Landmark Judgments on Banking Laws [2022] Part I

This article takes a brief sojourn into the landmark judgments delivered by the Supreme Court of India and the High Courts in the year 2022. The judgments are falling under the broad umbrella of banking laws, which comprises four principal enactments of Banking Regulation Act, 1949 (for short “BR Act”), Reserve Bank of India Act, 1934 (for short “RBI Act”), Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short “RDDFI Act”) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “SARFAESI Act”). Part I of this compendium thus comprises judgments on the aforementioned enactments and banking laws as a broad subject for the months from January to June 2022, quoting the views taken in judgments across the country. Part II which shall be the sequel to this part shall comprise judgments from July to December 2022. They are as follows:

(1) Phoenix ARC (P) Ltd. v. Vishwa Bharati Vidya Mandir1

(Delivered on January 12, 2022)

Coram: 2-Judge Bench of HM Justices M.R. Shah and B.V. Nagarathna

Authored by: HM Justice M.R. Shah

Issue before the court was maintainability of writ petition under Article 226 of the Constitution of India against an asset reconstruction company (for short “ARC”) and passing of interim orders protecting the interest of the secured creditor. Referring to the longline of judgments of United Bank of India v. Satyawati Tondon,2 Kanaiyalal Lalchand Sachdev v. State of Maharashtra,3 Sri Siddeshwara Cooperative Bank Ltd. v. Ikbal,4 City and Industrial Development Corpn. v. Dosu Aardeshir Bhiwandiwala,5 and Sadhana Lodh v. National Insurance Co. Ltd.,6 Court held that interim orders stalling/restricting the proceedings of the SARFAESI Act cannot be passed, especially when a large sum amount is involved.

It was further held that ARC is a private financial institution”, and thus writ petition against such entities is not maintainable, since they cannot be stated to be performing public functions, normally expected to be performed by the State authorities. The court disallowed the judgments of J. Rajiv Subramaniyan v. Pandiyas,7 Praga Tools Corpn. v. C.A. Imanual,8 and Ramesh Ahluwalia v. State of Punjab,9 relied upon by the borrowers as mentioning the writ petition to be maintainable. The filing of writ petitions was thus held to be an abuse of the process of the court and interim orders passed in favour of the borrowers set aside.

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(2) Pradeep Kumar v. Postmaster General10

(Delivered on February 7, 2022)

Coram: 3-Judge Bench HM Justices L. Nageshwara Rao, Sanjiv Khanna and B.R. Gavai

Authored by: HM Justice Sanjiv Khanna

The petitioner had laid a challenge to the dismissal order of the National Consumer Dispute Redressal Court (for short “NCDRC”) rejecting the claim of the petitioner for the grant of compensation under various heads along with interest for illegal encashment of Kisan Vikas Patra (for short “KVP”) purchased by them. The said KVPs were illegally encashed through the post office concerned at the instance of one agent Ruksana, who was employed by the State of U.P. The entire payment outstanding on the date of encashment was paid in cash, which was siphoned off and misappropriated by the said agent to her personal benefit. The agent was eventually convicted for various offences under IPC for cheating, misappropriation, etc. Question arose about the vicarious liability of the post office for the faults attributable to its employees. The court examined various provisions of Negotiable Instruments Act, 1881 (for short “NI Act”), especially the definitions of “banker”, “holder”, “endorse”, “holder in due course” and “payment in due course”, along with Sections 78 and 82 providing for the liability of the acceptor/endorser of the negotiable instrument concerned. It was further held that to saddle the bank with the liability of payment to an incorrect entity/person, what must be seen is the compliance of the standard bank practices. Whether the person to whom the payment is made is not entitled to seek payment of the amount mentioned is the line of enquiry. The scope of banker’s protection under Section 131, NI Act was also elaborated upon, with reference to several precedents and judgments on the said aspect. The banker was stated to be acting in good faith and without negligence, in view of the statutory duty enjoined by Sections 131 and 131-A of the NI Act. The agent Ruksana was not treated to be “holder in due course”, since she adopted possession of the owner under lawful possession by means of an offence of fraud or misrepresentation. She was just a carrier for the purposes of change of details in the KVP. Reference was also made to Government Savings Certificate Act 1959, pertaining to the transfer of NI. It was further held that no payment of the claimed amount could have been made through cash but could have been made only through cheque. The provisions of Rules 14 and 15 of the KVP Rules, 1988 were referred to hold that the post office was responsible for any loss caused to the holder by the fraud played by any person towards its encashment. In the process of encashment of the KVP, there was gross violation of various statutory provisions, especially the fraud played in the process. The employee of the bank, Mr M.K. Singh was also held to have acted irresponsibly and carelessly in disregard of the applicable procedure and provisions of KVP Rules, 1988. For all the aforesaid reasons, it was held that the post office was vicariously responsible for the fraud perpetrated by its employees and thus compensation of the claimed amount along with interest and various heads were awarded to the petitioner claimant, setting aside the order of NCDRC.

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(3) Bank of Baroda v. Karwa Trading Co.11

(Delivered on February 10, 2022)

Coram: 2-Judge Bench HM Justices M.R. Shah and Sanjiv Khanna

Authored by: HM Justice M.R. Shah

Appeal before the Supreme Court was preferred against the order of Rajasthan High Court, through which direction was issued to the borrower to deposit a part of outstanding amount to the bank, which was accordingly directed to release the property and hand over physical possession along with title deed of the same to the borrower. The borrower had deposited only half of the total outstanding amount with the bank and sought for quashing of the auction-sale in handing over the property back to him. Referring to the amended provisions of Section 13(8) of the SARFAESI Act, it was held that the secured asset cannot be sold or transferred by the secured creditor if outstanding amount is paid by the borrower prior to the issuance of auction notice. Admittedly in the present case, since the borrower did not deposit, nor was he ready to deposit the entire amount of dues with the secured creditor, he had no right to redeem the mortgaged property, secured in favour of the bank. Thus, the directions of the High Court were contrary to the mandate of amended provisions to Section 13(8) of the SARFAESI Act. It was further held that until and unless the borrower is ready and willing to deposit the entire amount along with the entire costs and expenses with the bank/secured creditor, no order could be passed of handing over the property back in his favour or compelling the bank to settle the outstanding amount at a much lesser value. Accordingly, the judgment of the High Court was set aside.

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(4) Union Bank of India v. Rajasthan Real Estate Regulatory Authority12

(Delivered on February 14, 2022)

Coram: 2-Judge Bench HM Justices M.R. Shah and B.V. Nagarathna

Authored by: HM Justice M.R. Shah

The Court held that in the event of conflict between RERA and SARFAESI Act, the provisions contained in RERA would prevail. RERA would not apply in relation to transactions between the borrower and the banks/financial institutions where security interest has been created by mortgaging the property prior to the introduction of the Act unless and until the same is found to be fraudulent or collusive. RERA shall have the jurisdiction to entertain a complaint under RERA Act by any aggrieved person against the bank as a secured creditor if the bank resorts to Section 13(4) or any incidental provision under the SARFAESI Act.

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(5) NKGSB Cooperative Bank Ltd. v. Subir Chakravarty13

(Delivered on February 25, 2022)

Coram: 2-Judge Bench of HM Justices A.M. Khanwilkar and C.T. Ravikumar

Authored by: HM Justice A.M. Khanwilkar

The seminal question before the court was powers of District Magistrate (DM) or Chief Metropolitan Magistrate (CMM) for appointing an advocate authorising him/her to take position of the secured asset for being forwarded to the secured creditor under Section 14(1)(a) of the SARFAESI Act, 2002. There was a deep cleavage of opinion amongst the High Courts with some deciding in favour and some deciding against the propositions. The issue arose in the context of phrase “may authorise any officer subordinate to him” employed under Section 14(1)(a) of the 2002 Act. Whether an advocate can be treated as an officer subordinate to the DM/CMM”. The court delved into three forms of subordination “administration subordination”, “functional subordination” and “statutory subordination”.

It extensively referred to the pari materia phrases in other legislations, both Central and State. Referring to a host of judgments like A. St. Arunachalam Pillai v. Southern Roadways Ltd.14 , S. Krishnaswamy Mudaliar v. P.S. Palani Pillai15, B. Veeraswamy v. State of A.P.16, and other such judgments, Court held that the nature of subordination depends on the scheme and intent of the statute. Holding that the advocate stands in a functional subordination”, the Court referred to the Statement of Objects and Reasons, various statutory provisions, and the Rules framed thereunder of the SARFAESI Act, 2002. Referring to Rule 2(a) of the Security Interest Rules, 2002, Court held that the debt can be realised through the “authorised officer”. It was further held that the amending provision of Section 14 clause (1)(a) inserted through the 2013 Amendment simply clarifies and reiterates the existing position and does not invest new powers with the DM/CMM as such for the first time. The job of the DM/CMM is purely “ministerial in nature” and does not involve any quasi-judicial adjudicatory function. Such an act under Section 14 cannot brook delay and time is of the essence, which is the spirit of the special enactment. Court also interpreted various words and terms in the judgment viz. “any”, “officer subordinate”, etc. to hold that lawyer is functionally subordinate to CMM/DM exercising power under Section 14. There is no prohibition either on engaging any Advocate Commissioner for taking the position of the secured assets. Accordingly, the view taken by the Bombay High Court was set aside and it was held that advocates can be appointed for the said purpose of taking over of the physical position of secured assets and the documents.

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(6) Punjab National Bank v. Union of India17

(Delivered on February 24, 2022)

Coram: 2-Judge Bench HM Justices L. Nageswara Rao and Vineet Saran

Authored by: HM Justice Vineet Saran

The issue that arose before the Supreme Court was primacy of the provisions of SARFAESI Act vis-à-vis the Central Excise Act, 1944. Who would have a better charge for the realisation of its dues, the secured creditor for Department of Customs and Central Excise (for short “CCE”). The proceedings under the SARFAESI Act, specifically taking over the symbolic possession under Section 13(4) was initiated by the PNB, which was objected to by the CCE.

On the date of confiscation of the land and the superstructure of the subject property, Rule 173-Q(2) had been omitted and as such the power to confiscate was not existing. The court referring to Section 34, read with Section 11-E of the Central Excise Act, 1944 read with Rule 173-Q of the Central Excise Rules, 1944, held that the power to confiscate stood omitted in the year 2000, whereafter a positive affirmative provision to confiscate the properties of the defaulting entities was not provided or existing. Referring to the Constitution Bench judgment in Kolhapur Canesugar Works Ltd. v. Union of India,18 the Court held that in the absence of any enabling or saving position protecting and conserving the pending confiscation proceedings in the Act of 1944 or the Excise Rules, 1944, the pending proceedings were bound to lapse, and it is not covered by the provisions of General Clauses Act, 1897. If a provision of any statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop, and fresh proceedings may be instituted as per the altered/substituted procedure. Thus, the proceedings by the CCE of confiscation got terminated on the date of the amendment of the applicable rules of the Central Excise Rules, 1944 with the omission of operative provisions without any savings therein. Further held that General Clauses Act, 1897 does not apply to the “rule” but applies only to a “Central Act” or “regulation” and thus prayer for its applicability was also negatived. Referring to the Full Bench judgment of the Madras High Court in UTI Bank Ltd. v. CCE,19 it was further stated that there is no enabling or positive statement giving first charge to the dues of CCE over any other statutory due, the said right cannot be claimed by the Revenue. Referring to the longline of judgments in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.,20 Central Bank of India v. Siriguppa Sugars & Chemicals Ltd.,21 the Court held that the rights of the secured creditor under a statute is protected and takes upper claim over the crowns dues. Thus, in light of provisions of Sections 2(f) and 2(1) (zc) to 2(zf) read with Section 13 of the SARFAESI Act, 2002, the secured creditor was said have had a first charge on the secured assets and shall have an overriding effect on all other laws. Accordingly, the judgment of the Allahabad High Court was set aside.

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(7) Asset Reconstruction Co. (India) Ltd. v. Chief Controlling Revenue Authority22

(Delivered on April 26, 2022)

Coram: 2-Judge Bench of HM Justices Hemant Gupta and V. Ramasubramanian

Authored by: HM Justice V. Ramasubramanian

The challenge was laid to the view taken by the Full Bench of Gujarat High Court in stamp reference under Section 54(1)(a) of the Gujarat Stamp Act, 1958 at the instance of CCRA, Gujarat. The sole issue was about the levy of extent of stamp duty on the assignment deed of debt in favour of asset reconstruction company (for short “ARC”) registered with the RBI. The assignment deed contained reference to power of attorney (PoA), which was stated to be chargeable to stamp duty under Article 45(f) of Schedule I to the Gujarat Stamp Act, 1958. The nature of PoA was “irrevocable in nature”. It was held by the court that no independent instrument of PoA was executed; the power of sale of secured assets in favour of ARC flowed out of the provisions of SARFAESI Act, 2002, vide Section 2(zd), “secured creditor” included an ARC. Vide Section 5(1-A), stamp duty was exempted on any document executed by the bank in favour of ARC for the purposes of asset reconstruction or securitisation. Interpreting Article 45(f) of Schedule I to the Stamp Act, 1958, Court held that two conditions have to be satisfied; Firstly, PoA should have been given for consideration and secondly an authorisation to sell any immovable property flowing out of the said instrument. The draft PoA appended to the assignment deed was only incidental to the deed of assignment, but not the principle instrument in itself. The deed of assignment was already charged to duty under Article 20(a) as a “conveyance“. The Court held that since a single instrument has been charged under the correct charging provision of the statute, namely, Article 20(a) of Schedule I, Revenue cannot be allowed to split the instrument into two only because of reduction of stamp duty by a notification issued by the State Government under Section 9(a). If the Government has exempted the levy of stamp duty under particular entry (Article 20 of Schedule I), then the same could not have been charged again/twice through splitting. Accordingly, the view taken by the Full Bench of Gujarat High Court was set aside by the Supreme Court.

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(8) Nedumpilli Finance Co. Ltd. v. State of Kerala23

(Delivered on May 10, 2022)

Coram: 2-Judge Bench of HM Justices Hemant Gupta and V. Ramasubramanian

Authored by: HM Justice V. Ramasubramanian

The issue before the court was whether non-banking financial companies (for short “NBFCs”) regulated by RBI in terms of provisions of the RBI Act, 1934 could also be regulated by respective State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011. The court traced the history of various State enactments as also the scheme and framework of the provisions under the RBI Act relating to the NBFCs. The power of the union was traceable to Entry 43 List I, whilst the power of the State was stated to be traceable to Entry 30 List II falling under Schedule VII. In the process of reasoning, the court extensively referred to provisions of Chapter III-B of the RBI Act and the regulatory measures undertaken by the RBI from time to time pertaining to the NBFCs. It was held that RBI Act takes a holistic approach to the business of banking, money lending and operation of the currency and credit system of the country. It is a complete code in itself that empowers RBI to control all the essential aspects and features of NBFCs from the cradle to the grave. No NBFC can carry on business without being registered under the RBI Act and entire life of NBFC “from the womb to the tomb” is regulated and monitored by the RBI. Scanning the provisions of Section 45(I to Q), as also the various circulars issued thereunder, it was held that nothing has been left untouched insofar as regulation of NBFCs by RBI is concerned and thus it can safely be concluded that it is a “complete code in itself“. Thus, in light of the same, the State of Kerala or any other State cannot step in or regulate even those features of NBFCs, on which the RBI Act is silent, as the silence of RBI implies that it was deliberately not intended to be regulated by the Parliament or RBI.

In the process of reasoning, the court explained and elucidated the doctrines of eclipse, conflict and repugnancy. Referring to the judgment of the Constitution Bench of Deep Chand v. State of U.P.24 , Court explained the “doctrine of eclipse“, meaning as to how a law when validly made gets subjected to a shadow by supervening constitutional inconsistencies or statutory inconsistencies. Thus, with the advent of Chapter III-B of the RBI Act, the State enactments specifically the Kerala Act or the Gujarat Act got eclipsed relating to the subject-matter of NBFCs.

Referring to the recent judgment of Innoventive Industries Ltd. v. ICICI Bank25, Court examined the “doctrine of repugnancy” and inconsistency of law to hold that the repugnancy shall arise only when State laws are referable to enactments under entries of List III and not otherwise. In other circumstances when the legislations relate to different lists under Schedule VII, when the Parliamentary and State legislations are referable to different entries under Schedule VII, then Article 246 shall apply, along with the accompanying “doctrine of conflict“. It was held thus that provisions of the RBI Act override all the State enactments, which cannot therefore govern the operation and functioning of NBFCs.

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(9) R.D. Jain and Co. v. Capital First Ltd.26

(Delivered on July 27, 2022)

Coram: 2-Judge Bench of HM Justices M.R. Shah and B.V. Nagarathna

Authored by: HM Justice M.R. Shah

Issue before the Court was whether the term District Magistrate/Chief Metropolitan Magistrate (for short “DM/CMM”,) under Section 14 of the SARFAESI Act, 2002 includes within its ken Additional District Magistrate or Additional Chief Metropolitan Magistrate also. The question arose because the borrowers contended that the Additional Chief Metropolitan Magistrate cannot be treated as an officer subordinate to the DM/CMM.

The Bombay High Court held that functions of DM/CMM under Section 14 are purely executionary in nature and not, without any element of quasi-judicial functions and that they are not a “persona designata” for the purposes of Section 14 of the SARFAESI Act. Referring to the recent judgment of NKGSB Cooperative Bank Ltd. v. Subir Chakravarty27, Court held that the amendment of 2013 to Section 14 inserting sub-section (1-A) is purely an explanatory provision merely restating the implicit power of the CMM/DM. The same does not invest a new power for the first time in the CMM/DM as such. Thus, the powers exercised by CMM/DM are of a “purely ministerial nature” and can be exercised by the Additional CMM/DM.

Referring to the provisions of Sections 11, 12, 15, 16, 17, 19 and 35 CrPC, Court held that powers exercisable by CMM are exercisable in equal capacity and equal role by the Additional CMM, who are on par with the former insofar as powers under CrPC are concerned. Therefore by no stretch of imagination can they be treated as officers subordinate to the CMM/DM, to whom the powers can be delegated or to be allowed to exercise such powers through special orders in this regard. Accordingly, the contrary view taken by some of the High Courts as expressed by the Supreme Court was specifically overruled.

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(10) Indian Overseas Bank v. RCM Infrastructure Ltd.28

(Delivered on May 18, 2022)

Coram: 2-Judge Bench of HM Justices L. Nageswara Rao and B.R. Gavai

Authored by: HM Justice B.R. Gavai

Issue before the court was relating to impact of Section 10 r/w Section 14 moratorium under the provisions of Insolvency and Bankruptcy Code, 2016 on the issuance of sale confirmation letter pending under Rule 94-A of the Security Interest Rules, 2002 (for short “Rules of 2002”). The sale was confirmed in favour of the auction-purchaser; however the formal sale certificate could not be issued since 75% balance payment of the big amount was pending, which period was extended under Rule 94-A of the Rules of 2002. It was argued on behalf of the auction-purchaser that considering Section 54 (part performance) of the Transfer of Property Act, 1882 (for short “the TP Act”), the auction-purchasers being bona fide purchasers, put into possession of the auctioned property, should not be disturbed. The right of the corporate debtor to redeem the mortgage property under Section 60 of the TP Act was lost in view of amended provisions of Section 13(8) of the SARFAESI Act, 2002. Referring to the provisions of Section 14 and 238 of the IBC, the Court held that provisions of the IBC shall have effect notwithstanding anything inconsistent with any other law for the time being in force. Referring to the judgments of CIT v. Monnet Ispat & Energy Ltd.29 and Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.30, Court held that Section 238 overrides and prevails over all other laws for the time being in force, including the provisions of the TP Act as also the SARFAESI Act. The sale in favour of the auction-purchaser was held to be a statutory sale, effected under Rules 8 and 9 of the Rules of 2002 and thus subject to the impact of Section 238 of the IBC. The balance amount was held to have been outstanding on the date of imposition of the statutory moratorium, on which date the CIRP commenced, and moratorium was ordered. The sale was thus incomplete without the receipt of outstanding part payment. Thus, in view of the IBC moratorium, it could not have been confirmed and rightly negated as null and void by the NCLT.

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(11) Annam Steels (P) Ltd. v. Canara Bank Ltd.31

(Delivered on January 3, 2022)

Coram: Single Judge Bench of HM Justice Bechu Kurian Thomas

Authored by: HM Justice Bechu Kurian Thomas

The petitioner had borrowed loans from multiple banks, who formed a consortium and raised demands from the petitioners. Proceedings under the SARFAESI Act were initiated separately, whereafter recovery proceedings were also instituted by the banks before the DRT. DRT directed the petitioner to pay the consortium of banks a particular amount with pendency lite and future interest @ 14 % p.a. The amount was received by the banks, whereafter for the outstanding amount, the banks started proceeding against the petitioner again. In this backdrop, the question arose was whether fresh securitisation proceedings from the stage of Section 13(2) notice ought to be initiated or the banks were entitled to continue the securitisation proceedings from the State at which the order by the DRT was passed. The case of the petitioner was that the banks are entitled to fresh de novo proceedings since they had paid the amount as per the directions of the DRT in the settlement arrived at mutually by all the parties. The order passed by DRT operated as a termination of pending securitisation recovery proceedings against the petitioner. The case of the bank was that the proceedings can be resumed from the stage and can be continued till and until the outstanding amount due has been received fully. The Court held that the word “debt” occurring under the provisions of the RDDB Act, as also the SARFAESI Act has to be interpreted with the same meaning and interpretation. Once an amount is declared as non-performing with the issuance of notice under Section 13(2), the borrower is statutorily obligated to discharge the entire liability to overcome the rigours of the Securitisation Act. A “partial discharge of the debt” is not sufficient to discharge the liability of the borrower and part payment of the amount under whatever mode (even through court order) is also not sufficient to discharge the debt due. Referring to the judgments of Mardia Chemicals Ltd. v. Union of India,32 and Transcore v. Union of India,33 the Court held that question of difference of amount may always be kept open and decided before the auction-sale of property, implying that DRT order does not terminate, till specifically mentioned the right of the bank to recover the outstanding due in the same proceedings. Part payment does not erode the sanctity of notice under Section 13(2) of the SARFAESI Act, otherwise a shrewd borrower will always be able to defeat the provisions of Act by making such a part payment and getting away with it. Accordingly, the writ petition was dismissed.

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(12) Bajaj Finance Ltd. v. Ali Agency34

(Delivered on January 10, 2022)

Coram: 2-Judge Bench of HM Justices Jaswant Singh and S.K. Panigrahi

Authored by: HM Justice Jaswubraant Singh

Multiple questions arose about the scope of remedies available to secured creditor/bank in the case of adverse orders being passed against them by the District Magistrate (for short “DM”) under Section 14 of the SARFAESI Act. The broad questions were as follows:

  1. Whether the present writ petition is maintainable in view of the remedy provided under Section 17 of the SARFAESI Act, 2002?
  2. Whether Chief Judicial Magistrate would have the jurisdiction to entertain an application under Section 14 of the SARFAESI Act, 2002?
  3. Scope of exercise of jurisdiction by the authorities concerned, while examining an application under Section 14 of the Securitisation Act, 2002.

On the first issue, it was held that under Section 17 of the Act of 2002, remedy is available to the “borrower or person aggrieved” against the actions of the secured creditor, but not to the secured creditor himself. The parliamentary intent is crystal clear from the phraseology employed thereunder. Referring to the judgment of Division Bench of Punjab and Haryana High Court in Allahabad Bank v. DM, Ludhiana35 and Kotak Mahindra Bank Ltd. v. DM, Ludhiana36, it was held that writ petition under Articles 226/227 of the Constitution of India is available as a remedy to the secured creditor for assailing the orders or inaction of the DM whilst adjudicating upon applications preferred under Section 14. Accordingly, the writ petition at the instance of secured creditor/bank was held to be maintainable.

On the second issue, it was held that jurisdiction to entertain an application under Section 14 is equally vested with the CJM as well as the DM and no distinction has been created between the two authorities by the legislature, for which reason they are therefore equally competent to entertain applications and pass appropriate orders. Referring to the judgment of Supreme Court in Indian Bank v. D. Visalakshi37, it was held that powers and functions of CMM and CJM are equivalent and similar in relation to matters specified in CrPC as also under Section 14 of the SARFAESI Act. Holding the power to be exercisable under Section 14 to be purely non-judicial, ministerial and exercise of coercive power, it was held that merely because only the word/term “CMM” has been used, instead of Chief Judicial Magistrate, it cannot be held that CJM becomes incompetent authority to entertain applications under Section 14. CJM was thus held to be possessing equivalent authority to entertain applications for handing over of physical possession to the secured creditor.

The court reiterated the principles governing disposal of Section 14 application, which does not involve any adjudicatory or quasi-judicial functions but is purely ministerial non-adjudicatory power sought to be exercised by the DM/CJM/CMM. Accordingly, the writ petitions were allowed.

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(13) SBI v. Tax Recovery Officer38

(Delivered on January 20, 2022)

Coram: Single Judge Bench of HM Justice S.M. Subramaniam

Challenge was laid to order of the Tax Recovery Officer, Income Tax Department, through which it was directed that subsequent mortgage with the bank is void considering Section 281 of the IT Act. The question thus arose about interplay and conflict between the provisions of IT Act and the SARFAESI Act. The mortgage was admittedly effected after the date of attachment of the assets for tax default and thus it was submitted on behalf of the IT Department that the transfer of the subject property through mortgage was void, being contrary to Section 281 of the IT Act. The court considered and interpreted the conflicting provisions of the IT Act, SARFAESI and the RDDB Act, 1993. It was held by the court that Section 281 unambiguously hits at all transactions or transfers made during the pendency of income tax proceedings. The mortgagee or the secured creditor is expected to follow the principles of “caveat emptor” (buyer beware), with the bound and duty of the borrower to inform the secured creditor about the existence/pendency of the IT proceedings on the subject-matter. The Court referred to and followed two doctrines – “The doctrine of priority of crown’s debts” and “the doctrine of constitutional priority“. Under the latter, priority is given to those debts, which are traceable and recognised under the constitutional provisions. Taxation laws are constitutionally recognised with reference to the sovereignty and the policies of the Government and thus, the supremacy of the Constitution overtakes the statutes enacted in such enactments which takes direct enactments under such statutes. Referring to the Constitution Bench judgment of the Supreme Court of India, in Builders Supply Corpn. v. Union of India,39 Court held that its a settled principle of Constitution law that as between creditors of same rank, Government is entitled to priority as arrears of tax due to the State always have an upper hand over private debt. Interpreting the rigours of Sections 34 of the IDDB Act and Section 35 of the SARFAESI Act, the Court held that they shall override other legislations only when there is an inconsistency. If there is no inconsistency between two enactments, then there is no question of overriding other legislations. Held that realisation of taxes by the State is a sovereign function, which must therefore be accorded primacy over other private debts. Accordingly, Section 281 of the IT Act was interpreted to mean that no mortgage ought to be created during the pendency of IT proceedings, which would render the whole mortgage void.

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(14) Mahipal Singh Yadav v. Union Bank of India40

(Delivered on January 24, 2022)

Coram: 2-Judge Bench of HM Justices Vipin Sanghi and Jasmit Singh

Authored by: HM Justice Vipin Sanghi

High Court entertained the writ petition against the orders passed by DRT, Jaipur since the post of the Presiding Officer in the office of DRAT (Debts Recovery Appellate Tribunal) had been lying vacant. The appeals under Section 18 were thus entertained by the High Court in view of the directions of the Supreme Court through its order dated 16-12-2021. The question arose about the consent of secured creditor as a precondition of sale of asset “below the reserve price” determined by the bank in terms of the Security Interest (Enforcement) Rules, 2002.

Referring to the provisions of Rule 8(6), the reserve price is fixed as a benchmark below which the property may not be sold and thus if at any stage the secured creditor intends to dispose of the property at a value lesser than the same, it is mandatory to share the said offer with the borrower, without whose consent the sale could not be affected. Referring to the judgment of Seaford Court Estates Ltd. v. Asher41, Court held that if any statutory provision is not very happily worded, is ambiguous then, the court must perform the constructive task of finding the intention of the Parliament (Legislature) for interpreting the written words in a way as to give “force and life” to the intention of the legislature. The Court held that the whole purpose of undertaking the sale of immovable property through public auction/tender stands defeated if the authorised officer is required to obtain the consent for disposing of the property for a value equivalent or higher than the reserve price. The second proviso to Rule 9(2) becomes relevant and attracted only if the case is not covered by the first proviso, namely, where the amount offered towards sale price is equal to or more than the reserve price specified under Rule 8(5). Accordingly, the order of DRT was affirmed, through which the request of the borrower to seek his consent prior to selling the mortgaged property at specifically the reserve price was rejected.

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(15) Amrik Singh v. DCB Bank Ltd.42

(Delivered on April 6, 2022)

Coram: 2-Judge Bench of HM Justices M.S. Ramachandra Rao and Jasjit Singh Bedi

Authored by: HM Justice M.S. Ramachandra Rao

The petitioner approached the High Court against rejection of their proposal for one-time settlement (for short “by the bank”), when it was stated that a substantial amount was already deposited and the remaining amount was being promised to be deposited within a short time of further 3 to 4 months. Various questions arose, firstly about the maintainability of the writ petition. The respondent DCB Bank was held to be a scheduled bank mentioned under RBI Act and governed by Banking Regulation Act, 1949. The OTS policy framed by the respondents was pursuant to certain circulars and departmental orders issued by the RBI, which was held to be binding on the bank, for enforcement of which an appropriate writ could have been rightly issued.

For various reasons demonstrating the bona fide of the borrower and his readiness to pay the outstanding amount, along with other factors, it was held by the court that writ petition is maintainable for directing the bank to consider and act upon the OTS proposal. Since the measures under SARFAESI Act viz. Section 13(4) have not been initiated by the Bank, therefore writ petition under Article 226 is maintainable. The judgment of Phoenix ARC (P) Ltd. v. Vishwa Bharati Vidya Mandir43 was distinguished and held to be inapplicable since DCB Bank as the asset reconstruction company was registered with the RBI, which registration could also be cancelled under Section 4 of the SARFAESI Act. The DCB bank as the asset reconstruction company was resultantly held to be amenable to writ jurisdiction under Article 226 of the Constitution of India. Since the petitioner had deposited a substantial amount of Rs 49 lakhs out of total of Rs 85 lakhs, his case was entitled to be considered sympathetically and non-acceptance of OTS was held to be arbitrary. He was entitled to be extended the date of repayment of the remaining amount along with an appropriate and reasonable rate of interest and to settle the dues outstanding to him. Accordingly, the petition was allowed with directions to the bank to act upon the OTS proposal of the petitioner.

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(16) Ballyfabs International Ltd. v. State of W.B.44

(Delivered on April 22, 2022)

Coram: 2-Judge Bench of HM Justices Harish Tandon and Rabindranath Samanta

Authored by: HM Justice Harish Tandon

The issue before the court was whether the sale conducted by an authorised officer under SARFAESI Act, 2002 is an “open market sale” and thus excluded from the scrutiny under Section 47-A of the Stamp Act, 1899. The matter was referred to 2-Judge Bench in view of difference of opinion amongst similar Benches. The controversy arose when the Registrar of Assurance, Calcutta took a view that since the public auction was conducted by statutory authority under the provisions of SARFAESI Act, and not by the Court, then in such circumstances, the price fetched cannot be treated as the price in the open market sale and would have to be subjected to the scrutiny of Section 47-A of the Stamp Act. The case of the petitioner was that if the sale is conducted by an authorised officer, it is preceded by white circulation in newspapers inviting the prospective buyers, which is from the general public and thus cannot be treated as a private transaction at all.

Court in its analysis interpreted the term “open market” as a market wherein supply and demand are explicitly in terms of the price determined between the seller and the purchaser in the ordinary course of trade. The expression “if sold in the open market” employed under Section 47-A clearly envisages that it is applicable only to private transactions between a private seller and an open buyer and not to open-market transactions. The said expression presupposes that property was not sold in open market between individuals, for which only Section 47-A has been enacted to deal with the cases of undervaluation/underpricing. Section 47-A, by its necessary implication applies only to properties not being sold in open market. Referring to the host of judgments especially to Anil Kumar Srivastava v. State of U.P.45 , Duncans Industries Ltd. v. State of U.P.46, B. Susila v. Saraswathi Ammal,47 Court held that the “reserve price” is entirely different from the “concept of valuation“. Reserve price is the minimum price with which the public auction starts, and the auction bidders are not permitted to offer bids below the set price, the minimum bid at the auction. Thus, the reserve price so fixed in any public auction is not at all relatable to the valuation of the property which it would fetch or would have fetched, if sold in open market. In the case of auction-sale under the SARFAESI Act, Court held that there is a right publication and advertisement of the property and the proposed auction inviting bid from the intending purchaser who has no connection or relation with the seller, for which reason only it is an open market share. The element of uncertainty about the final purchaser and inconceivability that the secured creditor would always sell the property at a consideration to fetch maximum price for the property, lies at the heart of this transaction. Accordingly, the reference was answered by the court as follows:

  1. The sale conducted by the authorised officer in exercise of the powers conferred under Rule 8 of the Security Interest (Enforcement) Rule, 2002 by public auction or by inviting tenders from the public would be regarded as the sale in the open market and the price so accepted shall be the price which it would fetch if sold in the open market under Section 47-A of the Stamp Act. The sale must be conducted by making a wide publication at least in one newspaper widely circulated in the particular city/town/district where the property is situated.
  2. The authorised officer shall not have any relation or connection with the intending purchaser.

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(17) HDFC Bank Ltd. v. Parwati Cotton48

(Delivered on April 29, 2022)

Coram: Single Judge Bench of HM Justice Bhargav D. Karia

The issue that arose before the court was whether Section 14 application for procuring physical possession of the property can be filed directly before the DM/CMM without first issuing the notice of taking over symbolic possession of Section 13(4) of the SARFAESI Act, 2002. Referring to the 2013 Amendment to Section 14, it was held that the affidavit under 9 points is to be submitted along with the application under Section 14 by the secured creditor. The application is incomplete in the absence of accompanying affidavits under 9 points as aforestated. Referring to the judgments of the Supreme Court in Jagdish Singh v. Heeralal,49 Standard Chartered Bank v. V. Noble Kumar,50 Court held that occasion for any borrower to approach the DRT by way of a securitisation application under Section 17 as a remedy being aggrieved by any action of the bank can arise only after issuance of Section 13(4) notice under the SARFAESI Act, not before. The DRT can examine the validity of the measures taken only thereafter, not before whilst exercising powers under Section 17 of the SARFAESI Act. Accordingly, the matter was remitted back to the District Magistrate, Rajkot for fresh adjudication and decision in view of the amended provisions of Section 14 and the non-issuance of notice under Section 13(4) of the SARFAESI Act by the secured creditor. Order passed by the DM was accordingly quashed and set aside.

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(18) Om Prakash Kumawat v. Hero Housing Finance Ltd.51

(Delivered on May 11, 2022)

Coram: Single Judge Bench of HM Justice Mahendar Kumar Goyal

Court negatived the contention of the petitioner that proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 as also those under the SARFAESI Act cannot run simultaneously. Referring to the judgments of the Supreme Court in M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd.52 and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd.53, that provisions of the SARFAESI Act are a remedy in addition to provisions of the Arbitration Act, where under liquidation of secured asset through a more expeditious procedure is what has been envisaged for. They are “cumulative remedies” and not “substitutionary remedies” of each other. SARFAESI proceedings were held to be in the nature of enforcement proceedings, whereas arbitration is an adjudicatory process. In the event the secured assets are insufficient to satisfy the debt, the secured creditor can proceed against other assets in execution against the debtor after determination of the pending amount in arbitration proceedings by a competent forum. It was further held that order passed under Section 14 by the District Magistrate directing for taking over a possession is an appealable order, for challenging which, writ petition cannot be preferred and is not maintainable.

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† Partner at SVS Attorneys, Expert in constitutional, civil and financial laws, Practising Advocate at the Supreme Court of India.

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