Expression “Parties” u/r 8(8) of SARFAESI Act not Mandate to include borrower and guarantor: Calcutta HC sets aside Order [Read Order]

Dr. Tushar Kanti Karmakar, the petitioner is purchaser of mortgaged property and Secured Creditor, State Bank of India assailed the impugned Judgment and Order dated 11th December, 2018 passed by Single Bench of the High Court in Shilabati Hospital Private Limited & Ors. Vs. State Bank of India & Ors.by filing two separate appeals.

The issues involved particularly arising from the sale of a mortgaged property under the provisions of The Securitisation And Reconstruction Of Financial Assets And Enforcement of Security Interest Act, 2002 ( ‘SARFAESI Act, 2002’) and The Security Interest (Enforcement) Rules, 2002 ( ‘the said Rules, 2002’) thereof.

The Writ Petitioners/Borrowers, being the Directors of M/s Shilabati Hospital Pvt. Ltd. (Private limited company within the meaning of Companies Act, 2013), approached the State Bank of India seeking a loan to facilitate medical treatment for the public through their hospital, namely, M/s Shilabati Hospital Pvt. Ltd.

Want a deeper insight into the Income Tax Bill, 2025? Click here

The Bank sanctioned credit facilities as term loan of Rs. 200 lakhs to the Writ Petitioners on 23rd July, 2003, upon mortgaging properties consisting of two adjacent Plots of land. The hospital building was erected on the first part of the borrower's land, and the second part belonged to the Guarantor of the loan, Smt. Tanushree Manna, who also held 50% ownership in the 1st part of the land. Smt. Tanushree Manna also took a separate loan against the second part of the property.

The Loan account was, subsequently, classified as a Non-Performing Asset (NPA) on 31st March, 2004, due to non-repayment of the term loan availed by the mortgagors. The Bank’s approved valuer assessed the combined value of the Hospital Building & Property of Tanushree Manna, i.e,. both properties at Rs. 1,77,22,000.00/- as on 17th June, 2006. A demand notice was issued under Section 13(2) of the SARFAESI Act, 2002 on 28th June, 2006 to the Writ Petitioners asking them to discharge the liability of Rs. 3,70,90,320.00/- in full within 60 days, but they failed.

The Bank issued a possession notice under Section 13(4) of the Act, maintaining all due process of law under the SARFAESI Act, 2002 on 16th December, 2006, covering both the hospital property and the adjacent land owned by Smt. Manna. Pursuant to Rule 8 of the said Rules, notice was published in Bengali and English Newspapers “Ajkal” and “The Statesman” on 22nd December, 2006. Rule 8 provides for the sale of immovable secured assets after compliance of necessary provision of the said SARFAESI Act, 2002. On 23.12.2006, writ petitioners handed over the physical possession of property to the Bank without any objection.

A fresh valuation was conducted on 11.01.2007 by Engineers and Valuers Collaborated, assessing the value at Rs. 1,85,97,000.00/- for Land & Building and Rs. 1,64,00,000.00/- for Plant & Machinery (Total Rs. 3,50,57,000.00/-) on 11th January, 2007 and after getting such valuation report of the properties, Bank issued notice for public auction as per Rule 8(5) of Rules, 2002 at a reserve price of Rs. 3,75,00,000/- on 23rd February, 2007. However, no bids were received.

How to Audit Public Charitable Trusts under the Income Tax Act Click Here

The writ petitioners challenged the public auction notice before the D.R.T under section 17 of the said Act which was ultimately dismissed for non-prosecution vide Order dated 05.10.2007. In the year 2007, the devastating flood swept the whole Ghatal town and the ground floor of Shilabati Hospital was clogged with a water level of 3 feet for four days, and all the costly machines were defunct. The bank again published a Public Auction Notice in the ‘Times of India’, keeping reserve price at Rs. 3.75 Crores on 2nd January, 2008, but this time also no bid offer was found from any corner.

Therefore, another valuation Report was sought from the Bank’s approved valuer. It was valued at Rs. 2.16 Crores for the Land & Building and Rs. 55 Lakhs for Plant & Machinery, both properties (Total comes to Rs. 2.71 Crores) on 26th March, 2008.

The writ petitioner had offered to the bank a one-time settlement at a full and final value of Rs. 155 Lakhs on 28th August, 2008, but the said offer was rejected by the Bank on 15th November, 2008, as the value of properties was higher than the offer price. A third Valuation Report was sought from the Bank’s approved valuer on 15th November, 2008. It was valued at Rs. 207.47 Lakhs for Land & Building and

Rs. 60.76 Lakhs for Plant & Machinery of both properties (Total Rs. 268.23 Lakhs).

Once possession of secured assets is taken by the Bank, an onerous duty of care is cast upon the secured creditor under Rule 8(3) of the Rules, 2002. The bank is obliged to take such care of the property as an owner of ordinary produce would take, under similar circumstances. Rule 8(4) of the 2002 Rules imposes additional responsibility upon authorized officers to take steps for the preservation and protection of the secured assets either movable or immovable and to protect the secured assets from financial loss due to unexpected events like natural disaster, fire, theft, vandalism or accidents. They can even insure the property, until they are sold or otherwise disposed of.

According to the Single Bench, the Bank is required to enter into an agreement in writing with the parties affected by the property concerned, to allow the Bank to sell the property by means other than public auction and the word “parties” under Rule 8(8) indicates bank, purchaser, borrower and guarantor as well because borrower and guarantor are the effected party due to interest in the property supposed to be sold under private treaty.

Master the Latest Amendments in Income Tax Act Click here

The Single Bench further observed that an ownership right is a constitutional right provided under Article 300A of the Constitution of India to the borrower, which mandates that no person shall be deprived of his property saved by the authority of law. The Bank needs to protect borrowers’ interests, particularly with regard to the valuation of the property. He should not be kept in the dark. Therefore, the term ‘parties’ herein refers to any entitiy against whom interest is involved in the property supposed to be sold by private treaty. When the secured property is to be sold by a private treaty, the terms and conditions of sale shall be decided between the parties for future reference.

The bench observed that the term ‘parties’ in the Rule 8(8) of the rule means the bank and only the purchaser. Before the date of final order passed in 2018, there was no clarification that ‘parties’ mean bank/purchaser/borrower and guarantor. After amendment, Rule 8(8) indicates “Sale by any methods other than public auction or public tender, shall be on such terms as may be settled (between the secured creditor (Bank) and the proposed purchaser in writing)” It was the legislative intention.

The provisions of the SARFAESI Act, 2002, do not require either the borrower or the guarantor when the terms and conditions are indicated in the brochure. The purchaser cannot play any role in the formulation of the terms from his side because he has to follow the terms of the Bank for purchasing the secured assets in public auction. The private party or the creditor (Bank) cannot fix terms independently in case of private treaty, therefore, written terms are required before effecting the sale. Therefore, there must be written terms and conditions. It requires to be followed by the parties who are involved in the sale process regarding the valuation of the property, mode and manner of payment and all other terms as applicable for sale under Rule 8 (8) of the Rules.

A division bench of Justice Rajasekhar Mantha and Justice Ajay Kumar Gupta observed that even after the amendment of Rule 8(8) of the Security Interest (Enforcement) Rules, 2002 in 2016, the expression “parties” therein has been clarified to mean only the secured creditor and the proposed purchaser. The clear legislative intent was that the agreement for sale under a private treaty would be concluded exclusively between these two parties, and such an amendment was purely clarificatory in nature to avoid administrative ambiguity.

If it were the legislative intent that the expression “parties” in Rule 8(8) also includes the borrower and guarantor, then the borrower could have, at best, been treated as a confirming party to the agreement for sale. However, such an interpretation would render the entire sale process uncertain and unworkable, since every borrower could obstruct the conclusion of sale by refusing to cooperate at the stage of registration or execution of the sale agreement.

The term “parties” under Rule 8(8) must be read as confined to the Bank and the proposed purchaser, the latter being a borrower, guarantor, or third party, if such person chooses to purchase the secured asset under private treaty.

As neither the borrower nor the guarantor came forward with any viable proposal to purchase the property, the sale in favour of Dr. Karmakar stands unimpeachable. The conduct of the borrower and guarantor is not appreciable in any manner. Unless the writ petitioners are able to establish substantial prejudice resulting from a proven procedural lapse under the SARFAESI Act or the Rules framed thereunder, no interference is warranted. It was evident that under Rule 8(8), whether in its pre-amendment or post-amendment form, the term “parties” refers only to the Bank and the proposed purchaser.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates