(A) Can a secured creditor enforce a security interest invoking the provisions contained under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the Act), even after obtaining a recovery certificate from the Debts Recovery Tribunal in respect of the very same secured asset?
(B) Does a “borrower” under the Act lose such status if an order has been passed against him by the Debts Recovery Tribunal for recovery of the debt?
(C) Is a Chief Judicial Magistrate in a non Metropolitan area debarred from exercising the powers under Section 14 of the Act to take possession of the secured asset?
2. These and certain other ancillary questions have come up for consideration in this petition filed by a borrower/judgment debtor under Section 482 of the Code of Criminal Procedure.
3. The petitioner had availed of a loan from M/s. Oriental Bank of Commerce, Ernakulam Branch (for short, the Bank). It is not in dispute that the Bank had approached the Debts Recovery Tribunal, Ernakulam for recovery of the outstanding dues payable by the petitioner under the Recovery of Debts Dug to Banks and Financial Institutions Act, 1993 (for short the RDDB Act). The Tribunal had passed an order in favour of the Bank and in fact issued a certificate of recovery as well. According to the petitioner the Recovery Officer had already initiated proceedings for sale of the property of the petitioner in execution of the certificate of recovery.
4. Anyhow, the admitted position is that the Bank filed an application before the Chief Judicial Magistrate, Emakulam under Section 14 of the Act praying, inter alia, to take possession of the secured asset and to pass such other appropriate orders as provided under the Act for enforcement of the secured interest. Though the petitioner had stoutly opposed the above application, the learned Chief Judicial Magistrate allowed the prayer and directed the parties to submit a panel consisting of three names for the purpose of appointing an Officer to take possession of the schedule property. A copy of the said order which is impugned in this petition is one record as Annexure I.
5. It is submitted by learned counsel for the petitioner that the Chief Judicial Magistrate had no jurisdiction to entertain the above application primarily for two reasons:
6. Firstly it is contended that Section 14 of the Act does not empower a Chief Judicial Magistrate to exercise powers contemplated under the above provision of the Act. Only a Chief Metropolitan Magistrate or District Magistrate is vested with power to take possession of a secured asset and documents relating thereto, if such a request is made by a secured creditor. The Chief Judicial Magistrate not being a Chief Metropolitan Magistrate, the application submitted by the Bank ought to have been rejected by the court below at the threshold itself. The second contention is that the Debt Recovery Tribunal having passed a final order against him under Section 19 of the RDDB Act, the Bank could not have sought the assistance of the court in enforcing the secured asset as provided under Section 14 of the Act. Further, the provisions contained in Section 13 of the Act would not also apply since the petitioner had ceased to be a borrower the moment the Tribunal had passed a final order under Section 19 of the RDDB Act.
7. But the above contention, in my view, is totally misconceived and untenable. It may be true that Emakulam/Kochi has not been declared a Metropolitan area and therefore going by the provisions contained in Section 8 of the Code of Criminal Procedure, the Judicial Magistrates in Emakulam are not designated as Metropolitan Magistrates. In every District (not being a Metropolitan area) there shall be a Chief Judicial Magistrate to be appointed by the High Court from among the Judicial Magistrate of First Class (Section 12 of the Code). If the area is declared as Metropolitan, the Judicial Magistrates will be designated as Metropolitan Magistrates. The High Court shall appoint a Metropolitan Magistrate to be the Chief Metropolitan Magistrate for such metropolitan area (Section 17). Obviously, therefore a Chief Judicial Magistrate in a non Metropolitan Magistrate and he is vested with all powers of a Chief Metropolitan Magistrate in a Metropolitan area. In that view of the matter, the contention raised by the petitioner that the Chief Judicial Magistrate, Ernakulam is not entitled to exercise the powers under Section 14 of the Act is liable to be rejected. I do so.
8. The next contention raised by the petitioner is that the Bank is not entitled to take recourse to the provisions contained under Section 13 of the Act, since the Debts Recovery Tribunal had already issued a certificate of recovery against the petitioner, pursuant to the order passed by it for realisation of the debt payable by the petitioner. The thrust of the argument of the learned counsel is that the Bank has to recover the amount by sale of the property in execution of the certificate of recovery issued by the Tribunal. The Recovery Officer having already initiated steps for sale of the property, the Bank cannot invoke the power under Section 13 of the Act. It is also contended that Section 13 has no application since the petitioner has cased to be a borrower because the Tribunal has already passed an order against him for recovery of the amount.
9. Relevant clauses of Section 13 are extracted hereunder:
“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 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 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 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).
(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.
(3A) ………
(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 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:
(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.
(c) require 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 frond 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.
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10. A perusal of the above provisions under Section 13 undoubtedly shows that any secured creditor may enforce any security interest created in his favour without the intervention of the court or tribunal by taking recourse to the provisions contained under the Act. Sub-section (2) empowers the secured creditor to take possession of the secured asset of the borrower and do all such other acts as provided under sub-section (4), if the borrower fails to discharge his liabilities in full even after service of demand notice issued by the secured creditor. A secured creditor can take possession of the secured asset and also take over the management of the business of the borrower or sale to realise the secured asset. A manager can also be appointed to manage the secured asset which has been taken over.
11. Section 14 of the Act enables the secured creditor to seek assistance of the Chief Metropolitan or the District Magistrate to take possession of the secured asset. If a secured creditor makes a request for assistance under Section 14 of the Act, the Chief Metropolitan Magistrate or the District Magistrate, as the case may be, may take or cause to be taken such steps, or use or cause to be used such force as may be necessary for taking possession of the secured asset. The contention of the petitioner is that a secured creditor cannot invoke the power or right under Section 13 or 14 of the Act, if he has already availed of the remedy available to him under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act).
12. As mentioned earlier, the Bank had admittedly obtained an order/decree against the petitioner from the Debts Recovery Tribunal, Emakulam. It is also the admitted position that a certificate of recovery had already been issued. The short question that arises for consideration is whether the Bank is precluded or debarred from invoking the powers under Sections 13 and 14 of the Act in the above facts and circumstances. In this context a perusal of the relevant clause of Section 19 of the RDDB Act with the newly added proviso thereunder may be pertinent.
19. Application to the Tribunal: (1) Where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal within the local limits of whose jurisdiction,—
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Provided that the bank or financial institution may, with the permission of the Debts Recovery Tribunal, on an application made by it, withdraw the application, whether made before or after the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 for the purpose of taking action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), if no such action had been taken earlier under that Act:
Provided further that any application made under the first proviso for seeking permission from the Debts Recovery Tribunal to withdraw the application made under sub-section (1) shall be dealt with by it as expeditiously as possible and disposed of within thirty days from he date of such application:— Provided also that in case the Debts Recovery Tribunal refuses to grant permission for withdrawal of the application filed under this sub-section, it shall pass such orders after recording the reasons therefor.
13. Sections 19 enables a Bank or a financial institution to make an application before the Tribunal to recover a debt from any person who has committed default in repayment. The provisos to sub-section (1) of Section 19 were incorporated by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 with effect from November 11, 2004. A perusal of the above newly added provisos shows that a secured creditor has to seek permission of the Tribunal to withdraw the pending application before taking action under the Act, if no such action had been taken earlier. Admittedly, no application was pending before the Tribunal when the Bank had moved the Court of the Chief Judicial Magistrate under Section 14 of the Act. It may be true that a recovery certificate had already been issued by the Tribunal for execution of the order passed by it. But that does not necessarily mean that any formal permission as provided under the first proviso to section 19 was necessary to initiate the proceedings under the Act. There is nothing in the RDDB Act which indicates that a secured creditor is precluded from taking recourse to the remedies available under the Act. Therefore the above contention raised by the petitioner is also liable to be repelled. I do so.
14. In W.A No. 1142/2005 a Division Bench of this Court had considered the scope and ambit of the newly added proviso to Section 19 of the RDDB Act. The Division Bench held that even if the secured creditor fails to seek permission from the Tribunal to withdraw the application, it may not be fatal as far as the proceedings initiated under Section 13 of the Act is concerned. The Division Bench even went to the extent of holding that no permission of the Tribunal was necessary for the Bank or the Financial Institution to invoke the provisions of the Act. I have referred to this aspect of the matter only to indicate that a secured creditor is not precluded from taking recourse to the remedies available under the Act, even if an application is pending before the Tribunal under the RDDB Act.
15. Yet another contention raised by the petitioner is that section 13 which comes under Chapter III of the Act deals with enforcement of security interest as against a borrower only. It is contended that the petitioner had lost the status of borrower the moment the Tribunal had passed an order against him under Section 19 of the RDDB Act and therefore the Bank cannot invoke the provisions contained under Chapter III of the Act, since the liability of the petitioner had been quantified and he had become a judgment debtor. What remains is only the execution of the order/decree passed by the Tribunal against him. The Tribunal has already issued a certificate or recovery for this purpose. Therefore the Bank has to execute the order in terms of the recovery certificate. In other words, the contention is that the provisions contained under Chapter XIII and XIV of the Act can be invoked only before initiating any proceeding before the Tribunal under the RDDB Act. Learned counsel submits that introduction of the provisos to Section 19 further strengthens the above interpretation because the first proviso to Section 19 stipulates that the secured creditor has to withdraw the application pending before the Tribunal before taking any action under the Act. Since the petitioner had ceased to be a borrower on passing of the order by the Tribunal against him, the Bank is not entitled to proceed against the secured asset which is the very same property ordered to be sold in execution of the order passed by the Tribunal. I am unable to agree with the above contention. It may be true that the clauses under Section 13 of the Act specifically refer to borrower, but it cannot be said that the provisions contained in Section 13 are in derogation of RDDB Act.
16. Section 37 of the Act clearly lays down that “the Provisions of the Act or the rules made thereunder shall be in addition to and not in derogation of the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force”. Moreover, a perusal of the objects and reasons of the Act undoubtedly shows that the Legislature wanted to give the financial sector and the Banking industry in India a more vibrant recovery mechanism in respect of long term assets. It was felt that the existing legal frame work relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This had resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. It was therefore that the Parliament had enacted the above legislation containing provisions which, inter alia, provided for facilitating easy transferability of financial asset by the securitisation Company and for empowering banking and financial institutions to take possession of securities the given for financial assistance etc. The mere fact that the Tribunal had passed an order against the petitioner under Section 19 of the Act did not mean that he had ceased to be a borrower.
17. The Act defines “borrower” as any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution. “Debt” as defined under the Act means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on the date of the application. The admitted position being that the petitioner had not discharged his debt or liability payable to the bank as on the date of application under Section 14 of the Act, he cannot be heard to say that he had ceased to be a borrower or that the Bank is not entitled to proceed against him under Chapter III of the Act. As noticed earlier, Section 37 of the Act provides that the provisions of the Act or the Rules made thereunder shall be in addition to and not in derogation of the RDDB Act or any other law for the time being in force. In that view of the matter also the contentions raised by the petitioner cannot be countenanced.
18. Thus having regard to the entire facts and circumstances, I do not find any illegality or irregularity in the impugned order passed by the learned Magistrate. Thus question No. (A) posed above is answered in the affirmative while question No. (B) and (C) are answered in the negative.
19. Crl. M.C fails and it is accordingly dismissed.