Dismissed

Ergo Foam v. Federal Bank

DRT16 Nov 2022SA/416/2022

Case brief

AI extract

What is this about?

The Debt Recovery Tribunal dismissed an application by a firm seeking to quash SARFAESI proceedings initiated by Federal Bank. The court held the application was time-barred as the limitation period for challenging symbolic possession expired, and rejected the claim that RBI guidelines on loss of assets applied to write off the liability.

What did the court decide?

The Securitisation Application No. 416 of 2022 is dismissed with no costs awarded.

Ergo Foam versus Federal Bank — Banking and Recovery | DRT (2022)

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Fair Order

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IN THE DEBTS RECOVERY TRIBUNAL - 1 AT ERNAKULAM

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DATED THIS 16^th DAY OF NOVEMBER, 2022

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PRESENT: Su. WILLYAHM, B.Sc., M.L. [DISTRICT JUDGE - Retd] PRESIDING OFFICER

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SA No. 416 of 2022

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Between

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M/s Ergo Foam, Plot No.XI Kinfra Small Industrial Park, Vellaramkunnu, Chundale, P.O. Kalpetta, Wayanad, Pin-673 123 represented by Mg. Partner, C.K. Ahmmed Nizar.

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---Applicant

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And

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The Manager, Federal Bank, Kalpetta Branch, Wayanad, Kerala, Pin -673121.

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The AEVP and Head,

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LCRD Kozhikode Division, 1^st Floor, Federal Towers,

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Mavoor Road, Kozhikode-673016.

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---Defendants

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This Securitisation Application coming on 14.10.2022 for final hearing before me in the presence of Mr. Faizel, Advocate for the Applicant and Mr. K.P. Sujesh Kumar, Counsel appeared for the Defendants and upon hearing the arguments of Counsels for both the parties and having stood over for consideration till this day, this Tribunal delivered the following:

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SA No.416 of 2022

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O R D E R

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This Securitisation Application was filed on 24.08.2022 seeking to pass an order setting aside all proceedings under the SARFAESI Act, 2002 initiated pursuant to and including Annx.A2 and A5 by the defendant bank and to direct the defendant to keep the SARFAESI Act proceedings in abeyance till the disposal of this application.

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2. The averments of the applicant in the SA in brief are as follows:

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The applicant firm had taken a loan sum of Rs.3.2 Crores from the defendant bank. The movable assets of the applicant was damaged under fire on 11.12.2019. The 1^st defendant had taken insurance policy from Bajaj Insurance for Rs.5 Crore, but they compensated the loss of only Rs.2.5 Crores. The defendant debited that amount towards the loan account and balance Rs.70 Lakhs was pending as liability. Now the liability became Rs.1,28,76,963/-. This applicant does not have any movable assets to perform and pay the balance loan amount of the 1st defendant bank. No firm can perform when all the movable assets ceased to exist due to fire. The RBI made it clear that when any assets are lost due to any bonafide event that has been declared as non performance of assets under loss assets and any liability happened due to that is liable to be declared as NPA under loss assets thereby writing off the liabilities. The applicant has created an equitable mortgage by depositing his residential property and other lands worth more than Rs.15 Crores. The 1^st respondent classified the applicant bank account as NPA without applying law and mind. The 1^st defendant issued notice under Section 13(4) of the Securitization and Security Act, 2002 on 14.12.2021. Thereafter the applicant issued a letter to the 1^st defendant stating that classification under NPA as normal is not sustainable when the movable assets was lost due to the fire. Reply to that letter was received by the petitioner, there was no averments or reason for not classifying the applicant account under NPA under loss assets and writing off the liabilities that was the main gist of the notice.

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The true copy of the First Information Report registered by the Kerala Police under Section 154 Cr. Pc dated. 12.12.2019 and the loss assessed by them was more than Rs.6 Crores is produced and marked as Annx.A1. True copy of the notice under Section 13(4) is produced and marked as Annx.A2. The copy of the letter dated. 22.06.2022 sent to the 1^st respondent bank under Section 9(3a) informing that Section 13(4) invoked towards the applicant firm against the Reserve

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SA No.416 of 2022

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Bank of India guide lines is produced and marked as Annx.A3. The reply letter dated 30.06.2022 from the 1^st respondent Bank stating untenable reasons for arraying the bank account of the applicant firm under non-performance account is produced and marked as Annx.A4. The true copy of the notice under Section 14 of the said Act by the Advocate in CMP No. 880/2022 dated 16.08.2022 is produced and marked as Annx.A5. The guide line of RBI to array the bank account dated 02.07.2007 as NPA if the assets are lost under act of god produced and marked as Annx.A6.

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The entire exercise of the defendants invoking the provisions of SARFAESI Act, for the alleged recovery of an amount of Rs.1,28,76,963/- is arbitrary, illegal and hence unsustainable. The RBI had issued the direction for classification of NPA and proceedings under the SARFAESI Act, only when the applicant firm is not performing with assets in his land. The provision to writ off the liabilities is stated in the Circular No.DBOD No.BP.BC 12/21 04.048/ 2007-08 dated 02.07.2007, when the assets is lost. Then invoking the SARFAESI Act, against the applicant firm is ultra vires and it is most humbly prayed that this Hon’ble Tribunal may be pleased to pass an order allowing the S.A.

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The averments of the defendants in the written statement in brief are as follows:

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The SA is not maintainable either in law or on facts and that the application was filed without any bonafides by suppressing the material facts. The applicant is only a guarantor to the credit facility availed by the borrower, M/s Collins Foams. The borrower has not challenged the proceedings so far.

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The SA is time barred as the same was not instituted within 45 days from the date of initiating measures under Section 13(4) of the SARFAESI Act. The symbolic possession of the secured asset was taken much earlier on 14.12.2021 and the applicant did not challenge the same so far. In the circumstances, the above SA is liable to be dismissed. Notice issued by the Advocate Commissioner pursuant to an order passed by the CJM Court under Section 14 of the SARFAESI Act, does not constitute a measure under Section 13(4) of the said Act and therefore the application under Section 17 will not lie before this Tribunal against the notice issued by the Advocate Commissioner and that sub-section (3) of Section 14 makes it clear that no act of the Chief Metropolitan Magistrate or the District Magistrate (any officer authorized by the Chief Metropolitan Magistrate or District Magistrate)

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SA No.416 of 2022

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done in pursuance of the section shall be called in question in any court or before any authority. It is settled law that under Section 14 of the SARFAESI Act, Chief Judicial Magistrate is performing only administrative function and he has no right to adjudicate upon the rights of the parties. Therefore, an order passed by the Chief Judicial Magistrate does not make out a cause of action to file an appeal under Section 17 of the SARFAESI Act. The applicant will have cause of action to institute SA under Section 17 only after losing actual possession of the secured assets. In the circumstances, the above SA is not maintainable before this Tribunal and the above SA should be dismissed with exemplary cost to this defendants.

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The 1^st defendant bank has granted various credit facilities to M/s Collins Foam aggregating to Rs.3.2 Crores. Apart from the personal guarantee offered by the partners, personal guarantee of Fathima, Sajith and Palliveetil Imbichammo was taken. The applicant, M/s Ergo Farm, partnership firm constituted by Ahamed Nizar and Imbichammo has also taken loan. In addition to the personal guarantee, the guarantors have created equitable mortgage in respect of the immovable properties. The borrower/guarantors have deposited the original title documents of their properties before the firm defendant Bank along with a confirmation letter of creation of mortgage in respect of the aforesaid properties. The borrowers have committed default of payment in the loan accounts and despite granting sufficient opportunity to regularize the loan accounts, there were no bona fide efforts on the part of the borrowers to regularize the loans. In the circumstances, the first defendant was constrained to classify the loan accounts of the applicant as ‘Non Performing Asset’ on 02.04.2021 in accordance with the guidelines issued by the Reserve Bank of India in this regard. Thereafter, the defendants initiated proceedings under the SARFAESI Act, against the mortgaged properties by issuing a demand notice on 13.09.2021 as contemplated under Section 13(2) of the SARFAESI Act, calling upon the applicant to pay the entire amount outstanding under the loans referred to above within a period of 60 days from the date of receipt of the said notice. True copy of the demand notice issued by the 2^nd defendant under the SARFAESI Act, dated 13.09.2021 is produced herewith and marked as Annexure-B1. Annx.B1 notice was received by the borrowers and the guarantors and despite the receipt of the said notice, the borrowers/guarantors did not comply with the demand made in the said notice and neither submitted any objection to the said notice. Thereafter symbolic possession of the secured assets were taken by the defendants on 14.12.2021 after issuing a possession notice under Section 13(4) of the SARFAESI Act. True copy of the

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SA No.416 of 2022

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possession notice is produced by the applicant in the SA as Annx.A2. Annx.A2 notice was also affixed on the conspicuous part of the secured assets. Copy of Annx.A2 notice was also published in two leading newspapers having circulation in the area where the secured asset is situated within 7 days from the date of issue of the said notice. Even after the issuance of the possession notice as contemplated under the SARFAESI Act, the borrowers/guarantors did not make any bona fide attempt to regularize the credit facilities granted to them.

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The 1^st defendant approached the Chief Judicial Magistrate Court Kozhikode by filing CMP No.880/2022 under Section 14 of the SARFAESI Act, seeking assistance of an Advocate Commissioner to take over the physical possession of the secured assets. Accordingly, learned CJM Court was pleased to pass an order by which an Advocate Commissioner was appointed and he was directed to take possession of the secured assets.

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As per the terms and conditions of the loan agreements, the borrower has to insure the plant, machinery and building. The amount of compensation granted by the insurance company was adjusted in the loan account. After adjusting the said amount, a sum of Rs.1,28,76,963/- is outstanding under the loan account and the borrowers/guarantors are bound to liquidate the liability under the loan account in terms of the loan agreement. Defendants are entitled to realize the said amount from the borrowers/guarantors by proceeding against the immovable properties mortgaged to them. The averments contained in paragraph 5(2) of the SA is incorrect, baseless and stoutly denied by the defendants. There is no stipulation or mandate on the part of the Reserve Bank of India to write of the liabilities under the credit facilities. Letter issued by the applicant was given a proper reply stating that it was due to default of payment in the loan account, defendants classified the loan account as NPA. Annx.A6 circular issued by the Reserve Bank of India is not applicable to the facts of the case and it is humbly prayed that this Tribunal may be pleased to dismiss the above SA with exemplary cost to this defendants.

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The which arises for consideration is as to whether the applicant is entitled to get reliefs sought for in the SA.

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Point: The applicant firm is a partnership firm under the name and style ‘M/s Ergo Foam’ represented by its Managing Partner Mr.C.K.Ahmmed Nizar, who has filed the SA. The applicant firm

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SA No.416 of 2022

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availed credit facilities to the tune of Rs.3.2 Crores from the 1^st defendant Bank upon creation of equitable mortgage in respect of the immovable properties. Admittedly, the insurance coverage for a sum of Rs.5 Crores had been made with Bajaj Insurance. According to the applicant firm, the movable assets of the applicant firm which had been insured were damaged under fire on 11.12.2019 and the Bajaj Insurance Company compensated the loss of only Rs.2.5 Crores and the 1^st defendant Bank debited that amount towards the loan account and the applicant firm did not have any movable assets to perform and pay the balance loan amount. The applicant firm has produced true copy of the FIR, Annx.A1 in order to show that the complaint has been lodged with the SHO, Kalpetta Police Station for the fire accident happened due to electric short circuit. The rival contention of the defendants is that as per the terms and conditions of the loan agreement, the applicant firm had to insure the plant, machinery and building and that compensation amount granted by the Insurance Company has been adjusted in the loan account and that a sum of Rs.1,28,76,963/- is outstanding and that since the applicant firm failed to repay the balance outstanding loan due, the loan account was classified as Non-Performing Asset on 02.04.2021. A perusal of the English translated version of the complaint, Annx.A1, would show that the applicant firm has not specifically stated as to which assets were damaged due to fire accident and that there is a mention of burning of two Lorries and damage around of Rs.6 Crores.

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The counsel for the applicant firm relied upon guidelines of 4.1.3 of circular issued by the Reserve Bank of India as Annx.A6 to strengthen his contention that the defendants shall adhere to the above circular of the RBI since the movable assets were lost due to natural calamity, loan account should not have been classified as NPA. It is the contention of the counsel for the applicant firm that it should be treated as ‘loss asset’ due to which alone accounts of the applicant firm should not have been classified as NPA. In support of his contention, he cited the judgment of the Hon’ble High Court of Delhi decided in M/s.Holystar Natural Resources .. vs. Union of India & Anr. wherein the circular of the RBI, 4.1.3 which reads as follows; has been referred to.

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“A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.”

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SA No.416 of 2022

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In the present case on hand, the applicant firm has not specifically stated in the SA or in the letter, Annx.A3, sent to the defendants as to whether the assets which were destroyed due to fire were covered under the terms and conditions entered into between the applicant firm and the defendants at the time of availment of credit facilities. It is revealed from the perusal of the averment of the written statement of the defendants and also from the copy of reply notice, Annx.A4 sent by the 1^st defendant Bank to the applicant firm that insurance policy was taken upon agreed terms and conditions between the applicant firm and the defendants and also as per the loan sanction order and that applicant firm had given a consent letter in favour of the Insurance Company stating that it would receive the amount as full and final settlement of the claim and that a discharge voucher for full and final discharge of the claim was also given to the Insurance Company. As per the above said RBI circular 4.1.3, a loss asset was not identified by the 1^st defendant Bank or by internal or external auditors or the RBI inspection. It is not the case of the applicant firm that the inspection was carried out in the premises of the applicant firm in order to assess the loss assets. Further, there is no specific stipulation in the above said circular for writing off the liabilities granted under the credit facilities. Hence this Tribunal holds that the above cited judgment of the Hon’ble High Court of Delhi has no application to the facts and circumstances of this case. Therefore, this Tribunal concurs with the argument advanced by the counsel for the defendants that Annx.A6 circular issued by the RBI cannot be made applicable to accept the above contention of the applicant firm.

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Since the applicant firm committed default in repayment of the outstanding loan due, the loan account of the applicant came to be classified as NPA on 02.04.2021 and SARFAESI proceedings were initiated by the 2^nd defendant. Demand notice dated 13.09.2021, Annx.B1 was issued to the applicant firm calling upon to pay outstanding loan amount within a period of 60 days from the date of receipt of the notice. The averment of the defendants that even though Annx.B1 notice was received by the borrowers/guarantors, they did not comply with the demand made in the notice nor did they send any objection to the notice has been refuted by the side of the applicant firm. Subsequently, the 2^nd defendant issued possession notice dated 14.12.2021, Annx.A2 for taking symbolic possession of the secured asset. Admittedly, the applicant firm did not challenge the possession notice by filing SA before this Tribunal. One of the reliefs sought for by the applicant firm in the SA is to set aside Annx.A2 possession notice which was issued as early as on 14.12.2021, but

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SA No.416 of 2022

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this SA was filed on 24.08.2021. Since the SA was not filed within the period of 45 days from the date of receipt of the possession notice, Annx.A2, the above relief sought for by the applicant firm is barred by limitation as contended by the side of the defendants.

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On application filed by the defendants under Section 14 of the Securitisation and the Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (in short ‘SARFAESI Act, 2002’) before the Chief Judicial Magistrate, Kozhikode, order was passed in CMP No. 880/2022 appointing Advocate Commissioner to take physical possession of the secured asset. The Advocate Commissioner issued notice dated 16.08.2022, Annx.A5 to the applicant firm informing that the physical possession of the secured asset would be taken on or after 30.08.2022. Hence the applicant firm has filed this SA seeking for the reliefs stated supra. On reading of the entire averments of the SA, this Tribunal could not find any averments with regard to any procedural irregularity in the order passed by the learned Chief Judicial Magistrate, Kozhikode. The only contention raised by the applicant firm in the SA is classification of loan account as NPA is not proper since the applicant firm had no assets to perform as fire destroyed the entire assets. This Tribunal has already categorically held that the aforesaid circular 4.1.3 of the RBI has no application for writing off the liabilities of the applicant firm. The applicant firm has failed to abide by the terms and conditions entered into between it and the 1^st defendant Bank with regard to the discharge of the loan liabilities after availment of a huge amount of Rs.3.2 Crores from the 1^st defendant Bank.

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The applicant firm did not send any objection or representation with regard to the classification of the loan account after receipt of the demand notice. The possession notice, Annx.A2 issued for taking symbolic possession of the secured asset was not challenged by the applicant firm by filing SA within the stipulated period of limitation. Therefore, the applicant firm is not entitled to challenge the order passed by the learned Chief Judicial Magistrate Court, Kozhikode for taking physical possession of the secured asset. The notice, Annx.A5 issued by the Advocate Commissioner is not a challengeable notice as it has been issued only pursuant to the direction given by the learned Chief Judicial Magistrate Court, Kozhikode in CMP No.880/2022. In any event, the applicant firm has not raised any plea in the SA as to whether the order passed by the learned Chief Judicial Magistrate Court, Kozhikode for taking physical possession of the secured asset suffers from any procedural irregularity. The applicant firm has

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SA No.416 of 2022

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miserably failed to prove its case so as to seek the indulgence of this Tribunal for granting the reliefs sought for in the SA.

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In view of the foregoing reasons, this Tribunal holds that the applicant firm is not entitled to get any reliefs sought for in this SA, which deserves to be dismissed.

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In the result SA No.416 of 2022 stands dismissed. No costs.

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Dictated to Steno, taken down, transcribed, typed by him, corrected and pronounced by me in the open court on this the 16^th November, 2022.

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(Su. WILLYAHM) PRESIDING OFFICER

Mj/

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SA No.416 of 2022

List of documents filed by the Applicant along with the application

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S.No.	Date	Particulars
1.	12.12.2019	True copy oftheFIR regarding thefire.
2.	14.12.2021	True copy ofthe Section 13(4)notice.
3.	22.06.2022	True copy of the letter sent to the 1^strespondent under Section9 oftheBanking OmbudsmanScheme.
4.	30.06.2022	True copy ofthereply sent by the1^strespondentBank.
5.	16.08.2022	True copy of the notice under Section 14 of the SARFAESI Act, 2002.
6.	02.07.2007	The copy oftheReserveBankof Indiacircular.

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List of documents filed by the Defendants along with the written statement

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S.No.	Date	Particulars
1.	13.09.2021	True copy of the demand notice issued by the 2^nd
		defendant under the SARFAESI Act.

(Su. WILLYAHM)

PRESIDING OFFICER

Mj/

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Ergo Foam v. Federal Bank

Case brief

What is this about?

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Ergo Foam v. Federal Bank

Case brief

What is this about?

What did the court decide?

What the court decided

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