REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL Nos. 2928-2930 OF 2018

[Arising out of SLP (C) Nos. 10215-10217/2016]

ITC LIMITED …. APPELLANT

VERSUS

BLUE COAST HOTELS LTD. & ORS. ….RESPONDENTS

WITH

CIVIL APPEAL Nos. 2931-2933 OF 2018

[Arising out of SLP (C) Nos. 10196-10198/2016]

J U D G M E N T

S. A. BOBDE, J.

1. Leave granted.

2. The auction purchaser ITC Ltd. is before us in the appeals arising

out of SLP (C) Nos.10215-10217/2016. The sale of a five star luxury

hotel property purchased in a public auction was set aside by an order

1

of the Bombay High Court in favour of the debtor Blue Coast

Hotels Ltd.

1

Dated 23.03.2016

1

3. The circumstances under which the auction purchaser purchased

the hotel property are as follows:-

Industrial Financial Corporation of India (IFCI), [filed appeals

arising out of SLP (C) Nos.10196-10198/2016 in this Court], the

secured creditor (hereinafter referred to as ‘the creditor’), in the

capacity of a financial institution entered into a corporate loan

agreement

2

with Blue Coast Hotels (hereinafter referred to as ‘the

debtor’) for a sum of Rs.150 crores. The agreement included a

creation of a special mortgage to secure the corporate loan. The

mortgaged property comprised of the whole of the debtor’s hotel

property- including the agricultural land on which the debtor was to

develop villas. The debtor defaulted in repayment of the loan and the

debtor’s account became a Non- Performing Asset (NPA)

3

.

4. Several notices intimating default in payment of the total

outstanding amount of Rs.133.18 crores were sent by the creditor to

the debtor. Upon failure to remit the overdue amount despite the

notices, a notice

4

under Section 13(2) of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 (hereinafter referred to as “the Act”) was sent by

the creditor calling upon the debtor to pay the amount overdue within

a period of 60 days.

2

Dated 26.02.2010

3

w.e.f. 30.09.2012

4

Dated 26.03.2013

2

5. In reply to the said notice, the debtor sent the creditor a

proposal

5

for extension of time for the payment of the outstanding

dues. The High Court held that the creditor’s failure to deal with this

representation constituted a violation of Section 13 (3A) of the Act.

Further, the High Court held that the notice issued under Section 13

(2) by the creditor comprising of agricultural property despite the bar

under Section 31 (i) of the Act is contrary to the law since the land

was not converted into non-agricultural land. The High Court also held

that the auction/sale of the property based upon symbolic possession

of the property is contrary to the scheme of the Act and the Rules.

6. On 18.06.2013, a notice was issued under Section 13 (4)

whereby symbolic possession of the hotel property was taken over by

the creditor. The debtor filed a securitization application

6

before the

Debts Recovery Tribunal (hereinafter referred to as ‘the DRT’) against

the taking over of the symbolic possession by the creditor. In the

meanwhile, the creditor published the first auction sale notice

7

with a

reserve price of Rs. 403 crores which came to be postponed in view of

the negotiations between the parties for the repayment of the dues.

Upon default in the repayment of the outstanding amount, a second

sale notice was published on 09.01.2014 with the same reserve price.

5

Dated

27.05.2013

6

Dated 31.07.2013

7

On 04.09.2013

3

The DRT passed an interim order,

8

directing the creditor to defer the

acceptance of bids and not to take any further steps for sale of the

property for the next 60 days. Subsequently, no bids were received

and the auction failed.

7. The creditor challenged the interim order passed by the DRT

order before Debts Recovery Appellate Tribunal (hereinafter referred to

as ‘the DRAT’). In the challenge, the Appellate Tribunal directed for the

second appeal to be disposed off within a month by the DRT.

8. The DRT disposed off the second appeal and set aside the notice

under Section 13(2)

9

on the ground of non compliance with Section

13(3A) and for issuance of the demand notice jointly for the

mortgaged land comprising of agricultural land to which the provisions

of the Act did not apply as per Section 31(i) of the Act.

9. The creditor filed an appeal to the order of the DRT

10

in the DRAT

which came to be allowed

11

and the validity of the notice issued under

Section 13(2) was upheld. Against the order of the DRAT setting aside

the order of the DRT, the debtor filed the Writ Petitions leading up to

the present SLP, in the High Court.

8

Vide order dated 6.02.2014

9

Vide order dated 26. 03.2013

10

Vide order dated 31.03.2014

11

Vide order dated 10.09.2014

4

The Auction Sale

10.On 04.09.2013, the creditor published a Notice of Sale by Public

Auction in the newspaper fixing the date of auction as 09.10.2013 at a

reserve price of Rs 403 crores. In view of this, the debtor sent a

letter

12

to the creditor undertaking that it will pay all outstanding

installments by 31.12.2013 and that the sale of assets be deferred

upto the aforesaid date. The debtor further stated that they shall not

proceed in respect of their Securitization Application

13

before the DRT.

In pursuance of it, the creditor deferred the sale by issuing a public

notice on 08.10.2013 and granted the debtor an opportunity

to clear the loan, however, the creditor extended repayment only

by 15-20 days.

11.Thereafter, on 25.11.2013, the debtor gave a letter of

undertaking accepting the schedule given by the creditor and also

acknowledging the right of the creditor to sell the assets in case of

default as per the schedule.

12.On 30.12.2013, the debtor sought further time to repay the loan

to which the creditor issued a notice taking over symbolic possession.

13.On 09.01.2014, the creditor published a second notice of sale at

the same reserved price of Rs. 403 crores. The DRT

14

passed an

12

Dated 19.09.2013

13

Dated 31.07.2013

14

Vide order dated 06.02.2014

5

interim order directing the creditor to defer the acceptance of the bids

and not take any further steps with regard to the sale of the property

for 60 days.

14.On 08.10.2014 the creditor issued a third Notice of Sale by

public auction fixing the auction on 12.11.2014 at a reserve price of

Rs. 542.57 crores. Pursuant to the writ petitions filed by the debtor,

the High Court

15

allowed the bids to be received for the sale of the Goa

Hotel to be held in a sealed cover till the next date of hearing which

was fixed to be on 19.11.2014. However, no bids were received

pursuant to the 3

rd

Public Auction Notice.

15.In the meanwhile, the debtor wrote to the creditor stating that

the corporate loan will be taken over by Hyatt who were the operating

service provider for the hotel. Hyatt in turn wrote to the creditor

stating that they will not be responsible for the repayment of the loan.

On 31.12.2014, a fourth and fresh notice for conducting the auction

sale of the Goa Hotel was issued by the creditor setting the reserve

price at Rs. 515.44 crores. This notice led to the sale of the Goa Hotel

to ITC Ltd. (hereinafter referred to as ‘the auction purchaser’).

Findings of the High Court

15

Vide order dated 11.11.2014

6

16.The parties eventually moved the High Court by way of writ

petitions in its jurisdiction under Article 226 of the Constitution of

India. Three writ petitions were filed:-

(i)Writ Petition No. 2698 of 2014 (renumbered as 222 of

2015) was filed on 04.10.2014 by the debtor challenging

the order of the DRAT.

16

(ii)Writ Petition No. 1150 of 2015 was filed on 02.03.2015 by

the debtor against the order of handing over possession

passed by the District Magistrate.

17

(iii)Writ Petition No. 2486 of 2015 was filed on 19.03.2015 by

the debtor challenging the sale of the secured assets in an

auction on 25.02.2015.

The writ petitions were filed before the Panaji Bench of the High

Court at Goa, though eventually they were heard by the Bombay High

Court. The High Court set aside the judgment of the DRT and held the

entire proceedings for recovery and sale of the Goa Hotel to be illegal

being in violation of the Act.

17.In brief the High Court held that:-

(i)The recovery proceedings were a breach of Section 13 (3A)

for failure of the creditor to reply to the representation of

the debtor and reject the same by a reasoned order.

(ii)That a portion of the land mortgaged by the debtor as

security interest consisted of agricultural land to which the

16

Order dated 10.09.2014

17

Order dated 26.02.2015

7

provisions of the Act do not apply. The land, therefore,

could not have been recovered.

(iii)The proceedings under Section 14 were initiated by the

creditor who was not a secured creditor after having sold

the property in auction to the auction purchaser.

(iv)It was incumbent of the creditor to take physical

possession of the property before putting it to sale in an

auction.

(v)Lastly, having regard to the manner in which the

proceedings of the auction sale were conducted, it was

held that they were vitiated by fraud and collusion.

Section 13 (3A) and its True Construction

18.One of the main contentions on behalf of the debtor which found

favour with the High Court was that after the creditor issued the notice

under Section 13(2), the debtor made a representation asking for a

reschedulement of the loan which the creditor neither considered

(constituting a breach of sub-section (3A) which is mandatory), nor

communicated the reasons for non-acceptance thereof. Thus, the

subsequent action of the creditor in resorting to a measure under

Section 13(4) is liable to be annulled.

19.The statutory scheme in this regard has been enumerated under

Section 13 of the Act

18

.

18

13. Enforcement of security interest

8

20.The Security Interest (Enforcement) Rules, 2002 (hereinafter

referred to as ‘the Rules’) framed under the Act

19

elaborate on the

manner in which the representation of the borrower is required to be

dealt with. Section 13 (4) enables any creditor to enforce any security

interest without the intervention of a court or tribunal. The procedure

prescribed is that after classifying the debt as a non-performing asset,

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property

Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be

enforced, without the intervention of court or tribunal, by such creditor in accordance with the

provisions of this Act.

(2) Where any borrower, who is under a liability to a secured creditor under a security

agreement, makes any default 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,

then, the secured creditor may require the borrower by notice in writing to discharge in full his

liabilities to the secured creditor within sixty days from the date of notice failing which the

secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

(3)…………….

(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation

or raises any objection, the secured creditor shall consider such representation or objection

and if the secured creditor comes to the conclusion that such representation or objection is not

acceptable or tenable, 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:

PROVIDED that the reasons so communicated or the likely action of the secured creditor at the

stage of communication of reasons shall not confer any right upon the borrower to prefer an

application to the Debts Recovery Tribunal under section 17 or the Court of District Judge

under section 17A.

(4) In case the borrower fails to discharge his liability in full within the period specified in

sub-section (2), the secured creditor may take recourse to one or more of the following

measures to recover his secured debt, namely:--

(a) take possession of the secured assets of the borrower including the right to transfer by way

of lease, assignment or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer

by way of lease, assignment or sale for realising the secured asset: PROVIDED that the right to

transfer by way of lease, assignment or sale shall be exercised only where the substantial part

of the business of the borrower is held as security for the debt:

PROVIDED FURTHER that where the management of whole of the business or part of the

business is severable, the secured creditor shall take over the management of such business of

the borrower which is relatable to the security for the debt.

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets

the possession of which has been taken over by the secured creditor;

9

the creditor may, by a notice in writing require the debtor/borrower to

discharge his liabilities within 60 days. On receipt of a notice, the

borrower may make a representation or raise any objection. The

creditor is then bound to consider the representation or objection. If

the creditor comes to the conclusion that the representation is not

acceptable or tenable, the creditor is required to communicate the

reasons for the non-acceptance of the representation/ objection within

fifteen days. Where the borrower fails to discharge his liability in full,

the creditor may take any of the actions under sub- section (4) which

include the taking over of possession of the secured assets et cetera.

(d) require at any time by notice in writing, any person who has acquired any of the secured

assets from the borrower and from whom any money is due or may become due to the

borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured

debt.

(5)………………

(6)………………

(7)………………

(8)………………

(9)………………

(10)…………….

(11)……………

(12)…………….

(13)…………….

19

3-A. Reply to Representation of the borrower.-

(a) After issue of demand notice under sub-section (2) of section 13, if the borrower makes

any representation or raises any objection to the notice, the Authorised Officer shall consider

such representation or objection and examine whether the same is acceptable or tenable.

(b) If on examining the representation made or objection raised by the borrower, the secured

creditor is satisfied that there is a need to make any changes or modifications in the demand

notice, he shall modify the notice accordingly and serve a revised notice or pass such other

suitable orders as deemed necessary, within fifteen days from the date of receipt of the

representation or objection.

(c) If on examining the representation made or objection raised, the Authorized Officer comes

to the conclusion that such representation or objection is not acceptable or tenable, 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.

10

21.Rule 3A of the Rules requires the authorized officer who is an

officer specified by the Board of Directors of the secured creditor to

consider the representation and modify the notice of demand if

satisfied of the need to do so in that regard. If the authorized officer

comes to the conclusion that such representation or objection is not

tenable or acceptable, he must communicate the reasons for

non-acceptance of the representation or objection within fifteen days.

22.The Act and the Rules thus provide for a locus poenitentiae. The

borrower may raise an objection or make a representation of any

nature that the creditor must consider, and if found not acceptable,

may reject the same before proceeding to resort to any of the

measures provided by Section 13(4) of the Act. The borrower may

thus raise an objection against the proposed measures or make a

representation explaining the circumstances in which he cannot

discharge his liabilities and propose reschedulement. This may result in

reconsideration by the creditor of whether or not it would be prudent

to carry out the proposed measures and may even result in a

renovation of the contract.

23.Sub-section (3A) of Section 13 was introduced in the Act by the

Parliament in pursuance of the following observations of this Court in

Mardia

20

Chemicals:

20

(2004) 4 SCC 311

11

“45. …The purpose of serving a notice upon the

borrower under sub-section (2) of Section 13 of the

Act is, that a reply may be submitted by the

borrower explaining the reasons as to why measures

may or may not be taken under sub-section (4) of

Section 13 in case of non-compliance with notice

within 60 days. The creditor must apply its mind to

the objections raised in reply to such notice and an

internal mechanism must be particularly evolved to

consider such objections raised in the reply to the

notice. There may be some meaningful consideration

of the objections raised rather than to ritually reject

them and proceed to take drastic measures under

sub-section (4) of Section 13 of the Act. Once such a

duty is envisaged on the part of the creditor it would

only be conducive to the principles of fairness on the

part of the banks and financial institutions in dealing

with their borrowers to apprise them of the reason

for not accepting the objections or points raised in

reply to the notice served upon them before

proceeding to take measures under sub-section (4)

of Section 13. Such reasons, overruling the

objections of the borrower, must also be

communicated to the borrower by the secured

creditor. It will only be in fulfillment of a requirement

of reasonableness and fairness in the dealings of

institutional financing which is so important from the

point of view of the economy of the country and

would serve the purpose in the growth of a healthy

economy. It would certainly provide guidance to the

secured debtors in general in conducting the affairs

in a manner that they may not be found defaulting

and being made liable for the unsavoury steps

contained under sub-section (4) of Section 13. At

the same time, more importantly, we must make it

clear unequivocally that communication of the

reasons for not accepting the objections taken by

the secured borrower may not be taken to give

occasion to resort to such proceedings which are not

permissible under the provisions of the Act. But

communication of reasons not to accept the

objections of the borrower, would certainly be for the

purpose of his knowledge which would be a step

forward towards his right to know as to why his

objections have not been accepted by the secured

12

creditor who intends to resort to harsh steps of

taking over the management/business of viz.

secured assets without intervention of the court.

Such a person in respect of whom steps under

Section 13(4) of the Act are likely to be taken cannot

be denied the right to know the reason of

non-acceptance and of his objections. It is true, as

per the provisions under the Act, he may not be

entitled to challenge the reasons communicated or

the likely action of the secured creditor at that point

of time unless his right to approach the Debts

Recovery Tribunal as provided under Section 17 of

the Act matures on any measure having been taken

under sub-section (4) of Section 13 of the Act.”

(emphasis

supplied)

24.The Parliament transformed the observations of this Court into a

provision in the Act with a plain intention to introduce a pause for the

creditor to rethink and reconsider the action proposed by the debtor.

It is a departure from the usual steps that an ordinary creditor is

bound to take for recovering the loan i.e. through the intervention of

the Court.

25.The question that arises for consideration before us is whether

the Parliament intended for a total invalidity to result from the failure

to reply and give reasons for the non-acceptance of the borrower’s

representation. In other words, whether sub-section (3A) of Section 13

is mandatory or directory in nature.

26.There is no doubt that if a reply with reasons is an integral and

indispensable part of the statutory scheme, the Courts would not

13

excuse a departure from it. But, on the other hand, if the reply is

merely a direction and not of substance to the scheme, the

non-compliance may be excused.

27.This question must be answered upon a construction of the

statute according to its true intent by taking into account the language

in which the intent is clothed. In a passage from Crawford’s Statutory

Construction, it is stated -

“The question as to whether a statute is mandatory

or directory depends upon the intent of the

Legislature and not upon the language in which the

intent is clothed. The meaning and intention of the

Legislature must govern, and these are to be

ascertained not only from the phraseology of the

provision, but also by considering its nature, its

design, and the consequences which would follow

from construing it the one way or the other.”

21

This has been followed in several decisions of the Supreme

Court

22

. Subbarao, J. in State of U.P. v. Babu Ram Upadhya

23

points

out, "For ascertaining the real intention of the Legislature, the court

may consider inter alia, the nature and design of the statute, and the

consequences which would follow from construing it the one way or

21

Passage from CRAWFORD: Statutory Construction, p. 516

22

State of U.P.v. Manbodhan Lal Shrivastava, AIR 1957 SC 912, p. 918: 1958 SCR 533; State of

U.P. v. Baburam, Upadhya, AIR 1961 SC 751, p. 765 : (1961) 2 SCR 679; Article 143 of the

Constitution of India, In the matter of, supra, p. 769; State of Mysore v. V.K. Kangan, AIR 1975

SC 2190, p. 2192: (1976) 2 SCC 895; Govindlal Chhagan-lal Patel v. Agriculture Produce Market

Committee, AIR 1976 SC 263, p. 267 : (1976) 1 SCC 369; Ganesh Prasad Sah Kesari v. Lakshmi

Narayan, (1985) 3 SCC 53, pp. 59, 60 : AIR 1985 SC 964; B.P. Khemka Pvt. Ltd. v. Birendra

Kumar Bhowmik, (1987) 2 SCC 407, p. 415 : AIR 1987 SC 1010; Owners and Parties interested

in M.V. "Vali Pero" v. Fernandes Lopez, AIR 1989 SC 2206, p. 2213 : (1989) 4 SCC 671; State of

M.P. v. Pradeep Kumar, (2000) 7 SCC 372, p. 377 : (2000) 10 JT 349; Sarla Goel v.

Krishanchand, (2009) 7 SCC 658 pp. 668, 669 para 30 : (2009) 9 JT 21.

23

AIR 1961 SC 751

14

the other; the impact of other provisions whereby the ne cessity of

complying with the provisions in question is avoided; the cir-

cumstances, namely, that the statute provides for a contingency of the

noncompliance with the provisions; the fact that the non-compliance

with the provisions is or is not visited by some penalty; the serious or

the trivial consequences, that flow therefrom; and above all, whether

the object of the legislation will be defeated or furthered".

28.We find the language of sub-section (3A) to be clearly impulsive.

It states that the secured creditor “shall consider such representation

or objection and further, if such representation or objection is not

acceptable or tenable, he shall communicate the reasons for

non-acceptance” thereof. We see no reason to marginalize or dilute the

impact of the use of the imperative ‘shall’ by reading it as ‘may’. The

word ‘shall’ invariably raises a presumption that the particular

provision is imperative

24

.

29.There is nothing in the legislative scheme of Section 13 (3A)

which requires the Court to consider whether or not, the word ‘shall’ is

to be treated as directory in the provision. As the Section stood

originally, there was no provision for the above mentioned requirement

of a debtor to make a representation or raise any objection to the

notice issued by the creditor under Section 13(2). As it was

24

State of U.P. v. Manbodhan Lal Shrivastava, AIR 1957 SC 912, p. 917

15

introduced via sub-section (3A), it could not be the intention of the

Parliament for the provision to be futile and for the discretion to ignore

the objection/representation and proceed to take measures, be left

with the creditor. There is a clear intendment to provide for a locus

poenitentiae which requires an active consideration by the creditor and

a reasoned order as to why the debtor’s representation has not been

accepted.

30.Moreover, this provision provides for communication of the

reasons for not accepting the representation/objection and the

requirement to furnish reasons for the same. A provision which

requires reasons to be furnished must be considered as mandatory.

Such a provision is an integral part of the duty to act fairly and

reasonably and not fancifully. We are not prepared in such

circumstances to interpret the silence of the Parliament in not

providing for any consequence for non-compliance with a duty to

furnish reasons. The provision must nonetheless be treated as

‘mandatory’.

We agree with the view of this Court in this regard in Mardia

Chemicals Ltd. v. Union of India

25

, Transcore v. Union of India

26

and

Keshavlal Khemchand & Sons (P) Ltd. v. Union of India

27

.

25

(2004) 4 SCC 311 (para 45, 47, 77 and 80)

26

(2008) 1 SCC 125 (para 24 and 25)

27

(2015) 4 SCC 770 (para 19 and 61)

16

We also approve of the view of several High Courts in this

regard

28

.

31.It was submitted on behalf of the creditor that the conduct of the

debtor does not warrant an interference in this case. However, we are

of the view that the construction of the Act should not be affected by

the facts of a particular case. For, indeed, where the remedy invoked

is a discretionary remedy, the Court may deny relief if the

circumstances so warrant.

32.In the present case, it is a fact that the creditor has not replied

to the debtor’s representation

29

, and thus appears to be in breach of

Section 13 (3A), but the following attendant circumstances are

important:

(i)On 26.03.2013, the creditor issued a notice under Section

13(2) to the debtor to discharge his liabilities within 60

days. On 27.05.2013 the debtor made a representation to

the creditor containing a proposal for reschedulement

28

Kiran Devi Bansal v. DGM SIDBI, AIR 2009 Guj 100 (DB)(para 9 and 10); Clarity Gold Pvt.

Ltd. v. State Bank of India, AIR 2011 Bom. 42 (DB)(para 11, 12 and 13); Vinay Container

Services Pvt. Ltd. v. Axis Bank, 2011 (1) Mh. L.J. 882 (para 6); Krushna Chandra Sahoo v.

Bank of India, AIR 2009 Orissa 35 (para 6 and 7); Tensile Steel Ltd. & Anr. v. Punjab and

Sind Bank & Ors., AIR 2007 Guj 126 (para 21); M/s Jayant Agencies v. Canara Bank & Ors.,

Jharkhand HC in WP (C) No. 4048 of 2010 (para 27, 28, 29, 32 and 33); M/s Tetulia Coke

Plant Pvt. Ltd. v. Bank of India, AIR 2013 Jhar 12 (para 5, 9, 20, 22, 23 and 24); Mrs.

Sunanda Kumari v. Standard Chartered Bank, (2007) 135 Comp Cases 604 (Kar) (para 5);

Palash Mukherjee v. U.O.I, W.P. 9876 (W) of 2014 Calcutta High Court (para 1, 2 and 67);

Jaideep Singh and Ors. v. Union of India and Anr., 2008 2 GLT (91) (para 25 and 28);

Malabar Sand and Stones (Pvt.) Ltd. v. Catholic Syrian Bank Ltd. & Ors., AIR 2013 Ker 25

(para 7, 8, 9 and 10).

29

Dated 27.05.2013

17

(which was the same as the one made as far back as on

22.08.2012) and reserving the right to file a reply.

(ii)On 07.06.2013, the debtor again sent a proposal for

extension of time for repayment, repeating its proposal

dated 27.05.2013.

(iii)On 20.06.2013, the creditor issued the notice of

possession under Section 13(4). The taking over of

possession was purely symbolic. We are informed that the

debtor is in possession of the hotel till date and is running

its business without any noteworthy repayment.

(iv)On the next day 21.06.2013, the debtor wrote a letter to

the creditor seeking extension of time and enclosed six

cheques for upfront payment of Rs.33.16 crores without

making any reference to the notice of taking over of

possession. The cheques were dishonoured.

(v)On 04.09.2013, the creditor published a Notice of Sale by

Public Auction in the newspaper fixing the date of auction

as 09.10.2013 at a reserve price of Rs. 403 crores.

(vi)Following this the debtor sent a letter to the creditor on

19.09.2013 undertaking that it will repay all outstanding

installments by 31.12.2013 and that the sale of assets be

deferred up to the said date. The debtor further stated

that it shall not proceed further in respect of their

Securitization Application before the DRT.

(vii)On 08.10.2013, the creditor deferred the sale by issuing a

public notice while considering the debtor’s proposal.

18

(viii)On 29.10.2013, the creditor granted an opportunity to the

debtor to clear the debt as stated in the debtor’s letter

dated 03.10.2013 wherein it sent forth another proposal

for extension of time for repayment stating that it will

repay a principal installment of the corporate loan of a

total of Rs. 89 crores by 31.12.2013. However, the creditor

only extended the time for repayment by 15-20 days.

(ix)On 25.11.2013, “A Letter of Undertaking” was given by the

debtor accepting the schedule given by the creditor on

29.10.2013 and also acknowledging the right of the

creditor to sell the assets in case of default as per the

above mentioned schedule.

(x)The creditor wrote to the debtor on 08.01.2014 informing

the debtor that due to the default in repayment, the

creditor is proceeding with steps to recover the dues and

accordingly rejected the debtor’s request letter dated

30.12.2013 seeking further time to repay the outstanding

dues.

33.From the above, it is clear that the creditor was induced by the

debtor not to take action against them through assurances and

promises. The creditor appeared to have entered into negotiations for

the settlement of the dues and even accepted cheques in repayment

19

much after the notice

30

under Section 13(2) and after the debtor’s

letter of representation

31

. Many opportunities were granted by the

creditor to the debtor to repay the debt which were all met by

proposals for extension of time. Eventually, the debtor even executed

“A Letter of Undertaking

32

” acknowledging the right of IFCI to sell the

assets in the case of default.

34.In these circumstances, we have no doubt that the failure to

furnish a reply to the representation is not of much significance since

we are satisfied that the creditor has undoubtedly considered the

representation and the proposal for repayment made therein and has

in fact granted sufficient opportunity and time to the debtor to repay

the debt without any avail. Therefore, in the fact and circumstances of

this case, we are of the view that the debtor is not entitled to the

discretionary relief under Article 226 of the Constitution which is

indeed an equitable relief.

Letter of Undertaking “Without Prejudice”

35.Much was sought to be made of the words “without prejudice” in

the letter

33

containing the undertaking that if the debt was not paid,

the creditor could take over the secured assets. The submission on

behalf of the debtor that the letter of undertaking was given in the

30

Dated 26.03.2013

31

Dated 27.05.2013

32

On 25.11.2013

33

Dated 25.11.2013

20

course of negotiations and cannot be held to be an evidence of the

acknowledgement of liability of the debtor, apart from being untenable

in law, reiterates the attempt to evade liability and must be rejected.

The submission that the letter was written without prejudice to the

legal rights and remedies available under any law and therefore the

acknowledgement or the undertaking has no legal effect must likewise

be rejected. This letter is reminiscent of a letter that fell for

consideration in Spencer’s

34

case as pointed out by Mr. Harish Salve,

“as a rule the debtor who writes such letters has no intention to bind

himself further than is bound already, no intention of paying so long

as he can avoid payment, and nothing before his mind but a desire,

somehow or other, to gain time and avert pressure.”

It was argued in a subsequent case

35

that an acknowledgment

made “without prejudice” in the case of negotiations cannot be used as

evidence of anything expressly or impliedly admitted. The House of

Lords observed as follows:

“But when a statement is used as acknowledgement

for the purpose of s. 29 (5), it is not being used as

evidence of anything. The statement is not an

evidence of an acknowledgement. It is the

acknowledgement.”

Therefore, the without prejudice rule could have no application.

It said:

34

Spencer v. Hemmerde [1922] 2 AC 507, HL at 526

35

Bradford and Bingley vs. Rashid [2006]

21

“Here, the respondent, Mr. Rashid was not offering

any concession. On the contrary, he was seeking one

in respect of an undisputed debt. Neither an offer of

payment nor actual payment.”

We, thus, find that the mere introduction of the words “without

prejudice” have no significance and the debtor clearly acknowledged

the debt even after action was initiated under the Act and even after

payment of a smaller sum, the debtor has consistently refused to

pay up.

36.All in all, as the matter stands, the debtor did not repay the loan.

The debtor managed to submit a letter purporting to be a

representation, containing a proposal for reschedulement made much

earlier to the creditor’s notice and reserved a right to file a reply.

Apparently, the debtor induced the creditor to enter into negotiations

to ward off the reply and avoid the taking over of possession. The

debtor ignored the symbolic possession taken over by the creditor and

continued to negotiate and even gave six cheques which were

dishonoured. The debtor then gave a final letter of undertaking

agreeing that the creditor could take over possession of the assets if

the debt was not repaid. All along, the debtor’s response has been that

of seeking extension of time to pay, with the usual unfulfilled promise

of repayment. We see no reason why the debtor should not be stopped

from questioning the taking over of possession, particularly since,

22

neither the debt nor the liability is in dispute. The debt has not been

repaid in fact, and the objection raised is merely on the ground that

the taking of assets is illegal because the creditor failed to reply to the

representation.

Inclusion of Agricultural Land as Security Interest in the Notice

of Recovery

37.One of the contentions raised on behalf of the debtor questioned

the correctness of the finding of the High Court on the ground that the

inclusion of agricultural land as security interest could not have been

validly included in the notice for recovery of the secured loan. The

correctness of the finding of the High Court depends on the effect of

Section 31 (i) of the Act, which reads as follows:-

”31. Provisions of this Act not to apply in certain

cases-The provision of this Act shall not apply to-

(a)….

(b)….

(c)….

(e)….

(f)….

(g)….

(h)….

(i) any security interest created in agricultural land;

(j)….”

38.The purpose of enacting Section 31(i) and the meaning of the

term “agricultural land” assume significance. This provision, like many

23

others is intended to protect agricultural land held for agricultural

purposes by agriculturists from the extraordinary provisions of this

Act, which provides for enforcement of security interest without

intervention of the Court. The plain intention of the provision is to

exempt agricultural land from the provisions of the Act. In other

words, the creditor cannot enforce any security interest created in his

favour without intervention of the Court or Tribunal, if such security

interest is in respect of agricultural land. The exemption thus protects

agriculturists from losing their source of livelihood and income i.e. the

agricultural land, under the drastic provision of the Act. It is also

intended to deter the creation of security interest over agricultural land

as defined in Section 2 (zf)

36

. Thus, security interest cannot be created

in respect of property specified in Section 31.

39.In the present case, security interest was created in respect of

several parcels of land, which were meant to be a part of single unit

i.e. the five star hotel in Goa. Some parcels of land now claimed as

agricultural land were apparently purchased by the debtor from

36

(zf) “security interest” means right, title or interest of any kind, other than those

specified in section 31, upon property created in favour of any secured creditor and

includes-

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of

any kind, on tangible asset, retained by the secured creditor as an owner of the property,

given on hire or financial lease or conditional sale or under any other contract which secures

the obligation to pay any unpaid portion of the purchase price of the asset or an obligation

incurred or credit provided to enable the borrower to acquire the tangible asset; or

(ii)such right, title or interest in any intangible asset or assignment or licence of such

intangible asset which secures the obligation to pay any unpaid portion of the purchase

price of the intangible asset or the obligation incurred or any credit provided to enable the

borrower to acquire the intangible asset or licence of intangible asset;

24

agriculturists and are entered as agricultural lands in the revenue

records. The debtor applied to the revenue authorities for the

conversion of these lands to non-agricultural lands which is pending till

date due to policy decision.

40.It is undisputed that these lands were mortgaged in favour of

the creditor under a deed dated 26.02.2010. Obviously, since no

security interest can be created in respect of agricultural lands and yet

it was so created, goes to show that the parties did not treat the land

as agricultural land and that the debtor offered the land as security on

this basis. The undisputed position is that the total land on which the

Goa Hotel was located admeasures 182225 sq. mtrs. Of these, 2335

sq. mtrs. are used for growing vegetables, fruits, shrubs and trees for

captive consumption of the hotel. There is no substantial evidence

about the growing of vegetables but what seems to be on the land are

some trees bearing curry leaves and coconut. This amounts to about

12.8 % of the total area.

41.The Corporate Loan Agreement

37

that deals with the mortgage in

question in the relevant clause

38

reads as follows:-

“The Borrower shall create mortgage on Exclusive

basis on the ‘Park Hyatt Goa Resort and Spa” Hotel

Property admeasuring 1, 82, 225 Sq Mtrs with a built

up area of 25182 Sq. Mtrs situated at 263 C,

Arossim, Canasaulim Goa.”

37

Dated 26.02.2010

38

Clause 2.1, part b

25

The mortgage is thus intended to cover the entire property of

the Goa Hotel. Prima facie, apart from the fact that the parties

themselves understood that the lands in question are not agricultural,

it also appears that having regard to the use to which they are put and

the purpose of such use, they are indeed not agricultural.

42.At the outset, it was argued on behalf of the debtor that Section

31(i) is beyond the legislative competence of the Parliament since it is

only the State Legislature which is competent to legislate on land

under Entry 18 of List II. This contention appears to be completely

untenable. Though Section 31(i) exempts agricultural land from the

operation of the Act it is not possible to construe such a provision as a

legislation on agricultural land. In fact, it is quite the contrary.

Moreover, Section 31 (i) is one of the provisions in the Act which has

been held by this Court as referable to Entry 45 of List I, in Union of

India and Another v. Delhi High Court Bar Association and Ors.

39

. The

Court held that:-

“14……. Entry 45 of List I relates to “banking”.

Banking operations would inter alia, include accepting

of loans and deposits, granting of loans and recovery

of the debts due to the bank. There can be little doubt

that under Entry 45 of List I, it is Parliament alone

which can enact a law with regard to the conduct of

business by the banks. Recovery of dues is an

essential function of any banking institution. In

exercise of its legislative power relating to banking,

Parliament can provide the mechanism by which

39

(2002) 4 SCC 275

26

monies due to the banks and financial institutions can

be recovered.”

In State Bank of India v. Santosh Gupta and Ors.

40

this Court concluded that the Act is referable to Entries 45 and 95 of

List I. It observed that:-

“43……. the entire Act, including Sections 17-A and

18-B, would in pith and substance be referable to

Entries 45 and 95 of List I,….”

43.The validity of Section 31(i) which in any case deals with security

interest created over agricultural land and not agricultural land itself, is

an integral part of the Act and cannot be questioned on the ground of

legislative competence.

In A.S. Krishna and Ors. v. State of Madras

41

this Court observed

as follows:-

“It would be quite an erroneous approach to the

question to view such a statute not as an organic

whole, but as a mere collection of sections, then

disintegrate it into parts, examine under what heads

of legislation those parts would severally fall, and by

that process determine what portions thereof are

intra vires, and what are not.”

Thus, this contention on behalf of the debtor must be rejected.

40

AIR 2017 SC 25

41

AIR 1957 SC 297

27

44.In ‘Commissioner of Wealth Tax, Andhra Pradesh v.

Officer-in-Charge (Court of Wards) Paigah

42

, this Court interpreted the

definition of the term ‘Agricultural Land’ with respect to Section 2(e)

of the Wealth Tax Act, 1957 that excluded the said term from the

definition of assets. This Court observed:-

“We agree that the determination of the

character of land, according to the purpose for

which it is meant or set apart and can be used ,

is a matter which ought to be determined on the

facts of each particular case. What is really

required to be shown is the connection with an

agricultural purpose and user and not the mere

possibility of user of land, by some possible

future owner or possessor, for an agricultural

purpose. It is not the mere potentiality, which will

only affect its valuation as part of "assets", but its

actual condition and intended user which has

to be seen for purposes of exemption from

wealth-tax. One of the objects of the exemption

seemed to be to encourage cultivation or actual

utilisation of land for agricultural purposes. If

there is neither anything in its condition, nor

anything in evidence to indicate the intention of its

owners or possessors, so as to connect it with an

agricultural purpose, the land could not be

"agricultural land" for the purposes of earning an

exemption under the Act. Entries in revenue records

are, however, good prima facie evidence.”

(emphasis supplied)

Similarly, in the case of Kunjukutty Saheb v. State of Kerala

43

,

this Court held as follows:

“We suppose that something or other can be, and

often is, grown on any vacant land, but that would

not necessarily make it agricultural land for our

42

(1976) 3 SCC 864

43

(1972) 2 SCC 364

28

purposes. To give an example the possibility of

cultivating, or even the actual cultivation of, what is

essentially a building site in the heart of a town

would not make it agricultural land. It is the purpose

for which it is held that determines its character and

the existence of a few coconut trees or a vegetable

patch on the land cannot alter the fact that it is held

for purposes of building and not for purposes of

agriculture.”

In any event, having regard to the character of the land and the

purpose for which it is set apart, we are of the view that the land in

question is not an agricultural land. The High Court mis-directed itself

in holding that the land was an agricultural land merely because it

stood as such in the revenue entries, even though the application

made for such conversation lies pending till date.

Transfer of Security Interest by IFCI to ITC

45.As noticed earlier, the creditor took over symbolic possession of

the property on 20.06.2013. Thereupon, it transferred the property to

the sole bidder ITC and issued a sale certificate for Rs.515,44,01,000/-

on 25.02.2015. On the same day, i.e., 25.02.2015, the creditor applied

for taking physical possession of the secured assets under Section 14

of the Act.

46.According to the debtor, since Section 14 provides that an

application for taking possession may be made by a secured creditor,

and the creditor having ceased to be a secured creditor after the

29

confirmation of sale in favour of the auction purchaser, was not

entitled to maintain the application. Consequently, therefore, the order

of the District Magistrate directing delivery of possession is a void

order. This submission found favour with the High Court that held that

the creditor having transferred the secured assets to the auction

purchaser ceased to be a secured creditor and could not apply for

possession. The High Court held that the Act does not contemplate

taking over of symbolic possession and therefore the creditor could not

have transferred the secured assets to the auction purchaser. In any

case, since ITC Ltd. was the purchaser of such property, it could only

take recourse to the ordinary law for recovering physical possession.

47.We find nothing in the provisions of the Act that renders taking

over of symbolic possession illegal. This is a well- known device in law.

In fact, this court has, although in a different context, held in

M.V.S.Manikayala Rao v. M.Narasimhaswami

44

that the delivery of

symbolic possession amounted to an interruption of adverse

possession of a party and the period of limitation for the application of

Article 144 of the Limitation Act would start from such date of the

delivery.

48.The question, however, whether the creditor could maintain an

application of possession under Section 14 of the Act; even though it

44

AIR 1966 SC 470

30

had taken over only symbolic possession before the sale of the

property to the auction purchaser, depends on whether it remained a

secured creditor after having done so.

Section 2(d) of the Act defines `secured creditor’ to mean a

"banking company" having the meaning assigned to it in clause (c) of

section 5 of the Banking Regulation Act, 1949;

Clause 2(L)

45

includes debts or receivables and any right or

interest in the security whether full or part underlying such debt or

receivables or any beneficial interest in property vide (L)(i)(iv) & (v)

46

.

Sub-section (6) of Section 13

47

posits that the transfer of the

secured asset by the secured creditor shall vest in the transferee all

the rights as if the transfer had been made by the owner of the

secured asset.

49.In Mulla’s the Transfer of Property Act

48

:-

45

2(L) SARFAESI Act

46

2 (l) "financial asset" means debt or receivables and includes—

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or

(iv) any right or interest in the security, whether fall or part underlying such debt or

receivables; or

(v) any beneficial interest in property, whether movable or immovable, or in such debt,

receivables, whether such interest is existing, future, accruing, conditional or contingent;

or

(vi)x x x

47

13 (6) Any transfer of secured asset after taking possession thereof or take over of

management under sub-section (4), by the secured creditor or by the manager on behalf of

the secured creditor shall vest in the transferee all rights in, or in relation to, the secured

asset transferred as if the transfer had been made by the owner of such secured asset.

48

Page 104, 105

31

“The section (s.8) does not apply to court sales, for

such sales effect a transfer by the operation of

law. The principle of the section was, however,

applied in a case decided by Madras High Court

where a debt for unpaid purchase money on a sale

of land was attached and sold, and the auction

purchaser was held entitled to the charge which the

vendor had under s 55(4) (b) on the property in the

hands of the buyer. The court, after observing that

the present section did not apply to court sales,

said: The effect of applying s 8 is to strengthen the

sale certificate by transferring the lien along with it.”

This Court observed in Abdul Aziz

49

that a sale through court is

different from a sale inter parties:-

“What is sold at a court sale is the right, title and

interest of the judgment debtor, and the extent of

that interest is a mixed question of fact and law to

be decided according to the circumstances of each

particular case, and depends upon what the court

intended to sell, and the purchaser intended to buy.”

We note that even though the entire right, title and interest were

purported to have been transferred, all the rights, transfer and interest

could not be said to have been transferred since the possession of the

property was not transferred to creditor. The possession was retained

by the debtor who continued to do business and receive rent from the

rooms on the property and has in fact continued to do so

till date. There is no doubt that after taking over the property from

debtor, the creditor also acquired the right to receive the usufruct of

the property i.e. the rent in this case. However, this was an interest in

49

Abdul Aziz v. Appayasami (1904) ILR 27 Mad 131, 31 IA 1.

32

the property which was not at any point of time transferred to the

auction purchaser.

50.In this case, the creditor did not have actual possession of the

secured asset but only a constructive or symbolic possession. The

transfer of the secured asset by the creditor therefore cannot be

construed to be a complete transfer as contemplated by Section 8 of

the Transfer of Property Act. The creditor nevertheless had a right to

take actual possession of the secured assets and must therefore be

held to be a secured creditor even after the limited transfer to the

auction purchaser under the agreement

50

. Thus, the entire interest in

the property not having been passed on to the creditor in the first

place, the creditor in turn could not pass on the entire interest to the

auction purchaser and thus remained a secured creditor in the Act.

Findings of Fraud and Collusion by the High Court

51.Finally, the High Court in its judgment renders a finding that

there was in fact fraud and collusion between the creditor and the

auction purchaser. According to the High Court, since the measures

were taken in breach of all laws, the inference of manipulation and

collusion cannot be ruled out.

52.We fail to see how such a finding of manipulation and collusion is

sustainable on account of breach of law in the present case. A risk of

50

Dated 25.02.2015

33

this kind taken up by an intending purchaser cannot lead to an

inference of collusion. Mainly, the finding is based on the fact that the

sale is a collusion because the auction purchaser was aware that a

dispute between the parties was pending and still went ahead and

made a bid for the property. It is not unusual in the sale of immovable

properties to come across difficulties in finding suitable buyers for the

property. We find that the property was eventually sold on the fourth

auction, and all the auctions were duly advertised.

53.Another fact on the basis of which the High Court has observed

an inference of collusion is that the property was sold and the sale was

confirmed in favour of ITC Ltd. though a statement was made in the

morning of 23.02.2015 before the DRT that the sale would not be

confirmed till the order is passed. This seems to be recorded in the

order of the DRT. However, what is overlooked is the fact that in the

statement on behalf of the creditor, the creditor only agreed to not

confirm the sale till 3 pm. In the absence of any finding as to what

actually transpired, it is not possible for us to infer manipulation and

collusion on this account. There is no dispute that the property was

actually purchased by ITC Ltd. in pursuance of a public auction and

that the entire amount of sale consideration has been deposited by it.

54.We have anxiously considered the entire matter and find that the

undisputed facts of the case are that a loan was taken by the debtor

34

which was not paid, the debtor did not respond to a notice of demand

and made a representation which was not replied to in writing by the

creditor. The creditor, however, considered the proposals for

repayment of the loan as contained in the representation in the course

of negotiations which continued for a considerable amount of time.

Several opportunities were in fact availed of by the debtor for the

repayment of the loan after the proceedings were initiated by the

secured creditor. The debtor failed to discharge its liabilities and

eventually undertook that if the debtor fails to discharge the debt, the

creditor would be entitled to take realize the secured assets.

55.As held, we are of the view that non-compliance of sub-section

(3A) of Section 13 cannot be of any avail to the debtor whose conduct

has been merely to seek time and not repay the loan as promised on

several occasions.

56.This Court in the case of State of Maharashtra v. Digambar

51

observed as follows:-

“19. Power of the High Court to be exercised under

Article 226 of the Constitution, if is discretionary, its

exercise must be judicious and reasonable, admits of

no controversy. It is for that reason, a person’s

entitlement for relief from a High Court under Article

226 of the Constitution, be it against the State or

anybody else, even if is founded on the allegation of

infringement of his legal right, has to necessarily

depend upon unblameworthy conduct of the person

seeking relief, and the court refuses to grant the

51

(1995) 4 SCC 683

35

discretionary relief to such person in exercise of such

power, when he approaches it with unclean hands or

blameworthy conduct.”

It relied on the judgment of the Privy Council in Lindsay

Petroleum Co. v. Hurd

52

, where the Privy Council observed:-

“…….Two circumstances, always important in such

cases, are, the length of the delay and the nature of

the acts done during the interval, which might affect

either party and cause a balance of justice or

injustice in taking the one course or the other, so far

as it relates to the remedy.”

57.Therefore, the debtor is not entitled for the discretionary

equitable relief under Articles 226 and 136 of the Constitution of India

in the present case.

58.We accordingly, set aside the impugned judgment of the High

Court and direct the debtor and its agents to handover possession

of the mortgaged properties to the auction purchaser within a

period of six months from the date of this judgment along with the

relevant accounts.

59.Appeals are allowed accordingly.

….………………………………..J.

[S.A. BOBDE]

….………………………………..J.

[L. NAGESWARA RAO]

NEW DELHI

MARCH 19, 2018

52

(1874) 5 PC 221

36