Verdict

In Supreme Court of India, Criminal Appellate jurisdiction
Criminal Appeal No. 736/2014 arising from Special Leave Petition No.1666/2012
with connected SLP’s & Writ petitions

Harshad Govardhan Sondagar …………….Appellant 
Vs
International Asset Reconstruction Company Ltd & Others …………. Respondents

On 3rd April 2014, the Supreme Court of India, while adjudicating on a batch of cases, ruled in favour of an appellant in a case of possession of secured assets by  banks / their authorized debt recovery agencies as remedy for recovering their secured debts from their borrowers. In the course of the judgment, the Supreme Court addressed issues of validity of lease regarding provisions of SARFAESI Act 2002.

A look at the highlights of the Judgment:

Facts       

1. Harshad and other appellants claimed to be tenants of different premises in Mumbai. The owner(s) of such premises (borrowers) mortgaged their properties to various banks for loans taken by them.
2. The owners did not repay their loans and hence the properties became non-performing assets (NPA). In accordance with the provisions of the SARFAESI Act 2002 (‘Act’) banks served notice to borrowers to make payment within a period of 60 days of receipt of the Notice.  Even after expiry of notice period served under the Act, the only remedy Banks had was to take vacant possession of such properties. The banks approached Chief Metropolitan Magistrate (CMM) to enable / assist in recovery of such vacant possession of such properties.
3. The appellants being tenants of such properties, petitioned the Bombay High Court (HC) for relief from dispossession of properties they were residing in. They contended that they were not borrowers, but only tenants / lessees of the borrowers and are hence entitled to remain in possession of the secured assets. Quoting the Trade Well vs Indian Bank [2007 CRI. L.J. 2544] case, the Bombay High Court rejected the petition stating that under the SARFAESI Act the borrowers’ liability crystallises i.e. ends with them and there can be no adjudication by the Chief Metropolitan Magistrate and that possession of property must be done through non-judiciary process. The HC also implied that the property already being on lease was irrelevant.
4. Aggrieved, the tenants filed a batch of Special Leave Petitions (SLP) in Supreme Court for relief from such dispossession.

Issues 

1. Whether a lessee / tenant of a property that is under dispute between the property owner (borrower) and Debt Recovery Agency (secured creditor) is liable for dispossession / eviction from the property?
2. Whether provisions of SARFAESI Act 2002 shall prevail over other laws?
3. Whether SARFAESI Act 1982 empowers a Chief Metropolitan Magistrate (‘CMM’) or District Magistrate (‘DM’) to assist a secured creditor in taking possession of a secured property that is under lawful possession of a lessee / tenant?

Analysis & Judgement
In the course of analysing the facts and relevant provisions, the Hon’ble Apex Court  considered judgements passed in a host of cases including but not limited to 

• Trade Well, a Proprietorship Firm, Mumbai and Anr. v Indian Bank and Anr,Cri. L.J.[2007]2544
• Central Bank of India v State of Kerala and Ors, 4 SCC[2009]94
• Authorised Officer, Indian Overseas Bank and Anr. v. Ashok Saw Mill, 8SCC[2009]366
• United Bank of India v Satyawati Tandon and Ors,8 SCC[2010]110
• Columbia Sportswear Company v. Director of Income Tax, Bangalore [(2012) 11 SCC 224]:

1: On the issue of rights of a lessee / tenant including possession of a property under dispute with the secured creditor, the Supreme Court held that 

• The rights of the tenants would depend upon when they became lessees – before or after servicing of notice under SARFAESI. Accordingly 
  
  (i) If a lessee was in possession of the property before the mortgage of property to the Bank, such lease/ tenancy being prior to the mortgage, the Bank’s rights under SARFAESI could not override the lessee’s / tenant’s rights. Hence the tenant cannot be asked to vacate or be dispossessed from the property until such lease / tenancy rights exist or expire in accordance with law. 
  
  (ii) If a lessee got possession of the property after it was mortgaged to the bank but before issue of default notice by the bank, then :
• the lessee cannot be dispossessed if the tenancy or lease is in accordance with the TP Act 1882 and not contrary to the mortgage. By virtue of sub-sections 7 and 8 of TPA, Lessee shall enjoy possession of the leased property as per the lease terms, irrespective of a subsequent mortgage of the property by Lessor to a creditor as secured asset.
• if the lease is not in accordance with section 65A of the TPA Act, or is  contrary to the mortgage, then then the Bank can directly take over the vacant possession of the property as its remedy under the SARFAESI Act.
  
  (iii) if the lease is given after issue of default notice by the Bank, then such lease itself would be held invalid and the Banks have the right to evict such tenants directly without having to take legal recourse and obtain vacant possession of the property. 

The category under which the lessee / tenant would fall under would be decided by the Magistrate as per provisions of the SARFAESI Act. Such decision will be binding on all parties. The lessee / tenant can only approach the Courts and not the debt recovery tribunal.

2: On the issue of SARFAESI Act prevailing over other laws for the time being force, the Hon’ble Supreme Court held that in the event of inconsistency between provisions of any other law and provisions of SARFAESI Act, section 35 of SARFAESI Act empowers it to prevail over provisions of all other laws, in matters relating to debt recovery by secured creditor from borrower.

3: On the issue of the CMM or DM’s decision being final and binding, the Supreme Court observed that the SARFAESI Act empowers the CMM or DM to assist the secured creditor in getting possession of the property on receipt of an application from secured creditor subject to certain conditions being fulfilled. The SARFAESI Act contain provisions to the effect that actions taken by CMM or DM in pursuit of possession that duly fulfil provisions of The Act cannot be challenged before any Court or authority. However, the Supreme Court, quoting its own judgement on the similar issue held that pursuant to provisions of Articles 226 & 227 of the Indian Constitution, the decision of the Chief Metropolitan Magistrate or the District Magistrate can be challenged before the High Court which can examine it considering settled principles of law.