SARFAESI Newsletter | August 2024

The SARFAESI Newsletter explores the recent cases, providing a framework for the enforcement of security interests by secured creditors, allowing them to recover dues through various means. One of the key provisions under this Act is Section 14, which empowers banks to seek assistance from a Magistrate to take possession of a property when necessary. When a bank purchases a property through an auction, questions arise about whether it can still invoke Section 14. This issue explores the interplay between the auction process and the continued applicability of Section 14, highlighting the legal nuances involved.

1) Failure to pay the balance of the sale price by Purchaser, the initial deposit of 25%, which the bidder made at the outset, will be forfeited

(In the matter of Pradish Kumar vs. Canara Bank and Another; W.P(MD)No.16929 of 2024)

In a significant ruling, the Hon'ble Madras High Court has provided clarity on Rule 9 of the Security Interest (Enforcement) Rules, 2002 (commonly known as the SARFAESI Rules). Rule 9 governs critical aspects such as the timing of the sale, the issuance of the sale certificate, and the delivery of possession of the auctioned property.

The court specifically addressed the provisions under Rules 9(4) and 9(5), which mandate that the balance purchase price for an immovable property must be paid by the purchaser within 15 days of the sale's confirmation. Alternatively, this period may be extended by the secured creditor (usually the bank) but under no circumstances can this extension exceed three months. Should the purchaser fail to pay the balance amount within this timeframe, the initial deposit of 25%-which is required at the time of the auction-will be forfeited by the bank or secured creditor. In such cases, the property will then be resold.

The ruling underscores the necessity for purchasers to adhere strictly to the payment deadlines set forth in the SARFAESI Rules, specifically the 15-day period from the date of confirmation, or within an extended period that cannot go beyond 90 days. Failure to comply will result in forfeiture of the deposit and the loss of the property.

2)A writ petition not maintainable when the borrower has an effective and alternative remedy available under Section 17 of the same Act

(In the matter of Madasamy Vs. The Authorized Officer/Chief Manager, Canara Bank; (2024) ibclaw.in 672)

The borrower filed a writ petition challenging an order passed by the Chief Judicial Magistrate (CJM) before Madras High Court. The order in question involved the appointment of an Advocate Commissioner tasked with taking physical possession of the borrower's property and handing it over to the secured creditor, as part of the enforcement actions under the SARFAESI Act. The Madras High Court addressed the issue of whether such a petition is maintainable.

The Hon'ble Madras High Court, in its judgment, relied on key precedents, including Union Bank of India v. Satyawadi Tondon and Ors. (2017) and South Indian Bank Ltd. and Ors. v. Naveen Mathew Philip and Anr. (2023), both of which were decided by the Supreme Court of India.

These cases emphasize the principle that when an alternative and efficacious remedy is available under the SARFAESI Act, particularly through an appeal to the Debt Recovery Tribunal (DRT) under Section 17, the borrower should not bypass this statutory remedy by filing a writ petition under Article 226 of the Constitution. Drawing from these judgments, the Madras High Court held that the writ petition filed by the borrower was not maintainable. The Court affirmed that the borrower should have sought relief by filing an appeal before the DRT under Section 17 of the SARFAESI Act, which is specifically designed to handle disputes arising from the enforcement of security interests. By attempting to circumvent this statutory remedy, the borrower's writ petition was found to be procedurally inappropriate.

This ruling underscore the judiciary's consistent approach in encouraging parties to exhaust statutory remedies before resorting to constitutional remedies, ensuring that the specialized forums created under the law are utilized effectively.

3) Magistrate well within the power to decide whether the property sought to take physical possession of is a secured asset or not

(In the matter of The People's Urban Co-Operative Bank Ltd. Vs. The Addl. Chief Judicial Magistrate and Anr.; WP(C) No. 21857 of 2023)

Section 14(1) of the SARFAESI Act begins with the phrase, "where the possession of any secured asset is required to be taken by the secured creditor," indicating that this provision can only be applied to take physical possession of a secured asset. The Court emphasized that Section 14 can be invoked only for such assets. While referring to precedents set by the Supreme Court in Balkrishna Rama Tarle vs. Phoenix ARC Pvt. Ltd. & Ors. (2022) and ITC Ltd. v. Blue Coast Hotels Ltd. and Ors. (2018), the Kerala High Court held that the Additional Chief Judicial Magistrate had erred in rejecting the petitions filed by the secured creditor. The Magistrate's rejection was based on the incorrect reasoning that once the property is purchased in a bid, it ceases to be a secured asset. The High Court, therefore, set aside the order passed by the Magistrate.

Contributors to the newsletter:

• Ravi Charan Pentapati, Partner
• Venkateshwara Rao Lakkineni, Senior Associate
• Grancy Bonam, Associate