SC miffed at the borrower’s attempts to delay

recovery procedures

Nidhi Bothra
nidhi@vinodkothari.com

(This article is an amendment to SC tells courts not to interfere in NPA recovery actions –
analysis of SC Ruling United Bank of India vs. Satyawati Tondon – Amended on 20th
August, 2010)

While the report released by Fitch in August, 2010, says that the debt recovery process in India
has improved and the statutory legislations have provided lenders with several redressal avenues
improving the debt recovery process and the debt recovered amount and the perception of the
global investor towards the country. However the Supreme Court seems to be miffed with the
way the defaulters are abusing the legal process to delay the recovery proceedings.

Supreme Court in spate of its recent judgments has expressed concerns over the use of judicial
process by the defaulting companies to delay the recovery proceedings undertaken by the
lenders.

In the recent pronouncement of Indian Bank vs M/s Blue Jaggers Estate Ltd, Supreme Court
(judgment dated – 9th August, 2010). The Supreme Court held that the borrowers are duty bound
to pay. In the present case Indian Bank sanctioned a loan M/s N.S Investment and the account
was declared as non-performing. Thereafter the assets and the liabilities of M/s N.S Investments
were taken over by M/s Blue Jaggers Estate Ltd. Then there were series of applications, pleas,
appeals filed by the borrowers to prolong the recovery process. The borrowers entered into a
Joint Memo of Compromise with the lending bank for full and final settlement of its dues, which
the borrower was unable to meet. When the lender issued notice u/s 13(2) of the Sarfaesi Act, the
borrowers filed objection u/s 13(3A) of the Act and appeal u/s 17 of the Act. Thereafter they
filed three interlocutory applications. The borrowers also filed a Writ of Mandamus before the
High Court, appeal u/s 18 of the DRT Act, another writ petition for grant of absolute and
unconditional stay over the recovery proceedings. All these actions are illustrative of how a
defaulting borrower can use the court process for frustrating the action initiated by a bank under
the Sarfaesi Act.

In yet another ruling of United Bank of India vs. Satyawati Tondon, Allahabad High Court
(judgment dated: 26th July, 2010) the Apex Court provided the secured creditors some relief
where it held that all the alternatives available to the borrower must be exhausted before the High
Courts can interfere with the debt recovery proceedings.
In the past several of the High Courts have ignored the Supreme Court’s views by entertaining
applications under Article 226 of the Constitution causing delay in the proceedings, defeating the
purpose of providing for an alternative remedy under the very legislation itself.

The Supreme Court has interfered with the decision of the High Court and said that –

“While expressing the aforesaid view, we are conscious that the powers conferred upon
the High Court under Article 226 of the Constitution to issue to any person or authority,
including in appropriate cases, any Government, directions, orders or writs including the
five prerogative writs for the enforcement of any of the rights conferred by Part III or for
any other purpose are very wide and there is no express limitation on exercise of that
power but, at the same time, we cannot be oblivious of the rules of self-imposed restraint
evolved by this Court, which every High Court is bound to keep in view while exercising
power under Article 226 of the Constitution. It is true that the rule of exhaustion of
alternative remedy is a rule of discretion and not one of compulsion, but it is difficult to
fathom any reason why the High Court should entertain a petition filed under Article 226
of the Constitution and pass interim order ignoring the fact that the petitioner can avail
effective alternative remedy by filing application, appeal, revision, etc. and the particular
legislation contains a detailed mechanism for redressal of his grievance….. Therefore,
the High Court should be extremely careful and circumspect in exercising its discretion
to grant stay in such matters.”

In Assistant Collector of Central Excise, Chandan Nagar, West Bengal v. Dunlop India Ltd. and
others(1985) 1 SCC 260 it was held that

“Article 226 is not meant to short-circuit or circumvent statutory procedures. It is only

where statutory remedies are entirely ill- suited to meet the demands of extraordinary
situations, as for instance where the very vires of the statute is in question or where
private or public wrongs are so inextricably mixed up and the prevention of public injury
and the vindication of public justice require it that recourse may be had to Article 226 of
the Constitution. But then the Court must have good and sufficient reason to bypass the
alternative remedy provided by statute. ….”

In City and Industrial Development Corporation v. Dosu Aardeshir Bhiwandiwala and

others(2009) 1 SCC 168, the Court highlighted the parameters which are required to be kept in
view by the High Court while exercising jurisdiction under Article 226 of the Constitution. It
says the Court while exercising its jurisdiction under Article 226 is duty-bound to consider
whether:

(a) adjudication of writ petition involves any complex and disputed questions of facts and
whether they can be satisfactorily resolved;
(b) the petition reveals all material facts;
 (c) the petitioner has any alternative or effective remedy for the resolution of the dispute;
(d) person invoking the jurisdiction is guilty of unexplained delay and laches;
(e) ex facie barred by any laws of limitation;
(f) grant of relief is against public policy or barred by any valid law; and host of other
factors.

In several such cases the Supreme Court has held that the High Courts should not neglect the
availability of statutory remedies and must take great caution, care and circumspection before
exercising discretion in addressing such matters.

In the present case as well the Hon’ble High Court of Allahabad had stayed the recovery
proceedings initiated by the United Bank of India on the plea of the guarantor of a loan. United
Bank of India had provided for a term loan facility of Rs. 22,50,000/- to Pawan Color Lab and
the guarantor, Satyawati Tondon had provided for the guarantee of repayment of the loan by
mortgage of the property. The account became non performing and while the bank proceeded to
take action against the borrower u/s 13 (2) and 13 (4) of the SARFAESI Act, the guarantor, faced
with imminent threat of losing the mortgaged property, filed a writ petition with the Hon’ble
High Court, praying for restraining the bank to take any coercive action. In response to this the
bank directed the borrower to pursue remedial action available u/s 17 of the SARFAESI Act. The
High Court did not pay heed to the bank’s plea and passed an impugned order restraining the
bank from taking action u/s 13(4) of the Act. The High Court held that the bank should have
exhausted all the means of recovery against the borrower before proceeding against the guarantor
and that mere notice u/s 13(2) is not enough.

DRT Act and SARFAESI are special legislations that were enacted to offload the burden of the
existing regular courts and to ensure that there is no unwarranted stumbling block in the recovery
of debt proceedings by the banks and the financial institutions, as the delay in resolution would
affect the financial health of these institutions and the economy as a whole. The legislation
provided for standalone powers to the secured creditors to enforce security interests and carry out
recovery proceedings without the intervention of the courts. However a lot of borrowers in the
past have been approaching the High Courts with frivolous cases, dissecting the course of action
prescribed by law in an attempt to impede the recovery procedure, leaving the secured creditors
in tumultuous situation. The Supreme Court’s recent judgments are welcomed pronouncements.