Debt assigned by NBFC can't be enforced by assignee-bank under SARFAESI Act

1.By this Petition which is filed under Article 226 of the Constitution of India, Petitioner is seeking the following substantive reliefs:

"a. to hold and declare that regardless of the status of the assignor, if the assignee of a debt along with its underlying security is a bank or Financial Institution it is open to such bank of Financial Institution to adopt steps under the RDDB Act/or SARFAESI Act and/or Civil Law."

"b. to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction calling for the records of the case in Appeal No.235 of 2014 and in Securitization Application No. 39 of 2014, from the Debts Recovery Appellate Tribunal, Mumbai and after considering the legality veracity and correctness of the impugned order dated 20th January, 2015 read with the Trial Courts order dated 28th November, 2014, this Hon'ble Court be pleased to quash and set aside the same or such part thereof as this Hon'ble Court deems fit and proper."

2. Petitioner No.1 is a Banking Company incorporated and registered under the Companies Act. Respondent No.1 and 2 claim to be the owners of Flat No.55, 5th Floor, "B" Wing, Gita Smruti Premises CHS Ltd., Pandita Ramabai Road, Gamdevi, Mumbai - 400 007. This Flat was given and accepted as security by Respondent No.4 with Respondent No.3 for advances made to Respondent No.4. It is an admitted position that Respondent No.3 is a Non-Banking Financial Institution, which was pleased to assign this debt to the Petitioner by virtue of a Deed of Assignment dated 18/07/2012 alongwith underlying security.

3.  Since Respondent No.4 had committed defaults in repayment of his debts, Respondent No.3 invoked the Arbitration Clause in the agreement and finally an award was passed in favour of Respondent No.3 on 31/07/2010, directing Respondent No.4 to pay sum of Rs 75,30,872/- with interest @ 13.24 % per annum with effect from 25/02/2010 to 31/07/2010 and thereafter @ 14% per annum till the actual payment and/or realization. Thereafter, Respondent No.3, by a Deed of Assignment dated 18/07/2012, transferred, assigned and released in favour of the Petitioner - Kotak Mahindra Bank Ltd. the entire amount payable by Respondent No.4 to Respondent No.3.

4. In view of Deed of Assignment, Petitioner started taking steps for realization of the outstanding amount and invoked the provisions of SARFAESI Act. Initially, notice dated 03/07/2013 under section 13(2) of the SARFAESI Act was issued to Respondent No.4, calling upon him to pay an amount of Rs 1,10,39,111/- due and payable as on 02/07/2013 with interest @ 14% per annum. No reply was given to the said notice by Respondent No.4. Petitioner, thereafter, filed an application under section 14 of the SARFAESI Act in the Court of Chief Metropolitan Magistrate, Esplanade, Mumbai. At the time of taking possession, Respondent No.1 was found in the premises, though Respondent No.4 had mortgaged the premises to Respondent No.3, which mortgage was assigned to the Petitioner.

5. Respondent Nos. 1 and 2 thereafter claiming to be the owners of the said Flat, challenged the action of the Petitioner by filing Securitization Application being Securitization Application No.39 of 2014 before the DRT, Mumbai on various grounds and more particularly on the ground that they have been dispossessed by the Petitioner without following due process of law. The principal contention, inter alia, which was raised by Respondent Nos. 1 and 2 was that Respondent No.3 - Citi Financial Consumer Finance Ltd., being a Non-Banking Financial Corporation, was not entitled to invoke the provisions of SARFAESI Act and, secondly, its Assignee i.e. the Petitioner was also not entitled to invoke the provisions of the SARFAESI Act.

6. The Presiding Officer of Debt Recovery Tribunal-II, by his judgment and order dated 28/11/2014, held that since Respondent No.3 - Citi Financial Consumer Finance Ltd. was not a Financial Institution within the definition of "financial institution" under the SARFAESI Act, Petitioner, despite being a Bank, was not entitled to exercise any powers or authority as a Bank under the provisions of the said Act against Respondent No.4. The Securitization Application filed by Respondent Nos. 1 and 2 was allowed and the Petitioner was directed to handover possession of the secured assets to Respondent Nos. 1 and 2. The operation of the order was, however, stayed for a period of one month.

7. Petitioner, being aggrieved by the judgment and order passed by the Presiding Officer, DRT-II, filed an appeal being Appeal No.235 of 2014 on various grounds. It was inter alia contended that even though the Petitioner - Bank was an Assignee of the debt from NBFC, it was entitled to take action under the provisions of the SARFAESI Act. It was contended that the "debt" as defined under section 2(g) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 ("RDDBFI Act") and 2(ha) of SARFAESI Act, included assignment regardless of the fact as to who the primary holder is. The DRAT by its judgment and order dated 20/01/2015 dismissed the appeal filed by the Petitioner and directed the Petitioner to restore the possession of Respondent Nos. 1 and 2.

8. Being aggrieved by both these orders, Petitioner has filed this Petition under Article 226 of the Constitution of India. 

HC held as under: 

9. Upon a conjoint reading of the definitions reproduced hereinabove alongwith Section 13 of the said Act read with Sections 17 and 18, it can be seen that though the word "debt" under section 2(ha) of the SARFAESI Act and section 2(g) of the RDDBFI Act is identical bringing within its fold any debt whether secured or unsecured or assigned, by virtue of the definitions quoted hereinabove under the SARFAESI Act and Sections 13, 17, 18 and 31 only the Bank who has assigned the debt to a Financial Institution and vice versa can take recourse to Section 13 sub-clause (2) and (4) of the said Act for the following reasons.

10. Definition of "borrower" is defined under section 2(f) to mean a person who fulfills two criteria viz (1) who has been granted financial assistance by any Bank or Financial Institution, (2) who has given any guarantee or created any mortgage or pledge as a security for financial assistance granted by any Bank or Financial Institution and (3) it includes a person who becomes a borrower of Securitisation Company or Reconstruction Company upon acquisition by it of any rights or interest of any Bank or Financial Institution in relation to such assistance. The third part, therefore, clearly restricts definition of the term "borrower" of a Bank or Financial Institution who acquires any right or interest and specifically excludes any other type of Institution such as Non-banking Financial Institution or a private person. 

11. As a corollary therefore it is clear that by virtue of the restrictive definition, only debts which are assigned to a Bank from another Financial Institution or to the Financial Institution from a Bank, such debts alone are covered under the term "borrower". If the legislature intended to expand the scope of "borrower" to mean any debt assigned to a Bank or Financial Institution by a Non-Banking Financial Institution or any other private person, it would not have excluded a Non-Banking Financial Institution or any other person in the last part of the definition. The term "borrower" is one of the crucial terms which is to be considered because security interest of borrower within the definition of section 2(f) alone can be enforced under Chapter-III, Section 13 sub-clause (2) and (4) of the said Act.

12. In our view, therefore, though the term "debt" as defined under the RDDBFI Act and SARFAESI Act includes the words "or assigned" such assignment therefore in view of the definition of the term "borrower" in section 2(f) would have to be restricted to a debt of borrower which is assigned to a Bank by a Financial Institution or vice versa.

13. The Objects and Reasons of the SARFAESI Act and various provisions of the said Act as well as the mechanism which has been provided under the said Act clearly disclose that this mechanism which is non-adjudicatory in nature has been designed only for the benefit of Banks and Financial Institutions and not for other categories such as Non-banking Financial Institutions etc. This is fortified from the other terms which are defined under the SARFAESI Act. The term "financial assistance" which is defined in section 2(k), again, is restricted to any Bank or Financial Institution.

14.  At the same time, definition of "financial institution" under section 2(m) reveals that it does not include a Non-banking Financial Institution nor the term "bank" defined in section 2(c) includes such NBFC. The term "secured creditor" under section 2(zd) is restricted to any Bank or Financial Institution or any consortium or group of Banks or Financial Institutions but does not include a Non-banking Financial Institution. The word "secured creditor", again, is used in the definition of the word "security interest" under section 2(zf) which restricts the meaning of "security interest" which is created in favour of any secured creditor which again means a Bank or a Financial Institution. The word appearing in section 2(zf) viz "assignment" other than those words specifically mentioned in Section 31 therefore will have to be given a restrictive meaning as an assignment by a Bank or Financial Institution and not the assignment made by NBFC.

15. Lastly, Section 5 of the said Act deals with acquisition of rights and interest in financial assets. Sub-clause (5) of Section 5 was inserted by Amendment Act No.1 of 2013 with effect from 15/01/2013 and it permits the Securitisation Company or Reconstruction Company an acquisition of financial assets under sub-section (1) which deals with acquisition of financial assets and any Bank or Financial Institution can substitute its name in any pending suit, appeal or other proceedings before the DRT or Appellate Tribunal etc. Chapter-III deals with enforcement of security interest and section 13(2) and (4) makes it clear that a borrower who fails to discharge his liability in full within a period prescribed in sub-section (2), again, against such a borrower, a secured creditor can take recourse to recover his secured debt. Consequently, therefore, only against such a borrower the debt which is defined under section 2(f) can be enforced under Section 13.

16. Taking into consideration the scheme of the Act, Objects and Reasons and various provisions of the SARFAESI Act, we have no hesitation in holding that the debt which is assigned to a Bank or Financial Institution by Non-banking Financial Institution is not covered within the definition of the term "borrower" and therefore cannot be enforced under Section 13 of the said Act. The submission made by Ms. Rajani Iyer, the learned Senior Counsel appearing on behalf of the Petitioner, therefore, cannot be accepted and we concur with the view taken by the DRT and DRAT.

17.  Ms Rajani Iyer, the learned Senior Counsel appearing on behalf of the Petitioner has relied on the judgment of the Apex Court in ICICI Bank v. APS Star Industries Ltd. (2010) 10 SCC 1 Relying on the said judgment, she submitted that the Apex Court has considered, whether assignments were permissible banking activity and whether assignments from a Bank, Financial Institution or NBFC to a Bank, Financial Institution and NBFC is legal and valid. She submitted that the Apex Court, while relying on the guidelines issued by the Reserve Bank of India, upheld the guidelines and further held that assignment from/to NBFC and Financial Institution was valid and legal. She further submitted that City Financial Consumer Finance Ltd. is NBFC and the assignment from NBFC to present Petitioner is permitted under the RBI guidelines. She further submitted that the debt therefore in the hands of the Bank is a "secured debt" within the meaning of section 2(ze) and 2(zf) of the SARFAESI Act and the Petitioner was entitled to enforce the secured asset under the provisions of the SARFAESI Act.

18.In our view, the said submission is without any substance. Perusal of the said judgment and order in ICICI Bank v.APS Star Industries Ltd. (2010) 10 SCC 1 reveals that the Apex Court was called upon to consider a question as to whether assignment of debts between Non-banking Financial Institutions and Banks was a permissible banking business. While deciding the said issue, the Apex Court, relying on RBI policy, held that it was a permissible banking business. In the said case, the question which fell for consideration and which had been reproduced in para 2 of the said judgment was as under:—

"Whether inter se transfer of non-performing assets ("NPA", for short) by the banks is illegal under the Banking Regulation Act, 1949 ("the BR Act, 1949", for short) as held by the Gujarat High Court in the impugned judgment?"

Answering the said question, after relying on RBI directives, the Apex Court held that guidelines issued by RBI dated 13/07/2005 have statutory force and are not ultra vires the BR Act, 1949 and it therefore held that assignment of debts of NBFC by one Bank to another Bank is permissible under 1949 Act and not violative of section 130 of the Transfer of Property Act, 1882. In our view, taking into consideration the facts of the said case, the issue which fell for consideration before the Apex Court therefore was entirely different. The issue which falls for consideration before this Court in this case is : whether the Bank to whom a debt has been assigned by the Non-Banking Financial Corporation ("NBFC") is entitled to adopt proceedings under the the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act, 2002? This issue being completely distinct and different from the issue decided by the Apex Court in ICICI Bank v. APS Star Industries Ltd., (2010) 10 SCC 1 in our view, ratio of the said judgment will certainly not apply to the facts of the present case. For the same reasons, guidelines issued by RBI dated 13/07/2005 also cannot be relied upon for answering the question raised in this Petition.

19. Reliance was also placed by the learned Senior Counsel appearing on behalf of the Petitioner on the judgment of the Delhi High Court in Kotak Mahindra Bank Ltd. v. Stiefel Und Schuh India Ltd. & Ors. ILR (2009) V Delhi 12 In the said case, original lender was NBFC viz. SBI Home Finance which filed proceedings in the Civil Court for recovery of a mortgaged debt. However, during the pendency of the suit, the debt was assigned to a Bank viz. the State Bank of India, which, in turn, assigned it to Kotak Mahindra Bank Ltd. After assignment, Kotak Mahindra Bank Ltd. applied for transfer of proceedings from Civil Court to DRT on the ground that subsequent assignee - Kotak Mahindra Bank Ltd. was a Bank under RDDB & FI Act, 1993. The learned Single Judge dismissed the application for transferring it to DRT. Appeal Court, however, reversed the decision and held that remedies available in the DRT were permitted to Kotak Mahindra Bank and therefore proceedings in the Civil Court were expressly barred.

20. In our view, it is not possible to accept the view taken by the Delhi High Court. Secondly, Delhi High Court was not required to consider the issue as to whether a debt which is assigned by a Non-banking Financial Institution to a Bank or Reconstruction Company could be enforced under the SARFAESI Act and, therefore, ratio of the said judgment, in any case, will not apply to the facts of the present case.

CONCLUSION:

21. For the aforesaid reasons the question framed in para 3 of this judgment is answered in the negative. We therefore decline to interfere with the order passed by DRT and confirmed by DRAT. Writ Petition is dismissed.

22. At this stage the learned Counsel for the Petitioner seeks extension of stay for a period of eight weeks in view of the statement made by the Counsel for the Respondents. The request is declined since no stay was granted by DRT, DRAT or by this Court.