About Me

My photo

ADVOCATEMMMOHAN -  Practicing both IN CIVIL, CRIMINAL AND FAMILY LAWS,Etc.,

Tuesday, February 25, 2014

Recovery of Debts Due to Banks and Financial Institutions Act,1993 (for short 'the DRT Act') - subsequent purchaser even though bonafide purchasers can not challenge the proceedings of DRT Act under writ proceedings with out exhausting the alternative proceedings available under the Act = Smt.K.Leelavathi and another... PETITIONER Debts Recovery Tribunal, Visakhapatnam, rep., by its Recovery Officer, 31-31- 21, Narayana Bhavanam, Sai Baba Street, Daba Gardens, Visakhapatnam and two others..RESPONDENTS = 2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10879

 Recovery of Debts Due to Banks and Financial Institutions Act,1993 (for short 'the DRT Act')  - subsequent purchaser even though bonafide purchasers can not challenge the proceedings of DRT Act under writ proceedings with out exhausting the alternative proceedings available under the Act =

The writ petitioners K. Leevalathi and Mohd. Rafi filed this writ petition
challenging the proceedings initiated by the 2nd respondent - Bank under the
provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (for short 'the DRT Act') to conduct auction proposed to be held on 13-02-
2014 by issuing notice under Rule 52 (2) of Second Schedule of Income tax Act as
arbitrary and illegal.=
In a recent judgment of the Apex Court in Commissioner of Income Tax and others
Vs. Chhabil Dass Agarwal2, it was held as follows:
"Non-entertainment of petitions under writ jurisdiction by the High Court when
an efficacious alternative remedy is available is a rule of self-imposed
limitation.  It is essentially a rule of policy, convenience and discretion
rather than a rule of law.  It is within the discretion of the High Court to
grant relief under Article 226 despite the existence of an alternative remedy,
however, the High Court must not interfere if there is an adequate efficacious
alternative remedy available to the petitioner and he has approached the High
Court without availing the same unless he has made out an exceptional case
warranting such interference or there exist sufficient grounds to invoke the
extraordinary jurisdiction under Article 226.  However, when a statutory forum
is created by law for redressal of grievances, a Writ Petition should not be
entertained ignoring the statutory dispensation. =

No doubt, the petitioners are purchasers of schedule property under two
different sale deeds dated 25-09-2009 and 04-04-2013 respectively referred to in
the petition.  
By the date of purchase, O.A was filed before the Debts Recovery
Tribunal and certificate for recovery of debt was issued by the Debts Recovery
Tribunal.  
When the property was purchased subsequent to the mortgage created in
favour of the 2nd respondent by the vendors of the petitioners, the purchase is
always subject to charge over the property i.e., mortgage and they are not
entitled to any protection though they are bona fide purchasers for a valuable
consideration.  
Therefore, the petitioners are not entitled to any indulgence of
this Court by exercising extraordinary jurisdiction under Article 226 of the
Constitution of India in view of the peculiar facts and circumstances of the
case.
        In view of our foregoing discussion, the writ petition is devoid of merits
and deserves to be dismissed.
        In the result, the writ petition is dismissed. Miscellaneous petitions, if
any, pending consideration in the writ petition shall stand closed.  No order as
to costs.



2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10879

HONOURABLE SRI JUSTICE ASHUTOSH MOHUNTA AND HONOURABLE SRI JUSTICE  M.SATYANARAYANA MURTHY                  

WRIT PETITION No.3428 OF 2014  

12-02-2014

Smt.K.Leelavathi and another... PETITIONER

Debts Recovery Tribunal, Visakhapatnam, rep., by its Recovery Officer, 31-31-
21, Narayana Bhavanam, Sai Baba Street, Daba Gardens, Visakhapatnam and two    
others..RESPONDENTS    

Counsel for Petitioner:Sri Challa Ajay Kumar

Counsel for the Respondents: Sri B.S. Prasad
                              Sri Hari Prasad Podina

<GIST:

>HEAD NOTE:  

?Cases referred

1) (MANU/TN/3572/2010)
2) MANU/SC/0802/2013  
3) AIR 2008 SC 1339
4) MANU/SC/1229/2009  

HONOURABLE SRI JUSTICE ASHUTOSH MOHUNTA            
AND
HONOURABLE SRI JUSTICE M.SATYANARAYANA MURTHY              

WRIT PETITION No. 3428 OF 2014  

ORDER: (per the Hon'ble Sri Justice M. Satyanarayana Murthy)
       
        The writ petitioners K. Leevalathi and Mohd. Rafi filed this writ petition
challenging the proceedings initiated by the 2nd respondent - Bank under the
provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (for short 'the DRT Act') to conduct auction proposed to be held on 13-02-
2014 by issuing notice under Rule 52 (2) of Second Schedule of Income tax Act as
arbitrary and illegal.
        It is alleged in the writ petition that
the 1st petitioner purchased 35
cents out of 70 cents in the total area of Acs.11.46 cents with D.No.26 of
Etukuru Village of Guntur Sub Division in Guntur District from one Shaik Quaisar
Khan, W/o Shaik Ibrahim Khan of Lakshmipuram, Guntur on 25-09-2009 for a total
consideration of Rs.64,00,000/- and since then she is in possession and
enjoyment of the property.
The 2nd petitioner purchased 35 cents out of 70
cents in D.No.26 from Shaik Mumtaj Shareef, W/o Shaik Mahaboob Sharif, resident
of Cherukupally Village and Mandal, Guntur on 04-04-2013 for a sale
consideration of Rs.71,15,000/-.
        Shaik Quaisar Khan stood as a guarantor to Shaik Mahin, Proprietor of M/s.
Rubbin Contton Industry, the 3rd respondent herein who obtained loan from the
2nd respondent - Bank and committed default in payment of debt due to the bank.
        The 2nd respondent - Bank filed O.A No. 229 of 2002 on the file of the 1st
respondent and obtained a certificate and initiated execution proceedings in R.P
No. 15 of 2007 for recovery of Rs.1,31,24,777.64 ps and called for tenders by
online e-auction scheduled to be conducted on 13-02-2014.
        The main contention of the writ petitioners is that they are not aware of
the factum of securing the debt by the 3rd respondent offering the schedule
property to the 2nd respondent - Bank for the loan obtained by him.  It is
further contended that under the One Time Settlement (OTS) proposal, the debt
was settled for Rs.1,10,00,000/- out of which the 3rd respondent paid a sum of
Rs.82,50,000/-, but failed to pay the balance of amount.  When the petitioners
approached the 2nd respondent - Bank for payment of the balance amount, the 2nd
respondent - Bank insisted payment of Rs.4,73,64,188.64 ps which is inclusive of
certificate amount of Rs.1,31,24,777.64 plus accrued interest at the rate of
18.25% per annum with quarterly rests which comes to Rs.3,42,39,411/- from 09-
12-2006 to 13-02-2014.
        One of the contentions of the petitioners is that as per the Reserve Bank
of India (RBI) guidelines when the account of the 3rd respondent was declared as
Non-Performing Asset (NPA), interest is chargeable only at the rate of 6% per
annum but not at 18.25% per annum.  Therefore, claim of interest at 18.25% per
annum which comes to Rs.3,42,39,411/- is arbitrary.
        The petitioners are only bona fide purchasers for a valuable consideration
and they are entitled to protect their rights.  Therefore, having no other
alternative, the petitioners approached this Court seeking indulgence of this
Court exercising extraordinary powers of judicial review under Article 226 of
the Constitution of India. Hence, prayed to declare that the action of the 2nd
respondent - Bank for the proposed sale of the schedule property on 13-02-2014
in pursuance of the orders in R.P No.15 of 2007 in O.A No. 229 of 2002 as
illegal and arbitrary.
        The 2nd respondent - Bank filed counter before admission denying the
allegations while admitting the claim made by it and initiation of execution
proceedings to recover total amount of
Rs. 4,73,64,188.64 ps which is inclusive of certificate amount and subsequent
interest accrued thereon and contended that when the auction is likely to be
held on 13-02-2014, the petitioners cannot straightaway approach this Court
without availing statutory remedy i.e., filing an application before the Debts
Recovery Tribunal and that the RBI guidelines regarding charge of interest at 6%
per annum is incorrect and that the interest claimed on the amount is as per the
rules.  Therefore, the writ petition is not maintainable and prayed for
dismissal of the writ petition.
        During the course of arguments, learned counsel for the petitioners mainly
contended that the writ petitioners are bona fide purchasers and fairly conceded
that on account of urgency, the petitioners approached this Court without
exhausting the statutory remedy available under the provisions of the DRT Act
and seek indulgence of this Court to pass appropriate orders declaring the
proceedings for realisatioin of debt due to the bank in R.P No. 15 of 2007 as
arbitrary.
Per contra, learned counsel for the 2nd respondent - Bank vehemently contended
that since the petitioners have approached this Court without exhausting
efficacious and alternative adequate remedy available under the DRT Act, this
Court cannot exercise its extraordinary power of judicial review as in appeal
and on this simple ground, the writ petition is liable to be dismissed.  Apart
from that, interest is calculated only based on the certificate issued by the
Debt Recovery Trtibunal in O.A No. 229 of 2002, but not otherwise.  The
petitioners purchased the property after obtaining certificate from Debts
Recovery Appellate Tribunal and thereby they are not bona fide purchasers for
valuable consideration and their rights are only subject to mortgage over the
existing property as on the date of their purchase.  Therefore, the petitioners
are not entitled to claim any protection as bona fide purchasers for valuable
consideration and prayed for dismissal of the writ petition.
Considering rival contentions and perusing the material available on record, the
points that arise for consideration are as follows:
(1) Whether the writ petition is maintainable under Article 226 of the
Constitution of India when alternative and efficacious remedy is available under
the DRT Act?
(2) Whether the claim of interest at 18.25% per annum from the date of
certificate issued by the Debts Recovery Tribunal is against the RBI guidelines.
If so, whether the claim of interest is in accordance with law?
(3) Whether the petitioners are entitled to claim any relief in view of One Time
Settlement arrived between the 2nd respondent - Bank and the 3rd respondent and
on failure to pay the amount in terms of OTS, the petitioners being the
subsequent purchasers are entitled to claim any relief in the writ petition?
Point No.1:
        The first and foremost contention raised by the counsel for the 2nd
respondent - Bank is that the writ petition is not maintainable when proceedings
were taken under Rule 52 (2) of Second Schedule of Income Tax Act read with
Section 31 (3) of the DRT Act, an alternative, effective and efficacious remedy
is available.  However, the counsel for the writ petitioners fairly conceded
that due to lack of time and in view of urgency in the matter, the petitioners
approached this Court seeking the relief under Article 226 of the Constitution
of India.
        Admittedly, auction is proposed to be held on 13-02-2014 by issuing notice
under Rule 52(2) of Second Schedule of Income Tax Act in execution of
certificate under the DRT Act by e-auction of the schedule property.
One of the main contentions of the
respondents is that when an effective, efficacious statutory alternative remedy
is available to the petitioners by filing a petition before Recovery Officer,
the petitioners cannot invoke the jurisdiction of this Court under Article 226
of Constitution of India.

According to Section 29 of the Act of 1993, provisions of Income Tax Act are
applicable to the proceedings and it reads as follows:
"Section 29: Application of certain provisions of Income Tax Act - The
provisions of the Second and Third Schedules to the Income Tax Act, 1961 (43 of
1961), and the Income Tax (Certificate Proceedings) Rules, 1961, as in force
time to time shall, as far as possible, apply with necessary modifications as if
the said provisions and the rules referred to the amount of debt due under this
Act instead of to the Income Tax Act:
Provided that any reference under the said provisions and the rules to the
'assessee' shall be construed as a reference to the defendant under this Act.
The provisions of 2nd and 3rd Schedules of Income Tax Act and the Income Tax
(Certificate Proceedings) Rules, as in force from time to time are made
applicable for enquiries in claims made by third parties.  At the same time,
Section 25 of the Act of 1993 prescribes modes of recovery of debt by the
recovery officer on receipt of copy of the certificate under sub-section (7) of
Section 19.  Section 28 prescribes other modes of recovery by issuance of notice
under Form Nos. 16 and 17 and if third party objects to the above recovery
proceedings, he can move the recovery officer under the provisions of Income Tax
Act and Certificate of Proceedings Rules."

Therefore, the petitioners in this matter, being the third parties to the
recovery proceedings, can move the recovery officer under Rule 11 of 2nd
Schedule of Income Tax Act  and it is useful to refer relevant Clauses of the
Rule for better appreciation of facts with reference to law.
"Investigation by Tax Recovery Officer:
(1)     Where any claim is preferred to, or any objection is made to the
attachment or sale of, any property in execution of a certificate, on the ground
that such property is not liable to such attachment or sale, the Tax Recovery
Officer shall proceed to investigate the claim or objection:
        Provided that no such investigation shall be made where the Tax Recovery
Officer considers that the claim or objection was designedly or unnecessarily
delayed.
(2) Where the property to which the claim or objection applies has been
advertised for sale, the Tax Recovery Officer ordering the sale may postpone it
pending the investigation of the claim or objection, upon such terms as to
security or otherwise, as the Tax Recovery Officer shall deem fit.
(3) ................................
(4) .................................
(5) Where the Tax Recovery Officer is satisfied that the property was, at the
said date, in the possession of the defaulter as his own property and not on
account of any other person, or was in the possession of some other person in
trust for him, or in the occupancy of a tenant or other person paying rent to
him, the Tax Recovery Officer shall disallow the claim.
(6) Where a claim or an objection is preferred, the party against whom an order
is made may institute a suit in a civil Court to establish the right which he
claims to the property in dispute; but, subject to the result of such suit (if
any), the order of the Tax Recovery Officer shall be conclusive."
In view of the provisions referred above, the third parties, the petitioners
herein, who are claiming rights over the property which was attached for
recovery of debt under the certificate of recovery and where the recovery
officer issued sale-cum-e-auction sale notice calling for "bid forms" online and
for fixing date, can file objections to the attachment or sale of the property
in execution of certificate of recovery.  If any order is passed by the recovery
officer under Rule 11 of Schedule-II of Income Tax Act, an appeal would lie
under Section 30 of the Act.  In the instance case on hand, the petitioners did
not file any objections before the recovery officer as contemplated under Rule
11 of Schedule-II of Income Tax Act.  Thus, without exhausting the effective,
efficacious and alternative statutory remedy provided under the Act, the
petitioners directly approached the Court.  When an alternative remedy is
available, this Court cannot exercise its jurisdiction under Article 226 of
Constitution of India.

In Machine Tools and Accessories Private Limited, Represented by its Director
Balaji Vs. The Debts Recovery Appellate Tribunal, Represented by its Chairman
and others1, Division Bench of Madras High Court in the similar situation held
as follows:
"When a remedy under Section 29 of the Act of 1993 read with Rule 11 of 2nd
Schedule under Income Tax Act, 1961, which is an alternative and effective
remedy to question the auction sale, without exhausting such remedy, it is not
open to the petitioner to project the present Writ Petition after a gap of more
than 3 years and 3 months from the date of conduct of auction.  Thereby, the
Writ Petition is not per se maintainable and dismissed the petition."

In a recent judgment of the Apex Court in Commissioner of Income Tax and others
Vs. Chhabil Dass Agarwal2, it was held as follows:
"Non-entertainment of petitions under writ jurisdiction by the High Court when
an efficacious alternative remedy is available is a rule of self-imposed
limitation.  It is essentially a rule of policy, convenience and discretion
rather than a rule of law.  It is within the discretion of the High Court to
grant relief under Article 226 despite the existence of an alternative remedy,
however, the High Court must not interfere if there is an adequate efficacious
alternative remedy available to the petitioner and he has approached the High
Court without availing the same unless he has made out an exceptional case
warranting such interference or there exist sufficient grounds to invoke the
extraordinary jurisdiction under Article 226.  However, when a statutory forum
is created by law for redressal of grievances, a Writ Petition should not be
entertained ignoring the statutory dispensation.
In the instant case, the Act
provides complete machinery for the assessment/re-assessment of tax, imposition
of penalty and for obtaining relief in respect of any improper orders passed by
the Revenue Authorities, and the assessee could not be permitted to invoke the
writ jurisdiction when he had adequate remedy open to him by an appeal to the
Commissioner of Income Tax (Appeals).  Assessee in the instance case neither
described the available alternative remedy under the Act as ineffectual and non-
efficacious nor has the High Court ascribed cogent and satisfactory reasons to
have exercised its jurisdiction in the facts of instant case.  Writ Court
accordingly, as held, should not have entertained the Writ Petition."

In view of the principle laid down in the above judgment, if alternative remedy
by way of claim before recovery officer is ineffective or non-efficacious, this
Court can exercise its power under Article 226 of Constitution of India.  Still,
the person, who is claiming the property attached or proposed to be sold, can
approach the civil Court under sub-Rule (6) of Rule 11 of Schedule-II of Income
Tax Act against the order passed by Recovery Officer but without exhausting
those remedies, the petitioners approached this Court.

Similar question of availability of alternative remedy under the Act of 1993
came up for consideration before the Allahabad High Court in M/s. Oswal Agencies
and another Vs. Recovery Officer, Debt Recovery Tribunal and others, the
Allahabad High Court held as follows:
"When a Writ Petition is filed impugning the recovery certificate, since
objection that recovery certificate amounted to order within the meaning of
Section 13(1) of the Act of 1993 for which an appeal was provided under Section
20 of the Act of 1993 to the appellate tribunal, the petitioner had a statutory
alternative remedy, the Writ Petition was not maintainable.  The contention of
the petitioner was that the amount sought to be recovered was not debt and order
of the Debts Recovery Tribunal was illegal."

The Allahabad High Court is of the view that the points raised in the writ
petition could be raised before the appellate tribunal also and the petitioner
could satisfy the appellate tribunal that since the amount sought to be
recovered was not a debt and that it could not be saddled with liability as a
condition precedent for entertaining and adjudicating the appeal and finally,
the Writ Petition was dismissed.

In view of the principles laid down in the above judgments though not binding
but persuaded by those principles and the provisions contained in the Act, we
are of firm view that the third party claimants to the recovery proceedings, the
petitioners herein, can file the claim under Section 29 of the Act 1993 read
with Rule 11 under Schedule-II of Income Tax Act which is more effective and
efficacious remedy.  In case the recovery officer did not accept the claim, the
claimants can approach the civil Court under sub-Rule (6) of Rule 11 of
Schedule-II of Income Tax Act where all claims after making necessary enquiry be
decided by the civil Court.  Thus, the remedy before the enquiry officer and
civil Court are more effective and efficacious than the remedy available under
Article 226 of Constitution of India.

Undisputedly, when equally effective and efficacious statutory remedy is
available under the Act of 1993, the petitioners are not entitled to claim any
relief in a petition filed under Article 226 of Constitution of India.  Time and
again, the Apex Court held that when alternative remedy in a different forum
under the statute is available, without exhausting the statutory remedy, the
petitioners cannot invoke the jurisdiction of this Court under Article 226 of
Constitution of India.  In case the petitioners are affected parties on account
of proposed sale, they can file a petition before Recovery Officer of Debts
Recovery Tribunal and if any adverse order is passed, they can approach Civil
Court or file an appeal under Section 30 of Act 1993, but without exhausting
such statutory remedies, the petitioners cannot straightaway approach this Court
invoking the extraordinary jurisdiction of this Court under Article 226 of
Constitution of India.

In view of aforementioned reasons, this Court cannot exercise its extraordinary
power of judicial review under Article 226 of Constitution of India as
statutory, effective and efficacious remedy is available to the petitioners.
Accordingly, the point is held against the petitioners and in favour of the
respondents.

Point No.2:
        One of the contentions raised by the counsel for the petitioners is that
as per the RBI guidelines when the loan account of the 3rd respondent is
declared as NPA, charging of interest at 18.25% per annum is illegal and
arbitrary and at best, interest can be charged only at 6% per annum.  All these
contentions based on factual aspects and guidelines issued by the Reserve Bank
of India cannot be looked into while exercising power under Article 226 of the
Constitution of India.  Even otherwise, in a judgment in Oriental Bank of
Commerce v. Sunder Lal Jain and another3, the Supreme Court held as follows:
        "6.  A perusal of the aforesaid revised guidelines issued by the Reserve
Bank of India on January 29, 2003 for compromise settlement of chronic Non-
Performing Assets (NPAs) of public sector banks will show that the same will be
applicable and will cover NPAs classified as sub-standard as on 31st March, 2000
which have subsequently become doubtful or loss.  The revised guidelines have no
application where the NPAs have not been classified as sub-standard as on 31st
March, 2000.  It is not in dispute that the account of the respondents was a
performing account between 1-4-2000 and 31-2-2001.  According to the records of
the bank, the account was consigned to Protest Bill Account on 15-10-2001 and
was declared as NPA as per prudential norms of RBI on 31-2-2001.  The
respondents contested the case before the DRT and did not admit their liability.
No such plea was raised that their account had become NPA as on 31-3-2000 before
DRT.  Therefore, the revised guidelines issued by Reserve Bank of India on
January 29, 2003 for compromise settlement of chronic Non-Performing Assets
(NPAs) of public sector banks were not at all applicable to the facts and
circumstances of the case and no direction could be issued to declare the
respondents account as NPA from 31st March, 2000.  The guidelines further
provide that in case where borrowers are unable to pay the entire amount in lump
sum, at least 25% of the amount of settlement should be paid unfront and the
balance amount of 75% should be recovered in instalments within a period of one
year together with interest.  The High Court, in the impugned order, has
directed that the amount should be recovered by the appellant bank in quarterly
instalments over a period of two years.  This is again contrary to the revised
guidelines, which provide a period of one year only for recovery of the entire
amount.
        9.  These very principles have been adopted in our country.  In Bihar
Eastern Gangetic Fishermen Cooperative Society Ltd. v. Sipahi Singh and others,
AIR 1977 SC 2149, after referring to the earlier decisions in Lekhraj Satramdas
Lalvani v. Deputy Custodian-cum-Managing Officer, AIR 1966 SC 334; Dr. Rai
Shivendra Bahadur v. The Governing Body of the Nalanda College, AIR 1962 SC 1210
and Dr. Umakant Saran v. State of Bihar, AIR 1973 SC 964, this Court observed as
follows in paragraph 15 of the reports:
        "............There is abundant authority in favour of the proposition that
a writ of mandamus can be granted only in a case where there is a statutory
obligation. The chief function of a writ is to compel performance of public
duties prescribed by statute and to keep subordinate Tribunals and officers
exercising public functions within the limit of their jurisdiction.  It follows,
therefore, that in order that mandamus may issue to compel the authorities to do
something, it must be shown that there is a statute which imposes a legal duty
and the aggrieved party has a legal right under the statute to enforce its
performance..........In the instant case, it has not been shown by respondent
No.1 that there is any statute or rule having the force of law which casts a
duty on respondents 2 to 4 which they failed to perform.  All that is sought to
be enforced is an obligation flowing from a contract which, as already
indicated, is also not binding and enforceable.  Accordingly, we are clearly of
the opinion that respondent No.1 was not entitled to apply for grant of a writ
of mandamus under Article 226 of the Constitution and the High Court was not
competent to issue the same."
        Therefore, in order that a writ of mandamus may be issued, there must be a
legal right with the party asking for the writ to compel the performance of some
statutory duty cast upon the authorities.  The respondents have not been able to
show that there is any statute or rule having the force of law which casts a
duty on the appellant bank to declare their account as NPA from 31st March, 2000
and apply R.B.I. guidelines to their case.
10.  The High Court, therefore, erred in issuing a writ of mandamus directing
the appellant bank to declare the respondents' account as NPA from 31st March,
2000 and to apply the RBI Guidelines to their case and communicate the
outstanding which shall be recoverable by quarterly instalments over a period of
two years.  The later part of the order passed by the High Court wherein a
direction has been issued to stay the recovery proceedings and the recovery
certificate issued against the respondents has been cancelled is also wholly
illegal as the decree passed by the DRT had attained finality and proceedings
for execution of decree could not be stayed in an independent writ petition when
the respondents had not chosen to assail the decree by filing an appeal, which
is a statutory remedy provided under Section 20 of Recovery of Debts Due to
Banks and Financial Institutions Act, 1993."

In a petition filed under Article 226 of the Constitution of India for issue of
mandamus seeking a direction to the bank to declare their account as NPA and to
apply revised guidelines issued by the Reserve Bank of India to their case,
since the said guidelines are purely executive instructions having no statutory
force in creating any right, issuance of mandamus by the High Court directing
the bank to declare the respondents account as NPA and to apply the said RBI
guidelines is not proper.
In the same judgment, the Supreme Court further held that a decree for
recoverable amount passed against the respondent borrower by Debts Recovery
Tribunal which attained finality could not be stayed in an independent writ
petition when the respondents had not chosen to assail the decree by filing an
appeal availing the statutory remedy.  The present facts of the case are
squarely covered by the judgment of the Supreme Court.  Applying the principle
laid down in the above judgment to the present case, the RBI guidelines to
charge 6% interest is only an executive instruction having no statutory force
and apart from that in the certificate issued by Debts Recovery Appellate
Tribunal interest at 18.25% per annum was awarded.  The judicial order is
binding, whereas the executive instructions without any statutory force is only
instructive in nature.  The Courts cannot compel the banks to charge interest at
6% per annum.  In any view of the matter, it is a question to be decided by the
appellate tribunal in an appeal filed against the order of the tribunal under
Section 20 of the DRT Act and all these aspects cannot be looked into in a
petition filed under Article 226 of the Constitution of India.
In view of the principles laid down by the apex Court, the writ petition is not
maintainable.  Therefore point No.2 is also held against the petitioners and in
favour of the 2nd respondent - Bank.
Point No.3:
        The contention raised by the petitioners is that that the petitioners have
already paid Rs.82,50,000/- in terms of OTS and the balance amount is meager.
In such a case, the entire property cannot be sold in auction.  But, this
contention would not stand to any legal reasoning in view of the principle laid
down by the Supreme Court in Union Bank of India and Anr vs. Panchanan Subudhi4
wherein the Supreme Court held that when the borrower failed to abide by the
terms of OTS, there was no justification for the High Court to entertain the
writ petition and that too by ignoring the fact that statutory alternative
remedy is available to the borrower under Section 17 of the SARFAESI Act and set
aside the order passed by the High Court.
        Here also, according to the allegations made in the affidavit annexed to
the writ petition, OTS was arrived and out of the settled amount Rs.82,50,000/-
was already deposited and the balance is only meager amount.  The allegation
itself indicates that the 3rd respondent - borrower violated the terms and
conditions of OTS and in such case, writ petition is not maintainable under
Article 226 of the Constitution of India.  Hence on this count also, the writ
petition is not maintainable.  This point is also held against the petitioners
and in favour of the 2nd respondent - Bank.
        The main endeavour of the counsel for the petitioners is to convince this
Court that the petitioners are only bona fide purchasers for a valuable
consideration and they are entitled to protection of the property purchased by
them.  No doubt, the petitioners are purchasers of schedule property under two
different sale deeds dated 25-09-2009 and 04-04-2013 respectively referred to in
the petition.  By the date of purchase, O.A was filed before the Debts Recovery
Tribunal and certificate for recovery of debt was issued by the Debts Recovery
Tribunal.  When the property was purchased subsequent to the mortgage created in
favour of the 2nd respondent by the vendors of the petitioners, the purchase is
always subject to charge over the property i.e., mortgage and they are not
entitled to any protection though they are bona fide purchasers for a valuable
consideration.  Therefore, the petitioners are not entitled to any indulgence of
this Court by exercising extraordinary jurisdiction under Article 226 of the
Constitution of India in view of the peculiar facts and circumstances of the
case.
        In view of our foregoing discussion, the writ petition is devoid of merits
and deserves to be dismissed.
        In the result, the writ petition is dismissed. Miscellaneous petitions, if
any, pending consideration in the writ petition shall stand closed.  No order as
to costs.



ASHUTOSH MOHUNTA, J      
----------------------
M.SATYANARAYANA MURTHY, J        
Dated: 12th February, 2014

Sarfaesi Act - the Arbitration Act-D.R.T. Act - M/s Deccan Chronicles Holdings Limited obtained loan of Rs.100/- crores from M/s India Bulls Financial Services Limited - IBSFL filed two ops invoking arbitration clause for recovery of loan amount - pending it merged in to her sister company M/s India Bulls Housing Finance Limited, which was registered under Sarfaesi Act - IBHFL initiated actions and took possession of properties directly under Sarfaesi Act - Their Lordship of High court held that when the loan was not taken directly from the later company and when the arbitration proceedings are pending, the later company by virtue of it's registration under Sarfaesi Act , can not proceed against the debtor as the merge was not done with the consent of the debtor and allowed the writ petition = M/s Deccan Chronicles Holdings Limited rep. by its Vice Chairman, and others..Petitioners The Union of India rep. by its Joint Secretary,Ministry of Finance & others..Respondents =2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10876

Sarfaesi Act - the Arbitration Act-D.R.T. Act -  M/s Deccan Chronicles Holdings Limited obtained loan of Rs.100/- crores from M/s India Bulls Financial Services Limited - IBSFL filed two ops invoking arbitration clause for recovery of loan amount - pending it merged in to her sister company M/s India Bulls Housing Finance Limited, which was registered under Sarfaesi Act - IBHFL initiated actions and took possession of properties directly under Sarfaesi Act - Their Lordship of High court held that when the loan was not taken directly from the later company and when the arbitration proceedings are pending, the later company by virtue of it's registration under Sarfaesi Act , can not proceed against the debtor as the merge was not done with the consent of the debtor and allowed the writ petition = 

accepted the Orissa high court judgement and differed with the Allahabad High court judgement
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"), 
the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and 
the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it.  Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act).  It is a mechanism for securing the
interests of a person or agency, who lent the amount to another.  The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself.  Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
     
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals.  Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also.  The Sarfaesi Act is a radical deviation
from the settled principles of adjudication.  The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders.  In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree.  Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property.  The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached.  Citing of
default in payment of installments is sufficient to take the drastic step.

The 4th respondent got itself registered under the Sarfaesi Act.  Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013.  It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad.  It is in this context, that the present writ petition is filed.
       It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law.

By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court.On 08-03-2013 the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners.  A corrigendum was issued
proposing certain amendments.  This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated 8th November, 2013.

Conclusion
The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1.  It was
upheld in all respects, observing that enough safeguards are provided in it.  It
was also observed that even if proceedings in relation to a loan transaction are pending before the
Tribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security. 
One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act.
whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge. 

The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible.  The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.

With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.

        We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).

        There are other subsidiary questions, that arise for consideration.

        The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act.  The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited.  When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable.  The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal.  The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act.  When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
       
        We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners.  It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
     

2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10876

THE HON'BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON'BLE SRI JUSTICE M.S.K.JAISWAL            

W.P.No.37381 of  2013

04-02-2014

M/s Deccan Chronicles Holdings Limited rep. by its Vice Chairman, and
others..Petitioners

The Union of India rep. by its Joint Secretary,Ministry of Finance &
others..Respondents

Counsel for the petitioners: Sri C.V. Mohan Reddy,
                              Sr. Counsel

Counsel for the Respondents: Sri S. Ravi, Sr.Counsel
                              Sri S. Niranjan Reddy
<GIST:

>HEAD NOTE:  

?Cases referred

1) (2004) 4 SCC 311
2)  AIR 2008 Orissa 88
3)  AIR 2010 Allahabad 3
4)  2004(1) UC 451


THE HON'BLE SRI JUSTICE L. NARASIMHA REDDY        
AND
THE HON'BLE SRI JUSTICE M.S.K. JAISWAL    

W.P.No.37381 of  2013


JUDGMENT:  (Per the Hon'ble Sri Justice L. Narasimha Reddy)
     
     
        This writ petition raises several questions of general importance, that
arise in the course of implementation of different enactments, such as
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (for short
'the Sarfaesi Act"), the Arbitration and Conciliation Act, 1996
(for short "the Arbitration Act"), and the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (for short the D.R.T. Act").
     
        The 1st petitioner is a public limited company, involved in the activity
of running newspapers and petitioners 2 to 5 are associated with the management
and administration thereof.  The petitioners obtained two separate loans: One
loan of Rs.50 crores on 08-12-2011, and another of Rs.50 crores on 05-01-2012 from
M/s India Bulls Financial Services Limited (for short "IBFSL"), after necessary
documentation.  On 08-09-2012, IBFSL issued a notice to the petitioners,
requiring them to pay the outstanding amount within seven days from the date of
receipt of the notice.
The petitioners got issued a reply.  Thereafter, IBFSL filed O.P.No.377 of 2013
against the petitioners in the Court of II Additional Chief Judge, City Civil
Court, Hyderabad, under Section 9 of the Arbitration Act, for the relief of
injunction, to restrain the petitioners from alienating, encumbering,
transferring or creating third party rights, vis--vis the properties that were
offered as security and for a direction to the petitioners to jointly and
severally furnish security for a sum of Rs.48,60,77,778/-. Similarly O.P.No.378
of 2013 was filed for similar relief in relation to another loan. Clause 25 of
the Loan Agreement, which provides for arbitration was invoked in both the OPs.
     
        According to the petitioners, about 10 crores was paid towards principal
of the borrowed amount by June 2012.  IBFSL was merged with its sister concern,
M/s India Bulls Housing Finance Limited, the 4th respondent, on the basis of an
order dated 12-12-2012 in Company Petition No.457 of 2012, passed by the Delhi High Court
under the provisions of the Companies Act, 1956.

The merger is said to have been effective from 08-03-2013.
     
        The 4th respondent got itself registered under the Sarfaesi Act.  Soon
after the merger of IBFSL with it, the 4th respondent initiated proceedings
under the Sarfaesi Act against the petitioners in respect of the loans, that
were borrowed from IBFSL. Possession notice dated 29-05-2013 was also issued.
The physical possession of the properties is said to have been taken on 02-08-
2013.  It is also stated that the 4th respondent has sold away 50% of the
shareholding of the 1st petitioner-company and put to sale, an item of property.
The 4th respondent got issued a notice dated 21-11-2013, to the petitioners proposing to sell two items of immovable property at Hyderabad.  It is in this context, that the present writ petition is filed.
     
        The petitioners contend that IBFSL, from which they obtained loan; was not
registered as a 'Financial Company', under Section 3 of the Sarfaesi Act, and
the mere fact that the said agency has merged with its sister concern, the 4th
respondent; does not bring about any change in the relations between themselves
and the IBFSL  They submit that even if the 4th respondent has stepped into the
shoes of the IBFSL, it can, at the most, take only those steps,
that could have been taken by IBFSL, and not any more.

        The second contention of the petitioners is that the
4th respondent is a Housing Finance Company, governed by the provisions of the
National Housing Bank Act, 1987 (for short 'the N.H.B Act') and it cannot deviate from the procedure prescribed under that Act.  It is also urged that once the proceedings under Section 9 of the
Arbitration Act have been initiated, it is not permissible for the 4th
respondent to initiate proceedings of any other form, that are prohibited under
Section 8 of that Act.

        On behalf of the 4th respondent a detailed counter-affidavit is filed.  It
is stated that the petitioners have borrowed about 100 crores from IBFSL, but
failed to repay the same.  They contend that once IBFSL has merged into the 4th
respondent, the procedure prescribed under the Sarfaesi Act becomes applicable, and the
contention of the petitioners cannot be accepted.  They raised the objection as
to the very maintainability of the writ petition.  It is also urged that the
merger of the IBFSL with the 4th respondent is complete in all respects, and the
assets and liabilities that accrued on the merger would be governed by the
provisions of law, that are applicable to the 4th respondent.
The allegation as to the realization of funds from other assets is denied.  As
regards the initiation of the proceedings under the Arbitration Act, the 4th
respondent contends that the Sarfaesi Act would have overriding effect on all
other enactments and that no exception can be taken to the impugned sale notice.
     
        Sri C.V. Mohan Reddy, learned Senior Counsel for the petitioners submits
that though the petitioners could have borrowed amounts from Nationalised Banks
and other similar agencies, they have chosen IBFSL only, on account of the
reason that the proceedings of the Sarfaesi Act are not applicable to it.
He contends that the merger of IBFSL with the 4th respondent was effected with
the sole objective of initiating proceedings under the Sarfaesi Act against the
petitioners and that the sequence of events discloses the same.  He submits that
whatever may have been the reason or justification for merger of the two
companies, it cannot be permitted to bring about any onerous conditions,
vis--vis the petitioners, in respect of the loan transactions, that too,
without notice to them.

        Learned Senior Counsel further submits that the very origin of the 4th
respondent is under the provisions of the N.H.B Act and its affairs are
predominantly governed by the provisions of that Act and not of the Sarfaesi
Act. He submits that the N.H.B Act prescribes a typical regime for recovery of
loans, particularly under Section 36(f); and Section 36(y) bars the jurisdiction
of not only the Court, but also authorities under any other enactment whatever,
and that the same has not been saved under the Sarfaesi Act.
It is also urged that the provisions of the Sarfaesi Act cannot be applied
indiscriminately in respect of a transaction, unless it was from an agency,
which is governed by the provisions of that Act.

        It is also argued that the loan agreements provided for arbitration and by
invoking the same, O.P.Nos.377 and 378 of 2013 were filed, under Section 9 of
the Arbitration Act, and in that view of the matter, initiation of any other
proceedings either by the original lender i.e. IBFSL or any successor thereof,
are impermissible in law.  Reliance is placed upon the judgments of various High
Courts and Supreme Court, in support of his contention.  It is pleaded that the
4th respondent has kept the petitioners in complete dark of the various steps,
through which amounts have been realized by selling almost half of the
shareholding of the 1st petitioner-company, or the manner in which, an item of
immovable property at Gurgaon was brought to sale.
     
        Sri S. Ravi, learned Senior Counsel has advanced arguments on behalf of
the 4th respondent, and to certain extent, they have been supplemented by Sri S.
Niranjan Reddy, learned counsel.
They contend that the writ petition is not maintainable in law, and
in case the petitioners feel aggrieved by any steps taken by the
4th respondent, the only course open to them is to approach the Debt Recovery
Tribunal (for short 'the Tribunal') by filing an appeal.

        It has been argued that though the petitioners borrowed the amount from
IBFSL, their liability stands transferred to the 4th respondent in view of the merger, and it being a company, registered under Section 3 of the Sarfaesi Act, is entitled to invoke the provisions of that
enactment.  Learned Senior Counsel submits that the Sarfaesi Act contains non-
obstante clauses that virtually override the provisions of any other law for the
time being in force, and in that view of the matter, the objection raised by the
petitioners for initiation of proceedings under that Act are untenable.  He
further submits that the initiation of proceedings under the Arbitration Act was
at a time when the merger did not take place, and with the merger becoming
complete, a totally different legal regime altogether came into existence and
the
4th respondent became entitled to invoke the provisions of the Sarfaesi Act.

        As regards the N.H.B Act, learned Senior Counsel submits that though the
4th respondent is a company governed by the provisions of that Act, it has every
right to choose or elect between the mechanisms under the N.H.B Act, or the
Sarfaesi Act, for recovery of the amounts, due to it.  He too placed reliance
upon quite a good number of precedents, in support of his contention.

        In view of the complexity, which the writ petition presents,
it becomes necessary to take note of the purport of different enactments in
relation to the rights of the parties.  On certain important aspects, an
authoritative pronouncement from the Hon'ble Supreme Court is yet to emerge, and
there is a vertical division of opinions between the various High Courts.  That
is the reason why every possible care is taken to ensure that the various
contentions urged by the parties are addressed, duly taking into account, the
view expressed by the Courts, in this behalf.

        It is not in dispute that the petitioners obtained two loans of Rs.50
crores each, from IBFSL, on 08-12-2011 and 05-01-2012, respectively.  It is also
not in dispute that the repayment of the loans was not as per the schedule, and
the lending agency has already issued notices, proposing to take action.  The
steps contemplated under its notices dated 08-09-2012, however, were not
referable to the Sarfaesi Act, obviously because it is not covered by the
provisions of that Act.  The relevant portion of the notice issued by it reads
as under:
     
        "...In view of the aforesaid and pursuant to provisions of the Loan
Documents, without prejudice to our other rights and remedies, we hereby call
upon you to forthwith pay us the aforesaid amount of Rs.51,54,05,096/- (Rupees
Fifty One Crores Fifty Four Lacs Five Thousand and Ninety Six only) within 7
(Seven) days from the date of this notice.
In case failure to comply with the aforesaid, without prejudice to our other
rights and without any further notice to any of you,
a) please treat this notice as a notice of/for sale, enforcement, disposing off,
transfer, assignment and/or encumbrance of any/all of the Security/Securities
(including any shares) provided in favour of the Lender under the Loan
Documents; and/or
b) the Lender shall be entitled to, inter alia, exercise all other rights and/or
enforce remedies (at your costs and risk) available under the Loan Documents
and/or law to recover all amounts payable by you under the Loan Documents.

Notwithstanding anything to the contrary, this notice shall prevail over and/or
not be affected by any other correspondence, payments, actions, etc., in present
or future, by or between you and the Lender, unless this notice is specifically
withdrawn/annulled by the Lender in writing.
Capitalized terms used and not defined herein shall have the meaning as ascribed
to such terms in the Loan Documents..."      
     
        It is also necessary to note that IBFSL filed Arbitration O.P.Nos.377 and
378 of 2013 under Section 9 of the Arbitration Act against the petitioners in
the Court of II Additional Chief Judge, City Civil Court, Hyderabad.  Clause 25
of the Loan Agreement, that was invoked by the IBFSL reads:
     
"25. Arbitration:
        25.1 Notwithstanding anything to the contrary in the Loan Documents and
herein, the Parties agree that if any dispute/disagreement/differences (Dispute)
arises between the parties during the subsistence of the Loan Documents
(including this Agreement) or thereafter, in connection with, inter alia the
validity, interpretation, implementation or alleged breach of any provision of
the Loan Documents (including this Agreement), jurisdiction or existence of the
arbitrator or of any nature whatsoever, then, the Dispute shall be referred to a
sole arbitrator who shall be nominated/appointed by the Lender only.  The
parties expressly agree that, in any circumstances, the appointment of the sole
arbitrator by the Lender shall be and shall always deemed to be sole means for
securing the appointment/nomination of the sale arbitrator, without recourse to
any other alternative mode of appointment/nomination.
25.2 The place of the arbitration shall be New Delhi and the arbitration
proceedings shall be governed by the Arbitration & Conciliation Act, 1995 and
shall be in English language.
25.3 The arbitrator award shall be in writing.  The arbitrator shall also decide
on the costs of the arbitration proceedings.
25.4 The award shall be binding on the parties subject to the applicable laws in
force and the award shall be enforceable in any competent court of law."
     
By the time, the O.Ps were filed, Company Petition No.457 of 2012 filed by
IBFSL, seeking merger with the 4th respondent, was pending in the Delhi High
Court.  Judgment therein was rendered
on 12-12-2012, paving the way for merger. However the merger was to come into
force only on compliance with certain conditions.  That occurred on 08-03-2013.
On the same day, the 4th respondent swung into action and issued notice under
Section 13(2) of the Sarfaesi Act, to the petitioners.  A corrigendum was issued
proposing certain amendments.  This was followed by issuance of possession
notice dated 29-05-2013, and sale notices dated
8th November, 2013.

        It is too well-known that the Sarfaesi Act is a typical and special
enactment, which has brought into existence, a legal regime, substantially
different from the one, that existed before it.  Mortgage is one of the modes of
transfer of properties, and it is dealt with in detail, under the provisions of
the Transfer of Property Act (T.P Act).  It is a mechanism for securing the
interests of a person or agency, who lent the amount to another.  The procedure
for redemption of the mortgage, at the instance of the mortgagor or the
foreclosure thereof, at the instance of the mortgagee, is prescribed in the T.P
Act itself.  Even where a decree for foreclosure is passed, it is in the form of
a preliminary step, giving an opportunity to the borrower to clear the debt, and
to be followed by a final decree, on failure.
     
Citing the reason that the process of recovery of loans, particularly by Banks,
on the strength of mortgages, through suits
in the Civil Courts is time consuming, the Parliament enacted the D.R.T. Act.
The procedure was simplified and the jurisdiction of the Civil Courts was
conferred upon the Tribunals.  Gigantic Financial Agencies, which have
sanctioned and paid loans of huge amounts were not satisfied with the mechanism
provided for under the D.R.T. Act also.  The Sarfaesi Act is a radical deviation
from the settled principles of adjudication.  The Parliament, which has to its
credit,the enactment of Debt Relief laws, to protect the interests of innocent and
gullible borrowers and relieved many from the indebtedness, has virtually taken
a 'U' turn, to protect the superlative corporate lenders.  In the process, the
lender was assigned the status of the adjudicator as well as the executing
agency of the decree.  Its word is treated as final not only in regulating a
debt but also to straightaway take possession of the mortgaged property.  The
curious part of it is that the debt can be recalled and mortgage can be invoked,
even if the time for complete repayment of the debt has not reached.  Citing of
default in payment of installments is sufficient to take the drastic step.

        The validity of the Sarfaesi Act has been dealt with by the Hon'ble
Supreme Court in Mardia Chemicals Ltd. v. Union of India & others1.  It was
upheld in all respects, observing that enough safeguards are provided in it.  It
was also observed that even if proceedings in relation to a loan transaction are pending before theTribunal, the financial agency can invoke its powers under the Sarfaesi Act and
proceed against the security.  The reason that appears to have weighed with the
Hon'ble Supreme Court is that the amounts advanced as loan by Banks and other
agencies constitute public finance, and it is in the national interest that the
procedure is streamlined for recovery of such amounts.  Once the Sarfaesi Act is
upheld, any amount of argument, advanced by the petitioners, vis--vis its
provisions, cannot be countenanced.  Ultimately, it is for the Supreme Court to
say anything further,
if it comes to the conclusion that the beneficiaries under that Act are heckling
at the age old legal system.

        One of the contentions advanced by the petitioners is that the provisions
of the Sarfaesi Act do not apply to its transactions since, a) they did not
borrow any amount from the 4th respondent and b) IBFSL, from whom they borrowed
money, was not under the purview of that Act. The gist of the arguments advanced
by the learned counsel on these aspects has already been taken note of, in the
preceding paragraphs.

        It is trite that an individual or a corporate personality has the freedom
to contract, and while taking a decision in the course of their business,
several factors assume importance.  If an individual intends to purchase an
item, he would take into account, several factors, such as the quality of the
item, its price structure, the reliability of the supplier and the like.
Similarly, if a person is in need of money, he has to take several aspects into
account.  Even where an agency is willing to lend the amount, the conditions
subject to which, the money is lent, would assume importance.  These conditions
may range from the rate of interest to the method of recovery.  If the method of
recovery is stringent and the lender reserves to himself, the right to take
steps, detrimental to the interests of the borrower, the latter may think twice.
In a given case, he may even choose not to borrow the amount, than to face
humiliation in the hands of a powerful and dominant lender.

        This can be demonstrated from the financial transactions in the public
field itself.  Entrepreneurs with expertise at their disposal would choose to
borrow the amount from the financial institutions that are under regulation by
the Reserve Bank of India, though there may be several private money lenders,
prepared to advance the amount.  The reason is that a semblance of protection
against indiscriminate levy of interest or undue squeezing of the borrower
at the discretion of the lender is felt, in case the money is borrowed from
regulated financial agencies.  Even as between the financial agencies, that are
controlled by Reserve Bank of India, there are specialized financial agencies,
that are meant to serve the industrial sector, housing sectors, etc.  Laws are
made to suit the interests of the lending, as well as the borrowing agencies,
keeping in view the purpose for which the money is borrowed.  Instances are not
lacking where the establishment of industries is treated as primary, and every
effort is made to sustain them.  The extreme steps taken in this regard can be
discerned from the scope and ambit of the Sick Industrial Companies Act, which
provides for framing of schemes, to sustain an industry, than to close it,
on account of its being sick.  Various agencies that advanced finances are even
made to re-schedule the loans, or to forego the component of interest.

        The 1st petitioner is in existence for the past several decades and it is
running a reputed newspaper.  May be, for expansion or other purposes, it wanted
some finances.  By the time it has chosen to borrow the amounts, the Sarfaesi
Act has already come into force.  It has deliberately chosen to approach a non-
discrepit financial agency, IBFSL, even while several Nationalized Banks were
prepared to lend the amount, by taking the same security.    What prompted the
1st petitioner to approach IBFSL appears to be that, it was not under the
purview of the Sarfaesi Act.  It is also essential to mention that the 4th
respondent, a sister concern of the IBFSL, was also in existence at that time.
The reason why the choice has fallen upon the IBFSL and not its sister concern,
the 4th respondent, appears to be that the latter is under the purview of the
Sarfaesi Act, whereas the former is not.  When this is the state of affairs
pertaining to the borrowing of amount by the 1st petitioner from IBFSL, any
change in the conditions, that too, to its detriment, should not have been
thrust upon it, without its consent.  The sequence of events, in the instant
case, discloses that the predominant purpose for which the IBFSL was merged with
the 4th respondent, was to bring the loan transaction of the 1st petitioner-
company, under the purview of the Sarfaesi Act.

        An argument is advanced on behalf of the 4th respondent to the effect that
once the merger has taken place, a new legal regime has come into existence, and
by operation of law,
the petitioners have incurred the obligation to be regulated under the Sarfaesi
Act.

        It is not uncommon that the relationship between the citizens and the
state, or the citizens inter se undergoes change, whenever a new enactment is
brought into existence.  Even in such cases,
the events, that have already taken place, before the new law is made, are
saved.  The driving force, which compels a citizen to submit himself to a law,
which is detrimental to him, is the sovereign power of the State.  In case the
subject-matter of the law,
so enacted, is a step in the exercise of sovereign powers, the Courts would be
slow, to rescue the citizen.  Where, however, the content of the law is not to
strengthen the sovereign power, but to help one of the parties to a transaction,
it would be the bounden duty of the Court to ensure that a citizen is not forced
to come under a regime, which he did not agree for.  When this is the approach
even to a law, the subsidiary step, such as merging of an agency, which was not
under the purview of the Sarfaesi Act, with the one, which is under it, cannot
be taken so lightly, or in a routine manner.
The well-settled principle, that what is not permitted to be done directly,
cannot be done indirectly; gets attracted.

        The question as to whether a loan transaction, which is outside the
purview of the Sarfaesi Act, can be brought under its purview, without the
consent of the borrower, has not been examined by the Hon'ble Supreme Court, so
far, to our knowledge.  The opinion of the High Courts on this aspect is not
uniform.  The Orissa High Court in Subash Chandra Panda v. State of Orissa2 took
the view that such a step is not permissible.  The Allahabad High Court in
Yogendra Kumar Jaiswal and others v. C.M.M and others3 took a different view.

        In Subash Chandra Panda v. State of Orissa (2 supra),
a Division Bench of the Orissa High Court took note of the definition of the
expressions "financial institution" under Section 2(m) of the Sarfaesi Act and
its ramifications and ultimately held that if a borrower was not a financial
institution, as defined under Section 2(m), when the transaction took place, the
lending agency cannot invoke the provisions of that Sarfaesi Act on the basis of
any subsequent arrangement.
In Yogendra Kumar Jaiswal and others v. C.M.M and  
others (3 supra), a Division Bench of the Allahabad High Court however took the
view that the Sarfaesi Act is more procedural than substantive in nature and in
the context of enforcement of security; the extant procedure can be followed.
With great respect to the Hon'ble Judges of the said High Courts, we are of the
view that it would be an act of oversimplification to treat the entire gamut of
the Sarfaesi Act, as mere procedure.

        In clear and categorical terms, the Sarfaesi Act prescribes a new legal
regime in the context of the foreclosure of mortgages, which is totally
different from the one, under the T.P Act.
Section 13, which is kingpin of the Sarfaesi Act, commences with the non-
obstante clause by making a specific reference to Sections 69 and 69-A of the
T.P. Act.  It is too nave to contend that Section 69 or 69-A of the T.P Act is
procedural in nature.  They create valuable substantive rights and create
corresponding obligations upon the parties to a mortgage.  Whenever a mortgage
comes into existence, the parties thereto agree upon certain terms within the
framework of law.  If the law in relation thereto is altered, during the
subsistence of mortgage, the rights of the parties to the transaction remain
unaffected by the amendment.  The change in law would only apply to the
transactions, that take place after it has come into force.

Howsoever tempting it may be, to put all objections of this nature under the
carpet, to receive the applause from the gigantic financial institutions, Courts
cannot be party to such an exercise.
It is only the prerogative of the Executive or the Legislature to take extreme
postures, such as wiping off the loans to the tune of thousands of crores
advanced from public funds; on the one hand, and to offer an ordinary borrower
to the alter of neo-rich kabuliwalas, on the other hand.   Directly or
indirectly, the Parliament has provided for one procedure for recovery of
amounts advanced to ordinary citizens, and another for affluent and highly
placed financial institutions.  Courts are supposed to view the changes in law
from the strict principles of interpretation,
not carried away by the other temptations.  The intention of the legislature
becomes relevant on different occasions, and not when the complaint is that the
rights of the parties are trampled.

        It is not as if that the petitioners are extended any facility or
favouritism on account of the 4th respondent being required to abide by the
conditions, under which the loan was borrowed.
Unfortunately, an impression is
being created among the citizens, that approaching an ordinary Court of law is a
purposeless exercise, or a punishment to a party.  The curious part of it is
that even Courts of higher order are giving this impression, may be
subconsciously, in the course of deliberations outside the Court for promoting alternative
dispute resolution mechanisms, or making observations in some judgments.  It is
an indirect way of belittling the existing system and telling the people that,
there is one legal system for elite, and the other, for ordinary and
inconsequential public.

        The Allahabad High Court appears to have been convinced by the judgment of
the Uttaranchal High Court in Unique Engineering Works v. Union of India (UOI)
and Ors.4  In that judgment also, Their Lordships were mostly impressed by the
fact that India is a signatory to several international conventions and our
gross fiscal deficit is approximately 10% GDP per annum.
The relevant paragraph
reads,

"Para-24: We do not find any merit in the arguments advanced on behalf of the
petitioner.  It was firstly argued before us that the impugned NPA Act, 2002 has
been enacted at the behest of the World Bank and at the behest of International
Financial Institutions.  In this connection, reliance is placed on Statement of
Objects and Reasons to the impugned NPA Act, 2002.  As stated above India is a
signatory to several International Conventions.  Our gross fiscal deficit is
approximately 10% of GDP per annum.  This is a very high ratio.  One of the
contributory factors is high amount of non-performing assets.  As stated above
the non-performing assets are to the tune of Rs.90,000/- crores which is not a
good indication for banks/financial institutions.  Therefore, the Act has been
enacted as a remedial measure to reduce non-performing assets.  Hence, there is
no merit in the argument that the impugned NPA Act, 2002 is enacted at the
behest of the World Bank, I.M.F. and other Financial Institutions.  Hence, there
is no merit in the first ground of attack."
     
        With due respect to the learned Judges, we are of the view that it is no
part of the duty of the Constitutional Courts to administer the finances, and we
totally disagree with the view expressed by them, that the Sarfaesi Act is
retroactive in nature. Whether one employs the term "retroactive" or
"retrospective", it cannot be permitted to govern the transactions, which were
outside its purview, when they were made.

        We respectfully agree with the ratio of the judgment of the Orissa High
Court in Subash Chandra Panda v. State of Orissa (2 supra).

        There are other subsidiary questions, that arise for consideration.

        The two O.Ps, i.e. 377 and 378 of 2013 have already been filed in the name
of IBFSL, under Section 9 of the Arbitration Act.  The arbitration clause that
existed in the agreements has been extracted in the preceding paragraphs.
Section 8 of the Arbitration Act makes it amply clear that if the agreement
between the parties contains an arbitration clause, institution of other
proceedings is prohibited.  When a suit cannot be instituted by a party to an
agreement, which contains an arbitration clause, the initiation of proceedings
before other fora becomes equally untenable.  The proceedings under the Sarfaesi
Act cannot be placed on a higher pedestal.  The borrower of a secured financial
institution, as defined under Section 2(f) of the Sarfaesi Act cannot be treated
as a super Court, to be kept on a higher pedestal in the context of Section 8 of the
Arbitration Act.  When arbitration proceedings have already been initiated, the
4th respondent cannot be permitted, ignore them and proceed against the
security.
       
        We therefore, allow the writ petition and set aside the proceedings
initiated by the 4th respondent, against the petitioners.  It is, however, left
open to it to take other steps in accordance with law, for recovery of its
loans.
       
        After the judgment was pronounced, learned counsel for the 4th respondent
submitted that the possession of the security has been taken in July 2013 and
status quo in respect thereof may be maintained for a reasonable period.

We direct that status quo obtaining as on today shall be maintained for a period
of four weeks.

The miscellaneous petitions filed in the writ petition shall also stand disposed
of.   There shall be no order as to costs.
_________________________  
L.NARASIMHA REDDY, J.  
_________________________  
M.S.K. JAISWAL, J.
Dt.04-02-2014

Monday, February 24, 2014

Sec.18 of Immoral Traffic Act - RDO has no power to attach directly - Lodged was raided for running brothel business - RDO/Executive magistrate issued show cause notice and attached the Lodged and directed to close the 2nd ,3rd floors - High court held that Executive Magistrate has no jurisdiction to attach the Lodge and direct to close the 2nd and 3 rd floors as per sec.18 - it empowers only to evict the brothels and it restrict to give lease/rent to others with out permission of magistrate with in one year - he can not attach the Lodge directly - their lordships of high court set aside the orders of Executive Magistrate and allowed the writ = M.Ramakrishna S/o Venkattappaiah....petitioner The Sub-Divisional Magistrate and RDO, Vijayawada and another.... Respondents =2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10872

Sec.18 of Immoral Traffic Act - RDO has no power to attach directly - Lodged was raided for running brothel business - RDO/Executive magistrate issued show cause notice and attached the Lodged and directed to close the 2nd ,3rd floors - High court held that Executive Magistrate has no jurisdiction to attach the Lodge and direct to close the 2nd and 3 rd floors as per sec.18 - it empowers only to evict the brothels and it restrict to give lease/rent to others with out permission of magistrate with in one year - he can not attach the Lodge directly - their lordships of high court set aside the orders of Executive Magistrate and allowed the writ =

Section 18 of the Immoral Traffic (Prevention) Act,1956 reads as follows:-
"18. Closure of brothel and eviction of offenders from the premises.---
(1) A magistrate may, on receipt of information from the police or otherwise,
that any house, room, place or any portion thereof within a distance of two
hundred meters of any public place referred to in sub-section(1) of section 7,
is being run or used as a brothel by any person or is being used by prostitutes
for carrying on their trade, issue notice on the owner, lessor or landlord of
such house, room, place or portion or the agent of the owner, lessor or landlord
or on the tenant, lessee, occupier of, or any other person incharge of such
house, room, place or portion to show cause within seven days of the receipt of
the notice why the same should not be attached for improper user thereof; and
if, after hearing the person concerned, the magistrate is satisfied that the
house, room, place or portion is being used as a brothel or for carrying on
prostitution, then the magistrate may pass orders-
(a) directing eviction of the occupier within seven days of the passing of the
order from the house, room, place or portion;
(b) directing that before letting it out during the period of one year or in a
case where child or minor has been found in such house, room, place or portion
during a search under section 15, during the period of three years, immediately
after the passing of the order, the owner, lessor or landlord or the agent of
the owner, lessor or landlord shall obtain the previous approval of the
magistrate.
Provided that, if the magistrate finds that the owner, lessor or landlord as
well as the agent of the owner, lessor or landlord, was innocent of the improper
user of the house, room, place or portion, he may cause the same to be restored
to the owner, lessor or landlord, or the agent of the owner, lessor or landlord
with a direction that the house, room place or portion shall not be leased out,
or otherwise given possession of, to or for the benefit of the person who was
allowing the improper use therein.

08.     A perusal of the above Section clearly shows that the Magistrate on
receipt of information from the police or otherwise that a house is being run as
a brothel, after issuance of notice to the owner or lessor, he may pass orders
directing eviction of the occupier of house and directing before letting it out
during the period of one year immediately after the passing of the order, the
lessor or the landlord should obtain the previous approval of the Magistrate.
09.     Though the Section provides for issuance of a notice of attachment for
improper use of the premises, the Magistrate was not given any power for
attachment of the premises directly. In the instant case, the 1st Respondent
ordered closure of the 2nd and 3rd floors of the lodge with
immediate effect.

10.     In view of the Section 18(1) of the Act, the order passed by the 1st
Respondent is illegal and is set aside. However, this order has no bearing on
the pending proceedings in C.C.No.174 of 2011, which are independent
proceedings.

The writ petition is accordingly allowed. No order as to costs.

2014 (Feb.Part) judis.nic.in/judis_andhra/filename=10872

THE HONOURABLE SRI JUSTICE A. RAMALINGESWARA RAO            

W.P.No.15623 OF 2010

05-02-2014

M.Ramakrishna S/o Venkattappaiah....petitioner

The Sub-Divisional Magistrate and RDO, Vijayawada and another.... Respondents

Counsel for the petitioner: Sri P.Gangarami Reddy

Counsel  for the Respondents:  G.P for Home & Revenue


<Gist :

>Head Note:

?Cases referred:

THE HON'BLE SRI JUSTICE A. RAMALINGESWARA RAO          

W.P.NO.15623 OF 2010  
ORDER:-

The writ petitioner is a Managing Partner of a lodge situated at Kodad Road,
Jaggaiahpet, Krishna District. The               2nd respondent-Inspector of
Police, Jaggaiahpet Circle along with mediators raided the said lodge on 03-05-
2010 at 13.00 Hours and registered Cr.No.50 of 2010 for an offence under
Sections 3, 4 and 5 of the Immoral Traffic (Prevention) Act, 1956 ( for short
"the Act") against the petitioner and five others. Based on the information
furnished by the 2nd respondent, 1st respondent issued a notice dated 02-06-2010
under Section 18(1) of the Act calling for explanation of the petitioner as to
why the lodge should not be attached on the ground that it was used as a brothel
house. The petitioner submitted his explanation on                      08-06-
2010. It is stated that the 1st respondent without considering the explanation,
passed the impugned proceedings in Rc.No.A1/2133/2010, dated 29-06-2010.

02.     The 2nd respondent filed a counter-affidavit stating that on information
regarding the maintenance of lodge as a brother house, he raided on 03-05-2010
along with staff and mediators and caught hold of the room boy and on his
confession raided Room No.111 and found two male and one female and recorded
their confessional statements before the mediators. Three persons were arrested
and in their statements they stated that the petitioner being the owner of the
lodge knew about the brothel house is being run in the said lodge. Cr.No.50 of
2010 was booked under Sections 3 to 5 of the Act against the petitioner and five
others. On 07-05-2010 he filed a petition before the 1st respondent to seize the
said lodge and on 02-06-2010 the 1st respondent issued a notice to the
petitioner asking to submit his explanation as to why the said lodge should not
be attached. The petitioner received the said notice and submitted his
explanation on 08-06-2010. After considering the explanation the impugned orders
were passed.

03.     Heard the learned counsel for the Petitioner and the learned Assistant
Government Pleader for the 2nd Respondent.

04.     The learned counsel for the Petitioner states that under Section 18(1) of
the Act, the 1st Respondent has power to pass the order of eviction of the
occupier, within seven days of the passing of the order, from the premises. If
the owner wants to let out during the period of one year, the owner has to
obtain previous approval of the Magistrate. But the impugned order was passed
directing closure of 2nd and 3rd floors with immediate effect and the same is
contrary to the provisions of the Act. It was further stated that there was no
allegation what-so-ever either in the First Information Report or in the
mediators' report to show that the owners are running the brothel house and they
are aware of the same.

05.     The learned Assistant Government Pleader on instructions states that case
was registered as C.C.No.174 of 2011 and it was posted for hearing on 19-12-
2013.

06.     The relevant portion of the impugned order reads as follows:-
        "The explanation given by the individual is not correct and his version
that the hotel is being run by employees' shows his irresponsibility and his
explanation that the entire happenings in the hotel. If any will not come to his
notice is not convincing and beyond reason.

        The records of the complainant i.e., Inspector of Police, Jaggaiahpeta
were also perused. As seen from the copy of the Register of Hotel Indu, the room
No.111 was booked on the name of Sri N.Veera Sankar S/o Veerabhadra Rao. In the
mediators report, it was clearly stated by the room boy Sri Pattipati Ramesh S/o
Late Yesaiah, that prostitution is being carried out in the hotel and the owners
of the hotel also aware of the matter. Sampath Gopi S/o Ramaiah and N.Veera
Sankar have stated that they have taken room No.111 for rent on 3-5-10 by paying
advance of Rs.1000/- and booked one lady by name Munisha for prostitution.

        Hence satisfied with the information laid by the Inspector of Police,
Jaggaiahpeta and the material available on record,              I, Sri K.Dharma
Reddy, Sub Divisional Magistrate & Revenue Divisional Officer, Vijayawada hereby
order to closure the 2nd and 3rd floors of Hotel Indu, Jaggaiahpeta U/s.18(1) of
the Immoral Traffic(Prevention) Act,1956, which is being used for carrying
prostitution with immediate effect.


07.     Section 18 of the Immoral Traffic (Prevention) Act,1956 reads as follows:-
"18. Closure of brothel and eviction of offenders from the premises.---
(1) A magistrate may, on receipt of information from the police or otherwise,
that any house, room, place or any portion thereof within a distance of two
hundred meters of any public place referred to in sub-section(1) of section 7,
is being run or used as a brothel by any person or is being used by prostitutes
for carrying on their trade, issue notice on the owner, lessor or landlord of
such house, room, place or portion or the agent of the owner, lessor or landlord
or on the tenant, lessee, occupier of, or any other person incharge of such
house, room, place or portion to show cause within seven days of the receipt of
the notice why the same should not be attached for improper user thereof; and
if, after hearing the person concerned, the magistrate is satisfied that the
house, room, place or portion is being used as a brothel or for carrying on
prostitution, then the magistrate may pass orders-
(a) directing eviction of the occupier within seven days of the passing of the
order from the house, room, place or portion;
(b) directing that before letting it out during the period of one year or in a
case where child or minor has been found in such house, room, place or portion
during a search under section 15, during the period of three years, immediately
after the passing of the order, the owner, lessor or landlord or the agent of
the owner, lessor or landlord shall obtain the previous approval of the
magistrate.
Provided that, if the magistrate finds that the owner, lessor or landlord as
well as the agent of the owner, lessor or landlord, was innocent of the improper
user of the house, room, place or portion, he may cause the same to be restored
to the owner, lessor or landlord, or the agent of the owner, lessor or landlord
with a direction that the house, room place or portion shall not be leased out,
or otherwise given possession of, to or for the benefit of the person who was
allowing the improper use therein.

08.     A perusal of the above Section clearly shows that the Magistrate on
receipt of information from the police or otherwise that a house is being run as
a brothel, after issuance of notice to the owner or lessor, he may pass orders
directing eviction of the occupier of house and directing before letting it out
during the period of one year immediately after the passing of the order, the
lessor or the landlord should obtain the previous approval of the Magistrate.
09.     Though the Section provides for issuance of a notice of attachment for
improper use of the premises, the Magistrate was not given any power for
attachment of the premises directly. In the instant case, the 1st Respondent
ordered closure of the                     2nd and 3rd floors of the lodge with
immediate effect.

10.     In view of the Section 18(1) of the Act, the order passed by the 1st
Respondent is illegal and is set aside. However, this order has no bearing on
the pending proceedings in C.C.No.174 of 2011, which are independent
proceedings.

The writ petition is accordingly allowed. No order as to costs.
________________________  
A.RAMALINGESWARA RAO,J      
05-02-2014