Rights of the Borrowers under SARFAESI proceedings

Source :Advocate V D RAO 

Many argue that the provisions of SARFAESI Act, 2002 are draconian in nature. Borrowers do often refer to their good relations with the Bank for a considerable time and they express angst at the Bank’s action under theprovisions of the SARFAESI Act, 2002. 

The borrowers do often question as to why the Bank should not consider the reputation of the customer, understand the temporarydifficulties and grant time rather proceeding against the ‘Secured Asset’ using theprovisions of the SARFAESI Act, 2002 mechanically. 

 The situation of the borrowersmay be sympathetic to the officials of the Bank at times, but, they too can do nothing when an account becomes a ‘Non-performing Asset’. 

The officials of the Bank are bound to act against the ‘Non-performing Assets’ in accordance with their internal guidelines and in accordance with theprovisions of the Act. 

The argument that the provisions of the SARFAESI Act are draconian was set-aside by the Constitutional Courts while giving guidelines and clarifying the legal position from time to time.

The problem comes to the borrowers in ascertaining the clear legal position under the provisions of the SARFAESI Act, 2002 and it’s a very complicated thing. Even when the borrower approaches a professional asking for an advice, the professional may not be in a position to give clear suggestion to the borrowers. 

There is an example.  In SARFAESI proceedings, the barrower and the Bank officials may communicate with each other and at the same time, they think about defending their respective rights in accordance with law. In many cases, the borrowers approach a professional asking for an advice based on the communication or the oral communication from the officials of the Bank concerned. 

The Bankofficials may ask the borrowers to deposit some amount and may promise that the action under SARFAESI Act may be deferred based on the payment. It will be very difficult for a professional to opine on the Bank’s offer.

It is very clear that the borrower may not be in a position to get any relief from the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 when there is no ground. Professionals may usually put some grounds and file an appeal based on the request made by the borrower under Section 17 of the Act, but, there is decrease in this tendency, of late.  Earlier, based on the grounds in the Appeal filed by the borrower under section 17 and without even listening to the reply or the version of the Bank, the Debt Recovery Tribunal used to grant an interim-stay subject to few conditions like depositing some nominal amount .

 The usual grounds of an appeal under section 17 of the Act can be as follows:

1. The Bank has grossly erred in calculating the outstanding due and the Bank has also not provided the statement of accounts from time to time despite a written request.

2. The Bank has no right to proceed against the ‘Secured Asset’ as the borrower is not a ‘willful defaulter’.

3. The Bank has not appraised the borrower while classifying the account as ‘Non-performing Asset’. Hadthe Bank informed the borrower about classification, the borrower should have taken appropriate steps.

4. The Borrower has not received any notice under section 13 (2) of the Act and the borrower has come to know about the Bank’s action only when few officials of the Bank inspected the property and wanted the borrower to vacate it.

5. The Bank has not responded to the objections raised by the borrower under Section 13 (3-A) of the Act.

6. The Bank has promised to regularize the account upon the payment of some substantial amount and even after the payment; the Bank has not regularized the Account and as such the account can not be treated as ‘Non-performing Asset’.

7. The Bank has failed to proceed against the borrower and instead harassing the guarantor.

8. The Bank is not right in not proceeding against the property of the borrower and it is illegal to proceed against the property of the guarantor without proceeding against the borrower.

9. There was no ‘valid mortgage’ with the Bank at all.

10. The Bank is preparing to sell the valuable property of the borrower/guarantor at pittance and the Bankis colluding with the bidders.

11. The Auction process is unfair and illegal.

The above are the few grounds and there can be many more grounds to file an appeal under section 17 of the SARFAESI Act, 2002. No purpose will be served by filing an appeal mechanically unless the intention of the borrower is bonafide and unless there is arguable case against the Bank. It can never be said thatthe Bank or Bank officials are always right and the borrower is always a ‘willful defaulter’. The borrowermay be genuine in his grievance against the Bank and he may simply want to fight for his rights againstthe Bank.

It is an allegation that the Debt Recovery Tribunals do favour the Banks and do not even listen to the borrowers even when there is a good case for the borrowers. I would like to give one example as to why borrowers/guarantors/public feels this way and the example is as follows:

Facts & Proceedings:

1. A person named ‘AB’ wants purchase a property from a person named ‘BC’.

2. While intending to purchase the property, Mr.AB wanted to inspect the original title deeds of the property of ‘BC’ and also wanted to check encumbrance over the property.

3. As the Original Deeds are available with ‘BC’ which are in order and as there is no encumbrance over the property, Mr.AB has purchased the property for a valuable considerable after paying requisite Stamp Duty and registration charges.

4. The property is handed-over to Mr.AB and Mr.AB has invested considerable amount further in the property.

5. While the property is in possession of Mr.AB, suddenly a Bank named ‘DE’ has affixed a notice under section 13 (4) at the property.

6. Shocked at the notice, Mr.AB has approached the Bank and wanted the details as to why the notice is affixed at the property.

7. The Bank has replied saying that the property is mortgaged with the Bank with due registration by Mr.AB and he has defaulted to repay loan.

8. Further enquiry has revealed that the Bank is at fault while getting the property mortgaged from Mr.AB and there is no reason as to why they have not insisted for the Deposit of Title Deeds.

9. As there is no option, Mr.AB has filed an appeal under Section 17 of the SARFAESI Act, 2002 alleging everything as to how he is a bonafide purchaser. He also leveled clear allegations against the Bank and their negligent attitude.

10. The Appeal is dismissed by the Debt Recovery Tribunal vaguely saying that the Bank has followed the procedure correctly under the provisions of SARFAESI Act, 2002 and without noting or dealing with the allegation pertaining to mortgage and without noting that the Bank has not replied to the charges made by the Appellant.

11. Mr.AB, as there is no option, has filed an Appeal with the DRAT. While the Appeal is pending, the Bank has brought the property for auction and while the proceeding is going on, the Bank has completed the Auction and says that it has confirmed the auction infavour of the ‘only bidder’ who bid the property on a particular date.

12. Mr.AB is being asked now to get the details of the bidder, implead him as party to the proceedings and also asked to challenge the act of Sale afresh.

The above case is an example as to how borrowers/guarantors and public get troubled with this recovery system. It may be true that that the Bank is supposed to defeat the unfair attitude of the borrower, but, there is a law and if the borrower raises a considerable legal point, the same is to be considered. Law is always supported by logic, and it can not be said that the legal point or right being raised by the borrower/person can be ignored without any reason. Against this background, of late, even the High Courts coming heavily against the Bank and High Court is setting-aside the proceedings of DRT or DRAT.

Complications in finding the remedy or granting the remedy:

Due to the reasons mentioned above, it is most often difficult for the borrowers/guarantors/public to find-out the appropriate remedy against the Bank if there is a good ground to challenge the Bank’s action.

 It is also difficult and complicated for the DRT and DRAT to grant relief to the borrowers and the adjudicating authority shall not purely depend upon the technicalities if it suits the Bank and can not ignore the legal principles raised by the borrower as a ‘delay tactic’. 

Just because, the Bank says a particular thing against a particular person, the same can not be the gospel truth. It all depends upon the facts and circumstances of the case.

Referring to the legal background under SARFAESI Act, 2002, dealing with the mandatory nature of Section 13 (3-A) and emphasizing as to the complications while granting relief as we can assume, theMadras High Court in W.P.No.6710 of 2011 reported in CDJ 2011 MHC 4916, is observed as follows:

“9. On classification of the debt as Non-Performing Asset, notice under Section 13(2) is issued giving sixty days time to the borrower for repayment of the debt or in instalment thereof. The notice under Section 13(2) is not appealable under Section 17 of the Act, as that section provides an appeal only against the measures taken under Section 13(4) of the Act. In the event the borrower fails to discharge in full his liabilities within sixty days from the date of notice, the secured creditor is entitled to issue possession notice under Section 13(4) of the Act. Again it has been settled that the possession under Section 13(4) may be physical or symbolic and the secured creditor would be entitled to bring the secured asset for sale. The secured creditor can also file an application under Section 14 before the Chief Metropolitan Magistrate/District Magistrate to assist the secured creditor in taking possession of the secured asset. Considering the application filed under Section 14, the Chief Metropolitan Magistrate/District Magistrate, as the case may be, discharges only ministerial function, as there is no adjudication process involved, and in that context, even no notice to the respondent in the petition is necessary.

10. Keeping the above law in mind, the rights of the secured creditor vis-a-vis the borrower should be considered. As the Act is intended to enable the secured creditor for speedy recovery of the debt from the borrower, the provisions are made very stringent bypassing the normal rule of relegating the parties to Civil Court for recovery of the debt. While such stringent provisions are intended, some minimum safeguards are also made available to the borrower to ensure fairness on the part of the secured creditor while taking measures for recovery of the debt. In this regard, three provisions can be referred to, namely,

(i) an opportunity to make representation or to raise objection in terms of sub-section (3-A) to the notice under sub-section (2) of Section 13;

(ii) the secured creditor could settle between the parties in writing the terms for sale in the event the secured creditor chooses to sell the immovable property by private treaty as envisaged under Rule 8(5)(d) of the Rules.

(iii) The Authorised Officer shall obtain the consent of the borrower and the secured creditor if he fails to obtain a price other than the reserve price and intends to effect the sale at a lower price.

11. In the above background, the question raised in the writ petition must be considered. In MardiaChemicals Ltd., and others v. Union of India and others, (2004) 4 SCC 311, wherein the Supreme Court, in paragraphs 45 to 47, has held as follows:

“45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.

46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.

47. This will also be in keeping with the concept of right to know and lender’s liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act.”

12. The very same question again came up for consideration before the Supreme Court in Transcorev. Union of India and another, (2008) 1 SCC 125, wherein the Supreme Court has held as follows:

“24. Section 13(3) inter alia states that the notice under Section 13(2) shall give details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the bank/FI. In the event of non-payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. It is very similar to notice of demand under Section 156 of the Income Tax Act, 1961.After classification of an account as NPA, a last opportunity is given to the borrower of sixty days to repay the debt. Section 13(3-A) inserted by amending Act 30 of 2004 after the judgment of this Court in Mardia Chemicals (supra), whereby the borrower is permitted to make representation/ objection to the secured creditor against classification of his account as NPA. He can also object to the amount due if so advised. Under Section 13(3-A), if the bank/FI comes to the conclusion that such objection is not acceptable, it shall communicate within one week the reasons for non-acceptance of the representation/objection. A proviso is added to Section 13(3-A) which states that the reasons so communicated shall not confer any right upon the borrower to file an application to the DRT under Section 17. The scheme of sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become sub-standard, doubtful or loss. The identification of debt and the classification of the account as NPA is done in accordance with the guidelines issued by RBI. Such notice of demand, therefore, constitutes an action taken under the provisions of NPA Act and such notice of demand cannot be compared to a show cause notice. In fact, because it is a notice of demand which constitutes an action, Section 13(3-A) provides for an opportunity to the borrower to make representation to the secured creditor. Section 13(2) is a condition precedent to the invocation of Section 13(4) of NPA Act by the bank/FI. Once the two conditions under Section 13(2) are fulfilled, the next step which the bank or FI is entitled to take is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt.

25. Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show-cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act.”

13. Most recently in KanaiyalalLalchand Sachdev v. State of Maharashtra, (2011) 2 SCC 782,the Supreme Court once again indicated the scope of Section 13(3-A) of the SARFAESI Act in the following words :-

“16. Section 13(3-A) of the Act was inserted by Act 30 of 2004 after the decision of this Court in Mardia Chemicals and provides for a last opportunity for the borrower to make a representation to the secured creditor against the classification of his account as a non-performing asset. The secured creditor is required to consider the representation of the borrowers, and if the secured creditor comes to the conclusion that the representation is not tenable or acceptable, then he must communicate, within one week of the receipt of the communication by the borrower, the reasons for rejecting the same.”

14. In Mardia Chemicals Ltd., two substantial contentions were raised on behalf of the borrowers before the Supreme Court, the first being the absence of an adjudicatory mechanism available to the borrowers and the second relates to the denial of an opportunity to state their case before issuance of a notice under Section 13(2) of SARFAESI Act.

(a) The first contention was opposed by the Union of India on the ground that the transaction in question was essentially one in the contractual field involving two contracting parties and as such, there was no question of compliance with the principles of natural justice. The said contention was negatived by the Supreme Court. The Supreme Court said :-

“69. On behalf of the respondents time and again stress has been given on the contention that in a contractual matter between the two private parties they are supposed to act in terms of the contract and no question of compliance with the principles of natural justice arises nor the question of judicial review of such actions needs to be provided for. However, at the very outset, it may be pointed that the contract between the parties as in the present cases, is no more as private as sought to be asserted on behalf of the respondents. If that was so, in that event parties would be at liberty to seek redressal of their grievances on account of breach of contract or otherwise taking recourse to the normal process of law as available, by approaching the ordinary civil courts. But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complain of the conduct of the banking companies and financial institutions for whatever goes on between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.

(b) The second contention pertaining to the violation of the principles of natural justice was answered by the Supreme Court thus :-

“77. It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied).

15. The judgments of the Supreme Court in Transcoreand Kanaiyalal Lalchand Sachdevalso proceed on the basis that Section 13(3-A) was in the nature of an opportunity to the borrowers to submit their case and the secured creditor was expected to consider the objection and it should result in a reply before initiating further proceedings under Section 13(4) of the Act.

16. The provisions of the Code as it stood originally do not contain a provision to give opportunity to the borrower to make any representation or raise any objections before the secured creditor to take measures under Section 13(4) of the Act. As per the then existing provisions, Section 13(2) was followed by action under Section 13(4) in case the borrower failed to discharge his liabilities in full within the period prescribed under sub section (2) of Section 13.

17. SARFAESI Act was challenged in Mardia Chemicals Ltd., primarily on the ground that Banks and Financial Institutions have been vested with arbitrary powers without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount sought to be recovered from the borrowers. The basic contention in Mardia Chemicals Ltd., was that the offending provisions as contained under the Act, are such that, it all has been made a one-sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. The challenge made to the SARFAESI Act was considered by the Supreme Court in the said background. The Supreme Court found that the borrowers were not given any opportunity before taking the extreme step of taking possession or management as provided under Section 13(4) of the Act. The Supreme Court also found that the purpose of serving a notice under Section 13(2) was to enable the borrower to submit a reply, explaining the reasons as to why measures may or may not be taken under sub section (4) of Section 13. The Supreme Court wanted an internal mechanism at the Bank level to consider the objections filed by the borrowers and to submit a reply to the borrowers with reference to such objections before taking the drastic measures under Section 13(4) of the Act.

18. The decision of the Supreme Court in MardiaChemicals Ltd. was made on 8^th April, 2004. It was only to give effect to the observation made by the Supreme Court in the said judgment, the SARFAESI Act was amended and Section 13(3-A) was inserted by way of Act 30/2004 with effect from 11^th November, 2004.

19. The statement of objects and reasons appended to the Amendment Act 30/2004 shows that it was virtually to give effect to the valuable suggestions given by the Supreme Court in MardiaChemicals Ltd., the Act was amended. In fact, realizing the importance of the issue, originally, an ordinance was promulgated on 14^th November, 2004 as the Parliament was not in session and subsequently, it was replaced by Act 30/2004.

20. The Supreme Court in Mardia Chemicals Ltd., very clearly stated that before proceeding to take measures under Section 13(4) of the Act, the borrower should be apprised of the reasons for not accepting their objections or points raised in their reply to the notice served upon them under Section 13(2) of the Act. The observation made by the Supreme Court with respect to the reply has to be considered in the light of the challenge made by the borrower against taking drastic measures under Section 13(4) without an opportunity to submit their version. Therefore, the Supreme Court very categorically stated that before proceeding to take measures, the reply notice must be served. Parliament by prescribing a short period of seven days to give a reply, wanted the Banks to Act swiftly so as to enable them to take further proceedings under Section 13(4) of the Act.

21. In Mardia Chemicals Ltd., the Supreme Court also stated that reasons given by the Banks for not accepting the objections raised by the borrower would not be a ground to challenge the proceedings. The said observation was also taken note of by the Parliament and accordingly, a proviso was appended to sub- section (3-A) of Section 13, whereby it was made clear that the reasons 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 of the Act.

22. The learned senior counsel for the petitioners contended that the very fact that the Parliament denied the right to the borrowers to challenge the reasons stated in the communication sent by the Bank by way of reply to the objections submitted to the notice under Section 13(2) shows that no right would accrue to the borrower in case reply is not given as prescribed under Section 13(3-A).

23. The Parliament wanted the Banks and Financial Institutions to recover the dues after giving a reasonable opportunity to the borrowers. It was only with that purpose, proviso was added to sub-section (3-A) of Section 13, barring legal action, to challenge the reasons given in the reply notice sent by the Banks. The Parliament has prescribed a period of one week to the Banks and Financial Institutions to send a reply to the objection filed by the borrowers pursuant to Section 13(2) of the Act. The fact that the Act is silent about the consequences of not sending a reply would not show that the direction is not mandatory. The requirement of sending a reply to the notice within a period of one week has to be considered in the light of the proviso to sub-section (3-A) of Section 13 of the Act. It is only against the reasons which are found in the reply notice, no action is possible. The absence of any provision in the Act indicating the consequences for not sending a reply cannot be taken as a ground to contend that the requirement to send a reply is not mandatory in nature and it is rather optional.

24. The SARFAESI Act being made with the sole intention of speedy recovery of the debts to the Banks and Financial Institutions contains only very few provisions giving a right to the borrowers to submit their version and have it considered by the Bank. Section 13(3-A) is one such provision which mandates consideration of their objections. The other two provisions are Rule 8(8) and the second proviso to Rule 9(2) of the SARFAESI Rules. The requirement as provided under Section 13(3-A) cannot be treated as an empty formality. The borrowers must be in a position to know the reasons which made the Bank to reject their objections on proposals. The question of compliance of the requirement as indicated in the notice under Section 13(2) would arise only in case the Bank intimates the borrower about the disposal of his objection made to the notice issued by the Bank. Section 13(3-A) if considered in the light and in the factual background of the judgment in Mardia Chemicals Ltd., would lead to no other conclusion than the requirement of sending a reply within a period of one week is mandatory in nature.

25. The Supreme Court in Transcore case held that issuance of notice under Section 13(2), consideration of objections and intimating the decision on such objections to the borrower under Section 13(3-A) and taking possession under Section 13(4) all constitute action taken by the Banks and Financial Institutions for the purpose of the SARFAESI Act.

26. Section 17 provides that any person [including a borrower] aggrieved by any of the measures referred to in sub-section (4) of Section 13, taken by the secured creditor can approach the Debts Recovery Tribunal within forty five days from the date on which such measures had been taken. Section 17(2) mandates that the Recovery Officer should consider as to whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of the security are in accordance with the provisions of the Act and the rules made thereunder.

27. The Supreme Court in Transcore, while considering the jurisdiction of the Debts Recovery Tribunal, observed that the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed not in accordance with the provisions of the Act, then Debts Recovery Tribunal is entitled to put the clock back by restoring the status quo ante. Since the measures taken under Section 13(4) would include the action commencing from issuance of notice under Section 13(2) and reply under Section 13(3-A), it is well within the jurisdiction of the Debts Recovery Tribunal to consider as to whether there was compliance of the condition enumerated under Section 13(3-A) of the Act. In short, the consideration of the correctness and legality of the measures taken by the Bank under Section 13(4) would include all the proceedings commencing from section 13 (2) and therefore, necessarily, the Tribunal has to consider the compliance of section 13(3-A) also.

28. The observation of the Supreme Court in Transcore, after extracting Section 13(2) and 13(3-A), is that once two conditions under Section 13(2) are fulfilled, the next step for the Banks and Financial Institutions is either to take possession of the secured assets of the borrower or to take over management of the business of the borrower or to appoint any manager to manage the secured assets or require any person, who has acquired any of the secured assets from the borrower, to pay the secured creditor towards liquidation of the secured debt, also supports the view that sending a reply to the borrower under Section 13(3-A) is a mandatory condition to be fulfilled by the Bank before taking possession under Section 13(4) of the Act.

29. A similar question came up for consideration before a Division Bench of the Karnataka High Court in Mrs.SunandaKumari v. Standard Chartered Bank represented by its Authorised Officer, 2006 (4) KCCR 2216, wherein the Division Bench observed as follows:

“It is not disputed that even though the petitioners had submitted Annexure ‘C’ reply to Annexure ‘B’ notice issued under sub-section (2) of Section 13, the respondent bank had not sent any communication to the petitioners as required under sub-section (3A) of Seciton 13. Annexure ‘D’ application was filed before the Chief Metropolitan Magistrate only on 27.1.2005 i.e,, after sub-section (3A) was inserted in Section 13. Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non-acceptance within one week of receipt of the representation or objection. Thus, sub-section (3A) confers on the borrower a right to know the reasons for the non-acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower’s representation or objection and if the representation or objection is not tenable or acceptable, he is bound to communicate the reasons for such non-acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non-acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under sub-section (4) of Section 13 and Section 14 is illegal and irregular….”

30. A learned Judge of the Gujarat High Court in Tensile Steel Ltd., and another v. Punjab and Sind Bank and Others, AIR 2007 Gujarat 126(1), has observed as follows:

“21…..It is not denied that the said reply had been received by the Bank. However, the Bank did not consider and decide the same. Sub-section (3-A) of Section 13 of the Act of 2002 enjoins the Bank to consider and decide such reply/objection and to communicate the decision thereof. Unless and until the said exercise is completed, the Bank is not authorised to proceed further and take any of the measures under sub-section (4) of the said Section 13. In the present case, it is indisputable that the Bank, without complying the mandatory requirement under sub-section (3-A) of the said Section 13, proceeded further under sub-section (4) of the said Section 13, took the assistance of the District Magistrate under Section 14 of the Act of 2002; and took over the possession of the secured assets. The action of the Bank is certainly contrary to the statutory mandate. The same requires to be quashed and set aside on that ground alone.”

31. The aforesaid judgment has been quoted with approval by a Division Bench of the Orissa High Court in KrushnaChandra Sahoo v. Bank of India and others, AIR 2009 Orissa 35 and the Division Bench observed as follows:

“7. A conjoined reading of both the provisions referred to hereinabove makes it clear that it is obligatory on the part of the authority first to consider and dispose of the objection by a speaking and reasoned order and communicate the order to the person aggrieved i.e, the borrower/guarantor. It is a condition precedent for issuance of notice under Section 13(4) of the Act. The authority cannot ignore the statutory provisions treating them merely to be a decoration piece in the statutes rather they require strict adherence for the simple reason that the financial institutions have been conferred with certain privileges for making expeditious recovery from the borrowers by-passing the onerous and lengthy procedure of civil suits.”

32. Mr.A.L.Somayaji, learned senior counsel for the third respondent would rely upon a Division Bench judgment of this Court in V.Nobelkumarv. The Authorised Officer, Standard Chartered Bank and others, 2011 (1) CTC 513 to contend that this Court has already held that the reply to the representation/objection made by the borrower under Section 13(3-A) and Rule 3-A(c) to the notice under Section 13(2) is mandatory. Though the said observation is also to the same view we are taking in this writ petition, we may add that the said observation was made in the context of considering the power of the Chief Metropolitan Magistrate/District Magistrate to pass orders under Section 14 only and not on any detailed discussions on the issue.

33. For all the above reasons, we hold that the right conferred on the borrower to make a representation is a valuable right and in the event the borrower either chooses to make his representation or raises objection, in the event the secured creditor comes to the conclusion that such representation/objection is not acceptable or tenable, the secured creditor shall communicate the reasons for such non-acceptance of the representation/objection to the borrower within seven days of the receipt of such representation/objection. Hence, the requirement to reply is mandatory.”