Allowed

Union Bank of India v. Satishkumar Gopalbhai Patel

DRAT8 Nov 2024MISC APPEAL/150/2024

Case brief

AI extract

What is this about?

Union Bank of India challenged a DRT order restraining it from taking physical possession of guaraantors' mortgaged properties. The appellate tribunal set aside the interim order, holding the creditor can proceed against guarantors without first exhausting remedies against the principal debtor, as their liability is joint and several.

What did the court decide?

The impugned order was set aside; the Securitisation Application No. 562 of 2023 was remitted to the DRT for expeditious disposal.

Union Bank of India versus Satishkumar Gopalbhai Patel — Banking and Recovery | DRAT (2024)

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BEFORE THE DEBTS RECOVERY APPELLATE TRIBUNAL, AT: MUMBAI Present: Mr Justice Ashok Menon, Chairperson

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Misc. Appeal No. 150/2024

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Between

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Union Bank of India … Appellant/s

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V/s.

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Satishkumar Gopalbhai Patel & Ors. …Respondent/s

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Mrs Mable Soans i/b M/s Mable & Associates, Advocate for Appellant.

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Mr Dhruvin Mehta, Advocate for Respondent appeared through Video Conferencing.

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-: Order dated: 08/11/2024:-

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The appellant Union Bank of India impugns the Order dated 19.06.2024 allowing I.A. No. 531 of 2024 in Securitisation Application (S.A.) No. 562 of 2023 by the Debts Recovery Tribunal-II (D.R.T.) Ahmedabad, by restraining the Bank from taking any coercive steps including taking physical possession of the secured assets of the Respondents/Guarantors for recovery of the debt under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (the ‘SARFAESI Act’, for short). The appellant bank is aggrieved and hence in appeal. 2. The facts and brief are thus:

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The appellant bank sanctioned a term loan of ₹50 crores on 11.12.2014 to M/s. SRK Group, a firm as the principal borrower, with its partners namely Naresh Paghdal, Bhavesh Paghdar and Harsukh Bhanderi as personal guarantors along with respondents Nos. 1 to 3 and late Kamleshbhai Bahubhai Bhasaniya as guarantors/mortgagors

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by executing a registered mortgage deed on 12.12.2014 as Reg. No. KMJ-15893-2014 which was modified later by executing a correction deed of mortgage on 12.01.2015 as Reg. No. KMJ-483-2015 and a supplemental deed of mortgage duly registered under Registration Receipt No. KMJ/23695 on 13.10.2017, from the Sub-Registrar’s office, Kamrej and created a charge concerning the properties “Mansarovar Residency” consisting of N.A land adm. 6-58-67 Hectare-Are- Sq. mtrs for residential purposes & “Mansarovar Plaza” consisting of N.A land adm. 0-79-45.57 Hectare-Are-Sq. mtrs for commercial purposes i.e. total adm. 73813.00 Sq. mtrs N. A land of Block No. 550/A (R.S No. 683) of village Kathor situated in Kamrej, Surat owned by the borrower firm and the property known as “Swapna Shrusti Elegant” consisting of the N.A. Land bearing Block No. 335, Block No. 336/A, Revenue Survey No. 348, adm. Hec-AreSq. mtrs, 2-02-51 i.e. adm. 20251.00 sq. mtrs and Block no. 335, Revenue Survey No. 348/1 (as per Form No. 7 & 12 dated 10.03.2012 to 13.02.2013, Revenue Survey No. 348/2, Hec-Are-sq. mtrs 1-44-09 i.e. adm. 14409 sq. mtrs adm. 34660.00 sq. mtrs situated at village Baleshwar, Sub-district Palsana, Surat owned by the guarantors in favour of the appellant bank. Respondents Nos. 4 to 6 are the legal representatives of the deceased guarantor Kamaleshbhai.

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The borrower firm defaulted on the repayment resulting in the loan account being classified as a non-performing asset (NPA) on 30.09.2018. The bank issued a demand notice under Sec. 13(2) of the SARFAESI Act demanding a sum of ₹ 36,21,25,075.70 against the borrower firm and respondents Nos. 1 to 3 and the deceased

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guarantor Bhaveshbhai. The borrowers and respondent/guarantors objected on 02.11.2018 u/s 13(3A) of the SARFAESI Act, the same was replied by the appellant on 06.12.2018. Steps under Sec. 13(4) ensued and symbolic possession of the secured assets namely the residential flats was taken on 12.06.2019 and 04.10.2021. Pursuant to that, the bank issued an auction sale notice in respect of the mortgage properties of the borrower firm. Meanwhile, the bank had also filed an Original Application No. 67 of 2019 on 30.04.2019 before the D.R.T.

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The partners of the borrower firm further defaulted on the repayment of the mortgage loan account being classified as an NPA on 31.05.2019, in addition, the bank issued a demand notice dated 07.06.2019 u/s 13(2) of the SARFAESI Act demanding a sum of ₹ 2,72,95,515.51.

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The appellant bank took symbolic possession of the mortgaged property, owned by the guarantors namely as “Swapna Shrusti Elegant” on 04.03.2020, and thereafter issued a sale notice on 10.06.2021 scheduling the e-auction on 20.07.2021.

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The borrowers and the respondents filed S.A. No. 207 of 2021 challenging the Sarfaesi measures. When the said S.A. was pending, the borrowers approached the bank with an OTS proposal to settle the dispute and offered to pay ₹43.50 crores as full and final settlement of both accounts. Consequently, the borrowers/guarantors unconditionally withdrew the said SA by filing an affidavit dated 22.04.2022. Recording this settlement, the D.R.T. disposed of the S.A. on 30.05.2022.

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However, the borrowers were not able to pay the entire amount as agreed within the stipulated time, hence, the bank cancelled the said OTS. Out of the said OTS amount of₹43.50 crores, a sum of Rs. 9,74,58,510/- alone was deposited by the firm and ₹67,59,071/- was deposited by the partners of the borrower firm.

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Appellant attempted to auction the borrowers' properties multiple times. All these attempted auctions failed for want of bidders. 9. Subsequently, the appellant initiated Sarfaesi measures u/s 13(4) against the respondents’ mortgaged property and took symbolic possession on 16.03.2024 after compliance with Rules 8(1) and Rule 8 (2) of the Security Interest (Enforcement) Rules. Thereafter, the appellant proceeded to take physical possession of the properties of the respondents by obtaining an order dated 01.05.2024 from the Additional CJM Surat u/s 14 of the SARFAESI Act.

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The Respondents filed S.A. No. 562 of 2023 before the D.R.T. challenging the measures initiated by the bank. Various averments were raised in their application. The appellant filed a reply to the S.A. raising the preliminary objections that given the withdrawal of the earlier S.A. No. 207/2021, the present S.A. for the very same reliefs would be hit by the principles of res-judicata. I.A. No. 531 of 2023 was filed by the respondents herein seeking an interlocutory relief to restrain the bank from selling the properties belonging to them before selling the properties belonging to the principal borrowers which according to them would be more than sufficient to realise the outstanding dues.

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The Ld. Presiding officer allowed the I.A. holding that there

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was no need to sell the properties of the guarantors before exhausting the remedy of selling the properties belonging to the principal debtors. The Ld. Presiding Officer relied on the decision of the Hon’ble Supreme Court in Ambati Narsayya vs. M. Subba Rao & Ano. 1989 Supp (2) SCC 693 to hold that the creditor must sell only such portion of the property which would be sufficient to clear the debt in conformity with the provisions of Order 21 Rule 64 of the Code of Civil Procedure. Hence the D.R.T. directed the bank to first proceed against the properties of the principal borrower for recovery of the outstanding dues and in case there is any shortfall, proceed against the properties of the guarantors.

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The bank is aggrieved for the reason that they are not able to proceed against the respondents to recover its debts. The limited question that arises for consideration thus in appeal is whether a creditor can proceed against the properties of the guarantor without first proceeding against the properties of the principal borrower.

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The Ld. Counsel appearing for the respondents. records perused.

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A principal borrower and a guarantor/mortgagor stand on a similar footing as is evident from the definition of a “borrower” under Sec. 2(f) of the SARFAESI Act which reads thus:

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“(f) “borrower” means [any person who, or a pooled investment vehicle as defined in clause (da) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) which,] has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution [and include a person who, or a pooled investment vehicle which,] becomes borrower of a [asset reconstruction company] consequent upon acquisition by it of any rights or interest of any bank of financial institution in relation to such financial assistance [or who has raised

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funds through issue of debt securities];

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15 A reading of the above-cited decision indicates that borrower means not only a person who has been granted financial assistance by the bank or financial institution but also a person who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by the bank. The respondents herein who are guarantors/mortgagors have created security interest by mortgaging their properties in favour of the appellant bank for the financial assistance given to the principal borrower firm. Hence, they would squarely come within the definition of the borrowers.

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The SARFAESI Act was implemented in 2002 when it was realised that even the enactment of the RDDB & FI Act was not sufficient to promptly recover the huge public debt that was due to the banks and the financial institutions and therefore, in one of the most radical legislative measures taken by the Parliament for ensuring that the dues of the secured creditors including banks and financial institutions are recovered from the defaulting borrowers without any obstruction, the aforesaid Act was implemented to facilitate the secured creditors to take steps for recovery of their dues without intervention of Courts or Tribunals. The question whether the creditor could have proceeded against the guarantor without first initiating action against the borrower is no longer res integra. Following the earlier decision of the Hon’ble Supreme Court in Bank of Bihar Ltd. vs. Dr Damodar Prasad AIR 1969 SC 297 , wherein it was held that the very object of guarantee was defeated if the creditor is asked to postpone his remedies against the surety. It was held that the guarantee is a collateral security and that the security will become useless if his rights

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against the surety can be so easily cut down and also relied upon the decision in SBI vs. Indexport Registered (1992) 3 SCC 159 , wherein it was held that the decree holder can execute the decree against the guarantor without proceeding against the principal borrower and also relying on another decision of the Hon’ble Supreme Court in Industrial Investment Bank of India Ltd. vs. Biswanath Jhunjhunwala (2009) 9 SCC 478, wherein it was held that the liability of the guarantor and the principal debtor is co-extensive and not alternative and the creditor/ decree holder has to right to proceed against either for recovery of dues or realisation of the decretal amount, the Hon’ble Supreme Court reiterated that in view of the law laid down in the aforementioned cases, it must be held that the High Court completely misdirected itself in assuming that the appellant could not have initiated action against Respondent No. 1 without making efforts for recovery of its dues from the borrower.

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The appellant bank has placed this decision before the DRT but it is surprising that the Ld. Presiding Office has not bothered to even read the decision or understand the ratio laid down therein. The DRT was completely misdirected by the fact that the sale of the entire property for the realisation of a debt for which a larger extent of the property was not required to be sold was being proceeded against. The decision of the Hon’ble Supreme Court in Ambati (supra) is to the effect that Order 21 Rule 64 of CPC makes it clear that only the extent of property as much is required for satisfaction of the debt needs to be sold in the auction.

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In a more recent decision of the Hon’ble Supreme Court in State

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Bank of India vs. Devendra Kumar Sinha & Ors 2024 SCC OnLine SC 943 rendered by a Division Bench of three judges held that there being a mortgage and loan amounts recoverable the creditor is entitled to proceed under the SARFAESI Act against the guarantor as the liability of the guarantor is joint and several with the principal debtor.

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The upshot of the discussions made above is that the Ld. Presiding Officer was completely misdirected by holding that the appellant bank could not proceed against the guarantor’s property before exhausting the remedy available against the principal debtor. It is pertinent to note that in the instant case, the bank had attempted to sell the principal debtor’s property multiple times and failed to get bidders to buy the property. Only thereafter did the bank proceed against the residential building of the respondents who are the guarantors. There is absolutely infirmity in such an action resorted by the bank. The DRT cannot direct the bank taking action under the SARFAESI Act to proceed against the property of the principal debtor before proceeding against the property of the guarantors. Such interference by the Tribunal in the Sarfaesi measure initiated by the bank is uncalled for and would defeat the very purpose of enacting the SARFAESI Act which contemplates recovery of the debt without interference of Courts or Tribunals.

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The appeal is allowed and the impugned order is set aside. The S.A. No. 562 of 2023 shall be considered and disposed of by the DRT as expeditiously as possible.

Sd/-

Chairperson

mks-01

Union Bank of India v. Satishkumar Gopalbhai Patel

Case brief

What is this about?

What did the court decide?

Union Bank of India v. Satishkumar Gopalbhai Patel

Case brief

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What did the court decide?

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