Retrospective application of S.31b of SARFAESI ultra vires: Madras High Court

It is the contention of the Bank that Recovery of Debts and Bankruptcy Act 1993, Section 31(b) was introduced in the year 2016 itself, which came into force on 1.9.2016, wherein the same indicates that secured debt shall have a priority over other debts and including Government dues. Therefore, the Plaintiff is not entitled to charge over the property. It is to be noted that the Section 31(b) deals with priority to secured creditors under Recovery of Debts and Bankruptcy Act 1993 came into effect on 1.9.2016. Whereas the sale deed was executed on 12.03.2016 much prior to the Act came into force and statutory charge already created by virtue of Section 55 (4)(b) of the Transfer of Property Act, before the provision Section 31(B) introduced under Recovery of Debts and Bankruptcy Act. Therefore, the statutory rights already created cannot be taken away by a subsequent legislation which came into effect only on 1.9.2016 at the most Section 31(B) can be applied only prospectively and cannot be given retrospective effect. (Para 17)

T.A.S. RATHNAKUMAR & ANOTHER V/S KARANAM MADHU &OTHERS

O.A.Nos. 1120 & 1121 of 2019, A.Nos. 628, 1893 & 2156 of 2020

Decided on October 16 , 2020

Counsel for plaintiff- Sharath Chandra

Counsel for defendant- M.L. Ganesh

The Honorable Justice N. Sathish Kumar at the High Court of judicature at Madras authored the current judgement .The OA Nos. 1120 and 1121 of 2019 were filed for interim injunction form the interfering with the peaceful possession and enjoyment of ,and from encumbering the plaintiff’s property which was pending disposal before the court. Application Nos, 1893 and 2156 of 2020 were filed seeking amendments to C.S.No. 708 of 2019 and application No. 628 of 2020 is filed to reject the plaint.

The original suit was filed to cancel the sale deed executed in favour of the 1st Defendant and also to declare the memorandum of deposit of the title deed dated 12.03.2016 executed by the 1st defendant in favour of the 2nd defendant , in the office of the 3rd defendant is null and void. The suit was filed on the ground that the amount assures as sale consideration was not paid in entirety . The 1st defendant remained ex- parte but the 2nd defendant bank filed a counter for amending the plaint , and contended that even when the entire sale consideration is not paid it can not be grounds for cancellation of the sale deed.

The applicant/bank in A .no.628 of 202 contended that the plaintiff had executed the sale deed on 12.03.2016 but chose to file the suit only after 18.11.2019 only after notice under 13 (4) of SARFAESI Act , issued ,tion that the Plaintiff has executed the sale deed on 12.03.2016 but chosen to file the suit only on 18.11.2019 only after notice under 13(4) of SARFAESI Act, issued. It is also the contention of the Applicant that they have advanced loan of 2.50 crores pursuant to the execution and registration of sale deed dated 12.03.2016. Hence, the suit seeking for declaration of Memorandum of Deposit of title deeds is not maintainable.

1. The learned counsel appearing on behalf of the plaintiff submitted before the court that sale deed cannot be cancelled on mere on payment, and the only remedy available now is recovery of the said amount. Therefore his contention is that as far as the unpaid sale consideration is concerned the statutory charge is already created the moment the document has registered as per Sec 56 of the Transfer of Property Act. He sought to amend the prayer in respect of declaration for statutory charge and delete the prayer for the termination of the sales deed. The plaintiff alleged the existence of a collusive relation between the Defendant bank and the 1st Defendant, given the loan was sanctioned one month prior to the signing of the sale deed and the MOD. Merely because SARFAESI notice has not been issued , the plaintiff can not be forced to go to the DRT , as the DRT can not provide statutory relief. The plaintiff's intention is not to prevent the bank from selling the property , but to enforce the charge. The court can only decide the issue as to which party has the right to enforce the charge.

The learned counsel appearing for the Bank has contended that the suit itself was at the behest of the borrower. In paragraph 9 and 10 it is stated by the plaintiff that the defendant has cheated him despite that no complaint was lodged even after the non payment of money , remaining silent for more than 3 years , this shows that there is a clear collusion between plaintiff and 1 defendant. The possession notice was issued on 07.12.2018 whereas the suit was filed only on 23.07.2019 . the plaintiff even being a third party may go to a Tribunal hence the court has no jurisdiction to entertain this suit . The amendment, if allowed, will impact the process under SARFAESI Act. As per Sec 31(B) of the SARFAESI , notwithstanding anything contained in any other law for the time being in force , the rights of secured creditors security interest id created, it shall have priority and shall be paid in priority over all the debts

The Court heard both parties.

The Court observed:

It is also to be noted that the charge is a statutory charge for the unpaid amount. It cannot be taken away merely on technical grounds. Merely because the plaintiff has come to the Court with some delay the same is not a ground to non-suit him. It is trite law that to enforce the charge the period of limitation is 12 years (para 16)

It is the contention of the Bank that Recovery of Debts and Bankruptcy Act 1993, Section 31(b) was introduced in the year 2016 itself, which came into force on 1.9.2016, wherein the same indicates that secured debt shall have a priority over other debts and including Government dues. Therefore, the Plaintiff is not entitled to charge over the property. It is to be noted that the Section 31(b) deals with priority to secured creditors under Recovery of Debts and Bankruptcy Act 1993 came into effect on 1.9.2016. Whereas the sale deed was executed on 12.03.2016 much prior to the Act came into force and statutory charge already created by virtue of Section 55 (4)(b) of the Transfer of Property Act, before the provision Section 31(B) introduced under Recovery of Debts and Bankruptcy Act. Therefore, the statutory rights already created cannot be taken away by a subsequent legislation which came into effect only on 1.9.2016 at the most Section 31(B) can be applied only prospectively and cannot be given retrospective effect. (Para 17)

The Court stated:

It cannot be concluded that the third party who has independent right of statutory charge over the property sold to the borrowers, his right can be agitated only by the Tribunal Court and not by Civil Court (Para 21 and 22)

The court noted that the facts of the present case are not applicable to the cases relied upon in the submissions , they all stand undisputed but the current case was considered unique . The suit is only for the recovery of the unpaid sale consideration. It also highlighted that the DRT has rejected the same relief sought in the civil court.

The Court allowed the Applications in A.No.2156 of 2020 and A.No.1893 of 2020 and dismissed A.No.628 of 2020 filed for rejection of suit and the other two Applications in A.Nos.1120 and 1121 of 2019 seeking Interim Injunctions filed against the bank.

View/Download Judgment: T.A.S. RATHNAKUMAR & ANOTHER V/S KARANAM MADHU &OTHERS

Shreya Shetty G R