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Under The Sarfaesi Act, The Debtor Cannot Use Court Custody Of A Secured Asset As A Shield To Prevent Creditors From Taking Possession: Bombay High Court

sahithi reddy ,
  06 June 2023       Share Bookmark

Court :
In The High Court Of Judicature At Bombay
Brief :

Citation :
Interim Application (l) No.4188 Of 2023

CAUSE TITLE:

Caparo Financial Solutions Ltd. - Applicant In Robin Karamchandani v. Jem and Associates & Ors

DATE OF ORDER:  

24-04-2023

JUDGE(S):.

R.I. CHAGLA J.

PARTIES:

Petitioner:Robin Karamchandani

Respondent:Jem and Associates & Ors

SUBJECT 

The Bombay High Court has ruled that a secured creditor cannot be barred from taking possession of a mortgaged property under Section 13 of the SARFAESI Act simply because the property is in custodia legis (court custody).

According to Justice RI Chagla, the court must help the secured in obtaining control of the secured asset. It specifically directed the court receiver to turn over possession of mortgaged property to Caparo Financial Solutions Limited, which had given the property owner a debt.

ARGUMENTS ON BEHALF OF PLAINTIFF

  • Mr. Fatterperkar, the learned Counsel acting for the Plaintiff, has stated that the requirements imposed by the Applicant can be easily met, including the filing of an Affidavit by the Defendants following the said judgment dated March 12, 2020. The mere failure to comply with the conditions cannot result in the Court Receiver handing over the subject mortgaged property, which is in custodia legis, to the Applicant.

ARGUMENTS ON BEHALF OF DEFENDANT 

  • Possession of the subject property cannot be obtained by section 13(4) of the SARFAESI Act, the secured creditor is statutorily required by Section 14 of the Act to make an Application before the Chief Metropolitan Magistrate or District Magistrate for assistance in obtaining possession. According to Mr. Tamboly, learned Counsel for the Defendants, by filing the current Application, the Applicant is circumventing this requirement.
  • He claims that the judgment debtor has filed a Section 17 application under the SARFAESI Act to contest the notification given under Section 13(2) and the actions taken under Section 13(4). The application is being processed. Additionally, he has claimed that the Applicant and the Defendants are also engaged in ongoing arbitration processes. 
  • Money owed to the Defendants has been demanded from the Applicant in the arbitration process. Accordingly, he has argued that no decisions should be made in the current application given the SARFAESI Act's legal requirements and the ongoing arbitral case where the amount owed by the applicant is still being decided.

ANALYSIS OF COURT 

  • In a lawsuit for the particular performance of a contract brought by Robin Karamchandani against a constructor named Jem and Associates, the court was addressing an interim application by Caparo. The case was settled, and the court appointed a court receiver to sell the properties at issue in the conditions of the settlement.
  • Additionally, Caparo Financial Solutions Limited and Reliance Home Finance Limited had mortgages on the residences. The court decided in a ruling issued on March 12, 2020, that neither of the two lenders' objections would be necessary for the property to be sold. The court ordered the court receiver to inform potential buyers that the mortgage will be paid off first out of the profits of the sale and to get the lenders' approval before making the transaction.
  • The property's sale received the conditional approval of the secured creditors. Caparo withdrew their approval after the requirements weren't met and sent a letter telling the court receiver not to trade in the property. By section 13(4) of the SARFAESI Act, Caparo started the process of regaining control of the property and assumed symbolic possession by notifying the guarantors and borrowers.
  • After then, Caparo filed the current application to ask the court receiver for instructions on how to turn over ownership of the property.
  • The defendant-builder objected to the application, claiming that Caparo had not requested assistance from the Chief Metropolitan Magistrates or the District Magistrate under section 14 of the SARFAESI Act to seize the secured asset. Additionally, it stated that Caparo owes it money.
  • The plaintiff also challenged the motion, claiming that the creditors' requirements could be easily met and that a simple delay in doing so could not justify giving Caparo the property.
  • According to SARFAESI Act Section 14, the secured creditor may submit a written request to the Chief Metropolitan Magistrate or the District Magistrate asking for help in seizing any secured property.
  • The defendant's reliance on Section 14 of the SARFAESI Act, according to the court, is misguided because in this instance the borrower does not own the secured asset. The court recognized that the property is actually in the custody of the court receiver.
  • "The Defendants' reliance on Section 14 of the SARFAESI Act in asserting that the Applicant would necessarily have to apply to the Chief Metropolitan Magistrate for an order assisting the Applicant / as Secured Creditor in taking possession of the secured assets is misplaced as in this case the possession of the secured asset / mortgaged property is with the Court Receiver and thus custodian"
  • The court concluded that because the prerequisites for approval for sale have not been met, the court must have helped the creditor take ownership of the asset.
  • The court approved the application as a result, and Caparo was given free and clear possession of the property by the court receiver. If there is any money left over after paying Caparo's debts, the plaintiff is free to go before the appropriate court or tribunal, according to the ruling of the court.


 

 
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