SARFAESI Proceedings Not Invalidated On Mere Failure Of Bank In Giving Reply To Objections If Borrower's Proposals Were Otherwise Considered : Supreme Court

A Bench comprising Justices L. Nageshwara Rao, Sanjiv Khanna and B.R. Gavai allowed a Special Leave Petition, assailing the order of Telangana High Court, setting aside and quashing the proceedings initiated by Andhra Bank for sale of concerned mortgaged asset, holding it to be in derogation of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Security Interest (Enforcement) Rules, 2002 (Rules).

Factual Background

Alphine Pharmaceuticals Private Limited and Bejjenki Bhaskara Chary (Borrower) was sanctioned working capital limit and granted term loan by Andhra Bank in March 2015 with moratorium period of six months to purchase Alphine Pharmaceuticals Pvt. Ltd. from its erstwhile promoters. As per the loan terms, the Borrower mortgaged the concerned property with Andhra Bank. On failure of repayment as per schedule, the loans were declared as Non-Performing Assets. Consequently the Bank issued notice under Section 13(2) of SARFAESI Act urging the Borrower to repay within sixty days beyond which the Bank would be entitled to invoke Section 13(4) of the SARFAESI Act, which lays down the measures that the bank could avail on non-repayment by the borrower.

The Borrower did not repay or reply to the said notice within the stipulated sixty days. Thereafter, on two occasions the Borrower wrote letters admitting defaults. Putting forth reasons for not abiding by the payment schedule, it sought a further moratorium of twelve months. The Bank informed the concerned authority to restructure the loan extending the moratorium and the action under SARFAESI was deferred. Subsequently, as the Borrower failed to meet its promise, the Bank issued notice under Section 13(4) of the Act and the underlying Rules to take symbolic possession of the concerned property. The Bank under Section 14 of the SARFAESI Act took physical possession of the concerned property. Eventually, the Bank issued notice to the borrower about the auction of the concerned property and gave an option of halting the auction on repayment by the Borrower. No response was received and the Bank went ahead with the auction, but received no bids. Again, the Borrowers wrote 3 letters asking for regularising the account. The Bank informed the Borrower the relevant document along with the restructuring proposal was not received for consideration. The Bank had clarified that on further delay, it would proceed under the SARFAESI Act.

The Borrower again wrote to the Bank, inter alia, with the restructuring proposal, but the Bank alleged non-compliance. In this backdrop the Bank made second and third attempts to sell the concerned property in auction, but received no bids. On the fourth attempt the Bank had reduced the reserve price and sold off the land to Basa Chandramouli and subsequently issued a sale certificate in this regard. The attempts to sell the property were never challenged by the Borrower.

The Borrower approached the Debts Recovery Tribunal challenging the enforcement proceedings pertaining to the concerned property and the steps taken by the Bank therein. The application was dismissed and the Borrower filed a Writ Petition before the High Court. By this time Basa Chandramouli had sold off the property to the Second buyer who, unaware of the Writ Petition, had demolished the old structure in the concerned property and made a new one.

Findings of the High Court

Placing reliance on ITC Limited v. Blue Coast Hotels Limited and Others (2018) 15 SCC 99, the High Court held that compliance with Section13(3A) was mandatory and failure on the part of the Bank to respond to the representation of the borrower would vitiate the recovery proceedings. The High Court further observed that the stipulation of sixty days within which the response was demanded by the Bank was not prescribed in the provision.

Relying on the decision of the Authorised Officer, Indian Overseas Bank and Another v. Ashok Saw Mill (2009) 8 SCC 366, it was held that when the Borrower challenges the measure in Section 13(4), it is open for them to also challenge the steps taken by the Bank under Section 13(2) of the Act from the date of action till the sale confirmation under Section 17 as a part of the same cause of action. Therefore, the Court held that the challenge was not barred by limitation.

The High Court also noted that the machinery and the building should have been auctioned separately by the Bank.

Findings of the Supreme Court

With respect to the challenge under Section 13(3A), resorting to the principles of waiver the Supreme Court held that Borrower did not question or object to the action of the Bank, and by express conduct it had asked the Bank to compromise its position and alter the contractual terms. On several occasions letters for restructuring of loan were sent to the Bank and accordingly ample time and opportunity was provided to the Borrowers for repayment. Therefore, applying the principle of equitable estoppel, the Court barred the Borrower from complaining of violation. The Court held:

"The Borrower, aware and conscious of its rights, chose to abandon the statutory claim and took its chance and even procured favourable decisions. Even if we are to assume that the Borrower did not waive the remedy, its conduct had put the Bank in a position where they have lost time, and suffered on account of delay and laches, which aspects are material. Action on the Subject Property was delayed by more than a year as at the behest of the Borrower, the Bank gave them a long rope to regularise the account. To ignore the conduct of the Borrower would not be reasonable to the Bank once third party rights have been created. In this background, the principle of equitable estoppel as a rule of evidence bars the Borrower from complaining of violation."

The Supreme Court took note of the fact that the ITC Ltd. judgment referred to by High Court to establish violation of Section 13(3A) of the SARFAESI Act had on the facts of the case distinguished the principle to state that the creditor having given sufficient opportunity to the debtor to pay, the debtor is not entitled to the discretionary relief under Article 226 of the Constitution, which is an equitable relief.

Citing ratio on the issue of waiver of mandatory requirement of a statute in Commissioner of Customs, Mumbai v. Virgo Steels, Bombay and Another (2002) 4 SCC 316, AL.AR. Vellayan Chettiar (Decd.) and Others v. Government of the Provide of Madras, Through the Collector of Ramnad at Madura and Another AIR 1947 PC 197, S. Raghbir Singh Gill v. S. Gurcharan Singh Tohra and Others (1980) Supp SC 53, Krishna Lal v. State of J&K (1994) 4 SCC 422, Martin & Harris Ltd. v. VIth Additional Distt. Judge and Others (1998) 1 SCC 732 , Bank of India and Others v. O.P. Swarnakar and Others (2003) 2 SCC 721, Shri Lachoo Mal v. Shri Radhey Shyam (1971) 1 SCC 619 and Pravesh Kumar Sachdeva v. State of Uttar Pradesh and Others (2018) 10 SCC 628, the Court held:

"If a party gives up the advantage that could be taken of a particular position in law, it cannot later be permitted to change and turn around so as to avail of that advantage. However, this rule will not apply when there is a prohibition against contracting out of the statute, which prohibition would have its consequences or in case the waiver would be contrary to public policy. Further, a person cannot waive a right of a third person."

Delving into the aspect of power of courts to mould relief by assessing "what is fair and just to do in a particular case", and referring to the ratio in Beg Raj Singh v. State of U.P. and Others (2003) 1 SCC 726 and Rameshwar and Others v. Jot Ram and Another (1976) 1 SCC 194, the Court further observed that the Bank had provided opportunities at all stages to the Borrower, whose conduct reflects disingenuity and unwillingness to pay. It held:

"...we are of the view that the Borrower has waived and is estopped from challenging violation of Section 13(3A) of the SARFAESI Act and hence, the first issue is decided in favour of the Bank."

On the issue of selling the building along with the machinery, the Court noted that the same was ultimately sold at a higher price than the reserved price or the fair market value. It held:

"...the law recognises that the lender knows its interests and how to secure best value of the property given the fact that the mortgaged property had to be sold for recovery of the debts due and payable to the Bank."

[Case Title: Arce Polymers Private Limited v. M/s. Alpine Pharmaceuticals Private Limited and Others Civil Appeal No. 7372 of 2021]