or objection and further, if such representation or objection is not acceptable or tenable, he shall communicate the reasons for non-acceptance” thereof. We see no reason to marginalize or dilute the impact of the use of the imperative ‘shall’ by reading it as ‘may’. The word ‘shall’ invariably raises a presumption that the particular provision is imperative. Moreover, this provision provides for communication of the reasons for not accepting the representation/objection and the requirement to furnish reasons for the same. A provision which requires reasons to be furnished must be considered as mandatory. Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully - We are not prepared in such circumstances to interpret the silence of the Parliament in not providing for any consequence for non-compliance with a duty to furnish reasons. The provision must nonetheless be treated as ‘mandatory’. It was submitted on behalf of the creditor that the conduct of the debtor does not warrant an interference in this case. However, we are of the view that the construction of the Act should not be affected by the facts of a particular case. For, indeed, where the remedy invoked is a discretionary remedy, the Court may deny relief if the circumstances so warrant - SARFAESI, Section 13(3A).  

The court held, there is nothing in the legislative scheme of Section 13 (3A) which requires the Court to consider whether or not, the word ‘shall’ is to be treated as directory in the provision. As the Section stood originally, there was no provision for the above mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2). As it was introduced via sub-section (3A), it could not be the intention of the Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor’s representation has not been accepted.

Further held,  From the fact that several letters and proposals were made and considered by the bank, and no reply to objections were given, it is clear that the creditor was induced by the debtor not to take action against them through assurances and promises. The creditor appeared to have entered into negotiations for the settlement of the dues and even accepted cheques in repayment much after the notice under Section 13(2) and after the debtor’s letter of representation. Many opportunities were granted by the creditor to the debtor to repay the debt which were all met by proposals for extension of time. Eventually, the debtor even executed “A Letter of Undertaking” acknowledging the right of the creditor to sell the assets in the case of default. In these circumstances, we have no doubt that the failure to furnish a reply to the representation is not of much significance since we are satisfied that the creditor has undoubtedly considered the representation and the proposal for repayment made therein and has in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail. Therefore, in the fact and circumstances of this case, we are of the view that the debtor is not entitled to the discretionary relief under Article 226 of the Constitution which is indeed an equitable relief. 

Violation of Section 13 (3A) cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions

Violation of Section 13 (3A) cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions. Loan was taken by the debtor which was not paid, the debtor did not respond to a notice of demand and made a representation which was not replied to in writing by the creditor. Creditor, however, considered the proposals for repayment of the loan as contained in the representation in the course of negotiations which continued for a considerable amount of time. Several opportunities were in fact availed of by the debtor for the repayment of the loan after the proceedings were initiated by the secured creditor. The debtor failed to discharge its liabilities and eventually undertook that if the debtor fails to discharge the debt, the creditor would be entitled to take realize the secured assets. Therefore, the debtor is not entitled for the discretionary equitable relief under Articles 226 and 136 of the Constitution of India in the present ca

Agricultural Land -

Obviously, since no security interest can be created in respect of agricultural lands and yet it was so created, goes to show that the parties did not treat the land as agricultural land and that the debtor offered the land as security on this basis.

In reference to Section 2(zf) , 31 (i) dealing with Agricultural Land and the issue re. Inclusion of Agricultural Land as Security Interest in the Notice of Recovery, the court held that purpose of enacting Section 31(i) and the meaning of the term “agricultural land” is intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court. The plain intention of the provision is to exempt agricultural land from the provisions of the Act. In other words, the creditor cannot enforce any security interest created in his favour without intervention of the Court or Tribunal, if such security interest is in respect of agricultural land - The exemption thus protects agriculturists from losing their source of livelihood and income i.e. the agricultural land, under the drastic provision of the Act - It is also intended to deter the creation of security interest over agricultural land as defined in Section 2 (zf) - Thus, security interest cannot be created in respect of property specified in Section 31.

Obviously, since no security interest can be created in respect of agricultural lands and yet it was so created, goes to show that the parties did not treat the land as agricultural land and that the debtor offered the land as security on this basis. Security interest was created in respect of several parcels of land, which were meant to be a part of single unit i.e. the five star hotel in Goa. Some parcels of land now claimed as agricultural land were apparently purchased by the debtor from agriculturists and are entered as agricultural lands in the revenue records. The mortgage is intended to cover the entire property of the Goa Hotel.  Prima facie, apart from the fact that the parties themselves understood that the lands in question are not agricultural, it also appears that having regard to the use to which they are put and the purpose of such use, they are indeed not agricultural .

Held, The undisputed position is that the total land on which the Goa Hotel was located admeasures 182225 sq. mtrs. Of these, 2335 sq. mtrs. are used for growing vegetables, fruits, shrubs and trees for captive consumption of the hotel. There is no substantial evidence about the growing of vegetables but what seems to be on the land are some trees bearing curry leaves and coconut. This amounts to about 12.8 % of the total area. The Corporate Loan Agreement that deals with the mortgage in question in the relevant clause reads as “The Borrower shall create mortgage on Exclusive basis on the ‘Park Hyatt Goa Resort and Spa” Hotel Property admeasuring 1,82,225 Sq Mtrs with a built up area of 25182 Sq. Mtrs situated at 263 C, Arossim, Canasaulim Goa.” - The mortgage is thus intended to cover the entire property of the Goa Hotel -  Prima facie, apart from the fact that the parties themselves understood that the lands in question are not agricultural, it also appears that having regard to the use to which they are put and the purpose of such use, they are indeed not agricultural.

Symbolic Possession - Whether the creditor could maintain an application of possession under Section 14 of the Act, even though it had taken over only symbolic possession before the sale of the property to the auction purchaser, depends on whether it remained a secured creditor after having done so

We find nothing in the provisions of the Act that renders taking over of symbolic possession illegal. This is a well- known device in law. Delivery of symbolic possession amounted to an interruption of adverse possession of a party and the period of limitation for the application of Article 144 of the Limitation Act would start from such date of the delivery

 Whether the creditor could maintain an application of possession under Section 14 of the Act, even though it had taken over only symbolic possession before the sale of the property to the auction purchaser, depends on whether it remained a secured creditor after having done so. Creditor took over symbolic possession of the property on 20.06.2013. Thereupon, it transferred the property to the sole bidder and issued a sale certificate on 25.02.2015. On the same day, i.e., 25.02.2015, the creditor applied for taking physical possession of the secured assets under Section 14 of the Act - In this case, the creditor did not have actual possession of the secured asset but only a constructive or symbolic possession - The transfer of the secured asset by the creditor therefore cannot be construed to be a complete transfer as contemplated by Section 8 of the Transfer of Property Act. The creditor nevertheless had a right to take actual possession of the secured assets and must therefore be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement dated 25.02.2015. Thus, the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act. 

Held, Even though the entire right, title and interest were purported to have been transferred, all the rights, transfer and interest could not be said to have been transferred since the possession of the property was not transferred to creditor. The possession was retained by the debtor who continued to do business and receive rent from the rooms on the property and has in fact continued to do so till date. There is no doubt that after taking over the property from debtor, the creditor also acquired the right to receive the usufruct of the property i.e. the rent in this case. However, this was an interest in the property which was not at any point of time transferred to the auction purchaser.