ASREC India Ltd vs Ms I Shunmugadurai and Firm on 26 August 2019

O R D E R

1. This application is filed by the applicant bank under Section 19(1) of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, against the defendants 1 to 4, jointly and severally, for recovery of a total sum of Rs.41,80,13,541.85, i.e. (i) a sum of Rs.28,56,85,354.30

being the amount due under Overdraft facility together with interest with 13% p.a. with monthly rests compounded along with 2% penal interest (ii) Rs.13,23,28,187.55 (Rupees Thirteen Crores Twenty Three Lakhs Twenty Eight Thousand One Hundred and Eighty Seven and Fifty Five Paise only) being the amount due under Term Loan facility together with interest with 14% p.a., with monthly rests compounded along with 2% penal interest, for sale of the schedule mentioned properties along with costs.

2. Brief facts of Application are as follows:

2.1. The applicant submits that the 1st Defendant is a Proprietary Concern represented by its Proprietor Mr.I.Shunmugadurai, the 2nd Defendant, involved in the business of Trading, availed Rs.20 Crores as Over Draft Credit Facility towards Working Capital requirement including takeover of liabilities with HDFC Bank vide Sanction dated 18.11.2013 from Karnataka Bank Ltd, Thambu Chetty Street, Chennai. The 1st Defendant had accepted all the terms and conditions and executed necessary borrowing instruments on 02.12.2013 along with the 3rd & 4th Defendants promising to repay the same with interest at 13.50% per annum compounded monthly, rising or falling with the Base Rate of interest as fixed by Karnataka Bank from time to time. The said facilities were granted against the Hypothecation of Receivables & Book Debts described in Schedule – A and as collateral security of Schedule – B property.

2.2. The applicant further submit that the 3rd & 4th Defendants stood as Guarantors and executed the Guarantee Letter on 02.12.2013. The applicant submits that the 1st Defendant also availed Rs.11.35 Crores as Term Loan against the primary security of mortgage of the property morefully described in Item No.2 & 3 of the Schedule – B of the OA for investment in business and executed necessary Term Loan Agreement on 02.12.2013 along with the 3rd & 4th Defendants promising to repay the same in 84 Equated Monthly installments of Rs.21,58,464/- each . The 3rd & 4th Defendants also stood as Guarantors and executed the Guarantee Letter on 02.12.2013 for the above said facility. The Term Loan facility was granted against the collateral security of equitable mortgage of Item No.1 of the Schedule – B Property.

2.3. The applicant further submits that the 2nd & 3rd Defendants had deposited the original title deeds relating to Item No.1 of the B- Schedule Property with Assignor Bank on 30.12.2013 and also executed & registered the Memorandum of Deposit of Title Deeds vide

Doc.No.293/2014. Similarly, the 2nd Defendant had deposited the original title deeds relating to Item No.2 of the B- Schedule Property with Assignor Bank on 16.12.2013 and also executed & registered the Memorandum of Deposit of Title Deeds vide Doc.No.697/2013. Similarly, the 2nd & 3rd Defendants had deposited the original title deeds relating to Item No.3 of the B- Schedule Property with Assignor Bank on 02.12.2013 and also executed & registered the Memorandum of Deposit of Title Deeds vide Doc.No.6674/2013.

2.4. The applicant further submits that the 1st Defendant had promised to repay the amounts availed together with various rates of interest mentioned in the security documents or at such rates and rests as may be revised by the Assignor Bank from time to time. The 1st Defendant promised that the amounts availed under Over Draft is to meet Working Capital requirements and agreed that the Demand pronote executed by the borrower/sin bank's favour and the agreement are to operate as a continuing security for the ultimate balance with interest thereon that may be payable to the Bank upon the said cash credit account. Moreover the 1st Defendant also agreed that the securities held under the loans as aforesaid shall extend and also to be held as security for any other loans or liability of the borrower/s to the bank, including ad-hoc facilities / temporary accommodation/exceeding of the sanctioned limit granted at the request of the borrowers etc., until the entire dues to the Bank are repaid in full. The 1st Defendant also in and by various letters and undertaking promised to indemnify the applicant against any loss. Further, the 1st Defendant also agreed that the applicant Bank shall have the right to recall the entire loan amount together with interest and other charges or any part thereof and/or withdraw the concessions if any,such as reduced rate of interest, subsidy, in case the loan amount is/has been used for any purpose other than for which it has been sanctioned.

2.5. The applicant further submits that the 1st Defendant also executed a Hypothecation Agreement in favour of the Assignor Bank hypothecating the Receivables & Book Debts of the firm from time to time whereby among other things the 1st Defendant agreed that the borrower/s shall regularly and punctually submit monthly statements to the Bank, verified by them as correct, giving full particulars of book debts (i.e.) date of debt, name and address of the debtor and amount of debts, etc., in the form and manner as prescribed by the bank. Further on the undertaking hereby given by the borrower/s that they will not create a further mortgage or lien or any charge over the hypothecated securities during the currency of the loans and that all the securities which are hypothecated and which stand hypothecated from time to time to the Bank, when left in the possession of the borrower/s shall be held by them, and deemed to be held by them, only as agent for the Bank, in trust of the Bank, and the borrower/s be accountable to the bank for all the securities hypothecated under the said agreement and placed in the possession and control of the borrower/sas agent for the Bank.

2.6. The applicant submits that due to irregular operation, the loan account of the 1st Defendant was classified as NPA on 31.03.2016. The applicant submits that the Assignor Bank had also issued the Demand Notice under Sec.13(2) of the SARFAESI Act to the Defendants on 26.05.2016. Since, the Defendants had neither replied nor repaid the amounts, the Assignor Bank had taken possession of the property under Sec.13(4) of the Act vide Possession Notice dated 19.01.2017. The applicant submits that pursuant to the Assignment Agreement, the applicant had informed the Defendants about the said assignment by a letter dated 13.04.2017. The applicant submits that after the receipt of the letter dated 13.04.2017, the Defendants had approached the Applicant herein and promised to settle the dues. But the Defendants have been giving only false promises under the pretext of settlement and had been delaying the repayment. The Defendants had since failed to repay the dues, the applicant is constrained to file the present recovery suit.

3. Brief averments made by the 2nd Defendants in his reply statement are as follows; The 2nd defendant had stated that the applicant has no locus standi to file the present OA. The applicant has not given credit to the amount of Rs.12 crores paid by the defendants, hence the entire calculation is wrong. The present OA is barred by limitation. As per the terms and conditions of the take over, the 1st defendant had made regular payments. The claim that the 3rd and 4th defendants stood as guarantors is in correct and false. The defendants have not executed any hypothecation agreement as claimed in the OA. The loan account of the 1st defendant was wrongfully and illegally classified as NPA on 31.3.2016. Thus contending, the defendants 1 to 3 prayed to dismiss the OA with costs.

During the course of the OA proceedings, the applicant has filed Part Satisfaction Memo dated 2.1.2019 reporting realization of a sum of Rs.21,01,00,000/- by sale of Items 2 and 3 of the

OA ‘B’ Schedule mentioned properties under SARFAESI auction held on 26.10.2018. However, the applicant bank had not stated as to how this amount of Rs.21,01,00,000/- has been appropriated. It is to be stated that the OA claim includes claim towards Overdraft Facility and TermLoan facility. In so far as Term Loan is concerned, the applicant bank had claimed a sum of Rs.13,23,28,187.55p as on the date of the filing of application together with interest @ 14% p.a. with monthly rests compounded along with penal interest @ 2% p.a. Therefore it is hereby ordered that the entire amount of Rs.21,01,00,000/- realized as aforesaid shall be given due credit towards Term Loan facility effective from 26.10.2018 and the balance amount, if any only, shall be claimed by the applicant.

5. Thus, in the above backdrop, the points that arise for consideration by this Tribunal are :

1. “Whether the applicant bank has established its claim against the defendants 1 to 4, if so, for what amount ?

2. Whether the applicant bank is entitled for pendent lite and future interest, if so, at what rate?

6. Point 1: “Whether the applicant bank has established its claim against the defendants, if so, for what amount ?

6.1. Ld. Counsel for the applicant bank, placing reliance on the proof affidavit of AW-1 besides Exhibits A-1 to A-31, vehemently contended that the claim of the applicant stands established, as such the applicant is entitled for a recovery certificate as prayed for.Ld. Counsel would further contend that even in the reply statement filed by the 2nd defendant, the 2nd defendant has not denied availing of credit facilities and execution of loan and security documents, as such the claim of the applicant stands unrebutted. That apart, in the absence of any counter proff affidavit from the defendants, there is no substantiation of pleas put forth by the defendants. Thus contending, ld. Counsel for the applicant bank prayed to issue recovery certificate against the defendants.

6.2. Per contra, the 2nd defendant, in his reply statement, has questioned the locus standee of the applicant in filing the present OA and contended that the assignment in favour of the applicant is false. It is stated that the defendants have made payments regularly and it is denied that the 3rd and 4th defendants stood as guarantors. The 2nd defendant also questioned the

declaration of the loan account as NPA.It is further stated that the 1st defendant tried to resolve the claim through OTS, but the same was not considered. It is stated that the claim as made is incorrect and in fact there is no cause of action. Thus submitting, the 2nd defendant has prayed to dismiss the OA.

6.3. No reply statement has been filed by the defendants 1, 3 and 4.

6.4. It is to be stated that though the 2nd defendant filed reply statement, the 2nd defendant has not chosen to file any Counter Proof Affidavit, despite sufficient opportunity. Therefore, in the absence of any Counter Proof Affidavit from the defendant, the Tribunal is not inclined to accept the contest of the defendants, as the scheme of adjudication of claims, require that the claim or the counter claim if any,be decided on the basis of the affidavits of the parties.

6.5. In so far as the plea that the borrower were not informed of the assignment of debt and the underlying securities, it is to be stated that the borrower has no say in Assignment Agreement entered by the Secured Creditor with the Assignee, as held by , Hon’ble Supreme Court in the matter between Rita Machines (India) Ltd Vs Debt Recovery Appellate Tribunal, [2013 SCC Online (P & H) 20732] : “ We have heard learned senior counsel for the petitioner for better part of an hour and a half. Learned senior counsel endeavored to take us through the scope of different provisions of the SARFAESI Act even though we repeatedly emphasized that the scope of scrutiny of this Court would only be quo the lisbefoe us i.e whether there was any violation of the order dated 18.11.2009 by the Central Bank of India in its act of assignment of the debt to IARC Limited as per the assignment deed dated 29.3.2011.

22. Before concluding, we may state that NPAs are created on account of the breaches committed by the borrower. He violates his obligation to repay the debts. One fails to appreciate the opportunity he seeks to participate in the "Transfer of Account Receivable" from one bank to the other." (emphasis supplied) We have given our thoughtful consideration to the matter and find that the writ petition is completely meritless. We must note at the inception that this Court is exercising jurisdiction under Article 226 of the Constitution of India and not as an Appellate Forum and, thus, occasion for invocation of such a jurisdiction in the context of the statutory provisions of the SARFESI Act would only arise when there is perversity in the impugned order. We find no such perversity in the impugned order of the Debts Recovery Appellate Tribunal. Rather, the order is completely valid and legal in the context of the provisions of the said Act and the jurisdiction invoked by the petitioner under Section 17 of the SARFESI Act before the Debts Recovery Tribunal. In so far as the principles which would govern such a transaction are concerned, we are unequivocally of the view that they would be completely guided by the pronouncement of the Hon'ble Supreme Court in ICICI Bank Ltd's case (supra) and to the extent that there are any observations contrary to the same by the Allahabad High Court, the same would be no more good law.

62. To enforce payment of money secured by a mortgagee or otherwise charge upon immovable 12 years When the money sued for becomes due. In our view, the provisions of the SARFESI Act are quite clear. Section 5 permits acquisition of rights or interest in financial assets by any securitization company or re-construction company or any bank or financial institution through the mode prescribed therein. Clause (b) to sub section (1) of section 5 of the SARFESI Act permits entering into agreement for such transfer.The petitioner is no one to question the same. In fact, if one may say, the occasion to enact the SARFESI Act arose on account of the long pendency of recovery proceedings by public financial institutions against debtors who fail to clear the dues. The bank may at times feel handicapped in the process or would not like to wait for the decision in the legal proceedings and, thus, assign debts for a lump sum to the ARC. As to what profit the ARC would make is none of the business of the petitioner as observed by the Hon'ble Supreme Court. The Hon'ble Supreme Court also noticed that NPAs are creation of the breaches committed by a borrower. We are unable to appreciate the plea advanced by learned senior counsel for the petitioner that though an acquisition by the ARC takes place under Section 5, qua the same transaction, the assignment is actually taking place by the bank under Section 13(4) of the said Act as there is no other provision for the said assignment. This is a complete mis-reading of the provisions of the said Act and assignment of the debt is to be fully governed by the provisions of Section 5 of the said Act. Section 13 is only for enforcement of the security interest. In fact, it falls in chapter III which deals with enforcement of security interest and Section 13(4) envisages the action to be taken on failure of a borrower to discharge his liability within the specified time. In view of this provision of law, any application filed under Section 17(1) of the SARFESI Act arising from the action taken by the bank under Section 13(4) of the SARFESI Act would naturally be confined to the enforcement of security interest and any interim order would, thus, have to be read into that context. The Debts Recovery Tribunal had nothing to do with the issue of assignment of debt, while dealing with the application of the petitioner under Section 17(1) of the said Act as has been rightly concluded by the Debts Recovery Appellate Tribunal. We are, thus, of the view that the petitioner has been unnecessarily prolonging the dispute on one pretext or the other and the pleas on which the present writ petition has been filed are completely misconceived. We had made it clear to the learned senior counsel for the petitioner at the inception itself that we are actually not even required to examine the validity of the assignment in the present proceedings as the issue is one of the alleged violation of the interim orders of the Debts Recovery Tribunal. As to what would happen to the counter-claim; against whom it would proceed, and the manner of such proceedings are the aspects the petitioner should urge before the appropriate forum, but certainly not in the present proceeding. But our plea was to no avail! We, thus, dismiss the writ petition and impose costs quantified at ` 50,000/- on the petitioner payable to respondents No. 2 and 3 in equal share. Therefore,the plea that the applicant has no locus standi as the assignment was without notice to the defendants, is liable to be rejected.

6.6. Nextly, the plea that the claim is barred by limitation, as the defendants have not acknowledged the liability on 5.3.2016, also shall fail invariably in as much as the claim of the applicant is not a mere money claim, but the claim, based on equitable mortgage created over the application schedule mentioned property created by the defendants. Article 62 of the Limitation Act states as follows; property. Admittedly,the credit facilities were sanctioned and availed in the year 2013. Therefore, the OA claim, filed on 6.4.2018, is well within the period of limitation. Therefore, whether or not the debt acknowledgement letter dt. 5.3.2016 is accepted, the claim of the applicant stands well within the period of limitation.

6.7. In the light of the above discussion and on careful perusal of proof affidavit of AW-1, besides Exhibits A-1 to A-31, written submissions of the applicant bank and the case law, the Tribunal is fully convinced that the applicant bank has established its claim against the defendants 1 to 4, as such the applicant bank is entitled for recovery certificate.

7. Point (2) Whether the applicant bank is entitled for pendent lite and future interest, if so, at what rate?

7.1. In terms of Sec. 19 (20) of the RDB Act, the Tribunal has been empowered to pass an order regarding payment of interest from the date on or before which payment of the amount is found due, up to the date of realisation or only payment, as it think fit to meet the ends of justice.

7.2. Since the defendants 1 to 4 failed to repay the debt, the Tribunal finds no bonafides on the part of the defendants 1 to 4 in discharging their liability. Hence this Tribunal is not inclined to interfere with the rate of interest claimed by the applicant. Point No.2 is answered accordingly.

8. For the reasons stated as above, it is held that the applicant bank is entitled for a Recovery Certificate against the defendants 1 to 4, jointly and severally, a sum of Rs.28,56,85,354.30 being the amount due under Overdraft facility together with interest with 13% p.a. with monthly rests, for sale of the ‘A’ and Item 1 of ‘B’ schedule mentioned properties along with costs.

9. In the result, application is allowed as under:

a) The applicant bank is entitled to recover from the defendants 1 to 4, jointly and severally, a sum of Rs.28,56,85,354.30 being the amount due under Overdraft facility together with interest with 13% p.a. with monthly rests from the date of filing till date of full and final realization,

b) It is further ordered that the amount realized through SARAFESI Auction, i.e. Rs. 21,01,00,000/- be appropriated towards the Term Loan Account and balance amount, if any, shall be claimed by the applicant.

c) It is further ordered that in case of default of payment by the defendants 1 to 4, the Applicant Bank is at liberty to sell the ‘A’ and Item 1 of ‘B’ schedule mentioned properties and appropriate the sale proceeds towards the decreetal dues,

d) If the sale proceeds are not found sufficient to cover the amount due and payable to the Applicant Bank, the defendant 2, 3 & 4 are personally liable for all such amounts due,

e) It is further ordered that any amount remitted or realized if any, during the course of the proceedings, shall be given due credit to the loan account of the defendants 1 to 4, f) The applicant bank is entitled for costs of this OA from the defendants.

10. The applicant bank is directed to file costs memo within two weeks of the receipt of this order.

11. Issue recovery certificate in favour of the applicant bank in terms of this final order.

12. Communicate a copy of the order to the parties concerned in terms of Rule 16 read with Rule 2(c) of DRT (Procedure)Rules, 1993. (Dictated to PS, transcribed by him, corrected, signed and pronouncedby me in the Open Court, this 26th day of August 2019) Sd/- (N.V.BADARINATH) PRESIDING OFFICER DRT-I, CHENNAI