Supreme Court: The division bench of *M.R. Shah and M.M. Sundresh, J.J., has held that only when the secured property is put to use as an agricultural land or when secured property was not used as a security by way of mortgage, can be exempted under Section 31(i) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act').
The Supreme Court order came while setting aside the Telangana High Court order, wherein, it had allowed the petition filed by the debtor to set aside the order passed by the Debts Recovery Tribunal-I, (‘DRT') Hyderabad, Possession and the Sale Notice issued by the Indian Bank (‘secured creditor') as well as a property mentioned in the Sale Notice pursuant to auction. Consequently, the Order passed by the Debt Recovery Tribunal (DRT) has been restored.
In the matter at hand, the secured creditor and auction purchaser had preferred the appeal against the Telangana High Court. Raus Constructions Pvt. Ltd. (‘respondent') defaulted in servicing the loan amount of the secured creditor which was classified as non-performing asset. The secured creditor thus, initiated proceedings under the SARFAESI Act, issuing notice to the borrower, mortgagors, and guarantors.
The possession notice issued by the secured creditor was published in leading newspapers through which the secured properties were put to e-auction. The borrower, however, sought stay from High Court of all further proceedings initiated by the secured creditor under the provision of the SARFAESI Act till the disposal of matter before the DRT.
Subsequently fresh e-auction was conducted in which auction purchaser was declared as the successful bidder and upon deposit of entire sale consideration, the sale certificate came to be issued in favour of the auction purchaser.
The borrower challenged the auction of a property stating that the same could not be the subject matter of auction under the provisions of the SARFAESI Act as it was an agricultural land. The DRT observed that the borrowers did not file any evidence to prove that agricultural activity was on going in the mortgaged land. Therefore, held that the land in question was not exempted under the SARFAESI Act and the sale certificate issued in favour of the auction purchaser was accordingly confirmed by the order of DRT.
The borrower challenged the orders of the DRT before the Telangana High Court whereof while allowing the petition it was held that non-compliance of Rule 9(3) of Security Interest (Enforcement) Rules, 2002 (‘Rules, 2002') inter alia on the ground that 25% of the amount of sale price and thereafter 75% of the balance sale price was not deposited within the time stipulated. Further, High Court went on to observe that in view of Section 31(i) of the SARFAESI Act, item no.8 property being an agricultural land could not have been put to auction.
The Supreme Court was of the view that the borrower had a statutory remedy available by way of appeal before the Debt Recovery Appellate Tribunal (DRAT) wherein it was required to deposit 25% of the debt due. However, with the intention to circumvent the 25% deposit with the DRAT, the borrower straightaway preferred the petition before the High Court. Therefore, the High Court ought not to have entertained the petition under Article 226 and 227 of the Constitution, allowing the borrower to circumvent the provision of the SARFAESI Act. Supreme Court also found the reasons stated in the order of the High Court as unsustainable.
The Supreme Court went on to state that the Telangana High Court did not appreciate the Possession Notices were published in newspapers having sufficient circulation in the locality which were, in addition also served upon the borrowers. Thus, held that Telangana High Court erred in holding that there was a breach of Rule 8(1) & (2) of the Rules, 2002.
Further, the Supreme Court held that the High Court erred in its observation that 25% of the amount was not deposited on the date of auction and that balance 75% amount was not deposited on or before 15th day of confirmation of the sale was contrary to Rules 9(3) and (4) of the Rules, 2002.
The Supreme Court agreed with the observation of the DRT stating that the subject property mentioned in Possession Notice was not agricultural property as no evidence to prove the same was advanced by the borrowers, thus will not enjoy the exemption permitted under the provisions of the SARFAESI Act. In addition, the Supreme Court also held that the Telangana High Court took a contrary view to the decision observed in ITC Limited v. Blue Coast Hotels Limited (2018) 15 SCC 99 which considered object and purpose of Section 31(i) of the SARFAESI Act that merely because in the revenue records the secured properties are shown as agricultural land is not sufficient to attract Section 31(i) of the SARFAESI Act.
Therefore, the Supreme Court held that only when the secured property was put to use as agricultural land or when secured property was not used as a security by way of mortgage, can be exempted under the provisions of the SARFAESI Act under Section 31(i). Accordingly, held that the High Court had committed an error in applying Section 31(i) of the SARFAESI Act.
The Supreme Court further opined that instead of shifting the burden of proof on the secured creditor to prove that the secured property was not agricultural property, the High Court should have laid down the burden of proof on the borrowers. The High Court, thus, materially erred in shifting the burden upon the secured creditor to prove that the property is non-agricultural land or have been put to non-agricultural use.
The Supreme Court, thus accordingly set aside the order passed by the High Court and restored the order passed by the DRT.
[K. Sreedhar v. Raus Constructions Pvt. Ltd., 2023 SCC OnLine SC 13, decided on 05-01-2023]
*Judgment by Justice M.R. Shah
Advocates who appeared in this case :
For the petitioner- Advocate Tarun Gupta
For the respondent- Advocate Krishna Kumar Singh and Advocate Himanshu Munshi