Allowed

Union Bank of India v. M/s. Asmita Paper Pvt. Ltd. and Ors.

DRAT22 Feb 2023REGULAR APPEAL/75/2014

Case brief

AI extract

What is this about?

The Debts Recovery Appellate Tribunal allowed an appeal filed by Union Bank of India against the Debts Recovery Tribunal's Ahmedabad. The lower court had upheld a challenge by borrowers alleging violation of Section 13(9) of the SARFAESI Act due to the existence of another secured creditor (State Bank of India). The Appellate Tribunal set aside the finding of violation, holding that the burden of proving other secured creditors lies on the borrower or the applicants in the Securitisation Application. The Tribunal ruled that Section 13(9) is a beneficial provision to protect the interests of joint financiers and does not constitute a defense for the borrower.

What did the court decide?

The impugned judgment of the Debts Recovery Tribunal upholding the violation of Section 13(9) of the SARFAESI Act is set aside.

Union Bank of India versus M/s. Asmita Paper Pvt. Ltd. and… — Company and Corporate | DRAT (2023)

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BEFORE THE DEBTS RECOVERY APPELLATE TRIBUNAL, AT: MUMBAI Present: Mr Justice Ashok Menon, Chairperson Appeal No. 75/2014

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Between

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Union Bank of India … Appellant/s V/s.

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M/s Asmita Papers Pvt. Ltd. & Ors. …Respondent/s

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Mr Rohit Gupta along with Ms N. I. Bakali, Advocate for Appellant.

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Mr Puneet Gagad along with Mr Raju U Shinde Advocate for Respondent No.1.

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-: Order dated: 22/02/2023:-

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The Appellant Union Bank of India, impugns the judgment dated 10/10/2013 of the Debts Recovery Tribunal-I, Ahmedabad (D.R.T.) in Securitisation Application (S.A.) No. 13 of 2013 under Sec. 18 (1) of the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’, for short).

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The Respondents had filed the aforesaid S.A. under Sec. 17 of the SARFAESI Act challenging the Sarfaesi measures initiated against them by the Appellant. The 1^st Respondent Company is the principal borrower and Respondent Nos. 2 to 5 are the guarantors and mortgagors. The Appellant bank had sanctioned credit facilities to the first Respondent on the creation of an equitable mortgage by deposit of title deeds. The first Respondent defaulted on repayment as a consequence of which the loan

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account was classified as a Non-Performing Asset (NPA) on 30/09/2012. A demand notice was issued to the Respondents under 13 (2) of the SARFAESI Act demanding repayment of ₹23,16,29,871.14 as of 30/09/2012. The Respondents did not pay the amount demanded and Sarfaesi measures were initiated against the secured assets for recovery of the amount due. Notice was issued for taking possession of the assets under Sec. 13 (4) and thereafter, an application was also filed for physical possession of the secured assets under Sec. 14 of the SARFAESI Act before the Chief Metropolitan Magistrate, Ahmedabad.

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The Respondents challenged the Sarfaesi measures in the aforesaid S.A. contending that the demand notice issued under Sec. 13 (2) is defective and the amount demanded is at variance from the statement of account furnished. The secured assets described in the demand notice are in the possession of tenants and this fact is known to the Appellant. It is also contended that apart from the Appellant, the State Bank of India is also a secured creditor having a 60% stake in the outstanding dues. Under the circumstances, the Sarfaesi measures initiated by the Appellant without the consent of the SBI are in violation of the provisions of Sec. 13 (9) of the SARFAESI Act. Moreover, the Respondents state that they had requested the Appellant to restructure the account but the said request was declined without any reason whatsoever. Hence the Respondents sought quashing of the entire Sarfaesi measures against them.

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The Appellant appeared in the S.A. and opposed the

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application by stating that there was no infirmity whatsoever in the demand notice issued by it under Sec. 13 (2) of the SARFAESI Act. The allegation that the restructuring of the loan was declined without examining the offer is also denied by the Appellant. The allegation regarding the non-compliance of provisions under Sec. 13 (9) pointed out by the Respondents is also disputed by the Appellants in their reply.

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The Ld. Presiding Officer observed that there is a discrepancy in the account statement maintained by the bank and the amount demanded, and therefore, the Appellant has in the notice issued under Sec. 13 (2) of the SARFAESI Act are at variance and moreover, the penal interest was capitalised, and therefore, the demand notice is defective and would therefore affect the entire Sarfaesi measures initiated by the Appellant. That apart, the contention of the Respondents regarding violation of the provisions under Sec. 13 (9) of the SARFAESI Act for not taking the prior consent of the SBI is also upheld by the Ld. Presiding Officer by stating that the Appellant has not controverted the contention in the reply, and also did not produce any documentary evidence in support of the claim that prior consent of the SBI was obtained or that which had a major stake in the security interest.

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The Appellant has in this appeal challenged the finding of the D.R.T. with regard to Sec. 13 (9) of the SARFAESI Act alone. Hence, the only point for consideration in this appeal is whether the D.R.T. was justified in allowing the S.A. on the basis of non-

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compliance with Sec. 13 (9) of the SARFAESI Act by the Appellant.

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The relevant portion of Sub Sec. (9) of Sec. 13 of the SARFAESI Act as it stood prior to the amendment of the SARFAESI Act in 2016 read thus:

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“(9) In case of financing of financial asset by more than one secured creditors or joint financing of financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to subSec. (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth and in value of the amount outstanding as on record date shall be binding on all the secured creditors: ……”

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The Ld. Counsel appearing for the Appellant, Mr Rohit Gupta argues that the provisions under Sec. 13 (9) of the SARFAESI Act are something to be exercised by any other bank or financial institutions who have advanced loan to the borrower in order to safeguard their interest and that the borrower cannot avoid payment by relying upon the violation of the aforesaid provision. The Ld. Counsel also points out to the reply filed by the Appellant before the D.R.T. to submit that the finding of the Ld. Presiding Officer that the Appellant did not controvert the averment made regarding non-compliance of Sec. 13 (9) is not true. Para 13 of the reply filed by the Appellants before the D.R.T. specifically controverts the allegation of violation of Sec. 13 (9).

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when the appeal was taken up for hearing, the Appellant filed I.A. 633/2022 to receive a copy of the communication dated 13/12/2022 issued by Omkara Assets to the 1^st Respondent

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company. It is a communication between Omkara Assets Reconstruction Pvt. Ltd. the assignee of the debt from the SBI, dated 22/09/2022 and the reply dated 03/12/2022 to the 1^st Respondent company. The 1^st Respondent had enquired as to whether the secured assets proceeded against by Union Bank of India were also mortgaged to Omkara Assets to which, it replied that it has no charge over the movable/immovable securities mortgaged with the Union Bank of India.

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The Respondents have opposed the application to receive additional documents by stating that such documents can be accepted only by giving an explanation as to why it was not produced earlier as contemplated under Order 41 Rule 27 of the Code of Civil Procedure.

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The Respondents did not produce any document to substantiate their pleading in the S.A. with regard to the violation of Sec. 13 (9) of the SARFAESI Act. The Ld. Presiding Officer readily accepted that averment for the reason that it is not controverted in the reply filed by the Appellant bank. This is factually incorrect. In the reply para 13 specifically controverts the averment regarding the violation of Sec. 13 (9).

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It is always for the applicant/plaintiff/petitioner to prove the averment is made in the application or plaint. No evidence whatsoever was produced by the Applicants in the S.A. to establish that the secured assets proceeded against by the Appellant were also mortgaged to the SBI. Much less is there any evidence to indicate that the debt due to the SBI exceeds three-

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fourths of the total liability over the secured assets. Without any material on record, the Ld. Presiding Officer came to the conclusion that the Appellant ought to have obtained the permission of the SBI before proceeding against the secured assets under the provisions of the SARFAESI Act.

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Despite the burden being on the Applicants in the S.A. to prove the existence of other debts over the secured assets, the Appellant has attempted to prove that the secured assets proceeded against by them were not mortgaged to the SBI by producing a communication with the assignee of the debt from the SBI. The application to receive additional documents is, therefore, allowed. The communication would indicate that the secured assets proceeded against by the Appellant were not mortgaged to the SBI as alleged. In the reply that is filed by the Respondents to this appeal, they have stated regarding an Original Application filed by the SBI for the realisation of the debt from them. But the details of the charge created for the mortgage are not produced.

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The Ld. Counsel appearing for the Respondents Mr Puneet Gogad submits that production of the additional evidence in the Appellate court is not a matter of course or routine. The Appellant will have to satisfy the conditions stated in Order 41 Rule 27 of the Code of Civil Procedure. He relies on the decision of the Hon’ble Supreme Court in Basayya I Mathad vs. Rudrayya S Mathad & Ors. (2008) 3 SCC 120 in support of his arguments. There is no doubt that documents or evidence cannot be produced by the

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parties at the appellate stage unless the reasons for nonproduction are explained. The provision of the CPC is not strictly applicable to the proceedings under the SARFAESI Act. Nevertheless, the principles under the CPC can be imported to the proceedings under the SARFAESI Act for compliance with natural justice. All that the party seeking to produce additional evidence needs to do is established the fact that notwithstanding due diligence, such evidence was not within his knowledge or could not after the exercise of due diligence be produced by him at the time when the decree appealed against was passed. In the instant case, the Applicants in the S.A. did not produce any evidence to substantiate the averment regarding the violation of Sec. 13(9) of the SARFAESI Act. Nevertheless, the Ld. Presiding Officer upheld the contentions without any material to hold that the State Bank of India was also a secured creditor representing not less than three-fourths in value of the amount outstanding as on a record date. Apart from the averment that the secured assets were also mortgaged to the SBI, the Applicants had not produced any document to establish this fact. The Ld. Presiding Officer accepted the contention and therefore, the Appellant had no other option but to produce evidence in this appeal to disprove the averment made by the Respondents in the S.A. The document produced by the Appellant is, therefore, to be accepted in evidence.

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Although there is no material to show the violation of Sec. 13(9) of the SARFAESI Act, it is also pertinent to hold that the

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defence is not available to a borrower as argued by Mr Rohit Gupta, the Ld. Counsel for the Appellant. The Ld. Counsel had relied upon two decisions in support of his argument. The High Court of Gujarat as in Sun Star Future Wood Ltd, through Bhanubhai G. Patel vs. Authorised Officer, Stressed Assets Stabilisation & 3 Ors. AIR 2008 Guj 79 wherein there is a dispute inter-se amongst the secured creditors on the aspect of sale or appropriation of the amount, and if brought before the court by any such creditors, it will have to be decided under Sec. 13(9) but the borrower, whose properties are mortgaged and action taken for realisation of the security interest cannot be made to earn any undue benefit therefrom. The High Court of Delhi has in Chemstar Organics India Ltd vs. Bank of Baroda & Ors Manu/DE/4495/2012 held that the provisions of Sec. 13(9) of the SARFAESI Act are not meant to be an instrument of defence by a borrower to avoid payment where ultimately three-fourth of the value of the secured creditors are at idem on the action proposed or taken.

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A perusal of the judgments cited above and considering the facts and circumstances of this case and the purport of Sec 13(9) of the SARFAESI Act it is adequately clear that this is a beneficial provision of the secured creditors and not for the debtor the reason being that if there are more secured creditors and joint financiers, one of the secured creditor should not be able to appropriate the proceeds of the secured assets all by themselves without the concurrence of the other secured creditors. It is for this reason that a benchmark is provided to get the consent of

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three-fourths value of the secured creditors. It is, therefore, for the SBI to raise an objection if the Appellant Bank was proceeding to realise the amount due to them without the concurrence of the SBI. The Respondents as borrowers could not have raised any objection regarding the violation of Sec. 13(9). The Ld. Presiding Officer has completely misread the purport of Sec. 13(9). Under the circumstances, the finding of the Ld. Presiding Officer in the impugned judgment with regard to the violation of Sec. 13(9) of the SARFAESI Act is to be set aside.

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In the result, the Appeal is allowed and the impugned judgment dated 10.10.2013 in S.A. No. 13 of 2013 on the files of DRT-I, Ahmedabad in so far as it upholds the violation of Sec. 13(9) of the SARFAESI Act is hereby set aside. No order as to cost.

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Chairperson
mks-1

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Union Bank of India v. M/s. Asmita Paper Pvt. Ltd. and Ors.

Case brief

What is this about?

What did the court decide?

Union Bank of India v. M/s. Asmita Paper Pvt. Ltd. and Ors.

Case brief

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