Bajarang Shyamsunder Agarwal vs Central Bank of India & Anr.

HELD : 1.1 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted in response to a scenario where slow–paced recovery and staggering amounts of non–performing assets were looming over the banks. The SARFAESI Act is intended to enable the bank to resolve the issue of liquidity and aim for the reduction in the number of non–performing assets. The Preamble to the Act emphasises upon the efficient and expeditious recovery of bad debts. This is also evident from the scheme of the Act. [Para 12] [361-G-H; 362-A-B]

1.2 Section 13 of the SARFAESI Act provides for the enforcement of security interest. This is a self–executory mechanism for the banks. Once the process of realizing the secured interest takes place, the secured creditor acts as trustee having de–jure/symbolic possession of the property and is required by law to realize it strictly in accordance with the provisions of Section 13, 14 and 15 of the SARFAESI Act. Crucially, sub–Section (2) of Section 13 of the SARFAESI Act envisages a notice, which acts as the trigger point for initiation of the recovery process under the SARFAESI Act. In the said notice, the secured creditor is required to disclose information on the amount payable by the borrower and the secured interest intended to be enforced by the secured creditor in the event of non– payment of the secured debt. If the borrower fails to discharge the liability, the secured creditor has four options including taking possession of the secured assets of the borrower (Section 13(4) of the SARFAESI Act). Critically for this case, once a notice is served on the borrower, he cannot further enter into any contract to create any encumbrance on the property (Section 13(13) of the SARFAESI Act). This extinguishes the right of the mortgagor to lease the property under Section 65–A of the Transfer of Property Act. Section 14 of the SARFAESI Act provides for the procedural mechanism for taking possession of property and documents with respect to the secured assets, from the borrower. [Para 13, 14] [362-B-F]

1.3 The objective of SARFAESI Act, coupled with the Transfer of Property Act and the Rent Act are required to be reconciled in the following manner:

(a) If a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. The lease has to be determined in accordance with Section 111 of the TP Act for determination of leases. As the existence of a prior existing lease inevitably affects the risk undertaken by the bank while providing the loan, it is expected of Banks/Creditors to have conducted a standard due diligence in this regard. Where the bank has proceeded to accept such a property as mortgage, it will be presumed that it has consented to the risk that comes as a consequence of the existing tenancy. In such a situation, the rights of a rightful tenant cannot be compromised under the SARFAESI Act proceedings.

(b) If a tenancy under law comes into existence after the creation of a mortgage, but prior to the issuance of notice under Section 13(2) of the SARFAESI Act, it has to satisfy the conditions of Section 65–A of the T.P. Act.

(c) In any case, if any of the tenants claim that he is entitled to possession of a secured asset for a term of more than a year, it has to be supported by the execution of a registered instrument. In the absence of a registered instrument, if the tenant relies on an unregistered instrument or an oral agreement accompanied by delivery of possession, the tenant is not entitled to possession of the secured asset for more than the period prescribed under Section 107 T.P. Act. [Para 25] [367-H; 368-A-E]

1.4 In the instant case, the bona fides of the tenant is highly doubtful, as there is no good or sufficient evidence to establish the tenancy in the first place. The case involves a tenant who allegedly entered into an oral agreement of tenancy before the mortgage deed was entered into between the borrower and Bank/Creditor. Additionally, it must be noted that tenancy created under such an oral agreement, results in a fresh tenancy after the expiry of statutory period fixed under the T.P Act. [Para 26] [368-F-G]

1.5 The records also do not demonstrate that the appellant– tenant has been able to prove his status as a valid leaseholder to merit the protection sought for. Admittedly, an equitable mortgage on the secured asset was created by the respondent no. 2–borrower/landlord by depositing title deeds with respondent no. 1–bank on 20.05.2000. However, the date of creation of the tenancy is not established in the instant case. The appellant– tenant, while seeking protection before the Small Causes Court, stated that the premises were let out to him in January, 2000, but the Court noted that the appellant–tenant produced photocopies of rent receipts for the period of 2001 to 2011. Contrarily, the tenant, has stated that he entered into the tenancy in October, 2005. [Para 27] [368-G-H; 369-A-B]

1.6 The claim of tenancy made by the appellant–tenant is not supported by a registered instrument. In the absence of a written lease deed the tenant may prove his existing rights by producing other relevant evidence before the Magistrate. The appellant–tenant has to produce evidence of payment of rent, property taxes, etc. Furthermore, if the rent and permitted increases were payable, then the quantum ought to have been mentioned. In addition to the above, the claim of tenancy could have been substantiated by relying upon other tax receipts such as BMC tax, water tax, electricity charges consumed by the tenant, etc. However, the appellant–tenant has only submitted xerox copies of rent receipts. Although the Small Causes Court held that the appellant–tenant seems to have, prima facie, a right over the secured asset, the order was passed ex parte, against the respondent no. 2–borrower/landlord, who did not oppose the application. The prima facie case was decided in favour of the appellant–tenant solely on the basis of the xerox copies of rent receipts produced by him. [Para 28–29] [369-C-E]

1.7 When the SARFAESI Act proceedings were pending, the factum of tenancy was never revealed by the parties. The earlier order dated 09.03.2012, passed by the CMM directing the Assistant Registrar to take over the possession of the secured asset, is silent about any existing encumbrance over the secured asset. It was only after passing of the said order of the Chief Metropolitan Magistrate, that the appellant–tenant started agitating his rights before the Small Causes Court based on a completely different fact scenario, without a whisper of the alleged tenancy under the concluded Section 14, SARFAESI Act proceedings. The respondent no.2–borrower/landlord did not even respond to the claims of the appellant–tenant. The respondent no.1–bank has produced multiple records to substantiate their claim that the tenant was nowhere to be seen earlier and that this tenancy was created just to defeat the proceedings initiated under the SARFAESI Act. On the contrary, the appellant–tenant has failed to produce any evidence to substantiate his claim over the secured asset. In such a situation, the appellant–tenant cannot claim protection under the garb of the interim protection granted to him, ex parte, by solely relying upon the xerox of the rent receipts. [Para 31] [370-B-E]

1.8 In such an event, wherein the claim of the appellant– tenant is not supported by any conclusive evidence, the rejection of the stay application by the Chief Metropolitan Magistrate cannot be held to be erroneous. In the instant case, the stay application of the appellant–tenant seems to be an afterthought. It is clear that the respondent no. 2–borrower/landlord never intimated the respondent no. 1–bank about the alleged tenancy. The claim of bona fide tenancy of the appellant–tenant cannot be accepted. [Para 32] [370-E-G]

1.9 In any case, considering the counterfactual pleaded by the appellant–tenant himself, that he was a tenant who had entered into an oral agreement, such tenancy impliedly does not carry any covenant for renewal, as provided under Section 65–A of T.P. Act. Therefore, in any case, Section 13 (13) SARFAESI Act bars entering into such tenancy beyond January, 2012. As the notice under Section 13 (2) was issued on 30.04.2011, subsequent reckoning of the tenancy is barred. Such person occupying the premises, when the tenancy has been determined, can only be treated as a ‘tenant in sufferance’. Such tenants do not have any legal rights and are akin to trespassers. Thus, the operation of the Rent Act cannot be extended to a ‘tenant–in–sufferance’ vis– a–vis the SARFAESI Act, due to the operation of Section 13(2) read with Section 13(13) of the SARFAESI Act. A contrary interpretation would violate the intention of the legislature to provide for Section 13(13), which has a valuable role in making the SARFAESI Act a self–executory instrument for debt recovery. Moreover, such an interpretation would also violate the mandate of Section 35, SARFAESI Act which is couched in broad terms. [Para 33, 36] [370-H; 371-A-B, F]

1.10 The instant case, does not mandate the additional protection to be provided under the Rent Act, to the appellant– tenant. The lower courts were correct in ordering delivery of possession to the respondent no. 1–bank as the tenancy stands determined. [Para 37] [371-G]

1.11 Since 7 years have lapsed from the deadline date, the appellant–tenant is directed to hand over the possession of the secured asset within the stipulated time to the Assistant Registrar, Mumbai Courts, who in turn would deliver the same to the respondent no.1–bank. Such devious practices by the borrower to obstruct the rights of the bank to legitimately realize its dues cannot be appreciated by this Court. [Para 38] [372-A-B]

Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. and Ors. (2014) 6 SCC 1 : [2014] 11 SCR 605 ; Kanaiyalal Lalchand Sachdev and Ors. v. State of Maharashtra and Ors. (2011) 2 SCC

782 : [2011] 2 SCR 602 ; R.V. Bhupal Prasad v. State of A.P. and Ors. AIR 1996 SC 140 : [1995] 2 Suppl. SCR 658 ; Smt. Shanti Devi v. Amal Kumar Banerjee, AIR 1981 SC 1550 : [1981] 2 SCC 199 ; Vishal N. Kalsaria v. Bank of India and Ors. (2016) 3 SCC

762 : [2016] 1 SCR 419 ; Murlidhar Jalan (since deceased) through his Lrs. v. State of Meghalaya and Ors. AIR 1997 SC 2690 : [1997] 1 Suppl. SCR 255 ; D.H. Maniar and Ors. v. Waman Laxman Kudav, [1977]

1 SCR 403 – referred to.