REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  10873   OF 2018 [ARISING OUT OF SLP(CIVIL) NO.5895 OF 2018]

M/S HINDON FORGE PVT. LTD. & ANR. …APPELLANTS

VERSUS

THE STATE OF UTTAR PRADESH THROUGH DISTRICT MAGISTRATE  GHAZIABAD & ANR. …RESPONDENTS

WITH

CIVIL APPEAL NO.  10874   OF 2018 [ARISING OUT OF SLP(CIVIL) NO.12841 OF 2018]

J U D G M E N T

R.F. NARIMAN, J.

1. Leave granted.  

2. These matters come to us from a Full Bench judgment of

the  Allahabad High  Court  dated  06.02.2018.  By  an  order  of

reference  dated  19.09.2017,  a  learned Single  Judge noticed

divergent opinions expressed by two different Benches of the 1

Allahabad High Court on the question whether an application

under section 17(1) of the Securitisation and Reconstruction of

Financial  Assets  and  Enforcement  of  Securities  Interest Act,

2002 (hereinafter  referred  to  as the  “SARFAESI  Act”  or  the

“Act”),  at  the  instance  of  a  borrower,  is  maintainable  even

before physical or actual possession of secured assets is taken

by banks/financial institutions in exercise of their powers under

section 13(4) of the Act read with rule 8 of the Security Interest

(Enforcement) Rules, 2002 (hereinafter referred to as the “2002

Rules”). After discussing the various provisions of the Act, the

2002  Rules  and  judgments  of  the  Supreme  Court,  the  Full

Bench summarised the true legal  position according to  it  as

follows:

“29. The upshot of legal position that emerges from the judgments of the Supreme Court, insofar as the question  referred  to  for  our  consideration  is concerned, briefly stated, is as under:

(a)  The  remedy  of  an  application  under  Section 17(1)  is  available  only  after  the  measures  under Section  13(4)  have  been  taken  by  the  Bank/FIs against the borrower.

(b) The issue of notice under Section 13(2) to the borrower  and  communication  contemplated  by Section  13(3-A)  stating  that  his representation/objection  is  not  acceptable  or

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tenable, does not attract the application of principles of natural justice. In other words, no recourse to an application  under  Section  17(1),  at  that  stage,  is available/maintainable.

(c)  The  borrower/person  against  whom  measures under Section 13(4) of the Act are likely to be taken, cannot  be  denied  to  know  the  reason  why  his application or  objections have not  been accepted, as a fulfilment of the requirement of reasonableness and fairness in dealing with the same.

(d)  One  of  the  reasons  for  providing  procedure under  Section  13(4)  read  with  Rule  8  for  taking possession is that the borrower should have a clear notice before the date and time of sale/transfer of the secured assets, in order to enable him to tender the  dues  of  the  secured  creditor  with  all  other charges or to take a remedy under Section 17, at appropriate stage.

(e)  The  time  of  60  days  is  provided  after  the “measures” under Section 13(4) have been taken so as to enable the borrower to approach DRT and in such  an  eventuality,  the  DRT  shall  have  a jurisdiction to pass any order/interim order, may be subject  to  conditions,  on  the  application  under Section 17(1) of the Act.

(f) The scheme of relevant provisions of the Act and the  Rules  shows  that  the  Bank/FIs  have  been conferred  with  powers  to  take  physical  (actual) possession  of  the  secured  assets  without interference of the Court and the only remedy open to  the  borrower  is  to  approach  DRT  challenging such  an  action/measure  and  seeking  appropriate relief, including restoration of possession, even after transfer of the secured assets by way of sale/lease, on  the  ground  that  the  procedure  for  taking possession or dispossessing the borrower was not in accordance with the provisions of the Act/Rules.

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(g) If the dues of the secured creditor together with all  costs, charges and expenses incurred by them are tendered to them (secured creditors) before the date fixed for sale or transfer, the assets shall not be sold  or  transferred  and  in  such  an  eventuality, possession can also be restored to the borrower.

(h) If the possession is taken before confirmation of sale,  it  cannot  be  stated  that  the  right  of  the borrower  to  get  the  dispute  adjudicated  upon  is defeated.  The  borrower's  right  to  get  back possession  even  after  the  sale  remains  intact  or stands  recognised  under  the  scheme  of  the provisions of the Act.

(i)  The  borrower  is  not  entitled  to  challenge  the reasons  communicated  or  likely  measure,  to  be taken by the secured creditor under Section 13(4) of the  Act,  unless  his  right  to  approach  DRT,  as provided  for  under  Section  17(1),  matures.  The borrower  gets  all  the  opportunities,  at  different stages, either to clear the dues or to challenge the measures under Section 13(4) or even to challenge the  reasons  rejecting  his  objections/not  accepting the  objections,  after  the  measures  under  Section 13(4) have been taken.

(j) While the banks have been vested with stringent powers for recovery of their dues, safeguards have also  been  provided  for  rectifying  any  error  or wrongful use of such powers by vesting DRT with authority,  after  conducting an adjudication into the matters, to declare any such action invalid and also to  restore  even though the  possession  may have been made over to the transferee.

(k)  The  safeguards  provided  under  the  scheme make it further clear that if the Bank/FIs proceeds to take actual possession of the assets that cannot be stalled by the interference of a Court.

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(l)  If  DRT  after  examining  the  facts  and circumstances  of  the  case  and  on  the  basis  of evidence  produced  by  the  parties,  comes  to  the conclusion that any of the measures referred to in Section 13(4), taken by the secured creditor is not in accordance with the provisions of the Act, it may by order declare that the recourse taken to any one or more measures is invalid and restore possession to the borrower.

(m)  Any  transfer  of  secured  asset  after  taking possession thereof by the secured creditor shall vest in  the transferee all  rights in,  or  in  relation to the secured asset as if the transfer had been made by the owner of such secured assets.

(n) No remedy under Section 17(1) can be taken by the  borrower  unless  he  loses  actual  (physical) possession of the secured assets. In other words, before  losing  actual  possession  or  unless  the secured creditor obtains physical possession of the secured asset under Section 13(4), it is not open to the borrower to take a remedy under Section 17(1) of the Act.”

The court then went on to hold:

“31. Section  13(4)  of  the  Act  provides  that  if  the borrower  fails  to  discharge  his  liability  within  the period prescribed under Section 13(2), the secured creditor can take recourse to one of the measures, such as taking possession of  the secured assets, including  the  right  to  transfer  by  way  of  lease, assignment or sale for realising the secured asset. From the language of this provision, it is further clear that  taking measure under  Section 13(4)(a)  would mean taking actual (physical) possession, and if we do not read it  in the said provision to say so, the right and power of the secured creditor to transfer the assets by way of lease, assignment or sale for

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realizing the secured assets, as provided for therein, would  render  redundant.  In  other  words,  putting such an interpretation on the language of  Section 13(4)  of  the  Act  would  be  atrocious  and  would defeat the very objective of bringing the legislation. It  is,  therefore,  not  possible  to  hold  that  taking “measures”  under  Section  13(4)(a)  also  means taking only “symbolic possession” and not “physical possession”. We record further reasons to say so in following  paragraph.  From the  scheme of  Section 13(4) and Sections 14 and 17 of  the Act  and the relevant Rules 8 and 9 of the Rules, it appears to us that  unless  physical  possession  is  taken,  the measure, contemplated under Section 13(4), cannot be stated to have been taken.

31.1. One  of  the  rights  conferred  on  a  secured creditor is to transfer by way of lease, the secured asset,  possession  or  management  whereof  has been taken under clauses (a) or (b) of sub-section (4) of Section 13. We have already held that sale or assignment  of  the  secured  assets  could  only  be undertaken if actual physical possession has been taken over by the bank/FI’s. If we pose a question whether right to transfer the secured assets by way of  lease  could  be  exercised  without  taking  actual physical  possession  of  the  secured  asset  or management  of  the business of  the borrower,  our answer would be obviously in the negative.

31.2. The word ‘lease’ has not been defined under the Act, but it has been used in the Act in the same sense as under the Transfer of Property Act, 1882. Thereunder, Section 105 defines lease as “transfer of a right to enjoy such property, made for a certain time,  express  or  implied,  or  in  perpetuity,  in consideration  of  a  price  paid  or  promised,  or  of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who

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accepts  the  transfer  on  such  terms.  Lease  is  a contract between the lessor and the lessee for the possession and profits of land, etc. on one side and the recompense by rent  or  other consideration on the  other.  The  estate  transferred  to  the  lessee  is called  the  leasehold.  The  estate  remaining  in  the lessor is called the reversion.

31.3. The absolute owner, who is under no personal incapacity can grant lease for any term he pleases. However, the limited owner like a tenant for life can grant  lease  but  it  would  not  endure  beyond  his death. The Supreme Court in Associated Hotels of India Ltd. v. R.N. Kapoor, AIR 1959 SC 1262, while making  a  distinction  between  lease  and  license observed thus:—

“A lease is a transfer of an interest in land. The  interested  transferred  is  called  the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor.

Under  S.  52  if  a  document  gives  only  a right to use the property in a particular way or under certain terms while it  remains in possession  and  control  of  the  owner thereof,  it  will  be  a  licence.  The  legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the permissive for  a  particular  purpose.  But  for  the permission,  his  occupation  would  be unlawful.  It  does not  create  in  his  favour any estate or interest in the property. There is, therefore, clear distinction between the two concepts.”

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31.4. One of the essential indicia of lease is parting of exclusive possession by the lessor to the lessee with conferment of reciprocal right in the lessee to protect  his  possession  during  subsistence  of  the lease  to  the  exclusion  of  the  lessor.  Although  in some cases, a licensee may also be given exclusive possession of  a property,  but  as observed above, parting  of  exclusive  possession  to  the  lessee  is a sine  qua  non for  creating  a  valid  lease.  Thus, where a person is not in physical possession of a property  nor  in  a  position  to  deliver  physical possession in future, he is incompetent to create a valid  lease.  The reason being that  he is  not  in  a position to confer upon the lessee the right to enjoy the  property  to  the  exclusion  of  the  lessor  and everyone else.

31.5. It  thus  necessarily  follow  that  the  ultimate object of taking possession of the secured asset or management of the business of the borrower would not be achieved unless the secured creditor is in a position to further exercise his right to transfer the same, inter alia, by way of lease or sale, which could be possible only if physical (actual) possession has been taken over  and not  constructive or  symbolic possession.  The  language  of  Section  13(6)  also supports our view. Thus, while there is no bar in first taking symbolic possession of the secured assets, but it is implicit in sub-section (4) of Section 13 that the  secured  creditor  has  to  thereafter  proceed  to take  physical  (actual)  possession  in  order  to exercise  its  right  to  transfer  by  way  of  lease, assignment or sale.”

xxx xxx xxx

“34. Thus, the scheme of the provisions of Sections 13 and 17 of the Act, read with Rules 8 and 9 of the Rules, would show that the “measure” taken under Section  13(4)(a)  read  with  Rule  8  would  not  be complete unless actual (physical) possession of the

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secured  assets  is  taken  by  the  Bank/Financial Institutions.  In  our  opinion,  taking  measure  under Section  13(4)  means  either  taking  actual/physical possession under  clause (a)  of  sub-section  (4)  of Section  13  or  any  other  measure  under  other clauses of this Section and not taking steps to take possession or making unsuccessful attempt to take measure under Section 13(4) of the Act.  Similarly, following the procedure laid down under Section 14 and/or Rules 8 and 9, where the Bank meets with resistance,  would only  mean taking steps to seek possession  under  Section  13(4)(a)  and  the “measure”  under  sub-section  (4)(a)  of  Section  13 would  stand  concluded  only  when  actual/physical possession  is  taken  or  the  borrower  loses actual/physical possession. It is at this stage alone or thereafter, the borrower can take recourse to the provisions of Section 17(1) of the Act. The transfer of  possession  is  an  action.  Mere  declaration  of possession by a notice, in itself, cannot amount to transfer of possession, more particularly where such a  notice  meets  with  resistance.  When  the possession is taken by one party, other party also loses it. In the present case, adversial possession in being claimed by the secured creditor  against  the borrower.  It  is  not  possible  that  both  will  have possession  over  the  secured  assets.  The possession of the secured creditor would only come into place with the dispossession of  the borrower. We  may  also  observe  that  in  a  securitisation application  under  Section  17(1),  the  borrower  will have  to  make  a  categoric  statement  that  he  lost possession or he has been dispossessed and pray for possession.

35.  Issuance  of  possession  notice,  as  observed earlier, gives borrower and the public in general an intimation  that  the  secured  creditor  has  taken possession of the property and at that stage, it  is

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quite possible, may be in view of resistance or if the Banks chooses to take only symbolic possession, to state  that  the  secured  creditor  has  taken symbolic/constructive  possession  and  not  physical possession,  but that  by itself  would not entitle the borrower to raise challenge under Section 17(1) of the  Act,  as  held  by  the  Supreme  Court  in Noble Kumar (supra).  Unless  the  borrower  loses  actual (physical)  possession,  he cannot  take recourse to provisions of Section 17(1). Even while taking steps under Section 13(4) of the Act read with Rule 8 of the  Rules,  in  a  given  case,  the  bank  may  not physically  dispossess  the  borrower  and  wait  till  it takes  steps  to  conduct  actual  sale/auction  of  the secured assets i.e. till he issues notice under Rule 8(6)  of  the  Rules.  Even  that  by  itself,  from  the scheme of the Act and the Rules, in the backdrop of the  objective  of  the  Act,  in  our  opinion,  does  not confer any right to take recourse to Section 17(1). The  borrower  can  file  securitisation  application under Section 17(1) only when he physically loses possession.”

xxx xxx xxx

“40.  We are, therefore, of the firm and considered opinion  that  taking  “symbolic  possession”  or issuance of possession notice under Appendix IV of the Rules, meeting with any resistance, cannot be treated as “measure”/s taken under Section 13(4) of the Act  and,  therefore,  the borrower  at  that  stage cannot file an application under Section 17(1) before DRT.  In  other  words,  a  securitisation  application under Section 17(1) of the Act is maintainable only when  actual/physical  possession  is  taken  by  the secured  creditor  or  the  borrower  loses actual/physical  possession  of  the  secured  assets. Once  the  right  to  approach  DRT  matures  and securitisation application under Section 17(1) is filed by the borrower, it is open to DRT to deal with the

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same  on  merits  and  pass  appropriate  orders  in accordance with law. Thus, the question referred to for our consideration stands answered in terms of this  judgment.  The judgment  of  this  Court  in Aum Jewels (supra),  in our opinion,  does not enunciate the correct law.”

3. Shri  Neeraj  Kishan  Kaul,  learned  Senior  Advocate,

appearing on behalf of the appellants, has placed before us all

the relevant sections under the SARFAESI Act as well as the

relevant  rules under  the 2002 Rules.  He has referred to the

Statement of Objects and Reasons of both the original Act as

well  as  the  Amendment  Act  made  in  2004  pursuant  to  a

judgment of this Court in  Mardia Chemicals Ltd. v. Union of

India, (2004) 4 SCC 311 (“Mardia Chemicals”).  According to

Shri Kaul, the scheme of section 13 is that a notice of default

once served under section 13(2) of the Act may call upon the

borrower to discharge in full his liability to the secured creditor

within 60 days from the date of notice, failing which the secured

creditor  shall  be  entitled  to  exercise  all  or  any  of  the  rights

under  sub-section (4)  of  section 13.   He relied upon section

13(3-A)  which  made  it  clear  that  even  though  reasons  are

communicated under the said sub-section, since no measures

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were actually taken under section 13(4), there is no right at that

stage for  the  borrower  to  prefer  an  application  to  the Debts

Recovery Tribunal under section 17 of the Act. According to the

learned Senior Advocate, section 13(4)(a) makes it  clear that

“possession”  of  the  secured  assets  of  the  borrower  may be

taken under this provision.  Obviously, such possession is to be

taken under the rules framed under the Act. Rule 8(1) makes it

clear  that  possession  is  taken  under  the  2002  Rules  by

delivering a possession notice prepared in the form contained

in Appendix IV to the rules, and by affixing the notice on the

outer door or at such conspicuous place of the property. Once

this  is  done,  and  the  possession  notice  is  published  in  two

leading newspapers under sub-rule (2), the form contained in

Appendix IV makes it clear that notice is given to the public in

general that possession has been taken in exercise of powers

contained under section 13(4) of the Act read with rule 8 of the

2002 Rules.  As  soon as  this  takes  place,  according  to  Shri

Kaul, since “symbolic possession” has been so taken, the right

of the borrower to approach the Debts Recovery Tribunal for

relief under section 17 gets crystallized.  He also relied upon

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sub-rule (3) to argue that possession may be taken under this

sub-rule which is “actual” as opposed to “symbolic” possession

under sub-rule (1). According to the learned Senior Advocate,

the moment possession is taken either under rule 8(1) or under

rule 8(3), section 13(6) gets attracted thereby making it  clear

that a transfer of secured asset, after taking such possession,

shall  vest  in the transferee  all  rights in,  or  in relation to,  the

secured asset transferred as if the transfer had been made by

the owner of such secured asset. According to Shri Kaul, after

symbolic possession is taken under rule 8(1), rules 8(5) to 8(8)

and  rule  9  can  then  be  followed  in  order  to  effect  sale  of

property  of  which symbolic  possession has been taken.  Shri

Kaul attacked the judgment of the Full Bench, stating that the

conclusion of the Full Bench that the borrower would have to

wait  until  actual  physical  possession of  the secured asset  is

taken would create great hardship in that a running business of

the borrower would be taken over without the borrower being

able to approach the Debts Recovery Tribunal, and would have

to wait  until  after the sale takes place to recover possession

under section 17(3), even if he is able to show that the steps

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taken by the secured creditor are in violation of the provisions

of  the Act.  Thus, if  symbolic  possession is  taken contrary to

section  13(2)  prior  to  60  days  from  the  date  of  the  notice

mentioned  therein,  all  borrowers  would  have  to  wait  until

physical possession is taken and/or a sale notice is issued to

get back their running business after the business is brought to

a grinding halt. This could not possibly have been the intention

of the legislature.  

4. Shri C.U. Singh, learned Senior Advocate, appearing on

behalf  of  respondent  no.  2,  took  us  through  the  statutory

provisions and the 2002 Rules and argued that the High Court

may have gone beyond what was argued by his predecessor

before the High Court. Shri Singh emphasised that his limited

argument  before  this  Court  is  that  the  stage  of  symbolic

possession is not a stage at which any prejudice is caused to

the borrower as he may continue to run his business. Section

13(6) does not come in at this stage at all, and section 13(13),

which  interdicts  a  borrower  after  receipt  of  a  notice  under

section 13(2)  to  transfer  by way of  sale,  lease or  otherwise,

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other  than  in  the  ordinary  course  of  business,  any  of  his

secured  assets  without  prior  written  consent  of  the  secured

creditor,  is  the  only  restraint  that  continues  to  attach  after

symbolic possession is taken. According to him, as no prejudice

is  caused  to  the  borrower  at  this  stage,  it  is  clear  that

“possession” spoken of in section 13(4) can only mean actual

physical  possession.  This  becomes  clear  on  a  reading  of

section 13(4)(c) which makes it clear that a manager can only

manage the secured assets the possession of which has been

taken over by the secured creditor, if actual physical possession

has  been  parted  with.  According  to  the  learned  Senior

Advocate, therefore, the object of the Act will be defeated if a

debtor  can  approach  the  Debts  Recovery  Tribunal  at  such

stage when no prejudice is caused to him, thereby rendering

what is statutorily granted to a creditor  futile.  He relied upon

observations in various Supreme Court judgments to buttress

his  stand  that  it  is  only  at  the  stage  of  actual  physical

possession that  an application can be filed under section 17

and not before.  

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5. Shri Ranjit Kumar, learned Senior Advocate, appearing on

behalf of the respondents in Civil Appeal arising out of SLP(C)

No.12841 of 2018, went on to argue that all the sub-clauses in

section 13(4) must be construed  together. If that is done, it is

clear  that  under  sub-clauses  (b)  and  (c),  management  and

possession  must  physically  be  taken  over.  Therefore,  under

sub-clause (a),  the expression “possession”  must  also mean

actual  physical  possession.  According  to  the  learned  Senior

Advocate, the measures taken under section 13 must also be

read with sections 14 and 15. It is clear that under section 14,

actual physical possession is to be handed over by the Chief

Metropolitan Magistrate or the District Magistrate to the secured

creditor,  and under  section 15,  management  of  the business

has  actually  to  be  taken  over  as  two  managements  cannot

possibly  continue  at  the  same  time.  Read  in  this  light,  the

scheme of the Act, therefore, is clear and it becomes equally

clear  that  only  actual  physical  possession  is  referred  to  in

section 13(4)(a) before a section 17 application can be filed.

He  also  referred  to  section  17(3)  to  further  argue  that

restoration of possession of secured assets could only refer to

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restoration of actual physical possession thereby strengthening

his interpretation of sections 13 and 17 of the Act. According to

him,  under  section  19,  compensation  is  also  payable  where

possession taken is not in accordance with the provisions of the

Act and 2002 Rules, again making it clear that when the Court

or Tribunal directs the secured creditor to return such secured

asset to the borrowers, compensation may be paid. Returning

secured assets obviously would mean assets of which physical

possession has been taken. When it came to reading rules 8(1)

and 8(3) of the 2002 Rules, according to Shri Ranjit Kumar, rule

8(3) is the next step after symbolic possession is taken over

under  rule  8(1),  and  without  taking  of  actual  physical

possession  under  rule  8(3),  no  sale  can  be  made  of  any

secured assets.  Like Shri  C.U.  Singh before him,  he agreed

that  the  High  Court  had  perhaps  gone  a  little  too  far  in  its

conclusion, and that the moment any real prejudice is caused to

the borrower, the borrower can certainly approach the Tribunal.

This  would  also  include  the  stage  at  which  a  sale  notice  is

issued under rule 8.  

17

6. Shri Ashish Dholakia, learned Advocate, appearing for the

intervenor, State Bank of India, referred to the objects of the

2002  Act  and  relied  upon  the  judgment  of  this  Court  in

Standard Chartered Bank v. V. Noble Kumar & Ors., (2013) 9

SCC 620 (“Noble Kumar”). He argued that if we were to grant

an opportunity to a debtor to approach the Tribunal at the stage

of  symbolic  possession,   there  would  be  little  difference

between the Recovery of  Debts Due to Banks and Financial

Institutions Act, 1993 (hereinafter referred to as the “Recovery

of Debts Act”)  and the SARFAESI Act,  and thus,  we would

destroy  the  very  object  for  which  the  SARFAESI  Act  was

enacted,  namely,  so that  banks could recover  their  debts by

selling properties outside the court process, something that the

Recovery of Debts Act did not envisage. He also referred to and

relied upon section 3 of  the Transfer  of  Property  Act  for  the

definition of “a person is said to have notice” and Explanation II

in particular, which referred to actual possession. According to

him therefore, the correct stage would be the stage at which

actual  physical  possession  has  been  taken,  upon  which  a

18

debtor may then approach the Debts Recovery Tribunal under

section 17.  

7. Having heard learned counsel for the parties, we may first

set out the Statement of Objects and Reasons for the 2002 Act.

The Statement of Objects and Reasons for the 2002 Act read

as follows:    

“Statement  of  Objects  and  Reasons.—The financial sector has been one of the key drivers in India's  efforts  to  achieve  success  in  rapidly developing its economy. While the banking industry in  India  is  progressively  complying  with  the international  prudential  norms  and  accounting practices  there  are  certain  areas  in  which  the banking  and  financial  sector  do  not  have  a  level playing field as compared to other participants in the financial  markets  in  the  world.  There  is  no  legal provision  for  facilitating  securitisation  of  financial assets  of  banks and financial  institutions.  Further, unlike international  banks,  the banks and financial institutions  in  India  do  not  have  power  to  take possession of securities and sell them. Our existing legal framework relating to commercial transactions has  not  kept  pace  with  the  changing  commercial practices  and  financial  sector  reforms.  This  has resulted in slow pace of recovery of defaulting loans and  mounting  levels  of  non-performing  assets  of banks  and  financial  institutions.  Narasimham Committee  I  and  II  and  Andhyarujina  Committee constituted  by  the  Central  Government  for  the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation

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for  securitisation  and  empowering  banks  and financial  institutions  to  take  possession  of  the securities and to sell them without the intervention of the  court.  Acting  on  these  suggestions,  the Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and  for  matters  connected  therewith  or  incidental thereto.  The  provisions  of  the  Ordinance  would enable  banks  and  financial  institutions  to  realise long-term assets, manage problem of liquidity, asset liability  mismatches  and  improve  recovery  by exercising powers to take possession of securities, sell  them  and  reduce  non-performing  assets  by adopting measures for recovery or reconstruction.

2. It is now proposed to replace the Ordinance by a Bill,  which,  inter  alia,  contains  provisions  of  the Ordinance to provide for—

(a)  registration  and  regulation  of securitisation companies or reconstruction companies by the Reserve Bank of India;

(b)  facilitating  securitisation  of  financial assets  of  banks  and  financial  institutions with  or  without  the  benefit  of  underlying securities;

(c)  facilitating  easy  transferability  of financial  assets  by  the  securitisation company  or  reconstruction  company  to acquire  financial  assets  of  banks  and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;

(d)  empowering  securitisation  companies or reconstruction companies to raise funds

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by  issue  of  security  receipts  to  qualified institutional buyers;

(e)  facilitating  reconstruction  of  financial assets  acquired  by  exercising  powers  of enforcement  of  securities  or  change  of management  or  other  powers  which  are proposed to be conferred on the banks and financial institutions;

(f)  declaration  of  any  securitisation company  or  reconstruction  company registered with the Reserve Bank of India as  a  public  financial  institution  for  the purpose of Section 4-A of the Companies Act, 1956;

(g) defining “security interest” as any type of security including mortgage and charge on  immovable  properties  given  for  due repayment  of  any  financial  assistance given by any bank or financial institution;

(h)  empowering  banks  and  financial institutions to take possession of securities given  for  financial  assistance  and  sell  or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset  in  accordance  with  the  directions given or guidelines issued by the Reserve Bank of India from time to time;

(i)  the  rights  of  a  secured  creditor  to  be exercised  by  one  or  more  of  its  officers authorised in this behalf in accordance with the rules made by the Central Government;

(j) an appeal against the action of any bank or  financial  institution  to  the  concerned Debts  Recovery  Tribunal  and  a  second

21

appeal  to  the  Appellate  Debts  Recovery Tribunal;

(k)  setting-up  or  causing  to  be  set-up  a Central  Registry  by  the  Central Government for the purpose of registration of  transactions  relating  to  securitisation, asset  reconstruction  and  creation  of security interest;

(l)  application  of  the  proposed  legislation initially  to  banks  and  financial  institutions and  empowerment  of  the  Central Government  to  extend  the  application  of the  proposed  legislation  to  non-banking financial companies and other entities;

(m)  non-application  of  the  proposed legislation  to  security  interests  in agricultural  lands,  loans  not  exceeding Rupees One lakh and cases where eighty per  cent  of  the  loans  are  repaid  by  the borrower.

3. The Bill seeks to achieve the above objects.”

Section 13 with which we are concerned reads as follows:

“13.  Enforcement  of  security  interest.—(1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any  default  in  repayment  of  secured  debt  or  any instalment  thereof,  and  his  account  in  respect  of such debt  is  classified by the secured creditor  as

22

non-performing  asset,  then,  the  secured  creditor may  require  the  borrower  by  notice  in  writing  to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4): 1[Provided that—

(i)  the  requirement  of  classification  of secured  debt  as  non-performing  asset under this sub-section shall not apply to a borrower  who  has  raised  funds  through issue of debt securities; and

(ii)  in  the event  of  default,  the debenture trustee shall be entitled to enforce security interest  in  the same manner  as provided under this section with such modifications as may be necessary  and in  accordance with  the  terms and conditions  of  security documents  executed  in  favour  of  the debenture trustee;]

(3)  The  notice  referred  to  in  sub-section  (2)  shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower. 2[(3-A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any  objection,  the  secured  creditor  shall  consider such representation or objection and if the secured creditor  comes  to  the  conclusion  that  such representation  or  objection  is  not  acceptable  or tenable, he shall communicate 3[within fifteen days] of  receipt  of  such  representation  or  objection  the

1 Ins. by Act 44 of 2016, S. 11(i) (w.e.f. 1-9-2016). 2 Ins. by Act 30 of 2004, S. 8 (w.r.e.f. 11-11-2004). 3 Subs. for “within one week” by Act 1 of 2013, S. 5(a) (w.e.f. 15-1-2013).

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reasons for non-acceptance of the representation or objection to the borrower :

Provided that the reasons so 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 or the Court of District Judge under Section 17-A.]

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor  may take recourse to one or more  of  the  following  measures  to  recover  his secured debt, namely:—

(a) take possession of the secured assets of  the  borrower  including  the  right  to transfer  by  way  of  lease,  assignment  or sale for realising the secured asset; 4[(b)  take  over  the  management  of  the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:

Provided that  the right  to  transfer  by way of lease, assignment or sale shall be exercised only where the substantial part of the  business  of  the  borrower  is  held  as security for the debt:

Provided  further  that  where  the management of whole, of the business or part  of  the  business  is  severable,  the secured  creditor  shall  take  over  the management  of  such  business  of  the borrower which is relatable to the security for the debt;]

4 Subs. by Act 30 of 2004, S. 8 (w.r.e.f. 11-11-2004). Prior to substitution it read as: “(b) take over the management of the secured assets of the borrower including

the right to transfer by way of lease, assignment or sale and realise the secured asset;”

24

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of  the secured assets from the borrower and from whom any money is due or may become due  to  the  borrower,  to  pay  the  secured creditor,  so  much  of  the  money  as  is sufficient to pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. 5[(5-A) Where the sale of an immovable property, for which a reserve price has been specified, has been postponed for want of a bid of an amount not less than such reserve price,  it  shall  be lawful  for  any officer of the secured creditor, if so authorised by the secured  creditor  in  this  behalf,  to  bid  for  the immovable  property  on  behalf  of  the  secured creditor at any subsequent sale.

(5-B) Where the secured creditor, referred to in sub- section (5-A), is declared to be the purchaser of the immovable  property  at  any  subsequent  sale,  the amount  of  the  purchase  price  shall  be  adjusted towards  the  amount  of  the  claim  of  the  secured creditor  for  which  the  auction  of  enforcement  of security  interest  is  taken  by  the  secured  creditor, under sub-section (4) of Section 13.

(5-C)  The  provisions  of  Section  9  of  the  Banking Regulation Act,  1949 (10 of 1949) shall,  as far as may be, apply to the immovable property acquired by secured creditor under sub-section (5-A).]

5 Ins. by Act 1 of 2013, S. 5(b) (w.e.f. 15-1-2013) 25

(6)  Any  transfer  of  secured  asset  after  taking possession  thereof  or  take  over  of  management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.

xxx xxx xxx

(13)  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 his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.”

Section 14(1) of the Act reads as follows:

“14.  Chief  Metropolitan  Magistrate  or  District Magistrate  to  assist  secured creditor  in  taking possession  of  secured  asset.—(1)  Where  the possession of any secured assets is required to be taken  by  the  secured  creditor  or  if  any  of  the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act,  the  secured  creditor  may,  for  the  purpose  of taking possession or  control  of  any such  secured assets,  request,  in  writing,  the  Chief  Metropolitan Magistrate  or  the  District  Magistrate  within  whose jurisdiction  any  such  secured  asset  or  other documents  relating  thereto  may  be  situated  or found,  to  take  possession  thereof,  and  the  Chief Metropolitan Magistrate or, as the case may be, the District  Magistrate  shall,  on  such  request  being made to him—

(a)  take  possession  of  such  asset  and documents relating thereto; and

26

(b)  forward such asset and documents to the secured creditor:

xxx xxx xxx”

Section 15(1) of the Act reads as follows:

“15.  Manner  and  effect  of  takeover  of management.—(1) 6[When  the  management  of business of  a  borrower  is  taken over  by a 7[asset reconstruction company] under clause (a) of Section 9  or,  as  the  case  may be,  by  a  secured  creditor under clause (b) of sub-section (4) of Section 13], the secured creditor may, by publishing a notice in a newspaper published in English language and in a newspaper  published  in  an  Indian  language  in circulation in the place where the principal office of the borrower is situated, appoint as many persons as it thinks fit—

(a)  in  a  case  in  which the  borrower  is  a company as defined in the Companies Act, 1956 (1 of 1956), to be the directors of that borrower in accordance with the provisions of that Act; or

(b)  in  any  other  case,  to  be  the administrator  of  the  business  of  the borrower.

xxx xxx xxx”

Section 17 of the Act reads as follows:

“8[17.  Application  against  measures  to  recover secured  debts].—(1)  Any  person  (including

6 Subs. for “When the management of business of a borrower is taken over by a secured creditor” by Act 30 of 2004, S. 9 (w.r.e.f. 11-11-2004). 7 Subs. for “securitisation company or a reconstruction company” by Act 44 of 2016, S. 3(i) (w.e.f. 1-9-2016). 8 Subs. for “Right to appeal” by Act 44 of 2016, S. 14(i) (w.e.f. 1-9-2016).

27

borrower,)  aggrieved  by  any  of  the  measures referred to in sub-section (4) of Section 13 taken by the secured creditor or his authorised officer under this chapter, 9[may make an application along with such  fee,  as  may  be  prescribed,]  to  the  Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken:

10[Provided that different fees may be prescribed for making the application by the borrower and the person other than the borrower.]

11[Explanation.—For the removal of doubts, it is hereby  declared  that  the  communication  of  the reasons to the borrower by the secured creditor for not having accepted his representation or objection or  the  likely  action  of  the  secured  creditor  at  the stage of communication of reasons to the borrower shall  not  entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub-section (1) of section 17.] 12[(1-A) 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.]

9 Subs. for “may prefer an appeal” by Act 30 of 2004, S. 10 (w.r.e.f. 21-6-2002). 10 Ins. by Act 30 of 2004, S. 10 (w.r.e.f. 21-6-2002). 11 Ins. by Act 30 of 2004, S. 10 (w.r.e.f. 11-11-2004). 12 Ins. by Act 44 of 2016, S. 14(ii) (w.e.f. 1-9-2016).

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13[(2)  The  Debts  Recovery  Tribunal  shall  consider whether  any  of  the  measures  referred  to  in  sub- section  (4)  of  Section  13  taken  by  the  secured creditor  for  enforcement  of  security  are  in accordance with the provisions of this Act and the rules made thereunder. 14[(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

13 Subs.  for sub-sections (2) and (3) by Act  30 of 2004, S.  10 (w.r.e.f.  11-11-2004).  Prior to substitution sub-sections (2) and (3) read as:

“(2)  Where  an  appeal  is  preferred  by  a  borrower,  such  appeal  shall  not  be entertained by the Debts Recovery Tribunal unless the borrower has deposited with the Debts  Recovery  Tribunal  seventy-five  per  cent  of  the  amount  claimed  in  the  notice referred to in sub-section (2) of Section 13:

Provided that the Debts Recovery Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

(3) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and rules made thereunder.”

14 Subs. by Act 44 of 2016, S. 14(iii) (w.e.f. 1-9-2016). Prior to substitution it read as: “(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 of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of  Section 13 taken by the secured creditors  as invalid and restore the possession of  the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and 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.”.

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(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.]

(4)  If,  the  Debts  Recovery  Tribunal  declares  the recourse  taken  by  a  secured  creditor  under  sub- section (4) of Section 13, is in accordance with the provisions  of  this  Act  and  the  rules  made thereunder,  then,  notwithstanding  anything contained  in  any  other  law  for  the  time  being  in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub-section (4) of Section 13 to recover his secured debt. 15[(4-A) 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

15 Ins. by Act 44 of 2016, S. 14(iv) (w.e.f. 1-9-2016). 30

(b) is contrary to Section 65-A of the Transfer  of  Property  Act,  1882  (4  of 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.]

(5) Any application made under sub-section (1) shall be  dealt  with  by  the  Debts  Recovery  Tribunal  as expeditiously  as  possible  and  disposed  of  within sixty days from the date of such application:

Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery  Tribunal,  shall  not  exceed  four  months from the date of making of such application made under sub-section (1).

(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as  specified  in  sub-section  (5),  any  party  to  the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing  the  Debts  Recovery  Tribunal  for

31

expeditious  disposal  of  the  application  pending before  the  Debts  Recovery  Tribunal  and  the Appellate Tribunal may, on such application, make an  order  for  expeditious  disposal  of  the  pending application by the Debts Recovery Tribunal.

(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the application in accordance with the provisions of  the  Recovery  of  Debts  Due  to  Banks  and Financial Institutions Act, 1993 (51 of 1993) and the rules made thereunder.]”

Rule 8 of the 2002 Rules reads as follows:

“8.  Sale  of  immovable  secured  assets.—(1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession,  by  delivering  a  possession  notice prepared  as  nearly  as  possible  in  Appendix  IV  to these  rules,  to  the  borrower  and  by  affixing  the possession  notice  on  the  outer  door  or  at  such conspicuous place of the property.

(2) 16[The possession notice as referred to in sub- rule (1) shall also be published, as soon as possible but in any case not later than seven days from the date  of  taking  possession,  in  two  leading newspapers],  one  in  vernacular  language  having sufficient circulation in that locality, by the authorised officer. 17[(2-A)  All  notices under  these rules  may also be served upon the borrower through electronic mode of service, in addition to the modes prescribed under sub-rule (1) and sub-rule (2) of rule 8.]

16 Subs. for “The possession notice as referred to in sub-rule (1) shall also be published in two leading newspaper” by S.O. 1837(E), dated 26-10-2007 (w.e.f. 26-10-2007). 17 Ins. by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016).

32

(3) In the event of possession of immovable property is  actually  taken  by  the  authorised  officer,  such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as a owner of ordinary prudence would, under  the  similar  circumstances,  take  of  such property.

(4)  The  authorised  officer  shall  take  steps  for preservation and protection of secured assets and insure  them,  if  necessary,  till  they  are  sold  or otherwise disposed of.

(5) Before effecting sale of the immovable property referred to in sub-rule (1) of rule 9, the authorised officer shall obtain valuation of the property from an approved  valuer  and  in  consultation  with  the secured creditor, fix the reserve price of the property and  may  sell  the  whole  or  any  part  of  such immovable  secured  asset  by  any  of  the  following methods:—

(a)  by  obtaining  quotations  from  the persons  dealing  with  similar  secured assets or otherwise interested in buying the such assets; or

(b) by inviting tenders from the public; 18[(c)  by  holding  public  auction  including through e-auction mode; or]

(d) by private treaty.

(6) the authorised officer shall serve to the borrower a  notice  of  thirty  days  for  sale  of  the  immovable secured assets, under sub-rule (5):

Provided that if the sale of such secured asset is being effected by either inviting tenders from the

18 Subs. by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016). Prior to substitution it read as: “(c) by holding public auction; or”

33

public  or  by  holding  public  auction,  the  secured creditor shall  cause a public notice in two leading newspapers  one  in  vernacular  language  having sufficient circulation in the locality by setting out the terms of sale, which shall include,—

(a)  the  description  of  the  immovable property to be sold, including the details of the  encumbrances  known to  the  secured creditor;

(b) the secured debt for recovery of which the property is to be sold;

(c) reserve price, below which the property may not be sold;

(d) time and place of public auction or the time after  which sale by any other  mode shall be completed;

(e)  depositing earnest  money as may be stipulated by the secured creditor;

(f)  any  other  thing  which  the  authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property.

(7)  Every  notice  of  sale  shall  be  affixed  on  a conspicuous  part  of  the  immovable  property  and may, if the authorised officer deems it fit, put on the website of the secured creditor on the Internet.

(8) Sale by any methods other than public auction or public  tender,  shall  be on such terms as  may be settled 19[between  the  secured  creditor  and  the proposed purchaser in writing].”

Appendix IV to the 2002 Rules reads as follows:

19 Subs. for “between the parties in writing” by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016). 34

“APPENDIX IV

[See rule 8(1)]

POSSESSION NOTICE

(for immovable property)

Whereas

The undersigned being the authorised officer of the ………..…………………. (name of the Institution) under  the  Securitisation  and  Reconstruction  of Financial  Assets  and  Enforcement  of  Security Interest 20[Act, 2002 (54 of 2002)] and in exercise of powers  conferred  under  Section  13(12)  read with 21[Rule 3] of the Security Interest (Enforcement) Rules,  2002  issued  a  demand  notice  dated ……………….  calling  upon  the  borrower  Shri ………………..……….  /M/s  ………………………… to repay the amount mentioned in the notice being Rs  ……………  (in  words  …………………………) within 60 days from the date of receipt of the said notice.

22[The  borrower  having  failed  to  repay  the amount, notice is hereby given to the borrower and the public in general that the undersigned has taken possession of the property described herein below in exercise of powers conferred on him under sub- section (4) of Section 13 of Act read with Rule 8 of the Security Interest Enforcement) Rules, 2002 on this the …….day of ….. of the year……]

The  borrower  in  particular  and  the  public  in general  is  hereby  cautioned  not  to  deal  with  the property and any dealings with the property will be subject  to  the  charge  of  the  ………….. …………………………. (name of the Institution) for an amount Rs. ……………….. and interest thereon.

20 Subs. for “Ordinance” by S.O. 103(E), dated 2-2-2007 (w.e.f. 2-2-2007). 21 Subs. for “Rule 9” by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016). 22 Subs. by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016).

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23[The  borrower’s  attention  is  invited  to provisions  of  sub-section (8)  of  Section  13 of  the Act,  in  respect  of  time  available,  to  redeem  the secured assets.]

Description of the Immovable Property

All that part and parcel of the property consisting of  Flat  No.  …… /Plot  No.  ……… In Survey No. …………/City  or  Town  Survey  No.  ………… /Khasara  No.  …….……………  within  the registration  sub-district  …………………….  and District …………………..

Bounded:   

On the North by   

On the South by   

On the East by   

On the West by   

sd/-

Authorised Officer

(Name of Institution)

Date:

Place:”

8. This Court in Mardia Chemicals (supra) after referring in

detail to the provisions of the Act held:

“48. The  next  safeguard  available  to  a  secured borrower  within  the  framework  of  the  Act  is  to approach  the  Debts  Recovery  Tribunal  under

23 Ins. by G.S.R. 1046(E), dt. 3-11-2016 (w.e.f. 4-11-2016). 36

Section 17 of the Act. Such a right accrues only after measures are taken under sub-section (4) of Section 13 of the Act. xxx xxx xxx 59. We may like to observe that proceedings under Section  17  of  the  Act,  in  fact,  are  not  appellate proceedings. It seems to be a misnomer. In fact it is the initial action which is brought before a forum as prescribed under the Act, raising grievance against the action or measures taken by one of the parties to the contract. It  is the stage of initial proceeding like  filing  a  suit  in  civil  court.  As  a  matter  of  fact proceedings under Section 17 of the Act are in lieu of a civil suit which remedy is ordinarily available but for the bar under Section 34 of the Act in the present case.  We  may  refer  to  a  decision  of  this  Court in Ganga  Bai v. Vijay  Kumar[(1974)  2  SCC  393] where  in  respect  of  original  and  appellate proceedings  a  distinction  has  been  drawn  as follows: (SCC p. 397, para 15)

“There is  a  basic  distinction between the right of suit and the right of appeal. There is an inherent right in every person to bring a suit of civil nature and unless the suit is barred by statute one may, at one's peril, bring a suit of one's choice. It is no answer to a suit, howsoever frivolous to claim, that the law confers no such right to sue. A suit for its maintainability requires no authority of law and it is enough that no statute bars the  suit.  But  the  position  in  regard  to appeals is quite the opposite. The right of appeal inheres in no one and therefore an appeal for its maintainability must have the clear  authority  of  law.  That  explains  why the  right  of  appeal  is  described  as  a creature of statute.”

xxx xxx xxx

37

62. As indicated earlier,  the position of  the appeal under Section 17 of the Act is like that of a suit in the court  of  the first  instance under  the Code of  Civil Procedure. No doubt, in suits also it is permissible, in  given  facts  and  circumstances  and  under  the provisions of the law to attach the property before a decree  is  passed or  to  appoint  a  receiver  and  to make  a  provision  by  way  of  interim  measure  in respect of the property in suit. But for obtaining such orders a case for  the same is  to  be made out  in accordance with the relevant provisions under  the law. There is no such provision under the Act. xxx xxx xxx 80. Under  the  Act  in  consideration,  we  find  that before taking action a notice of 60 days is required to be given and after the measures under Section 13(4) of the Act have been taken, a mechanism has been  provided  under  Section  17  of  the  Act  to approach  the  Debts  Recovery  Tribunal.  The abovenoted provisions are for the purpose of giving some  reasonable  protection  to  the  borrower. Viewing the matter in the above perspective, we find what emerges from different provisions of the Act, is as follows:

1. Under sub-section (2) of Section 13 it is incumbent  upon  the  secured  creditor  to serve 60 days’ notice before proceeding to take  any  of  the  measures  as  provided under sub-section (4) of Section 13 of the Act. After service of notice, if the borrower raises  any  objection  or  places  facts  for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not  accepting  the  objections,  howsoever brief they may be, must be communicated to  the  borrower.  In  connection  with  this conclusion  we  have  already  held  a discussion  in  the  earlier  part  of  the

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judgment.  The reasons so communicated shall  only  be  for  the  purposes  of  the information/knowledge  of  the  borrower without giving rise to any right to approach the Debts Recovery Tribunal under Section 17 of the Act, at that stage. 2.  As  already  discussed  earlier,  on measures  having  been  taken  under  sub- section  (4)  of  Section  13  and  before  the date of sale/auction of the property it would be open for the borrower to file an appeal (petition)  under  Section  17  of  the  Act before the Debts Recovery Tribunal. 3.  That  the  Tribunal  in  exercise  of  its ancillary  powers  shall  have  jurisdiction  to pass any stay/interim order subject to the condition as it may deem fit and proper to impose. 4. In view of the discussion already held in this behalf, we find that the requirement of deposit  of  75%  of  the  amount  claimed before  entertaining  an  appeal  (petition) under  Section  17  of  the  Act  is  an oppressive, onerous and arbitrary condition against all  the canons of reasonableness. Such a condition is invalid and it is liable to be struck down. 5. As discussed earlier in this judgment, we find that it will be open to maintain a civil suit in civil  court, within the narrow scope and on the limited grounds on which they are permissible,  in the matters relating to an  English  mortgage  enforceable  without intervention of the court.”

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Close on the heels of this judgment, the 2002 Act was amended on

30.12.2004 with effect from 11.11.2004. The Statement of Objects

and Reasons for the Amended Act reads as under:

“Statement  of  Objects  and  Reasons.—The Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest  Act, 2002  was  enacted  to  regulate  securitisation  and reconstruction of  financial  assets and enforcement of  security  interest  and  for  matters  connected thereto.  The  Act  enables  the  banks  and  financial institutions  to  realise  long-term  assets,  manage problems of  liquidity,  asset  liability  mis-match  and improve  recovery  by  exercising  powers  to  take possession of securities, sell them and reduce non- performing  assets  by  adopting  measures  for recovery or reconstruction. The Act further provides for  setting  up  of  asset  reconstruction  companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets and take over the management of the business of the borrower.

2. The Hon’ble  Supreme Court,  in  the case of Mardia Chemicals Ltd. v. Union of India, A.I.R. 2004 S.C. 2371 : (2004) 4 S.C.C 311, inter alia,—

(a) upheld the validity of the provisions of the said Act except that of sub-section (2) of Section 17 which was declared ultra vires Article  14  of  the  Constitution.   The said  sub-section  provides  for  deposit  of seventy-five  per  cent.  of  the  amount claimed  before  entertaining  an  appeal (petition)  by the Debts Recovery  Tribunal (DRT) under Section 17;

40

(b) observed  that  in  cases  where  a secured  creditor  has  taken  action  under sub-section (4)  of  Section 13 of  the said Act,  it  would be open to borrowers to file appeals under Section 17 of the Act within the limitation as prescribed therefor. It also observed that if the borrower, after service of notice under sub-section (2) of Section 13 of the said Act, raises any objection or places  facts  for  consideration  of  the secured creditor,  such reply to  the notice must be considered with due application of mind and the reasons for not accepting the objections,  howsoever  brief  that  may  be, must  be  communicated  to  the  borrower. The reasons so communicated shall  only be  for  the  purposes  of  the information/knowledge  of  the  borrower without giving rise to any right to approach the Debts Recovery Tribunal under Section 17 of the Act, at that stage.

3. In view of the above judgment of the Hon’ble Supreme  Court  and  also  to  discourage  the borrowers to postpone the repayment of their dues and  also  enable  the  secured  creditor  to  speedily recover their  debts,  if  required,  by enforcement  of security or other measures specified in sub-section (4)  of  Section  13  of  the  said  Act,  it  had  become necessary to amend the provisions of the said Act.

4. Since the Parliament was not in session and it was necessary to take immediate action to amend the said Act for the above reasons, the Enforcement of  Security  Interest  and  Recovery  of  Debts  Laws (Amendment) Ordinance, 2004 was promulgated on the 11th November, 2004.

5. The said Ordinance amends the Securitisation and  Reconstruction  of  Financial  Assets  and

41

Enforcement  of  Security  Interest  Act,  2002,  the Recovery  of  Debts  Due  to  Banks  and  Financial Institutions Act, 1993 and the Companies Act, 1956. Chapter  II  of  the  Ordinance  which  amends  the Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest  Act, 2002,—

(a) require  the  secured  creditor  to consider, in response to the notice issued by the secured creditor under sub-section (2)  of  Section  13  of  the  said  Act,  any representation made or objection raised by the borrower and cast an obligation upon the secured creditor to communicate within one week of receipt of such representation or  objection  the  reasons  for  non- acceptance  of  the  representation  or objection  to  the  borrower  and  take possession of the secured asset only after reasons for not accepting the objections of the borrower have been communicated to him in writing;

(b) enable  the  borrower  to  make  an application  before  the  Debts  Recovery Tribunal  without  making  any  deposit (instead  of  filing  an  appeal  before  the Debts  Recovery  Tribunal  after  depositing seventy-five  per  cent.  of  the  amount claimed  with  the  notice  by  the  secured creditor);

(c) provides  that  the  Debts  Recovery Tribunal shall dispose of the application as expeditiously  as  possible  and  dispose  of such application within sixty days from the date of such applications so that the total period of pendency of the application with

42

such  Tribunal  shall  not  exceed  four months;

(d) make  provision  for  transfer  of pending  applications  to  any  one  of  the Debts Recovery Tribunal in certain cases;

(e) enables  any  person  aggrieved  by any  order  made  by  the  Debts  Recovery Tribunal  to  file  an  appeal  to  the  Debts Recovery  Appellate  Tribunal  after depositing with the Appellate Tribunal fifty per cent. of amount of debt due from him, as  claimed  by  the  secured  creditor  or determined  by  the  Debts  Recovery Tribunal, whichever is less;

(f) enables the borrower residing in the State of Jammu and Kashmir to make an application to the Court of District Judge in that  State  having  jurisdiction  over  the borrower and make provision for filing an appeal to the High Court from the order of the Court of District Judge;

(g) makes provision for validation of the fees levied under the said Act before the commencement of this Ordinance.

xxx xxx xxx”

The  Act  was  accordingly  amended  in  accordance  with  the

aforesaid judgment.  

9. The judgment in Mardia Chemicals (supra) had made it

clear  in  paragraph  80  that  all  measures  having  been  taken

43

under  section  13(4),  and  before the  date  of  sale  auction,  it

would be open for the borrower to file a petition under section

17 of the Act. This paragraph appears to have been missed by

the Full Bench in the impugned judgment.  

10.  A reading of section 13 would make it clear that where a

default  in  repayment  of  a  secured  debt  or  any  instalment

thereof is made by a borrower, the secured creditor may require

the  borrower,  by  notice  in  writing,  to  discharge  in  full  his

liabilities to the secured creditor within 60 days from the date of

notice.  It  is  only  when  the  borrower  fails  to  do  so  that  the

secured creditor may have recourse to the provisions contained

in section 13(4) of the Act. Section 13(3-A) was inserted by the

2004 Amendment Act, pursuant to Mardia Chemicals (supra),

making it  clear  that  if  on receipt  of  the notice  under  section

13(2),  the  borrower  makes  a  representation  or  raises  an

objection,  the  secured  creditor  is  to  consider  such

representation  or  objection  and  give  reasons  for  non-

acceptance. The proviso to section 13(3-A) makes it clear that

this would not confer upon the borrower any right to prefer an

44

application to the Debts Recovery Tribunal under section 17 as

at this stage no action has yet been taken under section 13(4).  

11. When we come to section 13(4)(a), what is clear is that

the mode of  taking possession of  the secured assets of  the

borrower is specified by rule 8. Under section 38 of the Act, the

Central Government may make rules to carry out the provisions

of the Act. One such rule is rule 8. Rule 8(1) makes it clear that

“the  authorised  officer  shall  take  or  cause  to  be  taken

possession”.  The expression “cause to be taken” only means

that the authorised officer need not himself take possession, but

may, for example, appoint an agent to do so. What is important

is that such taking of possession is effected under sub-rule (1)

of  rule  8  by  delivering  a  possession  notice  prepared  in

accordance with Appendix IV of the 2002 Rules, and by affixing

such notice on the outer door or other conspicuous place of the

property concerned. Under sub-rule (2), such notice shall also

be  published  within  7  days  from the  date  of  such  taking  of

possession in two leading newspapers, one in the vernacular

language having sufficient circulation in the locality. This is for

45

the reason that when we come to Appendix IV, the borrower in

particular,  and the public in general  is cautioned by the said

possession notice not to deal with the property as possession

of the said property has been taken. This is for the reason that,

from this  stage on,  the secured asset is  liable to be sold to

realise the debt owed, and title in the asset divested from the

borrower  and  complete  title  given  to  the  purchaser,  as  is

mentioned in section 13(6) of the Act. There is, thus, a radical

change in the borrower dealing with the secured asset from this

stage.  At  the stage of  a section 13(2)  notice,  section 13(13)

interdicts  the  borrower  from  transferring  the  secured  asset

(otherwise than in the ordinary course of his business) without

prior  written  consent  of  the  secured  creditor.  But  once  a

possession  notice  is  given  under  rule  8(1)  and  8(2)  by  the

secured creditor to the borrower, the borrower cannot deal with

the secured asset at all as all further steps to realise the same

are to be taken by the secured creditor under the 2002 Rules.

12. Section 19, which is strongly relied upon by Shri  Ranjit

Kumar,  also  makes  it  clear  that  compensation  is  receivable

46

under section 19 only when possession of secured assets is not

in  accordance with the provision of  this  Act  and rules  made

thereunder.24 The scheme of section 13(4) read with rule 8(1)

therefore makes it clear that the delivery of a possession notice

together with affixation on the property and publication is one

mode of taking “possession” under section 13(4).  This being

the case, it is clear that section 13(6) kicks in as soon as this is

done as the expression used in section 13(6) is “after taking

possession”. Also, it is clear that rule 8(5) to 8(8) also kick in as

soon as “possession” is taken under rule 8(1) and 8(2).  The

statutory scheme, therefore, in the present case is that once

possession is taken under rule 8(1) and 8(2) read with section

13(4)(a),  section  17  gets  attracted,  as  this  is  one  of  the

measures referred to in section 13(4) that has been taken by

the secured creditor under Chapter III.  

13. Rule  8(3)  begins with the expression “in  the event  of”.

These  words  make  it  clear  that  possession  may  be  taken

alternatively under sub-rule (3). The further expression used in 24 That this is the general scheme of the Act is also clear from section 17(2) which states that the Debts  Recovery Tribunal, when an application is filed before it, shall consider whether any of the measures  referred to in section 13(4) taken by the secured creditor are in accordance with the provisions of the Act  and rules made thereunder.

47

sub-rule  (3)  is  “actually  taken”  making  it  clear  that  physical

possession  is  referred  to  by  rule  8(3).  Thus,  whether

possession is taken under either rule 8(1) and 8(2), or under

rule 8(3),  measures are taken by the secured creditor  under

section 13(4) for the purpose of attracting section 17(1).  

14. The  argument  made  by  the  learned  counsel  for  the

respondents that section 13(4)(a) has to be read in the light of

sub-clauses  (b)  and  (c)  is  therefore  incorrect  and  must  be

rejected.  Under  sub-clause  (c),  a  person  is  appointed  as

manager  to  manage  the  secured  assets  the  possession  of

which has been taken over by the secured creditor only under

rule 8(3).  Further,  the rule  of  noscitur  a  sociis  cannot  apply.

Sub-clause  (b)  speaks  of  taking  over  management  of  the

business  of  the  borrower  which  is  completely  different  from

taking  over  possession  of  a  secured  asset  of  the  borrower.

Equally,  sub-clause (d)  does not  speak of  taking over  either

management  or  possession,  but  only  speaks  of  paying  the

secured creditor so much of the money as is sufficient to pay off

the secured debt. These arguments must therefore be rejected.  

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15. Equally fallacious is the argument that section 13(4) must

be read in the light of sections 14 and 15. There is no doubt

whatsoever  that  under  section  14(1),  the  Magistrate  takes

possession  of  the  asset  and  “forwards”  such  asset  to  the

secured creditor.  Equally,  under section 15 there is no doubt

that  the  management  of  the  business  of  a  borrower  must

actually be taken over. These are separate and distinct modes

of  exercise  of  powers  by  a  secured  creditor  under  the  Act.

Whereas sections 14 and 15 have to be read by themselves,

section 13(4)(a), as has been held by us, has to be read with

rule 8,  and this  being the case,  this  argument  must  also be

rejected.

16. Yet another argument was made by the learned counsel

for the respondents that section 17(3) would require restoration

of  possession of  secured assets  to  the borrower,  which can

only happen if actual physical possession is taken over. Section

17(3) is a provision which arms the Debts Recovery Tribunal to

give certain reliefs when applications are made before it by the

borrower. One of the reliefs that can be given is restoration of

49

possession. Other reliefs can also be given under the omnibus

section 17(3)(c). Merely because one of the reliefs given is that

of restoration of possession does not lead to the sequitur that

only actual  physical  possession is therefore contemplated by

section 13(4),  since other  directions that  may be considered

appropriate  and  necessary  may  also  be  given  for  wrongful

recourse taken by the secured creditor to section 13(4).  This

argument again has no legs to stand on.  

17. Another argument made by learned senior counsel for the

respondents is  that  if  we were to accept  the construction of

section 13(4) argued by the appellants,  the object  of the Act

would be defeated. As has been pointed out hereinabove in the

Statement of Objects and Reasons of the original enactment,

paragraphs  2(i)  and  2(j)  make it  clear  that  the  rights  of  the

secured creditor are to be exercised by officers authorised in

this behalf in accordance with the rules made by the Central

Government. Further, an appeal against the action of any bank

or  financial  institution  is  provided  to  the  concerned  Debts

Recovery Tribunal. It can thus be seen that though the rights of

50

a secured creditor may be exercised by such creditor outside

the court process, yet such rights must be in conformity with the

Act.  If not in conformity with the Act, such action is liable to be

interfered with by the Debts Recovery Tribunal in an application

made by the debtor/borrower.  Thus,  it  can be seen that  the

object of the original enactment also includes secured creditors

acting in conformity with the provisions of the Act to realise the

secured debt which, if not done, gives recourse to the borrower

to get relief from the Debts Recovery Tribunal. Equally, as has

been seen hereinabove, the Statement of Objects and Reasons

of the Amendment Act of 2004 also make it clear that not only

do reasons have to be given for not accepting objections of the

borrower under section 13(3-A), but that applications may be

made before the Debts Recovery Tribunal without making the

onerous  pre-deposit  of  75% which  was  struck  down by  this

Court  in  Mardia  Chemicals (supra).  The  object  of  the  Act,

therefore, is also to enable the borrower to approach a quasi-

judicial forum in case the secured creditor, while taking any of

the  measures  under  section  13(4),  does  not  follow  the

provisions of the Act in so doing. Take for example a case in

51

which a secured creditor takes possession under rule 8(1) and

8(2) before the 60 days’ period prescribed under section 13(2)

is over. The borrower does not have to wait until actual physical

possession  is  taken  (this  may  never  happen  as  after

possession  is  taken  under  rule  8(1)  and  8(2),  the  secured

creditor  may  go  ahead  and  sell  the  asset).  The  object  of

providing a remedy against  the wrongful  action of  a secured

creditor to a borrower will be stultified if the borrower has to wait

until a sale notice is issued, or worse still, until a sale actually

takes place. It is clear, therefore, that one of the objects of the

Act,  as  carried  out  by  rule  8(1)  and  8(2)  must  also  be

subserved,  namely,  to  provide  the  borrower  with  instant

recourse  to  a  quasi-judicial  body  in  case  of  wrongful  action

taken by the secured creditor.  

18. Another  argument  that  was  raised  by  learned  senior

counsel  for  the respondents is  that  the taking of  possession

under section 13(4)(a) must mean actual physical possession

or  otherwise,  no  transfer  by  way  of  lease  can  be  made  as

possession of the secured asset would continue to be with the

52

borrower  when  only  symbolic  possession  is  taken.  This

argument  also  must  be  rejected  for  the  reason  that  what  is

referred to in section 13(4)(a) is the right to transfer by way of

lease for realising the secured asset. One way of realising the

secured asset is when physical possession is taken over and a

lease of the same is made to a third party. When possession is

taken under rule 8(1) and 8(2), the asset can be realised by

way  of  assignment  or  sale,  as  has  been  held  by  us

hereinabove. This being the case, it  is  clear that  the right to

transfer  could  be  by  way  of  lease,  assignment  or  sale,

depending upon which mode of  transfer  the secured creditor

chooses  for  realising  the  secured  asset.  Also,  the  right  to

transfer by way of assignment or sale can only be exercised in

accordance with rules 8 and 9 of the 2002 Rules which require

various pre-conditions to be met before sale or assignment can

be effected. Equally, transfer by way of lease can be done in

future in cases where actual physical possession is taken of the

secured asset  after  possession is  taken under  rule  8(1)  and

8(2)  at  a  future  point  in  time.  If  no  such  actual  physical

possession is taken, the right to transfer by way of assignment

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or sale for realising the secured asset continues. This argument

must also, therefore, be rejected.  

19. Shri Ashish Dholakia, learned Advocate, appearing for the

intervenor, State Bank of India, argued that if we were to upset

the  Full  Bench  judgment,  there  would  be  little  difference

between the Recovery of Debts Act and the SARFAESI Act as

banks  would  not  be  able  to  recover  their  debts  by  selling

properties  outside  the  court  process  without  constant

interference  by  the  Debts  Recovery  Tribunal.  We are  of  the

view that this argument has no legs to stand on for the reason

that banks and financial institutions can recover their debts by

selling  properties  outside  the  court  process  under  the

SARFAESI Act by adhering to the statutory conditions laid down

by the said Act. It is only when such statutory conditions are not

adhered to that the Debts Recovery Tribunal comes in at the

behest  of  the borrower.  It  is  needless to add that  under  the

Recovery  of  Debts  Act,  banks/financial  institutions  could  not

recover their debts without intervention of the Debts Recovery

Tribunal, which the SARFAESI Act has greatly improved upon,

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the only caveat being that this must be done by the secured

creditor following the drill of the SARFAESI Act and rules made

thereunder.  Shri  Dholakia  then  referred  to  and  relied  upon

section 3 of the Transfer of Property Act, 1882. Under the said

section,  “a person is said to have notice” of  a fact  when he

actually knows that fact, or when, but for willful abstention from

an inquiry or search which he ought to have made, or gross

negligence, he would have known it. Shri Dholakia referred to

and relied upon Explanation II to this definition, which reads as

under:

“Explanation  II.—Any  person  acquiring  any immoveable property or any share or interest in any such property shall be deemed to have notice of the title, if any, of any person who is for the time being in actual possession thereof.”

We  fail  to  understand  what  relevance  Explanation  II  could

possibly  have  for  a  completely  different  statutory  setting,

namely,  that  of  the  SARFAESI  Act  and  the  2002  Rules

thereunder. For the purpose of the Transfer of Property Act, a

person acquiring immovable property shall be deemed to have

notice of the title, if any, of any person who is for the time being

55

in actual possession thereof. For the purpose of the SARFAESI

Act read with the 2002 Rules, the taking of possession by a

secured creditor  of  the secured asset  of  the borrower would

include taking of  possession in any of  the modes prescribed

under  rule  8,  as  has  been  held  by  us  hereinabove.  This

argument must also, therefore, be rejected.  

20. We now come to some of the decisions of this Court. In

Transcore v. Union of India & Anr., (2008) 1 SCC 125, this

Court formulated the question which arose before it as follows:

“1. A short question of public importance arises for determination, namely, whether withdrawal of OA in terms of the first proviso to Section 19(1) of the DRT Act, 1993 (inserted by amending Act 30 of 2004) is a  condition  precedent  to  taking  recourse  to  the Securitisation  and  Reconstruction  of  Financial Assets  and  Enforcement  of  Security  Interest  Act, 2002 (“the NPA Act”, for short).”

To  this,  the  answer  given  is  in  paragraph  69,  which  is  as

follows:

“69. For the above reasons, we hold that withdrawal of the OA pending before DRT under the DRT Act is not  a precondition for  taking recourse to the NPA Act. It is for the bank/FI to exercise its discretion as to  cases  in  which  it  may  apply  for  leave  and  in cases  where  they  may  not  apply  for  leave  to withdraw.  We  do  not  wish  to  spell  out  those

56

circumstances  because  the  said  first  proviso  to Section  19(1) is  an  enabling  provision,  which provision may deal with myriad circumstances which we do not wish to spell out herein.”

Thereafter, the Court went on to discuss whether recourse to

take possession of secured assets of the borrower in terms of

section 13(4) of the Act would comprehend the power to take

actual possession of immovable property. In the discussion on

this point in paragraph 71 of the judgment, learned counsel on

behalf  of  the borrowers made an  extreme submission which

was  that  the  borrower  who  is  in  possession  of  immovable

property  cannot  be  physically  dispossessed  at  the  time  of

issuing the notice under section 13(4) of the Act so as to defeat

adjudication of his claim by the Debts Recovery Tribunal under

section 17 of the Act and that therefore, physical possession

can only be taken  after the sale is confirmed in terms of rule

9(9) of the 2002 Rules. This submission was rejected by stating

that the word “possession” is a relative concept and that the

dichotomy between symbolic and physical possession does not

find place under the Act. Having said this, the Court went on to

examine the 2002 Rules and held:

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“74.  ……… Thus,  Rule  8  deals  with  the  stage anterior  to  the  issuance  of  sale  certificate  and delivery of possession under Rule 9. Till the time of issuance of sale certificate, the authorised officer is like a Court Receiver under Order 40 Rule 1 CPC. The Court Receiver can take symbolic possession and in appropriate cases where the Court Receiver finds that a third-party interest is likely to be created overnight, he can take actual possession even prior to the decree. The authorised officer under Rule 8 has greater powers than even a Court Receiver as security interest in the property is already created in favour of the banks/FIs. That interest needs to be protected.  Therefore,  Rule  8  provides  that  till issuance of  the  sale  certificate  under  Rule  9,  the authorised officer shall take such steps as he deems fit  to preserve the secured asset.  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.  It  is  these types of  disputes which are sought to be avoided by Rule 8 read with Rule 9 of  the  2002  Rules.  In  the  circumstances,  the drawing of dichotomy between symbolic and actual possession does not find place in the scheme of the NPA Act read with the 2002 Rules.”

If the whole of paragraph 74 is read together with the extracted

passage,  it  becomes  clear  that  what  is  referred  to  in  the

extracted passage is the procedure provided by rule 8(3). It is

clear that the authorised officer’s powers, once possession is

taken under rule 8(3), include taking of steps for preservation

and protection of the secured assets which is referred to in the

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extracted  portion.  Thus,  the  final  conclusion  by  the  Bench,

though general in nature, is really referable to possession that

is taken under rule 8(3) of the 2002 Rules. Whether possession

taken under rule 8(1) and 8(2) is called symbolic possession or

statutory possession, the fact remains that rule 8(1) and rule

8(2)  specifically  provide  for  a  particular  mode  of  possession

taken under section 13(4)(a) of the Act. This cannot be wished

away by an observation made by this  Court  in  a completely

different context in order to repel an extreme argument. This

Court was only of the opinion that the extreme argument made,

as reflected in paragraph 71 of the judgment, would have to be

rejected.  This  judgment  therefore  does  not  deal  with  the

problem before us: namely, whether a section 17(1) application

is maintainable once possession has been taken in the manner

specified under rule 8(1) of the 2002 Rules.  

21. Another case strongly relied upon by learned counsel for

the  respondents  is  Noble  Kumar (supra).  This  judgment

decided that it is not necessary to first resort to the procedure

under section 13(4) and, on facing resistance, then approach

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the Magistrate under section 14. The secured creditor need not

avail  of  any  of  the  remedies  under  section  13(4),  and  can

approach the Magistrate straightaway after the 60-day period of

the notice under section 13(2) is over, under section 14 of the

Act.  This Court therefore held:

“35. Therefore,  there  is  no  justification  for  the conclusion  that  the  Receiver  appointed  by  the Magistrate is also required to follow Rule 8 of the Security  Interest  (Enforcement)  Rules,  2002.  The procedure  to  be  followed  by  the  Receiver  is otherwise regulated by law. Rule 8 provides for the procedure  to  be  followed  by  a  secured  creditor taking possession of the secured asset without the intervention  of  the  court.  Such  a  process  was unknown  prior  to  the SARFAESI Act.  So,  specific provision  is  made  under  Rule  8  to  ensure transparency in taking such possession. We do not see  any  conflict  between  different  procedures prescribed  by  law  for  taking  possession  of  the secured asset. The finding of the High Court in our view is unsustainable.

36. Thus,  there  will  be  three  methods  for  the secured creditor to take possession of the secured assets: 36.1. (i)  The  first  method  would  be  where  the secured  creditor  gives  the  requisite  notice  under Rule  8(1)  and  where  he  does  not  meet  with  any resistance.  In that  case, the authorised officer  will proceed to take steps as stipulated under Rule 8(2) onwards to take possession and thereafter for sale of  the secured assets to realise the amounts that are claimed by the secured creditor.

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36.2. (ii)  The second situation will  arise where the secured  creditor  meets  with  resistance  from  the borrower after the notice under Rule 8(1) is given. In that  case he will  take recourse to the mechanism provided  under  Section 14  of  the Act  viz.  making application  to  the  Magistrate.  The  Magistrate  will scrutinise the application as provided in Section 14, and then if satisfied, appoint an officer subordinate to  him as provided under  Section 14(1-A)  to take possession of the assets and documents. For that purpose  the  Magistrate  may  authorise  the  officer concerned to use such force as may be necessary. After  the  possession  is  taken  the  assets  and documents will be forwarded to the secured creditor. 36.3. (iii)  The third situation will  be one where the secured  creditor  approaches  the  Magistrate concerned directly under Section 14 of the Act. The Magistrate  will  thereafter  scrutinise the application as  provided  in  Section  14,  and  then  if  satisfied, authorise a subordinate officer to take possession of the assets and documents and forward them to the secured creditor as under clause 36.2.(ii) above. 36.4. In any of the three situations above, after the possession is handed over to the secured creditor, the  subsequent  specified  provisions  of  Rule  8 concerning the preservation,  valuation and sale of the  secured  assets,  and  other  subsequent  rules from  the  Security  Interest  (Enforcement)  Rules, 2002, shall apply.”

When  this  Court  referred  to  the  first  method  of  taking

possession of secured assets in paragraph 36.1.(i), this Court

spoke  of  a  case  in  which,  once  possession  notice  is  given

under  rule  8(1),  no resistance is  met  with.  That  is  why,  this

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Court states that steps as stipulated under rule 8(2) onwards to

take possession, and thereafter, for sale of the secured assets

to realise the amounts that are claimed by the secured creditor

would have to be taken, meaning thereby that advertisement

must necessarily be given in the newspaper as mentioned in

rule 8(2), after which steps for sale may take place.  This case

again does not deal with the precise problem that is before the

Court in this case. The observation made in paragraph 36.1.(i),

which  is  strongly  relied  upon by  the Full  Bench of  the  High

Court,  to  arrive  at  the  conclusion  that  actual  physical

possession must first be taken before the remedy under section

17(1) can be availed of by the borrower, does not flow from this

decision at all.     

22. In Canara Bank v. M. Amarender Reddy & Anr., (2017)

4 SCC 735, this Court after referring to Mathew Varghese v. M.

Amritha Kumar and Ors., (2014) 5 SCC 610, which held that

the 30-day period mentioned under rule 8(6) is mandatory, then

held:

“14. The secured creditor, after it decides to proceed with the sale of secured asset consequent to taking

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over possession (symbolic or physical as the case may be), is no doubt required to give a notice of 30 days for sale of the immovable asset as per sub-rule (6) of Rule 8. However, there is nothing in the Rules, either  express or  implied,  to  take the view that  a public notice under sub-rule (6) of Rule 8 must be issued only after the expiry of 30 days from issuance of individual notice by the authorised officer to the borrower about the intention to sell the immovable secured asset.  In  other  words,  it  is  permissible to simultaneously  issue notice  to the borrower  about the intention to sell the secured assets and also to issue a public notice for sale of such secured asset by  inviting  tenders  from  the  public  or  by  holding public auction. The only restriction is to give thirty days’ time gap between such notice and the date of sale of the immovable secured asset.”

Though  there  was  no  focused  argument  on  the  controversy

before  us,  this  Court  did  recognise  that  possession  may  be

taken over under rule 8 either symbolically or physically, making

it  clear  that  two  separate  modes  for  taking  possession  are

provided for under rule 8.  

 23. Similarly, in ITC Limited v. Blue Coast Hotels Ltd. and

Ors., AIR 2018 SC 3063, this Court held:

“45. As  noticed  earlier,  the  creditor  took  over symbolic possession of the property on 20.06.2013. Thereupon,  it  transferred  the  property  to  the  sole bidder  ITC  and  issued  a  sale  certificate  for  Rs. 515,44,01,000/-  on 25.02.2015. On the same day, i.e.,  25.02.2015,  the  creditor  applied  for  taking

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physical  possession  of  the  secured  assets  under Section 14 of the Act.

46. According  to  the  debtor,  since  Section  14 provides  that  an  application for  taking possession may be made by a secured creditor, and the creditor having  ceased  to  be  a  secured  creditor  after  the confirmation  of  sale  in  favour  of  the  auction purchaser,  was  not  entitled  to  maintain  the application. Consequently, therefore, the order of the District Magistrate directing delivery of possession is a void order. This submission found favour with the High  Court  that  held  that  the  creditor  having transferred  the  secured  assets  to  the  auction purchaser  ceased  to  be  a  secured  creditor  and could not apply for possession. The High Court held that  the  Act  does  not  contemplate  taking  over  of symbolic  possession  and  therefore  the  creditor could not have transferred the secured assets to the auction purchaser. In any case, since ITC Ltd. was the purchaser  of  such property,  it  could only take recourse to the ordinary law for recovering physical possession.

47. We find nothing in the provisions of the Act that renders taking over of symbolic possession illegal. This is a well-known device in law. In fact, this court has, although in a different context, held in  M.V.S. Manikayala Rao v.  M. Narasimhaswami  [AIR 1966 SC 470]  that  the  delivery  of  symbolic  possession amounted to an interruption of adverse possession of  a  party  and  the  period  of  limitation  for  the application of Article 144 of the Limitation Act would start from such date of the delivery.”

24. This judgment also speaks of the taking over of symbolic

possession under the SARFAESI Act. The judgment then goes

on to discuss whether a creditor could maintain an application 64

for possession under section 14 of the Act once it takes over

symbolic  possession  before  the  sale  of  the  property  to  the

auction purchaser. The Court referred to various authorities and

arrived  at  the  conclusion  that  a  secured  creditor  remains  a

secured creditor when only constructive or symbolic possession

is given, as the entire interest in the property not having been

passed on to the secured creditor in the first place, the secured

creditor  in  turn  could  not  pass  on  the  entire  interest  in  the

property to the auction purchaser. In this behalf, it is important

to refer to section 8 of the Transfer of Property Act, 1882 which

states as follows:

“8.  Operation  of  transfer.—  Unless  a  different intention  is  expressed  or  necessarily  implied,  a transfer  of  property  passes  forthwith  to  the transferee all the interest which the transferor is then capable of passing in the property and in the legal incidents thereof. xxx xxx xxx”

Section  13(6)  of  the  SARFAESI  Act  makes  it  clear  that  a

different intention is so expressed by the Act, as any transfer of

a secured asset after taking possession thereof, shall vest in

the transferee all rights in the secured asset so transferred as if

the  transfer  had  been  made  by  the  owner  of  such  secured

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asset.  It is clear, therefore, that statutorily, under section 13(6),

though only the lesser right of taking possession, constructive

or physical, has taken place, yet the secured creditor may, by

lease, sale or assignment, vest in the lessee or purchaser all

rights in the secured asset as if the transfer had been made by

the original  owner of  such secured asset.  This aspect of the

matter does not appear to have been noticed in the aforesaid

judgment.  The  ultimate  conclusion  in  the  said  judgment  is,

however,  correct  as  a  secured  creditor  remains  a  secured

creditor  even  after  possession  is  taken  over  as  the  fiction

contained in section 13(6) does not convert the secured creditor

into the owner of the asset, but merely vests complete title in

the  transferee  of  the  asset  once  transfer  takes  place  in

accordance with rules 8 and 9 of the 2002 Rules.

25. We may also add that by a notification dated 17.10.2018,

rule  8  has  since  been  amended  adding  two  sub-rules  as

follows:

“3. In the said rules, in rule 8— (i)  in  sub-rule  (6),  for  the  proviso,  the  following proviso shall be substituted, namely:-

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“Provided that if the sale of such secured asset is being effected by either inviting tenders from the public  or  by holding public  auction,  the secured creditor  shall  cause a public notice in  the Form given  in  Appendix  IV-A to  be  published  in  two leading  newspapers  including  one  in  vernacular language having wide circulation in the locality.”;

(ii)  for  sub-rule (7),  the following sub-rule shall  be substituted, namely:–

“(7)  every notice of  sale shall  be affixed on the conspicuous part of the immovable property and the  authorised  officer  shall  upload  the  detailed terms and conditions of the sale, on the web- site of the secured creditor, which shall include;

(a) the description of the immovable property to  be  sold,  including  the  details  of  the encumbrances known to the secured creditor;

(b) the secured debt for recovery of which the property is to be sold;

(c)  reserve price of  the immovable secured assets below which the property may not be sold;

(d)  time and place  of  public  auction  or  the time after which sale by any other mode shall be completed;

(e)  deposit  of  earnest  money  as  may  be stipulated by the secured creditor;

(f) any other terms and conditions, which the authorized officer considers it necessary for a purchaser  to  know the nature  and value of the property.”;

Appendix  IV-A  which  is  now  inserted  by  the  said

notification reads as follows:

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“APPENDIX - IV-A

[See proviso to rule 8 (6)]

Sale notice for sale of immovable properties

E-Auction Sale Notice for Sale of Immovable Assets under  the  Securitisation  and  Reconstruction  of Financial  Assets  and  Enforcement  of  Security Interest Act, 2002 read with proviso to Rule 8 (6) of the Security Interest (Enforcement) Rules, 2002

Notice is hereby given to the public in general and in particular to the Borrower (s) and Guarantor (s) that the  below  described  immovable  property mortgaged/charged  to  the  Secured  Creditor,  the constructive/physical ______________  (whichever is applicable) possession of which has been taken by  the  Authorised  Officer  of  ______________ Secured Creditor, will  be sold on “As is where is”, “As  is  what  is”,  and  “Whatever  there  is”  on ______________  (mention  date  of  the  sale),  for recovery  of  Rs.  due  to  the  ______________ Secured  Creditor  from  (mention  name  of  the Borrower (s)) and ______________ (mention name of the Guarantor (s)). The reserve price will be Rs. ______________  and  the  earnest  money  deposit will be Rs. ______________

(Give short  description of  the immovable  property with known encumbrances, if any)

For detailed terms and conditions of the sale, please refer  to  the  link  provided  in  ______________ Secured Creditor’s website i.e. www. (give details of website)

Date:

Authorised Officer

Place:”

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This  appendix  makes  it  clear  that  statutorily,  constructive  or

physical possession may have been taken, pursuant to which a

sale  notice  may then be issued under  rule  8(6)  of  the 2002

Rules.  Appendix IV-A, therefore, throws considerable light on

the controversy before us and recognises the fact that rule 8(1)

and  8(2)  refer  to  constructive  possession  whereas  rule  8(3)

refers to physical possession. We are therefore of the view that

the Full  Bench judgment  is  erroneous and is  set  aside.  The

appeals are accordingly allowed, and it is hereby declared that

the borrower/debtor can approach the Debts Recovery Tribunal

under  section  17  of  the  Act  at  the  stage  of  the  possession

notice referred to in rule 8(1) and 8(2) of the 2002 Rules. The

appeals are to be sent back to the Court/Tribunal dealing with

the facts of  each case to apply this  judgment and thereafter

decide each case in accordance with the law laid down by this

judgment.  

…………………………..J. (R.F. Nariman) …………………………..J. (Navin Sinha)

New Delhi; November 1, 2018.

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