Mortgagor consent required for selling mortgaged property in case of agreement.

1.  The respondent-bank had extended loan facility in the nature of cash credit to the extent of Rs.25 lakhs in favour of the first petitioner.

2.  The subject property was offered by its owner (the third petitioner), and accepted by the bank as a security and, thus, stood mortgaged upon deposit of the original title deeds with the bank.

3.  The borrower made a default in payment of the liability under the cash credit facility. The bank treated the account of the borrower as non-performing asset (NPA). It issued the demand notice on 21-1-2003 in terms of section 13(2) calling upon the borrower to pay its dues within the statutory period.

4.  The bank moved DRT under the Recovery of Debts due to the Banks and Financial Institutions Act, 1993 (RDDBFI Act) by instituting OA against the petitioner claiming a sum with interest.

5.  No payment was made even in terms of the compromise entered before the DRT. As a consequence, the recovery certificate in favour of the bank in terms of the claim in the OA became enforceable. For reasons that have not been explained, the bank did not approach the recovery officer under RDDBFI Act to execute the recovery certificate. The bank instead reverted back to the procedure under SARFAESI Act taking it further on the basis of demand notice dated 21-1-2003.

6.  Since no payment was made pursuant to the demand notice, or the recovery certificate issued by DRT, the bank issued possession notice on 20-8-2008 in respect of the subject property in terms of section 13(4).

7.  Auction sale notice was issued on 15-10-2008 indicating reserve price of Rs.70 lakhs, this in terms of the valuation made. The efforts to sell the property by auction on 18-11-2008, as scheduled, however, failed as no bid was received.

8.  The bank informed the borrower that since no bid had been received on 18-11-2008 for the price reserved, it intended to sell the subject property through 'private treaty' for Rs.61.10 lakhs.

9.  The petitioners questioned before DRT the above move of the bank by moving SA, inter alia,referring to the valuation conducted by 'K' and 'R', the bank's empanelled valuer on 23-6-2000 'at the fair market price of rupees one crore thirty three thousand sixty two. 

10.  The SA was allowed by DRT without notice to the bank.

11.  The order of DRT was challenged by the bank through appeal which was allowed by DRAT by judgment dated 24-9-2010, observing, inter alia, that the questions arising for determination had not been addressed.

12.  The matter was remanded by DRAT to DRT for fresh adjudication in terms of directions in the decision rendered on 24-9-2010.

13.  The DRT disposed off the OA and SA, inter alia, giving time to the petitioners, as requested, for three months to clear the outstanding dues towards Punjab National Bank (the first respondent), calculated at that stage at Rs.40,33,067.26 (inclusive of cost of Rs.1,05,561), computed on the basis of interest at the rate of 13.5 per cent compounded, adding the liability of interest to be paid at the said rate for the extended period, the dues, thus, calculated being payable by the petitioners in two equal instalments and upon such deposit being made the sale of the mortgaged property to stand set aside and in case of default on the part of the petitioners the bank being at liberty to confirm the said sale in favour of the auction-purchaser in accordance with law.

14.  The order of DRT was challenged by the petitioners through appeal which was dismissed by DRAT by the impugned order passed on 19-11-2014.

15.  In the order dated 19-11-2014, the DRAT has, inter alia, noted that during the pendency of the SA before the DRT, substantial amount of Rs.42.30 lakhs had been deposited by the petitioner which was duly reflected in the statement of account that also shows that the bank had charged interest at the rate of 13.5 per cent compounded.

16.  It was noted that the petitioners (appellant before the DRAT) had not made the deposit of Rs.40,33,06,726 along with interest at the rate of 13.5 per cent compounded within the period of three months for which time had been allowed on their request by the DRT.

17.  The petitioner filed writ petition to challenge to the order dated 19-11-2014 passed by the Debts Recovery Appellate Tribunal (DRAT).

18.  The prime contention raised on behalf of the petitioners was that the sale of private treaty in favour of the intending purchaser for price less than the reserved price, without the consent of the mortgagor (owner) was impermissible, it being violative of rule 8(8) of the Security Interest (Enforcement) Rules, 2002 framed for the purposes of regulating the procedure of enforcement of security interest under section 13. 

HC held as under : 

19.  Mortgagee, generally (in certain specified category of mortgages), even under the general law, is empowered to sell the mortgaged property on default of payment of the mortgage money without the intervention of the Court, by section 69 of the Transfer of Property Act, 1982. Section 13 of the SARFAESI Act is similarly conceived as the code prescribed for 'enforcement of security interest' by the secured creditors for whose purposes this special law has been enacted. The non obstante clause with which section 13 begins as also section 37 make it clear that the provisions of this law, and rules made thereunder, are legislated in addition to, 'and not in derogation of' other laws which would include the Transfer of Property Act and the RDDBFI Act. 

20.  Section 13 sets out at length the procedure in accordance with which the secured creditor may enforce the security interest 'without the intervention of the Court or Tribunal'. The process towards such end begins with notice under section 13(2) issued by the secured creditor unto the borrower in default, giving him opportunity 'to discharge in full his liabilites' within sixty days. There is provision for the borrower to take exception to the demand in such notice by submitting a representation or objection under section 13(3A). The response to the demand by the notice may include objection to the very demand or the calculation on which it has been raised. In the event of failure on the part of the borrower to discharge his liability in terms of the notice under section 13(2), the secured creditor is permitted, by section 13(4), to take recourse to any of the measures indicated in the said clause 'to recover his secured debt'. The measures permitted by section 13(4) include taking of possession, may be with assistance of magistracy under section 14, of the secured asset, in order to exercise the 'right to transfer' by way of lease, assignment or sale 'for releasing the secured asset'. The manner in which the power in the above nature given by the law is to be exercised is prescribed, in terms of section 13(12), read with section 38, in the form of the Security Interest (Enforcement) Rules, 2002. 

21.  Rule 8 of the 2002 Rules conceives of several modes of disposal of the property at the hands of the secured creditor, they including the method of obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets, by inviting tenders from the public, by holding public auction or by private treaty. But then, in terms of rule 8(8), sale by any method other than public auction or public tender, i.e., by obtaining quotations or by private treaty, must necessarily be 'on such terms as may be settled between the parties in writing'. It is one of the pre-conditions for initiation of the process through any of the abovementioned modes that the secured creditor obtains a valuation of the property from an approved valuer and fixes 'the reserve price' beforehand. In terms of rule 9(2), the sale of the property for a price less than the reserve price is not allowed except 'with the consent of the borrower and the secured creditor'. 

22.  The hallmark of the procedure for brining a property to sale through any of the permitted is the requirement of keeping the mortgagor duly informed. This is ensured by not only the initial notice under section 13(2) but also by serving on the mortgagor a copy of the various notices at different stages of the process, including the possession notice, the sale notice etc., the principle essentially being that the right of the mortgagor to redeem the mortgaged property inures till the time the matter is ripe for sale of the mortgaged property by secured creditor to be confirmed. 

23.  The writ petition at hand assails the impugned order of DRAT mainly on the grounds that in absence of a settlement 'in writing' within the meaning of rule 8(8) of the 2002 Rules, the move of the bank to sell the subject property 'by private treaty' is impermissible, particularly at a price less than 'the reserve price', this in view of the inhibition in second proviso to rule 9(2) of the 2002 Rules. The petitioners, in fact, also question the validity of the reserve price referring in this context to the initial valuation made on 23-6-2000. The petitioners insist that they have been 'ready and willing' to redeem the property by discharging the liability towards the bank claiming that the context throughout has been as to the rate of interest levied rather than the principal sum demanded. 

24.  The background facts of the case, however, show the fallacy of the above contentions and instead demonstrate that the borrower and mortgagor have abused the process of law to their advantage at every step of the way, to delay, if not thwart, the effort of the respondent bank to recover its dues. This conduct, renders them disentitled to any equitable or discretionary relief. 

25.  The borrowers have never disputed the liability to pay the principal amount or even the interest chargeable thereupon. When the bank had initiated the process of recovery by serving demand notice under section 13(2) on 21-1-2003, no exception was taken thereto. When the bank moved DRT under RDDBFI Act in 2007, the petitioners would not put in any contest. They rather opted to enter into a compromise having persuaded the bank to settle for an amount far less than what was due. The recovery certificate issued in the wake of compromise terms being accepted by the DRT on 5-3-2008 determined the liability of the petitioners to pay the amount claimed in the OA along with pendente lite and future interest at 13.5 per cent per annum inasmuch as the balance of the amount settled was not paid within the stipulated period of three/six months. To put it simply, since there had been a default in payment of the settled amount, the amount claimed by the bank in the OA became lawfully recoverable from the petitioners on and after 5-9-2008 (i.e., six months after the compromise). 

26.  Curiously, the bank having secured a recovery certificate to above effect did not choose to put it into execution and instead took it upon itself to enforce the security interest under the SARFAESI Act. The fact, however, remains that the petitioners offered to settle the amount under the compromise terms nevertheless failed to honour its word or abide by their obligation. It is impermissible, against such backdrop, for the petitioners to now argue that they have been only legitimately contesting the rate of interest claimed by the bank all these years. 

27.  It may be that at the time of the loan facility being advanced, the mortgaged property was valued at Rs.1,00,33,062. But when the stage came for the property to be disposed of in terms of section 13 so that the bank could realize its debt, the bank got the valuation done in terms of the 2002 Rules and on such basis fixed the reserve price at Rs. 70 lakhs. It is not the case of the petitioners that they were not kept in the loop as to the terms on which the property was offered for sale by public auction on 18-11-2008. Concededly, the borrowers and the mortgagor had due notice of such public auction. No objection to the valuation on the basis of which the reserve price had been fixed having been taken at that stage, the reference to the valuation of 23-6-2000 cannot be permitted to be urged now. 

28.  That the public auction arranged to be held on 18-11-2008 did not evoke any response (since no bid was received) undoubtedly shows that the reserve price fixed for such exercise was not realistic. In these facts and circumstances, the bank was within its rights to resort to other methods permitted by rule 8(5) to dispose of the property so that it could realize its lawful dues. It is the case of the bank that it had decided to switch over to the method of inviting tenders from the public. But then, no public notice extending such invitation is shown to have been published. The bank instead relies upon the offer made by the intending purchasers to acquire the property for consideration of Rs.61.10 lakhs. The bank, thus, was opting for disposal of the property 'by private treaty'.

29.  Strictly speaking, the bank could unilaterally sell the property by public auction or by public tender but to be able to sell it by private treaty, it necessarily required the consent of the mortgagor within the meaning of the clause contained in rule 8(8) of the 2002 Rules. It is to settle terms to such effect that the bank approached the borrower by way of letter dated 15-12-2008. It is, however, clear from the conduct of the borrowers that they were not interested in co-operating with the bank for sale in favour of the intending purchasers against the consideration that had been tendered. But, instead of responding to the bank in answer to the communication issued on 15-12-2008, or coming up with a better offer or proposal to break the impasse, the petitioners knocked at the door of the DRT by moving SA No. 01/2009. 

30.  The issue kept hanging fire before the DRT/DRAT for quite sometime, and unnecessarily so. Eventually, when the matter had been remanded to DRT by order dated 24-9-2010 by DRAT, the petitioners again offered to discharge the liability calculated at that stage at Rs. 40,33,067.26. The only request pressed before the DRT at that stage was for further time of three months to be extended so that the payment of the said amount could be made in two equal instalments. 

31.  Having regard to the tenor of the order dated 16-10-2012 passed by DRT, at the request of the petitioners, it is clear that they had given up their resistance to the sale of the subject property in favour of the other respondents against consideration of Rs.61.10 lakhs should there be another default on their part in making the payment to the bank within the three months time being granted. The sequitur of the terms of order passed by DRT on 16-10-2012 at the instance of the petitioners, thus, is thatto honour their commitment, the property could be sold to the other respondents at the consideration offered by private treaty as per th their only insistence was for yet another opportunity to redeem the mortgaged property and that they were agreeable that in case of failure on their part e arrangement made by the bank in terms of communication dated 15-12-2008. The requisite consent of the petitioners for purposes of rule 8(8) and second proviso to rule 9(2) of the 2002 Rules must be read inherent in this arrangement. 

32.  On above facts and in the circumstances, it is opined that the order passed by the DRT and DRAT cannot be assailed. The petition being devoid of substance is dismissed.