K Madhavi,And Anot v. Union Of India,Jnt Scy,Finance,New Delhi,And 3

THE HON'BLE SRI JUSTICE SANJAY KUMAR AND THE HON'BLE MS. JUSTICE J. UMA DEVI WRIT PETITION NO.5833 OF 2017

O R D E R

(per Justice Sanjay Kumar) Challenge in this writ petition is to the action initiated by Religare Housing Development Finance Corporation Limited, the third respondent, under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for brevity, 'the SARFAESI Act') against the house property of the second petitioner, bearing No.3-5-131/1/2 at Krishna Nagar Colony, Hyderguda, Attapur, Hyderabad. A declaration is also sought to the effect that the third respondent corporation is not entitled to invoke the provisions of the SARFAESI Act in respect of loans and facilities granted by the Citi Financial Consumer Finance India Limited.

A consequential direction is sought to the third respondent corporation and the auction purchaser, the fourth respondent, to cancel the registered sale certificate dated 23.01.2015 executed in favour of the fourth respondent and to return the subject house property. Heard Sri P.Nagendra Reddy, learned counsel for the petitioners, Sri G.Kalyan Chakravarthy, learned counsel for the third respondent corporation, and Sri Kowturu Pavan Kumar, learned counsel for the fourth respondent.

The facts of the case, in brief, are as follows: The petitioners are wife and husband respectively. The second petitioner offered the subject house property as security when he stood as a guarantor for the loan availed by his wife, the first petitioner, from

Citi Financial Consumer Finance Limited, Hyderabad. This loan was to the tune of Rs.55,00,000/-, under two accounts, i.e., for Rs.36,00,000/- and Rs.19,00,000/-. In 2010, Citi Financial Consumer Finance Limited, Hyderabad, informed the first petitioner that her loan accounts were assigned to Citibank NA. Citibank NA thereafter assigned the loans to Religare Finvest Limited, which assigned them to the third respondent corporation. Demand notice dated 13.12.2012 was issued by the third respondent corporation under Section 13(2) of the SARFAESI Act calling upon the petitioners to clear the entire amount due towards the first petitioner's loan accounts, which were classified as nonperforming assets (NPAs) on 06.12.2012, within 60 days.

The third respondent corporation thereafter affixed a possession notice on the subject house property and then approached the learned Chief Metropolitan Magistrate, Cyberabad, under Section 14 of the SARFAESI Act, vide Crl.M.P.No.396 of 2013, seeking appointment of an Advocate Commissioner for the purpose of taking physical possession thereof. By order dated 14.06.2013, the learned Chief Metropolitan Magistrate, Cyberabad, appointed an Advocate Commissioner who informed the petitioners of the same and required them to deliver physical possession. Aggrieved thereby, they filed S.A.No.466 of 2013 before the Debts Recovery Tribunal, Hyderabad. Conditional interim protection was granted therein subject to deposit of Rs.9,00,000/-.

The petitioners however failed to comply with this condition within the stipulated time and were dispossessed from the subject house property on 29.03.2014. The third respondent corporation then published sale notice dated 27.08.2014 and pursuant to the auction sale held on 28.09.

the fourth respondent emerged the highest bidder. The third respondent corporation then completed the sale formalities and executed registered sale certificate dated 23.01.2015 in his favour. These being the relevant facts, the contention of Sri P.Nagendra Reddy, learned counsel, is that the third respondent corporation was not competent to proceed under the SARFAESI Act for realization of the dues assigned by the original lender, Citi Financial Consumer Finance Limited, Hyderabad, which was not registered under Section 2(1)(m)(iv) of the SARFAESI Act. According to the learned counsel, Citibank NA was also not registered at the point of time when it assigned the loan to Religare Finvest Limited which was also unregistered.

Learned counsel would point out that the third respondent corporation itself was registered as a financial institution under the SARFAESI Act by way of notification dated 21.01.2011 issued by the Central Government. He would assert that though assignment of the subject loans to the third respondent corporation is a fact, it could not initiate proceedings under the SARFAESI Act for effecting recoveries as it would not govern transactions outside its purview. He would rely on DECCAN CHRONICLE HOLDINGS LIMITED V/s. UNION OF INDIA1. Sri G.Kalyan Chakravarthy, learned counsel, would assert that the procedure prescribed under the SARFAESI Act was scrupulously followed after classification of the loan accounts in question as NPAs. As regards the contentions urged by Sri P.

Nagendra Reddy, learned counsel, he would state that the requirement for initiating proceedings under the SARFAESI Act is that the financial institution should be registered thereunder as on the date of issuance of the demand notice. He would state that 1 2014 (2) ALT 740 (D.B.)

even loans sanctioned or disbursed by financial institutions which were earlier not registered under the SARFAESI Act can be realized thereunder, once this condition is satisfied. He would further point out that the petitioners initially approached the Tribunal by way of S.A.No.466 of 2013 but owing to their non-compliance with the conditional interim order passed therein, the subject property was brought to sale. As regards the decision relied upon by Sri P.Nagendra Reddy, learned counsel, he would state that the same has been overturned by the Supreme Court in M.D.FROZEN FOODS EXPORTS PVT. LTD. V/s. HERO FINCORP LTD.2. He would finally assert that as the sale in question has attained completion in all respects, it is not open to the petitioners to seek intervention therewith at this stage.

Sri Kowturu Pavan Kumar, learned counsel, would assert that his client was the bonafide purchaser of the subject house property in the auction sale held as per due procedure by the third respondent corporation and was in peaceful possession and enjoyment thereof. He would further submit that his client spent his hard earned money for purchasing the subject house property and equity should also weigh in his favour.

The issue to be considered presently is whether the third respondent corporation could have initiated proceedings under the SARFAESI Act in relation to the petitioners' loans which were advanced by a body which was not registered as a financial institution, under Section 2(1)(m)(iv) thereof, at that time. In DECCAN CHRONICLE HOLDINGS LIMITED1, the contention urged was that India Bulls Financial Services Limited, which advanced the loan, was not registered under Section 2 2017 SCC OnLine SC 1211 : AIR 2017 SC 4481 : 2017 (13) Scale 266

2(1)(m)(iv) of the SARFAESI Act initially, but thereafter merged with its sister concern which enjoyed such registration, and therefore proceedings could not be initiated under the SARFAESI Act in relation to the subject loan as it was advanced by a company which had no registration thereunder at the relevant time. Dealing with this issue, the Division Bench opined that the question for consideration is whether a loan transaction which is outside the purview of the SARFAESI Act could be brought under its purview without the consent of the borrower. Disagreeing with the views taken by the Allahabad High Court in YOGENDRA KUMAR JAISWAL AND OTHERS V/s. C.M.M. AND OTHERS3 and the Uttaranchal High Court in UNIQUE ENGINEERING WORKS V/s.

UNION OF INDIA4, which were to the effect that the SARFAESI Act was retroactive in nature, the Division Bench concluded that the SARFAESI Act cannot govern transactions which were outside its purview when they were made. The view expressed by the Orissa High Court in SUBASH CHANDRA PANDA V/s. STATE OF ORISSA5 which held to this effect was therefore affirmed. These judgments fell for consideration before the Supreme Court in M.D.FROZEN FOODS EXPORTS PVT. LTD.2. Hero Fincorp Limited was the financial institution from which loans had been availed by several borrowers, whose loan accounts thereafter became NPAs. Notification dated 05.08.

2016 was issued by the Central Government under Section 2(1)(m)(iv) of the SARFAESI Act specifying certain non-banking financial companies as financial institutions to which the provisions of the SARFAESI Act would apply. Hero Fincorp was at Serial No.68 in this notification. 3 AIR 2010 Allahabad 3 (D.B.) 4 2004 (1) UC 451 5 AIR 2008 Orissa 88 (D.B.)

Thereafter, Hero Fincorp issued a demand notice under Section 13(2) of the SARFAESI Act on 24.11.2016. One of the questions raised before the Supreme Court was as to whether the SARFAESI Act was prospective in operation or could be given retrospective or retroactive effect. Taking note of the cleavage of judicial opinion amongst the High Courts, the Supreme Court framed three legal issues for determination:

(i) ......

(ii) Whether resort can be had to Section 13 of the SARFAESI Act in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the respondent?

(iii) A linked question to question (ii), whether the lender can invoke the SARFAESI Act provision where its notification as financial institution under Section 2(1)(m) has been issued after the account became an NPA under Section 2(1)(o) of the said Act?

These legal issues are crucial for the purpose of this case as the argument of Sri P.Nagendra Reddy, learned counsel, hinges upon the same.

Dealing with the question as to whether recourse could be taken to Section 13 of the SARFAESI Act in respect of debts which had arisen out of loan agreements/mortgages created prior to the SARFAESI Act applying to the financial institutions, the Supreme Court observed that the said enactment was brought into force to resolve the problems of recovery of large debts in NPAs and therefore, the very rationale for the Act to be brought into force was to provide an expeditious procedure where there was a security interest.

While declaring that it certainly did not apply retrospectively from before the date when it came into force, the Supreme Court observed that the question would be whether it could be applicable to financial institutions at a subsequent date,

thereby allowing them to utilize its provisions with regard to past debts. The SARFAESI Act was therefore held to be applicable to all claims which were alive at the time when it was brought into force and therefore, qua Hero Fincorp or other non-banking financial institutions, it would be applicable from the date when it was made applicable to them. Till Hero Fincorp was not a financial institution within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, it was not a secured creditor as defined under Section 2(1)(zd) of the SARFAESI Act and therefore could not invoke the provisions of the SARFAESI Act, but the right to proceed thereunder accrued once the notification was issued. The Supreme Court therefore concluded that the provisions of the SARFAESI Act would become applicable qua all debts owing and live when the Act became applicable to Hero Fincorp in terms of the following parameters: (i) Existence of a present actionable debt;

(ii) Status of the person invoking the jurisdiction is that of a secured creditor;

(iii) Assets have been secured in satisfaction of the debt; and (iv) That the debtor/borrower should have been declared an NPA.

In the light of this authoritative edict, the decision of this Court in DECCAN CHRONICLE HOLDINGS LIMITED1 holding to the effect that the SARFAESI Act could not govern transactions which were outside its purview when they were made, no longer constitutes good law. All that is required for a secured creditor to take recourse to the provisions of the SARFAESI Act, as per the law laid down in M.D.FROZEN FOODS EXPORTS PVT. LTD.2, is that the aforestated parameters should be satisfied so as to bring the

debt, which is owing and live, within the ambit of recovery proceedings under the SARFAESI Act.

Be it noted that unlike the fact situation covered by the above decision, classification of the petitioners' loan accounts as NPAs in the case on hand was subsequent to the assignment thereof to the already registered third respondent corporation. Further, the debt was owing and live by the time the third respondent corporation came into the picture and it was only thereafter that it was declared a NPA on 06.12.2012. The provisions of the SARFAESI Act were therefore very much available to the third respondent corporation.

The only ground urged by Sri P.Nagendra Reddy, learned counsel, is therefore devoid of merit. In consequence, the writ petition fails and is accordingly dismissed.

Pending miscellaneous petitions, if any, shall also stand dismissed. No order as to costs.

______________________ SANJAY KUMAR, J ______________________ J. UMA DEVI, J 19th JANUARY, 2018 Svv