India: Analysis Of "ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors."(Section 13 (3-A) of the SARFAESI Act Is Mandatory And Not Directory)

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, ("Act") is a mighty tool in the hands of the secured creditors for recovery of outstanding debt. Recent trends show the keenness of the banks in taking recourse to the provisions of the Act as a first resort for recovering loans. However, the banks have also been misusing the provisions of the Act, by jumping into coercive actions and throwing overboard the due process as prescribed under the Act to recover the debt.

Under Section 13 of the Act, the banks have the power to initiate the recovery process without approaching the courts. The bank, after declaring the account of a borrower as Non-Performing Asset ("NPA")¹, issues a notice in writing to the borrower under Section 13(2) of the Act calling upon the borrower to discharge in full his liabilities to the secured creditor within 60 days from the date of the notice. The borrowers on receiving such notice may make representation or raise objections under Section 13 (3-A) of the Act which shall be considered by the secured creditor within a period of 15 days of receipt of such representation or objection. In the case ITC Limited vs. Blue Coast Hotels Ltd. & Ors., 2 the question which was required to be decided by the Hon'ble Supreme Court was, "whether the Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower's representation. In other words, whether subsection (3A) of Section 13 is mandatory or directory in nature."³

The Hon'ble Supreme Court, in its decision in ITC Limited vs. Blue Coast Hotels Ltd. & Ors., held that once the proceedings have been initiated by a secured creditor under Section 13 of the Act, it is mandatory for the secured creditor to consider the representations made by the debtors under Section 13 (3A) of the Act.

In the said case, Industrial Financial Corporation of India (IFCI) had entered into a corporate loan agreement with Blue Coast Hotels for a sum of Rs. 150 Crores. The said loan was secured by creation of special mortgage of debtor's hotel property including the agricultural land on which the debtor was to develop villas. On default in repayment of the outstanding loan amount, the account of the debtor was declared NPA and a notice under Section 13(2) of the Act was sent by IFCI calling upon Blue Coast Hotel to pay the overdue amount within a period of 60 days. On receiving the Notice under Section 13(2) of the Act, Blue Coast Hotel sent a proposal to IFCI for extension of time for the payment of the outstanding dues. However, IFCI failed to deal with the said representation of Blue Coast Hotel.

IFCI took symbolic possession of the hotel property of Blue Coast Hotel in June 2013 and a notice for auction sale was also published. Blue Coast Hotel aggrieved by the said auction sale notice, filed a Securitization Application ("S.A.") against the said notice before the Ld. Debt Recovery Tribunal ("DRT") wherein, the Ld. DRT passed an interim order directing IFCI not to take any steps in the next 60 days with respect to the sale of the hotel property. The Ld. DRT also set aside the Notice sent by IFCI under Section 13(2) of the Act on the ground of non-compliance by IFCI with the provisions of Section 13(3-A) of the Act and for issuance of demand notice jointly for agricultural land and the mortgaged property. The Ld. DRT also clarified that the provisions of the Act do not apply to the agricultural land as specified under Section 31(i) of the Act.

IFCI aggrieved by the order passed by the Ld. DRT, filed an appeal before the Ld. Debt Recovery Appellate Tribunal ("DRAT"). The Ld. DRAT allowed the appeal and upheld the validity of the notice issued under Section 13(2) of the Act by IFCI. Thereafter, Blue Coast Hotel filed Writ Petitions against the order of the Ld. DRAT before the Hon'ble Bombay High Court.

In the meantime, IFCI issued another auction notice in December 2014 and the hotel property was eventually purchased by ITC Ltd. However, the Hon'ble Bombay High Court held that:

a. Since IFCI failed to reply to the proposal given by Blue Coast Hotel, IFCI violated the provisions of Section 13(3-A) of the Act;

b. IFCI had issued the notice under Section 13(2) of the Act for agricultural land and hence the same was in violation of the Section 31(i) of the same Act; and

c. Auction/ sale of the mortgaged property on the basis of symbolic possession is contrary to the scheme of the Act and Rules.

ITC Ltd. aggrieved by the said order passed by the Hon'ble Bombay High Court, filed a SLP before the Hon'ble Supreme Court wherein the Hon'ble Supreme Court held that "We find the language of sub-section (3A) to be clearly impulsive. It states that the secured creditor 'shall' consider such representation or objection and further, if such representation or objection is not acceptable or tenable, he shall communicate the reasons for non-acceptance" thereof. We see no reason to marginalize or dilute the impact of the use of the imperative 'shall' by reading it as 'may'. The word 'shall' invariably raises a presumption that the particular provision is imperative."⁴

It was further held by the Hon'ble Supreme Court that "As the Section stood originally, there was no provision for the above-mentioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2). As it was introduced via sub-section (3A), it could not be the intention of the Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor's representation has not been accepted."⁵

However, considering the facts in the instant matter, the Hon'ble Supreme Court held that "we have no doubt that the failure to furnish a reply to the representation is not of much significance since we are satisfied that the creditor has undoubtedly considered the representation and the proposal for repayment made therein and has in fact granted sufficient opportunity and time to the debtor to repay the debt without any avail. Therefore, in the fact and circumstances of this case, we are of the view that the debtor is not entitled to the discretionary relief under Article 226 of the Constitution which is indeed an equitable relief."⁶

Accordingly, in view of the Hon'ble Supreme Court of India's judgment in the aforesaid matter, it is mandatory (and not discretionary) for all banks who have issued a notice under Section 13(2) of the Act to give consideration to the representations or objections that may be raised by the borrower under Section 13(3A) of the Act and if the said representations or objections are not acceptable or tenable then the banks are mandated to communicate the reasons for the same to the borrower within 15 days of receipt of such representations or objections.

Footnotes

1 As per para 2.1.2 of the Reserve Bank of India Master Circular on Income Recognition, Asset Classification & Provisioning pertaining to advances (RBI/2014-15/74) bearing DBOD No. BP.BC.9/21.04.048/2015-15 dated 1 July 2014 a Non Performing Asset is a loan or advance where : (i) interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan; (ii) the account remains 'out of order' as indicated at paragraph 2.2, in respect of an Overdraft/Cash Credit (OD/CC); (iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted; (iv) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops; (v) the instalment of principal or interest thereon remains overdue for one crop season for long duration crops; (vi) the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006; and (vii) in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

2 Decided on 18.03.2018 by the Hon'ble Supreme Court.

3 Para 25 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors. 4 Para 28 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors. 5 Para 29 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors. 6 Para 34 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors.

5 Para 29 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors.

6 Para 34 of ITC Ltd. vs. Blue Coast Hotels Ltd. & Ors.

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