Bank has taken the physical possession under section 13(4) of SARFAESI act

by obtaining permission for district magistrate and CJM on the basis of

specified affidavit. What is the remedy to get back the property under the act?

First of all let’s understand the process with respect to loan borrowing:

But is the borrower is unable to pay then section 13 come in picture, the relevant provisions are:

13. Enforcement of security interest.—

(2) Where any borrower, who is under a liability to a secured creditor under a security
agreement, makes any default in repayment of secured debt or any instalment thereof,
and his account in respect of such debt is classified by the secured creditor as
non-performing asset, then, the secured creditor may require the borrower by notice in
writing to discharge in full his liabilities to the secured creditor within sixty days from the
date of notice failing which the secured creditor shall be entitled to exercise all or any of
the rights under sub-section (4):
Provided that—
(i) the requirement of classification of secured debt as non-performing asset under this
sub-section shall not apply to a borrower who has raised funds through issue of debt
securities; and
(ii) in the event of default, the debenture trustee shall be entitled to enforce security
interest in the same manner as provided under this section with such modifications as
may be necessary and in accordance with the terms and conditions of security documents
executed in favour of the debenture trustee;

(4) In case the borrower fails to discharge his liability in full within the period specified
in sub-section (2), the secured creditor may take recourse to one or more of the following
measures to recover his secured debt, namely:
(a) take possession of the secured assets of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall be exercised
only where the substantial part of the business of the borrower is held as security for the
debt:
Provided further that where the management of whole of the business or part of the
business is severable, the secured creditor shall take over the management of such
business of the borrower which is relatable to the security for the debt;
(c) appoint any person (hereafter referred to as “the manager”), to manage the secured
assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may become due
to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay
the secured debt.

Now what is the recourse or remedy for the borrower?

Under Section 13(4), after the accounts are being declared as NPA and the representation
of the borrower/guarantor is rejected, the secured creditor (i.e. bank or FI) can take
recourse to any of the measures specified therein to recover its outstanding debt. This
includes taking over “symbolic possession” of the mortgaged property; or taking over the
management of the business of the borrower, as mentioned thereunder. In continuum,
Sections 13(5-A), (5-B) and (5-C) encapsulate the mechanism of auctioning of the
mortgaged immovable property to 3rd parties for the recovery of the outstanding dues. If
the statutory scheme is being seen holistically, then it clearly implies that taking over of
symbolic possession followed by auction of the mortgaged property is all part of the same
proceedings as a series of steps towards the larger objective of recovery of outstanding
loans of the bank/FI.

Section 13 is wide enough to allow the creditor to resort to any type of measures of
recovery, and this is the distinctive feature of the SARFAESI Act, that it has vested the
secured creditor with host of powers for arm-twisting the borrower or the guarantor for
expeditious realization of the outstanding borrowings.

Proceeding to Section 17, it employs the phrase “any person aggrieved by any of the
measures under Section 13(4)”, which implies any and every action resorted to by the
bank, it is authorized to take recourse to under and in pursuance of Sections 13(4), 14, 15,
so on and so forth. The section does not clearly stop at providing remedy for the decision
under Section 13(4), but transcends to include every such measure, which all are being
undertaken by the bank towards making its action under Section 13(4) fruitful and
consequential.

The application under Section 17 is to be preferred within a period of 45 days “from the
date on which such measure has been taken”. Thus, the concept of limitation running
from the last and latest action in the series of continuing events with respect to recovery
of dues from the borrower/guarantor concerned is duly embodied.

Section 17 further acknowledges that the borrower/guarantor if aggrieved by the unlawful

exercise of power by the lender authorities must not be left remediless and given time
from every individual milestone of adverse action taken by the bank against him. Every
subsequent milestone becomes and creates a fresh starting point for the aggrieved
borrower/guarantor to approach the DRT by way of application under Section 17.
Cases:

Indian Overseas Bank v. Ashok Saw Mill (2009) 8 SCC 366:

● The Supreme Court in Indian Overseas Bank v. Ashok Saw Mill interpreted the
correlation between Sections 13(4) and 17 holding that the plethora of remedies
and powers conferred under Section 17 acts as “checks and balances” on the
creditors from misusing their powers. Section 17 balances the stringent powers of
recovery of their dues vested with the banks/FIs and DRT can even restore
possession after the same has been made over to the transferee by declaring any
action under Section 13 as void.

● This includes setting aside any concluded sale transaction, even when the
possession has been transferred to the auction purchaser. The Court referred to the
judgment of Mardia Chemicals Ltd. v. Union of India to hold that post the
aforesaid judgment sweeping amendments were affected to Section 17, whereafter
the DRT has been conferred with ample powers of restoring the position of the
borrower back to its original place prior to Section 13(4) initiation.

● Vide paras 36-39, the Court held that the DRT if it discovers after inquiry that
resort to Section 13(4) or any of its successive measures has been improper, then it
can go to any extent and pass any order for restituting the borrower to its
pre-Section 13(4) situation.

● This includes setting aside any transaction that might have happened including
auction, sale, vesting of ownership in the auction purchaser, so on and so forth.
Thus Section 17 is a repository of remedies and redressals available to any
borrower against the bank and limited interpretation should not be accorded to it.

Hindon Forge Private Limited v. The State of Uttar Pradesh (Civil Appeal No.
10873 of 2018)

The High Court of Allahabad in its judgment, inter alia, held that
(i) an application under Section 17(1) of the SARFAESI Act is maintainable only when a
borrower loses physical possession of the secured assets;

(ii) a borrower is not entitled to challenge the measure(s) proposed to be taken by a secured
creditor under Section 13(4) of the SARFAESI Act, unless his / her right to approach the
Debts Recovery Tribunal, as provided for under Section 17(1) of the SARFAESI Act,
matures;

(iii) the scheme of provisions of Sections 13 and 17 would show that the “measure” taken
under Section 13(4)(a) read with Rule 8 would not be complete unless actual physical
possession of the secured assets is taken by the secured creditor.

The transfer of possession, the Court held, is an action and a mere declaration of possession,
by a notice, in itself, cannot amount to transfer of possession, more particularly when such a
notice meets with resistance. It was further observed that in a securitization application under
Section 17(1) of the SARFAESI Act, the borrower is required to make a categorical
statement that he / she lost possession or has been dispossessed and pray for possession;

and (iv) a borrower is granted all the opportunities, at different stages, either to clear the dues
or to challenge the measure(s) under Section 13(4) of the SARFAESI Act or even to
challenge the reasons rejecting his objections, after the measures under Section 13(4) have
been taken.

The question before the Supreme Court was, therefore, whether the scope of the expression
“possession” under Section 13(4) of the SARFAESI Act, includes both, symbolic and
physical possession or only refers to physical possession? This question arose in light of the
undisputed fact that a borrower is entitled to approach the Debts Recovery Tribunal once
possession is taken under Section 17(1) of the SARFAESI Act.

Supreme Court’s observations and findings:

1. The Supreme Court held that a borrower can approach the Debts Recovery Tribunal under
Section 17 of the SARFAESI Act at the stage of possession notice, as stipulated under Rules
8(1) and 8(2) of the 2002 Rules.

2. It was observed that the object of the SARFAESI Act, as set out in the Statement of
Objects and Reasons, is to, inter alia, enable a borrower to approach a quasi-judicial forum in
case the secured creditor, while taking any of the measures under Section 13(4) of the
SARFAESI Act, does not adhere to the provisions of the SARFAESI Act. In this regard, the
Supreme Court, while drawing an example, stated that “in the event a secured creditor takes
possession under Rules 8(1) and 8(2) of the 2002 Rules before the 60 (sixty) days’ period
prescribed under section 13(2) is over. The borrower does not have to wait until actual
physical possession is taken (this may never happen as after possession is taken under rule
8(1) and 8(2), the secured creditor may go ahead and sell the asset). The object of providing a
remedy against the wrongful action of a secured creditor to a borrower will be stultified if the
borrower has to wait until a sale notice is issued, or worse still, until a sale actually takes
place. It is clear, therefore, that one of the objects of the Act, as carried out by rule 8(1) and
8(2) must also be subserved, namely, to provide the borrower with instant recourse to a
quasi-judicial body in case of wrongful action taken by the secured creditor.”

3. The Supreme Court further held that Rule 8(3) of the 2002 Rules starts with the expression
“in the event of”, which makes it clear that apart from possession under Rules 8(1) and 8(2)
of the 2002 Rules, possession may be taken under Rule 8(3) as well. In view of this, whether
possession is taken under Rules 8(1), 8(2) or 8(3), these measures are taken by the secured
creditor under Section 13(4) of the SARFAESI Act for the purpose of attracting Section
17(1).

4. A perusal of Section 13(6) of the SARFAESI Act, the Supreme Court observed, makes it
clear that statutorily, though only the lesser right of taking possession (viz. symbolic or
physical) has taken place, yet the secured creditor may, by lease, sale or assignment, vest in
the lessee or purchaser, all rights in the secured assets as if the transfer has been made by the
original owner of such secured asset(s). The Supreme Court, in this regard, affirmed that a
secured creditor remains a secured creditor even after possession is taken as the fiction
stipulated in Section 13(6) of the SARFAESI Act does not convert the secured creditor into
the owner of the asset, but merely vests complete title in the transferee of the asset once the
transfer occurs in accordance with Rules 8 and 9 of the 2002 Rules.

5. The Supreme Court also observed that Appendix IV-A (inserted by an amendment to Rule
8 of the 2002 Rules on October 17, 2008), throws light on and recognizes the fact that, Rules
8(1) and 8(2) of the 2002 Rules refer to symbolic possession whereas Rule 8(3) refers to
physical possession.

6. In view of this, the Supreme Court (i) set aside the judgment dated February 6, 2018,
passed by a Full Bench of the High Court of Allahabad; and (ii) held that a borrower can
approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act at the stage
of possession notice as stipulated under Rules 8(1) and 8(2) of the 2002 Rules.