State Bank Of India vs Om Prakash And Ors.

Ranjit Singh, J

While allowing the S.A. filed by the respondent, the Tribunal below has directed the Bank to return a sum of Rs. 18,26,000/- with interest @ 8% per annum to the auction purchaser, who had purchased the property, and to take back the title deeds as well as possession of the secured asset from the auction purchaser. The respondent No. 1 is also directed to return the excess amount received by him from the appellant Bank. The Bank is held entitled to recover its dues in accordance with law pursuant to the demand notice dated 11th February, 2010. While allowing S.A., the Tribunal has held that the sale notice dated 27th February, 2011 and second sale notice dated 30th December, 2011 was not issued to the guarantor who would fall within the definition of 'borrower'. Aggrieved against this order passed by the Tribunal below, the Bank has filed the present Appeal.

In this case, the property of the respondent who is borrower was put to sale by way of auction pursuant to the possession notice dated 11th February, 2011 and sale notice dated 27th February, 2011. This S.A. filed by respondent was dismissed by the Tribunal below on 30th March, 2012, respondent had impugned this order by filing Appeal No. 388/2013. This Tribunal found that the order passed by the Tribunal below was bereft of reasons and accordingly remanded the case back to the Tribunal below for passing fresh order giving reasons. On remand, the present impugned order has now been passed allowing the S.A.

The respondent had assailed the possession notice and the sale, notice on various grounds. Plea was that demand notice did not contain details of the amount, and that the Bank had taken forcible possession without any notice. Allegations were that the Bank did not publish the possession notice in two leading newspapers as required by the Rules. The respondent had further alleged that no proper procedure prescribed under the relevant law was followed by the Bank and the measures taken by the bank were illegal, arbitrary and contrary to the provisions of the SARFAESI Act.

The facts on record would show that no bid was received pursuant to the sale notice dated 27th February, 2011. The Bank thereafter conducted a fresh auction on 31st January, 2012 after issuing fresh notice on 28th December, 2011. As per the respondent No. 1, the Bank had not followed the provisions of Rule 8(6) of the Security Interest (Enforcement) Rules by serving notice on him at the new address which was in the knowledge of the Bank. It is alleged that the Bank had already taken physical possession of the secured asset on 11th February, 2011 and, hence, serving of notice at the said address could not be taken as proper service in eyes of law.

In its response, the Bank would plead that the demand notice dated 11th February, 2010 was issued to the respondent borrower at the address mentioned in the S.A. The amount recoverable from the respondent was also mentioned and clearly stated in the notice. As per the Bank, it had given details of the amount due in the demand notice. The Bank would further point out that before taking physical possession of the secured asset on 11th February, 2011 the Bank had issued prepossession notice dated 13th December, 2010, demanding possession of the secured asset on or before 24th December, 2011, failing which the possession of the secured asset was to be taken at the risk, cost and responsibility of the respondent No. 1. As per the Bank, the family members of the respondent No. 1 did not open the door and copy of the pre-possession notice was dropped inside the gate of the house on 28th December, 2010 and also affixed on the outer part of the secured asset as well. The possession notice was also duly published in two daily newspapers, one in 'Daily News' and the other in 'Punjab Kesari' on 15th February, 2011. The Bank accordingly would plead that the requirement of Rule 8(2) of the Rules was fully complied with. As per the Bank, respondent had duly received the possession notice dated 11th February, 2011 and this would be evident from the letter written by the respondent for restoring the possession with the promise to pay the dues of the Bank in instalments. The Bank would accordingly plead that it had acted in prescribed manner in taking possession of the secured asset. Accordingly, the Bank had pleaded for dismissal of the S.A.

The factual position which would emerge from the pleadings is that the auction sale could not be concluded pursuant to the sale notice dated 27th February, 2011, as no bids were received. The respondent No. 1 would allege that for conducting fresh auction the Bank did not follow the provisions of Rule 8(6) of the Rules, as the sale notice was not served on the borrower/guarantor. The respondent No. 1 would urge that the sale notice was not served at the new address which was in the knowledge of the Bank, since it had already taken physical possession of the secured asset. The appellant Bank would respond to this plea by pointing out that the sale notice was issued to the respondent No. 1 at the address as mentioned in the S.A. The Bank had taken a stand that the respondent No. 1 had even mentioned the same address in the amended cause title filed on 10th June, 2015. The Bank has alleged that the respondent No. 1 had received copy of the sale notice dated 30th December, 2011 but refused to acknowledge the receipt thereof when the sale notice was pasted on the secured asset. The sale notice dated 30th December, 2011 was also published in two newspapers to comply with the requirement of Rule 8(6) of the Rules.

The Tribunal has found that although the demand notice dated 11th February, 2010 was issued to both the borrowers, i.e., applicant as well as guarantor, but the Bank had not adduced any documentary evidence about service of possession notice on all the borrowers, which included guarantor as per Section 2(f) of the SARFAESI Act. It is viewed by the Tribunal below that the definition of 'borrower' include guarantor and mortgagor and thus the Bank had not complied with the provisions of Rule 8(1) of the Rules as it had not issued possession notice dated 11th February, 2011 to the guarantor. The Tribunal otherwise has found the plea by the respondent No. 1 that sale notice dated 30th December, 2011 was not served on him despite knowing the new address of the said respondent, to be devoid of any substance. This finding returned by the Tribunal is not challenged by the respondent No. 1 in any manner. The Tribunal below, however, has found that the appellant Bank has not filed any documentary evidence to show that the sale notice dated 30th December, 2011 was not served on the guarantor Mr. Ranjeet Singh Shekhawat as required under Rule 8(6) of the Rules read with Section 2(f) of the SARFAESI Act. Holding that the borrower would include guarantor, the Tribunal has held that this would reveal violation of Rule 8(6) of the Rules. The Tribunal has accordingly held that the action initiated by the Bank pursuant to the possession notice dated 11th February, 2011 and the sale notice dated 30th December, 2011 and the auction held on 31st January, 2012 to be invalid. The sale held in favour of respondent No. 2 has accordingly been set aside.

The Counsel for the appellant would make a serious challenge to the finding returned by the Tribunal below. The Counsel for the appellant would first refer to the notice issued under Rule 8(6) of the SARFAESI Act, a copy of which has been endorsed to Mr. Ranjeet Singh Shekhavat. This notice dated 30th December, 2011 is annexed with the Appeal. Even copy of the notice under Section 13(2) of the Act had been endorsed to said Mr. Ranjeet Singh Shekhavat at his address: 40, Nirman Vihar, Dadi Ka Phatak, Jhotwara, Jaipur, requiring him to make payment of the amount mentioned in the notice.

When the Counsel for the appellant referred to these documents to show that notice has been served on the guarantor as well, the Counsel for the respondent No. 1 came up with the plea that these documents are not available on record of the Tribunal below. The respondent No. 1 has filed an affidavit on 9th November, 2015 that the documents appearing at Pages 91, 92, 93 and 94 of the Appeal, claiming to be notice issued to guarantor, are not part of the record of the S.A. In this affidavit, respondent No. 1 had further deposed that the documents are created as an afterthought with the purpose.

In response to this affidavit, the Bank did not dispute that these documents were not available on the record of the Tribunal below, but pointed out that there was no occasion to file these documents before the Tribunal below, as this plea of notice having not been issued to the guarantor was never taken in the S.A. filed before the Tribunal below. As per the appellant, the S.A. filed by the respondent No. 1 was for quashing possession notice dated 10th February, 2011 and sale notice dated 27th February, 2011. The Bank had accordingly pleaded that since the issue was raised in the Appeal, it could have easily sought permission to place these documents on record by way of additional evidence. The allegation that these documents were frivolous is denied by the Bank. It is urged that the sale notice dated 30th December, 2011 was issued to the borrower Mr. Om Prakash (respondent No. 1) and guarantors Mr. Rupendra Kumar Saxena and Mr. Ranjeet Singh Shekhawat. It is alleged that both the guarantors refused to accept the sale notice and a copy of the same is placed on record of the Appeal before this Tribunal.

There is also serious contest between the parties if there would be any necessity to issue sale notice to the guarantor who is not a mortgagor. The property with which the loan was secured was of the respondent No. 1 who is found to have been served with the notice. In this regard, Counsel for the appellant would contend that there was no requirement to issue notice to guarantor Mr. Ranjeet Singh Shekhawat, for sale of the mortgaged property belonging to borrower, who has only furnished his personal guarantee. As per the Counsel, guarantor was not at all concerned with the sale of the mortgaged property. Counsel submits that the definition of 'borrower' as given in Section 2(f) of the SARFAESI Act is for the purpose of security interest in the secured asset. When there is no security interest vis-a-vis guarantor, a mere definition under the Act would not require the secured creditor to give or serve notices of possession and sale of the secured asset to such uninterested guarantors. The Bank has also pleaded that there was no occasion for the Bank to adduce a document to prove the service of notices of possession and sale to the said guarantor, as this question was never raised by the respondent No. 1 in the S.A. filed by him and the guarantor has not made any issue in this regard.

In support of his plea, the Counsel for the appellant Bank would rely upon a decision of DRAT, Mumbai rendered in Appeal No. 227 of 2007 Anushree Sah v. Bombay Mercantile Bank Ltd., decided on 14th September, 2007, reported in II (2008) BC 63 (DRAT), where this issue has been considered. In this case, DRAT, Mumbai has considered the question of non-issuance of notice under Section 13 of the SARFAESI Act to legal heir of the guarantor of a loan. The Court has held that the deceased father being only a guarantor does not fall under any of categories to whom notice was required to be given. The Appeal was dismissed. In this case, the appellant before the Tribunal had placed reliance on the word 'borrower' used in Section 2(1)(f) of the SARFAESI Act to urge that the borrower would also mean guarantor. DRAT, Mumbai in this regard has held as under:

"14. Coming to the interpretation of Section 13(2) of the SARFAESI Act, no doubt one has to consider the definition of the term 'borrower' as given under Section 2(1)(f) of the SARFAESI Act. The term 'borrower' is not defined to mean and include the guarantor and mortgagor along with borrower but it is defined by using disjunctive 'or'. According to the said definition of a 'borrower' means any person who has been granted financial assistance i.e. the company in this case being Car Mart Pvt. Ltd. or a guarantor who has given guarantee or created any mortgage or pledge as security for the financial assistance granted.

In order to understand Section 13(2) of the SARFAESI Act one has also to look into the definition of another phrase used therein i.e. 'security agreement' which is defined in Section 2(1)(zb). The security agreement is defined as follows:

(zb) "security agreement" means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor.

The phrase 'security interest' used in the above clause is defined under CI. (zf) of Sub-section (1) of Section 2 of the SARFAESI Act to mean right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31.

Thus, in order to be entitled to a notice under Section 13(2) of the SARFAESI Act what is required is that the person must be a borrower or guarantor or a mortgagor against whom a secured creditor like the respondent-Bank wants to enforce a security agreement like a mortgage creating security interest in favour of the secured creditor. Negatively speaking, notice under Section 13(2) of the SARFAESI Act is not required to be served on a person unless a Bank wants to enforce his liability under the security agreement like a mortgage deed. Therefore, the question is, firstly, against whom the Bank wants to enforce the security agreement. It is not the case of the appellant that the deceased father had executed security agreement in favour of the respondent-Bank. If appellant's father was not a party to the security agreement i.e. mortgage deed there was no question of the Bank enforcing it against him and consequently about serving notice on him or his heirs under Section 13(2) of the Act. He was only a guarantor and the Bank was not seeking to enforce the guarantee executed by her father in which case after his death the appellant would be a necessary party. Thus, in my view, when the guarantee was not being enforced by the proposed action of the respondent-Bank and there was no question of the Bank giving notice to the guarantor and for that reason to the heirs and legal representatives of the guarantor. The fact that the notice was given to the mother of the appellant rightly or wrongly does not entitle the appellant for the notice. Appellant's mother may have been given notice because she was concerned with the borrower company being the Managing Director of the company to which notice is required to be given. In the proceeding filed in the Co-operative Court even guarantors were joined as the Bank wanted to enforce the guarantee."

On the other hand, the Counsel for the respondent would rely upon the decision of DRAT, Chennai in the case of Mahavir Plantations P. Ltd. v. ICICI Bank, IV (2005) BC 154 (DRAT) : (2005) 127 Comp. Cas. 456 (DRAT). The DRAT, Chennai has held that, the definition of borrower includes guarantor also and the notice to the guarantor is also mandatory. Since no notice was issued to the guarantor, the entire proceedings taken by the Bank was held vitiated. The judgment in the case of Mahavir Plantation (supra) was only concerned with notice to the guarantor under Section 13(2) of the SARFAESI Act. It is rightly observed that this section contemplates a notice in writing to the borrower to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the creditor is entitled to exercise all or any of the rights under Sub-section (4) of Section 13. Opportunity is thus given to the borrower to discharge the liability or to the guarantor for making arrangement, if possible, to discharge the liability. This notice as such would have to be issued to the guarantor as well, as vide this notice the borrower or guarantor is asked to discharge the liability within 60 days.

Concededly, notice under Section 13(2) of the SARFAESI Act was issued to the guarantor as well in this case. The question in the present case is not regarding non-issuance of notice under Section 13(2) of the SARFAESI Act to the guarantor, but it relates to issuance of notice of possession under Section 13(4). For that, the view expressed by DRAT, Mumbai would clearly come into play as is held in Anushree Sah (supra). The Tribunal has held that the term 'security agreement' defined in Section 2(1)(zb) to mean an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor includes the creation of mortgage by deposit of title deeds with the secured creditor. It is held that what is required is that the person must be a borrower or guarantor or a mortgagor against whom a secured creditor like the respondent-Bank wants to enforce a security agreement like a mortgage creating security interest in favour of the secured creditor. The Tribunal has viewed that negatively speaking, notice under Section 13(2) of the SARFAESI Act is not required to be served on a person unless the Bank wants to enforce his liability under the security agreement like a mortgage deed. Since the notice under Section 13(2) has been issued to the guarantor, the question would be whether such guarantor was required to be served with the notice of possession or sale notice. I do not see any reason or purpose for serving any sale notice on the guarantor who is not a mortgagor and has no concern with the property of the borrower and would go with the view expressed by DRAT, Mumbai in case of Anushree Sah (supra).

Another moot point would be whether such a grievance can be raised by the borrower that no notice was served on the guarantor who has not come forward to make this complaint. Obviously, the guarantor would not be concerned with the sale of this property of the borrower/mortgagor and that is why he was not impleaded as party respondent in the S.A. and has not so far been impleaded or has otherwise come forward to make any grievance in regard to non-service of possession or sale notice on him. It is the concerned guarantor who can properly come and plead if possession or sale notice was ever served on him or not. The respondent borrower cannot have any information with him if the possession or sale notice was ever served on the guarantor or not.

The Bank has placed on record the copy of the sale notice which is found to have been addressed to the guarantor as well. The Tribunal has also not found, as a matter of fact, that the notice was not issued to the guarantor, but has quashed the proceedings on the ground that the Bank has not showed evidence on record that the possession or sale notice was issued or served upon the guarantor. The Tribunal, in my view, has failed to notice that such a grievance could be made by the guarantor only, who was not before the Tribunal below. This was not even the plea raised by the respondent in the S.A. The guarantor or respondent No. 1 has not even pleaded/challenged the sale by way of auction held in favour of respondent No. 2. Will it be appropriate, in this background, to consider the issue of non-service of notice on the guarantor when there is evidence available on record that in fact the possession and the sale notices had been addressed to the guarantor as well?

I have perused the S.A. filed by the respondent before the Tribunal below. The respondent himself has averred in the S.A.:

"5-6 That on 10th February, 2011 Bank officials with some Advocate and Police persons reached at mortgaged property and demanded amount Bank officer and Advocate Mr. R.K. Bhargav told to appellant that he gave offer for payment of dues otherwise Bank will take possession of property forcibly appellant requested that he will pay the amount regularly and given in writing but after receiving said letter they changed their colours and forcefully dispossessed the appellant from his lonely house. A copy of possession notice is Exhibit-A-1."

The above action of the Bank was challenged as arbitrary and unfair. The ground was simple that the auction was contrary to law and that the Bank had not mentioned the amount as per Section 13(3) of the SARFAESI Act and that before taking forcible possession the Bank had not given notice. No ground was pleaded in the S.A. that the notice had not been served on the guarantor and this would be in violation of the mandate of statute. The Bank did not accordingly get any opportunity either to rebut this contention or to place on record the documents to show that in fact the possession and the sale notices had been addressed and served upon the guarantor as well. The Bank, apparently, was taken by surprise when the Tribunal had returned the finding that the Bank was required to serve notice on the guarantor as well who, as per the definition of 'borrower', would be taken as borrower. It can be said that the Bank did not get fair opportunity to prove the factual position that notice indeed had been addressed and served on the guarantor as well.

In view of this infirmity emerged from the pleadings in the S.A., the proper course would have been to remand the case back to the Tribunal to permit the Bank to meet the objection which had taken the Bank by surprise. I am not adopting that course because the property in the meantime had been sold in an auction and this sale has not been put to any challenge. The auction purchaser who is impleaded as respondent No. 2 has come forward with the plea that he being bona fide purchaser cannot be made to suffer if there was any violation of the rules in the conduct of sale. For this proposition of law, the Counsel would seek support from a recent decision of the Hon'ble Supreme Court in the case of Sadashiv Prasad Singh v. Harendar Singh, II (2014) SLT 5 : I (2014) BC 654 (SC), rendered in Civil Appeal No. 161/2014 on 8th January, 2014.

In this case, the Division Bench of the High Court had held that the proceeding before the Recovery Officer was held in violation of the provisions of Rule 11(2) of the Income-tax (Certificate Proceedings) Rules. The High Court had accordingly set aside the proceedings conducted by the Recovery Officer, including the sale of the property by public auction. The auction purchaser had assailed this order passed by the Division Bench of the High Court by filing SLP before the Hon'ble Supreme Court. The plea by the auction purchaser before the Court was that in terms of the law declared by the Apex Court, property purchased by third party auction purchaser, in compliance of the Court order, cannot be interfered with on the basis of the success or failure of parties to a proceeding, if auction purchaser had bona fidely purchased the property. In support of this proposition, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Ashwin S. Mehta v. Custodian, I (2006) SLT 309 : I (2006) CLT 11 (SC) : (2006) 2 SCC 385. The Court in this case has held as under:

"In that view of the matter, evidently, creation of any third-party interest is no longer in dispute nor the same is subject to any order of this Court. In any event, ordinarily, a bona fide purchaser for value in an auction-sale is treated differently than a decree-holder purchasing such properties. In the former event, even if such a decree is set aside, the interest of the bona fide purchaser in an auction-sale is stayed. [See Nawab Zain-ul-Abdin Khan v. Mohd. Asghar Ali Khan, (1887) 151. A. 12]. The said decision has been affirmed by this Court in Gurjoginder Singh v. Jaswant Kaur, (1994) 2 SCC 368."

Reliance was also placed on Janatha Textiles v. Tax Recovery Officer, III (2008) BC 372 (SC) : V (2008) SLT 369 : (2008) 12 SCC 582. The conclusion drawn in the case of Ashwin S. Mehta (supra) was reiterated in Janatha Textiles' cases (supra). The Court has referred to the judgments in the cases of Nawab Zain-ul-Abdin Khan v. Mohd. Asghar Ali Khan (supra), Janak Raj v. Gurdial Singh, 1966 (SLT Soft) 192 : AIR 1967 SC 608, Gurjoginder Singh v. Jaswant Kaur (supra), Padanathil Ruqmini Amma v. P.K. Abdulla, I (1996) CLT 443 : (1996) 7 SCC 668 to observe that it is an established principle of law that third party auction purchaser's interest in the auctioned property continues to be protected notwithstanding the underlying decree is set aside or otherwise. The relevant observations in this regard in the case of Janatha Textiles (supra) are as under:

"20. Law makes a clear distinction between a stranger who is a bona fide purchaser of the property at an auction-sale and a decree-holder purchaser at a Court auction. The strangers to the decree are afforded protection by the Court because they are not connected with the decree. Unless the protection is extended to them the Court sales would not fetch market value or fair price of the property."

The Supreme Court has also taken note of the exception carved out to the above proposition of law in the case of Valji Khimji & Co. v. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited, IV (2008) BC 536 (SC) : VII (2008) SLT 621 : (2008) 9 SCC 299. In this case, the Hon'ble Supreme Court has observed that once the sale is confirmed by the authority, certain rights accrue in favour of the auction purchaser and these rights cannot be extinguished except in exceptional cases such as fraud. The relevant observations of the Court reads as under:

"30. In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction-purchaser. However, where the auction is subject to subsequent confirmation by some authority (under a statute or terms of the auction) the auction is not complete and no rights accrue until the sale is confirmed by the said authority. Once, however, the sale is confirmed by that authority, certain rights accrue in favour of the auction-purchaser, and these rights cannot be extinguished except in exceptional cases such as fraud.

In the present case, the auction having been confirmed on 30th July, 2003 by the Court it cannot be set aside unless some fraud or collusion has been proved. We are satisfied that no fraud or collusion has been established by anyone in this case."

Thus, the Supreme Court has held that the right of the auction purchaser in the property can only be extinguished when the said purchaser was assailed on the ground of fraud or collusion.

In the instant case, the sale by auction is not even under challenge in the S.A. The pleading by the respondent in the S.A. to allege collusion cannot entitle the respondent to seek a declaration that the auction was actuated by fraud or collusion. If the respondent had intention to challenge the sale on the ground of fraud, he ought to have raised the same before the Tribunal below or taken any other appropriate action. In the absence of challenge to the sale in the S.A., it cannot be taken that the appellant could have raised this ground in the Appeal as respondent in this Appeal. While so observing I am conscious of the fact that strict procedure under the CPC is not necessarily required to be followed in the proceedings before the DRT, but in the absence of any challenge to the sale, the requirement of principle of natural justice with which this Tribunal is to be guided would also stand violated. Even if there was some defect in the service of sale notice to the guarantor, which issue only the guarantor could have raised, and not the respondent; still the auction sale in favour of respondent No. 2 being not under challenge would be protected. It would be protected not only on account of absence of challenge to the sale, but in view of law laid down by the Hon'ble Supreme Court in the case of Sadashiv Prasad (supra) and other judgments which have been referred to and relied upon as noted above. The respondent No. 1 cannot be permitted to plead fraud and collusion in his capacity as respondent in this Appeal in the absence of challenge to sale. In view of above, the order passed by the Tribunal below and challenged in the present Appeal cannot be sustained and is accordingly set aside. The Appeal is accordingly allowed.