Case BriefsHigh Courts

Madras High Court: Sanjib Banerjee, J., addressed whether this Court is the appropriate forum to decide the quantum that can be forfeited and elaborated more of right to forfeit.

Instant petition was filed for issuance of a Writ of Certiorarified Mandamus calling for the records of the impugned letter issued by the respondent under Rule 9 (5) of the Security Interest (Enforcement) Rules, 2002 and quash the same and reasonable time frame to be fixed by this Court for paying the balance amount towards 75% of the balance purchase price by the petitioner.

Petitioner’s grievance was that the respondent secured creditor did not inform the petitioner of certain encumbrance pertaining to the asset sold under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

At the bid, the petitioner had deposited only 25% of the consideration and did not pay any further.

Further, the petitioner’s case was that she tried to obtain loans to finance the purchase but was impeded by the property standing encumbered in some third party’s favour.

Another grievance of the petitioner was that the bank had purported to forfeit the consideration tendered without affording the petitioner a chance to pay the balance amount, particularly since the second surge of the pandemic stood in the way of the petitioner arranging for money.

Secured Creditor submitted that, notices were issued to the petitioner, and they had no authority to extend the payment period beyond 90 days from the date of the auction.

Adding to the above, secured creditor submitted that it had duly forfeited the amount which has been tendered by the petitioner and no question arises of the sale going through or of the consideration being returned.

Bench stated that, writ court is not the appropriate forum to adjudicate as to whether the forfeiture or the quantum thereof is appropriate and as to whether the secured creditor in this case is obliged to extend the time for making the balance payment by the petitioning-auction purchaser.

Right to Forfeit

Right to Forfeit has to be balanced against the rule against unjust enrichment.

Merely because there is a forfeiture clause does not imply that the entire amount deposited has to be forfeited.

Further, the High Court elaborating more, added that,

Forfeiture clause, like an earnest money deposit clause or a liquidated damages clause, has to be regarded as a genuine pre-estimate of the loss that may have been incurred, but when a forfeiture clause does not indicate an amount but provides that the entire amount tendered would be forfeited, it may not be permissible to forfeit, say 99% of the payment made for the default in depositing the balance 1%.

Thus, the quantum that can be forfeited will depend on the extent of the loss or damage suffered by the party, not in breach and this is, essentially, a question of fact that has to be adjudicated by an appropriate forum. The High Court, in exercise of the jurisdiction under Article 226 of the Constitution, is not such forum.

In view of the above, petition was disposed of.[Rubina v. Axis Bank Ltd., 2021 SCC OnLine Mad 2349, decided on 2-07-2021]

Advocates before the Court:

For Petitioner: Mr. Adithya
For Respondent: Mr. R. Sreedhar

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, Hemant Gupta* and Ajay Rastogi, JJ has upheld Kerala High Court’s decision holding that Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) mandating the District Magistrate to deliver possession of a secured asset within 30 days, extendable to an aggregate of 60 days upon reasons recorded in writing, is a directory provision.

Object of SARFAESI Act

It was noticed that the SARFAESI Act was enacted to provide a machinery for empowering banks and financial institutions, so that they may have the power to take possession of secured assets and to sell them. This was done after Recovery of Debts due to Banks and Financial Institutions Act, 1993, which was first enacted to streamline the recovery of public dues, did not give desirous results.

Does inability to take possession of secured assets within time limit renders the District Magistrate Functus Officio?

Taking note of this objective of the SARFAESI Act in mind, the Court noticed that the time limit to take action by the District Magistrate has been fixed to impress upon the authority to take possession of the secured assets. However, inability to take possession within time limit does not render the District Magistrate Functus Officio.

Interpreting Section 14 of the SARFAESI Act, the Court said that

“… the secured creditor has no control over the District Magistrate who is exercising jurisdiction under Section 14 of the Act for public good to facilitate recovery of public dues. Therefore, Section 14 of the Act is not to be interpreted literally without considering the object and purpose of the Act. If any other interpretation is placed upon the language of Section 14, it would be contrary to the purpose of the Act.”

The Court noticed that the time limit is to instill a confidence in creditors that the District Magistrate will make an attempt to deliver possession as well as to impose a duty on the District Magistrate to make an earnest effort to comply with the mandate of the statute to deliver the possession within 30 days and for reasons to be recorded within 60 days. Hence, the remedy under Section 14 of the Act is not rendered redundant if the District Magistrate is unable to handover the possession. The District Magistrate will still be enjoined upon, the duty to facilitate delivery of possession at the earliest.

Limitations on power of High Courts to pass interim orders

On the issue of borrowers and other aggrieved persons invoking the jurisdiction of the High Court under Articles 226 or 227 of the Constitution of India without availing the alternative statutory remedy, the Court said that though the High Courts are well aware of the limitations in exercising their jurisdiction when affective alternative remedies are available, but a word of caution would still be necessary for the High Courts that

“… interim orders should generally not be passed without hearing the secured creditor as interim orders defeat the very purpose of expeditious recovery of public money.”

[C. Bright v. District Collector, 2020 SCC OnLine SC 909, decided on 05.11.2020]

*Justice Hemant Gupta has penned this judgment

Case BriefsTribunals/Commissions/Regulatory Bodies

Appellate Tribunal for SAFEMA, FEMA, PMLA, NDPS and PBPT Act: Justice Manmohan Singh (Chairman) allowed an appeal filed by a consortium of banks and set aside an order by the Adjudicating Authority which had attached properties of appellant herein (PMT Machines) mortgaged with the banks on the ground that the mortgaged properties were acquired much before the date of the alleged offence and the charge of properties are also much prior to the date of alleged offence committed.

The case of the appellants was that PMT Machines Limited was undergoing a corporate insolvency resolution process (CIRP). Meanwhile, by order of the Directorate of Enforcement (ED), its properties were attached under PMLA. The appellant banks were providing PMT Machines with financial facilities and PMT created charge and rights in favour of the banks. Banks (the creditors), in the instant appeal filed through the Resolution Professional of PMT Machines, were pressing for relief to enable them to maximise the value of assets and recover their debts.

Shri Rajshekhar Rao, on behalf of the appellants, contended that the allegations of money laundering in the complaint pertained to period after charge/mortgage was created. It was also submitted that the assets were acquired by PMT Machines much before the commission of the alleged offence. In addition to this, ED did include Banks as a Respondent in the proceedings before the Adjudicating Authority as required by Section 8(1) of the Prevention of Money Laundering Act, 2002. Due to such attachment, the CIRP was getting delayed and thus the objective of the Insolvency and Bankruptcy Code, 2016 was being defeated. 

Shri Nitesh Rana, on behalf of the respondents, argued that though the banks were entitled to recover the amount, they should approach the Special Court by filing the petition under Section 8(8) of PMLA.

The Appellate Tribunal accepted the contention that the mortgaged properties were acquired much before the date of the alleged offence and the charge of properties are also much prior to the date of the alleged offence committed. The Tribunal looked into the object of both the legislations (PMLA and IBC) and also relied on Delhi High Court Judgment in Directorate of Enforcement v. Axis Bank, 2019 SCC OnLine Del 7854, and opined that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in property by the third party cannot conceivably be on account of intent to defeat this law.

Similarly, when a secured creditor being a bonafide third party claimant initiates actions in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the initiation of the latter action unwittingly having the effect of frustrating the former since both actions are in accord with law, in order to co-exist and be in harmony with each other, it would be appropriate that the PMLA attachment, though remaining valid and operative, takes a back-seat allowing the secured creditor bonafide third-party claimant to enforce its claim by disposal of the subject property, the remainder of its value, if any, thereafter to be made available for purposes of PMLA. The tribunal ordered in favour of the banks and specifically mentioned that ED is not precluded to attach other private properties and assets of the accused. [PMT Machines Ltd. v. Directorate of Enforcement, Delhi, 2019 SCC OnLine ATPMLA 43, decided on 16-09-2019]

Case BriefsSupreme Court

Supreme Court: The bench of AM Khanwilkar and Dinesh Maheshwari, JJ has held that the Chief Judicial Magistrate (CJM) is competent to process the request of the secured creditor to take possession of the secured asset under Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The bench said,

“substitution of functionaries (CMM as CJM) qua the administrative and executive or so to say non­judicial functions  discharged by them in light of the provisions of Cr.P.C., would not be inconsistent with Section 14 of the 2002 Act; nay, it would be a permissible approach in the matter of interpretation thereof and would further the legislative intent having regard to the subject and object of the enactment. That would be a meaningful, purposive and contextual construction of Section 14 of the 2002 Act, to include CJM as being competent to assist the secured creditor to take possession of the secured asset.”

The Court further noticed that the expressions “CMM and CJM” are used interchangeably in Cr.P.C. and are considered as synonymous to each other. Section 14, even if read literally, in no manner denotes that allocation of jurisdictions and powers to CMM and CJM under the Code of Criminal Procedure are modified by the 2002 Act. Hence, Section 14 of the 2002 Act, stricto sensu, cannot be construed as being inconsistent with the provisions of the Code of Criminal Procedure or vice­versa in that regard. If so, the stipulation in Section 35 of the 2002 Act will have no impact on the expansive construction of Section 14 of the 2002 Act.

The bench, however, noted that Section 14 of the 2002 Act is not a provision dealing with the jurisdiction of the Court as such. It is a remedial measure available to the secured creditor, who intends to take assistance of the authorised officer for taking possession of the secured asset in furtherance of enforcement of security furnished by the borrower. The authorised officer essentially exercises administrative or executive functions, to provide assistance to the secured creditor in terms of State’s coercive power to effectuate the underlying legislative intent of speeding the recovery of the outstanding dues receivable by the secured creditor. At best, the exercise of power by the authorised officer may partake the colour of quasi­judicial function, which can be discharged even by the Executive Magistrate. The authorised officer is not expected to adjudicate the contentious issues raised by the concerned parties but only verify the compliances referred to in the first proviso of Section 14; and being satisfied in that behalf, proceed to pass an order to facilitate taking over possession of the secured assets.

The Court said that

“the provisions of the Section 14 of the 2002 Act are in no way inconsistent with the provisions of Code of Criminal Procedure, it must then follow that the provisions of the 2002 Act are in addition to, and not in derogation of the Code.”

[Authorised Officer, Indian Bank v. D. Visalakshi, 2019 SCC OnLine SC 1242, decided on 23. 09.2019]

Case BriefsSupreme Court

Supreme Court: In a case dealing with companies defaulting a loan of Rs. 48 Crores including interest from Kotak Mahindra Bank, the question relating to the right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal [DRT] and a recovery certificate based thereon arose before the bench of RF Nariman and Navin Sinha, JJ. On the issue, the bench said:

“cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same.”

The Court said that when it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar to jurisdiction contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956. It further added:

“As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.”

Citing Lord Atkin’s judgment in Lissenden v. C.A.V. Bosch, Ltd., [1940] 1 All E.R. 425 at 436-437, where he said that one has not lost one’s right to a second helping because one has taken the first, the Court said that the Bank cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously, in fact:

“When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter.”

[Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., 2019 SCC OnLine SC 92, decided on 29.01.2019]