State Bank of India vs M/s. Yadav Builders & Developers, a Partnership Firm, & 34 Ors

Ashok Menon, Chairperson

The State Bank of India is the Appellant aggrieved by the impugned order of the Ld. Presiding Officer in Securitization Application (S.A.) No. 15/2007 on the files of Debts Recovery Tribunal, Nagpur (D.R.T. for short) dated 29.09.2008 allowing the S.A. and setting aside the action taken by the Appellant Bank u/s 13 (4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002 (the SARFAESI Act for short).

The first Respondent herein is M/s. Yadav Builders & Developers, a Partnership Firm, represented by its partners (hereinafter referred to as the 'Firm'). Respondent Nos.2 to 35 are the purchasers of the flats agreed to be constructed by the first Respondent Firm. The first Respondent Firm is a developer and builder. The facts as outlined in the S.A. filed by the Firm are thus:

They approached one Smt. Kamlabai Shankarrao Aate for her property having an extent of 0.65 hectares to develop the and construct Row Houses intended for sale to prospective buyers. Ext. A1 Power of Attorney was executed on 29.10.2002 by the aforesaid Kamlabai in favour of the Firm. On 07.09.2003 the Firm alleged agreed with M/s. Chandela Housing Pvt. Ltd. to sell 9 + 23 duplex individual units consisting of single and double bedroom units to be built on the said property. It is alleged by the Firm that the aforesaid company also nominated 34 buyers who were to be allotted units and detailed the transaction Ext. A2 Agreement was executed. There was another agreement executed as Ext. A3 with the prospective buyers on 29.09.2003 which had certain corrections and Ext. A4 agreement was executed rectifying those errors on 03.11.2003.

The Firm allegedly purchased the property vide Ext. A5 Sale Deed dated 20.10.2003 from Smt. Kamlabai. The Firm alleges that M/s. Chandela Housing Pvt. Ltd. did not pay them the amount in full, the cheques issued were dishonoured and the letters were written to them demanding payment. Notices were also issued claiming the amount as per the dishonoured cheques. M/s. Chandela approached the Firm and sought a re-scheduling of the agreement dated 07.09.2003 and consequently, a fresh agreement was executed as Ext. A6 on 26.07.2004. 34 prospective buyers had in their capacities, based on the Agreement to Sell approached the Appellant Bank for loans to purchase the building. The same was granted and the amount disbursed to the Respondent Firm.

When M/s. Chandela defaulted the payment of the amount, the Firm sent a letter on 27.07.2004 at Ext. A7 informing the Appellant Bank about the default. Thereafter a letter at Ext. A8 was forwarded to the Bank on 10.01.2005 stating that no sale deeds have been executed in favour of the prospective buyers. Certain negotiations allegedly took place between the Bank, the Firm, and M/s. Chandela. It is consequent to that, that the Bank claimed that the property belonging to the Firm has been mortgaged with the Bank, that reply of the Bank is at Ext. A10. The Firm sent a reply on 28.03.2005 as Ext. A11 reiterated that there was no mortgage, and no Sale Deed was executed. To that, the Bank sent Ext. A12 reply on 05.05.2005 and 01.03.2006 the Bank issued demand notice to 34 borrowers u/s 13 (4) of the SARFAESI Act with intimation to the Firm. Those notices are at Ext. A13 and A14. In reply, the Firm sent a representation to the Bank on 24.06.2006 at Ext. A15 reiterates that no sale deed has been executed in favour of the borrowers and, therefore, they could not have mortgaged the property. It was also made clear the loan amount was disbursed to the Firm but to the company M/s. Chandela Housing Pvt. Ltd.

The Bank officers came to the site for taking possession of the property belonging to the Firm and the Firm allegedly filed Ext. A16 a complaint before the Police. The representation made by the Firm is at Ext. A15 was rejected by the Bank on 07.07.2006 vide Ext. A17. Thereafter, the Bank took possession of the property to which the Firm protested vide notice at Ext. A19 and A20.

Thereafter the Firm allegedly approached the D.R.T. with the aforementioned Securitization Application mainly on the ground that no notice u/s 13 (2) of the SARFAESI Act has been issued to the Firm by the secured creditor and the proceedings u/s 13 (4) of the SARFAESI Act are, therefore, not valid. The original title deed is still with the Firm. The main contention of the Applicant Firm before the D.R.T. was that there is no privity of contract between the Firm and the Bank.

The Appellant Bank contested the S.A. denying all the averments made in the application and stated that on the strength of a Power of Attorney, the Firm had executed the Agreements to Sell in favour of the prospective buyers who are Respondent Nos.2 to 35, and it based on that Agreement for Sale that the buyers approached the Bank for loans. The bank released an amount of Rs.2,52,40,000/- being 85% of the sanctioned amount of Rs.3,03,13,000/- to the Firm. However, the Firm did not even complete 25% of the construction, and all the persons who had booked the residences in the said scheme had borrowed the money and became defaulters. All the accounts were categorized as Non-Performing Asset (N.P.A. for short) and in consequence to that, the Bank filed Original Applications (O.As. for short) before the D.R.T., Nagpur. All the O.As. were allowed by the D.R.T. holding that defendants were jointly and severally liable to pay the amount together with the future interest. Assailing the judgment of the D.R.T., the Firm filed Appeals before the D.R.A.T. and those Appeals were dismissed upholding the finding of the D.R.T. The Respondent Bank does not dispute that the land originally belonged to one Smt. Kamlabai Shankarrao Aate, The loan was sanctioned to the prospective buyers on the strength of the Agreement for Sale which they had entered with the developer and the builder, and the amounts were disbursed directly to the Firm. Agreements with the borrowers were entered between September 2003 to October 2003 and thereafter a sale deed was also executed on 20.10.2003 by the aforesaid Smt. Kamlabai Shankarrao Aate in favour of the Firm which became the absolute owner of the property. Even after the transfer of ownership to the Firm, properties were sold which are not in dispute. The Firm had approached the Hon'ble High Court of Judicature at Bombay, Nagpur Bench, with Writ Petitions challenging the findings of this D.R.A.T. which uphold the decision of the D.R.T., Nagpur in the O.As. There is a specific finding by the D.R.T. and the D.R.A.T. concurrently regarding the fact that the deeds of Agreements to Sell executed between the borrowers and the Firm deposited with the Bank by the borrowers who had bought residential accommodations under the scheme would constitute valid mortgages. The Bank is, therefore, entitled to proceed against the property which is a secured property for the realization of the amount. The Hon'ble High Court of Judicature at Bombay, at Nagpur, had considered the issue as to whether the loan to the respective borrowers for booking the residential accommodations with the Firm would constitute a 'debt' within the meaning of Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the RDDB&FI Act) and whether the Bank could proceed against the property in the D.R.T. to enable the recovery of the amount from the Firm. Reliance was placed on the decision of the Hon'ble High Court of Judicature in Raj Corporation & Anr. Vs. Bank of Baroda & Ors. 2004 (4) Mah. L.J. 278 (DB) and the decisions of the Hon’ble Apex Court in State Bank of Bikaner & Jaipur Vs. Ballabh Das & Co. AIR 1999 SC 3408 and Eureka Forbes Ltd. Vs. Allahabad Bank & Ors. 2010 (6) SCC 193, and the Hon’ble High Court concluded that the transaction in the instant case would also come within the definition of the ‘debt’ u/s 2 (g) of the RDDB&FI Act. The Hon’ble Supreme Court had in the decision of Eureka Forbes Ltd. (Supra) observed that the word 'debt' u/s 2 (g) of the RDDB&FI Act is incapable of being given a restricted or narrow meaning and warranted liberal approach. Referring to the provision of the over-riding effect of the RDDB&FI Act u/s 34, the Hon'ble High Court observed that the RDDB&FI Act would prevail over all other enactments in force such other statues which either militate with or derogate from its efficacy, therefore, ceased to be of any assistance to any person from whom the debt is permitted to be recovered under the RDDB&FI Act and thus the Hon'ble High Court of Bombay, at Nagpur, concluded that the Firm's insistence of not having privity of contract with the Appellant Bank is erroneous and misconceived. It was also held that the Firm had received the money and acquiesced in the arrangement and undertook to raise the stipulated structure with the said funds for the prospective buyers. Had the Firm not agreed to it, the Bank would not have disbursed the amount. The W.Ps were disposed of by holding that no case is made out warranting interference with the orders of the D.R.T. and D.R.A.T. in the O.As and the Appeals.

In the instant Appeal, what we are concerned with is whether the Bank could take action against Respondent Nos.2 to 35 under the SARFAESI Act based on the registered Agreement of Sale executed by the Firm in favour of Respondent Nos.2 to 35 and whether the Firm is a beneficiary of the amount which was borrowed and the Bank could take Securitization measures and whether the Firm could maintain the Securitization Application before the D.R.T. which stands allowed.

34 persons who are prospective buyers of the Row Houses agreed to be constructed and developed by the first Respondent Firm had approached the Bank based on the registered agreement of sale executed in their favour by the Firm which was at that time holding a Power of Attorney of the original owner of the property viz. Smt. Kamlabai Shankarrao Aate. It is also pertinent to note that later on Smt. Kamlabai Shankarrao Aate had executed a Sale Deed in favour of the Firm transferring exclusive ownership of the property. This would indicate that the Appellant had every authority to enforce the Agreement of Sale in favour of the prospective buyers. The D.R.T. had found that the Agreements to Sell not being the documents of the title and not being a conveyance deed as defined u/s 54 of the Transfer of Property Act could not be a 'title deed' capable of being mortgaged for creating an equitable mortgage u/s 58 (f) of the T.P Act and, therefore, those properties could not be a secured asset within the meaning of the SARFAESI Act.

The Appellant Bank has produced copies of 45 cheques on record indicating that the amount of Rs.2,52,40,000/- was disbursed to the first Respondent Firm. The first Respondent Firm has no case that the amount was not released or cheques not encashed. The Firm alleged that the amount was handed over to the M/s. Chandela Housing Pvt. Ltd. does not stand proved. Even if it is true that M/s. Chandela Housing Pvt. Ltd. was engaged by the Firm to complete the construction of the Row Houses for and on behalf of the Firm which had agreed to sell the Row Houses to prospective purchasers.

There is no dispute that the property in question was intended for the construction of Row Houses under a scheme floated by the first Respondent Firm which is subject to the provisions of the Maharashtra Apartment Owners Act, 1970. The Hon'ble High Court of Judicature of Bombay in the State of Maharashtra Vs. Mahavir Lalchand Rathod 1992 LawSuit (Bom) 79, held that the Court will have to first ascertain whether the document in question i.e. agreement of sale or agreement to sell is a document conveying right, title, and interest in the writ flat in favour of the buyers. The Court will also have to find out from the material on record whether such a document ever contemplates the execution of any other conveyance at a later point in time.

The Hon’ble Supreme Court had in Nahalchand Laloochand Pvt. Ltd. Vs. Panchali Co-operative Housing Society Ltd. 2010 LawSuit (SC) 1577 held that there was an obligation cast upon the promoter to execute the documents of title and convey to the co-operative society or the company or an association of flat purchasers/apartment owners, right, title and interest in the land and building under Section 11 of the Maharashtra Apartment Ownership Act, 1970. In ITC Limited Vs. State of Maharashtra 1997 LawSuit (Bom) 211, the Hon'ble High Court of Bombay had relied upon the Maharashtra Apartment Ownership Act and the Stamp Act of Maharashtra and observed that even on an agreement to sell falling within the Explanation to Item 25 of the Bombay Stamp Act 1958, stamp duty is leviable at the same rate as applicable to a conveyance and the Explanation, in no way, even purports to obliterate the distinction between a conveyance and an agreement to sell. Even if a subsequent conveyance is to be executed in tune with the agreement to sell to avoid the levy of duty again on the very same transaction, provision has been made for adjustment of the amount of duty levied on the agreement to sell towards the duty payable on the conveyance. The learned counsel for the Appellant has also drawn the attention of this Tribunal to the Real Estate (Regulation and Development) Act, 2016, which according to him applies to the present case as the first Respondent Firm has not yet obtained a completion certificate and the scheme is still incomplete.

Section 13(1) of the SARFAESI Act states that notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal, by such creditor under the provisions of this Act. The mortgage created by the purchasers in respect of the secured asset belonging to the Respondent firm stands established. Section 2 (zb) of the SARFAESI Act provides that agreement, instruction or any other document or arrangement under which security interest is created in favour of the Bank, i.e. the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor is the "security agreement". In the instant case, there is nothing in the agreement executed by the Respondent firm in favour of the buyers to indicate that something more than the existing agreement has to be executed in their favour to conclude the sale. As long as there is no such recital in the document, it has to be held that the conveyance has concluded. Item 25 in Schedule I of the Bombay Stamp Act, 1958 which came into effect on 09.12.1985, and the agreements in question were all executed consequent to that, and therefore, there is justification in treating these agreements as conveyance.

Given the above discussions, I am of the considered view that the Ld. P.O. has gone wrong in allowing the S.A. and, therefore, it needs interference in Appeal. The Appeal is allowed and the impugned order dated 29.09.2008 is set aside and the S.A. No. 15 of 2007 on the files of the D.R.T., Nagpur, stands dismissed. The Appellant Bank is at liberty to proceed with the security measures with respect to the secured assets. No order as to costs.