SCI (2006.11.29) in M/s Transcore Vs Union Of India & Anr. [ 2008 (1) SCC 125, Civil Appeal Nos. 1374/06, 2841/06, 3225/06, 3226/06 and 908/06..] held that;
Therefore, when Section 13(4) talks about taking possession of the secured assets or management of the business of the borrower, it is because a right is created by the borrower in favour of the bank/ FI when he takes a loan secured by pledge, hypothecation, mortgage or charge.
In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If any one of the three elements is not there, the doctrine will not apply.
The doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.
Section 13(4-A) refers to the word "possession" simpliciter. There is no dichotomy in sub-section (4-A) as pleaded on behalf of the borrowers. Under Rule 8 of the 2002 Rules, the authorised officer is empowered to take possession by delivering the possession notice prepared as nearly as possible in Appendix IV to the 2002 Rules. That notice is required to be affixed on the property. Rule 8 deals with sale of immovable secured assets. Appendix IV prescribes the form of possession notice. It inter alia states that notice is given to the borrower who has failed to repay the amount informing him and the public that the bank/FI has taken possession of the property under Section 13(4) read with Rule 9 of the 2002 Rules.
Rule 9(6) states that on confirmation of sale, if the terms of payment are complied with, the authorised officer shall issue a sale certificate in favour of the purchaser in the form given in Appendix V to the 2002 Rules.
Rule 9(9) states that the authorised officer shall deliver the property to the buyer free from all encumbrances known to the secured creditor or not known to the secured creditor.
Till the time of issuance of sale certificate, the authorised officer is like a court receiver under Order XL Rule 1 CPC. The court receiver can take symbolic possession and in appropriate cases where the court receiver finds that a third party interest is likely to be created overnight, he can take actual possession even prior to the decree. The authorized officer under Rule 8 has greater powers than even a court receiver as security interest in the property is already created in favour of the banks/FIs.
Excerpts of the Order;
Points for determination:
(i) Whether the banks or financial institutions having elected to seek their remedy in terms of DRT Act, 1993 can still invoke the NPA Act, 2002 for realizing the secured assets without withdrawing or abandoning the O.A. filed before the DRT under the DRT Act.
(ii) Whether recourse to take possession of the secured assets of the borrower in terms of Section 13(4) of the NPA Act comprehends the power to take actual possession of the immovable property.
(iii) Whether ad valorem court fee prescribed under Rule 7 of the DRT (Procedure) Rules, 1993 is payable on an application under Section 17(1) of the NPA Act in the absence of any rule framed under the said Act. Findings:
(i) On Point No. 1:
Mr. K.V. Viswanathan, learned counsel for the appellant in the lead matter submitted that the banks or FIs. cannot be permitted to avail of the remedy under the NPA Act when they have already invoked the jurisdiction of the DRT Act. He urged that it was mandatory for the respondent-bank (Indian Overseas Bank) to withdraw the said O.A. No. 354/99 before DRT before initiating action under the NPA Act. He urged, that Notice dated 6.1.2003 given by IOB under Section 13(2) of NPA Act, 2002 was a mere show cause notice; that it did not constitute action so as to exclude the applicability of the proviso to Section 19(1) of DRT Act, 1993; consequently, it was urged that, on the facts of the present case, in the matter of M/s Transcore, the bank should have taken permission of the DRT for withdrawal of O.A. No. 354/99 before invoking the NPA Act. Elaborating this aspect, it was urged that NPA Act has been enacted to enforce the security interest without the intervention of the court and this implies that any intervention by way of OA already resorted to should got out of the way before invoking NPA Act. Learned counsel submitted that the proviso to Section 19(1) of DRT Act inserted by amending Act 30 of 2004 was inserted precisely for the above purpose. In this connection, reliance was placed on the text of the proviso which states that the bank or FI may, with the permission of the DRT, withdraw the O.A. for the purpose of taking action under the NPA Act, if no such action had been taken under the NPA Act. The point emphasized is that, the notice under Section 13(2) dated 6.1.2003 is the show cause notice, it is not an action in terms of the above proviso and, therefore, in the present case, the bank ought to have taken permission from the DRT before invoking the NPA Act. Similarly, in the said proviso the words are that the bank or FI may, with the permission of the DRT, withdraw the OA for the purpose of taking action under the NPA Act, learned counsel urged that, this proviso read as a whole indicates applicability of the doctrine of election. Learned counsel urged that, the very object of enacting the proviso was that two parallel procedures cannot simultaneously be resorted to unless leave is granted in that regard by the DRT under the said proviso. According to the learned counsel, the second proviso to Section 19(1) inter alia states that, the application made by the bank or FI seeking withdrawal of the OA shall be dealt with as expeditiously as possible. Reliance on second proviso was placed in support of the argument that, if the bank or FI is permitted to invoke both the remedies simultaneously, then the very object of expeditious disposal would stand defeated. It was further urged that when NPA Act was enacted in 2002, Section 13(3-A) and the provisos to Section 19 of the DRT Act were not there on the statute book. The constitutional validity of the Act was upheld in Mardia Chemicals (supra). However, learned counsel invited our attention to Para 80 of the judgment of this Court in Mardia Chemicals (supra) which states that, before taking any action, a notice of sixty days was required to be given and after the measures under Section 13(4) of the NPA Act have been taken a mechanism had been provided under Section 17 of the NPA Act to approach the DRT. The object behind the above provisions was to give reasonable protection to the borrower. Placing reliance on Para 80 of the said judgment, learned counsel urged that in the said paragraph this Court has used the expression "action" in juxtaposition to the words "measures adopted under Section 13(4)", therefore, even this Court did not understand the word notice under Section 13(2) as "action" taken. Learned counsel urged that "action taken" under Section 13 of the NPA Act can only be the steps taken by the bank or FI under Section 13(4) and, therefore, notice of sixty days under Section 13(2) was a mere show cause notice which did not constitute action taken and, therefore, the proviso to Section 19(1) of the DRT Act was applicable in the facts and circumstances of the case in which M/s Transcore is the appellant. Learned counsel urged that, since the proviso had not been complied with, IOB was not entitled to invoke the NPA Act as it purported to do so vide notice dated 8.1.2005. Reliance was also placed on the provisions of Section 13(3-A) which enables the borrower to make any representation/ objection to the secured creditor and if the secured creditor rejects such representation then the proviso states that the reasons so communicated by the bank or FI shall not provide right upon the borrower to make an application under Section 17 to the DRT. In the proviso, the words used are that even a likely action by the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application under Section 17 to DRT. Once again, emphasis is on the word "action" in the said proviso to show that, a notice under Section 13(2) is different from the word action under the scheme of Section 13 as amended. Learned counsel points out that, Section 13(3-A) bars an appeal against the order communicating reasons or against the likely action of the secured creditor. Since no appeal is provided for against the order rejecting representation and since Section 17 of the NPA Act provides remedy to the borrower only against action taken under Section 13(4), the scheme of Section 13 suggests that, the notice under Section 13(2) should be read only as a show cause notice. Similarly, reliance is placed by the learned counsel on the provisions of Section 13(10) of the NPA Act which states that, where the dues of the secured creditor are not fully satisfied, the secured creditor may file an application to the DRT for the recovery of the balance. Learned counsel submitted that Section 13(1) shows that simultaneous action for enforcement of security interest was not contemplated by the NPA Act. It was further urged, that even conceptually there is a difference between the right to debt and the right to take action of recovery; that these two concepts are totally different concepts; that one is a right to receive and the other is a right to enforce. Learned counsel urged, that a debt is not the same thing as a right of action for its recovery; that a debt is a right in the strict sense corresponding to the duty of the debtor to pay, whereas a right of action is a legal authority corresponding to the liability of the debtor to be sued, therefore, according to the learned counsel, the two are distinct concepts which is clear from the fact that, the right of action can stand destroyed by prescription while the debt remains. Applying these concepts to the scope of the NPA Act, learned counsel urged that, the NPA Act only gives certain powers to the bank/ FI to enforce a recovery of debt and for that purpose it excludes Section 69 of the TP Act vis-`-vis certain acts specified therein. Therefore, it was urged that, when Section 13(2) notice is issued, it merely reiterates a right to debt which has accrued to the secured creditor. According to the learned counsel, the most important words find place in the proviso to Section 19(1) to the DRT Act are "if no such action had been taken". Learned counsel places reliance on these words in support of his contention that, there is no need to apply for withdrawal of the O.A. where the recovery stands enforced. Learned counsel urged that, mere giving of a notice under Section 13(2) does not indicate conclusion of recovery. Hence, Section 13(2) notice is merely a show cause notice. According to the learned counsel, the proviso to Section 19 only says about concluded cases where the enforcement power stands exhausted. This power is not exhausted by mere giving of Section 13(2) notice. The issuance of notice under Section 13(2) without a concluded action under Section 13(4) would not be saved by the proviso. Learned counsel urged that, Section 13(2) does not create a vested right of any action and, therefore, no remedy against the notice is provided for. Reliance was also placed in support of his above arguments on Section 13(13) of the NPA Act which states that, no borrower shall, after receipt of notice under Section 13(2), transfer by way of sale, lease or otherwise (other than in the ordinary course of business) any of the secured assets without prior written consent of the secured creditor. Learned counsel urged that, Section 13(13) allows the secured assets to be disposed of in the usual course of business and, consequently, notice under Section 13(2) cannot constitute action taken under the Act, as urged by the banks. Alternatively, it was urged that, even assuming for the sake of argument that Section 13(2) notice creates a right to take action, such a right is not a vested right and is at best contingent on other factors, namely, continuation of action by secured creditors even after representations. The proviso to Section 19 of the DRT Act speaks only of concluded action under Section 13(4) of the NPA Act to prevent closed transactions from being reopened. In this connection, learned counsel submitted that, the right vests when all the facts have occurred. Whereas a right is contingent when some but not all the vestitive facts have occurred. Learned counsel urged, that Section 13(2) refers to a right, at the highest, at an inchoate stage; that Section 13(4) only refers to Section 13(2) in the context of the period fixed; that before introduction of Section 13(3-A) no opportunity to represent was there and, consequently, Section 13(2) notice is only a show cause notice.
Learned counsel further submitted that, the proviso to Section 19 of the DRT Act is the statutory recognition of the doctrine of election; it is not a simple withdrawal procedure as set out in Order XXIII CPC because the proviso to Section 19 states that the withdrawal of the O.A. is for the purpose of taking action under the NPA Act. Learned counsel urged that, in view of Section 19(25) of the DRT Act, it cannot be said that the DRT has no inherent powers. Learned counsel submitted that the doctrine of election is a branch of the rule of estoppel. It was urged that, the said doctrine postulates that when two remedies are available for the same relief, the aggrieved party has an option to elect either of the two but not both. In this connection, reliance was placed on the judgments of this Court in the case of National Insurance Co. Ltd. v. Mastan and Anr. reported in 2006 (2) SCC 641 and A.P. State Financial Corporation v. M/s Gar Re- Rolling Mills and Anr. reported in 1994 (2) SCC 647. Learned counsel, therefore, urged that the proviso to Section 19(1) mandates that either one of the two remedies can be resorted to at a time but not both and in view of the statutory interventions, there is no option with the secured creditor but to withdraw the DRT proceedings to cases where the proviso to Section 19(1) of DRT Act is applied.
The above submissions of the learned counsel for the appellant (M/s Transcore) was adopted by Mr. Pankaj Gupta, learned counsel for M/s Nemat Ram Batra (the respondent in civil appeal No. 2841/06) and Mr. A.K. Jaiswal for M/s Kalyani Sales Co. (the respondent in civil appeal No. 908/2006).
In reply to the above submissions, Mr. K.N. Bhat, learned senior counsel appearing for Indian Overseas Bank (the bank) submitted that, Section 13(2) notice is a condition precedent for invoking Section 13(4) of the NPA Act and, therefore, the said notice is an action and not a mere show cause notice. Learned counsel submitted that Section 13(2) notice is the step-in-aid for enforcement of security interest under Chapter III of the NPA Act. He submitted that the proviso to Section 19(1) of the DRT Act cannot affect the rights of a bank/FI under the NPA Act which deals only with recovery and which only deals with enforcement of security interest. Learned counsel urged, that Section 13(2) notice is given on the basis that the client's account in the books of account, which is an asset of the bank as the amount receivable under that account, has become sub-standard, doubtful or a loss; that Section 13(2) proceeds on the basis of classification of that account as a NPA; that there is no adjudication contemplated under Section 13(2) as the said section deals with enforcement of security interest alone which security interest is recognized by the Act as a financial asset of the bank/ FI. In the circumstances, learned counsel urged that, Section 13(2) notice is not a mere show cause notice. He submitted that, the purpose of NPA Act is to enable the secured creditor to enforce any security interest without the intervention of the court or the tribunal, apart from creation of asset reconstruction company and securitisation company. In this connection, it was pointed out that sub-section (4)(a) of Section 13 of the NPA Act permits a bank/FI to take possession of the secured assets. Similarly, sub-section (4)(b) enables a bank/ FI to take over management of the business of the borrower. Similarly, sub-section (4)(c) permits appointment of a manager to manage the secured assets, the possession of which has been taken over and, similarly, sub-section 4(d) authorizes the secured creditor to require any transferee of the secured assets to pay the secured creditor the specified amount by just a return notice. According to the learned senior counsel, under the scheme of Section 13(4), all these powers are to be exercised without the intervention of the court/ tribunal. He urged that if the proviso to Section 19(1) of the DRT Act is read as mandatory, then the consequence would be that a secured creditor can have recourse to Section 13 only with the prior permission of the DRT which would defeat the very object of the NPA Act which is to remove all fetters, if any, on the right of enforcement by the secured creditor. It was next urged that the DRT does not have inherent powers and that Section 19(25) of the DRT Act which empowers the tribunal to issue appropriate directions for enforcement of its orders is not akin to Section 151 CPC and, therefore, a provision akin to the provision was necessary to be inserted. In this connection, learned senior counsel submitted that, in the DRT Act there was no provision similar to Order XXIII CPC and to get rid of that lacuna, the DRT Act had to be amended. He urged that, the proviso to Section 19 is an enabling provision. The bank/ FI may apply to the DRT for withdrawal of the O.A. in cases where the DRT has appointed a court receiver or in cases where the DRT had granted attachment or injunction. If the bank/ FI seeks to invoke the NPA Act vis-`-vis a financial asset over which a court receiver is appointed or over which an attachment stands then in such cases an enabling provision is made whereby the bank or FI can move the DRT for permission seeking withdrawal of O.A. in part or in whole in order to enable the bank/ FI to take appropriate steps for enforcement of security under the NPA Act. Learned counsel submitted that, vide the impugned judgments, the High Courts have erred in making the said proviso mandatory/ obligatory. He submitted that, the very purpose behind the proviso would be defeated if it is read as mandatory. He submitted that, withdrawal application in respect of O.A. can be made by the bank/ FI at any time. The proviso is inserted only to meet contingencies where the assets are in possession of the court receiver or under attachment/ injunction. Learned counsel submitted that there is no bar to the application of both the Acts simultaneously. He submitted that the NPA Act gives to the bank/ FI an independent right and wherever required the bank/FI may apply that option as given to the secured creditor. In this connection, he submitted that, under third proviso to Section 19(1) of the DRT Act even part withdrawal of the suit/application is permissible. He further submitted that, under Section 13(10) of the NPA Act where the dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the bank/ FI may file an application to the DRT for recovery of the balance from the borrower. The point which is emphasized is that part withdrawal of the suits or the invocation of DRT jurisdiction for recovery of the balance are aspects which required an amendment to be carried out in the DRT Act as well as in the NPA Act so that the provisions are brought at par with Order XXIII CPC. This was the main object behind the enactment to the first proviso to Section 19(1) to the DRT Act. In fact, it is pointed out by the learned counsel that the amending Act 30 of 2004 has made changes in both the DRT Act and the NPA Act simultaneously which indicates that both the Acts complement each other. He submitted that the enabling provision under the first proviso had to be made so that withdrawal is restricted to cases where the bank/FI wishes to withdraw the O.A. for the purpose of taking action under the NPA Act and not for any other purpose. It is pointed out that Order XXIII CPC provides for several situations whereas the proviso to Section 19 deals with some aspects/ situations only. In this connection, learned counsel submitted that Section 13(10) provides for a fresh cause of action. Inability to realise the entire dues does not provide any fresh cause of action for proceeding under the DRT Act. The course of action for proceeding under the DRT Act is the debt due. Not satisfying the dues fully, according to the learned counsel, is not a cause of action attributable to the borrower. He, therefore, submitted that proviso to Section 19(1) is not a condition precedent to taking recourse to NPA Act. Learned counsel further pointed out that, Section 36 of NPA Act talks of limitation. Section 36 of NPA Act makes it clear that no action under NPA Act can be taken unless the claim is within limitation and, therefore, according to the learned counsel, the time spent in adopting action under DRT Act is not excluded and it does not stop the limitation. Therefore, it is urged that this aspect also indicates that the proviso to Section 19(1) is not a condition precedent to taking recourse to NPA Act. On the question of doctrine of election, learned counsel submitted that, the doctrine of election is an aspect of estoppel which can have no effect on the operation of a statute inasmuch as it is well settled that there can be no estoppel against a statute. Therefore, learned counsel submitted that the interpretation placed by the High Courts on the proviso to Section 19(1) of the DRT Act, making it mandatory for banks/ FIs. to take prior permission of the DRT, would render the whole NPA Act meaningless.
Learned counsel further contended that there is no merit in the arguments advanced on behalf of the borrowers that the amendments under Act 30 of 2004 introduced into the DRT Act has restricted the rights of the secured creditors under the NPA Act. He urged that this argument has no basis as there is no amendment restricting any of the rights of secured creditors under the NPA Act. He submitted that the NPA Act deals with the secured creditors, including, banks and financial institutions and the persons mentioned in sub-section (zd) to Section 2. He further pointed out that the words "security interest" with which NPA Act is concerned, includes mortgage, charge, hypothecation etc. except those specified in Section 31 which excludes ten types of securities from the purview of NPA Act. He submitted that the NPA Act is the special Act whose provisions override all other laws inconsistent therewith. In this connection, he places reliance on Section 35 of the NPA Act. Learned counsel urged, that Act 30 of 2004 amended the NPA Act as well as the DRT Act simultaneously; that the said Act 30 of 2004 specifically amended Section 13 by insertion of sub-section (3-A), however, no provision corresponding to the proviso to Section 19 was introduced into the NPA Act, which indicates that Parliament did not intend to dilute rights of the secured creditors granted to them under the NPA Act through DRT Act. He also invited our attention to Section 37 of the NPA Act which provides that the NPA Act shall be in addition to and not in derogation of the DRT Act. Learned counsel urged, that the proviso to Section 19(1) was introduced in DRT Act to make it more effective; that provision is akin to Order XXIII CPC, which was not there in the original DRT Act. As stated above, learned counsel urged that DRT unlike a court has no inherent powers. Learned counsel urged that there may be innumerable situations in which the secured creditor may have to withdraw the recovery application and but for a specific provision, it was not open to the tribunal to entertain an application for withdrawal and, in any case, it was not open to the tribunal to pass conditional order on such application for withdrawal without express provision in that regard, which now is the proviso to Section 19(1) of the DRT Act. Therefore, to fill this lacuna, the proviso was inserted in Section 19(1). The proviso makes it very clear that the withdrawal of the O.A. shall be limited to the purpose of taking action under the NPA Act. It clarifies that such application for withdrawal may be made if no action has been taken under the NPA Act before seeking withdrawal. Learned senior counsel urged that the said proviso does not compel the withdrawal of the OA before having recourse to NPA Act either before 11.11.2004 or thereafter. He submitted that, reading the proviso of Section 19(1) of the DRT Act as a condition precedent for taking recourse to the NPA Act would have serious adverse effects, for example, in a given case relief might have been claimed against the guarantors also, those guarantors may be specific to one of the consortium transactions. Compelling the creditor to withdraw his application before the DRT would amount to forcing that creditor to give up his claim against the guarantors also. Similarly, if the mortgage property is not subject to any attachment or court receiver, there is no need for permission to withdraw the application before resorting to Section 13(4). However, if the argument of the borrowers is accepted, the bank/ FI is forced to move the tribunal for permission even in cases where it is not necessary. Lastly, the time spent in action under NPA Act is not excluded for saving limitation for recovery of the balance. The Banks/ FIs. have to revert back to DRT within the period of limitation under Section 13(10) of the NPA Act, and if the banks/FIs. are forced to withdraw, then all securitisation actions starting from the issue of demand notice and ending with sale of securities must be completed within the period of limitation and if the banks/FIs. fail to complete these actions within the period of limitation, they will not be able to go back to DRT. In a given case, if the DRT refuses permission to withdraw, the very purpose of the NPA Act will be defeated. To make the NPA Act subject to the prior permission of DRT would make the NPA Act redundant. Learned senior counsel urged that Section 24 of the DRT Act makes the Limitation Act, 1963 applicable to claims before the DRT. This means that, by the time the pending recovery application is allowed to be withdrawn, an application under Section 13(10) of NPA Act would become time barred. Thus, the banks/FIs, if compelled to withdraw the recovery applications before resorting to Section 13, will be deprived of their rights to recover the balance amount under Section 13(10). In this connection, reliance was also placed on the provisions of Section 36 of the NPA Act which requires the claims to be made under NPA Act within the period prescribed under the Limitation Act, 1963. Learned counsel, therefore, submitted that there is no merit in the contention of the appellant that the banks/FIs should be compelled to first withdraw their O.As. before resorting to Section 13 of NPA Act.
Mr. Soli J. Sorabjee, learned senior counsel appearing on behalf of Indian Bank, submitted that the doctrine of election does not apply to curative relief. He submitted, that a creditor is entitled to choose one or more cumulative remedies open to him, unless precluded by statutory provisions or by the doctrine of election; that in the absence of any bar, it is open to the creditor to choose one or more of the cumulative remedies. Learned senior counsel submitted that under the scheme of NPA Act, a bank/ FI is under no disability to take recourse under Section 13 of NPA Act even after it has invoked Section 19 of DRT Act. He submitted, that the object of both the sections is to recover dues; that there is no inconsistency inherent or implied in the two remedies; that the doctrine of election applies in cases of inconsistent remedies. He submitted that, in the present case, the two remedies are not inconsistent to each other. He submitted that the judgment of this Court in the case of A.P. State Financial Corporation (supra) has no application because in that case this Court has held that the State Financial Corporation Act has expressly provided for the doctrine of election. Learned counsel submitted that the doctrine of election is a doctrine evolved by courts on equity. It is based on the principle that a man shall not be allowed to approbate and reprobate. If a person has chosen a particular remedy and has intentionally relinquished another remedy, he is debarred by the doctrine of election to pursue the remedy he has intentionally given up. Learned counsel submitted that a creditor is not precluded by the doctrine of election if he makes a choice of one or more cumulative remedies available to him. The adoption of remedies under Section 19 of DRT Act and under Section 13(4) of NPA Act are not inconsistent with each other. Both the remedies recognize the existence of the same facts, on the basis of which reliefs are claimed. In the case of election of remedies a party is confined to the remedy first chosen, precluding a resort to another, because the two remedies are inconsistent with each other, and not analogous, consistent and concurrent. Learned senior counsel submitted that a creditor is not concluded by the rule of election where he merely makes a choice of one or more consistent and cumulative remedies available to him. Thus, a creditor whose claim is secured by two written obligations falling due simultaneously has a right to proceed thereafter upon either or both of them to enforce payment of the amount due. In this connection, learned senior counsel placed reliance on Corpus Juris Secundam, Vol. XXVIII, para 13; American Jurisprudence, 2d, Vol. 25 and Snell's Principles of Equity, Twenty-Eighth Edition, page 495. Learned counsel urged that the interpretation suggested by the borrowers would not subserve the object of the NPA Act which is enacted for speedy recovery of debts. If a bank/FI is compelled or mandatorily required to withdraw its application under the proviso to Section 19 of DRT Act and, thereafter, invoke NPA Act, it would face a situation where Section 13(10) would fail. It would lead to further complications which would involve questions of limitation and delay in the speedy recovery of its dues. Learned counsel urged that the conclusion drawn by the Punjab & Haryana High Court in the case of Kalyani Sales Co. v. Union of India was erroneous because it states that once the bank/FI decides to proceed under the NPA Act, that Act imposes an obligation on the bank/ FI to withdraw the O.A. under Section 19 of DRT Act.
Mr. Ranjit Kumar, learned senior counsel appearing for Indian Bank, submitted that if notice under Section 13(2) of NPA Act was only a show cause notice then Section 13(3-A) was not required. He submitted that because Section 13(2) notice constituted an action taken under the Act, Section 13(3-A) becomes necessary because it gives an opportunity to the borrower to object to the notice. Learned counsel submitted that the NPA Act deals only with secured assets whereas the DRT Act deals with both secured and non-secured assets. He submitted that a secured asset is an asset which is owned by the bank/ FI and, therefore, it can act without intervention of the court. Learned counsel urged that in certain respects, the DRT Act did not provide for the remedies, which led to the enactment of the NPA Act. In this connection, he cited the example of take over of management of the business of the borrower which is provided for only in the NPA Act and not in the DRT Act.
Shri D. Dave, learned senior counsel appearing for Indian Bank' Association (IBA) submitted, that NPA Act has to operate de hors the DRT Act; that both the Acts operate within the same scheme but the DRT Act is a general Act whereas the NPA Act is the special Act. He submitted that a bank/FI is entitled to go back to the DRT under Section 13(10) which indicates that the NPA Act is a special Act vis-`-vis the DRT Act which is the general Act. He urged that the NPA Act is amplification of DRT Act. In this connection, it is pointed out that the concept of asset reconstruction and the concept of asset management is wider than the concept of recovery of debt under the DRT Act. Our attention was invited to Section 5 of the NPA Act which refers to acquisition of rights or interest in financial assets which concept is not there in DRT Act. Learned counsel, therefore, submitted that NPA Act is a special Act and, therefore, irrespective of the pendency of litigation under the DRT Act, acquisition of interest in financial assets can take place under the NPA Act. Learned senior counsel further pointed out, that under DRT Act a debt could be secured as well as unsecured; that under Section 9(f) of the NPA Act, a reconstruction company or a securitisation company is empowered for the purposes of assets reconstruction to take possession of secured assets without prejudice to the provisions contained in any other law for the time being in force. Therefore, even a reconstruction company can enforce security interest under Section 13 of the NPA Act without being restricted by the provisions of the DRT Act. Section 9(f) is put into service to show that at every stage, Parliament has ousted the jurisdiction of the courts and DRT to get the NPA liquidated at the earliest opportunity. Learned senior counsel submitted, that Section 19 of the DRT Act concerns the procedure which has to be followed by the tribunal; that it is a procedural section and, therefore, Section 19 of DRT Act cannot confer or allow jurisdiction to be retained by the tribunal. He submitted that by Section 13(3-A), Parliament has made a conscience decision that there will be no interference from DRT/ court at any stage, therefore, it states that a borrower cannot approach DRT against communication of reasons by a bank/ FI which shows that in the matter of NPA, Parliament has ruled out intervention by courts and tribunals. Learned senior counsel submitted that calling to the borrowers for hearing, the NPA Act shall remain suspended till leave is given by DRT. This interpretation, according to the learned senior counsel, defeats the very object behind enactment of the NPA Act. Lastly, he pointed out that Section 35 of NPA Act states that the Act shall override all other laws which are inconsistent with NPA Act. Similarly, Section 37 of NPA Act states that if any law is consistent with NPA Act then the NPA Act shall be treated as an additional Act. The NPA Act is made in addition to the Companies Act, 1956, the SEBI Act, 1992, the DRT Act, 1993 as well as the Securities Contracts (Regulation) Act, 1956 and, therefore, the doctrine of election has no application in this case. Learned counsel submitted that the very object for enacting the NPA Act is to introduce banking reforms including change in the DRT Act so as to include the provisions of the NPA Act therein and, therefore, withdrawal of the O.A. is not a condition precedent for invoking NPA Act.
Shri Rajiv Shakdhar, learned senior counsel appearing for ICICI Bank Ltd. submitted that Rule 2(b) of the Security Interest (Enforcement) Rules 2002 ("2002 Rules") states that a demand notice is the notice in writing issued by a secured creditor to any borrower pursuant to Section 13(2) of the NPA Act. Reliance is placed on the said rule to show that the notice under Section 13(2) is not a mere show cause notice, that it is a demand notice similar to Section 156 of the Income Tax Act. In this connection, learned counsel submitted, that Section 22 of the NPA Act refers to default in repayment of debt on the part of the borrower plus classification of his account as NPA; that once an account is classified as NPA then the account continues to remain as NPA even if there is a part payment. Learned counsel submitted that under Rule 3 of the 2002 Rules, the service of demand notice under Section 13(2) indicates the procedure to be followed in serving such notice and if the amount mentioned in the demand notice is not paid within the stipulated period then Rule 4 provides that the Authorised Officer of a bank/ FI shall proceed to realise the amount by adopting any one or more of the measures specified in Section 13(4). These rules are relied upon to show that the notice under Section 13(2) constitute an action taken under the NPA Act. Further, he pointed out that after giving of the demand notice, the debtor is debarred from dealing with the assets, vide Section 13(13) of NPA Act. He submitted that Section 13 of NPA Act deals with secured interest whereas Section 9 of the NPA Act deals with unsecured interest. Learned counsel submitted, that there is a basic difference between suits to recover debts and suits to enforce securities; that NPA Act deals with enforcement of securities and it does not wait for debts to crystallize and, therefore, O.A. filed in the DRT will not be required to be withdrawn in the event action by way of Section 13(2) notice is taken even before 11.11.2004. The doctrine of election would not apply to the proceedings under the NPA Act and the DRT Act. It is urged, that the nature, ambit and scope of the proceedings under the two Acts are different; that the legislative purpose for conferring the power on the secured creditors to enforce its security interest by taking recourse to Section 13(4) of NPA Act without intervention of the court is to free the secured creditors of the impediments contained in Section 69 of the TP Act. A secured creditor is now empowered by virtue of Section 13 of the NPA Act to take any of the measures including sale of the secured assets without intervention of the court and notwithstanding the limitations of Section 69 of the TP Act. The power of sale of property in a suit even prior to the passing of decree has been upheld by this Court by placing reliance on Order XL Rule 1(1)(d) CPC. In the circumstance, withdrawal of O.A. cannot be made a condition precedent for taking recourse to N.PA Act.
Mr. Dhruv Mehta, learned counsel appearing on behalf of the Punjab National Bank, submitted that the doctrine of election is for banks/ FIs. and not for borrowers. The reason is that a creditor has to see his debtor, it is the right of the bank to liquidate the asset which right is unfettered once a security or interest is created in favour of the bank/FI. [See Abdul Azeez v. Punjab National Bank (2005)127CompCas514(Ker)]. Learned counsel submitted that the purpose of enacting proviso to Section 19(1) is to bring in Order XXIII CPC. Learned counsel submitted that the doctrine of election applies only in case of inconsistent remedies and not in case of additional remedies. He urged that withdrawal of an application could be a condition precedent for alternate remedy, however, it cannot be a condition precedent for taking recourse to an additional remedy. Learned counsel urged that unlike SICA, in the NPA Act, 2002 there is no proviso saving limitation, and, therefore, if the argument of the borrowers is accepted, it could lead to a situation where the banks' action under NPA Act would be time barred. In any event, NPA Act, according to the learned counsel, is a later enactment and, therefore, it shall prevail over the DRT Act.
Ms. J.S. Wad, learned counsel for Central Bank of India, has adopted the above arguments advanced on behalf of the various banks.
The heart of the matter is that NPA Act proceeds on the basis that an interest in the asset pledged or mortgaged with the bank or FI is created in favour of the bank/ FI; that the borrower has become a Debtor, his liability has crystallized and that his account with the bank/ FI (which is an asset with the bank/FI) has become sub-standard.
Value of an asset in an inflationary economy is discounted by "time" factor. A right created in favour of the bank/ FI involves corresponding obligation on the part of the borrower to see that the value of the security does not depreciate with the passage of time which occurs due to his failure to repay the loan in time.
Keeping in mind the above circumstances, the NPA Act is enacted for quick enforcement of the security. The said Act deals with enforcement of the rights vested in the bank/ FI. The NPA Act proceeds on the basis that security interest vests in the bank/FI. The NPA Act proceeds on the basis that security interest vests in the bank/FI. Sections 5 and 9 of NPA Act is also important for preservation of the value of the assets of the banks/ FIs. Quick recovery of debt is important. It is the object of DRT Act as well as NPA Act. But under NPA Act, authority is given to the banks/ FIs, which is not there in the DRT Act, to assign the secured interest to securitisation company/ asset reconstruction company. In cases where the borrower has bought an asset with the finance of the bank/ FI, the latter is treated as a lender and on assignment the securitisation company/ asset reconstruction company steps into the shoes of the lender bank/ FI and it can recover the lent amounts from the borrower.
According to Snell's Equity (Thirty-first edition) at page 777, a dual obligation could arise on the same transaction, namely, A's obligation to repay a sum of money to B or some other obligation. In such a case, B can sue A for money or for breach of the obligation. However, B will often have some security which covers the obligation of A, say, in the form of an asset over which B can exercise his rights. B may be entitled to this security either by law or by operation of common law principles or under the transaction (contract). In addition, B may acquire a personal right of action against the third party. Security over the asset (property) may be obtained by mortgage, charge, pledge, lien etc. Security in the form of right of action against a third party is known as guarantee. Broadly, there are three types of security over the asset. One is where the creditor obtains interest in the asset concerned (mortgage). Second is securities in which the rights of the creditor depends on possession of the asset (pledge/ lien). The third is charge where the creditor neither obtains ownership nor possession of the asset but the asset is appropriated to the satisfaction of the debt or obligation in question (charge). The dichotomy, which is of importance, is that more than one obligation could arise on the same transaction, namely, to repay the debt or to discharge some other obligation.
Therefore, when Section 13(4) talks about taking possession of the secured assets or management of the business of the borrower, it is because a right is created by the borrower in favour of the bank/ FI when he takes a loan secured by pledge, hypothecation, mortgage or charge. For example, when a company takes a loan and pledges its financial asset, it is the duty of that company to see that the margin between what the company borrows and the extent to which the loan is covered by the value of the financial asset hypothecated is retained. If the borrower company does not repay, becomes a defaulter and does not keep up the value of the financial asset which depletes then the borrower fails in its obligation which results in a mis- match between the asset and the liability in the books of the bank/ FI. Therefore, Sections 5 and 9 talks of acquisition of the secured interest so that the balance sheet of the bank/ FI remains clean. Same applies to immovable property charged or mortgaged to the bank/ FI. These are some of the factors which the Authorised Officer of the bank/ FI has to keep in mind when he gives notice under Section 13(2) of the NPA Act. Hence, equity, exists in the bank/FI and not in the borrower. Therefore, apart from obligation to repay, the borrower undertakes to keep the margin and the value of the securities hypothecated so that there is no mis-match between the asset-liability in the books of the bank/FI. This obligation is different and distinct from the obligation to repay. It is the former obligation of the borrower which attracts the provisions of NPA Act which seeks to enforce it by measures mentioned in Section 13(4) of NPA Act, which measures are not contemplated by DRT Act and, therefore, it is wrong to say that the two Acts provide parallel remedies as held by the judgment of the High Court in M/s Kalyani Sales Co.. As stated, the remedy under DRT Act falls short as compared to NPA Act which refers to acquisition and assignment of the receivables to the asset reconstruction company and which authorizes banks/ FIs. to take possession or to take over management which is not there in the DRT Act. It is for this reason that NPA Act is treated as an additional remedy (Section 37), which is not inconsistent with the DRT Act.
In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If any one of the three elements is not there, the doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, page 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell's Equity (Thirty-first Edition, page 119), the doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.
In our view, the judgments of the High Courts which have taken the view that the doctrine of election is applicable are erroneous and liable to be set aside.
We have already analysed the scheme of both the Acts. Basically, the NPA Act is enacted to enforce the interest in the financial assets which belongs to the bank/ FI by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of NPA Act is recovery by non-adjudicatory process. A secured asset under NPA Act is an asset in which interest is created by the borrower in favour of the bank/ FI and on that basis alone the NPA Act seeks to enforce the security interest by non-adjudicatory process. Essentially, the NPA Act deals with the rights of the secured creditor. The NPA Act proceeds on the basis that the debtor has failed not only to repay the debt, but he has also failed to maintain the level of margin and to maintain value of the security at a level is the other obligation of the debtor. It is this other obligation which invites applicability of NPA Act. It is for this reason, that Sections 13(1) and 13(2) of the NPA Act proceeds on the basis that security interest in the bank/FI; needs to be enforced expeditiously without the intervention of the court/tribunal; that liability of the borrower has accrued and on account of default in repayment, the account of the borrower in the books of the bank has become non-performing. For the above reasons, NPA Act states that the enforcement could take place by non-adjudicatory process and that the said Act removes all fetters under the above circumstances on the rights of the secured creditor.
The question still remains as to the object behind insertion of the three provisos to Section 19(1) of DRT Act vide amending Act 30 of 2004. The DRT is a tribunal, it is the creature of the statute, it has no inherent power which exists in the civil courts. Order XXIII Rule 1 (3) CPC states inter alia that where the court is satisfied that there are sufficient grounds for allowing the plaintiff to institute a fresh suit for the subject-matter of a suit or part of a claim then the civil court may, on such terms as it thinks fit, grant the plaintiff permission to withdraw the entire suit or such part of the claim with liberty to institute a fresh suit in respect thereof. Under Order XXIII Rule 1(1)(4)(b), in cases where a suit is withdrawn without the permission of the court, the plaintiff shall be precluded for instituting any fresh suit in respect of such subject-matter. Order XXIII Rule 2 states that any fresh suit instituted on permission granted shall not exclude limitation and the plaintiff should be bound by law of limitation as if the first suit had not been instituted. Order XXIII Rule 3 deals with compromise of suits. It states that where it is proved to the satisfaction of the court that a suit has been adjusted wholly or in part by any lawful agreement or compromise or where the defendant satisfies the plaintiff in respect of whole or any part of the subject- matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith.
The object behind introducing the first proviso and the third proviso to Section 19(1) of the DRT Act is to align the provisions of DRT Act, the NPA Act and Order XXIII CPC. Let us assume for the sake of argument, that an O.A. is filed in the DRT for recovery of an amount on a term loan, on credit facility and on hypothecation account. After filing of O.A., on account of non disposal of the O.A. by the tribunal due to heavy backlog, the bank finds that one of the three accounts has become sub-standard/ loss, in such a case the bank can invoke the NPA Act with or without the permission of the DRT. One cannot lose sight of the fact that even an application for withdrawal/ leave takes time for its disposal. As stated above, with inflation in the economy, value of the pledged property/ asset depreciate on day to day basis. If the borrower does not provide additional asset and the value of the asset pledged keeps on falling then to that extent the account becomes non-performing. Therefore, the bank/ FI is required to move under NPA Act expeditiously by taking one of the measures by Section 13(4) of the NPA Act. Moreover, Order XXIII CPC is an exception to the common law principle of non-suit, hence the proviso to Section 19(1) became a necessity.
For the above reasons, we hold that withdrawal of the O.A. pending before the DRT under the DRT Act is not a pre-condition for taking recourse to NPA Act. It is for the bank/FI to exercise its discretion as to cases in which it may apply for leave and in cases where they may not apply for leave to withdraw. We do not wish to spell out those circumstances because the said first proviso to Section 19(1) is an enabling provision, which provision may deal with myriad circumstances which we do not wish to spell out herein.
(ii) On Point No. 2 on question of possession:
The short question under this head is whether recourse to take possession of the secured assets of the borrower under Section 13(4) of the NPA Act comprehends the power to take actual possession of the immovable property.
Mr. N.C. Sahni and Mr. Pankaj Gupta, learned advocates appearing on behalf of the respective borrowers submitted that Section 13(4) of the NPA Act empowers the secured creditor to take possession of the secured immovable assets of the borrower on expiry of sixty days and notice served under Section 13(2) of that Act. It is pointed out that in many cases, the banks/FIs. have taken actual physical possession whereas in other cases they have taken only a symbolic possession. Learned advocates submitted that in Kalyani Sales Co., the High Court has rightly held that if physical possession is taken on expiry of sixty days, the remedy of application under Section 17 of the NPA Act by the borrower would become illusory and meaningless as the borrower or the person in possession would be dispossessed even before adjudication of the objections by the tribunal. Learned advocates further submitted that under Section 13(8), the bank/FI is prevented from selling the secured assets, if the dues of the secured creditor with all costs, charges and expenses are tendered to the secured creditor at any time before the date fixed for sale. Learned advocates pointed out that under Rule 8(1) of the 2002 Rules, a secured creditor is empowered to take possession as per notice appended in terms of Appendix IV. That notice cautions the borrower not to deal with the property. Learned advocates submitted that notice in terms of Rule 8(1) of the 2002 Rules operates as attachment. It contemplates a symbolic possession. Learned advocates submitted that actual physical possession of immovable assets can be taken under Rule 8(3), in cases where there is a vacant plot or a property which is lying unattended, but where the immovable property is in actual physical possession of any person, the person in possession cannot be dispossessed by virtue of a notice under Rule 8(1); that actual physical possession is to be delivered only after confirmation of sale under Rule 9(6) read with Appendix V under which the authorised officer is empowered to deliver the property to the purchaser free from all encumbrances in terms of Rule 9(9) of the 2002 Rules. Learned advocates, therefore, submitted that the High Court was right in holding that the borrower or any other person in possession of the immovable property cannot be physically dispossessed at the time of issuing notice under Section 13(4) of the NPA Act so as to defeat the adjudication of his claim by the DRT under Section 17 of NPA Act, and that, physical possession can be taken only after the sale is confirmed in terms of Rule 9(9) of the 2002 Rules.
We do not find any merits on the above contentions for the following reasons.
The word possession is a relative concept. It is not an absolute concept. The dichotomy between symbolic and physical possession does not find place in the Act. As stated above, there is a conceptual distinction between securities by which the creditor obtains ownership of or interest in the property concerned (mortgages) and securities where the creditor obtains neither an interest in nor possession of the property but the property is appropriated to the satisfaction of the debt (charges). Basically, the NPA Act deals with the former type of securities under which the secured creditor, namely, the bank/FI obtains interest in the property concerned. It is for this reason that the NPA Act ousts the intervention of the courts/ tribunals.
Keeping the above conceptual aspect in mind, we find that Section 13(4) of the NPA Act proceeds on the basis that the borrower, who is under a liability, has failed to discharge his liability within the period prescribed under Section 13(2), which enables the secured creditor to take recourse to one of the measures, namely, taking possession of the secured assets including the right to transfer by way of lease, assignment or sale for realizing the secured assets. Section 13(4-A) refers to the word "possession" simpliciter. There is no dichotomy in sub-section (4-A) as pleaded on behalf of the borrowers. Under Rule 8 of the 2002 Rules, the authorised officer is empowered to take possession by delivering the possession notice prepared as nearly as possible in Appendix IV to the 2002 Rules. That notice is required to be affixed on the property. Rule 8 deals with sale of immovable secured assets. Appendix IV prescribes the form of possession notice. It inter alia states that notice is given to the borrower who has failed to repay the amount informing him and the public that the bank/FI has taken possession of the property under Section 13(4) read with Rule 9 of the 2002 Rules. Rule 9 relates to time of sale, issue of sale certificate and delivery of possession. Rule 9(6) states that on confirmation of sale, if the terms of payment are complied with, the authorised officer shall issue a sale certificate in favour of the purchaser in the form given in Appendix V to the 2002 Rules. Rule 9(9) states that the authorised officer shall deliver the property to the buyer free from all encumbrances known to the secured creditor or not known to the secured creditor. (emphasis supplied).
Section 14 of the NPA Act states that where the possession of any secured asset is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred, the secured creditor may, for the purpose of taking possession, request in writing to the District Magistrate to take possession thereof. Section 17(1) of NPA Act refers to right of appeal. Section 17(3) states that if the DRT as an appellate authority after examining the facts and circumstances of the case comes to the conclusion that any of the measures under Section 13(4) taken by the secured creditor are not in accordance with the provisions of the Act, it may by order declare that the recourse taken to any one or more measures is invalid, and consequently, restore possession to the borrower and can also restore management of the business of the borrower. Therefore, the scheme of Section 13(4) read with Section 17(3) shows that if the borrower is dispossessed, not in accordance with the provisions of the Act, then the DRT is entitled to put the clock back by restoring the status quo ante. Therefore, it cannot be said that if possession is taken before confirmation of sale, the rights of the borrower to get the dispute adjudicated upon is defeated by the authorised officer taking possession. As stated above, the NPA Act provides for recovery of possession by non-adjudicatory process, therefore, to say that the rights of the borrower would be defeated without adjudication would be erroneous. Rule 8, undoubtedly, refers to sale of immovable secured asset. However, Rule 8(4) indicates that where possession is taken by the authorised officer before issuance of sale certificate under Rule 9, the authorised officer shall take steps for preservation and protection of secured assets till they are sold or otherwise disposed of. Under Section 13(8), if the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the creditor before the date fixed for sale or transfer, the asset shall not be sold or transferred. The costs, charges and expenses referred to in Section 13(8) will include costs, charges and expenses which the authorised officer incurs for preserving and protecting the secured assets till they are sold or disposed of in terms of Rule 8(4). Thus, Rule 8 deals with the stage anterior to the issuance of sale certificate and delivery of possession under Rule 9. Till the time of issuance of sale certificate, the authorised officer is like a court receiver under Order XL Rule 1 CPC. The court receiver can take symbolic possession and in appropriate cases where the court receiver finds that a third party interest is likely to be created overnight, he can take actual possession even prior to the decree. The authorized officer under Rule 8 has greater powers than even a court receiver as security interest in the property is already created in favour of the banks/FIs. That interest needs to be protected. Therefore, Rule 8 provides that till issuance of the sale certificate under Rule 9, the authorized officer shall take such steps as he deems fit to preserve the secured asset. It is well settled that third party interests are created overnight and in very many cases those third parties take up the defence of being a bona fide purchaser for value without notice. It is these types of disputes which are sought to be avoided by Rule 8 read with Rule 9 of the 2002 Rules. In the circumstances, the drawing of dichotomy between symbolic and actual possession does not find place in the scheme of the NPA Act read with the 2002 Rules.
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