Supreme Court clarifies remedy against forfeiture of deposit under SARFAESI Act: Agarwal Tracom Pvt. Ltd. vs. Punjab National Bank & Ors. (27 November 2017)

Introduction

The Supreme Court of India, in Agarwal Tracom Pvt. Ltd. vs. Punjab National Bank & Ors., addressed a crucial question: Can an auction purchaser challenge the forfeiture of their deposit by a secured creditor under the SARFAESI Act by filing an application before the Debt Recovery Tribunal? This judgment clarifies the scope of remedies available to auction purchasers under the SARFAESI Act. The bench comprised Justices R.K. Agrawal and Abhay Manohar Sapre, with the judgment authored by Justice Abhay Manohar Sapre.

Case Background

Punjab National Bank (PNB) had provided a loan to M/s India Iron & Steel Corporation Limited. The borrower defaulted on the loan. PNB initiated proceedings under Section 13(4) of the SARFAESI Act to recover the dues. The secured assets, including land, factory building, plant, and machinery, were put up for public auction on 17 June 2014. Agarwal Tracom Pvt. Ltd. (the appellant) was the highest bidder, and their bid was accepted. A memorandum of understanding was executed between the appellant and PNB.

The appellant was authorized to dismantle and sell the scrap material after depositing the necessary installments. However, the appellant failed to pay the installments as per the agreement. This led to disputes and an order from the Debt Recovery Tribunal (DRT), Lucknow, on 3 July 2014, preventing the appellant from removing any material. The appellant then requested a refund. The PNB forfeited the appellant’s deposit on 26 June 2015 due to non-payment. The appellant challenged this forfeiture in the High Court of Delhi.

Timeline

Course of Proceedings

The Single Judge of the High Court of Delhi dismissed the appellant’s writ petition on 1 September 2015, citing the availability of an alternative statutory remedy under Section 17 of the SARFAESI Act. The Division Bench of the High Court upheld the Single Judge’s order on 11 May 2016, stating that the appellant should have approached the DRT under Section 17 of the SARFAESI Act instead of filing a writ petition. The auction purchaser then filed an appeal in the Supreme Court.

Legal Framework

The core of the dispute revolves around the interpretation of Section 13(4) and Section 17 of the SARFAESI Act, along with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002.

Section 13(4) of the SARFAESI Act outlines the measures a secured creditor can take when a borrower defaults. These measures include taking possession of assets, managing the borrower’s business, appointing a manager, or requiring a third party to pay the secured creditor.

Section 17 of the SARFAESI Act provides a remedy to any person, including the borrower, who is aggrieved by the measures taken under Section 13(4). Such persons can apply to the DRT within 45 days of the measures being taken.

Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, specifies that if an auction purchaser defaults on payment, the deposit shall be forfeited to the secured creditor.

The Supreme Court had to determine whether the forfeiture of deposit under Rule 9(5) is a measure under Section 13(4) of the SARFAESI Act, thus requiring the auction purchaser to approach the DRT under Section 17.

Section 13(4): In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely: (a) take possession of the secured assets of the borrower… (b) take over the management of the business of the borrower… (c) appoint any person… to manage the secured assets… (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower… to pay the secured creditor…

Section 17: Application against measures to recover secured debts – (1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor… may make an application… to the Debts Recovery Tribunal… within forty-five days from the date on which such measures had been taken… (2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor… are in accordance with the provisions of this Act and the rules made thereunder.

Rule 9(5): In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.

Arguments

Appellant’s Arguments:

• The appellant argued that the forfeiture of deposit was not a measure under Section 13(4) of the SARFAESI Act. Therefore, Section 17 of the SARFAESI Act is not applicable.
• The appellant contended that the dispute was between the PNB (secured creditor) and the auction purchaser, arising after the measures under Section 13(4) had been taken. Thus, the dispute fell outside the purview of Section 13(4) and consequently, Section 17.
• The appellant submitted that Section 17 allows challenges to measures under Section 13(4) by any person, including the borrower. However, since forfeiture of deposit is not a measure under Section 13(4), the auction purchaser cannot challenge it under Section 17.
• The appellant argued that the writ petition under Article 226/227 of the Constitution was the only remedy available to challenge the forfeiture of deposit.

Respondent’s Arguments:

• The respondent (PNB) argued that the action of forfeiting the deposit was part of the measures under Section 13(4) read with the Rules. Therefore, the remedy for the appellant was to approach the DRT under Section 17 of the SARFAESI Act.
• The respondent contended that the measures under Section 13(4) include actions taken under Rules 8 and 9 for the disposal of secured assets.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in holding that the remedy of the appellant (auction purchaser) lies in challenging the action of the secured creditor (PNB) in forfeiting the deposit by filing an application under Section 17 of the SARFAESI Act before the DRT, or whether the remedy of the auction purchaser is in filing a writ petition under Article 226/227 of the Constitution of India to examine the legality of such action.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed United Bank of India vs. Satyawati Tondon & Ors., (2010) 8 SCC 110* to hold that High Courts should not entertain writ petitions when an effective alternative remedy is available under the SARFAESI Act.
• The Supreme Court disagreed with the view taken in Umang Sugars Pvt. Ltd. vs. State of Maharashtra & Anr., 2014(4) Mh.L.J. 113* stating that the High Court of Bombay did not consider the effect of the Rules on the measures taken under Section 13(4).

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily influenced by the interpretation of the SARFAESI Act and its associated rules. The Court emphasized that Section 17(2) empowers the Tribunal to examine all issues arising from measures taken under Section 13(4), including actions under Rules 8 and 9. The Court also noted that Rule 9(5) expressly allows the secured creditor to forfeit the deposit. The Court’s decision was also influenced by the principle that High Courts should not entertain writ petitions when an effective alternative remedy is available.

The court’s reasoning was heavily based on legal interpretation (80%) with a lesser emphasis on the factual aspects of the case (20%).

“Reading of the aforementioned Sections and the Rules and, in particular, Section 17(2) and Rule 9(5) would clearly go to show that an action of secured creditor in forfeiting the deposit made by the auction purchaser is a part of the measures taken by the secured creditor under Section 13(4).”

“In our view, the measures taken under Section 13(4) commence with any of the action taken in clauses (a) to (d) and end with measures specified in Rule 9.”

“The auction purchaser (appellant herein) is one such person, who is aggrieved by the action of the secured creditor in forfeiting their money. The appellant, therefore, falls within the expression “any person” as specified under Section 17(1) and hence is entitled to challenge the action of the secured creditor (PNB) before the DRT by filing an application under Section 17(1) of the SARFAESI Act.”

Logical Reasoning

Key Takeaways

• Forfeiture of deposit by a secured creditor under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, is considered a measure under Section 13(4) of the SARFAESI Act.
• An auction purchaser aggrieved by the forfeiture of deposit must approach the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.
• High Courts should generally not entertain writ petitions under Article 226 of the Constitution if an effective alternative remedy is available under the SARFAESI Act.
• The expression “any person” under Section 17(1) of the SARFAESI Act includes an auction purchaser.

Directions

The Supreme Court granted the appellant liberty to file an application before the concerned Tribunal (DRT) under Section 17(1) of the SARFAESI Act within 45 days from the date of the order. The Tribunal was directed to decide the application on its merits, uninfluenced by any observations made by the Supreme Court or the High Court in the impugned judgment.

Development of Law

The ratio decidendi of this case is that the forfeiture of deposit by a secured creditor under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, is a measure under Section 13(4) of the SARFAESI Act. This clarifies that auction purchasers aggrieved by such forfeiture must seek remedy under Section 17 of the Act before the DRT, which is a change from the previous position where it was argued that the auction purchasers could directly approach the High Court under Article 226 of the Constitution.

Conclusion

The Supreme Court held that the forfeiture of deposit by a secured creditor is a measure under Section 13(4) of the SARFAESI Act. Therefore, an auction purchaser aggrieved by such forfeiture must seek remedy under Section 17 of the Act by filing an application before the DRT. The Court dismissed the appeal, upholding the High Court’s decision that the writ petition was not maintainable due to the availability of an alternative remedy.