Gujrath H C upholds provisions of Securitisation Act

In a significant order, the Division Bench of 

Gujarat High Court has upheld the provisions of 

Section 14 of the Securitisation and Reconstruction

of Financial Assets and Enforcement of Security

Interest Act, 2002 (Securitisation Act).

The Act prescribes the procedure for taking
possession of secured assets of a borrower by
secured creditors like banks and financial institutions.

The Division Bench consisting of
Chief Justice S J Mukhopadhaya and
Justice A S Dave pronounced the order
while acting on a petition by one Rameshwaram
Cotton Industries (Gujarat) Pvt Ltd.

The petitioner had challenged the provisions of
Section 14 of the Securitisation Act.

He had made Rajkot District Magistrate,
Rajkot Mamlatdar and the bank from which the
credit was borrowed as respondents.

Under the provision of Section 14 of the Securitisation
Act, a secure creditor has to take assistance from
the appropriate officer of the rank of either District
Magistrate (DM) or Chief Metropolitan Magistrate
(CM) to take possession of the secured asset in
case of default in repayment by the borrower.

And the DM or the CMM can order assistance
to the creditor to get the possession of the secured asset.
The petitioner's lawyer had contended that while
taking action under Section 14 of the Securitisation Act,
the District Magistrate had not issued any notice to
the petitioner and passed the order straightaway for
taking possession of the petitioner's property.

Calling the powers conferred on the District Magistrate
under Section 14 of the Act as violative of principles
of natural justice, the petitioner had challenged the provision.

While dismissing the petition, the court observed,
"Any action on the part of the secured creditor in
taking possession of secured asset, if not in accordance
with the Act or the Rules framed there under, such measures
as deemed to be taken... one can challenge such action
or measures taken by filing petition under
Section 17 of the Securitisation Act,
but such illegal action, if any, will not render Section 14 bad in law."

"We, therefore, uphold Section 14 of the Securitisation
Act being the procedure prescribed to take possession,
which is followed only after notice under sub-section (2)
to Section 13 and deciding the objections, if any, preferred
by the borrower...," the DB added.

The court suggested that any illegality in taking
possession of the secured asset can be challenged
before the Debt Recovery Tribunal.

DRAT- Chennai judgement in RA-16/2002

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 28^TH JANUARY, 2004

PRESENT:  HON’BLE MRS. JUSTICE A. SUBBULAKSHMY

CHAIRPERSON

RA-16/2002

(OA-457/1999-DRT, Hyderabad)

BETWEEN:

State Bank of India,

Rep. by its Branch Manager,

Red Hills, Hyderabad.

…  Appellant

            (Counsel:  Mr. K.S. Sundar)

AND

1.  Mr. D.V.S. Raju,

     S/o. D. Balarama Raju,

     Aged about 60 years,

     Residing at 5 Balaji Avenue,

     T. Nagar, Chennai-600 017.

2.  M/s. A.P. Carbides Ltd. (In liquidation),

     Rep. by the Official Liquidator,

     High Court of Andhra Pradesh,

     Hyderabad.

3.  Mr. N.V. Janardhana Rao,

     S/o. N. Satyanarayana Murthy,

     Aged about 65 years,

     Residing at 6-1-69/A/4/8,

     Saifabad, Hyderabad.

4.  The Industrial Development Bank of India,

     “Parishrama Bhavan”, 5^th Floor,

     5-9-58/B, Fatehmaidan Road,

     Basheerbagh, Hyderabad-29.

5.  The Industrial Finance Corporation of India,

     Bank of Baroda Building,

     16, Parliament Street,

     P.B.No.363, New Delhi-110 001.

6.  The Industrial Credit and Investment Corporation of India Ltd.,

     163, Bombay Reclamation Scheme,

     Mumbai-500 021.

7.  Life Insurance Corporation of India,

     “Yogakshema”,

     Jeevan Bhima Marg,

     Mumbai.

8.  Unit Trust of India,

     13, Sir Vittaldas Thackerey Marg

     (New Marine Lines),

     Post Bag No.11410,

     Mumbai-20.

…  Respondents

            (Counsel:  Mr. T.V. Ramanujam for Mr. D. Gopinath)

:  O R D E R  :

1.         The Original Application (OA) was decreed by the PO, DRT, Hyderabad, as against the other defendants except Defendant No.3 and the OA was dismissed as against D3 by Order dated 18.6.2002.  Aggrieved against this dismissal Order as against D3 the appellant Bank has come forward with this appeal.

2.         Counsel for the appellant Bank submits that D3 is also liable for the Suit claim since he executed the guarantee and the decree has to be passed as against D3 also.  Counsel for the 1^strespondent 3^rd defendant submits that D3 resigned from his Directorship in the year 1981 and he was no longer the Director and he had no more claim over the 1^st defendant Company and all the loan transactions were done by the next set of Directors and not by this respondent and the 1^st respondent is not liable and the Order passed by the PO, DRT, is not to be interfered with. 

3.         Counsel for the appellant Bank very much relies upon the guarantees executed by the 1^st respondent, other Directors and the 1^st defendant Company and the Counsel for the appellant Bank submits that as per the guarantee executed the 1^st respondent is liable since it is a continuing guarantee.  He relies upon the guarantees Exs.A3 to A5.  Ex.A3 is the Deferred Payment Guarantee executed on 22.6.1978 between the Bank and the D1 Company.  The guarantee shall remain in force until 30.4.1989 unless a Suit or action to enforce a claim under the guarantee is filed within three months from that date.  Exs.A4 & A5 are the Counter Guarantees dated 22.6.1978 executed by the D1 Company and the three Directors viz. N.V. Janarthana Rao, K. Srinivasa Rao & D.V.S. Raju. 

4.         Counsel for the 1^st respondent pointed out this Ex.A5 guarantee was executed by the Directors only in their capacity as Directors and they never executed personal guarantee and after ceasing from the Directorship they are no longer responsible.  Clause (b) of Ex.A5 Counter Guarantee states “The Bank shall be at liberty to debit the Current Account maintained by us at the Bank’s Red-Hills Branch with any amount paid or payable by the Bank pursuant to Clause (a) of this Counter-guarantee.”   Clause (c) of the Guarantee states that “It is further agreed that this Counter-guarantee will remain in force until the Bank if finally discharged of the liabilities under the said guarantee and has obtained confirmation in writing thereof from the Beneficiary and received therefrom the said Guarantee duly redeemed.”   Clause (b) in this guarantee reveals that the Bank is at liberty to debit the Current Account maintained at the Bank’s branch with any amount paid or payable by the Bank.  Only in their capacity as Directors they have executed this guarantee.  Admittedly, the 1^st respondent resigned from his Directorship in the year 1981.  So, after he resigned from the Directorship since he is no longer the Director of the Company, he cannot be held liable for any subsequent dealings or for the amount due to the Bank and only the next set of Directors will be liable.  After his resignation, D3 cannot be held responsible for any amount due to the Bank because he executed the guarantee only in his capacity as Director of that Company.

5.         It appears that the other two Directors who also executed the guarantee Ex.A5 are no more and their LRs are not added as parties in the Suit.  Counsel for the 1^st respondent submits that when the other guarantors died and no LRs have been added and as the Suit has been abated as against those guarantors, this respondent is also absolved of his liability under that guarantee.  He relies upon the decision in Vol.I (2003) Banking Cases Page-555 (SC) (Zahirul Islam Vs. Mohd. Usman & Ors.) wherein it has been held that “Judgment pronounced against defendant notwithstanding death of Defendant No.2 shall have same force and effect as if judgment pronounced before death took place:  Permission contemplated under Order 22 Rule 4 not obtained from Court exempting plaintiff from bringing on record L.R. of the deceased defendant No.2: Order under record unsustainable.”

6.         The non-joinder of LRs of the deceased has resulted in the loss of valuable right of subrogation available to the 1^st respondent. Even though the 1^st respondent has executed the guarantee, since he has executed the guarantee in his capacity as the Director and as he also resigned from the Directorship in the year 1981, the 1^st respondent cannot be held liable.  Further, there is also variation in that contract and the loan account was converted into Cash Credit Account after ten years and the Suit has been filed as against this erstwhile Director the 1^st respondent and for that variation of contract also the 1^st respondent cannot be held responsible.  So, viewed at any angle it is crystal clear that the 1^st respondent cannot be held liable for the Suit claim.  The 1^st defendant Company availed the loan facility.  Even in the plaint the Bank has clearly accepted that in or about April, 1982 there was a change in the management of the 1^st defendant Company and the defendants 2 & 3 ceased to be the Managing Director and Director respectively and the other Director K. Srinivasa Rao who executed the personal Counter guarantee alongwith the other guarantors D2 & D3, has expired.  It is further recited in the plaint that the management of the Company also appear to have abandoned their efforts to resuscitate the industry and at the request of the present management and with a view to safeguard the properties, the plaintiff and other financial Institutions are providing the 1^st defendant necessary finance from time to time to pay salaries to the security staff and these sums are being debited to the 1^st defendant Company’s account.  It is also recited in the plaint that at the request of the 1^st defendant, the amounts were initially debited to the Cash Credit Account maintained at the T.I.F. Campus (Kurnool) Branch and the outstanding debits were then re-transferred to the account maintained at the Red Hills (Hyderabad) Branch, as that branch was handling these transactions.  These things clearly establish that there was variation in the contract and there was change in the management of the 1^st defendant Company even in the year 1982 and the 1^st respondent ceased to be the Director and he was never in the management of that Company and after the new management has taken over the responsibility the erstwhile Director the 1^st respondent cannot be held responsible for the amount due to the Company after so many years after his resignation in the year 1981. 

7.         Counsel for the appellant Bank submitted that because D3 the 1^st respondent executed the Counter Guarantee, the 1^st respondent is liable for the Suit claim.  He relies upon the decision reported in (1969) I Supreme Court Reports Page-622 (Bank of Bihar Ltd. Vs. Damodar Prasad & Anr.) wherein it has been held that “It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated to the rights of the creditor under S. 140 of the Indian Contract Act, and he may then recover the amount from the principal and the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety.”  But in the case on hand, the 1^st respondent has resigned from his Directorship and subsequent dealings by the Bank were done only with the new Directors and D3 has nothing to do with these transactions and D3 after his resignation cannot be held liable.  Since D3 resigned in the year 1981 and subsequent contract has been entered into by the new Directors and all the dealings have been done by the new Directors, D3 cannot be held liable on the guarantee executed by him.

8.         Even in the Written Statement, the 3^rd defendant 1^st respondent has set out that the signatories to the Counter guarantee dated 22.6.1978 have ceased to be associated with the 1^stdefendant Company as from April, 1982 to the knowledge of the plaintiff and the plaintiff has by its conduct and the subsequent Agreement entered into with the new Directors absolved this defendant of all the liabilities under the Counter guarantee.  It has been agreed by the plaintiff Bank itself that there was a change in the management and the plaintiff has dealt with the 1^st defendant with the new Directors and extended further loans and they were looking forward only for the new Directors for the fulfillment of the obligations.  So, it is evident that the liability of the 1^st respondent under that guarantee was discharged immediately on resignation by this respondent.

9.         The significant factor is that before filing of the Suit, no notice was given to the 1^st respondent at all. Ex.A17 Notice was sent only to the new set of Directors Mr. Sudheekar Reddy and the Managing Director.  Ex.A17 was given only to Mr. Sudheekar Reddy and the Managing Director and not to the 1st respondent.  Only Mr. Sudheekar Reddy and the Managing Director have been asked to arrange for payment of that amount immediately to the Bank for the dues.  Even for the amount due in 1981 by the 1^st defendant Company, only Mr. Sudheekar Reddy and the Managing Director have been asked to pay that amount under Ex.A17.  No notice has been sent to the 1^st respondent at all before filing of the Suit directing that the 1^st respondent pay that amount.  The sending of the Notice to the new Directors in Ex.A17 clearly reveals that the Bank itself accepts that only the new set of Directors are liable for the Suit claim and not the old Director.  The fact that the Bank did not give any notice to the 1^st respondent for repayment of that amount before filing of that Suit also clearly reveals that the Bank is well aware that the 1^st respondent 3^rd defendant is not liable for the Suit claim.  The applicant State Bank of India is fully aware of the new promotional Agreement and the change in management which has been clearly set out in the plaint.  The new co-promoters Mr. Sudheekar Reddy and Mr. George Reddy were to take over all obligations and liabilities and they also undertook to discharge earlier co-promoters from all liabilities by giving fresh guarantees.  The new co-promoters had given fresh guarantees and the appellant State Bank of India is aware of the change of management and permitted the change of management and the State Bank of India is aware that the old Directors of the Company had ceased to be co-promoters of that Company. 

10.       It is also evident that the appellant Bank has changed the hypotheca which was originally hypothecated, without the knowledge and consent of D3.  So, it is evident that D3 was not concerned after his resignation in 1981.  The granting of time to the D1 Company by the applicant Bank in the matter of Bills under the Deferred Payment Guarantee (DPG) without the consent of D3 has attracted the provisions of Section-135 of the Contract Act, which entitles D3 for discharge from the original contract.  The act of the applicant Bank in merging DPG instalments into the Cash Credit Account of the Company has resulted in variation of the terms of contract.  The applicant Bank entered into agreement with the new Directors.  So, it is crystal clear that only the new Directors will be liable and D3 cannot be held liable for the Suit claim.  Because of the variation in the terms of contract, the resignation of D3 from the Directorship in the year 1981 and the entering into contract by the new Directors of the D1 Company with the applicant Bank, it can be safely concluded that D3 the 1^st respondent cannot be held liable for the Suit claim.  The PO, DRT, rightly considered this point and dismissed the OA as against the 3^rd defendant.  I see no ground to interfere in the Order passed by the PO, DRT, Hyderabad.

11.       Appeal dismissed.

(Dictated to PS & the transcript corrected, pronounced & signed by me in the open court today the 28^th January, 2004).

[ MRS. JUSTICE  A. SUBBULAKSHMY ]

CHAIRPERSON