India SME Asset Reconstruction Company Ltd. vs Corporation Bank

Ranjit Singh, J

The contest in this appeal is primarily between two banks. Respondent No. 1 Corporation Bank had challenged the action of appellant Punjab National Bank, whereby it had exercised its rights and power conferred upon it by section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the SARFAESl Act).

The facts giving rise to the present appeal may be noticed in brief.

Respondent No. 1, Corporation Bank, had filed an S.A under section 17(1) of the SARFAESI Act for quashing the notices issued by the appellant Punjab National Bank under sections 13(2) and 13(4) of the Act. Corporation Bank had granted certain credit facilities to Smt. Rohina Kakaria, proprietor of M/s Tiberius. To secure this loan, respondent No. 2, Mr. Vivek Raj Kakaria, had mortgaged Flat No. 9, S-473, Greater Kallash-ll, New Delhi on 16.5.2001. The borrower and mortgagor failed to maintain the financial discipline and on account of this, their accounts were declared NPA. The Corporation Bank filed an O.A. under the RDDBFI Act in the year 2003 against the borrower and the guarantor for recovery of its dues amounting to Rs.38,99,079.11 together with pendente lite and future interest from the date of filing of the suit till realization of the amount. The O.A. was decided in favour of Corporation Bank on 4.1.2006. The Tribunal held that immovable property bearing No. 9, S-473, Greater Kailash-II, New Delhi was validly mortgaged in favour of Corporation Bank. Recovery Officer was directed to recover the decretal amount within two months failing which the same was ordered to be recovered from the mortgaged property.

During the execution proceedings, the Corporation Bank exercised its power conferred under sections 13(2) and 13(4) of the SARFAESI Act on 5.8.2003 and issued notice to Mr. Vivek Raj Kakaria demanding a sum of Rs.39,04,232.11 with future interest at contractual rate. This was followed by notice under section 13(4) of the Act, which was published in three leading newspapers, namely, The Financial Express, Jansatta, and The Indian Express, all dated 31.1.2005. The possession of the property was then taken Corporation Bank, thereafter, initiated steps for sale of the property and published notices. It is stated that the property was sold for Rs. 21,03,000/- and the auction purchaser had deposited the entire sale consideration with Corporation Bank. The bank, accordingly, confirmed the sale on 28.3.2005. Later, during the course of proceedings, it was discovered that appellant Punjab National Bank had also affixed some notice on the subject property for taking symbolic possession. Corporation Bank, therefore, wrote a letter to Punjab National Bank narrating all the facts and requesting it not to proceed further in respect of the subject property. Punjab National Bank, however, declined to hear to the request and through the letter dated 6.6.2006 threatened to hold auction of the subject property to recover its dues. Corporation Bank, therefore, filed S.A. before the Tribunal below challenging the action of Punjab National Bank to be illegal and void ab initio and liable to be quashed. The main plea raised by Corporation Bank was that the mortgage in respect of the property in favour of Corporation Bank had already been declared valid and legal, whereas, the claim of Punjab National Bank was yet to be adjudicated upon.

Notice was issued and Punjab National Bank had put in appearance. As per Punjab National Bank, the S.A. filed by Corporation Bank was false and frivolous and prayed for dismissal of the same. It was stated that the Punjab National Bank had initiated process for recovery of its dues and had served a notice under section 13(2) of the Act on 6.2.2003 followed by notice under section 13(4) of the Act on 26.7.2004. It was alleged that Mr. Vivek Raj Kakaria had created equitable mortgage of Flat No. 9, S-473, Greater Kailash-ll, New Delhi by deposit of title deed on 26.5.1993 and further signed letters dated 26.8.1994, 15.3.1995, 6.6.1995, 4.10.1995, 11.6.1996 and 15.2.1997 for continuation of the equitable mortgage in favour of the Punjab National Bank as collateral security. This was to secure the facility availed by M/s VRK International. It was further alleged that physical possession of the said mortgaged property was taken by the bank on 1.8.2005 and the possession notice in this regard was published in the newspapers like 'The Statesman' and 'Amar Ujala' and so respondent Corporation Bank had no right to file the application.

Punjab National Bank further challenged the maintainability of the S.A. on the ground that Mr. Vivek Raj Kakari, impleaded as respondent No. 2 in the said application had no right on the property bearing Flat No. 9, S-473, second floor, Greater Kailash-ll, New Delhi which was registered in the name of Mr. Vivek Raj Kakaria on the basis of sale deed dated 9.3.1993. He was stated to be the mortgagor of the property in question, which was wrong and illegal as Mr. Vivek Raj Kakaria had no right over the property in any form. It was contended that the alleged mortgage is nether valid nor legal and so the Corporation Bank had no right of action upon the property. The appellant bank also made reference to the mortgage of the property created in favour the bank by deposit of title deed, which was subsequently confirmed, much prior to the date of alleged mortgage in favour of Corporation Bank created on 16.5.2001.

Respondent No. 2 did appear before the Tribunal. Respondents 3 and 4 appeared but did not file any reply, Parties led evidence and on the basis thereof the Tribunal passed the impugned order. The Tribunal below has mainly gone by the decision in the O.A. filed by the Corporation Bank where mortgage in favour of the bank was held to be lawful and valid. The Tribunal found that this finding had become final and binding on the parties which the appellant never tried to get it set right. The Tribunal further observed that the appellant bank did not even seek review of the final order passed in the O.A standing in favour of Corporation Bank and had also not filed any appeal against this order despite the fact that they came to know about the same. The Tribunal also noticed that the mortgage in favour of Punjab National Bank is still disputed and so the said mortgage cannot be held to be valid. The finding further is that the appellant bank did not file any counter claim and had also not taken action by way of filing a separate S.A. Finding further is that a respondent in S.A. is not entitled to seek any relief against co-respondent when they have not filed any counter-claim.

Respondent Nos. 3 and 4 were found to have purchased this property in open auction for valuable consideration. The sale in their favour was also confirmed, which had also not been challenged by the appellant bank. While upholding that the sale of the property by way of auction in favour of respondents 3 and 4, the Tribunal has relied upon some judgments like Janatha Textiles & Ors. vs. Tax Recovery Officer & Anr., 2008 Vll AD 9 SC 387, where it was held that the third party auction purchaser's interest in the auctioned property continues to be protected notwithstanding that the underlying decree, is subsequently set aside. Somewhat similar was the view in Janak Raj vs. Gurdial Singh, AIR 1967 SC 608, where it was held that the sale which has been confirmed by the court cannot be set aside or even after the decree in the suit is reversed. The Tribunal accordingly has allowed the S.A. in favour of Corporation Bank against which the appellant Punjab National Bank has filed the present appeal.

During the pendency of this appeal, appellant Punjab National Bank had assigned the debt in question to M/s India SME Asset Reconstruction Company Ltd. The said Company is now prosecuting the present appeal.

The counsel for the appellant would contend that the Tribunal below was not justified in allowing the S.A. in favour of Corporation Bank by observing that the appellant had not challenged the order passed in the O.A. As per the appellant bank, it was not a party in the O.A. and it was a matter between Corporation Bank and the mortgagee. It is accordingly urged that the only opportunity available to the bank to dispute the validity of the mortgage was in the S.A. filed before the Tribunal, which it did. As per the counsel, the mortgage in favour of the appellant bank was created much prior to the mortgage in favour of Corporation Bank. It is also, alleged that Corporation Bank was not having possession of the original title deed of the property. The grievance of the appellant bank further is that the submission made regarding creation of the mortgage by the respondent bank on the basis of certified copy /photocopy of the title deed, as was raised, is not found considered in the impugned order, but still it is held that the mortgage created in favour of the respondent Corporation Bank is valid. The counsel would also urge that the observation that finding in the O.A. had become final has no relevance while deciding the S.A. and the observation made by the Tribunal that the appellant bank had not filed review or appeal against the order is also misplaced as no such opportunity ever came available which was not exercised.

The counsel for Corporation Bank, however, supported the finding returned by the Tribunal below.

The counsel for the appellant has now placed certain precedents before me in support of his submission. He would first rely on the case of Hotel Sonar Bangla vs. The State Bank of India & Ors. which is a decision of the Calcutta High Court in (W.P). No. 25701(W) of 2007 decided on 30.7.2010. In this case, a Writ Petition was filed claiming that respondent No. 3 was the owner of the hotel and prayer was made for quashing the notice under sections 13(2) and 13(4) of the SARFAESI Act, which was published in the newspaper. A Writ of Prohibition was also sought against one of the respondents from acting in any manner on the basis of the said notice. The Court in this case observed that the second creditor, may, however, seek alternative remedy for realization of their dues as per law. The notices were set aside with direction not to give any effect or further effect to the said notices. The parties were given liberty to move appropriate forum.

How this would be relevant for deciding the controversy in question really cannot be made out. Here the bank had initiated the proceedings under the relevant provisions of the Act and the decision thereafter has come. The counsel for the appellant perhaps has placed this judgment to take benefit of some observations made to the effect that the deposit of title deed is the essence of initiating process under section 13(4) of the SARFAESI Act. The Court in this case has held that if the deed is not valid, its deposit does not confer any right upon the Bank to dispose of such property which is already mortgaged with the bank. The Court also observed that the entire fabric of the second creditor in this case State Bank of India, rests on the validity of the deposit of title deed which cannot be affected since one of such instruments over the same property has been acted upon much earlier making the other one inoperative. The Court has further held that if this deed is void, the entire edifice of bank's claim of right to sell the property dilutes into mere lexicographic morphology. The Court in this back ground found it useless to discuss the provisions of the SARFAESI Act or whether this will prevail over the Cooperative Societies Act.

Counsel has then relied upon a judgment of this Tribunal in the case of State Bank of India vs. Punjab and Sind Bank & Ors., I (2009) BC 80 (DRAT). In this case, it is observed that auction sale of the mortgaged property which is equitably mortgaged by the same guarantor in favour of first charge-holder bank, the title deed was handed over by the guarantor the first charge-holder. The decree in favour of the first charge-holder was also passed in earlier point of time and the property having been auctioned by the Recovery Officer of DRT at the behest of the second charge-holder, this Tribunal observed that the sale proceeds is to be released in favour of the first charge-holder and the second charge-holder would be entitled to residue of the amount after satisfying the claim of the first charge-holder.

Reference is also made to another case titled ICICI Bank Ltd. vs. SIDCO Leathers Ltd. & Ors., (2006) 10 Supreme Court Cases 452. In this case, the Hon'ble Supreme Court has considered the prior of claims of the first charge-holder over the second charge-holder by observing that right to recover money lent by enforcing mortgage would also be a right to enforce an interest in the property. It is observed that the provisions. of the Transfer of Property Act provide for different types of charges and in terms of section 48 of the Transfer of Property Act claim of the first charge-holder shall prevail over the claim of the second charge-holder and in a given case where the debts due to both, the first charge-holder and the second charge-holder, are to be realized from the property belonging to the mortgagor, in that event, the first charge-holder will have to be repaid first.

There is no doubt about the legal position as is emerging from these precedents, but this legal position is to be applied considering the facts in this case. The Tribunal has found it as a matter of fact that the respondent Corporation Bank has succeeded in proving the mortgage in its favour, where as there is no such finding in favour of the appellant bank. When the appellant bank made an attempt to invoke its right on the basis of so called alleged first charge over the property, this action was challenged. The finding returned by the Tribunal below is in favour of Corporation Bank. What apparently has weighed with the Tribunal below is that a third party right has been created on the basis of auction conducted by Corporation Bank long ago. This property was put to auction for a consideration of Rs.26,42,500/-. If the appellant had slept over its right and did not invoke the mortgage in its favour for all these years, the third party auction purchaser cannot be made to suffer. The Tribunal has relied on various precedents in support of the same that third party auction purchaser's interest in the auctioned property continues to be protected notwithstanding that the decree is set aside or otherwise. This is a dispute between the banks and even after the appellant bank succeeded in showing that it had the first charge on the property, ultimately it was to be put to auction. There cannot be any dispute that the appellant bank had not challenged the action of the Corporation Bank seeking setting aside of the sale by filling any S.A. The appellant bank has also not taken any step to challenge the finding returned in the O.A., which has also been allowed to attain finality. Ultimately, it will be an issue as to who is to get this money realized out of the auction on the basis of legal position. The action of the appellant bank was challenged successfully by the respondent Corporation Bank, still the appellant bank had not taken any action to get the situation remedied. In order to succeed, the appellant bank has to show that the charge/equitable mortgage created in favour of Corporation Bank is not valid being based on the certified copy of the documents. It has also not so far raised any challenge against the order whereby the mortgage in favour of Corporation Bank has been held valid. There is no action taken so far by the appellant Punjab National Bank to challenge the sale conducted by way of action. In my view, at this belated stage the challenge by the appellant bank to the auction held would be unfair. If there is a dispute in regard to the right of the appellant bank to claim the first charge over the money realized, the appellant bank would be at liberty to take any action in accordance with law. No case for interference in the impugned order is, however, made out. The appellant, if so advised, may take any appropriate action if it still maintains that it has first charge over the property to claim the money realized from the auction of the property. The impugned order, in my view, does not suffer from any infirmity which may call for any interference.

The present appeal is accordingly disposed of.