Transcore vs. Union of India (UOI) and Anr.
Key Words: debt, recovery, security, banks, financial institutions, liability, tribunal, reconstruction, financial assets, enforcement of security interest, Mardia Chemicals, possession, immovable properties, notice, enabling provision
Relevant Acts & Provisions:
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI/NPA) Act, 2002: Ss. 13 (2), 13(4), 17 (1)
- Recovery of Debts Due to Banks and Financial Institutions (RDDBFI/DRT) Act, 1993- Ss. 19 (1)
- Under the first proviso of S, 19(1), the bank or FI may, with the permission of the DRT, on an application made by it, withdraw the O.A. for the purpose of taking action under the NPA Act, if no such action has been taken earlier under that Act.
- Under the second proviso, it is further provided that, any application made for withdrawal to the DRT under the first proviso shall be dealt with expeditiously and shall be disposed of within thirty days from the date of such application.
CASE(S) REFERRED: Mardia Chemicals Ltd. and Ors. v. Union of India and Ors.
- The constitutional validity of the NPA Act was upheld.
- Held that in cases where a secured creditor has taken action under Section 13(4), it would be open to the borrower to file an application under Section 17 of the NPA Act.
An Original Application (O.A.) was filed by Indian Overseas Bank (Bank) before the DRT, Chennai for recovery of dues from M/s Transcore (T) and bring the properties to sell. The claim was disputed. Later on, a notice under Section 13(2) of the SARFAESI Act was issued vide which T was called upon to repay the amount due together with interest within sixty days. T failed to repay the amount. The Bank took the possession of the immovable properties and the same became subject to the charge of the Bank.
- The Bank could not have invoked the SARFAESI Act under the proviso to Section 19(1) of the DRT Act without the prior permission of the Tribunal before whom the O.A. was already pending.
- The Notice under Section 13(2) of the SARFAESI Act was merely a show cause notice and such a Notice did not constitute an action in terms of the first proviso to the said Section 19(1) of the DRT Act. Consequently, the Bank was duty bound and obliged to make an application to the DRT seeking withdrawal of the O.A.
- Since, the proviso has not been complied with by the Bank the Possession Notice/ Order issued by the Bank under Section 13(4) of the NPA Act was illegal and bad in law and liable to be set aside.
- The doctrine of election is applicable. The doctrine is a branch of the rule of estoppel which
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.
- The proviso to S. 19(1) of the DRT Act is an enabling provision and banks and financial institutions have an independent right to recover debts;
- Banks/Financial Institutions (FIs) are not mandatorily obliged to obtain the prior leave of DRT and the said proviso is not a condition precedent to taking recourse to the NPA Act.
- NPA Act is the special Act whose provisions override all other laws inconsistent therewith.
ISSUE: Whether withdrawal of Original Application (O.A.) in terms of the first proviso to Section 19(1) of the RDDBFI Act is a condition precedent to taking recourse to the SARFAESI Act, 2002.
The Apex Court in this case pointed out some crucial differences and similarities between the DRT Act and NPA Act in terms of their relief, object and purpose, etc. apart from clarifying the meaning of certain related terms.
Meaning of Securitization: Securitisation is a financing tool which involves creating, combining and recombining of assets and securities. RBI has defined the same as “a process by which a single performing asset or a pool of performing assets are sold.”
Meaning of Non-Performing Assets (NPA): NPA is an account which becomes non-viable and non-performing in terms of the guidelines given by the RBI. It arises on account of mismatch between asset and liability.
SARFAESI Act, 2002:
- To enable the banks and FI to realise long-term assets, manage problems of liquidity, asset liability mismatch and to improve recovery of debts by exercising powers to take possession of securities, sell them and thereby reduce non-performing assets by adopting measures for recovery and reconstruction.
- To provide for setting up of asset reconstruction companies (ARCs) which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale.
- To empower ARCs to take over the management of the business of the borrower.
- To remove the fetters which were in existence on the rights of the secured creditors.
- To accelerate the process of recovery of debt and to remove deficiencies/ obstacles in the way of realisation of debt under the DRT Act.
- To give discretion to the bank/FI to take steps in order to protect its assets from being alienated, transferred or disposed of in any other manner.
- Under Section 17(2) of the NPA Act, the DRT is required to consider whether any of the measures referred to in Section 13(4) taken by the secured creditor for enforcement of security are in accordance with the provisions of the NPA Act and the Rules made thereunder.
DRT Act, 1993:
- Under Section 19(18) the DRT is also empowered on grounds of equity to appoint a receiver of any property, before or after grant of certificate for recovery of debt.
- Under Section 19(19), a recovery certificate issued against a company can be enforced by the DRT which can order the property to be sold and the sale proceeds to be distributed amongst the secured creditors in accordance with the provisions of Section 529-A of the Companies Act, 1956.
- Section 25 provides for three modes of recovery of debts namely, (a) attachment and sale; (b) arrest of the defendant; and (c) appointment of a receiver for the management of the properties of the defendant.
- Section 28 states that where a certificate has been issued by the DRT to the Recovery Officer under Section 19(7), the Recovery Officer may, without prejudice to the modes of recovery specified in Section 25, recover the amount of debt by any one or more of the modes mentioned in Section 28.
- Section 13(6) inter alia provides that once the bank/FI takes possession of the secured asset, then the rights, title and interest in that asset can be dealt with by the bank/FI as if it is the owner of such an asset and the asset will vest in them free of all encumbrances and the secured creditor would be entitled to give a clear title to the transferee in respect thereof.
Differences between DRT Act and SARFAESI Act:
- DRT Act did not provide for assignment of debts to Securitisation companies and therefore, secured assets also could not be liquidated in time. 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.
- The NPA Act proceeds on the basis that the liability of the borrower to repay has crystallized; that the debt has become due and that on account of delay the account of the borrower has become sub-standard and non-performing. Therefore, there is no scope of any dispute regarding the liability.
- Meaning of ‘debt’ under DRT Act is broader and covers secured, unsecured and assigned debts. It also covers debts payable under a decree, arbitration award or under a mortgage.
- DRT Act provides for adjudication of disputes as far as the debt due is concerned.
- DRT Act does not rule out applicability of the provisions of the Transfer of Property Act, in particular Sections 69 and 69A of that Act. Section 35 of NPA Act gives it an overriding effect with all other laws if such other laws are inconsistent with the NPA Act.
- The scheme of the NPA Act does not deal with disputes between the secured creditors and the borrower. On the contrary, the NPA Act deals with the rights of the secured creditors inter se.
- The object behind Section 13 of the NPA Act and Section 17 r/w Section 19 of the DRT Act is the same, namely, recovery of debt.
- The tribunal under the DRT Act is also the tribunal under the NPA Act.
- The amendments in DRT Act were made in order to enable the banks/FIs. to withdraw, with the permission of DRT, the O.As. made to it, and thereafter take action under the NPA Act.
- There is a difference between accrual of liability, determination of liability and liquidation of liability. Section 13(2) of NPA Act deals with liquidation of liability. Section 13 deals with enforcement of security interest, therefore, the remedies of enforcement of security interest under the NPA Act and the DRT Act are complementary to each other. Thus, the enactment of NPA Act is not in derogation of the DRT Act.
- It is wrong to say that the two Acts provide parallel remedies.
- In the event of non- payment of secured debts by the borrower, notice under Section 13(2) is given as a notice of demand. The scheme of Sub-sections (2), (3) and (3-A) of Section 13 of NPA Act shows that the notice under Section 13(2) is not merely a show cause notice, it is a notice of demand and it constitutes an action taken by the bank/ FI for the purposes of the NPA Act. That notice of demand is based on the footing that the debtor is under a liability and that his account in respect of such liability has become substandard, doubtful or loss.
- Section 13(10) shows that the bank/ FI is not only free to move under NPA Act with or without leave of DRT but having invoked NPA Act, liberty is given statutorily to the secured creditors (banks/ FIs.) to move the DRT under the DRT Act once again for recovery of the balance in cases where the action taken under Section 13(4) of the NPA Act does not result in full liquidation of recovery of the debts due to the secured creditors. Section 13(10) thus fortifies that the remedies for recovery of debts under the DRT Act and the NPA Act are complementary to each other. Section 13(10) shows that the first proviso to Section 19(1) of DRT Act is an enabling provision and that the said provision cannot be read as a condition precedent to taking recourse to NPA Act.
- 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).
- 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. If in truth there is only one remedy, then the doctrine of election does not apply. As the NPA Act is an additional remedy to the DRT Act abd they together constitute one remedy, the doctrine of election does not apply. Even otherwise, since there is no repugnancy or inconsistency between the two remedies, the doctrine of election has no application.
OUTCOME: The 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.