The Supreme Court, on 1st November, 2018, elucidated upon when a borrower can seek remedy against wrongful recourse taken by the creditor against the secured asset (Hindon Forge Pvt. Ltd. vs The State of Uttar Pradesh   MANU/SC/1250/2018). The current legal situation can be understood in the following manner –

Issue: The issue to be determined by the Supreme Court was whether a securitization application under Section 17(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act/the Act”),at the instance of the borrower, against a notice for possession was maintainable even before physical or actual possession of secured assets is taken by the banks/financial/lending institutions to facilitate the measures prescribed under Section 13(4) of the Act read with Rule 8 of the Security Interest(Enforcement) Rules, 2002 (“the Rules”).

Impugned Judgment: In the impugned judgment,the full bench of the Allahabad High Court had concluded that unless a borrower loses actual physical possession, he cannot take recourse to provisions of Section 17(1) of the Act. Thus, it was held that losing of mere symbolic or constructive possession, not amounting to a ‘measure’ under Section 13(4), was not sufficient to avail this remedy by approaching the Debt Recovery Tribunal (DRT). 

Decision: The Supreme Court (SC), however, set aside the impugned judgment by holding 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. It made the following pertinent observations –

  • Once a notice under Section13 (2) is sent by the creditor, the borrower gets a period of 60 days to repay his dues, on failure of which, the creditor may take recourse to the measures provided under Section 13(4). However, the borrower can raise objections or provide explanations to the creditor under which the creditor can either consider or reject through communication sent under Section 13(3-A)[1]. This right of the borrower to make representation to the creditor does not empower the borrower to move the DRT since no measure has been taken against him under Section 13(4)as yet.
  • The mode of taking possession of secured assets of the borrower is governed by Rule 8 of the 2002 Rules. Rule 8(3), referring to taking of actual possession of secured asset, is an alternate mode to those prescribed under Rules 8(1) and 8(2) – by delivery of possession notice and affixation on property and publication. Thus, when possession is taken under Rules 8(1) and 8(2), i.e., symbolic/statutory possession, section 17 still gets attracted, as this is one of the measures referred to in section 13(4) that can be taken by a secured creditor.Therefore, the borrower will have the right to move the DRT in case of any irregularity on part of the creditor while exercising his powers under Section 13(4).
  • Restoration of possession of secured assets is one relief that can be granted by the DRT under Section 17(3). However, the contention that such relief would necessarily require the actual possession to have been transferred from borrower to creditor in the first place under Section 13(4) is erroneous as various other remedies, apart from restoration, can be availed under this omnibus provision against any wrongful recourse taken by the creditor.

[1] Inserted in the Act as a result of the SC’s decision in the case of Mardia Chemicals.

This article has been authored by Varnika Jain from Team LawSkills.