Legal Updates

Section 2(f) of the SARFAESI Act defines the terms ‘borrower’ as under: –

2(f) “borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a [asset reconstruction company] consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance [or who has raised funds through issue of debt securities].”

By virtue of the above definition even a guarantor would fall within the definition of the term “borrower” as defined in Sec.2(f) of the SARFAESI Act. Even a deceased guarantor would also fall within the definition of term “borrower”.

In Standard Chartered bank v. Noble Kumar (2013) 9 SCC 620 it the Supreme Court held that it is not mandatory for a secured creditor to first issue a notice under Sec. 13 (4) of the SARFAESI Act and try to take possession and only on it’s failure approach the District magistrate/Chief General magistrate under Sec.14 of the SARFAESI Act. The Supreme Court had held:

“26. It is in the abovementioned background of the legal frame of Sections 13 and 14, we are required to examine the correctness of the conclusions recorded by the High Court. Having regard to the scheme of Sections 13 and 14 and the object of the enactment, we do not see any warrant to record the conclusion that it is only after making an unsuccessful attempt to take possession of the secured asset, a secured creditor can approach the Magistrate. No doubt that a secured creditor may initially resort to the procedure under Section 13(4) and on facing resistance, he may still approach the Magistrate under Section 14. But, it is not mandatory for the secured creditor to make attempt to obtain possession on his own before approaching the Magistrate under Section 14. The submission that such a construction would deprive the borrower of a remedy under Section 17 is rooted in a misconception of the scope of Section 17.

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36. Thus, there will be three methods for the secured creditor to take possession of the secured assets:

36.1. (i) The first method would be where the secured creditor gives the requisite notice under Rule 8(1) and where he does not meet with any resistance. In that case, the authorised officer will proceed to take steps as stipulated under Rule 8(2) onwards to take possession and thereafter for sale of the secured assets to realise the amounts that are claimed by the secured creditor.

36.2. (ii) The second situation will arise where the secured creditor meets with resistance from the borrower after the notice under Rule 8(1) is given. In that case he will take recourse to the mechanism provided under Section 14 of the Act viz. making application to the Magistrate. The Magistrate will scrutinise the application as provided in Section 14, and then if satisfied, appoint an officer subordinate to him as provided under Section 14(1-A) to take possession of the assets and documents. For that purpose the Magistrate may authorise the officer concerned to use such force as may be necessary. After the possession is taken the assets and documents will be forwarded to the secured creditor.

36.3. (iii) The third situation will be one where the secured creditor approaches the Magistrate concerned directly under Section 14 of the Act. The Magistrate will thereafter scrutinise the application as provided in Section 14, and then if satisfied, authorise a subordinate officer to take possession of the assets and documents and forward them to the secured creditor as under clause 36.2.(ii) above.”

The question as to whether the provisions of the SARFAESI ACT can be invoked against the legal heirs of a deceased borrower was considered by the Division Bench of the Andhra Pradesh High Court in G. Manohar Vs. Indian Bank 2010 (1) Bank J 352 = MANU/AP/0262/2009 = 2009(5) ALD 532.

The Andhra Pradesh High Court in G. Manohar held that the definition of the term “borrower” in the SARFAESI Act has to be understood in the light of the object of the Act rather than a literal reading of the said definition; that it is well settled that a literal construction which is opposed to intentions of the legislature cannot prevail and the definition has to be given a meaning which will carry further the objects of the Act; if the said definition is literally read, it will result in an absurd conclusion that the remedy under the Act is available only against the original borrower so long as he lives and that after his death under the said Act, the remedy would not be available; that such a construction would completely defeat the purpose for which the Act was enacted; that under Sec. 2(2) of the SARFAESI Act, words and expressions used and not defined in SARFAESI Act but defined in Indian Contract Act, 1872 or the Transfer of Property Act, 1882 would have the meanings respectively assigned to them in those Acts; and the term ‘mortgager’ and ‘mortgagee’ are dealt with by Sec. 58(a) of the Transfer of Property Act, 1882 and as per Sec.59A those terms would include the persons deriving title from them and would also include legal representatives who succeed the mortgager by devoluation of the property to them. It held that the legal representatives cannot say that they are not covered by the definition of “borrower” because Section 2(2) of the SARFAESI Act provides a reference that the definition and expressions under the Transfer of Property Act are expressly applicable, and a “borrower” being admittedly the mortgager, his liability under the SARFAESI Act cannot be said to have been wiped off on account of his death and his legal representatives are equally bound and stand covered by the definition of the “borrower” under the SARFAESI Act.

In Shri Rajan Gupta and others Vs. Bank of India (Delhi High Court ) (WP(c) No.1508 of 2007), it was again contended that the term “borrower’ used in Sec.13(2) of the SARFAESI Act does not include the legal heirs of the borrowers and that the said term defined in Sec.2(f) of the Act cannot extend and does not extend to include legal representatives of the original borrower. The Delhi High Court rejected this plea and held that the word “borrower” used in Section 13(2) of the SARFAESI Act is further qualified by the words ‘who is under a liability to a secured creditor under a security agreement’; therefore, the guarantor, who created a mortgage by deposit of title deeds with the secured creditor, would fall within the said expression of the term “borrower”; that under Section 2(2) of the SARFAESI Act words and expressions used and not defined in the SARFAESI Act but defined in the Transfer of Property Act or the Contract Act would have the same meanings respectively assigned to them in those Acts; by virtue of Section 59A of the Transfer of Property Act, 1882, the term “mortgager” would be deemed to include reference to persons deriving title from a mortgagor; and therefore, with regard to an equitable mortgage created by guarantor his or her legal heirs would also be deemed to be mortgagors.

Similar view was also taken in Kamal Gupta Vs. Bank of India 2007 SCC Online Del 1473 by the Delhi High Court.

The Kerala High Court in Authorised Officer Tamil Nadu Mercantile Bank Ltd. Vs. Devi Prasad (Kerala High Court) (W.A. No.1754 of 2017) considered the question whether proceedings against legal heirs of the borrowers have to be started afresh if he dies after Sec.13(4) proceedings are received by him before his death. In that case, the son of a deceased borrower had filed a Writ Petition in the High Court alleging that his father died on 14.6.2014, that the Bank has to initiate afresh proceedings under Sec.13(2) of the SARFAESI Act against all the legal heirs despite such notice having been issued earlier to the deceased during his life time. He sought quashing of a notice issued by an Advocate Commissioner appointed by the Chief General Magistrate in proceedings under Sec.14 of the SARFAESI Act asking the petitioner and other legal heirs to deliver possession of the property to him for handing them over to the secured creditor. A learned single Judge of the Kerala High Court accepted the plea of the petitioner. But a Division Bench of the High Court set aside his order. It held that since the original borrower/mortgagor had submitted objections to the notice under Sec.13(2) during his life time and the same was considered and rejected by the Bank and it had also issued notice under Sec.13(4) thereafter, there is no necessity to issue fresh proceedings to the legal heirs. It held that the proceedings initiated against the original borrowers for enforcement of security interest stand concluded by virtue of intimation served upon them with respect to taking over possession under Sec.13(4) of the SARFAESI Act; and the death of the original borrower occurring at that stage of the proceedings will not result in abatement of the entire steps already taken.

A contrary view was taken by the Madras High Court in S. Suhaina Banu and others Vs. Indian Bank 2011 (1) CWC 448= MANU/TN/3149/2010. In that case, notice under Section 13(2) of the SARFAESI Act was issued during the life of the borrower but before notice under Section 13(4) of the SARFAESI Act was affixed on the property, the guarantor had died. Thereafter proceedings under Section 14 of the SARFAESI Act were initiated and the Chief Metropolitan Magistrate passed an order appointed an Advocate Commissioner to take possession of the property but the legal heirs of the deceased were not parties before the Magistrate. It has held that the proceedings initiated against a person while he was alive would automatically stand abated immediately after his or her demise and it was necessary for a secured creditor to again initiate proceedings by issuing a fresh notice under Rule 3 of the Security Interest (Enforcement) Rules, 2002 [for short ‘the Rules’] to the Legal Heirs to the borrower as the legal heir of the borrower would have an opportunity to discharge the liability in 60 days. The Madras High Court took the view that since the object of provisions of sub-section (2) of Sec.13 is to require the borrower/guarantor by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from date of notice, failing which the secured creditor is entitled to exercise all or any of the rights under Sec.13(4) of the Act, the proceedings initiated against the person while he was alive would automatically stand abated immediately after his demise.

The Punjab and Haryana High Court has in Kotak Mahindra Bank Ltd vs. The District Magistrate dissented from the view of the Madras High Court. It was pointed out that in S. Suhaina Banu, notice under Sec.13(2) was issued on 20.9.2008 and was served on the deceased guarantor/ mortgagor. She did not file any objections within the 60 days period which would end on 20.10.2008. She died on 23.11.2008, a month later. If she did not file objections within the time provided, and died one month after the time fixed for filing objections, we do not see why her legal representatives ( who under 13 of 17 Sec.59A of the Transfer of Property Act,1882 would fall within the definition of the ‘mortgagor’ as they derive title from her) should again be given another opportunity and further time of 60 days to file objections, the P&H High Court observed. It was held that the Madras High Court has obviously not noticed that references to ‘mortgagors’ would include persons claiming through them under Sec59A of the Transfer of Property Act,1882. The legal representatives cannot have a better defence than what she had and so they cannot seek a fresh start to the proceedings.

In the case before the P&H High Court, the deceased guarantor had replied to the notice under Section 13(2) of the SARFAESI Act and his objections had been considered by the Bank and a revised notice issued by the Bank and thereafter proceedings under Section 14 of the SARFAESI Act were initiated. Once the objections of the deceased mortgagor/guarantor had been considered by the Bank, there is no necessity for the Bank to give the legal heirs a fresh opportunity to file objections and give them 60 more days for the said purpose.

As per the decision in Nileshkumar N. Kotak and others Vs. Union of India 2015 GH (2) 459, if notice under Sec.13(2) was issued against a dead person, then his legal heirs must be given such a notice afresh.

In Sapna Awasthi Vs. Bank of Maharashtra II (2017) BC65 (DRAT), the Debt Recovery Appellate Tribunal has taken a view that all legal heirs are entitled to fresh notice under Sec.13(2) of the Act and service of notice on only one legal heir is not valid.

Also, once the legal heirs of the deceased are impleaded as parties in the proceedings under Section 14 of the SARFAESI Act whatever defences the law permits them to take, they are entitled to take.

As held in Standard Chartered bank v. Noble Kumar (2013) 9 SCC 620, it is the duty of the secured creditor to furnish an affidavit containing the information required to be furnished to the Magistrate under the proviso to Section 14 of the SARFAESI Act, and the duty of the Magistrate is merely to examine the factual correctness of the assertions made therein and he is not entitled to go into the legal niceties of the transactions.

The Supreme Court held that after the Magistrate passes an order after satisfying himself to the factual correctness of the assertions made in the affidavit, he would record his satisfaction and pass appropriate orders regarding taking of possession of the secured asset and thereafter the borrower can avail the remedy under Section 17 of the SARFAESI Act.

This judgment was reiterated in The Authorised Officer, Indian Bank Vs. D. Visalakshi and another 2019(20) SCC 47 and the Court held that the enquiry by the Magistrate is not one which should result in adjudication of inter se rights of the parties in respect of the subject property.