Biren Vaishnav, J.:— In both these petitions, the petitioner bank has challenged the orders of the Debt Recovery Tribunal, so confirmed by the Debt Recovery Appellate Tribunal, Mumbai. In short, the challenge to these orders is on the ground that the Tribunal ought not to have allowed the Securitization Applications of the respondents on the ground that there is non compliance of provisions of Section 13(2) of the SARFAESI Act. For the purposes of deciding the question on the validity of the orders of the Tribunal viz-a-viz the question under Section 13(2), the facts of Special Civil Application No. 19918 of 2019 are considered.
2. The facts in a nutshell are that the respondent-company availed Cash Credit Facility and the Term Loan Facility from the petitioner bank. On the respondent committing default, the account of the borrower was classified as Non Performing Asset on 27.12.2014. On 29.12.2014, a notice under Section 13(2) of the SARFAESI Act was issued by the petitioner bank. Consequential actions under the SARFAESI Act resulted thereafter and a notice on 19.03.2015 to take physical possession was issued. An order under Section 14 was passed on 22.07.2019.
3. These proceedings were a subject matter of challenge at the hands of the respondent applicant before the Tribunal by filing Securitization Application No. 48 of 2015. The Tribunal by its decision dated 22.06.2017 allowed the application. The Tribunal held that there was non compliance of Section 13(2) inasmuch as, details of the amounts due were not provided. The Tribunal directed the bank to restore the possession with a liberty that the bank can proceed afresh under the provisions of the SARFAESI Act.
4. The bank carried the matter in appeal. The Debt Recovery Appellate Tribunal by its order dated 23.08.2010 confirmed the order of the Tribunal.
5. Ms. Nalini Lodha, learned counsel appearing for the petitioner bank has drawn my attention to the notice under Section 13(2) of the Act and submitted that the details i.e. final figure due, outstanding and payable by the respondent has been stated in the notice which is sufficient compliance of Section 13(2) of the Act.
5.1. Ms. Lodha, learned counsel, would further submit that the respondent cannot be said to be unaware of the interest rate inasmuch as, even before the notice under Section 13(2) was issued, a letter dated 25.10.2013 was addressed to the bank which indicates that a request was made to the bank to provide specific and acute details and interest calculations. According to Ms. Lodha, the bank would not have considered this and furnished the details as per the I.C.R.A. request made by the respondent. Taking me through the letters addressed by the advocate at page 56 and the objections filed by the respondent at page 68 where the request was made to reduce the interest rate at 10% and in context of the agreement for loan (page 30) and for the cash credit facility at page 45, she invited my attention to the relevant clause of the agreement to submit that the rates of interest has been specified and agreed to, and therefore, the respondent could not have asked for specific details when they were aware of the rate of interest to which they had agreed. The recovery Tribunal and the Appellate Tribunal, therefore, committed gross error of law in holding that the notice under Section 13(2) was defective.
5.2. In her submission, when a representation was made under Section 13(3A) r/w. Rule 3(A) of the Securitization Interest (Enforcement) Rules, 2002, there was no need for modifying the notice once it was an admitted fact by way of Loan Agreement and Cash Credit Facility that the amount was agreed to and that the orders of the Tribunal and of the Appellate Tribunal were bad.
6. Mr. R.S. Sanjanwala, learned Senior Counsel has appeared with Mr. Sandip Bhatt, learned advocate for the respondent. Mr. Sanjanwala, learned Senior Counsel, has invited my attention to the provisions of Section 13(2) of the Act and submitted that where a borrower makes a default in payment of secured debt or in installment of a debt, it is classified as a Non Performing Asset. When read in juxtaposition of subsection 3 of Section 13, subsection 3 unequivocally makes it clear that the notice under subsection 2 shall give details of the amount. Inviting my attention to the notice at page 60, Mr. Sanjanwala, learned Senior Counsel, would submit that except for the final figure, no break-up was given of the interest that was due.
6.1. To the submission of Ms. Lodha, learned advocate, that there was an agreement entered into for the loan facility and the cash credit facility and the interest rates were agreed upon, Mr. Sanjanwala, learned advocate would submit by drawing my attention to the relevant clauses of the agreement at page 31 with regard to the loan agreement and page 48 with regard to the cash credit facility that the rate of interest would vary from time to time. Relevant clause of the agreement reads as under:
“13 B. That the Borrower agrees to pay additional interest at the rate of 2.00% p.a. With agreed rests as under:
i) In case of default in payment of interest on the due date on the amount outstanding from the date of default;
ii) In case of excess borrowing due to overdrawal of limit, on the amount of excess borrowed;
iv) In case of default in complying with the terms & conditions of the Facilities or of this deed or the said Account becomes irregular or for non-compliance of any other terms of sanction and the Bank's general guidelines on the amount outstanding from the date the said Account becomes irregular/from the day of non - compliance of any conditions;
v) In case of delay in submission of stock and book debts statement on the amount outstanding, when the statement becomes due/overdue;
vi) In case the Facilities are recalled, on the amount outstanding from the date of demand/recall.
Vii) In case of non Submission/Delayed submission of Renewal papers i.e., audited balance sheet, statement of assets & liabilities of guarantors etc., within eleven months from the date of sanction.”
6.2. He supported the findings of the Tribunal, and therefore, submitted that the petitions be dismissed.
7. Having considered the submissions of learned counsels for the respective parties, what needs to be first considered is the provisions under the SARFAESI Act. Section 13 of the SARFAESI Act, reads as under:
“13. Enforcement of security interest:— (1) Notwithstanding anything contained in section 69 of section 69A 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.
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[(3A)] 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 [within fifteen days] of receipt of such representation or objection the 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 17A.]”
7.1. Reading subsection 3 of Section 13 makes it clear that a notice under Subsection 2 shall give details of the amount payable by the borrower. If Ms. Lodha's submission were to be accepted, then the word “shall give details” would be rendered negatory. Therefore, to suggest that notice should only give the final figure, in my opinion, is not in accordance with the provisions of Section 13(2) of the Act. The recovery Tribunal has considered this issue in para 9 of the judgment, which reads as under:
“9. Respondent Bank issued Demand Notice dated 29/12/2014 under Section 13(2) of SARFAESI Act 2002 for an amount of Rs. 9,11,99,276.92 outstanding in Cash Credit Limit and an amount of Rs. 81,19,651/- outstanding in Term Loan Account. Thus respondent Bank has claimed a total amount of Rs. 9,93,18,927.92/- outstanding as on 30/11.2014. As per Demand Notice, account has been classified as Non-Performing Asset on 27th December, 2014 as per guidelines issues by Reserve Bank of India. Respondent Bank has placed on record copy of account pertaining to each account. As per Demand Notice, the contractual rate of interest is claimed from 01/12/2014 until payment in full is made within a period of 60 days. However, Demand Notice is silent regarding rate of interest charged in each of the accounts before 01/12/2014. The Demand Notice only mention regarding facility advanced, limit sanctioned and balance outstanding as on 30/11/2014. Applicants have placed on record copy of sanction letter dated 31st August, 2012 wherein interest agreed by the applicants by acceptance of sanction letter for Cash Credit Limit, is base rate plus 4.25% subject to change from time to time as per RBI/HO guidelines and credit risk rating. The interest is charged in the account on monthly basis. However, it is nowhere mentioned in the sanction letter whether interest will be charged on the yearly basis, quarterly basis or monthly basis. Applicants have requested vide letter dated 25th October, 2013 to provide them details with regard to interest calculation and reduction in interest rate after issuance of ICRA Certification dated 26/07/2012. It is further stated that the applicants had been informed that the applicants had been informed that the interest rate will be subsidized after issuance of ICRA Certificate. Applicants have raised objection to Demand Notice dated 31/03/2014 through their Advocate Mr. Gaurav A. Bade that respondent Bank had assured to decrease rate of interest. Respondent Bank through its Advocate gave reply to the said legal notice vide reply dated 10th March, 2015 stating that interpretation regarding rate of interest is not acceptable to respondent Bank. Respondent Bank had an opportunity to explain to the applicants regarding rate of interest agreed as well as charged by the respondent Bank. However, respondent Bank simply denied contention of the applicants. The rate of interest charged in the account appears to be inclusive of penal interest and same is capitalized because as per Statement of Account, rate of interest is charged @ 15.75% p.a. With monthly rests. It is an undisputed fact that the Banks or financial institutions are entitled to charge penal interest but the same could not be capitalized as held by Hon'ble Apex Court in case of Central Bank of India v. Ravindra (2002) 1 SCC 367, wherein Hon'ble Apex Court has held that “though interest can be capitalized on analogy that interest falling due and remaining unpaid, partakes the character of advance on that date, yet penal interest, which is charged by way of penalty for non-payment cannot be capitalized. Further interest i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalized. It will be opposed to public Policy.”
7.2. The necessity to give the details of the amount becomes more important because even though the agreements were entered into and may be that the respondent borrower was aware of the rate of interest that was needed to be charged, the terms and conditions of the agreements make it abundantly clear that the rate of interest that the base rate are subject to change by the bank from time to time and the revised rate of interest shall accordingly be charged from time to time in the said account. These stands would obviously make it incumbent upon the bank while issuing notice under Section 13(2) of the Act to give details of the amount payable under a notice under Section 13(2). The Tribunal while considering the issue at hand has relied on a few decisions.
7.3. In the case of Tirupati Storage v. United Commercial Bank, Kolkata, reported in (2012) 4 PLJR 748, the Patna High Court has considered the issue under Section 13(2) in the SARFAESI Act in para 15 of the judgment and specifically held that by using the word “details” before the expression “of the amount payable”, the legislature clearly intended that in the notice under subsection 2, the details of calculation of principal and interest must be mentioned. The relevant para 15 of the said judgment read as under:
“15. Coming to the question no. (v) above, in respect of the scope and import of sub-section (3) of Section 13 of the Act, this Court finds that this sub-section has been incorporated by the Legislature in the section only to specify as to what is required to be mentioned in the notice to be issued under Sub-section (2). Insertion of this sub-section makes it clear that the Legislature did not intend any ambiguity or insufficiency of information to get into the notice under sub-section (2) by leaving the discretion with the authorized officer of the secured creditor to decide its contents. That is why the Legislature has provided in this sub-section that the notice “shall give details of the amount payable” and “the secured assets intended to be enforced”. It is significant to note that the Legislature has used the expression ‘shall give the details of the amount and not ‘shall give the final amount payable’ or ‘shall give total amount due’ or the like. The word ‘details’ used by the Legislature before ‘the amount payable’ is, in the opinion of this Court, very significant. This Court is of the view that, by using the word ‘details’ before the expression ‘of the amount payable’, the Legislature clearly intended that in the notice under sub-section (2) the details of calculation of principal and interest, with all debits and credits, must be mentioned. The use of words ‘shall give’ before ‘details’ further leaves no discretion to a secured creditor to withhold any information from the borrower in respect of steps taken by it to reach final figure of amount payable by him in sixty days from the date of service of notice under subsection (2). In Mardia Chemicals (supra) the Court has found the requirement of reasonableness and fairness in the dealings of institutional financing and has used the expression ‘transparency’, though in the context of informing a borrower the reasons for not accepting his objections. The observations of the Court in paragraph 47 of the judgment, in this context are:—
47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly of the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater to the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions, is inherent under Section 13(2) of the Act.”
7.4. Similarly, on a decision that Mr. Sanjanwala, learned Senior Counsel, relied upon in the case of Madhu Sudan Ghosh v. The Bank of Baroda, reported in 2010 SCC OnLine Cal 2607., of the High Court of Calcutta, the Court on appreciating the provisions of section 13(2) has specifically held that the notice under Section 13(2) shall give details of the amount payable.
8. Having perused the notice impugned before the Debt Recovery Tribunal at page No. 60, in context of the agreements entered into and the communications dated 25.10.2013 and the notice of the bank at page no. 56, I see no reason to interfere with the orders passed by the Debt Recovery Tribunal and so confirmed by the Appellate Tribunal. The petitions are dismissed, accordingly.