29 November, 2018
In the recent judgment dated November 01, 2018 of the Hon'ble Supreme Court of India in M/s. Hindon Forge Pvt. Ltd. & Anr. Vs. State of Uttar Pradesh (Civil Appeal No. 10873 of 2018), the main controversy dealt with was in respect to the maintainability of the application moved by the borrower under section 17(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, (“SARFAESI Act”) when the physical or actual possession of secured assets is yet to be taken by the bank or financial institutions in exercise of their powers under section 13 (4) of the SARFAESI Act read with rule8 of Security Interest (Enforcement) Rules 2002 (“SARFAESI Rules”).
The brief facts of the case are that previously the full bench of the Allahabad High Court, after considering the various provisions of the SARFAESI Act, the Rules and various judgments of the Supreme Court, held that the recourse to application against measures to recover secured debts under Section 17 (1) of the Act is not maintainable/ available at the time of issuance of notice under section 13 which gives borrower and the general public an intimation that secured creditor has taken symbolic possession of the property and further same cannot be treated as “measure”/s taken under Section 13 (4) of the SARFAESI Act. The High Court further held that even while taking steps under Section 13 (4) of the SARFAESI Act read with rule 8 of the SARFAESI Rules, the bank may not physically dispossess and may wait till actual sale / auction of the secured assets, and still the borrower cannot take recourse to the provisions of Section 17 of the Act. It was held that the borrower can file application under Section 17 of the Act only when he physically losses the possession.
The Supreme Court in the appeal against the aforementioned judgment of the High Court, examined various sections of the Act, more particularly sections 13, 14, 16 and 17(1) of the SARFAESI Act, and Rule 8 and 9 of the SARFAESI Rules. The Supreme Court opined that the legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms, which has resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets.
Further, The SARFAESI Act provides for setting up of asset reconstruction companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realize the secured assets and take over the management of the business of the borrower.
The Supreme Court noted that in a case in which a secured creditor takes possession under rules 8(1) and 8(2) before the 60 day's period prescribed under section 13(2) is over. The borrower does not have to wait until actual physical possession is taken. Therefore, the Supreme Court observed that the object of providing a remedy against the wrongful action of secured creditor to a borrower will be stultified if the borrower has to wait until a sale notice is issued, or worse still, until a sale actually takes place. The object of the SARFAESI Act is to provide the borrower with instant recourse to a quasi-judicial body in case of
wrongful action is taken by the secured creditor.
Accordingly, the Supreme Court set aside the High Court Judgment and allowed the appeal and declared that the borrower can move an application under Section 17 of the SARFAESI Act at the stage of the possession notice referred Rules 8 (1) and 8 (2) of the SARFAESI Rules.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com
