Partly allowed

Shree Tuljabhavani Sugar Private Ltd. v. Vaishnavi Sugar India Ltd. and Ors.

DRAT8 May 2024REGULAR APPEAL/236/2015

Case brief

AI extract

What is this about?

In a common order dismissing two appeals, the Debts Recovery Appellate Tribunal upheld the DR&T's setting aside of a secured asset sale. The court held that agricultural land used for a sugar factory is not exempt under Section 31(i) of SARFAESI Act. However, the TB ruled that the specific sale on appeal was invalid because the bank failed to obtain a fresh valuation and fresh borrower consent bef

What did the court decide?

Affirmed the direction setting aside the sale, but deleted the direction binding the State Bank of India (mortgagee of the purchaser), holding that specific sale failed due to lack of fresh valuation

Shree Tuljabhavani Sugar Private Ltd. versus Vaishnavi Sugar… — 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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Appeal No. 193/2015

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Between

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The Buldhana District Central Co-operative Bank Ltd. & Anr.

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… Appellant/s

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V/s.

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Vaishnavi Sugar India Ltd. & Ors.

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…Respondent/s

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Mr Rajesh Nagory, i/b Ms Sanjana Ghogare, Advocate for Appellants. Mr M.G. Sarda, Advocate for Respondent No. 1.

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AND

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Appeal No. 236/2015

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Between

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Shree Tuljabhavani Sugar Pvt. Ltd. … Appellant/s V/s.

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Vaishnavi Sugar India Ltd. & Ors. …Respondent/s

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Mr Rakesh N Reddy, Advocate for Appellant. Mr M.G. Sarda, Advocate for Respondent No. 1.

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Mr Rajesh Nagory, Advocate for Respondents Nos. 2 & 3.

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-: Common Order dated: 08/05/2024:-

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Buldhana District Central Co-operative Bank Ltd., the creditor is the Appellant in Appeal No. 193 of 2015 while Appeal No. 236 of 2015 is filed by Shree Tuljabhavani Sugar Pvt. Ltd., the purchaser, of the secured asset, challenging the judgment and order dated 18.05.2015 allowing Securitisation Application (S.A.) No. 11 of 2013 on the files

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of the Debts Recovery Tribunal, Nagpur (D.R.T.) filed by the debtor, setting aside the sale.

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The aforesaid S.A. was filed by the debtor Vaishnavi Sugar India Ltd. (the first Respondent in both these appeals) under Sec. 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act”, for short) challenging the sale of the secured asset by the first Respondent Co-operative Bank in favour of the third Respondent Shree Tuljabhavani Sugar Pvt. Ltd. (the third Respondent in S.A.) by a registered sale deed on 29.01.2013. The S.A. was allowed and the sale was set aside by the impugned judgment and the bank was directed to refund the sale consideration paid by the third Respondent. The bank has come in appeal by filing Appeal No. 193 of 2015 while the third Respondent in the S.A. which had purchased the property is the Appellant in Appeal No. 236 of 2015. The parties are hereinafter referred to by their status in the S.A.

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The facts in brief are thus:

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The applicant company had availed a loan from the first Respondent bank in executed a document described as “Taran Gahankhat” for securing the term loan of ₹9 crores on 07.08.2001. The property mortgaged is described as agricultural land in Sr. No. 174 admeasuring 12 hectares 33 ares and field No. Sr. 175 admeasuring 8 hectares 60 ares. The applicant also executed another similar document in favour of the first Respondent bank for a term loan of ₹409.20 lakhs.

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Repayment of the loan was defaulted by the borrower and the account was classified as a non-performing asset (NPA) followed by

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the issuance of a demand notice under Sec. 13(2) of the SARFAESI Act on 30.05.2007 demanding a sum of ₹27.32 crores as of 31.03.2007. The applicant sent an objection to that notice to which the bank sent a reply. The applicant contended that the date is barred by limitation and that the notice is not signed by a person competent to issue the notice as an authorised officer. It was also contended that security is created over agricultural land; therefore, no action under the SARFAESI Act could have been taken.

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A possession notice was issued by the bank on 04.12.2009 under Sec. 13(4) of the SARFAESI Act and physical possession of the secured asset was taken. The sale notice was issued on 13.01.2010 and did not attract any bidders. A second sale notice was issued on 26.11.2010. Though there was one bidder who participated, he failed to deposit a consideration and the sale failed. The reserve price for the property was fixed at ₹15,45,22,075/-. There was a second charge over the property in favour of Canara Bank. In concurrence with the borrower, the property was agreed to be sold for ₹11 crores to a private party named Atharva Sugar and Allied Pvt. Ltd. vide agreement dated 24.12.2010. Canara Bank filed S.A. No. 54 of 2011 before the D.R.T., and challenged the intended private sale. The first Respondent bank contended that Atharva Sugar had undertaken to clear the dues of Canara Bank also. However, at the time of the final hearing of the S.A. No. 54 of 2011, the first Respondent bank submitted that the sale was being cancelled. S.A. No. 54 of 2011 thus became infructuous and was disposed of on 02.02.2012. Thereafter, yet another sale notice was published in two newspapers on

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11.02.2012 for a reserve price of ₹15.45 crores. There were no bidders. The applicant had objected to the effect that no notice was served on them as required under Rule 8(6) of the Security Interest (Enforcement) Rules. It was also mentioned in that objection that one S. K. Enterprises has offered to purchase the secured asset for ₹20 crores in 2010 and that the property has an actual market value of not less than ₹50 crores.

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It is contended for the bank that the Chairman of the borrower company had given a consent letter on 24.10.2010 permitting the sale of the property below the reserve price of ₹15.45 crores. On 29.01.2013, the property was sold to the third Respondent Tuljabhavani Sugar under a private treaty for ₹11.91 crores and for purchasing the property, a mortgage was created in favour of SBI.

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The Tribunal below had raised points regarding the various contentions raised by the applicant in challenging the Sarfaesi measures. On the question of whether the secured assets were exempted from the purview of the SARFAESI Act under Sec. 31(i) of the SARFAESI Act which was one of the main contentions raised, the D.R.T. observed that the dominant purpose for which the land was being used was non-agricultural. I agree with this finding of the Ld. Presiding Officer. The Hon’ble Supreme Court in Indian Bank vs. K. Pappireddiyar (2018) 18 SCC 252 held that the classification of land in revenue records as agricultural is not dispositive or conclusive. The question as to whether a land is agricultural has to be determined based on the totality of the facts and circumstances including the nature and character of the land, the use to which it was put and the purpose and

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intent of the parties on the date on which the security interest was created. In ITC Ltd. Vs. Blue Coast Hotel Ltd. & Ors. (2018) 15 SCC 99 considering the provisions under Sec. 31(i) of the SARFAESI Act. It was observed that Sec. 31(i) is intended to protect agricultural land held for agricultural purposes by agriculturists from extraordinary provisions of the SARFAESI Act. In that decision, the facts indicate that the security interest was created in respect of agricultural land which was meant to be a part of a five-star hotel in Goa and the debtor had applied to the Revenue Authority for the conversion of the land to non-agricultural land which was pending due to policy decision. Applying these precedents to be facts of the present case, it can be seen that the agricultural land was being used for a sugar factory and therefore, the borrower intended to use the property not for agricultural purposes but for running a sugar factory. Hence, the borrower is not entitled to the protection under Sec. 31(i) of the SARFAESI Act.

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Contentions were also raised regarding the authority of the Appellant bank to perform its function as a banker and also regarding the authority of a Co-operative bank to resort under the provisions of the SARFAESI Act. The position has now been settled by the Hon’ble Supreme Court by holding that the Co-operative Societies functioning as banks can resort to the provisions of the SARFAESI Act. Moreover, the definition of the bank in Sec. 2(c) of the SARFAESI Act includes a Multi-State Co-operative Bank. The objection raised by the applicant in this regard would, therefore, not be sustainable.

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There is no dispute that the property was sold to the third

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Respondent by way of a private treaty. The said sale is challenged on various counts. It is contended that the sale was at a price less than the reserve price. Secondly, the sanction of the borrower /mortgagor was not obtained for such a private sale. Thirty days' notice as contemplated under Rule 9(1) of the Security Interest (Enforcement) Rules was not served on the applicant. It is also stated that before affecting the sale of the immovable property under Rule 9(1), a valuation report from an approved valuer as contemplated under Rule 8(5) was not complied with. A valuation report was obtained in the instant case on 04.04.2009 and the property was valued at ₹10.56 crores. On 13.01.2010, when tenders were invited for the sale of the subject property the reserve price was fixed at ₹15,45,22,075/-. There were no bidders and thereafter, the Chairman of the applicant company vide letter dated 24.12.2010 consented to sell the property to Atharva Sugar for ₹11 crores. When that sale by a private treaty was to conclude, it was challenged by the Canara Bank by filing S.A. No. 54 of 2011 on 02.02.2012 which was dismissed as infructuous since the private sale to Atharva Sugar was not accomplished.

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Thereafter, a fresh notice for the sale of the property was issued on 11.02.2012 scheduling the auction on 23.02.2012. The applicant objected to the notice stating that the notice was not served. The reserve price for that sale was fixed at ₹15.45 crores. There were no bidders and ultimately the bank sold the property to the third Respondent for ₹11.91 crores. It was in consequence of this sale that S.A. No. 11 of 2013 was filed.

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It is contended by the applicant that the sale by private treaty

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also needs to be preceded by a thirty days notice as required under Rule 9(1) and Rule 8(6). No fresh valuation report was obtained and the consent that the Chairman of the applicant had allegedly given on 24.12.2010 for sale to Atharva Sugar for ₹11 crores could not have been utilised for the sale in favour of Respondent No. 3. The applicant contends that they had agreed to a private sale to Atharva Sugar because Atharva Sugar had agreed to settle the dues to Canara Bank as well. The dues to Canara Bank were about ₹29 crores. In case Atharva Sugar agreed to purchase the property for ₹11 crores and also settle the due to Canara Bank, the effective price for the property would be ₹40 crores. The sale in favour of the third Respondent for ₹11.91 crores specifically excludes the liability towards Canara Bank. 12. There is no doubt that several unsuccessful attempts were made to sell the properties. At some point in time, the borrower had agreed to sell the property by private treaty to Atharva Sugar for a price less than the reserve price, for ₹11 crores. Because of the interference by the Canara Bank by filing S.A. No. 54 of 2011 that attempted sale failed. The contention of the borrower that Atharva Sugar was willing to clear the debt due to Canara Bank does not appear to be true. Had it been so, Canara Bank would have readily consented to proceed with the sale to Atharva Sugar. From the records it is seen that the borrower was given umpteen opportunities to bring purchasers for a higher price. Though it is contended by the borrower that the property would fetch between ₹40 crores to ₹50 crores, none came forward to purchase the property for such a price. The contention that Atharva had agreed to purchase the property for ₹40 crores inclusive of the

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liability to Canara Bank appears to be an imagination.

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However, the objection concerning non-compliance of Rule 8

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appears to be sustainable. Rule 8(5) reads thus:

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“(5) Before effecting sale of immovable property referred to in subrule (1) of rule 9, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods: -

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(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or

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(b) by inviting tenders from the public;

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(d) by private treaty:--------------------------"

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A reading of the aforesaid rule indicates that even for a sale by private treaty valuation of property by an approved valuer will have to be obtained and reserve price fixed. In the instant case, a valuation report was obtained many years ago and the reserve price fixed was

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₹15.45 crores. Hence, there is a clear violation of the said rule.

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15 It is also contended that sub-rule (6) of Rule 8 is violated. The said rule reads thus:

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“(6) The authorised officer shall serve to the borrower a notice of thirty days for the sale of immovable secured assets, under sub-rule (5): Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale which shall include …………………”

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The sale by private treaty does not require publishing in

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newspapers and therefore, there is no violation of this rule.

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It is also contended that there is a violation of sub-rule (8) of

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Rule 8. The said rule reads thus:

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“(8) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.”

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The Tribunal below has held that there is a violation of sub-rule

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(8). That does not appear to be correct. What is contemplated in the sub-rule is that a private treaty shall be on such terms as may be settled between the parties in writing which indicates that the “parties” referred to here are the parties to the treaty, which is the essentially the creditor and the purchaser of the property. Hence, there is no agreement in writing involving the borrower necessary. I find support for this view in a decision of the Bombay High Court in Suit No. 1910 of 2009 dated 31.01.2013 .

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It is further contended that there is a violation of Rule 9 (2) of the Rules which reads thus:

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“ 9. Time of sale, issue of sale certificate and delivery of possession, etc.- (1) No sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of the sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to the borrower.

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(2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor:

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Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under subrule (5) of rule 9;

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Provided further that if the authorised officer fails to obtain a price higher price than the reserve price, he may, with the consent of the borrower and the secured creditor effect the sale at such price.--------”

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A reading of this rule would indicate that the sale shall not be

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finalised before the expiry of thirty days from the date of publication or serving of notice to the borrower. In the instant case, there is no evidence regarding serving of notice to the borrower before the sale by private treaty. The second proviso to sub-rule (2) makes it clear that if the offer to the authorised officer is not higher than the reserve price, the authorised officer may with the consent of the borrower and the secured creditor affect the sale at such price. The words ‘offer to

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the authorised officer’, would no doubt include an offer by way of private sale as well. Hence consent of the borrower and the secured creditor is indispensable. No consent of the borrower to sell the property to the third Respondent at a price of ₹11.41 crores which is admittedly lesser than the reserve price of ₹15.45 crores was obtained. Can the consent given for the sale to Atharva Sugar be considered consent for the sale to the third Respondent is the question that arises for consideration.

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The bank contends that the borrower was given enough opportunity to bring persons for sale by a private treaty. Atharva Sugar was indeed brought by the borrower to purchase the property for ₹11 crores and the Chairman had also consented to selling the property below the reserve price. However, the sale in favour of Atharva Sugar did not fructify. Thereafter, though a public notice of sale was published, there were no bidders. When another sale by private treaty is attempted, fresh consent of the borrower to sell the property at a price less than the reserve price is essential. The earlier consent of the Chairman to sell the property to Atharva Sugar cannot be taken as consent for sale to the third Respondent. Hence, I agree with the finding of the Ld. Presiding Officer of this point regarding violation of the second proviso to sub-rule 2 to Rule 9 as well.

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.The upshot of the discussion made above is that the sale in favour of the third Respondent cannot be justified or sustained, and the finding in the impugned judgment setting aside the sale cannot be interfered with. However, the impugned order about the State Bank of India the mortgagee of the third Respondent being bound by the order and the

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direction given to the State Bank of India shall not be implemented or complied with, and that portion of the order is modified and deleted.

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Sd/Chairperson

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mks-01 & 02

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Shree Tuljabhavani Sugar Private Ltd. v. Vaishnavi Sugar India Ltd. and Ors.

Case brief

What is this about?

What did the court decide?

Shree Tuljabhavani Sugar Private Ltd. v. Vaishnavi Sugar India Ltd. and Ors.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Statutes considered

Parties & counsel

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Case details

All orders in this case

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