Itc Limited vs Blue Coast Hotels Ltd. & Ors.

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

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: s. 13(3A) – Whether s.13(3A) is mandatory or directory in nature – There is no doubt that if a reply with reasons is an integral and indispensable part of the statutory scheme, the Courts would not excuse a departure from it – But, on the other hand, if the reply is merely a direction and not of substance to the scheme, the non-compliance may be excused – The language of sub-section (3A) is clearly impulsive – It states that the secured creditor “shall consider such representation or objection and further, if such representation or objection is not acceptable or tenable, he shall communicate the reasons for nonacceptance” thereof – There is no reason to marginalize or dilute the impact of the use of the imperative ‘shall’ by reading it as ‘may’ – The word ‘shall’ invariably raises a presumption that the particular provision is imperative – However, in the instant case, failure to furnish a reply to the representation is not of much significance since the creditor undoubtedly considered the representation and the proposal for repayment made therein and in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail – Therefore, in the fact and circumstances of this case, the debtor is not entitled to the discretionary relief – Interpretation of statutes.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: s. 31(i) – Plea of debtor that portion of land mortgaged by debtor as security interest consisted 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 agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court – The plain intention of the provision is to exempt agricultural land from the provisions of the Act – In other words, the creditor cannot enforce any security interest created in his favour without intervention of the Court or Tribunal, if such security interest is in respect of agricultural land – The exemption thus protects agriculturists from losing their source of livelihood and income i.e. the agricultural land, under the drastic provision of the Act – In the instant case, security interest was created in respect of several parcels of land, which were meant to be a part of single unit i.e. the five star hotel in Goa – Some parcels of land claimed as agricultural land were apparently purchased by the debtor from agriculturists and were entered as agricultural lands in the revenue records – The debtor applied to the revenue authorities for the conversion of these lands to non-agricultural lands which is pending till date due to policy decision – The land in question is not an agricultural land – The High Court mis-directed itself in holding that the land was an agricultural land merely because it stood as such in the revenue entries, even though the application made for such conversation lies pending till date.

Interpretation of statutes: Mandatory provision – A provision which requires reasons to be furnished must be considered as mandatory – Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully.

Constitution of India: Plea that s.31(i) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is beyond the legislative competence of Parliament – Held: The validity of s.31(i) which deals with security interest created over agricultural land is an integral part of the Act and cannot be questioned on the ground of legislative competence.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: s.14 – Whether the creditor could maintain an application of possession under s.14 of the Act; even though it had taken over only symbolic possession before the sale of the property to the auction purchaser – Held: In the instant case, the creditor did not have actual possession of the secured asset but only a constructive or symbolic possession – The transfer of the secured asset by the creditor, therefore, cannot be construed to be a complete transfer as contemplated by s.8 of the Transfer of Property Act – The creditor nevertheless had a right to take actual possession of the secured assets and must, therefore, be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement – Thus, the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act.

Fraud: Auction purchaser, allegation of collusion – Finding by High Court that there was fraud and collusion between the creditor and the auction purchaser based on fact that there was pending dispute between the parties and still he went ahead and made a bid for the property – Held: A risk of this kind taken up by an intending purchaser cannot lead to inference of collusion. Allowing the appeals, the Court

HELD: 1.1 Rule 3A of the Rules requires the authorized officer who is an officer specified by the Board of Directors of the secured creditor to consider the representation and modify the notice of demand if satisfied of the need to do so in that regard. If the authorized officer comes to the conclusion that such representation or objection is not tenable or acceptable, he must communicate the reasons f or non-acceptance of the representation or objection within fifteen days. [Para 21] [533-D]

1.2 There is nothing in the legislative scheme of Section

13 (3A) which requires the Court to consider whether or not, the word ‘shall’ is to be treated as directory in the provision. As the Section stood originally, there was no provision for the above mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the 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 to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor’s representation has not been accepted. Moreover, this provision provides for communication of the reasons for not accepting the representation/objection and the requirement to furnish reasons for the same. A provision which requires reasons to be furnished must be considered as mandatory. Such a provision is an integral part of the duty to act fairly and reasonably and not fancifully. [Paras 29, 30] [537-B-D] Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC

311 : [2004] 3 SCR 982; Transcore v. Union of India (2008) 1 SCC 125 : [2006] 9 Suppl. SCR 785; Keshavlal Khemchand & Sons (P) Ltd. v. Union of India (2015) 4 SCC 770 : [2015] 2 SCR 51; State of U.P. v. Manbodhan Lal Shrivastava [1958] SCR 533; State of U.P. v. Baburam, Upadhya [1961] 2 SCR 679; State of Mysore v. V.K. Kangan (1976) 2 SCC 895 : [1976] 1 SCR 369; Govindlal Chhagan-lal Patel v. Agriculture Produce Market Committee (1976) 1 SCC 369 : [1976] 2 SCR 758; Ganesh Prasad Sah Kesari v. Lakshmi Narayan (1985) 3 SCC 53 : [1985] 3 SCR 825; B.P. Khemka Pvt. Ltd. v. Birendra Kumar Bhowmik (1987) 2 SCC

407 : [1987] 2 SCR 559; Owners and Parties interested in M.V. “Vali Pero” v. Fernandes Lopez (1989) 4 SCC

671 : [1989] 1 Suppl. SCR 187; State of M.P. v. Pradeep Kumar (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 take action against them through assurances and promises. The creditor appeared to have entered into negotiations for the settlement of the dues and even accepted cheques in repayment much after the notice under Section 13(2) and after the debtor’s letter of representation. Many opportunities were granted by the creditor to the debtor to repay the debt which were all met by proposals for extension of time. Eventually, the debtor even executed “A Letter of Undertaking” acknowledging the right of IFCI to sell the assets in the case of default. In these circumstances, the failure to furnish a reply to the representation is not of much significance since the creditor has undoubtedly considered the representation and the proposal for repayment made therein and has in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail. Therefore, in the fact and circumstances of this case, the debtor is not entitled to the discretionary relief under Article 226 of the Constitution 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, AIR 2011 Bom. 42 (DB); Vinay Container Services Pvt. Ltd. v. Axis Bank, 2011 (1) Mh. L.J. 882; Krushna Chandra Sahoo v. Bank of India, AIR 2009 Orissa 35; Tensile Steel Ltd. & Anr. v. Punjab and Sind Bank & Ors., AIR 2007 Guj 126; M/s Jayant Agencies v. Canara Bank & Ors., Jharkhand HC in WP (C) No. 4048 of 2010; M/s Tetulia Coke Plant Pvt. Ltd. v. Bank of India, AIR 2013 Jhar 12; Mrs. Sunanda Kumari v. Standard Chartered Bank, (2007) 135 Comp Cases 604 (Kar); Palash

Mukherjee v. U.O.I, W.P. 9876 (W) of 2014 Calcutta High Court; Jaideep Singh and Ors. v. Union of India and Anr., 2008 2 GLT (91); Malabar Sand and Stones (Pvt.) Ltd. v. Catholic Syrian Bank Ltd. & Ors., AIR 2013 Ker 25 – approved.

1.4 Letter of Undertaking “Without Prejudice”

1.4.1 Much was sought to be made of the words “without prejudice” in the letter containing the undertaking that if the debt was not paid, the creditor could take over the secured assets. The submission on behalf of the debtor that the letter of undertaking was given in the course of negotiations and cannot be held to be an evidence of the acknowledgment of liability of the debtor, apart from being untenable in law, reiterates the attempt to evade liability and must be rejected. Mere introduction of the words “without prejudice” have no significance and the debtor clearly acknowledged the debt even after action was initiated under the Act and even after payment of a 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 not repay the loan. The debtor managed to submit a letter purporting to be a representation, containing a proposal for reschedulement made much earlier to the creditor’s notice and reserved a right to file a reply. Apparently, the debtor induced the creditor to enter into negotiations to ward off the reply and avoid the taking over of possession. The debtor ignored the symbolic possession taken over by the creditor and continued to negotiate and even gave six cheques which were dishonoured. The debtor then gave a final letter of undertaking agreeing that the creditor could take over possession of the assets if the debt was not repaid. All along, the debtor’s response has been that of seeking extension of time to pay, with the usual unfulfilled promise of repayment. There is no reason why the debtor should not be stopped from questioning the taking over of possession, particularly since, neither the debt nor the liability is in dispute. The debt has not been repaid in fact, and the objection raised is merely on the ground that the taking of assets is illegal because the creditor failed to reply to the representation. [Para 36] [541-C-E]

2. Inclusion of Agricultural Land as Security Interest in the Notice of Recovery

2.1 Plea of debtor was that the inclusion of agricultural land as security interest could not have been validly included in the notice for recovery of the secured loan in view of Section 31 (i) of the Act. The purpose of enacting Section 31(i) and the meaning of the term “agricultural land” assume significance. This provision, like many others is intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court. The plain intention of the provision is to exempt agricultural land from the provisions of the Act. It is also intended to deter the creation of security interest over agricultural land as defined in Section 2 (zf). Thus, security interest cannot be created in respect of property specified in Section 31. In the present case, security interest was created in respect of several parcels of land, which were meant to be a part of single unit i.e. the five star hotel in Goa. Some parcels of land now claimed as agricultural land were apparently purchased by the debtor from agriculturists and are entered as agricultural lands in the revenue records. The debtor applied to the revenue authorities for the conversion of these lands to non-agricultural lands which is pending till date due to policy 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 located admeasures 182225 sq. mtrs. of these, 2335 sq. mtrs. are used for growing vegetables, fruits, shrubs and trees for captive consumption of the hotel. There is no substantial evidence about the growing of vegetables but what seems to be on the land are some trees bearing curry leaves and coconut. This amounts to about 12.8% of the total area. As per the Corporate Loan Agreement the mortgage is intended to cover the entire property of the Goa Hotel. Prima facie, apart from the fact that the parties themselves understood that the lands in question are not agricultural, having regard to the use to which they are put and the purpose of such use, they are indeed not agricultural. The High Court mis-directed itself in holding that the land was an agricultural land merely because it stood as such in the revenue entries, even though the application made for such conversation lies pending till date. [Paras 40, 41, 44] [543-D-F; 546-B] Union of India and Another v. Delhi High Court Bar Association and Ors. (2002) 4 SCC 275 : [2002] 2 SCR 450; State Bank of India v. Santosh Gupta and Ors. AIR 2017 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. Officerin-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 the property on 20.06.2013. Thereupon, it transferred the property to the sole bidder ITC and issued a sale certificate for Rs. 515,44,01,000/- on 25.02.2015. On the same day, i.e., 25.02.2015, the creditor applied for taking physical possession of the secured assets under Section 14 of the Act. According to the debtor, since Section 14 provides that an application for taking possession may be made by a secured creditor, and the creditor having ceased to be a secured creditor after the confirmation of sale in favour of the auction purchaser, was not entitled to maintain the application. Consequently, therefore, the order of the District Magistrate directing delivery of possession is a void order. This submission found favour with the High Court that held that the creditor having transferred the secured assets to the auction purchaser ceased to be a secured creditor and could not apply for possession. The High Court held that the Act does not contemplate taking over of symbolic possession and therefore the creditor could not have transferred the secured assets to the auction purchaser. In any case, since ITC Ltd. was the purchaser of such property, it could only take recourse to the ordinary law for recovering physical possession. [Paras 45, 46] [546-C-F]

3.2 There is nothing in the provision of the Act that renders taking over of symbolic possession illegal. The question, however, whether the creditor could maintain an application of possession under Section 14 of the Act; even though it had taken over only symbolic possession before the sale of the property to the auction purchaser, depends on whether it remained a secured creditor after having done so. In this case, the creditor did not have actual possession of the secured asset but only a constructive or symbolic possession. The transfer of the secured asset by the creditor therefore cannot be construed to be a complete transfer as contemplated by Section 8 of the Transfer of Property Act. The creditor nevertheless had a right to take actual possession of the secured assets and must therefore be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement. Thus, the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act. [Paras 47, 48, 50] [546-G; 547-A-B; 548-B-F]

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

4.1 The finding is based on the fact that the sale is a collusion because the auction purchaser was aware that a dispute between the parties was pending and still went ahead and made a bid for the property. It is not unusual in the sale of immovable properties to come across difficulties in finding suitable buyers for the property. 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 a loan was taken by the debtor which was not paid, the debtor did not respond to a notice of demand and made a representation which was not replied to in writing by the creditor. The creditor, however, considered the proposals for repayment of the loan as contained in the representation in the course of negotiations which continued for a considerable amount of time. The debtor failed to discharge its liabilities and eventually undertook that if the debtor fails to discharge the debt, the creditor would be entitled to take realize the secured assets. As held, non-compliance of subsection (3A) of Section 13 cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions. Therefore, the debtor is not entitled for the discretionary equitable relief under Articles

226 and 136 of the Constitution of India in the present case. [Paras 54, 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 the Transfer of Property Act Page 104, 105 – referred to.