In the backdrop of tardy judicial recovery mechanism relating to bad loans in India, the Government of India (GOI) initiated corrective measures by endeavouring to change the existing legal provisions to circumvent such menace. Amongst the various corrective measures, the GOI introduced the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 (Bill) on 9 May 2016 before the Parliament (Lok Sabha). The Bill, as it then was, sought to amend four existing legislations, namely, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), The Recovery of Debts due to Banks and Financial Institutions Act, 1993, The Indian Stamp Act, 1899 and The Depositories Act, 1996.

One of the key amendments proposed by the Bill was to Section 17 of the SARFAESI, which deals with the “right to appeal”. This article attempts to examine if the said amendment has practically been able to deal with the mischief of non-exclusivity of Debt Recovery Tribunal in adjudicating claims of a tenant on a secured asset, as addressed below.

Clause 14 of the Bill had proposed the following amendments to Section 17 of the SARFAESI:

In the principal Act, in section 17, -

(i)            for the marginal heading “Right to appeal”, the words “Application against measures to recover secured debts” shall be substituted;

(ii)           after sub-section (1), the following sub-sections shall be inserted, namely: -

   “1A)       An application under sub-section (1) shall be filed before the Debts Recovery Tribunal  within the local limits of whose jurisdiction –

(a) the cause of action, wholly or in part, arises; or

(b) where the secured asset is located. 

                (1B)        Where any person, in an application under sub-section (1) claims any tenancy or any other right upon the property over which the security interest has been created for the secured debt, the Debts Recovery Tribunal shall have the jurisdiction to examine such claims and pass such orders as it deems appropriate,”;

 (iii)          after sub-section (3), the following proviso shall be inserted, namely: -

 “Provided that if the Debts Recovery Tribunal is of the opinion that an applicant other than the borrower is entitled to restoration of possession of secured assets or management of the business of the borrower, the Debt Recovery Tribunal shall restore the possession of assets or management to such person”.

It is noteworthy that, for the first time, the rights of a tenant on a secured asset upon any action being taken by a secured creditor on the said secured asset have been addressed in the Bill in relation to Section 17 of the SARFAESI. A possible reason for this inclusion could be as this vacuum in law was also observed by the Supreme Court of India (Supreme Court) in a recent case of Harshad Govardhan Sondagar vs International Assets Reconstruction Company Limited and Others [2014 6 SCC 1] (Harshad Govardhan case). In this case, the Supreme Court, inter alia, while noting the lacunae in Section 17 of the SARFAESI, held that:

  1. A tenant could not approach the Debt Recovery Tribunal to assert its lawful possession under a valid lease over a secured asset if an action is taken by a secured creditor to dispossess it from the said secured asset upon any default by a borrower (being the mortgagor and lessor). This was because the Debt Recovery Tribunal, even if it desired to, had no power to restore back the possession of a secured asset to a tenant under (the then) Section 17 (3) of the SARFAESI.
  2. If a tenant, upon receiving a notice of possession from secured creditor under Rule 8 of the Security Interest (Enforcement) Rules, 2002, resists any attempt of taking possession of a secured asset (on which it is residing as a tenant), then the secured creditor cannot evict such a tenant by force. The secured creditor is mandatorily required to file an application under Section 14 of the SARFAESI before the concerned magistrate. When the said application is filed, the concerned magistrate, inter alia, is necessarily required to consider the following criteria’s:
    1. Whether the lease deed was executed before mortgage;
    2. Whether the lease deed was executed after the mortgage but before receipt of the Section 13(2) of the SARFAESI notice by the mortgagor/owner.
    3. If the lease deed was executed in terms of (ii), above, whether the same fulfilled all the requirement of the Section 65A of the Transfer of Property Act, 1882.
  3. Upon determining the above inclusive criteria’s, the concerned Magistrate may decide either way, namely, rejecting delivery of possession of the secured asset to the secured creditor for the period of lease deed or allowing the possession in favour of secured creditor. In either case, any aggrieved party would only be entitled to challenge such an order of the Magistrate under Article 226 and 227 of the Constitution of India to enable the High Court to decide the said challenge in accordance with law.

The above interpretation of the Supreme Court in Harshad Govardhan case had, in practical terms, led to multiplicity of proceedings before different judicial fora. Consequently, resulting in conflicting views, thereby delaying the enforcement of the rights of a secured creditor. This is because while a borrower could have challenged any action under Section 13 before the Debts Recovery Tribunal, the same borrower and also the tenant would have the independent rights to place their challenge before the concerned Magistrate in proceedings under Section 14 of the SARFAESI. The delay would get further prolonged depending on the outcome of such proceedings, the parties would still continue to have independent rights to file writ petition(s) before the concerned High Court.   

Having succinctly discussed the above background, the Bill was referred to Joint Parliamentary Committee on the same day it was introduced in Lok Sabha. The Joint Parliamentary Committee was constituted to study the Bill and to submit its report based on its findings. The report of Joint Parliamentary Committee (Report) was presented to the Lok Sabha and the Rajya Sabha on 22 July 2016. The Report, inter alia, proposed substantial modifications to the proposed amendment to Section 17 of the Bill. In doing so, the Report categorically stated that it had, amongst other issues, considered the decisions of the Supreme Court in, Harshad Govardhan case and Vishal N. Kalsaria vs Bank of India and Others [(2016) 3 SCC 762] (Vishal Kalsaria case). Accordingly, the Report suggested the following modifications in the Bill, the text of which is extracted below:

“In the principal Act, in section 17:—

(i)            for the marginal heading "Right to appeal", the words "Application against measures to recover secured debts" shall be substituted;

(ii)           after sub-section (1), the following sub-sections shall be inserted, namely —

"(1A)     An application under sub-section (1) shall be filed before the Debts Recovery Tribunal within the local limits of whose jurisdiction—

(a) the cause of action, wholly or in part, arises;

(b) where the secured asset is located; or

(c) the branch or any other office of a bank or financial institution is maintaining an account in which debt claimed is outstanding for the time being.";

(iii)          for sub-section (3), the following sub-section shall be substituted, namely-

"(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management or restoration of possession, of the secured assets to the borrower or other aggrieved person, it may, by order —

(a) declare the recourse to any one or more measures referred to in sub-section (4) of   section 13 taken by the secured creditor as invalid; and

(b) restore the possession of secured assets or management of secured assets to the borrower or such other aggrieved person, who has made an application under sub-section (1), as the case may be; and

(c) pass such other direction 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;

 (iv)        after sub-section (4), the following sub-section shall be inserted, namely:—

                "(4A) Where—

 (i) any person, in an application under sub-section (1), claims any tenancy or leasehold rights upon the secured asset, the Debt Recovery Tribunal, after examining the facts of the case and evidence produced by the parties in relation to such claims shall, for the purposes of enforcement of security interest, have the jurisdiction to examine whether lease or tenancy,—

(a) has expired or stood determined; or

(b) is contrary to section 65A of the Transfer of Property Act, 1882; or

(c) is contrary to terms of mortgage; or

(d) is created after the issuance of notice of default and demand by the Bank under sub-section (2) of section 13 of the Act; and

(ii) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (i), then notwithstanding anything to the contrary contained in any other law for the time being in force, the Debt Recovery Tribunal may pass such order as it deems fit in accordance with the provisions of this Act."

It is worthwhile to mention that both, the Lok Sabha and the Rajya Sabha, duly accepted the above recommendations on 1 August 2016 and 9 August 2016 respectively. Subsequent to which, the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (SARFAESI Amendment Act) received presidential assent on 12 August 2016, and was published in gazette on 16 August 2016. Further, on 1 September 2016, most of the provisions of the SARFAESI Amendment Act came into force, including the amendment to Section 17 (as extracted above).

Thus, Section 17 of SARFAESI Amended Act seems to have corrected the jurisdictional lacunae by enabling the Debts Recovery Tribunal to decide a claim of a tenant over a secured asset on the parameters laid down, therein, thereby addressing the concern of the Supreme Court in the Harshad Govardhan case. However, in our considered view, the SARFAESI Amended Act falls short of plugging the interpretation given by the Supreme Court in Vishal Kalsaria case, which was also relied upon by the Joint Parliamentary Committee. In order to address this aspect, it may be noted that the Supreme Court, in the said case, while considering whether SARFAESI overrides a state Rent Control Act (in the said case, Maharashtra Rent Control Act, 1999), stated that once a tenancy is created, a tenant could only be evicted following the due process as per the relevant Rent Control Act and could not be arbitrarily evicted under the SARFAESI. In laying down the said law, Section 35 of the SARFAESI, as extracted below, was relied by Supreme Court to allude that a non-obstante clause could not be used to bulldoze the statutory rights vested in a tenant under a Rent Control Act. Further, the Supreme Court categorically held that the below non-obstante clause could only be extended to laws operating in the same field (which in this case, were not the same). Accordingly, the Supreme Court held that SARFAESI could not override a Rent Control Act to allow a secured creditor to evict a tenant from a secured asset in terms of the provisions of the SARFAESI. 

“35          The provision of this Act to override other laws. - The provisions 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.”     

The above interpretation of the Supreme Court allowed a legal window to unscrupulous tenant(s) [largely fronting defaulting borrowers] to frustrate a secured creditor from taking possession of secured asset (under tenancy) by approaching the concerned authorises under the relevant state Rent Control Act, to delay the process initiated by such a secured creditor under SARFAESI. This mischief, in our view, does not seem to have been appreciated in the Bill nor by the joint Parliamentary Committee, thereby resulting in a vacuum in Section 17 of SARFAESI Amendment Act, to the extent of, not conferring exclusive jurisdiction to Debts Recovery Tribunal to the express exclusion of any other applicable law, upon an action taken by a secured creditor under SARFAESI for taking possession of a secured asset (under tenancy). 

Having discussed the above vulnerability, in our view, another interesting and open issue is that the dictum in Vishal Kalsaria case, to the above extent, can be argued to be per incuriam on the ground that it did not consider an earlier view of the concurrent bench in Harshad Govardhan case, as, while interpreting Section 34 of SARFAESI Act, the Supreme Court, in Harshad Govardhan case, had already taken a view that an authority under a state Rent Control Act could not interfere, much less injunct, an action taken under SARFAESI by a secured creditor in relation to a secured asset (under tenancy).

In any event, while Section 17 of the SARFAESI Amendment Act is still at its infancy, the same seems already ripe to be a victim of judicial vagaries, to the extent discussed above, resulting in further delay in our existing judicial recovery system.