W.P. (C) No. 9518 of 2005. Case: Sarthak Builders Pvt. Ltd. and Another Vs Orissa Rural Development Corporation Limited and 5 Others. High Court of Orissa (India)

Case NumberW.P. (C) No. 9518 of 2005
CounselFor Appellant: Mr. Ramesh Sahoo, Adv. and For Respondents: Mr. S.K. Nayak, Sr. Advocate, Mr. R.K. Mohapatra, Govt. Advocate as Amicus Curiae and Mr. T. Sahu, Adv.
JudgesA. K. Goel, C.J., C. R. Dash and Dr. A. K. Rath, JJ.
IssueCode of Civil Procedure, 1908 (CPC) - Order XL Rule 40; Section 428; Companies Act, 1956 - Section 4A; Employees' State Insurance Act, 1948 - Section 45B; Recovery of Debts Due to Banks and Financial Institutions Act, 1993 - Sections 17, 2; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - ...
Judgement DateFebruary 14, 2014
CourtHigh Court of Orissa (India)

Judgment:

A. K. Goel, C.J.

1. The question referred for consideration of this Bench is whether provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 can be invoked with reference to the loan transaction entered into prior to coming into force of the said Act?

2. A Division Bench of this Court in Subash Chandra Panda v. State of Orissa and others, AIR 2008 Orissa 88: 2008 (I) ORL 659, held in the negative while contra view has been taken by Uttaranchal High Court and Allahabad High Court in Unique Engineering Works v. Union of India and others, II (2004) BC 241 (DB) and Pradeep Kumar Gupta and another v. State of U.P. and others, AIR 2010 All. 3 respectively.

3. It may be necessary to advert to some basic facts giving rise to the question. The Orissa Rural Housing Development Corporation Limited (ORHDC) advanced loan to the petitioner-builder against mortgage of property in the year 1998. SARFAESI Act came into force on 17.12.2002 replacing the corresponding provisions of ordinance which came into force from 21.6.2002. The Act inter alia provides for enforcing of Security Interest by a Secured Creditor without the intervention of Court. The term 'Secured creditor' means a bank or 'financial institution' and other entities as defined under Section 2(zd). The financial institution is defined under Section 2(m) of the Act to mean institutions specifically described therein and any other institution which may be so specified by a notification by the Central Government. The Central Government has notified several financial institutions under the said provision from time to time, including ORHDC. ORHDC was so notified on 10.11.2003. Thereafter, ORHDC invoked provisions of Section 13 of the SARFAESI Act and issued impugned notices dated 8.12.2004 and 18.4.2005 under Section 13(2) and 13(4) of the Act, followed by sale notice dated 25.6.2005. The said notices have been impugned by the affected parties.

4. One of the contentions though raised belatedly was that the SARFAESI Act could not be invoked in respect of loan transaction entered into prior to 10.11.2003. This plea was supported by Division Bench of this Court in Subash Chandra Panda.

5. However, financial institution sought reconsideration of the view expressed in Subash Chandra Panda and the Division Bench hearing the matter considered it appropriate to refer the matter to a larger Bench. Hence this reference.

6. We have heard learned counsel for the petitioner, learned counsel for the financial institution and learned Amicus Curiae.

7. It would be appropriate to refer to the background of the legislation in question.

The Act is aimed at speedy recovery of defaulted loans in the light of international experience highlighted by Expert Committee known as Andhyarujina Committee and Narasimham Committee, constituted by the Central Government for examining banking sector reforms. The said Committees suggested new law empowering financial institutions to take possession of the securities and sell the same without intervention of the Court. Earlier, for speedy disposal of claims of the bank for recovery of loans, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT) was enacted with a view to set up specialized Tribunals, excluding the jurisdiction of civil Courts.

8. Section 13 of the Act confers power for enforcement of Security Interest of Secured Creditor. Relevant part of the said provision is as follows:

13. Enforcement of security interest -- (1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or Tribunal, by such creditor in accordance with the provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under Sub-section (4).

9. In Subash Chandra Panda, the question for consideration was as follows:

8. Now the question is whether by virtue of the notification dated 10.11.2003 issued by the Central Government notifying it to be a financial institution, it can initiate such proceeding under Section 13 of the Securitization Act in respect of those two loan agreements of 2001 and 2002.

10. Dealing with the question, the Bench observed as follows:

10. From a perusal of those provisions, it appears that in order to invoke them, the opposite party must show that, 'security interest' has been created in favour of any 'secured creditor'. If it is so created it can be enforced without the intervention of the Court or Tribunal, by such creditor in accordance with the provisions of the said Act. In the said Act the expressions 'secured creditor' and 'security interest' have been defined. "Secured creditor" has been defined in Section 2(zd) which definition is as follows:

(zd) 'secured creditor' means any bank or financial institution or any consortium or group of banks or financial institutions and includes-

(i) debenture trustee appointed by any bank or financial institution; or

(ii) securitization company or reconstruction company, whether acting as such or managing a trust set up by such securitization company or reconstruction company for the securitization or reconstruction, as the case may be; or

(iii) any other trustee holding securities on behalf of a bank or financial institution,

in whose favour security interest is created for due repayment by any borrower of financial assistance.

"Security Interest" has been defined in Section 2(zf) which reads as follows:

(zf) 'security interest' means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31.

If we deal with those two definitions, it would be clear that 'secured creditor' means a bank or financial institution or group of banks or financial institutions and 'security interest' has been defined to mean right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge hypothecation etc.

11. Therefore, unless on the date the impugned agreement was entered into, between the petitioner and the opposite party No. 6 and 7, the opposite party No. 6 has become a secured creditors within the meaning of Section 2(zd) of the said Act, no security interest can be created in its favour. So they cannot invoke the provisions of Section 13 of the said Act.

14. It is clear that prior to the notification dated 10.11.2003, the opposite party No. 6 was not a financial institution within the meaning of Section 2(m)(iv) of the Act. Since it was not a financial institution, it was not a secured creditor and it cannot invoke the provisions of the said Act in respect of a loan transaction of a prior date.

16. Opposite party No. 6 has been declared a financial institution only by the notification and the said notification takes effect from 10.11.2003 prospectively and not from a prior date. Therefore, the fact remains that by the time the alleged agreement was entered into between opposite party No. 6 and petitioner i.e. on 26.5.2001 and 6.5.2002, opposite party No. 6 Maharshi Housing Development Finance Corporation Ltd., was not a financial institution within the meaning of Section 2(m)(iv) of the said Act and not being a financial institution it was not a secured creditor and could not invoke the provisions of Section 13 of the Securitization Act. Nor the petitioner, was a 'borrower' under the definition of Section 2(f) on 26.5.2001 or on 6.5.2002 since a borrower means a person who has been granted financial assistance by a financial institution. Opposite party No. 6 not being a financial institution either on 26.5.2001 or on 6.5.2002 whatever loan it might have granted to the petitioner on that date was not any financial assistance given to the petitioner by a financial institution within the meaning of Section 2(m)(iv).

23. From the discussion which has been made hereinabove, it is clear that on the dates on which the alleged transactions were made between the petitioner and the opposite party No. 6, it was not a financial institution within the meaning of Securitization Act and it could not invoke Section 13. That being the position, the notice which is issued to the petitioner under Section 13(2) of the Securitization Act is without jurisdiction. It is highly doubtful whether any notice under Section 13(4) was given. Even if it is given for the same reason it is wholly without jurisdiction and the proceeding on the basis of which the petitioner has been dispossessed from his residential property is illegal and without any authority of law. Thus, the entire action of opposite party No. 6 is unauthorized, illegal and bad in law.

11. In Unique Engineering Works v. Union of India and others, II (2004) BC 241 (DB), the same issue was dealt with as follows:

26. Thirdly, it was argued that the impugned NPA Act, 2002 cannot apply retrospectively..... There is a difference between retrospectively and retroactivity. In the case of retroactivity the Parliament takes note of the existing conditions and it takes remedial measures to rectify the conditions. In the present case, if one looks at the various provisions of the impugned NPA Act, 2002 it is clear that the impugned NPA Act, 2002 is retroactive in nature. Firstly, the Act is...

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