Supreme Court quashes High Court order in SARFAESI Act case: Kotak Mahindra Bank vs. Narendra Jayantilal Trivedi (2022)

Date of the Judgment: May 13, 2022
Citation: 2022 INSC 487
Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a High Court grant interim relief that effectively stalls recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)? The Supreme Court of India recently addressed this question, emphasizing the importance of not delaying recovery processes. The case involved a bank seeking to recover dues from a borrower, and the High Court’s interim order had hindered these efforts. The Supreme Court bench comprised Justices M.R. Shah and B.V. Nagarathna, who delivered the judgment.

Case Background

A loan of Rs. 29,50,000 was initially provided by the State Bank of India to M/s Aromatics Intermediates and Chemicals, a proprietorship firm owned by Respondent No. 1, Narendra Jayantilal Trivedi. The loan was secured by mortgaging Respondent No. 1’s property. Due to defaults in payments, the bank filed a civil suit in 1986 to recover the dues. Following the enactment of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the case was transferred to the Debts Recovery Tribunal (DRT) and numbered as Transfer Application No. 95/1995. On March 3, 2000, the DRT ordered Respondent No. 1 and the guarantors to jointly pay Rs. 44,01,159.47 with costs.

The debt was later assigned to the Appellant bank. After the assignment, the bank issued a demand notice under Section 13(2) of the SARFAESI Act, 2002, on June 20, 2011, for Rs. 27,35,85,200.62, along with further interest, expenses, and costs. Before the bank could take further action under Section 13(4) of the SARFAESI Act, Respondent No. 1 filed an application under Section 17 of the SARFAESI Act before the DRT, which was dismissed on January 6, 2015.

The bank took symbolic possession of the mortgaged property on July 16, 2015, under Section 13(4) of the SARFAESI Act. Respondent No. 1 raised objections which were rejected by the Recovery Officer on January 6, 2015. However, the Recovery Officer reviewed his order on July 15, 2016, which was challenged by the bank before the DRT. The bank also filed an application under Section 14 of the SARFAESI Act before the Chief Metropolitan Magistrate (CMM), which was allowed on August 16, 2016, permitting the bank to take physical possession of the secured assets. Respondent No. 1 then filed another application before the DRT.

The bank filed a criminal application before the High Court, which was disposed of on December 2, 2016. Subsequently, the CMM authorized the Registrar to take possession of the property. Respondent No. 1 filed an interlocutory application before the DRT, which was rejected. A criminal miscellaneous application filed by Respondent No. 1 before the CMM was also rejected on February 4, 2017.

Respondent No. 1 then filed a writ petition before the High Court, challenging the orders passed by the Recovery Officer, CMM, and DRT. The Single Judge of the High Court dismissed the writ petition on October 7, 2021, with a cost of Rs. 1,00,000, noting that Respondent No. 1 had not paid any dues for 21 years. The Division Bench of the High Court granted an ex-parte stay on the dispossession of the property and the cost imposed by the Single Judge. This order was challenged by the bank before the Supreme Court.

Timeline

Course of Proceedings

The initial suit filed by the bank in 1986 was transferred to the DRT in 1995, which passed an order in favor of the bank in 2000. After the debt was assigned to the appellant bank, the bank initiated proceedings under the SARFAESI Act, 2002. The DRT initially rejected the objections raised by the respondent. The Recovery Officer’s order was reviewed, and the bank’s appeal against this review was pending before the DRT. The CMM allowed the bank to take physical possession of the property.

The High Court initially disposed of the criminal application filed by the bank. The DRT rejected the respondent’s interlocutory application. The respondent filed a writ petition before the High Court challenging multiple orders, which was dismissed by the Single Judge with costs. The Division Bench of the High Court granted an ex-parte stay on dispossession and the imposed costs, which led to the appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Key provisions include:

• Section 13(2) of the SARFAESI Act: This section allows a secured creditor to issue a demand notice to the borrower when their account is classified as a non-performing asset. The notice requires the borrower to discharge their liabilities within 60 days.
• Section 13(4) of the SARFAESI Act: If the borrower fails to comply with the demand notice under Section 13(2), this section empowers the secured creditor to take possession of the secured assets.
• Section 14 of the SARFAESI Act: This section allows the secured creditor to seek the assistance of the Chief Metropolitan Magistrate (CMM) or District Magistrate to take possession of the secured assets.
• Section 17 of the SARFAESI Act: This section provides a right to the borrower to file an application before the Debts Recovery Tribunal (DRT) against any measures taken by the secured creditor under Section 13(4).

Arguments

Appellant (Bank)’s Submissions:

• The bank argued that the writ petition filed by the respondent before the High Court was not maintainable under Article 226 of the Constitution of India, as there were alternative remedies available under the SARFAESI Act and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
• The bank contended that the High Court’s interim order had effectively stalled the proceedings under the SARFAESI Act.
• The bank relied on the judgments of the Supreme Court in Authorized Officer, State Bank of Travancore and Anr. Vs Mathew K.C. [(2018) 3 SCC 85] and Phoenix ARC Private Limited Vs. Vishwa Bharati Vidya Mandir & Ors. [CA Nos.257-259/2022], which held that writ petitions against proceedings under the SARFAESI Act are not maintainable.
• The bank highlighted that the respondent had been delaying the recovery proceedings since 1986 and had not paid any dues despite the decree passed by the DRT in 2000.

Respondent’s Submissions:

• The respondent argued that the bank had not complied with the order passed by the Recovery Officer on July 15, 2016, which directed the bank to provide details of recoveries and to quantify the dues afresh.
• The respondent contended that the proceedings initiated by the bank under the SARFAESI Act were time-barred.
• The respondent sought compliance with the order of the Recovery Officer dated 15.07.2016.

The innovativeness of the argument by the respondent lies in seeking to use the order of the Recovery Officer to stall the proceedings under the SARFAESI Act, despite the dismissal of their application before the DRT and the pendency of the bank’s appeal against the Recovery Officer’s order.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the Division Bench of the High Court was justified in granting an ex-parte ad-interim relief, staying the dispossession of the property and the cost imposed by the Single Judge, especially considering the availability of alternative remedies under the SARFAESI Act and the conduct of the respondent in delaying the proceedings.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Authorized Officer, State Bank of Travancore and Anr. Vs Mathew K.C. [(2018) 3 SCC 85] – Supreme Court of India: This case was cited to support the argument that writ petitions under Article 226 of the Constitution of India against proceedings initiated under the SARFAESI Act are not maintainable.
• Phoenix ARC Private Limited Vs. Vishwa Bharati Vidya Mandir & Ors. [CA Nos.257-259/2022] – Supreme Court of India: This recent decision of the Supreme Court also supported the view that writ petitions against SARFAESI Act proceedings are not maintainable.
• V. Chandrasekaran v. Administrative Officer [2012(4) R.C.R.(Civil) 588] – Supreme Court of India: This case was relied upon by the DRT to highlight that the applicants had not come with clean hands.

Legal Provisions:

• Section 13(2) of the SARFAESI Act, 2002: Pertains to the issuance of demand notice by the secured creditor.
• Section 13(4) of the SARFAESI Act, 2002: Pertains to the measures taken by the secured creditor to take possession of secured assets.
• Section 14 of the SARFAESI Act, 2002: Pertains to seeking the assistance of the CMM or District Magistrate to take possession of the secured assets.
• Section 17 of the SARFAESI Act, 2002: Pertains to the right of the borrower to file an application before the DRT against measures taken under Section 13(4).
• Article 226 of the Constitution of India: Pertains to the power of the High Courts to issue certain writs.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed the principles laid down in Authorized Officer, State Bank of Travancore and Anr. Vs Mathew K.C. [(2018) 3 SCC 85] and Phoenix ARC Private Limited Vs. Vishwa Bharati Vidya Mandir & Ors. [CA Nos.257-259/2022], emphasizing that writ petitions under Article 226 of the Constitution of India are generally not maintainable against proceedings initiated under the SARFAESI Act.
• The Supreme Court relied on the observations made by the DRT, which had cited V. Chandrasekaran v. Administrative Officer [2012(4) R.C.R.(Civil) 588], to highlight the respondent’s conduct in not approaching the court with clean hands.

The Supreme Court held that the Division Bench of the High Court erred in granting an ex-parte ad-interim relief and in extending the same, despite the pendency of the appeal before the Supreme Court. The Court noted that the respondent had been deliberately delaying the recovery proceedings and had not paid any dues since 1986. The Court observed that the High Court’s order effectively nullified the observations made by the Single Judge and the DRT. The Court emphasized that the High Court should not have interfered with the recovery proceedings under the SARFAESI Act, especially when alternative remedies were available.

The Supreme Court stated that the practice of litigants enjoying the fruits of litigation for several years, then inviting an order on merits, and subsequently withdrawing the appeal while seeking to nullify adverse observations, is reprehensible. The Court quashed the relevant portions of the High Court’s order and vacated the interim stay.

The Court also imposed a cost of Rs. 1,00,000 on the respondent, to be deposited with the Gujarat High Court Legal Services Committee, underscoring the need to discourage such dilatory tactics.

The Supreme Court observed, “The proceedings before the Court are not for taking the chance by the litigants.”

The Supreme Court also noted, “Such conduct on the part of the litigant to once enjoy the fruits of the litigation for number of years, invite the order on merits, which is against him and in the appeal initially after obtaining the ex-parte ad-interim relief and thereafter, having realised that the same would not be sustained, withdrawing the appeal and requesting that observations made by the learned Single Judge while dismissing the writ petition may not be considered, cannot be accepted and such conduct reprehensible.”

The Supreme Court further observed, “We fail to understand as to on what basis the Division Bench of the High Court permitted withdrawal of the Letters Patent Appeal on the one hand while simultaneously granting relief to the appellant.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to prevent the abuse of the court process and to ensure the effective implementation of the SARFAESI Act. The Court was concerned about the respondent’s repeated attempts to delay the recovery proceedings and the High Court’s order that effectively stalled the process. The Court emphasized that the SARFAESI Act provides a specific mechanism for recovery, and it should not be undermined by unwarranted judicial interference. The Court’s reasoning was also driven by the need to discourage litigants from adopting dilatory tactics to avoid their financial obligations.

Logical Reasoning:

Key Takeaways

• Writ petitions under Article 226 of the Constitution of India against proceedings initiated under the SARFAESI Act are generally not maintainable if alternative remedies are available.
• High Courts should be cautious in granting interim relief that effectively stalls recovery proceedings under the SARFAESI Act.
• Litigants should not abuse the court process by adopting dilatory tactics to avoid their financial obligations.
• Courts should discourage the practice of litigants enjoying the fruits of litigation for several years, then inviting an order on merits, and subsequently withdrawing the appeal while seeking to nullify adverse observations.
• The SARFAESI Act provides a specific mechanism for recovery, and it should not be undermined by unwarranted judicial interference.

Directions

The Supreme Court directed the respondent to deposit a cost of Rs. 1,00,000 with the Gujarat High Court Legal Services Committee within four weeks.

Development of Law

The ratio decidendi of this case is that High Courts should not interfere with the proceedings under the SARFAESI Act, especially when alternative remedies are available, and that litigants should not abuse the court process to delay recovery proceedings. This judgment reinforces the existing legal position that writ petitions against SARFAESI Act proceedings are generally not maintainable, as established in previous Supreme Court decisions.

Conclusion

The Supreme Court quashed the Division Bench of the High Court’s order, which had granted an ex-parte stay on the dispossession of property and the cost imposed by the Single Judge. The Court emphasized that the High Court should not have interfered with the recovery proceedings under the SARFAESI Act, especially given the availability of alternative remedies and the respondent’s history of delaying tactics. The Supreme Court also imposed a cost of Rs. 1,00,000 on the respondent. This judgment underscores the importance of adhering to statutory procedures and avoiding dilatory tactics in legal proceedings.