M/s Manas Oil Industries And Ors. vs Authorized Officer, Bank Of Baroda

This order of mine will dispose of SA 504 of 2019 filed by the applicants u/ s. 17 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred as to SARFAESI Act, 2002).

The applicant No. 1 is a partnership firm of applicant No. 2 to 6 and applicant No. 2 to 8 gave their personal guarantee to secure the due repayment of loan granted by respondent bank and also created security interest over moveable and immoveables. The applicant No.2,5,6,7 & 8 mortgaged their properties of applicant No.l hypothecated its assets.

The applicant No.1 availed loan & committed default & bank issued demand notice under section 13(2) of SARFAESI Act, 2002 dated 06.05.2019 & subsequently issued fresh demand notice dated 5.7.2019 for Rs.1,72,08,568.19 followed with symbolic possession on 18.9.19. The bank also approached Ld. Dist. Magistrate under section 14 of SARFAESI Act, 2002 and Ld. Dist. Magistrate passed order on 24.02.2020 during pendency of this Securitisation Application and applicants challenged the same by way of amendment.

The applicants have filed this Securitisation Application on various grounds. The bank has filed its reply and negated the averments made in Securitisation Application.

At the time of final hearing Ld. Counsel for parties submitted as under:

Ms. J.N. Raval Ld. Counsel for applicant

Mr. P.S. Shah Ld. Counsel for respondent bank.

With concurrence of both the counsel case is taken up for final hearings.

At the outset Ld. Counsel for applicant submitted that bank has issued demand notice dated 05.07.2019 and has claimed amount under four accounts i.e. Cash Credit, hypothecation of stocks and book debts of Rs. 1,25,00,000/-, term loan hypothecation of plant and machinery of Rs.67 lacs, venture capital amount (by SSAC) of Rs. 27,82,000/- and (DIC) capital subsidy of Rs. 10,05,000/-.

She further submitted that although applicant availed loan and created mortgage but that mortgage is secured for Cash Credit, hypothecation and term loan only and there is no mortgage for Venture capital amount of Rs. 27,82,000/- and (DIC) capital subsidy of Rs. 10,05,000/-. So the demand as raised by the applicant is defective and consequently entire Securttisation process is also defective.

Ld. Counsel for applicant submitted that she intends to further argue her case but if bank will satisfy validity of demand notice on that account she may be permitted to proceed further.

In reply Ld. Counsel for bank submitted that the demand as claimed by the bank is in accordance with the security documents and arrangement between the parties.

He further referred to the sanction letter dated 01.01.2016 annexed at Pg. 53 and further referred Pg. 55 of his reply i.e. terms and conditions on which venture capital amount was sanctioned to the applicants.

He further referred Pg. 58 of his reply and submitted that in the said letter the applicants admitted that bank would retained securities till repayment of venture capital amount.

He further submitted that bank has deliberately claimed such amount in the demand notice as if under eventuality after receipt of demand notice under section 13(2) of SARFAESI Act, 2002, Applicants came forward with repayment. In that event after receipt of amount bank will have to issue no due certificate and it would create problem and complication for the bank to recover venture capital amount and subsidy amount. So bank has rightly claimed such amount in the demand notice and as such demand notice is valid.

He further submitted that bank has given credit of said amount in the accounts of the applicants. So even otherwise bank is entitled to recover said amount and further applicants are liable to pay the said amount and in the light of this demand raised on behalf of the bank is valid and legal.

He further submitted that even under section 13(3) of SARFAESI Act, 2002, the legislature has clearly indicated that bank is to mention amount payable and its details in the demand notice.

I have heard the Ld. Counsel for parties and also gone through the records. Vide my separate detailed order Securitisation Application is allowed.

I have heard the Ld. Counsel for the parties and also gone through the records. Before proceeding further I would like to reproduce section 13(2) and section 13(3) of SARFAESI Act, 2002 which are as under:

Section 13(2) in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge infull his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4) Section 13(3) in Tile Securitlsation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower. 1[(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower:

Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17 A.]

The bank has issued demand notice for Rs.1,72,08,568.19 in following manner:

Nature and type of facility

Limit

ate of Interest

Outstanding amount- Contractual dues (in Rs.) as on 06.05.2019 (including interest unto 06.05.2019)

Cash Credit (hypo. Of stock / Book debts)

1,25,00,000/-

8.90%

Rs.1,32,58,240.65+ [UN APPLIED INTEREST + OTHER CHARGES W.E.F. 07.05.2019]

Term Loan (hypo Plant & machinery)

67,00,000/-

8.90%

Rs.11,68,327.54+ [UN APPLIED INTEREST + OTHER CHARGES W.E.F. 07.05.2019]

Venture Capital amount

27,82,000/-

27,82,000

Total

Rs.l,72,08,568.19ps [UNAPPLIED INTEREST + OTHER CHARGES W.E.F. 07.05.2019]

As per the Securitisation Act, a banker or a creditor has no right to invoke provision of Securitisation Act unless and until said banker or creditor comes within the ambit of secured creditor and intends to enforce security interest for recovery of its dues. Admittedly, in this case, mortgage was created to secure cash credit facility and Term loan and there is no mortgage or security interest for capital venture amount and DIC subsidy amount.

Ld. Counsel for bank has heavily banked upon sanction letter dated 01.01.2016 and letter dated 18.05.2016. I would like to reproduce relevant portion of the said sanction letter and letter dated

18.05.2018. Same are read as under:

The Branch Manager: Bank of Baroda,

Branch Address: Lathi Road Branch, Mohannaqar, Lathi Road, Amreli, Gujarat Sub: Disbursement of Rs.27.821akhs (Rupees Twenty Seven Lakh Eighty Two Thousand Only) as venture capital to M/s Manas Oil Industries, Office Address Survey No. 30, Paiki 2, Paiki 1, Amrelia Road, AT: Malaviya Pipriya, Taluka: Lathi, District : Amreli, Gujarat; for setting up of unit for Manufacturing of Cotton Seed Oil & Cotton Seed Cakes. Sir,

I am directed to invite your attention to our Sanction Order No. SFAC/GUJ/11-132/VCA/20l5/4l92 dated 01/01/2016 conveying sanction of Rs.27.82 lakh (Rupees Twenty Seven Lakh Eighty Two Thousand Only) to M/s Manas Oil Industries, subject to their executing necessary agreement with SFAC in terms of which they will refund the amount of Venture Capital Assistance after the full repayment of the term loan sanctioned by your bank as per its original due date or earlier.)They will also furnish a letter of Authority/TJndertaking to your bank to debit their Current/Cash Credit Account with the amount of the Venture Capital Assistance for remitting the same to SFAC by RTGS/Demand Drait payable at Delhi and will ensure to keep requisite amount available in the said account for the purpose. A copy of the letter of authority/undertaking will be acknowledged by you, which will be submitted by the promoters to us.

M/s Manas Oil Industries, will also furnished a post dated cheque in favour of SFAC for the amount of Venture Capital Assistance for the purpose of refunding VCA. You have to verify signature of the drawer of the post dated cheque separately on branch letter head and note the same in your records.

The release of the venture capital amount is subject to the following stipulations:

I. Venture capital sanctioned by SFAC is government money which has to be refunded by M/s Manas Oil Industries, after the full repayment of term loan sanctioned and disbursed by your bank as per the original due date or earlier in case the term loan is prepaid, foreclosed or swapped with another bank.

In the event of prepayment, foreclosure or change of bank leading to full repayment of the term loan sanctioned by your bank, the bank will ensure that the venture capital amount is also refunded to SFAC and will not release the securities charged for the term loan unless and until the amount of venture capital is duly refunded by M/s Manas Oil Industries.

SFAC does not take any separate security/collateral for the venture capital amount sanctioned. However, the securities/collateral charged to the bank for its term loan will, on repayment of the term loan, vest with SFAC for the purpose of refund of venture capital. Your Bank is required to furnish an undertaking that it will not part with the securities so charged until and unless the amount of venture capital is recovered and remitted by the Bank to SFAC or is directly refunded to SFAC by M/s Manas Oil Industries.

As the Scheme for Agribusiness Development through Venture Capital and Project Development Facility is being implemented in dose coordination and cooperation with the lending banks. Since it is government money, your bank will agree to undertake simultaneous steps for recovery of its term loan as well as the amount of venture capital and for this purpose obtain required binding undertaking from M/s Manas Oil Industries. In the event of any litigation for simultaneous recovery of term loan as well as venture capital, SFAC will bear the cost on proportionate basis.

Your bank will keep SFAC apprised of the progress of the project and will share with SFAC its regular inspection reports besides submitting half yearly reports on working of the unit indicating therein whether the operations of the unit are in the line with projections and whether the borrowers are adhering to repayment commitments.

Full details, viz. Name of the Company, Nature of Account & No. to which remittance is sought, Name of the Bank and Branch, and relevant Bank Codes necessary for remittance by RTGS, full postal address, telephone/fax no. and e-mail address of the branch may also please be furnished urgently.

Further, your bank has to furnish the following undertaking separately to SFAC before release of VCA amount by SFAC to promoters through you: 'We undertake that on receipt of VCA amount from SFAC, we shall mark a caution on respective pages of our Mortgage/Title Deed/Recital register for not releasing the securities before refund of VCA to SFAC, under confirmation to SFAC and only then the amount of VCA will be released to the promoters for utilization'."

The Notified Financial Institution will also keep SFAC informed of any proposal of rephasement of their Term Loan and will seek SFAC consent before implementing such rephasement. However, any proposal for rephasement of Banks Term Loan and VCA simultaneously, SFAC's prior permission is mandatory. The entrepreneur will not be eligible for any rephasement of VCA at a later date in case permission has not been sought by bank at the time of rephasement of term loan. However, the request for rephasernent of VCA can be exercised by Notified Financial Institution/Promoters only once.

Entrepreneur through their Lending Notified Financial Institution will obtain prior permission from the SFAC for change of bank. This facility can be availed by the promoter only once in the tenure of the Venture Capital Assistance. Lending Financial Institution/Bank will ensure not to entertain the request of promoters until and unless the latter complete the formalities and obtain NOC from SFAC in this regard.

Enclosure: Format for Undertaking is enclosed.

You are requested to kindly convey your acceptance of the above stipulations so that we can arrange to remit the funds to your Branch by RTGS for disbursement to M/s Manas Oil Industries.

LETTER OF AUTHORIZATION AND UNDERTAKING

Date: 18.05.2016

To,

The Branch Manager Bank of Baroda

Lathi Road Branch Mohannagar

Lathi Road Amreli, Gujarat

Subject: Refund of Venture Capital granted by SFAC-A/c Manas Oil Industries, Survey NO. 30 Paiki 2, Paiki 1, Amrelia Road, AT: Malaviya Pipriya, Taluka: Lathi, District: Amreli, Gujarat.

Sir,

We hereby authorize you to debit our Cash Credit Account NO. 45930500000030 with your bank, on due date for refunding Venture Capital extended to us by SFAC, New Delh, after full and final repayment of Term Loan of Rs. 67.00 Lakhs(Rupees Sixty Seven Lakh Only) sanctioned by your bank to us, as per original schedule or earlier.

We also undertake to ensure that sufficient fund is kept in our above Account in order to debit the account with the entire refundable amount of above Venture Capital on due date or earlier.

In terms of the Agreement signed by us with SFAC, we further authorize you to hold our securities with your bank towards the term loan after repayment of the term loan on due date or earlier, until the repayment of venture capital of SFAC.

A copy of this letter is being endorsed to Small Farmer's Agribusiness Consortium (A Society under Department of Agriculture & Cooperation, Government of India), 5" Floor, NCUI Auditorium Building,3, Siri Institutional Area, Hauz Khas, New Delhi 110016 for information and record.

MANAS OIL INDUSTRIES

Yours faithfully

Partner

(Rajubhai M. Bhutaiya)

A Carefully reading of terms and conditions on which venture capital amount was sanctioned reveals that to secure the said amount, there is no primary security or collateral security. Rather, there is covenant in the sanction letter that unless and until said amount is not repaid, bank will retain security documents. So right of the bank is restricted for retention of documents of title and at no point of time it was agreed between the parties that mortgage already created for Cash Credit limit and term loan accounts are to be considered as extended to secure venture capital amount and subsidy amount. Once there was no security interest in favour of the bank qua said amount i.e. venture capital amount and subsidy bank should not have included that amount in its total demand under section 13(2) of SARFAESI Act, 2002 raised to invoke security interest in different properties mortgage to secure two credit facilities i.e. Cash Credit and term loan. If at all bank was apprehensive about payment and complications bank could have made recital in the demand notice that bank is also entitled or applicants are also liable to pay amount in venture capital amount and subsidy account or bank is to refund that amounts to concerned authorities and further apprised the applicants that in case of failure of borrowers to pay the said amount, the bank will retain securities or documents of title as per agreement, but raising demand under section 13(2) of SARFAESI Act, 2002, including amount recoverable in venture capital amount or subsidy amount as total recoverable dues to invoke security interest against various mortgaged properties dehors the provision of Securitisation Act. So demand notice itself is not in consonance with the provision of Securitisation Act. As such the entire subsequent process is also defective, and due to this patent defect in the demand notice, I find no necessity to go into the merits of remaining process.

Need not to say that this Securitisation Application is within time from the date of symbolic possession and as such applicants have every right to question validity of demand notice even otherwise it is a patent legality in the demand notice and it may be looked into to adjudicate dispute between the parties on merits in a judicious way.

The demand notice dated 5.7.2019 is accordingly quashed. Consequently all subsequent process is also quashed. Bank is directed not to debit any expenses incurred in defective process in the account of the borrower.

However bank may proceed to recover its dues in accordance with law by issuing fresh demand notice in its own discretion. Securitisation Application is accordingly disposed off.

Further it will be the duty of the Ld. Counsel for bank to inform the concerned authorities about this order and its effects. Let copies be supplied as per rules.

Pronounced and Dictated on :17.03.2020

Corrected and signed by me: 18.03.2020