Will C. Bright v. Distt. Collector herald dilution of SARFAESI Act?

This article discusses C. Bright v. Distt. Collector⁴ case arising from interpretation of amended Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)⁵ in which the Supreme Court took an interpretation path slightly deviating from the settled path. It discusses the precedents and goes on to surmise how such deviations may end up diluting the vigour of the law in the future.

Facts of the case and what the court held in brief

In C. Bright v. Distt. Collector⁶, the appellant challenged the Division Bench of the Kerala High Court’s decision that the time-limits specified in Section 14 of the SARFAESI Act for the District Magistrate or Chief Metropolitan Magistrate to assist secured creditors in taking possession of secured assets are directory rather than mandatory. The High Court reasoned that the lack of specified consequences for non-compliance and the public duty nature of the Magistrate’s role suggested flexibility beyond the stipulated 60 days.

The Supreme Court upheld this view, after relying on numerous instances in which power vested on statutory authorities were held to be discretionary though the word “shall” was used in the law, emphasising that the word “shall” used in Section 14(1) is directive in nature as is indicated by the absence of penalties in the legislation in case of default in compliance. Effectively the Supreme Court held that the word “shall” must be read as “may”.

What do the precedents say?

The Supreme Court in a plethora of cases held that the SARFAESI Act is very strict, stringent and harsh on the borrowers. It is also true that time and again, courts have reiterated that the individual interest is subservient to the larger public interest. But, that this legislation is against the commercial interest of the borrowers and did not consider their capacity to repay the loan should be kept in hindsight. To substantiate the same, some excerpts of a few cases are provided below.

The Supreme Court in Mardia Chemicals Ltd. v. Union of India⁷ (UOI) observed as follows:

81. … The effect of some of the provisions may be a bit harsh for some of the borrowers but on that ground the impugned provisions of the Act cannot be said to be unconstitutional in view of the fact that the object of the Act is to achieve speedier recovery of the dues declared as non-performing assets (NPAs) and better availability of capital liquidity and resources to help in growth of the economy of the country and welfare of the people in general which would subserve the public interest.

The Supreme Court in Celir LLP v. Bafna Motors (Mumbai) (P) Ltd.⁸ observed as,

105. … The said enactments were enacted for speedy recovery and for benefiting the public at large and does not give any licence to the bank officers to act de hors the scheme of the law or the binding verdicts.

It can be understood that our courts have repeatedly harped on the rigours of the SARFAESI law, but it seems to have gotten lost in the act of balancing individual rights and recovery of public dues. In Mathew Varghese v. M. Amritha Kumar⁹ the Supreme Court (SC) held that if the procedure laid down by SARFAESI Act under Section 13¹⁰ has not been followed to the letter and spirit by the creditor or if the steps stipulated could not be completed within the statutory time-limit, then the procedure should start afresh. This goes to establish that procedural lapses on the creditors’ side does not extinguish their right of sale of the secured property and can be cured by starting afresh. Hence, there is no grave penalty on the creditor for delay or improper procedure other than repeating the process again which of course leads to some delay in recovering the dues. With this as the base, the effect of literally interpreting the “shall” will be discussed in the following paragraphs.

What should have been considered?

The SC intervened and interpreted Section 14(1) since the word “shall” enacted by the legislature seemed to be ambiguous and was a stumbling block for furthering the object of the SARFAESI Act. When there is an ambiguity, one rule of interpretation requires the courts to look within the four corners of the Act to understand the meaning of the ambiguous words. Interestingly, in para 8 of the judgment the court does make an observation that:

8. … It is not always correct to say that if the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceeding invalid and that when a statute uses the word “shall”, prima facie, it is mandatory, but the Court may ascertain the real intention of the legislature by carefully attending to the whole scope of the statute.¹¹, but proceeded on to rely on precedents from statutes which are not in pari materia with the SARFAESI Act, instead of gathering the intention from within the Act.

To understand the meaning of the word “shall”, attending to the whole scope of the statute is necessary as opined by the court, especially if it is a special statute. This rule of construction called as “ex visceribus actus” meaning an Act should be read as a whole has been beautifully expounded by Supreme Court in Philips India Ltd. v. Labour Court.¹² The Court observed in the said case that:

15. No canon of statutory construction is more firmly established than that the statute must be read as a whole. This is a general rule of construction applicable to all statutes alike which is spoken of as construction ex visceribus actus. This rule of statutory construction is so firmly established that it is variously styled as “elementary rule” (see Attorney General v. Bastow¹³) and as a “settled rule” (see Poppatlal Shah v. State of Madras¹⁴). The only recognised exception to this well-laid principle is that it cannot be called in aid to alter the meaning of what is of itself clear and explicit. Lord Coke laid down that: “it is the most natural and genuine exposition of a statute, to construe one part of a statute by another part of the same statute, for that best expresseth meaning of the makers”.

Though, of late courts are using this rule of construction for fiscal and penal statutes and SARFAESI Act does not strictly falls in that category, generally looking at the ambiguous word “shall” through this glass will guide the courts to keep the context in perspective when interpreting special laws like SARFAESI Act.

Better way to understand the intention of the legislature would have been to explore the nature of the statute that is in question, how the court in the past has interpreted the Act or has settled the ambiguities before venturing into taking a new stand that does not sit well with the rest of the Act. SARFAESI Act was enacted to circumvent the rigours of the Transfer of Property Act, 1882¹⁵ in realising the debts from mortgaged property and to quickly liquidate the non-performing secured assets to settle the debts. It is well settled that this Act is a procedural law that directly interferes with the substantive right of the debtors. For this reason, time and again this Court has held, the procedural formalities laid down in this Act should be followed to the letter and spirit of the provisions as it is harsh on the borrower. This ratio should permeate in all of the provisions pertaining to SARFAESI Act including when interpreting the word “shall” in doing so the literal rule of interpretation would have prevailed.

It should be pointed out that the legislature also did a poor job of not stipulating the consequences of the lapse in time period which would have clarified the purport of the word “shall”. But that there is nothing in the Act that takes away the rights of the creditors on the lapse of 60 days should be taken note of. Hence, it can be safely inferred that there is no prohibition in law for the creditor to file another application before the same authority after the lapse of the stipulated time to start the proceeding afresh. In fact, in reality starting the process afresh is the usual course followed under Section 13 by the bank/non-banking financial company (NBFC) when they are unable to take further steps or there is a delay in taking steps. The legal hurdle of res judicata does not arise as the prior application was not decided and res sub judice is out of question because the previous application automatically becomes infructuous owing to lapse of time. But technically the authority does become functus officio vis-à-vis that application which did not fructify into an order.

Given that SARFAESI Act is a special statute enacted to speed up recovery of debts by bypassing the law that then existed, care must be placed when interpreting its provisions against the debtor as they take away their rights. In other words, the statute under which the public authority is exercising his powers should also be considered. In this case the court sought to interpret the time limitation placed by the statute on the Chief Metropolitan/District Magistrate to strike a balance between private party rights and the loss to public exchequer while ignoring aspects that were essential to interpreting the Act.

Hence, the reliance placed by the SC on precedents to lay down that power vested in the public authority should be exercised in such a way that it does less inconvenience to the public and not cause loss to the public exchequer in the context of Section 14(4) of the SARFAESI Act in the authors’ humble opinion, is misplaced and not in line with the precedents laid down by this Court in umpteen number of SARFAESI Act cases. In the authors’ opinion, the SC should have invoked the literal rule of interpretation which would have still given full effect to the provision while giving time for the debtor to repay the debt.

One could argue that after the Section 13(8) amendment which effectively moved extinguishment of the right of redemption of the borrower from issuance of sale certificate and to issuance of notice of sale, starting the procedure afresh under Section 14(1) would amount to an empty formality and waste of time. But it should not be forgotten that conferral or extinguishment of right on one party has nothing to do with the procedure to be followed by the other party. After all SARFAESI Act itself is a procedural statute and giving leeway to some procedural compliance contemplated therein would not make sense.

Future of SARFAESI Act

It may appear as if the interpretation put forth in the article does not lead to change in the legal effect that is produced in the end. But by trivialising the interpretation and the legal path to be traced when reaching a conclusion, one ignores the silent message that is sent to the judicial fraternity. The real effect of taking literal interpretation or purposive interpretation in absence of ambiguity will only be known down the line when courts start heavily relying on this precedent. This case in no way completely whittles down the procedural rigours of the SARFAESI Act, but this judgment may be a stepping stone for the dilution of the procedural rigours inherent in SARFAESI Act by way of judicial interpretation and may lead to abuse by the lender organisations. The point that is thrust forward in this article is this precedent does send a signal to the other courts in our country as to the stand they should be taking in the future when interpreting harsh laws like that of SARFAESI Act.