The time period of fifteen days prescribed by Section 13(3A) of the SARFAESI Act is only directory even though the compliance of the sub-section itself is mandatory

The Delhi High Court affirmed that compliance of Section 13(3A) of the SARFAESI Act is mandatory however, the period of fifteen days provided to the lender for responding to the objections of the borrower is only directory. If a lender considers the objection within a reasonable time, the same shall be considered substantial compliance of the provision.

The above ratio was delivered in the judgment of Delhi High Court in the matter of M/s Kannu Aditya India Ltd Vs. State Bank Of India in W.P.(C) 11540/2018 decided on 26.10.2018.

Facts & Challenge:

The petitioner had during the course of its business availed of financial assistance from State Bank of India (SBI). The SBI recalled the facilities. The SBI issued a notice dated 30.07.2018 under Section 13(2) of the SARFAESI Act, inter alia, stating that the petitioner’s account had been classified as a Non Performing Asset (NPA) and further called upon the petitioner to discharge its liability. The petitioner claimed to have received the said notice on 02.08.2018.

On 27.09.2018, the petitioner filed a representation against the SBI’s notice dated 30.07.2018 issued under section 13(2) of SARFAESI Act. The SBI did not accept the objection/representation submitted by the petitioner and communicated its conclusion by a letter dated 14.10.2018. The petitioner claimed that the said letter was dispatched on 19.10.2018 and was received by the petitioner on 20.10.2018.

The only question that fell for consideration of the Court was whether the delay by a lender in communicating its decision to reject a representation made by a borrower under Section 13(3A) of the SARFAESI Act vitiates the proceedings initiated in terms of Section 13 of the SARFAESI Act.

Relevant Legal Provisions and Case:

The present case revolves around interpretation of Section 13(3A) of the SARFAESI Act.

Section 13(3A) primarily lays down that any security interest created in favour of a secured creditor is enforceable without the intervention of any court or tribunal. As per sub-section (2) a creditor is required to issue a notice in writing to the borrower to discharge his liability within sixty days of the notice when such borrower has defaulted in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset. If the borrower fails to discharge his liability despite the service of notice, the creditor is free to recover debt through the modes prescribed in sub-section (4) such as – taking over possession of the secured assets of the borrower, taking over management of the business of the borrower etc.

Sub-section (3A) of Section 13 of SARFAESI Act was introduced by way of an amendment in the year 2004 whereby (3A) the borrower is given an opportunity to make representation or raise objection with respect to the notice issued under subsection (2). A further duty is imposed on the creditor to consider such representation/objection and if creditor concludes that  such representation or objection is meritless, he shall communicate within fifteen days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower.

The present judgement also refers to a Supreme Court judgment of ITC Limited v. Blue Coast Hotels Ltd., 2018 SCC OnLine SC 237 wherein it was held that Section 13(3A) was mandatory. In that case the Supreme Court had considered the appeals preferred against the decision of the Bombay High Court holding that Section 13(3A) of the SARFAESI Act was mandatory and failure on the part of the lender to respond to the same had vitiated the recovery proceedings. The action taken by the creditor under Section 13(4) of the Act was also held to be invalid. The Supreme Court considered the question whether the provisions of Section 13(3A) of the Act were mandatory and held in the affirmative.

Arguments Advanced:

It was pleaded by the petitioner that the response to the petitioner’s representation under Section 13(3A) of the SARFAESI Act was received beyond the period of fifteen days from receipt of the petitioner’s representation and the same was fatal to the proceedings commenced under the SARFAESI Act. Relying on the judgment of the Supreme Court in ITC Limited v. Blue Coast Hotels Ltd. & Ors.: 2018 SCC OnLine SC 237, the petitioner further contended that the provisions of Section 13(3A), which expressly stipulates that the lender should communicate its decision to the borrower within a period of fifteen days of receipt of such representation/objection, is mandatory.

Held:

The Delhi High Court discussed the facts and ratio of ITC Limited v. Blue Coast Hotels Ltd which was the basis of the entire case of the petitioner. It was held by the Court that undoubtedly, the provisions of Section 13(3A) of the SARFAESI Act are mandatory and it is necessary for the lender to consider the representation/objection made by the borrower in response to the notice issued under Section 13(2) of the SARFAESI Act. However, the Court still considered the question – whether the specific time period of fifteen days for a lender to respond to the borrower’s objection/representation as specified under Section 13(3A) of the SARFAESI Act is also mandatory.

The Delhi High Court observed that the intention of the Legislature in introducing sub-section (3A) is to ensure that objection/representation of a borrower against any action for enforcement of security interest are considered before a creditor proceeds to take possession of the secured assets in terms of Section 13(4) of the SARFAESI Act. The Court opined that bearing the aforesaid object in mind, it became at once clear that it is mandatory for the creditor to consider the objection and representation furnished by the borrower before resorting to any action under Section 13(4) of the SARFAESI Act. However, the Court was of the view that there is no reason to hold that if the lender fails to do so within a period of fifteen days, it loses its right to enforce the security interest under provisions of Section 13 of the Act.

The Court held that the prescribed period of fifteen days in Section 13(3A) of the SARFAESI Act must, therefore, be considered as directory and introduced to indicate a time frame within which the lender is expected to consider the objections and take a decision with regard to any representation or any objection made by the borrower. If a lender considers the same within a reasonable time – reasonable time being such period as can be considered reasonable in the context of the benchmark of fifteen days as specified – before proceeding to take an action under section 13(4) of the SARFAESI Act, would be substantial compliance of the aforesaid provision.

In view of the above, the petitioner’s contention that the SBI was precluded from taking any action under Section 13(4) of the SARFAESI Act since it had not communicated its decision to the petitioner’s representation within a period of fifteen days from receipt of such representation, was found meritless.