top of page

Technical defects in procedure under SARFAESI act is not a ground to vitiate proceedings: SC


M/s. L&T Housing Finance Limited v. M/s. Trishul Developers and Anr.

Civil appeal no(s). 3413 of 2020 (Arising out of SLP(C) No(s). 18360 of 2019)

Decided on October 27, 2020

A three-judge bench comprising of Justice L. Nageswara Rao, Justice Hemant Gupta and Justice Ajay Rastogi decided that proceedings under the SARFAESI Act cannot be negated on the ground of trivial defects in procedure unless substantial prejudice is caused to the defaulter.

The respondents, a partnership firm and a partner of that firm respectively, approached the appellant, a Housing Finance Company, for seeking financial assistance and submitted a request to the appellant through application dated 15.05.2015 for term loan of Rs.20 crores for completion of its project. The appellant sanctioned Term Loan Facility for the same purpose through a sanction letter dated 07.08.2015 on specified terms and conditions and for availing the above credit facility, the respondents executed Facility Agreement dated 11.08.2015 along with security documents by mortgaging the various immovable properties as a security for creating security interest in favour of the appellant. The sanction letter dated 07.08.2015, duly signed by the authorised signatory of “L&T Housing Finance Ltd.” for execution of the Facility Agreement was accepted and signed by the authorised signatory on behalf of the first respondent and also by the guarantors, clearly demonstrates that on the top of the letterhead towards right, the name of the company is mentioned “L&T Finance (Home Loans)” and in the bottom towards left, it was mentioned “L&T Housing Finance Ltd.” with registered office at Mumbai and this is the letterhead which has always been taken in use for correspondence at all later stages.

The respondents became a defaulter and owing to the alleged breach of the terms and conditions of the Facility Agreement executed between the appellant and the respondents towards completion of its project, the appellant served a demand notice dated 16.12.2016 to the respondents to pay the outstanding dues within a stipulated period. On failure of outstanding payment, the appellant classified the account of the respondents as Non-Performing Assets on 15.04.17 and issued a demand notice on 14.06.2017 on the same letterhead as mentioned above under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter SARFAESI Act) calling upon respondents to pay the dues of Rs.16,97,54,851/ as on 31.05.2017 in terms of the notice with future interest till actual payment within sixty days from the date of the receipt of the demand notice. The respondents did not discharge their liability and replied to the notice on 08.08.2017; no objection was raised by them of misconception or misconduct with respect to the secured creditor. The appellant filed an application before the competent authority under Section13(4) read with Section 14 of the SARFAESI Act for taking possession of the mortgaged properties and the collateral security of the respondents.

At this stage, the respondents filed a Securitisation Application No.76/2018 before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act criticizing the issuance of demand notice under Sections 13(2) and 13(4) of the Act on various grounds. The learned Debt Recovery Tribunal in its order dated 23.03.18 set aside the demand notice on the premise that it has not been validly issued in the name of the appellant (“L&T Housing Finance Ltd.”) instead the name of the company has been mentioned as “L&T Finance Ltd.” and this defect as alleged not being curable after issuance of demand notice by another group company instead of secured creditor, held the proceedings not sustainable. The appellant challenged this order before the Debt Recovery Appellate Tribunal (DRAT) which in its order dated 16.04.2019 set aside the order of Debt Recovery Tribunal, which later came to be challenged by the respondents in a writ petition before the High Court of Karnataka. The High Court while setting aside the order of DRAT returned its finding in conformity with what was observed by the DRT in its order, which is the subject matter of appeal before this Court.

The counsel for the appellant submitted that all notices were issued on the same letterhead of the appellant and further submits that the self-same authorised signatory, being there of both the companies use common letterhead having its registered office and details of the sanction letter and of Facility Agreement coupled with default committed by the respondents, are in reference to “L&T Housing Finance Ltd.” and only at one stage, due to oversight, the appellant put the seal of “L&T Finance Ltd.” and it has not caused any substantial prejudice in acknowledging that from whom the demand notice has been served, which can be further countenanced from the reply to the demand notice filed by the respondents. The counsel contends that the technical defect in the notice will not negate the proceedings initiated under the SARFAESI Act for protecting their security interest and that it was not justified by the High Court to reverse the finding of fact supported by the material on record and that needs interference of this Court.

The learned counsel for the respondents contends that when the salient defect has been noticed by the DRT and confirmed by the High Court at the very inception of the proceedings, all the consequential proceedings initiated in furtherance thereof cannot be said to be in compliance of the SARFAESI Act and once a procedure has been prescribed by law as mandated under the SARFAESI Act, the secured creditor was under the obligation to comply which has not been followed and hence no error has been committed by the High Court under its impugned judgment and according to him, it needs no interference of this Court.

The Court, on hearing the counsel for both parties and perusal of the material available on record, concurred with the contentions of the counsel for appellant and noted that the respondents did not deny advancement of loan, execution of Facility Agreement, their liability and compliance of the procedure being followed by the secured creditor prescribed under the SARFAESI Act.

The Court observed:

In the facts and circumstances, when the action has been taken by the competent authority as per the procedure prescribed by law and the person affected has a knowledge leaving no ambiguity or confusion in initiating proceedings under the provisions of the SARFAESI Act by the secured creditor, in our considered view, such action taken thereof cannot be held to be bad in law merely on raising a trivial objection which has no legs to stand unless the person is able to show any substantial prejudice being caused on account of the procedural lapse as prescribed under the Act or the rules framed thereunder still with a caveat that it always depends upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant prejudiced if any, being caused and there cannot be a straitjacket formula which can be uniformly followed in all the transactions.(Para 19)

The Court held that the objection raised by the respondents was trivial and technical in nature and that the appellant has complied with the procedure prescribed under the SARFAESI Act. The respondents were unable to justify the error in the procedure being followed by the appellant to be complied with in initiating proceedings under the SARFAESI Act, hence the orders of the DRT and High Court are unsustainable. Further, the Court stated that the contentions of the respondents were without substance for the reason that “L&T Finance Ltd.” and “L&T Housing Finance Ltd.” are the companies who in their correspondence with all its customers use a common letterhead having their selfsame authorised signatory and there was not an iota of confusion in the respondents knowledge regarding the action being initiated in the instant case.

The Court set aside the judgment of the High Court of Karnataka and allowed the appeal.

Jhanavi M



bottom of page