Bank Of Baroda vs E star Infotech Ltd & Anr

Ashok Menon, Chairperson

The Bank of Baroda is aggrieved by the judgment dated 06/11/2009 of the Debts Recovery Tribunal-II, Mumbai allowing Securitisation Application (S.A.) No. 41 of 2009 quashing the measures initiated by the appellant under the provisions of the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”, for brevity) against the respondents for recovery of the debt allegedly due from them.

The  facts  necessary  for  the  disposal  of  this  appeal  can  be encapsulated thus:

The respondents are the borrowers/mortgagors who had borrowed money from the appellant bank and defaulted in repayment. The account was classified as a non-performing asset (NPA), and a demand notice was issued under Sec. 13 (2) of the SARFAESI Act on 28/12/2005 demanding ₹70,84,537/- and intending to proceed against the secured asset. The respondents objected on 01/03/2006 to the demand notice. The appellant sent a reply on 17/07/2006 to that objection under Sec. 13(3A) of the SARFAESI Act which was not within a week as stipulated under the provisions, and hence, the Sarfaesi measures are bad. It was also contended that the bank did not adhere to the terms and conditions of the guarantee. Payments were made after the expiry of the guarantee period. Hence there is no liability. The demand notice under Sec. 13 (2) was not served on the guarantor. It is further contended that the amount the bank claims is less than 20% of the disbursed amount. Hence, there is a bar under Sec. 31 (j) of the SARFAESI Act from proceeding with the action. Thereafter, the bank filed an Original Application No. 116 of 2007 to recover the debt. This would indicate that the bank had abandoned its action under the SARFAESI Act.

The respondent bank contradicted all the contentions raised in the S.A. and prayed for the dismissal. Considering the rival contentions, the D.R.T. vide the impugned judgment allowed the S.A. on two grounds. It was found that the amount demanded in the demand notice was less than 20% of the amount inclusive of interest due and therefore, the Sarfaesi action is barred. Under Sec. 31 (j) of the SARFAESI Act. The D.R.T. also found merit in the contention that there is a violation of Sec. 13 (3A) of the SARFAESI Act since the bank did not communicate within one week of receiving the objections to the demand notice. The appellant is aggrieved and hence in appeal.

Sec. 31 (j) of the SARFAESI Act that the provisions of the Act shall not apply to any case in which the amount due is less than twenty per cent of the principal amount and interest thereon. The D.R.T. observed that the sanctioned amount under the Foreign Bank Guarantee Facility was ₹360 lakhs and the amount demanded was ₹70 lakhs and odd which is less than 20% of the amount and interest paid by the bank. There appears to be an error because the amount is not ₹360 lakhs, but ₹375 lakhs. If that be so, the amount demanded is not less than 20% attracting the bar under Sec. 31 (j) of the SARFAESI Act. The finding of the Ld. Presiding Officer on this point appears to have been faulty.

The next question for consideration in this appeal is whether the finding of the D.R.T. regarding the non-compliance of Sec. 13 (3A) is correct. There is no dispute that the reply to the objections raised by the borrower to the demand notice by the bank under Sec.13(3A) was not within a week as stipulated by the statute. Mr A.B. Shinde, the Ld. Counsel appearing for the bank vehemently argued that the provisions under Sec. 13 (3A) to send a reply to the objections raised by the borrower within a week is only directory and not mandatory to render the Sarfaesi action invalid. The Ld. Counsel has relied upon a decision of the Hon'ble High Court of Gujarat in Kirandevi Bansal vs. D.G.M. Small Industries Development Bank of India, Ahmedabad AIR 2009 Gujarat 100 wherein it was held that non-compliance with the limit of one week provided in Sec. 13 (3A) for communicating non-acceptance of objection is only directory and not mandatory, and as such will not appreciate the proceedings initiated under Sec. 13 (4) provided the objection is communicated to the borrower before taking action under Sec. 13 (4) of the SARFAESI Act. The Ld. Counsel also relied upon a decision of the Hon’ble Madras High Court in Industrial Development Bank of India Ltd. vs. Kamaldeep Synthetics Ltd. 2008 (2) Bankers’ Journal 365 wherein it was held that the non-compliance of the provisions under Sec. 13 (3A) of the SARFAESI Act by the bank is only any irregularity and unless the borrower can demonstrate prejudice of loss that is likely to be caused to him, the Sarfaesi action will not fail.

However, given the decision of the Hon’ble Supreme Court in ITC Ltd. vs Blue Coast Hotels Ltd. 2018 (15) SCC 99 the decisions relied upon by the Ld. Counsel for the appellant may not apply to the case in hand. The Hon’ble Supreme Court holds thus:

“29. There is nothing in the legislative scheme of Section 13(3A) which requires the Court to consider whether or not, the word ‘shall’ is to be treated as directory in the provision. As the Section stood originally, there was no provision for the above mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2). As it was State of U.P. v. Manbodhan Lal Shrivastava, AIR 1957 SC 912, p. 917 introduced via sub-section (3A), it could not be the intention of the Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor’s representation has not been accepted.

Moreover, this provision provides for communication of the reasons for the same. A provision which requires reasons to be furnished must be considered as mandatory. Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully. We are not prepared in such circumstances to interpret the silence of the Parliament in not providing for any consequence for non-compliance with a duty to furnish reasons. The provision must nonetheless be treated as mandatory.”

In view of the findings of the Hon’ble Supreme Court that the provision under Sec. 13(3A) is mandatory and it was necessary for the lender to consider the representation/objection made by the borrower in response to the notice issued under Sec. 13(2) of the SARFAESI Act, the fact that the response of the appellant bank was not within the stipulated time would affect the very foundation of the measures taken under the SARFAESI Act. The scheme of the SARFAESI Act makes it amply clear that the creditor is required to consider such representation of the borrower within the stipulated time before proceeding to resort to any measures under Sec. 13(4) of the SARFAESI Act.

Since there is a blatant violation of the provisions, the Sarfaesi action has to fail going by the maxim sublato fundamento cadit opus which translates to “remove the foundation and structure falls”. Hence, I find no reason to interfere with the impugned judgment.

There are no merits in the appeal and hence, the appeal is dismissed.