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Nadeem Qureshi (Advocate/ nadeemqureshi1@gmail.com)     18 November 2012

Sarfaesi act 2002

SARFAESI Act, 2002, Section 13(2) 13(4) ----------- Bank Loan Recovery, Bank Engaging enforcement agency and claiming amount paid to such agency--------------------- held------------------------- Unjustified and untenable.

 

 

IN THE HIGH COURT OF PUNJAB AND HARAYANA AT

CHANDIGARH

Date of Decision:  20.10.2011

(i) Civil Writ Petition No. 11662 of 2010

Mohinder Pal Singh and another       …..Petitioners 

Versus 

State Bank of India and another        …..Respondents

Present: Shri Anand Chhibbar,

Shri Ranjit Chawla and

Shri I.P. Singh, Advocates, for the petitioners. 

Shri S.C. Pathela, Advocate, for the respondents. 

(ii) Civil Writ Petition No. 299 of 2011

Rajeev Gulati  and another       …..Petitioners 

Versus 

State Bank of India       …..Respondent

Present: Shri Karan Bhardwaj, Advocate, for the petitioners. 

Shri S.C. Pathela, Advocate, for the respondent. 

CORAM: HON’BLE MR. JUSTICE HEMANT GUPTA

HON’BLE MR. JUSTICE G.S. SANDHAWALIA

1. Whether Reporters of local papers may be allowed to see the judgment?

2. To be referred to the Reporters or not?

3. Whether the judgment should be reported in the Digest?

HEMANT GUPTA, J. 

This order shall dispose of Civil Writ Petition No. 11662 of

2010 and Civil Writ Petition No. 299 of 2011, challenging the action of

the Bank in taking possession of the secured assets, even though the

amount of the financial assistance stands substantially paid.  Civil Writ Petition No. 11662 of 2010

For the facility of reference, the facts are taken from Civil

Writ Petition No. 11662 of 2010. The petitioner herein availed loan of

Rs.10 lacs on 23.8.2006 and mortgaged the property, a piece of land,

as collateral security. The petitioner defaulted in payment of the loan

which led to the issuance of a notice under Section 13(2) of the

Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 (for short `the Act’). A copy

of the said notice, produced by the respondent-Bank in Court, shows

the outstanding amount as Rs.12,15,630/- as on 15.5.2008 along

with further interest and incidental expenses. The Bank vide letter

dated 12.9.2008 sought the assistance of an Enforcement Agency,

namely, M/s Vrinda Corporate Services Ltd., to take possession of

the immovable and movable property as an agent of the Bank.

Subsequently, a notice for taking possession under Section 13(4) of

the Act was issued on 4.2.2009 by the Authorized Officer of the Bank.

Such notice was published in the newspaper “The Hindustan Times”

on 9.2.2009. The petitioner failed to make payment of the amount,

which led to the issuance of another notice dated 27.5.2009 under

Section 13(4) of the Act. Such notice under Section 13(4) of the Act,

was published in the newspaper `The Tribune’ (English Edition) and

vernacular newspaper `Punjabi Tribune’ dated 13.6.2009 proposing

the date of auction as 17.7.2009. The amount mentioned in the sale

notice was Rs.12,15,630/- along with interest. The petitioner

deposited a sum of Rs.2.00 lacs on 13.7.2009 and sought six

months’ time to deposit the balance amount.

Another public notice was published in the newspapers

`The Tribune’ (English Edition) and vernacular newspaper `Punjabi

Tribune’ dated 5.6.2010 proposing the date of sale as 7.7.2010. The

petitioner deposited the balance amount in parts with last deposit of

Rs.2,17,444/- on 25.6.2010. As per the petitioner, with the said

(Civil Writ Petition No. 11662 of 2010

deposit, there was only one rupee in the debit account, as per the

statement of account Annexure P.4 appended with the writ petition.

In view of the statement of account (Annexure P.4), it is argued that

the entire amount, as mentioned in the notice under Sections 13(2)

and 13(4) of the Act, stands paid, therefore, for the non deposit of the

interest amount, the property cannot be sold.   

This Court on 6.7.2010 permitted the Banks to receive bids, but

it was ordered that it will not finalise the auction of the property.   The

respondent-Bank initially filed written statement on 25.9.2011 raising

a plea that the jurisdiction of the Civil Court is barred in terms of

Section 34 of the Act and that the provisions of the Act, have

overriding effect on any other law in terms of Section 35 of the Act. It

is also pointed out that the outstanding dues towards the petitioners

as on 21.9.2011 are as under:- 

(a) Accrued interest upto 21.9.2011 amounting to  Rs.2,85,808/-

(b) Charges of enforcement agency Rs.1,28,600/-

(c) Charges of publication of notices dated 13.6.2011 Rs.24,192/-

(d) Charges of publication of notices dated 5.6.2010 Rs.18432/-

(e) Legal fee Rs.20,400/-

Total outstanding dues Rs.4,77,432/-

The writ petition was taken up for hearing on 29.9.2011

on the aforesaid date along with CWP No. 299 of 2011, which is also

being decided by the present order. In the aforesaid case also, the

Bank has engaged recovery/enforcement agency and is said to have

paid a sum of Rs.1,28,608/- even before issuance of the notice under

Section 13(2) of the Act, to such agency. The Chief General Manager

of the Bank was called to explain the conduct of the officers of the

Bank in claiming the amount paid to the enforcement agency, even

before notice under Section 13(2) of the Act, was issued. Shri S.K.

Sehgal, Chief General Manager of the State Bank of India, explained

on 30.9.2011 that the Bank has issued instructions to claim charges

(Civil Writ Petition No. 11662 of 2010

of the Enforcement Agencies only at the stage of taking over

possession i.e. after the action under Section 13(4) of the Act is taken.

The counsel for the Bank thereafter, sought time to furnish

additional affidavit to explain the claim of the charges paid to the

enforcement agencies.

In CWP No. 11662 of 2010, an additional affidavit has

been filed to the effect that the recovery case of the borrower was

handed over to the recovery/enforcement agent on 12.9.2008 and

possession of the secured assets i.e. plot measuring 403 square was

taken on 4.2.2009 and a notice under Section 13(4) of the Act, was

served on 4.2.2009. The notice was published in the newspapers on

9.2.2009. Since the borrower did not make payment of the

outstanding dues, notice of sale was issued on 27.5.2009. After the

deposit in part by the borrower, it is explained that the balance  in the

account of the borrower as on 5.6.2010 was Rs.2,17,445/- and that

the borrower was also liable to pay the accrued interest and actual

expenses incurred by the Bank in effecting the recovery. The

borrower deposited an amount of Rs.2,17,444/- on 25.6.2010, but did

not pay the accrued interest amounting to Rs.2,48,461/- as on

25.6.2010 and also an amount of Rs.1,71,224/- towards the expenses

incurred by the Bank in effecting recovery. The details of the

payments  are as under:- 

(i) Publication of notices paid to M/s Raghuvanshi

Advertising on 21.7.2009

Rs.24192/-

(ii) Paid to M/s Vrinda Corporate Services Limited, the

Enforcement Agent on 17.8.2009

Rs.40,000/-

(iii) Publication of notices paid to M/s Design Matters

Advertising on 2.7.2010

Rs.18,432/-

(iv) Paid to M/s Vrinda Corporate Services Limited, the

Enforcement Agent on 10.7.2010

Rs.44,300/-

(v) Paid to M/s Vrinda Corporate Services Ltd. Rs.44,300/-

(Civil Writ Petition No. 11662 of 2010

Thus, it is pointed out that an amount of 4,19,685/- is still due and

payable to the petitioner. 

Shri Pathela, has also filed documents such as the circulars

dated November 3, 2006 and April 24, 2011 issued by Reserve Bank

of India as well as the copies of the bills, submitted by the

enforcement agency, M/s Vrinda Corporate Services Ltd. Vide

circular dated 3.11.2006, the Reserve Bank of India has issued

“Guidelines on Managing Risks and Code of Conduct in Outsourcing

of Financial Services by Banks”. Para 5.5 of the said circular deals

with “The Outsourcing Agreement”. It is contemplated that every such

agreement should address the risks and risk mitigation strategies.

Para 5.7 of the said circular deals with the responsibilities of the

recovery agents. Shri Pathela also relies upon the Bank’s Outsourcing

Policy, 2011 contained in a master circular issued by the Banking

Operations Department Corporate Centre, Mumbai. It is pointed out

that the recovery agencies are carrying out a financial activity, which

is covered under the outsourcing arrangement permitted as per the

guidelines issued by the Bank.

Reliance was also placed upon circular dated 16.11.2002

issued by the office of the Chief General Manager of the Bank. The

said circular deals with the procedure after issuance of notice under

the Act. Clause (g) deals with taking possession of the immovable

property, which reads as under:- 

“6. Procedure after issue of notice

xxx xxx

D. The guidelines that follow mainly cover the procedure for

taking possession/ sale of secured assets and appointment of

Enforcement Agencies to assist the branches.

(a)  xx

(g)  Taking possession of immovable property

i) Where the secured asset is an immovable property, the

authorized officer may take, or cause to be taken

(Civil Writ Petition No. 11662 of 2010

possession by delivering a Possession Notice to the

borrower as per format given in Annexure 6.

ii) The notice should also be affixed on the outer door or at

such conspicuous place of the property. 

iii) The possession notice should also be published in two

leading newspapers, one in vernacular language,

having sufficient circulation in that locality.

iv) The property should be kept in the custody of the

Authorized Officer or in the custody of any person

appointed/authorized by him, who shall take due care

as a man of ordinary prudence would, under the

similar circumstances, take of such property.

                 v) The Authorised Officer shall take steps for preservation

and protection of secured assets and insure them, if

necessary, till they are sold or otherwise disposed of.”

xx xx xx

  (o) Appointment of Enforcement Agencies (EAs)

It has been decided that, where warranted, Authorised

Officers may enlist the services of Enforcement

Agencies (EAs) for assisting them in enforcing security

rights under the Ordinance (i.e. taking possession of

the assets, maintenance and eventual sale). The

Agencies so enlisted will be an Agent of the Authorised

Officer. The salient features of the arrangement will be

as under.”

In the circular dated 10.3.2005 issued by the Bank,

attached as Annexure R-2 with CWP 299 of 2005, the remuneration

structure for the enforcement agents is as under: 

For recoveries above

Rs.20 lacs and upto Rs.50

lacs

Rs.2 lacs plus 2.5% of the

amount recovered in excess of

Rs.20 lacs.

For recoveries above

Rs.50 lacs upto Rs.5

crores

Rs.2.75 lacs plus 1.5% of the

amount recovered in excess of

Rs.50 lacs.

For recoveries above Rs.5

crores

Rs.9.50 lacs plus 1% of the

amount recovered in excess of

Rs.5 crores.

It is pointed out that after such circular, the

remuneration payable to the enforcement agency has been revised

vide Circular Letter No. CirCFO/Adv/358/2006-07 dated 23.2.2007.

The relevant extracts are as under:-

(Civil Writ Petition No. 11662 of 2010

Sr.

No.

Item  Remuneration Payable

a) For recoveries upto Rs.1

lac

@ 20% of the amount

recovered

b) For recoveries above

Rs.1 lac and upto Rs.20

lacs

Rs.20,000/- plus 10% of

the amount recoveries in

excess of Rs.1 lacs.

c) For recoveries above

Rs.20 lacs and upto

Rs.50 lacs

Rs.2 lacs plus 2.5% of the

amount recoveries in excess

of Rs.20 lacs.

d) For recoveries above

Rs.50 lacs and upto

Rs.5 crores

Rs.2.75 lac plus 1.5% of the

amount recoveries in excess

of Rs.50 lacs.

e) For recoveries above

Rs.5 crores 

Rs.9.50 lacs plus 1% of the

amount recovered in excess

of Rs.5 crores.

Vide circular dated 5.5.2010, Annexure R-4 with CWP

299 of 2011, the remuneration structure for the enforcement agencies

has further been revised, which reads as under:- 

“Proposed Fee Structure

Situation

A B C

a) For recoveries

upto Rs.10.00 lacs

4% of the amount

recovered maximum

Rs.40,000/-

(Minimum

Rs.12,000/-)

Rs.10,000/- Rs.5000/-

b) For recoveries

above Rs.10.00

lacs and upto

Rs.50.00 lacs

Rs.40,000/- plus

2.5% of the amount

recovered in excess

of Rs.10.00 lacs

Rs.15,000/- Rs.5000/-

c) For recoveries

above Rs.50.00

lacs and upto

Rs.1.00 crore

Rs.1,40,000/- plus

2.00% of the

amount recovered

in excess of

Rs.50.00 lacs

Rs.20,000/- Rs.10,000/-

d) For recoveries

above Rs.1.00

crore and upto

Rs.5.00 crores

Rs.2,40,000/- plus

1.25% of the

amount recovered in

excess of Rs.1.00

crore

Rs.25,000/- Rs.15,000/-

e) For recoveries

above Rs.5.00

crores and upto

Rs.10 croes

Rs.7,40,000/- plus

0.75% of the

amount recovered in

excess of Rs.5.00

crores

Rs.30,000/- Rs.20,000/-

(Civil Writ Petition No. 11662 of 2010

f) For recoveries

above Rs.10

crores

Rs.11,15,000/- plus

0.50% of the

amount recovered in

excess of Rs.10.00

crores

Rs.30,000/- Rs.20,000/-

Situation A: In case physical possession has been taken and

recovery is made whether before or after auction.

Situation B: In case recovery is made before possession but after

obtaining DM permission and visit made by Enforcement Agents

(EAs).

Situation C: In case recovery/settlement is made before possession

and before DC permission but before case entrusted to EAs.”

It is, thus, contended by Shri Pathela that the procedure

for enforcement agents is in accordance with the circulars issued by

the Reserve Bank of India and also the guidelines issued by the Bank.

Learned counsel for the petitioner has controverted the

said contention and relied upon circular dated 24.4.2008 issued by

the RBI, after the judgment of the Apex Court in Manager, ICICI Bank

Ltd. v. Parkash Kaur, AIR 2007 SC 1349, wherein the following is the

condition:- 

“Taking possession of property mortgaged/hypothecated to

banks.

(xii) In a recent case which came up before the Honourable

Supreme Court, the Honourable Supreme Court observed that

we are governed by rule of law in the country and the recovery

of loans or seizure of vehicles could be done only through

legal means. In this connection it may be mentioned that the

Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 (SARFAESI Act)

and the Security Interest (Enforcement) Rules, 2002, framed

thereunder have laid down well defined procedures not only

for enforcing security interest but also for auctioning the

movable and immovable property after enforcing the security

interest. It is, therefore, desirable that banks rely only on legal

remedies available under the relevant statutes while enforcing

security interest without intervention of the Courts.”

On the basis of such facts, learned counsel for the

petitioner has argued that enforcement agents  may be permissible for

(Civil Writ Petition No. 11662 of 2010

Bank to be engaged, but such enforcement agents are not

contemplated under the Act, much less before the stage of taking of

actual physical possession. It is argued that in all other actions for

the recovery of the dues by the Banks, the Bank has to seek

intervention of either the Court or the Tribunal but an action under

the Act is permissible to be taken by the Bank through its authorized

officers, therefore, the Bank cannot take assistance of an enforcement

agency while taking action under the Act. 

It is contended that the actions under the Act are contemplated

by an Authorized Officer, as defined under Rule 2(a) of the Security

Interest (Enforcement) Rules, 2002 (for short `the Rules’) to mean an

Officer not less than a Chief Manager of a Public Sector Bank. In the

present case, the notices under Sections 13(2) and 13(4) of the Act,

have been issued by such authorized officer. The process of sale of

assets is to be initiated after such deemed possession, by way of

publication in the newspaper. The process of sale of immovable

secured assets is regulated by Rule 8 of the Rules. The deemed

possession is to be taken by the Authorized Officer by delivering a

possession notice on the outdoor or at such conspicuous place of the

property or in the newspaper. Before the property is put to sale, a 30

days notice is required to be served under Sub Rule 6 of Rule 8 of the

Rules. It is argued that since the property mortgaged in favour of the

Bank was an open plot, therefore, the act of taking possession does

not require any preparation of inventory or any other expenses to

secure the same. The Bank has claimed the dues to the enforcement

agents even before notice under Section 13(4) was served upon the

petitioner and published in the newspapers. It is contended that the

claim of the enforcement agents is the fixed amount on the amount

recovered and not for any services provided, which is apparent from

the bill raised and produced by Counsel for the Bank. The

(Civil Writ Petition No. 11662 of 2010

enforcement agents have raised the bills, with the following

particulars:-

In the case of Sh. Mohinder Pal Singh

Bill dated Particulars Amount

(Rs.)

10.8.2009 Charges for enforcement

as per Bank’s rates (on

the recovery of First

Rs.3,00,000/-)

40000.00

    

08.7.2010 Charges for enforcement

as per Bank’s rates (on

the recovery of

Rs.11,86,000/-) 

Less amount received Net

Amount

128600.00

40000.00

88600.00

18.3.2011 Charges for enforcement

(pending amount)

44,300.00

Thus, on the basis of circular dated 23.2.2007 and the

aforesaid bills, it is argued by the learned counsel for the Petitioner

that the amount paid to the enforcement agent is a reward to the

enforcement agencies and not reimbursement of the expenses and

thus, such amount, cannot be charged from the petitioner. It was

explained by the counsel for the Bank that the recovery case of the

petitioner was entrusted to enforcement agency on 12.11.2008 i.e.,

after issuance of notice under Section 13(2) of the Act on 15.5.2008,

though the notices under Section 13(4) of the Act were issued on

4.2.2009 and 27.5.2009. Therefore, such charges have been rightly

claimed from the petitioner as reasonable expenses to realize the

security permissible under Section 13(7) of the Act as such amount

has been claimed after notices under Section 13(4) were issued and

published.

We have heard learned counsel for the parties at some

length and find that the action of the Bank in engaging enforcement

agency and claiming amount paid to such agency as unjustified and

untenable.

Though the Reserve Bank of India, as per the circular

dated 3.11.2006 has permitted outsourcing of certain financial

(Civil Writ Petition No. 11662 of 2010

services, but some safeguards are to be kept in view while giving effect

to the agreement engaging such enforcing agencies. Such agreement

restricts the rights of the commercial bank in engaging enforcement

agents for effecting recoveries under the Act as per clause (xii) of the

Circular dated April 24, 2008. The process of recovery through the

process of the Civil Court or the Debt Recovery Tribunal stands at a

different footing. But in the case, where the recovery process is to be

initiated under the Act, it is the Bank, the secured creditor, who is

permitted to realize its security without the intervention of the Court

or the Tribunal. Keeping in view the aforesaid fact, though the circular

dated 3.11.2006 permits outsourcing of certain services, but such

outsourcing is restricted in case, if the process of recovery is to be

initiated under the Act. The Act and the Rules contemplate an action

by the secured creditor through its authorized officer. It is Authorized

Officer who has taken action under the Act, when notice under

Section 13(4) of the Act, was published for deemed possession of the

property. Before the issuance of the notice under Section 13(4), the

enforcement agency is not expected to take any action. In fact that is

the stand of the Chief General Manager of the Bank. Even after the

possession in terms of Section 13(4) of the Act is taken, the secured

creditors can claim such expenses as are properly incurred in terms

of Section 13(7) of the Act. The said provisions contemplated for

reimbursement of expenses which the secured creditors have

incurred. There cannot be any fixed expenses payable to the

Enforcement Agents, irrespective of the costs, charges and expenses

incurred by such Enforcement Agents. Therefore, the fixed amount

claimed by the Enforcement Agency, without proof of actual

expenses, is beyond the scope of Section 13(7) of the Act or the

guidelines issued by the Reserve Bank of India.

(Civil Writ Petition No. 11662 of 2010

Even otherwise, from the circular issued by the Bank and

the bills submitted by the Enforcement Agencies, it transpires that

the charges are claimed in relation to the amount recovered. Thus,

the amount paid to the Enforcement Agencies is a reward for the

services. The amount of reward cannot be passed on to anyone else.

Such amount has to be paid to the Enforcement Agencies out of the

assets realized or by the Bank out of funds at its disposal. Section 13

(7) of the Act, authorizes the secured creditors to claim charges, costs

and expenses, which are actually incurred. The actual expenses

incurred have no co-relation with the amount recovered or

recoverable. Therefore, the claim of fixed charges in view of the

amount recovered is beyond legislative sanction and not admissible. 

Apart from the said fact, the Bank has claimed legal fee.

The notices under Sections 13(2) and 13(4) of the Act are the notices

on the performa circulated on 16.11.2002. The Authorised Officer of

the Bank does not require any legal opinion in issuing such notices.

There is no justification to claim such legal charges from the

borrower, which is not related to any professional services rendered

by an Advocate to the Bank. There was no occasion for any legal

advice in issuing notice under Sections 13(2) or 13(4)of the Act.

Learned counsel for the petitioner has further agued that

the Bank has claimed interest on the amount of expenses including

the charges of enforcement agencies, legal fee and advertisement

expenses, which is not permissible in view of the judgment of this

Court in Paramjit Singh v. UCO Bank Ghudani Kalan and another,

2007(4) PLR 747, wherein, similar expenses claimed by the Bank has

been disallowed as not permissible in law. In view of the said fact, we

are of the opinion that the Bank cannot claim interest on the

expenses.  

(Civil Writ Petition No. 11662 of 2010

In CWP 299 of 2011, it is averred in the written statement

that Rs. 64528/- is the due amount as on 22.8.2011 in the loan

accounts of the petitioner whereas another sum of Rs.2,28,516 is

payable on account of recovery agents fee, publication in newspapers

and legal fee etc even after the petitioner has deposited a sum of

Rs.5,00,000/- in terms of the interim order passed by this court to

restore possession of the house on deposit of the said amount. The

amount of deposit shows that the meager amount is due from the

borrower towards interest, whereas, the major amount is towards the

expenses allegedly incurred.

Consequently, we dispose of the present writ petitions with

direction to the respondent-Bank to recalculate amount payable by

the borrower(s) by deleting the charges/expenses of the Enforcement

Agencies, legal fee and the interest on the amount of expenses. The

Bank shall communicate within two weeks the due amount as on

6.7.2010 i.e. when the petitioner in CWP 11662 of 2010 made the last

payment; and as on 31.5.2011 in CWP 299 of 2011, the date of last

payment. The petitioners are granted one month thereafter to deposit

the said amount so communicated. The deposit of the amount by

petitioners shall give complete discharge of the dues of the Bank and

the title deeds etc. shall be returned to the borrower within next two

weeks. 

(HEMANT GUPTA) 

JUDGE

October  20 , 2011      (G.S. SANDHAWALIA)

ds       JUDGE

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Nadeem Qureshi (Advocate/ nadeemqureshi1@gmail.com)     18 November 2012

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