SC: Auction Purchaser to Approach DRT Before Invoking Writ Jurisdiction

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1772

November 29, 2017

Agarwal Tracom Pvt. Ltd. v. Punjab National Bank

Date of Judgment: November 27, 2017

In the case, PNB had given loan facility to a Company called “M/s India Iron & Steel Corporation Limited” (Borrower) for their business, which they were carrying in U.P. To secure the loan amount, the Borrower had secured their assets. The Borrower, however, failed to clear their loan amount and became a defaulter in its repayment. The PNB, therefore, invoked their powers under Section 13(4) of SARFAESI Act, 2002 (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act).

Section 13(4) of SARFAESI Act provides for the measures that can be taken by the secured creditor to recover his secured debt from the Borrower. The appellant’s (auction purchaser) bid was accordingly accepted by the PNB. However, later on there was conflict between PNB and the auction purchaser due to non-compliance of memorandum of understanding between them. This led the PNB to forfeit the appellant’s deposit to which the auction purchaser objected before the Single Judge of Allahabad High Court and then before the Division Bench of Allahabad High Court. The High Court in the case dismissed the appellant’s writ petition on the ground of availability of alternative statutory remedy to the appellant of filing the application before the Debt Recovery Tribunal (DRT) under Section 17 of SARFAESI Act. Felt aggrieved, the auction purchaser approached the Supreme Court.

Section 17 of SARFAESI Act provides for the right to appeal. It enumerates that any person who is aggrieved by the measures referred to in Section 13(4) of SARFAESI Act shall make an application to the DRT within 45 days from the date on which measure had been taken.

The Appellant contended that in order to attract the rigor of Section 17 of SARFAESI Act it is necessary that the action complained of by the party concerned must satisfy the conditions set out in Section 13(4) of SARFAESI Act and that the “forfeiture of deposit” impugned in the writ petition is not and nor it could be considered as one of the measures falling in Section 13(4) of SARFAESI Act.

The seminal issue with which the Supreme Court was confronted in the case was:

Whether the High Court was justified in holding that the remedy of the auction purchaser lies in challenging the action of the secured creditor in forfeiting the deposit by filing an application under Section 17 of the SARFEASI Act before the DRT or the remedy of auction purchaser is in filing the writ petition under Article 226 of Constitution to examine the legality of such action?

Bench’s Verdict

  • That Section 17 provides a remedy to a person who is aggrieved by the measures taken by the secured creditor or his authorized officer under Section 13(4) in relation to secured assets of the borrower. 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 .
  • To decide the issue at hand, the Supreme Court also made reference to Rules 8 and 9 of Security Interest (Enforcement) Rules, 2002. The Court stated that Section 17(2) of the Act empowers the Tribunal to examine all the issues arising out of the measures taken under Section 13(4) including the measures taken by the secured creditor under Rules 8 and 9 for disposal of the secured assets of the borrower.

Rule 8 provides for sale of immovable secured asset and Rule 9 provides for time of sale, issue of sale certificate and delivery of possession of the immovable secured asset.

  • That expression “provisions of this Act and the Rules made thereunder” occurring in sub-sections (2), (3), (4) and (7) of Section 17 clearly suggests that it includes the action taken under Section 13(4) as well as the action taken under Rules 8 and 9 which deal with the completion of sale of the secured assets. In other words, the measures taken under Section 13(4) would not be completed unless the entire procedure laid down in Rules 8 and 9 for sale of secured assets is fully complied with by the secured creditor.
  • That Rule 9(5)1 confers express power on the secured creditor to forfeit the deposit made by the auction purchaser in case the auction purchaser commits any default in paying installment of sale money to the secured creditor. The Court opined that such action is a part of the measures specified in Section 13(4) and, therefore, it is regarded as a measure taken under Section 13(4)
  • That the auction purchaser is one such person, who is aggrieved by the action of the secured creditor in forfeiting their money and fell within the expression “any person” as specified under Section 17 and hence is entitled to challenge the action of the secured creditor i.e. PNB before the DRT by filing an application under Section 17 of the SARFAESI Act.

Writ Petition not to be preferred when alternative remedy was available– That it is a settled law that the High Court will ordinarily not entertain a petition under Article 226 of Constitution if an effective remedy is available to the aggrieved person. In all such cases, the High Court must insist that before availing remedy under Article 226 of Constitution, a person must exhaust the remedies available under the relevant statute.

That rule of exhaustion of alternative remedy is a rule of discretion and not one of compulsion, but it is difficult to fathom any reason why the High Court should entertain a petition filed under Article 226 of Constitution and pass interim order ignoring the fact that the petitioner can avail effective alternative remedy by filing application, appeal, revision, etc. and the particular legislation contains a detailed mechanism for redressal of his grievance.

In view of the aforesaid observations, the Supreme Court dismissed the auction purchaser’s writ petition on the ground of availability of alternative statutory remedy of filing an application under Section 17 of SARFAESI Act before the DRT to challenge the action of the PNB in forfeiting the appellant’s deposit under Rule 9(5).

In the case, the auction purschaser was granted liberty to approach the concerned DRT under Section 17 of SARFAESI Act within 45 days from the date of the order.

Take Away

In the case, the Supreme Court has settled the law that not only the Borrower but even the auction purhaser can approach DRT under Section 17 of SARFAESI Act if he is aggrieved by any of the measures taken by the secured creditor under Section 13(4) of the Act.

Other authority which states the said legal principle is Supreme Court’s observation in the case of United Bank of India v. Satyawatu Tandon & Ors.2 wherein the Court examined in detail the provisions of the SARFAESI Act andquestion regarding invocation of the extraordinary power under Article 226 of Constitution in challenging the actions taken under the SARFAESI Act.

In the case, the Court stated that the expression “any person” used in Section 17(1) is of wide import. It takes within its fold, not only the borrower but also the guarantor or any other person who may be affected by the action taken under Section 13(4) or Section 14. Both, the Tribunal and the Appellate Tribunal are empowered to pass interim orders under Sections 17 and 18 and are required to decide the matters within a fixed time schedule.

1Rule 9(5)- In default of payment within the periodmentioned in sub rule (4), the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may be subsequently sold.

2(2010) 8 SCC 110