Manoj Kumar Sahu Advocate Newdelhi
The object of SARFAESI Act, 2002 is very good aiming at reducing ‘Non-performing Asset”, the constitutional courts had to interpret the provisions of the Act dealing with many complicated issues and keeping in view the interest of the borrowers. Many issues under the provisions of SARFAESI Act, 2002 are settled now.
The two most important cases in that process are Mardia Chemicals Ltd v. Union of India[1] and Transcore v. Union of India[2]. Where the Supreme Court has settled the legal position substantially with regard to the SARFAESI Act and made the rigor of SARFAESI Act for the recovery of NPAs effective in letter and spirit. however, the issue of eviction of Tenant using the authority or the power under Section 14 remains very significant. Many states have special laws protecting the interests of the Tenants and it has a very great object despite criticism.
There need not to be any written agreement or registered Lease Deed etc. for availing the protection under Tenant Protection laws in a particular state and the provision of tenant protection law will prevail. In the light of the object of SARFAESI Act, 2002 and the object of Tenant Protection Laws in a particular state, the issue of eviction of Tenant under Section 14 of SARFAESI Act, 2002 occupies significance.
There can be complications if the bank is asked to approach the Rent Control Courts to evict the Tenant. Again, there can serious issues if the bank is allowed to proceed against the Tenant under Section 14 of the SARFAESI Act, 2002 without having any regard to the Lease Agreement, understanding or the Lease Deed. The complications with the eviction of Tenant by the bank in the course of its action under the provisions of SARFAESI Act, 2002 are in brief, as follows
- If the bank is not allowed to proceed against the Tenant under Section 14 to take physical possession of the property, then the ‘Secured Asset’ may not fetch good value when it goes for auction. It can be detrimental to the interests of the borrowers and also can be detrimental to the interests of the banks too in some cases. The bidders may definitely discount the risk of eviction while bidding for the property in auction. If the property is not fetching the market value, then, It may provide a right to the borrower or the owner of the property to challenge the auction.
- If the bank is asked to approach Rent Control Courts or Rent Control Tribunal under the special State law dealing with the protection of Tenants, then, it would be interesting to see as to the grounds available to the Banks to ask for the eviction of Tenants from the ‘Secured Asset’.
- From Tenants point of view, he or she may suffer an irreparable loss due to the action of the bank under SARFAESI Act, 2002 and the Tenant may find it difficult to proceed against the owner of the property in getting the Advance amount back or in claiming the damages. There is a justification from Tenants point of view and it will be definitely difficult to the Tenant to vacate the premises immediately as against their plans. Who will compensate the Tenant in genuine cases
- We cannot also rule-out the possibility of fictitious arrangements or Agreements if the protection is provided to the Tenants and it is held that the banks cannot take physical possession of the ‘Secured Asset’ under Section 14. We know many cases pending before Rent Control Courts or Tribunal for years. In many cases, Tenants used to approach Debt Recovery Tribunal now under Section 17 as soon as they come to the knowledge of SARFAESI proceedings. The DRT, may rule in favor of bank in many of these cases and the Tenant is carefully been scrutinized.
Does SARFAESI Act override Local laws?
In Transcore case[3] the Supreme Court has held “in our view, section 17(4) shows that the secured creditor is free to take recourse to any of the measures under Section 13(4) notwithstanding anything contained in any other law for the time being in force, e.g. let us say there is conflict between the Section 13(4) of the SARFAESI Act and provision under state land revenue law, then notwithstanding such conflict, the provision of Section 13(4) shall override the local law. This position also stands clarified by Section 35 of the NPA Act which states that the provisions of SARFAESI Act shall override all the laws which are inconsistent with the SARFAESI Act.” When Supreme Court compared State Revenue law with the SARFAESI Act it sent wrong signals as if the SARFAESI Act overrides even the substantive laws. In Shree Lakshmi Products v. State Bank of India[4] the Division Bench of the Madras High Court quoting the above observation of the Supreme Court has held in (para 9) that by virtue of Section 17(4) read with Section 35 of the SARFAESI At if in a given case the measures undertaken by the secured creditor under the Section 13(4) comes into conflict with the provisions of the State law, then notwithstanding to such conflict, the provisions of Section 13(4) shall override the local law.
Section 13(13) of the SARFAESI act operates as an attachment/injunction restraining the borrower “No borrower shall, after receipt of notice referred to in sub-section (2) transfer by way of sale, lease or otherwise (other than in the ordinary course of this business) any of his secured assets referred to in the notice, without prior consent of the secured creditor” and therefore any tenancy created after such notice would be null and void. Any tenancy created by the mortgagor after the mortgage in contravention of Section 65A would not be binding on the Bank/FI and in any event such tenancy tights shall stand determined once action under Section (4) has been taken by the Bank/FI. When the petitioner is claiming a tenancy prior to the creation of mortgage and such tenancy is disputed by the Bank the remedy of the petitioner is to approach DRT by way of an application under Section 17 of the SARFAESI Act to establish its rights[5].”
The madras High Court cited with approval a judgment of the Division Bench of the Kerala High Court and observed in S. Shameen v. The City Police commissioner and others[6] it was held that in respect of the transactions governed by SARFAESI Act the overriding provisions effectively nullify the rights normally admissible even to a tenant as available under the Rent Control laws. A decision of the Delhi High Court was also cited and it was observed that in Sanjeev Bansal v. Oman International Bank SAOG[7], the court held that the protection afforded by the Rent Control Act to a tenant is from the landlord of the premises and the landlord of the premises cannot recover possession from the tenant unless he takes recourse to any of the grounds as available to him under Rent Control Act and the right of the tenant is fully protected notwithstanding anything contrary contained in any other law or contract.
This protection is however not available against the mortgagee who seeks to enforce his rights under the SARFAESI Act against the principal borrower who had mortgaged the property the property in question by duly and validly executing the memorandum of mortgage in favour of the mortgagee. The Court further held that Section 65-A of the Transfer of property Act clearly mandates that the duration of lease to be executed by the mortgagor cannot exceed 3 years.
These judgments have opened a new angles as if the SARFAESI Act overrides the substantive laws and more specifically the rights of the tenant vis-à-vis that of the mortgagee, the secured creditor. In these judgments the judiciary has glorified Section 65A of Transfer of Property Act though Sub-section (3) of Section 65A of Transfer of Property Act saves the right of contract and thereby provides that if the mortgage deed contains provisions contrary to Sub-section (1) & (2) of Section 65A, the provisions under mortgage deed shall prevail.
The analogy that applies to the statutory tenancies which varies with the provisions of Sub-sections (1) and (2) of Section 65A of Transfer of Property Act. In the above circumstance the judiciary has merged the rights of the mortgagor and the rights of the lesser with the mortgagee/Bank in a summary manner without giving reasonable opportunity to a lessee to prove his bona fides before a court.
Decisions discussing analogous provisions under the RDB Act :
The Division Bench of the Madras High Court held in writ petition[8] dealt with in detail the Rules of Income-tax (i.e. Rule 39 & 40) (Certificate proceedings) Rules, 1962 read with section 29 of the Recovery of Debts Act under which the Recovery Officer had issued the orders of eviction.
The Bench considered the comprehensive effect of the Rules while holding that the order of the Recovery Officer is not sustainable in law and is liable to be set aside. While arriving at the above decision two main points were considered:
- The Bench analyzed the Rules empowering the Recovery Officer to put the auction purchaser in possession of the properties (Rule 40). The Bench also considered the rules which permitted the Recovery Officer to put back in possession any person who other than the defaulter claiming in good faith to be in possession of the property on his own account or on account of some person other than the defaulter. (Rules 44 to 47).
- Secondly they drew an analogy with the provisions of CPC and held that the Rules framed under the ITCP[9] Rules largely correspond to the relevant Rules occurring under Order 21 of the Code of Civil Procedure relating to the execution of a decree. They held that Rule 39 of the ITCP Rules corresponds to Order 21 Rule 95 C.P.C which deals with delivery of possession in occupancy of judgment debtor and Rule 40 of the ITCP Rules corresponds to Order 21 Rule 96 CPC they were of the view that Rule 40 of the ITCP Rules dealing with the case where the property is in occupation of the tenant or other person entitled to occupy the same in his own right contemplates bly symbolical possession to the auction purchaser and the tenant (who are strangers to the decree) cannot be evicted by the Recovery Officer by issuing an order directing them to vacate the properties forfeiting their rights under the relevant provisions of the Rent Control Law.
The Bench applied the ratio decidendi in Tara chand v. Ganga Ram MANU/DE/0163/1977 (Delhi High Court) and (Division Bench of the Delhi High Court in) M/s. Puran Chand & Co. M/s. Ganeshi Lal Tara MANU/DE/1160/2000 wherein it was held that where the property is in possession of a tenant, the auction purchaser would be entitled to symbolical possession of the property in terms of Order 21 Rule 96 CPC the reason being that if the tenanted property is sold, the purchaser would be purchasing the right, title and interest of the judgment debtor and he would become the landlord and it is for him to take proceedings to evict the tenant in occupation of the property.
This coupled with the fact that property was in the occupation of tenants much before the time when it was sold, the Bench held that auction purchaser would be entitled to symbolical possession of such property only and hence quashed the orders of the Recovery Officer and allowed the appeals.
Similarly the Calcutta High Court in Ratan Kumar Khaitan v. united Bank of India has held that in a suit filed for recovery the Recovery Officer cannot evict a bona fide tenant of mortgaged property. In the recovery application filed by United Bank of India the mortgaged property was tried to be sold by the Receiver on “as is where is basis”. This was successfully resisted by one of the lawful tenants. The court while directing to Recovery Officer/DRT to proceed with the recovery proceeding strictly in accordance with law held that “The petitioner in this revisional application is admittedly a tenant in respect of the premises in question.
The certificate debtors mortgaged the said premises and the recovery proceedings a receiver has been appointed to sell the property. Nevertheless, a property should be sold “as is where is basis” and a bona fide tenant in respect of the said premises cannot be evicted taking recourse to the recovery proceedings. The Tribunal has directed sale of the mortgaged property, but it cannot be said to mean that the property should be sold in vacant possession or that the auction purchaser has been entitled to vacant possession of the premises in question. A tenant in lawful possession cannot be evicted from the property. Therefore the Recovery Officer had no authority to pass an order directing the petitioner either to vacate or to offer the real value to the portion over which he has been found remaining in possession.”
Tenant and his rights
A tenant gets vested right of tenancy or lease in the property let out. It is a transfer of leasehold interest in the immovable property and it is a substantive right. The same applies in case of statutory tenancy where tenancy rights are created by a statute. SARFAESI Act does not over ride any substantive right as stated earlier. Out of enthusiasm in equipping the Banks and Financial Institutions to recover the NPAs and to pave the way for such smooth and early recovery the judiciary has tried to overlook the substantive rights of the tenancy. Justifying such an enactment in the face of mounting dues to the Banks and in the guise of protecting public interest the Supreme Court while upholding the provisions of SARFAESI Act, has held in Mardia Chemicals Case[10] “it is well known that in different states Rent Control legislations were enacted providing safeguards to the sitting tenants as against the existing rights of the landlords, which before coming into force of such law were governed by contract between the private parties. Therefore, it is clear that it has always been held to be lawful, whenever it was necessary in the public interest to legislate irrespective of the fact that it may affect some individuals enjoying certain rights.
In the present we find that case the unrealized dues of banking companies and financial institutions utilizing public money for advances were mounting[11] and it was considered imperative in view of recommendations of experts committees to have such law which may provide speedier remedy before any major fiscal set back occurs and for improvement of general financial flow of money necessary for the economy of the county that the impugned Acts was enacted. Undoubtedly such legislation would be in the public interest and the individual interest shall be subservient to it. Even if a few borrowers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest.
On a perusal of all of the above instances cited by the Supreme Court it could be seen that sufficient protection was given to the substantive rights of the lessee, whereas the same rights have been trampled upon by the various judicial interpretations under the SARFAESI Act. Further in the case of SARFAESI Act, there is no specific provision overriding substantive laws.
While discussing the issue relating to taking over actual possession of the mortgaged securities under Section 14 of SARFAESI Act by the secured creditor the Supreme Court in Transcore cases had held that “it is well settled that third party interests are created overnight and in very many cases those third parties take up the defence of being a bona fide purchaser for value without notice”. This observation of the Apex Court is only apprehension expressed and it should not mislead to override the rights lawfully created.
Symbolic possession if Tenant is Bonafide Third party In Hutchinsons Essar South Ltd. V. Union Bank of India Ltd[12] the Karnantaka High Court allowed the lessee’s Writ petition challenging the action of the bank under Section 14 of SARFAESI seeking a declaration that the petitioner’s leasehold rights are not regulated and covered by SARFAESI Act. The ratio decidendi in the said case was “if a bonafide third party is in occupation of the secured asset, third party lessee cannot be thrown out and the secured person can acquire on symbolic and not actual possession”.
“if the purchaser of the secured asset has to take the actual possession, the same has to be in accordance with the due process of law only”.
“Even where the sale of assets takes place the tenant cannot be evicted without the due process of law”.
In Para 23 of this case the Court has held “however if the secured asset is in the possession of a Bonafide lessee or tenant, he cannot be thrown out by invoking Section 13 and 14 of the Securitisation Act, however, if the banker or purchaser of the secured asset has take the actual possession, the same has to be in accordance with the due process of law only.
Determination of rights of parties in mortgaged property not barred[13]“A loan was taken from a bank by mortgaging certain properties. There was default in repayment of the loan. Properties were to be put to sale by public auction. A partition suit in respect of the properties was filed.
Section 34 of the SARFAESI Act, 2002 is a bar on civil courts to entertain suits in respect of matters which the Debt Recovery Tribunal (DRT) or Appellate Tribunal (DRAT) are empowered to determine. The court said that in the spite of the bar, adjudication or determination of rights or claims of parties, being in the nature of civil rights or claims, cannot be stopped. Section 34 of the SARFAESI Act does not come into play in respect of adjudication of such rights. The bank can enforce its security interest for realisation of the amount due to it[14]”.
Rights of third party in case of unregistered Lease/Deeds:-
In these cases, the issue of registration of Lease Agreements or Deeds occupies significance and in many cases of this kind, emphasis is being laid on the issue of registration as required under Transfer of Property Act or Registration Act. Even dealing with the issue of requirement of registration of Rental Agreements or Lease Deeds in the light of protection available to the Tenants under the State Laws, the Court has observed as follows:
Incidentally a question was raised as to whether an unregistered instrument can create a lease. The said question came up for consideration before the Supreme Court in the judgment in Rana Vidya Bhushan Singh v. Shri Rati Ram[15], wherein the Supreme Court observed as follows:- “The agreement was unregistered. It could not create in favour of the defendant the right of a tenant for a period of fifteen years.
The agreement was on that account inadmissible in evidence to support that claim. But in support of the plea that his possession was that of a tenant the defendant was entitled to rely upon the recitals contained in that agreement of lease A document required by law to be registered, if unregistered, is inadmissible as evidence of a transaction affecting immovable property, but it may be admitted as evidence of collateral facts, or for any collateral purpose, that is for any purpose other than that of creating, declaring, assigning, limiting or extinguishing a right to immovable property.”
In the event an unregistered document is sought to be relied upon for collateral purpose, namely, the purpose other than that of creating, declaring, assigning, limiting or extinguishing a right over immovable property, it is admissible in evidence.
In Anthony v. K.C. Ittoop and Sons and others[16], the Supreme Court found that there are three interdictions to claim that an instrument can create a valid lease in law.
The first inhibition is that it should be in accordance with the provisions of Section 107 of the Transfer of Property Act. That Section reads as under:- “S.107. A lease of immovable property from year to year, or for any term exceeding one year, or reserving an yearly rent, can be made only by a registered instrument.”
The second inhibition, as pointed out by the Supreme Court, is Section 17(1)(d) of the Registration Act, which states that where a lease of immovable property from year to year or for any term exceeding one year or reserving an yearly rent, such document should be compulsorily registered.
The third inhibition, as noted by the Supreme Court, is Section 49 of the Registration Act relating to the consequence of non-compliance of Section 17. Section 49(c) contemplates that no document required by Section 17 or by any provision of the Transfer of Property Act to be registered shall be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered.
Having regard to the above three inhibitions, the Supreme Court has held that insofar as the instrument of lease is concerned, there is no scope for holding that the appellant is a lessee by virtue of the said instrument. Nevertheless, the Supreme Court, taking into consideration of the proviso to Section 49 of the Registration Act, found that an unregistered lease deed may be taken as evidence of any collateral transaction not required to be effected by registered instrument. The Supreme Court, in paragraph 13 of this judgment, has held as follows:-
“When lease is a transfer of a right to enjoy the property and such transfer can be made expressly or by implication, the mere fact that an unregistered instrument came into existence would not stand in the way of the court to determine whether there was in fact a lease otherwise than through such deed.”
The Supreme Court further went on to add that when the landlord intended to put the tenant into possession of the building and the tenant was paying monthly rent or had agreed to pay the rent in respect of the building, the legal character of the appellant’s possession should be attributed as a jural relationship between the parties. With that finding, the Supreme Court held in paragraph 14 as follows:-
“When it is admitted by both sides that the appellant was intended into the possession of the building by the owner thereof and that the appellant was paying monthly rent or had agreed to pay rent in respect of the building, the legal character of the appellant’s possession has to be attributed in a jural relationship between the parties. Such a jural relationship, on the facts situation of this case, cannot be placed anything different from that of lessor and lessee falling within the purview of the second para of Sec.107 of the TP Act extracted above. ….”
In the given case, the lease deed which is sought to be relied upon by the tenant in a proceeding initiated by the bank under the provisions of the SARFAESI Act to contend that in the wake of the provisions of Section 31(e) and it being a tenant in bona fide occupation, the bank cannot take possession of the premises in question from the tenant under the provisions of SARFAESI Act. The reliance sought to be placed by the tenant over the unregistered lease deed is only for a collateral purpose to show that the tenant was inducted into the premises right from the year 1992 and thereafter, by an unregistered lease deed, from the year 2000 it had been in possession of the premises.
Hence, the contention of the learned senior counsel that in view of sub-section (2) of Section 69 of the Indian Partnership Act, the application at the instance of an unregistered partnership firm is not maintainable against the bank cannot be accepted and the point is answered accordingly.”
Tenancy before and after Mortgage
As far as the judicial interpretation under the SARFAESI Act is concerned on a reading of the various judgements it becomes clear that the only yardstick applied by the Courts is whether the lease has be executed before or after the mortgage, for the lessee to be entitled to seek relief under the civil laws. If the lease has been created subsequent to mortgage, the tenancy becomes determined immediately on taking action under Sec. 13(4). If the lease was prior to the date of mortgage then the Courts held that tenancy could be terminated under the due process of law.
Section 65A of the TP Act is an empowering section and it confers on the mortgagor a power to lease which shall be binding on the mortgagee. Sub-section (3) lays down that the condition laid down in Sub section (2) can be varied and altered in the mortgage deed in which cases the covenants in the mortgage deed would prevail. Therefore no doubt certain conditions have been stated in Sub-section (2) of Sec. 65A, but a statutory permission has been given to contracts out of the above conditions in Sub-section (2) of Section 65A[17].
The present section confers upon the mortgagor in possession a statutory power of leasing, subject to any express provision in the deed of mortgage, Under this section the validity of the lease granted by a mortgagor in possession is determined with reference to the section and the terms of the deed of mortgage without regard to its effect on the mortgagee’s security. Such a lease would not bind the mortgagee or anyone claiming though him unless the mortgagee has given his consent to the lease. Such consent may be given his consent to the lease. Such consent may be given in the lease deed itself, it is submitted on a parity of reasoning that this new section which expressly gives power to the mortgagor in possession to grant a lease which, without the consent of the mortgagee, will not be binding on the mortgagee, but will be binding on the mortgagor.
Very few Courts have opined that Section 65A does not bar the mortgagor from creating a lease. On a reading of the entire section it is clear that Sub-section (3) of Section 65A permits the mortgagor and mortgagee to contract out of the provisions of Sub section (2). Hence the terms of the mortgage deed have to be gone into in detail. As the facts and circumstances may vary in each case such an oversimplification of the law as in Shree Lakshmi Products[18] case that “Any tenancy created by the mortgagor after the mortgage in contravention of Section 65-A would not be binding on the Bank/FI, and in any event such tenancy rights shall stand determined once action under Section 13(4) has been taken by the Bank/FI”, is erroneous.
The secured creditor is bound by the contract and the SARFAESI Act does not override such contract. In tune with the above observation the findings in India Oil Corporation Ltd. V. Shikshak Sahakari Bank Ltd.[19] Is very relevant. In the said case the lessee in possession of the property based on a registered lease deed challenged the SARFAESI action by the Bank. It was held : On the facts, there is hardly any controversy. I say so because the appellant’s possession as lessee on the basis of registered lease deed dated 30th june, 2003 is not disputed on behalf of respondent No. (Bank) In disputed, there is evidence of the copy of lease deed proving that fact. The contention on behalf of the Bank, however, is that the lease deed is not legal and valid since it has been subsequent to the creation of equitable mortgage. The copy of memorandum dated 6.3.1997 is produced by the Bank on the record Mr. Gharpure, learned counsel for the Bank has submitted that the lease deed contravenes of the following clause in the agreement of term loan:
“The borrowers shall not, without the written consent of the Bank, create in any manner any charge, lien or other encumbrance on the Property/Assets and security given to the Bank in respect of such advance or create any interest on such security in favour of any other party or person”. By the clause the borrower(respondent 3) had undertaken that without the Bank’s(respondent no. 1) consent, it will not create charge, etc On “the property/asset” and security given to the bank. Now, the term loan agreement does not mention any property or asset to which the words “the property/asset” could be co-related.
The work “the” is not without significance and connotes specific property. Therefore, i think these words cannot be made applicable to all property/asset of the respondent No.3. The clause can apply to the security actually given to the Bank on the date of said agreement of term loan. The equitable mortgage in this case was created on or about 6th March, 1997 which means that the same was created on or about 6th March, 1997 which means that the same was created subsequent to the term loan agreement.
Thus, the property in question was not the Bank’s security on the date of term loan agreement which in turn means that the aforesaid clause cannot be made applicable to the property in question. In the result, it cannot be said that the creation of lease was in contravention of the equitable mortgage by respondent No.3 in favour of respondent No.1 of the property.
The learned Counsel for the parties admit that there is no provision in law which puts fetter on the ownership rights of mortgagor, Section65-A of Transfer of Property Act even if is applied to equitable mortgage (which in fact is doubted) there is no complete bar in that provision on creation of lease. In the circumstances, it will have to be held for the limited purpose of the applicant that the lease in favour of the appellant is legal. It is trite law that a person in lawful possession cannot be dispossessed except in due course of law.
There is unanimity amongst the parties that the provisions or SARFAESI Act by themselves do not empower the secured creditor to dispossess the lawful tenant. The due process of law means the process as per ordinary Civil law. That means, the dispossession by the respondent No.1 Bank will have to be held to be illegal. Consequently, the direction for restoration of possession has to be given”. As regards any tenancy before mortgage the Courts were of the uniform opinion that if there is any grievance the lessee could approach the DRT under Section 17 of SARFAESI Act.
In Tradewell v. Indian Bank[20] in this petition filed by borrower on the orders of CMM allowing the Bank’s petition under Section 14 for possession, the Bombay High Court decided that appeal under Section 17 is an efficacious alternate remedy. It has been categorically stated by the Division Bench that any grievances of third parties can be entertained by way of application to DRT under Section 17 only, except under extreme conditions. The Bench has further held in Para 67:”when the bank takes any measure under Section 13(4), on account of failure of the borrower to repay the liability is already crystallized. Similarly when the secured creditor approaches the CMM/DM for assistance to take possession of the secured asset, the liability having been crystallized, there can be no adjudication about it at that stage. Possession has to be taken by non-ad judicatory process.
There is no question of pointing out to the CMM/DM at that stage the person who is to be dispossessed is a tenant, or that he has a prior registered sale deed or that in case of simple mortgage, ownership rights are not transferred; that the mortgagee is only entitles to an obligation to pay and, hence, possession cannot be taken or that such a course will improve or change, this is the scheme of the SARFAESI Act. It is so framed to achieve its object. At first blush this may appear harsh. But it is not so. The borrower and the third party is not remedy-less. Remedy is provided in Section 17 where appropriate relief can be given to then, the Bench has given a go by to the arguments of the borrower’s counsels that on a combined reading of Section 13(2) the SARFAESI Act contemplates action against the borrower.
That in “Transcore’s case the Supreme Court has discussed the provisions of the SARFAESI Act in the context of the borrower. The SARFAESI Act does not deal with third parties. Possession of third parties cannot be taken by adopting measure under Section13(4). Third party is not given notice under 13(2). Taking possession from a third party in such a manner is not contemplated in the SARFAESI Act nor has the Supreme court said so in Transcore’s case. The Bombay High Court in Tradewell case has held that in an appeal under Section 17, the DRT could adjudicate beyond the correctness of the measures under Section 13(4) and apply the principle of natural justice to seek the ends of justice. However any relief to a bonafide tenant who has been dispossessed is farfetched, as it is also a principle of natural justice that for the cause of the public good, private interest should be sacrificed.
As regards the contention that no relief can be given to a third party because Section 17(3) speaks only of restoration of possession of the secured asset to the borrower the Bombay High court has simply glossed over the same by holding that Section 17(3) further goes on to say that DRT can pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under Sub-section(4) of Section 13.
Another example of third party rights accrued before the mortgage is title by adverse possession. If a third party acquires title by adverse possession before mortgage in favour of Banks/Financial Institutions and if the third party raises such ground against SARFAESI action, Banks/financial institutions cannot proceed further, since mortgagor even at the time of mortgage would have lost title to the property.
Analysis of Third party rights in the light of Constitution
There can be many complications when it comes to eviction of Tenant by the Bank while it proceeds against the ‘Secured Asset’ under the provisions of SARFAESI Act, 2002. It is not simple and it is complicated requiring a special law as otherwise, we would be seeing many judgments on this issue expressing different views and it will take some time to see a settled legal position in this regard. In the absence of any special law or attention by the law-makers with regard to eviction of Tenants under SARFAESI Act, 2002, there will be many more judgments on this issue and it may take some time to see a settled legal position in this regard.
The Madras High Courts dealing with this particular issue in the writ petition[21] and observes that “The contention of the tenant is that its right to continue to be in possession of the property in question as lessee is protected by the TN Rent Control Act. Hence, under Section 13(4) of the SARFAESI Act, only symbolic possession could be taken and not actual/physical possession. It is the further contention that the SARFAESI Act cannot extinguish the right accrued to a Tenant under the provision of the TN Rent Control Act. On the other hand, it is the contention of the bank that the SARFAESI Act has got overriding effect over the TN Rent Control Act in view of the provisions of Section 35 and therefore the rights said to have been accrued in favor of the Tenant under the TN Rent Control Act cannot be enforced as against the bank while the bank invokes the provisions of the SARFAESI Act,
The question is, therefore, as to whether the SARFAESI Act has got overriding effect over the TN Rent Control Act, Under Section 35 of SARFAESI Act[22].
The power to make laws by the Parliament and State Legislature flows from Article 245 of the Constitution. Article 246 of the Constitution deals with respective subject matter of laws that could be made by the Parliament and State Legislature respectively as provided in Seventh Schedule, by virtue of the non obstante claws with respect to any of the matters enumerated in List I of Seventh Schedule.
By virtue of the non obstante clause contained in Article 246(2) of the Constitution, Parliament and, subject to clause (1), the Legislature of any State shall have power to make laws with respect to any of the matters enumerated in List III of Seventh Schedule. Likewise, by virtue of Article 246(3) of the Constitution, subject to clauses (1) and (2), the State Legislature has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II of Seventh Schedule. Article 254 of the Constitution is a mechanism to reconcile a law made by the Parliament and a law made by the State Legislature, in the event there is inconsistency.
The scope and ambit of Article 254 of the Constitution came up for consideration before the Supreme Court on various occasions. A Constitution Bench of the Supreme Court in M karunanidhi v. Union of India[23] had an occasion to consider the issue relating to repugnancy between the law enacted by the Parliament and the State Legislature and evolved certain principles to be applied for determining the repugnancy between those laws, in paragraph 8 of the said judgment, the Supreme Court has held as follows:- “it would be seen that so far as clause (1) of Article 254 is concerned, clearly lays down that where there is direct collision between a provision of law made by Parliament with respect to one of the matters enumerated in the Concurrent List, then, subject to the provision clause (2), the State law would be void to the extent of the repugnancy. This naturally means that where both the State and Parliament occupy the field contemplated by the Concurrent List then the Act passed by Parliament being prior in point of time will prevail and consequently the State Act will have to yield to the Central Act. In fact, the scheme of the Constitution is a scientific and equitable distribution of legislative powers between Parliament and the State Legislatures. First, regarding the matters contained in List I i.e. the union List to the Seventh Schedule, Parliament alone is empowered to legislate and the State Legislatures have no authority to make any law in respect of the Entries contained in List I. Secondly, so far as the Concurrent List in concerned, both Parliament and the State Legislatures are entitled to legislate in regards to any of the Entries appearing therein, but that is subject to the condition laid down by Article 254 (1) discussed above. Thirdly, so far as the matters in List II, i.e. the State List are concerned, the State Legislatures alone are competent to legislate on then and only under certain conditions Parliament can do so. It is, therefore, obvious that in such matters repugnancy may result from the following circumstances.
- Where the provisions of a Central Act and a State Act in the Concurrent List are fully inconsistent and are absolutely irreconcilable, the Central Act will prevail and the State Act will become void in view of the repugnancy.
- Where however a law passed by the State comes into collision with a law passed by parliament on an Entry in the Concurrent Act would become void provided the State Act has been passed in accordance with clause (2) of Article 254.
- Where a law passed by the State Legislature while being substantially within the scope of the entries in the State List entrenches upon any of the Entries in the Central List the constitutionality of the law may be upheld by invoking the doctrine of pith and substance if on an analysis of the provisions of the Act it appears that by and large the law falls within the four corners of the State List an entrenchment, if any, is purely incidental or inconsequential.
- Where, however, a law made by the State Legislature on a subject covered by the Concurrent List in inconsistent with and repugnant to a previous law made by Parliament, then such a law can be protected by obtaining the assent of the President under Article 254(2) of the Constitution. The result of obtaining the assent of the President would be that so far as the State Act is concerned, it will prevail in the State and overrule the provisions of the Central Act in their applicability to the State only. Such a state of affairs will exist only until Parliament may at any time make a law adding to, or amending, varying or repealing the law made by State Legislature under the proviso to Article 254
So as far as the present State Act is concerned, we are called upon to consider the various shades of the Constitutional validity of the same under Article 254(2) of the Constitution.
Subsequently, in Government of Andhra Pradesh and another v. J.B. Educational Society and another[24] in paragraph 9, after referring to M. Karunanidhi’s cases, the Supreme Court has held as follows:- “Parliament has exclusive power to legislate with respect to any of the matters enumerated in List I, notwithstanding anything contained in clauses(2) and (3) of Article 246. The non obstante clause under Article 246(1) indicates the predominance or supremacy of the law made by the Union Legislature in the event of an overlap of the law made by Parliament with respect to a matter enumerated in List I and a law made by the State Legislature with respect to a matter enumerated in List II of the Seventh Schedule.”
In Central Bank of India v. State of Kerala[25], after referring to the judgment in State of West Bengal v. Kesoram Industries Limited[26], the Supreme Court has observed as “In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the “same field” with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State Law will be ultra virus and shall have to give way to the Union Law.”
Zameer Ahmed Latifur Rehman Sheikh v. State of Maharashtra and others,[27] after referring to the above judgments, more particularly, the judgment of the Constitution Bench in M. Karunanidhi’s case, in paragraph 38, the Supreme Court has held as follows:-
It is common ground that the State legislature does not have power to legislate upon any of the matters enumerated in the Union List. However, if it could be shown that the core area and the subject matter of the legislation is covered by an entry in the State List, then any incidental encroachment upon an entry in the Union List would not be enough so as to render the State Law invalid, and such an incidental encroachment will not make the legislation ultra virus the Constitution.”
While dealing with an identical case, a Constitution Bench of the Supreme Court in Offshore Holdings Private Limited v. Bangalore Development Authority and others[28], in paragraph 61 has held as follows: “We are dealing with a federal Constitution and its essence is the distribution of legislative powers between the Centre and the State. The Lists enumerate, elaborately, the topics on which either of the legislative constituents can enact. Despite that, some overlapping of the field of legislation may be inevitable. Article 246 lays down the principle of federal supremacy that in case of inevitable and irreconcilable conflict between the Union and the State powers, the Union power, as enumerated in List I, shall prevail over the State and the State power, as enumerated in List II, in case of overlapping between List III and II, the former shall prevail. This principle of federal supremacy laid down in Article 246(1) of the Constitution should normally be resorted to only when the conflict is so patent and irreconcilable that co-existence of the two laws is not feasible.
Such conflict must be an actual one and not a mere seeming conflict between the Entries in the two Lists. While Entries have to be construed liberally, their irreconcilability and impossibility of co-existence should be patent. One, who questions the constitutional validity of a law as being ultra virus, takes the onus of proving the same before the Court. Doctrines of pith and substance, overlapping and incidental encroachment are, in fact, species of the same law. It is quite possible to apply these doctrines together to examine the repugnancy or otherwise of an encroachment. In a case of overlapping, the Courts have taken the view that it is advisable to ignore an encroachment which is merely incidental in order to reconcile the provisions and harmoniously implement them. If, ultimately, the provisions of both the Acts can co-exist without conflict, then it is not expected of the Courts to invalidate the law in question.”
In another case Constitution Bench of Supreme Court held as follows:-
“A self-contained code is an exception to the rule of referential legislation. The various legal concepts covering the relevant issues have been discussed by us in detail above. The schemes of the MRTP Act and the Land Acquisition Act do not admit any conflict or repugnancy in their implementation. The slight overlapping would not take the colour of repugnancy. In such cases, the doctrine of pith and substance would squarely be applicable and rigors of Article 254(1) would not be attracted[29]”.
Keeping in mind the principles evolved by the Supreme Court in the above judgments, let us consider the scheme of the SARFAESI Act and the TN Rent Control Act. The SARFAESI Act is traceable to Entry 45 of List I of the Seventh Schedule, whereas the TN Rent Control Act is traceable to Entry 6 of list III. Both the Acts have been enacted by the Parliament and the State Legislature respectively well within their respective competence in their respective fields. The question to be considered is as to whether there is any overlapping between the two enactments. To find out whether a particular enactment is within the legislative competence of the Parliament or State Legislature, the doctrine of pith and substance is to be applied.
If the same is applied to the facts of the present case, it goes without saying that the SARFAESI Act is an Act aiming at a mechanism to recover the outstanding dues towards the banks and financial institutions by following certain procedures without the intervention of the Courts and Tribunals. Prior to the enactment of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the dues to the banks were to be recovered only by approaching the civil Courts. Having experienced the delay in civil courts and taking into account that public money is locked in the hands of unscrupulous persons which is not good for the Banking sector and ultimately the economy of the country, the Central Government constituted a committee on the financial system headed by Shri M.Narasimhan to go into the issue and based on the recommendations of the said Committee, the above Act was passed thereby ousting the jurisdiction of the civil Courts in respect of the debts due to the banks and constituting Tribunals. Under the said Act, the banks could approach the Debts Recovery tribunal and for appeal, the Debts Recovery Appellate Tribunal constituted under the Act for recovery of its dues.
The said Act is a complete code in itself. During the working of the said Act, it was felt that even the said Act was not effective, as the same did not achieve the desired result. Therefore, it was thought of evolving a new mechanism so that the debts due to the banks could be recovered in a speedy manner. It was under those circumstances, two committees were constituted and the said committees recommended to the Government that even the intervention of the tribunal may not be necessary and instead, the banks themselves can be given power to directly recover the debts due to the banks by following certain procedures. It was based on the said recommendations; the SARFAESI Act came into being.
The Act can be treated as one of the legislative measures taken by the Government for ensuring that the dues of secured creditors including banks and financial institutions are recovered from the defaulting borrower without undergoing long drawn litigation in civil Courts. A close reading of the scheme of the SARFAESI Act would go to show that it aims at speedy recovery of the debts due to the banks and financial institutions without the intervention of either the civil court or tribunal. Certain safeguards are also provided for the debtor to approach the Debt Recovery Tribunal by making application under Section 17 of the SARFAESI Act and also to make further appeal to the Debts Recovery Appellate Tribunal, if the debtor is aggrieved by any of the actions of the bank under Section 13 of the SARFAESI Act. From the scheme of the Act, beyond any controversy, the SARFAESI Act is basically procedural in nature only to recover the dues. The Act does not create any substantive right in the bank.
As against the above, the TN Rent Control Act was enacted by the State Legislature under Entry 6 of Concurrent List to protect the interest of the tenants. As it was felt that the provisions of the TP Act were not found to be effective to protect the interest of the tenants, the State Legislature thought it fit to bring in the legislation mainly with a view to protect the rights of the lessees. It is needless to point out that under the TP Act, a lease can be terminated without assigning any reason by simply issuing a statutory notice under Section 106 of TP Act. The TN Rent Control Act was enacted to regulate the letting of residential and non-residential buildings and control of rents of such buildings and the prevention of unreasonable eviction of tenants there from.
For the said purpose, Rent Control Tribunals are constituted with a provision of appeal enabling the aggrieved persons to approach them. A further revision is also contemplated to the High Court. Under the TN Rent Control Act, a tenant can be evicted only on specific grounds enumerated under Section 10 of the Act. The lease cannot be terminated by the unilateral act of the landlord.
Further, under the TN Rent Control Act, tenancy under an unregistered deed or even under oral agreement is protected and such tenant is also entitled to have equal rights like that of the tenant under the registered lease under Section 107 of the TP Act. The entire scheme of the Act would go to show that it is more substantive as well as procedural and the Act is a complete code in itself. This Act clearly mandates that a tenant is entitled to continue to be in possession of the building until and otherwise he is evicted as per the provisions of the Act and not otherwise.
Under Section 13(4) of the SARFAESI Act, the secured creditor can take possession of the secured assets of the borrower. There can be no difficulty in taking such possession of the secured assets either under Section 13(4) or under Section 14 of the SARFAESI Act, if the secured asset is in the possession of the borrower or guarantor, as the case may be. SARFAESI Act entitles the creditor to take possession of the secured assets either by issuing possession notice under Section 13(4) or by making application to the Chief Metropolitan Magistrate/District Magistrate to take physical possession under Section 14. Though the function of Chief Metropolitan Magistrate/District Magistrate is only ministerial, the provision of Section 14 confers drastic power to take possession even by use of force. The difficulty arises only in cases where the possession of the property is in the hands of the tenant (lessee).
The SARFAESI Act does not contain any specific provision enabling the secured creditor to take possession from the hands of a tenant (lessee). On the other hand, the TN Rent Control Act contemplates that a tenant is entitled in law to continue to be in possession unless he is evicted under the provisions of the said Act. SARFAESI Act being mainly procedural and the TN Rent Control Act being exclusively dealing with the substantive right of tenants, both the Acts operate on different fields. Only in the event the SARFAESI Act contains a provision to enable the bank to take possession of a secured asset from a lessee, then only it can be held that there is conflict between the SARFAESI Act and the TN Rent Control Act in which case, the TN Rent Control Act should give way for the SARFAESI Act to have overriding effect.
However, there is no such provision in the SARFAESI Act enabling the bank to take possession from the lessee, though the Act speaks of the right of the bank to take possession of the secured asset. Moreover, right from Section 13(2) till exhausting the provision of appeal, the bank deals only with the “borrower/guarantor” and the Tenant/lessee is nowhere in the picture, as the Act does not require the bank to involve the lessee/tenant as well in the proceedings.
Thus, there is no overlapping or inconsistency between these two Acts. When there is no such overlapping or repugnancy between these two provisions in respect of taking possession from the lessee, it has to be held that physical possession of the secured assets from the lessee/tenant can be taken only by invoking the provisions of the TN Rent Control Act.”
[5] www.lawyersclubindia.com/articles/Sale-Under-SARFAESI-Act-vis-a-vis-Third-Party-Rights–2829.asp
[7] 2006 4 BC 299 DB Delhi
[8]Stephen Samuel v. Union of India 2003 (3) CTC 95
[9] Income tax certificate proceeding 1962
[13] “Tannan’s “Banking Law And Practice In India”, LexisNexis Butterworth’s Wadhwa Nagpur 2010 PP 2067
[14] Krishna v. kedarnath, 2006 3 BC 9
[17] GC Bharuka “Mulla’s Transfer of property act 1882” LexisNexis Butterworth’s New Delhi Tenth edition 2006 PP 737
[20] 2008 (81) SCL 173 Bombay
[21] between Indian Bank Adyar Branch vs. M/s Nippon Enterprises South, CDJ 2011 MHC 1482
[22] S. 35 of SARFASI Act “the provision of this Act to overrides other laws.-the provision of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”
[29] Girnar Traders v. State of Maharashtra and others 2011 (1) scale 223 Para 78
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