ITC LIMITED versus BLUE COAST HOTELS LTD. & ORS.

[2018] 5 S.C.R. 516

[2018] 5 S.C.R.

ITC LIMITED

BLUE COAST HOTELS LTD. & ORS.

(Civil Appeal Nos. 2928-2930 of 2018)

MARCH 19, 2018

[S. A. BOBDE AND L. NAGESWARA RAO, JJ.]

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s.13(4) – Grievance ofdebtor was that after the creditor issued the notice under s.13(2),Cthe debtor made representation asking for reschedulement ofthe loan which the creditor neither considered nor communicatedthe reasons for non-acceptance thereof – Whether recoveryproceedings were in breach of s.13(3A) for failure of the creditor toreply to the representation of the debtor and for want of reasonedDorder – Held: s.13(4) envisages that if debt is classified as NPA, thecreditor may by notice in writing require the debtor to discharge hisliabilities within 60 days – After that debtor may make arepresentation and creditor is then bound to consider therepresentation and communicate the reasons for non-acceptanceof representation within 15 days – When debtor fails to dischargeEhis liability in full, the creditor may take any of the actions undersub-section (4) which include taking over the possession of securedassets – In the instant case, the creditor was induced by the debtornot to take action against them through assurances and promises –The creditor entered into negotiations for the settlement of the duesFand even accepted cheques in repayment much after the notice unders.13(2) and after the debtor’s letter of representation – Manyopportunities were granted by the creditor to the debtor to repaythe debt which were all met by proposals for extension of time – Thedebtor ignored the symbolic possession taken over by the creditorand continued to negotiate and even gave six cheques which wereGdishonoured – The debtor then gave final letter of undertakingagreeing that the creditor could take over possession of the assetsif the debt was not repaid – All along, the debtor’s response hasbeen that of seeking extension of time to pay, with the usualunfulfilled promise of repayment – In the fact and circumstances ofH

this case, the debtor is not entitled to the discretionary relief underArt.226 of the Constitution which is indeed an equitable relief –Equity – Constitution of India – Art. 226.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s.13(3A) – Purpose ofintroduction of s.13(3A) – Held: s.13(3A) was introduced with aplain intention to introduce pause for the creditor to rethink andreconsider the action proposed by the debtor.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s. 13(3A) – Whethers.13(3A) is mandatory or directory in nature – There is no doubtthat if reply with reasons is an integral and indispensable part ofthe statutory scheme, the Courts would not excuse departure fromit – But, on the other hand, if the reply is merely direction and notof substance to the scheme, the non-compliance may be excused –The language of sub-section (3A) is clearly impulsive – It statesthat the secured creditor “shall consider such representation orobjection and further, if such representation or objection is notacceptable or tenable, he shall communicate the reasons for non-acceptance” thereof – There is no reason to marginalize or dilutethe impact of the use of the imperative ‘shall’ by reading it as ‘may’– The word ‘shall’ invariably raises presumption that the particularprovision is imperative – However, in the instant case, failure tofurnish reply to the representation is not of much significancesince the creditor undoubtedly considered the representation andthe proposal for repayment made therein and in fact grantedsufficient opportunity and time to the debtor to repay the debt withoutany avail – Therefore, in the fact and circumstances of this case,the debtor is not entitled to the discretionary relief – Interpretationof statutes.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s. 31(i) – Plea of debtorthat portion of land mortgaged by debtor as security interestconsisted of agricultural land to which s. 31(i) does not apply and,therefore, land could not be recovered – Tenability of – Held: s.31(i)is intended to protect agricultural land held for agriculturalpurposes by agriculturists from the extraordinary provisions of this

ABCDEF

AAct, which provides for enforcement of security interest withoutintervention of the Court – The plain intention of the provision is toexempt agricultural land from the provisions of the Act – In otherwords, the creditor cannot enforce any security interest created inhis favour without intervention of the Court or Tribunal, if suchsecurity interest is in respect of agricultural land – The exemptionBthus protects agriculturists from losing their source of livelihoodand income i.e. the agricultural land, under the drastic provisionof the Act – In the instant case, security interest was created inrespect of several parcels of land, which were meant to be part ofsingle unit i.e. the five star hotel in Goa – Some parcels of landCclaimed as agricultural land were apparently purchased by thedebtor from agriculturists and were entered as agricultural landsin the revenue records – The debtor applied to the revenue authoritiesfor the conversion of these lands to non-agricultural lands whichis pending till date due to policy decision – The land in question is

not an agricultural land – The High Court mis-directed itself inDholding that the land was an agricultural land merely because itstood as such in the revenue entries, even though the applicationmade for such conversation lies pending till date.

Interpretation of statutes: Mandatory provision – provisionwhich requires reasons to be furnished must be considered asEmandatory – Such provision is an integral part of the duty to actfairly and reasonably and not fancifully.

Constitution of India: Plea that s.31(i) of Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 is beyond the legislative competence of ParliamentF– Held: The validity of s.31(i) which deals with security interestcreated over agricultural land is an integral part of the Act andcannot be questioned on the ground of legislative competence.

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002: s.14 – Whether theGcreditor could maintain an application of possession under s.14 ofthe Act; even though it had taken over only symbolic possessionbefore the sale of the property to the auction purchaser – Held: Inthe instant case, the creditor did not have actual possession of thesecured asset but only constructive or symbolic possession – The

transfer of the secured asset by the creditor, therefore, cannot beconstrued to be complete transfer as contemplated by s.8 of theTransfer of Property Act – The creditor nevertheless had right totake actual possession of the secured assets and must, therefore, beheld to be secured creditor even after the limited transfer to theauction purchaser under the agreement – Thus, the entire interestin the property not having been passed on to the creditor in the firstplace, the creditor in turn could not pass on the entire interest to theauction purchaser and thus remained secured creditor in the Act.

Fraud: Auction purchaser, allegation of collusion – Findingby High Court that there was fraud and collusion between the creditorand the auction purchaser based on fact that there was pendingdispute between the parties and still he went ahead and made bidfor the property – Held: risk of this kind taken up by an intendingpurchaser cannot lead to inference of collusion.

Allowing the appeals, the Court

HELD: 1.1 Rule 3A of the Rules requires the authorizedofficer who is an officer specified by the Board of Directors of thesecured creditor to consider the representation and modify thenotice of demand if satisfied of the need to do so in that regard. Ifthe authorized officer comes to the conclusion that suchrepresentation or objection is not tenable or acceptable, he mustcommunicate the reasons for non-acceptance of therepresentation or objection within fifteen days. [Para 21] [533-D]

1.2 There is nothing in the legislative scheme of Section13 (3A) which requires the Court to consider whether or not, theword ‘shall’ is to be treated as directory in the provision. As theSection stood originally, there was no provision for the abovementioned requirement of debtor to make representation orraise any objection to the notice issued by the creditor underSection 13(2). As it was introduced via sub-section (3A), it couldnot be the intention of the Parliament for the provision to befutile and for the discretion to ignore the objection/representationand proceed to take measures, be left with the creditor. There isa clear intendment to provide for locus poenitentiae whichrequires an active consideration by the creditor and reasonedorder as to why the debtor’s representation has not been accepted.

AMoreover, this provision provides for communication of thereasons for not accepting the representation/objection and therequirement to furnish reasons for the same. provision whichrequires reasons to be furnished must be considered asmandatory. Such provision is an integral part of the duty to actfairly and reasonably and not fancifully. [Paras 29, 30] [537-B-D]B

Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC311 : [2004] 3 SCR 982; Transcore v. Union of India(2008) 1 SCC 125 : [2006] 9 Suppl. SCR 785; KeshavlalKhemchand & Sons (P) Ltd. v. Union of India (2015) 4SCC 770 : [2015] 2 SCR 51; State of U.P. v. ManbodhanCLal Shrivastava [1958] SCR 533; State of U.P. v.Baburam, Upadhya [1961] 2 SCR 679; State of Mysorev. V.K. Kangan (1976) 2 SCC 895 : [1976] 1 SCR 369;Govindlal Chhagan-lal Patel v. Agriculture ProduceMarket Committee (1976) 1 SCC 369 : [1976] 2 SCRD758; Ganesh Prasad Sah Kesari v. Lakshmi Narayan(1985) 3 SCC 53 : [1985] 3 SCR 825; B.P. KhemkaPvt. Ltd. v. Birendra Kumar Bhowmik (1987) 2 SCC407 : [1987] 2 SCR 559; Owners and Parties interestedin M.V. “Vali Pero” v. Fernandes Lopez (1989) 4 SCC671 : [1989] 1 Suppl. SCR 187; State of M.P. v. PradeepEKumar (2000) 7 SCC 372 : [2000] 3 Suppl. SCR 235;Sarla Goel v. Krishanchand (2009) 7 SCC 658 : [2009]10 SCR 481 – relied on.

1.3 The creditor was induced by the debtor not to takeaction against them through assurances and promises. TheFcreditor appeared to have entered into negotiations for thesettlement of the dues and even accepted cheques in repaymentmuch after the notice under Section 13(2) and after the debtor’sletter of representation. Many opportunities were granted by thecreditor to the debtor to repay the debt which were all met byGproposals for extension of time. Eventually, the debtor evenexecuted “A Letter of Undertaking” acknowledging the right ofIFCI to sell the assets in the case of default. In thesecircumstances, the failure to furnish reply to the representationis not of much significance since the creditor has undoubtedlyconsidered the representation and the proposal for repaymentH

made therein and has in fact granted sufficient opportunity andtime to the debtor to repay the debt without any avail. Therefore,in the fact and circumstances of this case, the debtor is notentitled to the discretionary relief under Article 226 of theConstitution which is indeed an equitable relief. [Paras 33, 34][539-F-H; 540-A-B]

Kiran Devi Bansal v. DGM SIDBI, AIR 2009 Guj 100(DB); Clarity Gold Pvt. Ltd. v. State Bank of India, AIR2011 Bom. 42 (DB); Vinay Container Services Pvt. Ltd.v. Axis Bank, 2011 (1) Mh. L.J. 882; Krushna ChandraSahoo v. Bank of India, AIR 2009 Orissa 35; TensileSteel Ltd. & Anr. v. Punjab and Sind Bank & Ors., AIR2007 Guj 126; M/s Jayant Agencies v. Canara Bank &Ors., Jharkhand HC in WP (C) No. 4048 of 2010; M/sTetulia Coke Plant Pvt. Ltd. v. Bank of India, AIR 2013Jhar 12; Mrs. Sunanda Kumari v. Standard CharteredBank, (2007) 135 Comp Cases 604 (Kar); PalashMukherjee v. U.O.I, W.P. 9876 (W) of 2014 CalcuttaHigh Court; Jaideep Singh and Ors. v. Union of Indiaand Anr., 2008 2 GLT (91); Malabar Sand and Stones(Pvt.) Ltd. v. Catholic Syrian Bank Ltd. & Ors., AIR2013 Ker 25 – approved.

1.4 Letter of Undertaking “Without Prejudice”

1.4.1 Much was sought to be made of the words “withoutprejudice” in the letter containing the undertaking that if thedebt was not paid, the creditor could take over the securedassets. The submission on behalf of the debtor that the letter ofundertaking was given in the course of negotiations and cannotbe held to be an evidence of the acknowledgment of liability ofthe debtor, apart from being untenable in law, reiterates theattempt to evade liability and must be rejected. Mere introductionof the words “without prejudice” have no significance and thedebtor clearly acknowledged the debt even after action wasinitiated under the Act and even after payment of smaller sum,the debtor has consistently refused to pay up. [Para 35] [540-C;541-B]1.4.2 All in all, as the matter stands, the debtor did notrepay the loan. The debtor managed to submit letter purporting

Ato be representation, containing proposal for reschedulementmade much earlier to the creditor’s notice and reserved rightto file reply. Apparently, the debtor induced the creditor to enterinto negotiations to ward off the reply and avoid the taking overof possession. The debtor ignored the symbolic possession takenover by the creditor and continued to negotiate and even gaveBsix cheques which were dishonoured. The debtor then gave afinal letter of undertaking agreeing that the creditor could takeover possession of the assets if the debt was not repaid. All along,the debtor’s response has been that of seeking extension of timeto pay, with the usual unfulfilled promise of repayment. There isCno reason why the debtor should not be stopped from questioningthe taking over of possession, particularly since, neither the debtnor the liability is in dispute. The debt has not been repaid infact, and the objection raised is merely on the ground that thetaking of assets is illegal because the creditor failed to reply tothe representation. [Para 36] [541-C-E]D2. Inclusion of Agricultural Land as Security Interest in theNotice of Recovery

2.1 Plea of debtor was that the inclusion of agricultural landas security interest could not have been validly included in theEnotice for recovery of the secured loan in view of Section 31 (i) ofthe Act. The purpose of enacting Section 31(i) and the meaningof the term “agricultural land” assume significance. Thisprovision, like many others is intended to protect agriculturalland held for agricultural purposes by agriculturists from theextraordinary provisions of this Act, which provides forFenforcement of security interest without intervention of the Court.The plain intention of the provision is to exempt agricultural landfrom the provisions of the Act. It is also intended to deter thecreation of security interest over agricultural land as defined inSection 2 (zf). Thus, security interest cannot be created in respectGof property specified in Section 31. In the present case, securityinterest was created in respect of several parcels of land, whichwere meant to be part of single unit i.e. the five star hotel inGoa. Some parcels of land now claimed as agricultural land wereapparently purchased by the debtor from agriculturists and areentered as agricultural lands in the revenue records. The debtorH

applied to the revenue authorities for the conversion of theselands to non-agricultural lands which is pending till date due topolicy decision. [Paras 37, 38, 39] [541-F-G; 542-D, E-F; 543-A-B]

2.2 The total land on which the Goa Hotel was locatedadmeasures 182225 sq. mtrs. of these, 2335 sq. mtrs. are usedfor growing vegetables, fruits, shrubs and trees for captiveconsumption of the hotel. There is no substantial evidence aboutthe growing of vegetables but what seems to be on the land aresome trees bearing curry leaves and coconut. This amounts toabout 12.8% of the total area. As per the Corporate LoanAgreement the mortgage is intended to cover the entire propertyof the Goa Hotel. Prima facie, apart from the fact that the partiesthemselves understood that the lands in question are notagricultural, having regard to the use to which they are put andthe purpose of such use, they are indeed not agricultural. TheHigh Court mis-directed itself in holding that the land was anagricultural land merely because it stood as such in the revenueentries, even though the application made for such conversationlies pending till date. [Paras 40, 41, 44] [543-D-F; 546-B]Union of India and Another v. Delhi High Court BarAssociation and Ors. (2002) 4 SCC 275 : [2002] 2 SCR450; State Bank of India v. Santosh Gupta and Ors. AIR2017 SC 25 : [2016] 9 SCR 985; A.S. Krishna and Ors. v.State of Madras AIR 1957 SC 297 : [1957] SCR 399;Commissioner of Wealth Tax, Andhra Pradesh v. Officer-in-Charge (Court of Wards) Paigah (1976) 3 SCC 864 :[1977] 1 SCR 146; Kunjukutty Saheb v. State of Kerala(1972) 2 SCC 364 : [1973] 1 SCR 326 – relied on.

3. Transfer of Security Interest by IFCI to ITC

3.1 The creditor took over symbolic possession of theproperty on 20.06.2013. Thereupon, it transferred the propertyto the sole bidder ITC and issued sale certificate forRs. 515,44,01,000/- on 25.02.2015. On the same day, i.e.,25.02.2015, the creditor applied for taking physical possessionof the secured assets under Section 14 of the Act. According tothe debtor, since Section 14 provides that an application for takingpossession may be made by secured creditor, and the creditor

Ahaving ceased to be secured creditor after the confirmation ofsale in favour of the auction purchaser, was not entitled to maintainthe application. Consequently, therefore, the order of the DistrictMagistrate directing delivery of possession is void order. Thissubmission found favour with the High Court that held that thecreditor having transferred the secured assets to the auctionBpurchaser ceased to be secured creditor and could not applyfor possession. The High Court held that the Act does notcontemplate taking over of symbolic possession and thereforethe creditor could not have transferred the secured assets to theauction purchaser. In any case, since ITC Ltd. was the purchaserCof such property, it could only take recourse to the ordinary lawfor recovering physical possession. [Paras 45, 46] [546-C-F]

3.2 There is nothing in the provision of the Act that renderstaking over of symbolic possession illegal. The question, however,whether the creditor could maintain an application of possessionDunder Section 14 of the Act; even though it had taken over onlysymbolic possession before the sale of the property to the auctionpurchaser, depends on whether it remained secured creditorafter having done so. In this case, the creditor did not have actualpossession of the secured asset but only constructive orsymbolic possession. The transfer of the secured asset by theEcreditor therefore cannot be construed to be complete transferas contemplated by Section 8 of the Transfer of Property Act.The creditor nevertheless had right to take actual possessionof the secured assets and must therefore be held to be securedcreditor even after the limited transfer to the auction purchaser

Funder the agreement. Thus, the entire interest in the propertynot having been passed on to the creditor in the first place, thecreditor in turn could not pass on the entire interest to the auctionpurchaser and thus remained secured creditor in the Act. [Paras47, 48, 50] [546-G; 547-A-B; 548-B-F]

GM.V.S. Manikayala Rao v. M.Narasimhaswami AIR 1966SC 470 – relied on.

4.1 The finding is based on the fact that the sale is collusionbecause the auction purchaser was aware that dispute betweenthe parties was pending and still went ahead and made bid for

the property. It is not unusual in the sale of immovable propertiesto come across difficulties in finding suitable buyers for theproperty. The property was eventually sold on the fourth auction,and all the auctions were duly advertised. [Para 52] [549-B-C]

4.2 The undisputed facts of the case are that loan wastaken by the debtor which was not paid, the debtor did not respondto notice of demand and made representation which was notreplied to in writing by the creditor. The creditor, however,considered the proposals for repayment of the loan as containedin the representation in the course of negotiations whichcontinued for considerable amount of time. The debtor failed todischarge its liabilities and eventually undertook that if the debtorfails to discharge the debt, the creditor would be entitled to takerealize the secured assets. As held, non-compliance of sub-section (3A) of Section 13 cannot be of any avail to the debtorwhose conduct has been merely to seek time and not repay theloan as promised on several occasions. Therefore, the debtor isnot entitled for the discretionary equitable relief under Articles226 and 136 of the Constitution of India in the present case. [Paras54, 55, 57] [549-F, G-H; 550-A, E-F]

State of Maharashtra v. Digamber (1995) 4 SCC 683 –relied on.

Lindsay Petroleum Co. v. Hurd (1874) 5 PC 221 –referred to.

Crawford’s : Statutory Construction, p. 516; Mulla’s theTransfer of Property Act Page 104, 105 – referred to.

Case Law Reference

526SUPREME COURT REPORTS

[2018] 5 S.C.R.

From the Judgment and Order dated 23.03.2016 of the High CourtHof Bombay in Writ Petition Nos. 222, 1150 and 2486 of 2015

WITH

C.A. No. 2931-2933 of 2018.

Harish Salve, Dr. A. M. Singhvi, Shyam Divan, Mukul Rohatgi,P.S. Narsimha, C.U. Singh, Shekhar Naphade, Bharat Bhushan Parsoon,Shyam Divan, Sr. Advs., L. K. Bhushan, Anirudh Arun Kumar, MohitSharma (for M/S. Dua Associates), Kush Chaturvedi, Shubhanshu Padhi,Somay Kapoor, Ajay Aggarwal, Anirudha Joshi, Manish Desai, MaheshAgarwal, Sowjanya Menon, Ankur Saigal, Ms. Nidhi Singh, ShakibDhorajiwala, Aman Varma, Ms. Smriti Churiwal, Rishabh Parikh, MunjaalBhatt, E. C. Agrawala, Ms. Sonam Priya, Vaibhav Mishra, PratapVenugopal, Ms. Surekha Raman, Dileep P. Kota, Anuj Sarma,Ms. Niharika, Ms. Kanika Kalaiyarasan (for M/S. K J John And Co.),Anshuman Srivastava, S.S. Rebello, Apoorva Bhumesh, Advs. for theappearing parties.

The Judgment of the Court was delivered by

S. A. BOBDE, J. 1. Leave granted.

2. The auction purchaser ITC Ltd. is before us in the appealsarising out of SLP (C) Nos.10215-10217/2016. The sale of five starluxury hotel property purchased in public auction was set aside by anorder[1] of the Bombay High Court in favour of the debtor Blue CoastHotels Ltd.

3. The circumstances under which the auction purchaserpurchased the hotel property are as follows:-

Industrial Financial Corporation of India (IFCI), [filed appealsarising out of SLP (C) Nos.10196-10198/2016 in this Court], the securedcreditor (hereinafter referred to as ‘the creditor’), in the capacity of afinancial institution entered into corporate loan agreement[2] with BlueCoast Hotels (hereinafter referred to as ‘the debtor’) for sum of Rs.150crores. The agreement included creation of special mortgage tosecure the corporate loan. The mortgaged property comprised of thewhole of the debtor’s hotel property- including the agricultural land onwhich the debtor was to develop villas. The debtor defaulted in repaymentof the loan and the debtor’s account became Non- Performing Asset(NPA)[3].1 Dated 23.03.20162 Dated 26.02.20103 w.e.f. 30.09.2012

A4. Several notices intimating default in payment of the totaloutstanding amount of Rs.133.18 crores were sent by the creditor to thedebtor. Upon failure to remit the overdue amount despite the notices, anotice[4] under Section 13(2) of the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act, 2002(hereinafter referred to as “the Act”) was sent by the creditor callingBupon the debtor to pay the amount overdue within period of 60 days.

5. In reply to the said notice, the debtor sent the creditor proposal[5]for extension of time for the payment of the outstanding dues. The HighCourt held that the creditor’s failure to deal with this representationconstituted violation of Section 13 (3A) of the Act. Further, the HighCCourt held that the notice issued under Section 13 (2) by the creditorcomprising of agricultural property despite the bar under Section 31 (i)of the Act is contrary to the law since the land was not converted intonon-agricultural land. The High Court also held that the auction/sale ofthe property based upon symbolic possession of the property is contraryDto the scheme of the Act and the Rules.

6. On 18.06.2013, notice was issued under Section 13 (4)whereby symbolic possession of the hotel property was taken over bythe creditor. The debtor filed securitization application[6] before the DebtsRecovery Tribunal (hereinafter referred to as ‘the DRT’) against theEtaking over of the symbolic possession by the creditor. In the meanwhile,the creditor published the first auction sale notice[7] with reserve priceof Rs. 403 crores which came to be postponed in view of the negotiationsbetween the parties for the repayment of the dues. Upon default in therepayment of the outstanding amount, second sale notice was publishedon 09.01.2014 with the same reserve price. The DRT passed an interimForder,[8] directing the creditor to defer the acceptance of bids and not totake any further steps for sale of the property for the next 60 days.Subsequently, no bids were received and the auction failed.

7. The creditor challenged the interim order passed by the DRTorder before Debts Recovery Appellate Tribunal (hereinafter referredGto as ‘the DRAT’). In the challenge, the Appellate Tribunal directed forthe second appeal to be disposed off within month by the DRT.

4 Dated 26.03.20135 Dated 27.05.20136 Dated 31.07.2013

7 On 04.09.2013H8 Vide order dated 6.02.2014

8. The DRT disposed off the second appeal and set aside thenotice under Section 13(2)[9] on the ground of non compliance with Section13(3A) and for issuance of the demand notice jointly for the mortgagedland comprising of agricultural land to which the provisions of the Actdid not apply as per Section 31(i) of the Act.

9. The creditor filed an appeal to the order of the DRT[10] in theDRAT which came to be allowed[11] and the validity of the notice issuedunder Section 13(2) was upheld. Against the order of the DRAT settingaside the order of the DRT, the debtor filed the Writ Petitions leading upto the present SLP, in the High Court.

The Auction Sale

10. On 04.09.2013, the creditor published Notice of Sale byPublic Auction in the newspaper fixing the date of auction as 09.10.2013at reserve price of Rs 403 crores. In view of this, the debtor sent aletter[12] to the creditor undertaking that it will pay all outstandinginstallments by 31.12.2013 and that the sale of assets be deferred uptothe aforesaid date. The debtor further stated that they shall not proceedin respect of their Securitization Application[13] before the DRT. Inpursuance of it, the creditor deferred the sale by issuing public noticeon 08.10.2013 and granted the debtor an opportunity to clear the loan,however, the creditor extended repayment only by 15-20 days.

11. Thereafter, on 25.11.2013, the debtor gave letter of undertakingaccepting the schedule given by the creditor and also acknowledging theright of the creditor to sell the assets in case of default as per the schedule.

12. On 30.12.2013, the debtor sought further time to repay theloan to which the creditor issued notice taking over symbolic possession.

13. On 09.01.2014, the creditor published second notice of saleat the same reserved price of Rs. 403 crores. The DRT[14] passed aninterim order directing the creditor to defer the acceptance of the bidsand not take any further steps with regard to the sale of the property for60 days.

9 Vide order dated 26. 03.2013

10 Vide order dated 31.03.2014

11 Vide order dated 10.09.2014

12 Dated 19.09.2013

13 Dated 31.07.2013

14 Vide order dated 06.02.2014

A14. On 08.10.2014 the creditor issued third Notice of Sale bypublic auction fixing the auction on 12.11.2014 at reserve price of Rs.542.57 crores. Pursuant to the writ petitions filed by the debtor, the HighCourt[15] allowed the bids to be received for the sale of the Goa Hotel tobe held in sealed cover till the next date of hearing which was fixed tobe on 19.11.2014. However, no bids were received pursuant to the 3[rd]BPublic Auction Notice.

15. In the meanwhile, the debtor wrote to the creditor stating thatthe corporate loan will be taken over by Hyatt who were the operatingservice provider for the hotel. Hyatt in turn wrote to the creditor statingthat they will not be responsible for the repayment of the loan. OnC31.12.2014, fourth and fresh notice for conducting the auction sale ofthe Goa Hotel was issued by the creditor setting the reserve price at Rs.515.44 crores. This notice led to the sale of the Goa Hotel to ITC Ltd.(hereinafter referred to as ‘the auction purchaser’).

Findings of the High Court

16. The parties eventually moved the High Court by way of writpetitions in its jurisdiction under Article 226 of the Constitution of India.Three writ petitions were filed:-

(i) Writ Petition No. 2698 of 2014 (renumbered as 222 of 2015)Ewas filed on 04.10.2014 by the debtor challenging the orderof the DRAT.[16]

(ii) Writ Petition No. 1150 of 2015 was filed on 02.03.2015 by thedebtor against the order of handing over possession passedby the District Magistrate.[ 17]

F(iii) Writ Petition No. 2486 of 2015 was filed on 19.03.2015 bythe debtor challenging the sale of the secured assets in anauction on 25.02.2015.

The writ petitions were filed before the Panaji Bench of the HighCourt at Goa, though eventually they were heard by the Bombay HighGCourt. The High Court set aside the judgment of the DRT and held theentire proceedings for recovery and sale of the Goa Hotel to be illegalbeing in violation of the Act.

15 Vide order dated 11.11.2014

16 Order dated 10.09.2014

17 Order dated 26.02.2015H

17. In brief the High Court held that:-

(i) The recovery proceedings were breach of Section 13 (3A)for failure of the creditor to reply to the representation of thedebtor and reject the same by reasoned order.

(ii) That portion of the land mortgaged by the debtor as securityinterest consisted of agricultural land to which the provisionsBof the Act do not apply. The land, therefore, could not havebeen recovered.

(iii) The proceedings under Section 14 were initiated by the creditorwho was not secured creditor after having sold the propertyin auction to the auction purchaser.

(iv) It was incumbent of the creditor to take physical possessionof the property before putting it to sale in an auction.

(v) Lastly, having regard to the manner in which the proceedingsof the auction sale were conducted, it was held that theywere vitiated by fraud and collusion.

Section 13 (3A) and its True Construction

18. One of the main contentions on behalf of the debtor whichfound favour with the High Court was that after the creditor issued thenotice under Section 13(2), the debtor made representation asking fora reschedulement of the loan which the creditor neither considered(constituting breach of sub-section (3A) which is mandatory), norcommunicated the reasons for non-acceptance thereof. Thus, thesubsequent action of the creditor in resorting to measure under Section13(4) is liable to be annulled.

19. The statutory scheme in this regard has been enumeratedunder Section 13 of the Act[18].

18 13. Enforcement of security interest

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer ofProperty Act, 1882 (4 of 1882), any security interest created in favour of any securedcreditor may be enforced, without the intervention of court or tribunal, by such creditorin accordance with the provisions of this Act.

(2) Where any borrower, who is under liability to secured creditor under securityagreement, 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 inwriting to discharge in full his liabilities to the secured creditor within sixty days fromthe date of notice failing which the secured creditor shall be entitled to exercise all orany of the rights under sub-section (4).

A20. The Security Interest (Enforcement) Rules, 2002 (hereinafterreferred to as ‘the Rules’) framed under the Act[19] elaborate on themanner in which the representation of the borrower is required to be

(3)…………….

(3A) If, on receipt of the notice under sub-section (2), the borrower makes anyrepresentation or raises any objection, the secured creditor shall consider suchBrepresentation or objection and if the secured creditor comes to the conclusion thatsuch representation or objection is not acceptable or tenable, he shall communicatewithin 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 securedcreditor at the stage of communication of reasons shall not confer any right upon theborrower to prefer an application to the Debts Recovery Tribunal under section 17 orCthe Court of District Judge under section 17A.(4) In case the borrower fails to discharge his liability in full within the period specifiedin sub-section (2), the secured creditor may take recourse to one or more of the followingmeasures to recover his secured debt, namely:—

(a) take possession of the secured assets of the borrower including the right to transferby way of lease, assignment or sale for realising the secured asset;

D(b) take over the management of the business of the borrower including the right totransfer by way of lease, assignment or sale for realising the secured asset: PROVIDEDthat the right to transfer by way of lease, assignment or sale shall be exercised onlywhere the substantial part of the business of the borrower is held as security for thedebt:

PROVIDED FURTHER that where the management of whole of the business or partof the business is severable, the secured creditor shall take over the management of suchEbusiness of the borrower which is relatable to the security for the debt.(c) appoint any person (hereafter referred to as the manager), to manage the securedassets 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 thesecured assets from the borrower and from whom any money is due or may become dueto the borrower, to pay the secured creditor, so much of the money as is sufficient topay the secured debt.F(5)………………

(6)………………

(7)………………

(8)………………

(9)………………

(10)…………….

G(11)……………

(12)…………….

(13)…………….

19 3-A. Reply to Representation of the borrower.-

(a) After issue of demand notice under sub-section (2) of section 13, if the borrowermakes any representation or raises any objection to the notice, the Authorised Officershall consider such representation or objection and examine whether the same isHacceptable or tenable.

dealt with. Section 13 (4) enables any creditor to enforce any securityinterest without the intervention of court or tribunal. The procedureprescribed is that after classifying the debt as non-performing asset,the creditor may, by notice in writing require the debtor/borrower todischarge his liabilities within 60 days. On receipt of notice, the borrowermay make representation or raise any objection. The creditor is thenbound to consider the representation or objection. If the creditor comesto the conclusion that the representation is not acceptable or tenable, thecreditor is required to communicate the reasons for the non-acceptanceof the representation/ objection within fifteen days. Where the borrowerfails to discharge his liability in full, the creditor may take any of theactions under sub- section (4) which include the taking over of possessionof the secured assets et cetera.

21. Rule 3A of the Rules requires the authorized officer who is anofficer specified by the Board of Directors of the secured creditor toconsider the representation and modify the notice of demand if satisfiedof the need to do so in that regard. If the authorized officer comes to theconclusion that such representation or objection is not tenable oracceptable, he must communicate the reasons for non-acceptance ofthe representation or objection within fifteen days.

22. The Act and the Rules thus provide for locus poenitentiae.The borrower may raise an objection or make representation of anynature that the creditor must consider, and if found not acceptable, mayreject the same before proceeding to resort to any of the measuresprovided by Section 13(4) of the Act. The borrower may thus raise anobjection against the proposed measures or make representationexplaining the circumstances in which he cannot discharge his liabilitiesand propose reschedulement. This may result in reconsideration by thecreditor of whether or not it would be prudent to carry out the proposedmeasures and may even result in renovation of the contract.

(b) If on examining the representation made or objection raised by the borrower, thesecured creditor is satisfied that there is need to make any changes or modifications inthe demand notice, he shall modify the notice accordingly and serve revised notice orpass such other suitable orders as deemed necessary, within fifteen days from the dateof receipt of the representation or objection.

(c) If on examining the representation made or objection raised, the Authorized Officercomes to the conclusion that such representation or objection is not acceptable ortenable, he shall communicate within fifteen days of receipt of such representation orobjection, the reasons for non-acceptance of the representation or objection, to theborrower.

A23. Sub-section (3A) of Section 13 was introduced in the Act bythe Parliament in pursuance of the following observations of this Courtin Mardia[20] Chemicals:

“45. …The purpose of serving notice upon the borrowerunder sub-section (2) of Section 13 of the Act is, that replyBmay be submitted by the borrower explaining the reasons asto why measures may or may not be taken under sub-section(4) of Section 13 in case of non-compliance with notice within60 days. The creditor must apply its mind to the objectionsraised in reply to such notice and an internal mechanism mustbe particularly evolved to consider such objections raised inCthe reply to the notice. There may be some meaningfulconsideration of the objections raised rather than to rituallyrejectthem and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such duty isenvisaged on the part of the creditor it would only beDconducive to the principles of fairness on the part of the banksand financial institutions in dealing with their borrowers toapprise them of the reason for not accepting the objectionsor points raised in reply to the notice served upon them beforeproceeding to take measures under sub-section (4) of Section13. Such reasons, overruling the objections of the borrower,Emust also be communicated to the borrower by the securedcreditor. It will only be in fulfillment of requirement ofreasonableness and fairness in the dealings of institutionalfinancing which is so important from the point of view of theeconomy of the country and would serve the purpose in theFgrowth of healthy economy. It would certainly provideguidance to the secured debtors in general in conducting theaffairs in manner that they may not be found defaultingand being made liable for the unsavoury steps containedunder sub-section (4) of Section 13. At the same time, moreimportantly, we must make it clear unequivocally thatGcommunication of the reasons for not accepting the objectionstaken by the secured borrower may not be taken to giveoccasion to resort to such proceedings which are notpermissible under the provisions of the Act. But communication

20 (2004) 4 SCC 311H

of reasons not to accept the objections of the borrower, wouldcertainly be for the purpose of his knowledge which wouldbe step forward towards his right to know as to why hisobjections have not been accepted by the secured creditorwho intends to resort to harsh steps of taking over themanagement/business of viz. secured assets withoutintervention of the court. Such person in respect of whomsteps under Section 13(4) of the Act are likely to be takencannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per theprovisions under the Act, he may not be entitled to challengethe reasons communicated or the likely action of the securedcreditor at that point of time unless his right to approach theDebts Recovery Tribunal as provided under Section 17 of theAct matures on any measure having been taken under sub-section (4) of Section 13 of the Act.”

(emphasis supplied)

24. The Parliament transformed the observations of this Courtinto provision in the Act with plain intention to introduce pause forthe creditor to rethink and reconsider the action proposed by the debtor.It is departure from the usual steps that an ordinary creditor is boundto take for recovering the loan i.e. through the intervention of the Court.

25. The question that arises for consideration before us is whetherthe Parliament intended for total invalidity to result from the failure toreply and give reasons for the non-acceptance of the borrower’srepresentation. In other words, whether sub-section (3A) of Section 13is mandatory or directory in nature.

26. There is no doubt that if reply with reasons is an integral andindispensable part of the statutory scheme, the Courts would not excusea departure from it. But, on the other hand, if the reply is merely adirection and not of substance to the scheme, the non-compliance maybe excused.

27. This question must be answered upon construction of thestatute according to its true intent by taking into account the language inwhich the intent is clothed. In passage from Crawford’s StatutoryConstruction, it is stated -

A“The question as to whether statute is mandatory or directorydepends upon the intent of the Legislature and not upon thelanguage in which the intent is clothed. The meaning andintention of the Legislature must gov-ern, and these are to beascertained not only from the phraseology of the provision,but also by considering its nature, its design, and theBconse-quences which would follow from construing it the oneway or the other.”[21]

This has been followed in several decisions of the Supreme Court[22].Subbarao, J. in State of U.P. v. Babu Ram Upadhya[23] points out, “Forascertaining the real intention of the Legislature, the court mayCconsider inter alia, the nature and design of the statute, and theconsequences which would follow from construing it the one wayor the other; the impact of other provisions whereby the ne-cessityof complying with the provisions in question is avoided; thecir-cumstances, namely, that the statute provides for contingencyDof the non-compliance with the provisions; the fact that the non-compliance with the provisions is or is not visited by some penalty;the serious or the trivial consequences, that flow therefrom; andabove all, whether the object of the legislation will be defeated orfurthered”.

28. We find the language of sub-section (3A) to be clearlyimpulsive. It states that the secured creditor “shall consider suchrepresentation or objection and further, if such representation or objectionis not acceptable or tenable, he shall communicate the reasons for non-acceptance” thereof. We see no reason to marginalize or dilute the impactof the use of the imperative ‘shall’ by reading it as ‘may’. The word

21 Passage from CRAWFORD: Statutory Construction, p. 516.

22 State of U.P.v. Manbodhan Lal Shrivastava, AIR 1957 SC 912, p. 918: 1958 SCR 533;State of U.P. v. Baburam, Upadhya, AIR 1961 SC 751, p. 765 : (1961) 2 SCR 679; Article143 of the Constitution of India, In the matter of, supra, p. 769; State of Mysore v. V.K.Kangan, AIR 1975 SC 2190, p. 2192: (1976) 2 SCC 895; Govindlal Chhagan-lal Patel v.GAgriculture Produce Market Committee, AIR 1976 SC 263, p. 267 : (1976) 1 SCC 369;Ganesh Prasad Sah Kesari v. Lakshmi Narayan, (1985) 3 SCC 53, pp. 59, 60 : AIR 1985SC 964; B.P. Khemka Pvt. Ltd. v. Birendra Kumar Bhowmik, (1987) 2 SCC 407, p. 415 :AIR 1987 SC 1010; Owners and Parties inter-ested in M.V. “Vali Pero” v. FernandesLopez, AIR 1989 SC 2206, p. 2213 : (1989) 4 SCC 671; State of M.P. v. Pradeep Kumar,(2000) 7 SCC 372, p. 377 : (2000) 10 JT 349; Sarla Goel v. Krishanchand, (2009) 7 SCC658 pp. 668, 669 para 30 : (2009) 9 JT 21.

H23 AIR 1961 SC 751.

‘shall’ invariably raises presumption that the particular provision isimperative[24].

29. There is nothing in the legislative scheme of Section 13 (3A)which requires the Court to consider whether or not, the word ‘shall’ isto be treated as directory in the provision. As the Section stood originally,there was no provision for the above mentioned requirement of debtorto make representation or raise any objection to the notice issued bythe creditor under Section 13(2). As it was introduced via sub-section(3A), it could not be the intention of the Parliament for the provision tobe futile and for the discretion to ignore the objection/representation andproceed to take measures, be left with the creditor. There is clearintendment to provide for locus poenitentiae which requires an activeconsideration by the creditor and reasoned order as to why the debtor’srepresentation has not been accepted.

30. Moreover, this provision provides for communication of thereasons for not accepting the representation/objection and the requirementto furnish reasons for the same. provision which requires reasons tobe furnished must be considered as mandatory. Such provision is anintegral part of the duty to act fairly and reasonably and not fancifully.We are not prepared in such circumstances to interpret the silence ofthe Parliament in not providing for any consequence for non-compliancewith duty to furnish reasons. The provision must nonetheless be treatedas ‘mandatory’.

We agree with the view of this Court in this regard in MardiaChemicals Ltd. v. Union of India[25], Transcore v. Union of India[26]and Keshavlal Khemchand & Sons (P) Ltd. v. Union of India[27].

We also approve of the view of several High Courts in this regard[28].

24 State of U.P. v. Manbodhan Lal Shrivastava, AIR 1957 SC 912, p. 91725 (2004) 4 SCC 311 (para 45, 47, 77 and 80)26 (2008) 1 SCC 125 (para 24 and 25)27 (2015) 4 SCC 770 (para 19 and 61)

28 Kiran Devi Bansal v. DGM SIDBI, AIR 2009 Guj 100 (DB)(para 9 and 10); ClarityGold Pvt. Ltd. v. State Bank of India, AIR 2011 Bom. 42 (DB)(para 11, 12 and 13);Vinay Container Services Pvt. Ltd. v. Axis Bank, 2011 (1) Mh. L.J. 882 (para 6);Krushna Chandra Sahoo v. Bank of India, AIR 2009 Orissa 35 (para 6 and 7); TensileSteel Ltd. & Anr. v. Punjab and Sind Bank & Ors., AIR 2007 Guj 126 (para 21); M/sJayant Agencies v. Canara Bank & Ors., Jharkhand HC in WP (C) No. 4048 of 2010(para 27, 28, 29, 32 and 33); M/s Tetulia Coke Plant Pvt. Ltd. v. Bank of India, AIR2013 Jhar 12 (para 5, 9, 20, 22, 23 and 24); Mrs. Sunanda Kumari v. Standard CharteredBank, (2007) 135 Comp Cases 604 (Kar) (para 5); Palash Mukherjee v. U.O.I,

A31. It was submitted on behalf of the creditor that the conduct ofthe debtor does not warrant an interference in this case. However, weare of the view that the construction of the Act should not be affectedby the facts of particular case. For, indeed, where the remedy invokedis discretionary remedy, the Court may deny relief if the circumstancesso warrant.B

32. In the present case, it is fact that the creditor has not repliedto the debtor’s representation[29], and thus appears to be in breach ofSection 13 (3A), but the following attendant circumstances are important:

(i) On 26.03.2013, the creditor issued notice under Section13(2) to the debtor to discharge his liabilities within 60 days.COn 27.05.2013 the debtor made representation to the creditorcontaining proposal for reschedulement (which was thesame as the one made as far back as on 22.08.2012) andreserving the right to file reply.

(ii) On 07.06.2013, the debtor again sent proposal for extensionDof time for repayment, repeating its proposal dated27.05.2013.

(iii) On 20.06.2013, the creditor issued the notice of possessionunder Section 13(4). The taking over of possession was purelysymbolic. We are informed that the debtor is in possessionEof the hotel till date and is running its business without anynoteworthy repayment.

(iv) On the next day 21.06.2013, the debtor wrote letter to thecreditor seeking extension of time and enclosed six chequesfor upfront payment of Rs.33.16 crores without making anyFreference to the notice of taking over of possession. Thecheques were dishonoured.

(v) On 04.09.2013, the creditor published Notice of Sale byPublic Auction in the newspaper fixing the date of auction as09.10.2013 at reserve price of Rs. 403 crores.

(vi) Following this the debtor sent letter to the creditor on19.09.2013 undertaking that it will repay all outstanding

W.P. 9876 (W) of 2014 Calcutta High Court (para 1, 2 and 67); Jaideep Singh and Ors.v. Union of India and Anr., 2008 2 GLT (91) (para 25 and 28); Malabar Sand and Stones(Pvt.) Ltd. v. Catholic Syrian Bank Ltd. & Ors., AIR 2013 Ker 25 (para 7, 8, 9 and 10).H29 Dated 27.05.2013

installments by 31.12.2013 and that the sale of assets bedeferred up to the said date. The debtor further stated that itshall not proceed further in respect of their SecuritizationApplication before the DRT.

(vii) On 08.10.2013, the creditor deferred the sale by issuing apublic notice while considering the debtor’s proposal.

(viii)On 29.10.2013, the creditor granted an opportunity to thedebtor to clear the debt as stated in the debtor’s letter dated03.10.2013 wherein it sent forth another proposal for extensionof time for repayment stating that it will repay principalinstallment of the corporate loan of total of Rs. 89 croresby 31.12.2013. However, the creditor only extended the timefor repayment by 15-20 days.

(ix) On 25.11.2013, “A Letter of Undertaking” was given by thedebtor accepting the schedule given by the creditor on29.10.2013 and also acknowledging the right of the creditorto sell the assets in case of default as per the above mentionedschedule.

(x) The creditor wrote to the debtor on 08.01.2014 informing thedebtor that due to the default in repayment, the creditor isproceeding with steps to recover the dues and accordinglyrejected the debtor’s request letter dated 30.12.2013 seekingfurther time to repay the outstanding dues.

33. From the above, it is clear that the creditor was induced bythe debtor not to take action against them through assurances andpromises. The creditor appeared to have entered into negotiations forthe settlement of the dues and even accepted cheques in repaymentmuch after the notice[30] under Section 13(2) and after the debtor’s letterof representation[31]. Many opportunities were granted by the creditor tothe debtor to repay the debt which were all met by proposals for extensionof time. Eventually, the debtor even executed “A Letter of Undertaking[32]”acknowledging the right of IFCI to sell the assets in the case of default.

34. In these circumstances, we have no doubt that the failure tofurnish reply to the representation is not of much significance since we

30 Dated 26.03.2013

31 Dated 27.05.2013

32 On 25.11.2013

Aare satisfied that the creditor has undoubtedly considered therepresentation and the proposal for repayment made therein and has infact granted sufficient opportunity and time to the debtor to repay thedebt without any avail. Therefore, in the fact and circumstances of thiscase, we are of the view that the debtor is not entitled to the discretionaryrelief under Article 226 of the Constitution which is indeed an equitableBrelief.

Letter of Undertaking “Without Prejudice”

35. Much was sought to be made of the words “without prejudice”in the letter[33] containing the undertaking that if the debt was not paid,Cthe creditor could take over the secured assets. The submission on behalfof the debtor that the letter of undertaking was given in the course ofnegotiations and cannot be held to be an evidence of theacknowledgement of liability of the debtor, apart from being untenable inlaw, reiterates the attempt to evade liability and must be rejected. Thesubmission that the letter was written without prejudice to the legal rightsDand remedies available under any law and therefore theacknowledgement or the undertaking has no legal effect must likewisebe rejected. This letter is reminiscent of letter that fell for considerationin Spencer’s[34] case as pointed out by Mr. Harish Salve, “as rule thedebtor who writes such letters has no intention to bind himselfEfurther than is bound already, no intention of paying so long as hecan avoid payment, and nothing before his mind but desire,somehow or other, to gain time and avert pressure.”

It was argued in subsequent case[35] that an acknowledgmentmade “without prejudice” in the case of negotiations cannot be used asFevidence of anything expressly or impliedly admitted. The House ofLords observed as follows:

“But when statement is used as acknowledgement for thepurpose of s. 29 (5), it is not being used as evidence ofanything. The statement is not an evidence of anGacknowledgement. It is the acknowledgement.”

Therefore, the without prejudice rule could have no application.

It said:

33 Dated 25.11.2013

34 Spencer v. Hemmerde [1922] 2 AC 507, HL at 526

H35 Bradford and Bingley vs. Rashid [2006]

“Here, the respondent, Mr. Rashid was not offering anyconcession. On the contrary, he was seeking one in respectof an undisputed debt. Neither an offer of payment nor actualpayment.”

We, thus, find that the mere introduction of the words “withoutprejudice” have no significance and the debtor clearly acknowledgedthe debt even after action was initiated under the Act and even afterpayment of smaller sum, the debtor has consistently refused to pay up.

36. All in all, as the matter stands, the debtor did not repay theloan. The debtor managed to submit letter purporting to be arepresentation, containing proposal for reschedulement made muchearlier to the creditor’s notice and reserved right to file reply.Apparently, the debtor induced the creditor to enter into negotiations toward off the reply and avoid the taking over of possession. The debtorignored the symbolic possession taken over by the creditor and continuedto negotiate and even gave six cheques which were dishonoured. Thedebtor then gave final letter of undertaking agreeing that the creditorcould take over possession of the assets if the debt was not repaid. Allalong, the debtor’s response has been that of seeking extension of timeto pay, with the usual unfulfilled promise of repayment. We see no reasonwhy the debtor should not be stopped from questioning the taking overof possession, particularly since, neither the debt nor the liability is indispute. The debt has not been repaid in fact, and the objection raised ismerely on the ground that the taking of assets is illegal because thecreditor failed to reply to the representation.

Inclusion of Agricultural Land as Security Interest in theNotice of Recovery

37. One of the contentions raised on behalf of the debtor questionedthe correctness of the finding of the High Court on the ground that theinclusion of agricultural land as security interest could not have beenvalidly included in the notice for recovery of the secured loan. Thecorrectness of the finding of the High Court depends on the effect ofSection 31 (i) of the Act, which reads as follows:-

“31. Provisions of this Act not to apply in certain cases-Theprovision of this Act shall not apply to-

542SUPREME COURT REPORTS

[2018] 5 S.C.R.

(i) any security interest created in agricultural land;C

38. The purpose of enacting Section 31(i) and the meaning of theterm “agricultural land” assume significance. This provision, like manyothers is intended to protect agricultural land held for agricultural purposesby agriculturists from the extraordinary provisions of this Act, whichDprovides for enforcement of security interest without intervention of theCourt. The plain intention of the provision is to exempt agricultural landfrom the provisions of the Act. In other words, the creditor cannotenforce any security interest created in his favour without interventionof the Court or Tribunal, if such security interest is in respect ofEagricultural land. The exemption thus protects agriculturists from losingtheir source of livelihood and income i.e. the agricultural land, under thedrastic provision of the Act. It is also intended to deter the creation ofsecurity interest over agricultural land as defined in Section 2 (zf)[36].Thus, security interest cannot be created in respect of property specifiedin Section 31.F

36 (zf) “security interest” means right, title or interest of any kind, other than thosespecified in section 31, upon property created in favour of any secured creditor andincludes-

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of anykind, on tangible asset, retained by the secured creditor as an owner of the property,given on hire or financial lease or conditional sale or under any other contract whichGsecures the obligation to pay any unpaid portion of the purchase price of the asset oran obligation incurred or credit provided to enable the borrower to acquire the tangibleasset; or

(ii) such right, title or interest in any intangible asset or assignment or licence of suchintangible asset which secures the obligation to pay any unpaid portion of the purchaseprice of the intangible asset or the obligation incurred or any credit provided to enablethe borrower to acquire the intangible asset or licence of intangible asset;H

39. In the present case, security interest was created in respectof several parcels of land, which were meant to be part of single uniti.e. the five star hotel in Goa. Some parcels of land now claimed asagricultural land were apparently purchased by the debtor fromagriculturists and are entered as agricultural lands in the revenue records.The debtor applied to the revenue authorities for the conversion of theselands to non-agricultural lands which is pending till date due to policydecision.

40. It is undisputed that these lands were mortgaged in favour ofthe creditor under deed dated 26.02.2010. Obviously, since no securityinterest can be created in respect of agricultural lands and yet it was socreated, goes to show that the parties did not treat the land as agriculturalland and that the debtor offered the land as security on this basis. Theundisputed position is that the total land on which the Goa Hotel waslocated admeasures 182225 sq. mtrs. Of these, 2335 sq. mtrs. are usedfor growing vegetables, fruits, shrubs and trees for captive consumptionof the hotel. There is no substantial evidence about the growing ofvegetables but what seems to be on the land are some trees bearingcurry leaves and coconut. This amounts to about 12.8 % of the totalarea.41. The Corporate Loan Agreement[37] that deals with the mortgagein question in the relevant clause[38] reads as follows:-

“The Borrower shall create mortgage on Exclusive basis onthe ‘Park Hyatt Goa Resort and Spa” Hotel Propertyadmeasuring 1, 82, 225 Sq Mtrs with built up area of 25182Sq. Mtrs situated at 263 C, Arossim, Canasaulim Goa.”

The mortgage is thus intended to cover the entire property of theGoa Hotel. Prima facie, apart from the fact that the parties themselvesunderstood that the lands in question are not agricultural, it also appearsthat having regard to the use to which they are put and the purpose ofsuch use, they are indeed not agricultural.

42. At the outset, it was argued on behalf of the debtor that Section31(i) is beyond the legislative competence of the Parliament since it isonly the State Legislature which is competent to legislate on land underEntry 18 of List II. This contention appears to be completely untenable.

37 Dated 26.02.201038 Clause 2.1, part

AThough Section 31(i) exempts agricultural land from the operation of theAct it is not possible to construe such provision as legislation onagricultural land. In fact, it is quite the contrary. Moreover, Section 31(i) is one of the provisions in the Act which has been held by this Courtas referable to Entry 45 of List I, in Union of India and Another v.Delhi High Court Bar Association and Ors.[39]. The Court held that:-B“14……. Entry 45 of List I relates to “banking”. Bankingoperations would inter alia, include accepting of loans anddeposits, granting of loans and recovery of the debts due tothe bank. There can be little doubt that under Entry 45 ofList I, it is Parliament alone which can enact law with regardCto the conduct of business by the banks. Recovery of dues isan essential function of any banking institution. In exerciseof its legislative power relating to banking, Parliament canprovide the mechanism by which monies due to the banks andfinancial institutions can be recovered.”DIn State Bank of India v. Santosh Gupta and Ors.[40]this Courtconcluded that the Act is referable to Entries 45 and 95 of List I. Itobserved that:-

“43……. the entire Act, including Sections 17-A and 18-B,would in pith and substance be referable to Entries 45 and95 of List I,….”E43. The validity of Section 31(i) which in any case deals withsecurity interest created over agricultural land and not agricultural landitself, is an integral part of the Act and cannot be questioned on theground of legislative competence.In A.S. Krishna and Ors. v. State of Madras[41]this CourtFobserved as follows:-

“It would be quite an erroneous approach to the question toview such statute not as an organic whole, but as merecollection of sections, then disintegrate it into parts, examineunder what heads of legislation those parts would severallyGfall, and by that process determine what portions thereof areintra vires, and what are not.”

Thus, this contention on behalf of the debtor must be rejected.

39 (2002) 4 SCC 27540 AIR 2017 SC 25H41 AIR 1957 SC 297

44. In ‘Commissioner of Wealth Tax, Andhra Pradesh v. Officer-in-Charge (Court of Wards) Paigah[42], this Court interpreted thedefinition of the term ‘Agricultural Land’ with respect to Section 2(e)of the Wealth Tax Act, 1957 that excluded the said term from thedefinition of assets. This Court observed:-

“We agree that the determination of the character of land,according to the purpose for which it is meant or set apartand can be used, is matter which ought to be determined onthe facts of each particular case. What is really required tobe shown is the connection with an agricultural purpose anduser and not the mere possibility of user of land, by somepossible future owner or possessor, for an agricultural purpose.It is not the mere potentiality, which will only affect its valuationas part of “assets”, but its actual condition and intended userwhich has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption seemed to be toencourage cultivation or actual utilisation of land foragricultural purposes. If there is neither anything in itscondition, nor anything in evidence to indicate the intentionof its owners or possessors, so as to connect it with anagricultural purpose, the land could not be “agriculturalland” for the purposes of earning an exemption under theAct. Entries in revenue records are, however, good prima facieevidence.”

(emphasis supplied)

Similarly, in the case of Kunjukutty Saheb v. State of Kerala[43],this Court held as follows:

“We suppose that something or other can be, and often is,grown on any vacant land, but that would not necessarilymake it agricultural land for our purposes. To give an examplethe possibility of cultivating, or even the actual cultivationof, what is essentially building site in the heart of townwould not make it agricultural land. It is the purpose for whichit is held that determines its character and the existence of afew coconut trees or vegetable patch on the land cannot

42 (1976) 3 SCC 864

43 (1972) 2 SCC 364

Aalter the fact that it is held for purposes of building and notfor purposes of agriculture.”

In any event, having regard to the character of the land and thepurpose for which it is set apart, we are of the view that the land inquestion is not an agricultural land. The High Court mis-directed itself inBholding that the land was an agricultural land merely because it stood assuch in the revenue entries, even though the application made for suchconversation lies pending till date.

Transfer of Security Interest by IFCI to ITC

45. As noticed earlier, the creditor took over symbolic possessionCof the property on 20.06.2013. Thereupon, it transferred the property tothe sole bidder ITC and issued sale certificate for Rs.515,44,01,000/-on 25.02.2015. On the same day, i.e., 25.02.2015, the creditor appliedfor taking physical possession of the secured assets under Section 14 ofthe Act.

46. According to the debtor, since Section 14 provides that anapplication for taking possession may be made by secured creditor,and the creditor having ceased to be secured creditor after theconfirmation of sale in favour of the auction purchaser, was not entitledto maintain the application. Consequently, therefore, the order of theEDistrict Magistrate directing delivery of possession is void order. Thissubmission found favour with the High Court that held that the creditorhaving transferred the secured assets to the auction purchaser ceasedto be secured creditor and could not apply for possession. The HighCourt held that the Act does not contemplate taking over of symbolicpossession and therefore the creditor could not have transferred theFsecured assets to the auction purchaser. In any case, since ITC Ltd.was the purchaser of such property, it could only take recourse to theordinary law for recovering physical possession.47. We find nothing in the provisions of the Act that renders takingover of symbolic possession illegal. This is well- known device in law.GIn fact, this court has, although in different context, held inM.V.S.Manikayala Rao v. M.Narasimhaswami[44] that the delivery ofsymbolic possession amounted to an interruption of adverse possessionof party and the period of limitation for the application of Article 144 ofthe Limitation Act would start from such date of the delivery.

H44 AIR 1966 SC 470

48. The question, however, whether the creditor could maintainan application of possession under Section 14 of the Act; even though ithad taken over only symbolic possession before the sale of the propertyto the auction purchaser, depends on whether it remained securedcreditor after having done so.

Section 2(d) of the Act defines ‘secured creditor’ to mean a“banking company” having the meaning assigned to it in clause (c)of section 5 of the Banking Regulation Act, 1949;

Clause 2(L)[45] includes debts or receivables and any right or interestin the security whether full or part underlying such debt or receivablesor any beneficial interest in property vide (L)(i)(iv) & (v)[46].

Sub-section (6) of Section 13[47] posits that the transfer of thesecured asset by the secured creditor shall vest in the transferee all therights as if the transfer had been made by the owner of the securedasset.

49. In Mulla’s the Transfer of Property Act[48]:-

“The section (s.8) does not apply to court sales, for such saleseffect transfer by the operation of law. The principle of thesection was, however, applied in case decided by MadrasHigh Court where debt for unpaid purchase money on asale of land was attached and sold, and the auction purchaserwas held entitled to the charge which the vendor had under s55(4) (b) on the property in the hands of the buyer. The court,after observing that the present section did not apply to court

45 2(L) SARFAESI Act

46 2 (l) “financial asset” means debt or receivables and includes —

(i) claim to any debt or receivables or part thereof, whether secured or unsecured; or(iv) any right or interest in the security, whether fall or part underlying such debt orreceivables; or

(v) any beneficial interest in property, whether movable or immovable, or in such debt,receivables, whether such interest is existing, future, accruing, conditional or contingent;or

(vi)x x x

47 13 (6) Any transfer of secured asset after taking possession thereof or take over ofmanagement under sub-section (4), by the secured creditor or by the manager on behalfof the secured creditor shall vest in the transferee all rights in, or in relation to, thesecured asset transferred as if the transfer had been made by the owner of such securedasset.

48 Page 104, 105

548SUPREME COURT REPORTS

[2018] 5 S.C.R.

Asales, said: The effect of applying s 8 is to strengthen the salecertificate by transferring the lien along with it.”This Court observed in Abdul Aziz[49] that sale through court isdifferent from sale inter parties:-

“What is sold at court sale is the right, title and interest ofBthe judgment debtor, and the extent of that interest is mixedquestion of fact and law to be decided according to thecircumstances of each particular case, and depends uponwhat the court intended to sell, and the purchaser intendedto buy.”.

CWe note that even though the entire right, title and interest werepurported to have been transferred, all the rights, transfer and interestcould not be said to have been transferred since the possession of theproperty was not transferred to creditor. The possession was retainedby the debtor who continued to do business and receive rent from therooms on the property and has in fact continued to do so till date. ThereDis no doubt that after taking over the property from debtor, the creditoralso acquired the right to receive the usufruct of the property i.e. therent in this case. However, this was an interest in the property whichwas not at any point of time transferred to the auction purchaser.

50. In this case, the creditor did not have actual possession of theEsecured asset but only constructive or symbolic possession. The transferof the secured asset by the creditor therefore cannot be construed to bea complete transfer as contemplated by Section 8 of the Transfer ofProperty Act. The creditor nevertheless had right to take actualpossession of the secured assets and must therefore be held to be asecured creditor even after the limited transfer to the auction purchaserFunder the agreement[50]. Thus, the entire interest in the property not havingbeen passed on to the creditor in the first place, the creditor in turn couldnot pass on the entire interest to the auction purchaser and thus remaineda secured creditor in the Act.

Findings of Fraud and Collusion by the High CourtG

51. Finally, the High Court in its judgment renders finding thatthere was in fact fraud and collusion between the creditor and the auctionpurchaser. According to the High Court, since the measures were taken

49 Abdul Aziz v. Appayasami (1904) ILR 27 Mad 131, 31 IA 1.50 Dated 25.02.2015H

in breach of all laws, the inference of manipulation and collusion cannotbe ruled out.

52. We fail to see how such finding of manipulation and collusionis sustainable on account of breach of law in the present case. risk ofthis kind taken up by an intending purchaser cannot lead to an inferenceof collusion. Mainly, the finding is based on the fact that the sale is acollusion because the auction purchaser was aware that disputebetween the parties was pending and still went ahead and made bidfor the property. It is not unusual in the sale of immovable properties tocome across difficulties in finding suitable buyers for the property. Wefind that the property was eventually sold on the fourth auction, and allthe auctions were duly advertised.

53. Another fact on the basis of which the High Court has observedan inference of collusion is that the property was sold and the sale wasconfirmed in favour of ITC Ltd. though statement was made in themorning of 23.02.2015 before the DRT that the sale would not beconfirmed till the order is passed. This seems to be recorded in theorder of the DRT. However, what is overlooked is the fact that in thestatement on behalf of the creditor, the creditor only agreed to not confirmthe sale till 3 pm. In the absence of any finding as to what actuallytranspired, it is not possible for us to infer manipulation and collusion onthis account. There is no dispute that the property was actually purchasedby ITC Ltd. in pursuance of public auction and that the entire amountof sale consideration has been deposited by it.54. We have anxiously considered the entire matter and find thatthe undisputed facts of the case are that loan was taken by the debtorwhich was not paid, the debtor did not respond to notice of demandand made representation which was not replied to in writing by thecreditor. The creditor, however, considered the proposals for repaymentof the loan as contained in the representation in the course of negotiationswhich continued for considerable amount of time. Several opportunitieswere in fact availed of by the debtor for the repayment of the loan afterthe proceedings were initiated by the secured creditor. The debtor failedto discharge its liabilities and eventually undertook that if the debtor failsto discharge the debt, the creditor would be entitled to take realize thesecured assets.

55. As held, we are of the view that non-compliance of sub-section(3A) of Section 13 cannot be of any avail to the debtor whose conduct

Ahas been merely to seek time and not repay the loan as promised onseveral occasions.

56. This Court in the case of State of Maharashtra v. Digambar[51]observed as follows:-

“19. Power of the High Court to be exercised under ArticleB226 of the Constitution, if is discretionary, its exercise mustbe judicious and reasonable, admits of no controversy. It isfor that reason, person’s entitlement for relief from HighCourt under Article 226 of the Constitution, be it against theState or anybody else, even if is founded on the allegation ofCinfringement of his legal right, has to necessarily depend uponunblameworthy conduct of the person seeking relief, and thecourt refuses to grant the discretionary relief to such personin exercise of such power, when he approaches it with uncleanhands or blameworthy conduct.”

DIt relied on the judgment of the Privy Council in Lindsay PetroleumCo. v. Hurd[52], where the Privy Council observed:-

“…….Two circumstances, always important in such cases, are,the length of the delay and the nature of the acts done duringthe interval, which might affect either party and cause aEbalance of justice or injustice in taking the one course or theother, so far as it relates to the remedy.”

57. Therefore, the debtor is not entitled for the discretionaryequitable relief under Articles 226 and 136 of the Constitution of India inthe present case.

58. We accordingly, set aside the impugned judgment of the HighCourt and direct the debtor and its agents to handover possession of themortgaged properties to the auction purchaser within period of sixmonths from the date of this judgment along with the relevant accounts.

59. Appeals are allowed accordingly.

Devika Gujral

Appeals allowed.

51 (1995) 4 SCC 683H52 (1874) 5 PC 221