SARFAESI Act; J.M Financial Asset Reconstruction Company Pvt. Ltd. Vs. Board of Trusts of The Port of Mumbai [Bombay High Court, 24-08-2016]

Public Premises (Eviction of Unauthorized Occupants) Act, 1971 – Ss. 4 & 7 – Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Ss. 13(4) – the provisions of the SARFAESI Act cannot destroy the rights of the landlord who has admittedly not mortgaged its ownership rights in favour of the secured creditor – if the landlord has a right to terminate the lease, that right cannot be destroyed and remains unaffected by any action taken by the secured creditor for selling the leasehold interest in said property and which was mortgaged in its favour.

SARFAESI Act


IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

CORAM : S. C. DHARMADHIKARI & B.P.COLABAWALLA, JJ.

Pronounced On : 24 August, 2016.

WRIT PETITION NO. 17 OF 2014

JM Financial Asset Reconstruction ] Company Pvt. Ltd. a company incorporated ] under the provisions of the Companies Act,1956, ] and registered as a securitization and ] reconstruction company under Section 3 of ] Securitization and Reconstruction of Financial ] Assets and Enforcement of Security Interest Act, ig ] 2002, having its registered office at 141, Maker ] Chambers III, Nariman Point, Mumbai – 400 021 ] …Petitioner vs 1. The Board of Trustees of the Port of ] Mumbai, a statutory corporation ] constituted under the provisions of Major ] Port Trusts Act, 1963, having its registered ] office at Vijay Deep, Shoorji Vallabhdas ] Marg, Fort, Mumbai – 400 001 2 Shubh Hospitality Pvt. Ltd., a company ] incorporated under the provisions of the ] Companies Act, 1956 having its address at ] 3 P.J. Ramchandani Marg, Opposite Radio ] Club, Colaba, Mumbai – 400 005. ] 3 Bank of India, a body corporate ] constituted under the provisions of the ] Banking Companies (Acquisition and ] Transfer of Undertaking) Act, 1970, having ] its head office at Star House, C-5, G Block ] Bandra Kurla Complex, Bandra (West), ] Mumbai – 400 051 and branch office at ] Bank of India Building, 1st Floor, 70-80, ] Mahatma Gandhi Road, Fort, Mumbai – ] 400 001. ] The Estate Office, being the officer ] appointed under the provisions of the Public ] Premises (Eviction of Unauthorized ] Occupants) Act, 1971 and having his office ] at 7th Floor, Port Bhavan, Shoorji ] Vallabhdas Marg, Ballard Estate Mumbai ] – 400 001 ]…Respondents. ….. Mr. S.U. Kamdar, Sr. counsel along with Mr Sharan Jagtiani, Mr Chirag Kamdar, Ms Helina Desai i/b M/s Wadia Ghandy and Co. for the Petitioner. Mr. E.P. Bharucha, Sr. counsel a/w Mr Ajay Fernandes for Respondent Nos.1 and 4. Mr Rony P. Joseph for Respondent No.3. …..

JUDGMENT

[ Per B. P. Colabawalla, J ]

1. Rule. By consent of parties, rule made returnable forthwith and heard finally.

2. This Writ Petition is filed under Article 226 of the Constitution of India, inter alia challenging (i) the termination letter dated 27 September, 2012 issued by Respondent No.1 to Respondent No.2 terminating the lease dated 29 October, 1935; and (ii) the Show Cause Notices (“SCNs”) both dated 18 February, 2013, issued by Respondent No.4 under

Sections 4 and 7 of the Public Premises (Eviction of Unauthorized Occupants) Act, 1971

(for short the “PP Act”).

3. The property in question is all that piece and parcel of land admeasuring approximately 1036.71 sq. mtrs. bearing plot No.26 (old RR No.1245) and cadestral Survey No. 10/384 of Colaba division together with the building standing thereon consisting of ground + four floors, two garages and a pump-house (hereinafter referred to as “said property”). At the outset, we must mention here that it is not in dispute before us that the 1st Respondent is a “statutory authority” as defined in section 2(fa)(iv) of the PP Act and the said property are “public premises” as defined in section 2(e)(2)(v) of the said Act. It is also not in dispute that Respondent No.1 is the owner / landlord of the said property.

4. In a nutshell, in this Petition, the Petitioner has challenged the jurisdiction of Estate Officer (Respondent No.4) to issue the impugned SCNs (both dated 18 February, 2013) on the (Colabawalla).doc ground that the Petitioner, being an Asset Reconstruction Company (“ARC”), and having taken possession of the said property under

Section 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(for short the “SARFAESI Act”), could not be evicted under the provisions of the PP Act. To put it simply, it is the case of the Petitioner that the provisions of the SARFAESI Act override the provisions of the PP Act, and therefore, if the 1st Respondent wanted to evict and get possession of the said property from the Petitioner, the same could be done only by approaching the Debt Recovery Tribunal (“DRT”) under Section 17 of the SARFAESI Act. It is in these circumstances, that the termination letter dated 27 September, 2012 as well as the SCNs, both dated 18 February, 2013, have been challenged in the present Writ Petition.

5. The brief facts giving rise to the present controversy are as follows:

(a) The Petitioner before us is a company incorporated under the provisions of the Companies Act, 1956 and registered as a securitisation and reconstruction company under Section 3 of the SARFAESI Act. The Petitioner claims that it is in exclusive possession of the said property since 6 August, 2012 pursuant to measures taken under Section 13(4) of the SARFAESI Act. Respondent No.1 is the Board of Trustees of the Port of Mumbai, a statutory corporation constituted under the provisions of Section 5 of the Major Port Trusts Act, 1963. Respondent No.1 is the successors-in-title to the Trustees of the Port of Bombay, constituted under the provisions of the Bombay Port Trust Act, 1879 (since repealed). Respondent No.2 is a company incorporated under the provisions of the Companies Act, 1956 and is the assignee of the leasehold rights in the said property as more particularly set out hereinafter. Respondent No.3 is the Bank of India, who claims to be a mortgagee of the said leasehold rights of Respondent No.2 for a loan granted by Respondent No.3 to Respondent No.2. Subsequently, Respondent No.3 has assigned the debts owed by Respondent No.2 to Respondent No.3 together with the underlying security interest, in favour of the Petitioner. Respondent No.4 is the Estate Officer, appointed by the Central Government in exercise of the powers conferred under Section 3 of the PP Act and is the authority that has issued the impugned SCNs against Respondent No.2, Respondent No.3 and the Petitioner respectively.

(b) By and under a lease deed dated 29 October, 1935 (“the said Lease”) executed between the successors-in-title of Respondent No.1 of the first part and Phirozshaw Cowasji Lentin and Banoo Phirozshaw Lentin of the second part and Rao Bahadur Dadasahib A. Surve of the third part, demised unto the said Rao Bahadur Dadasahib A. Surve, the said property for a period of 99 years. It is the case of the Petitioner that under the terms of said lease, there was no prohibition for creation of a mortgage by deposit of a title deeds. The only restriction was for creating a mortgage by way of an under-lease.

(c) Thereafter, pursuant to diverse assignments which were duly permitted by the predecessors of Respondent No.1, the leasehold rights in respect of the said property stood vested in favour of one Balwant Rai Shelley. Under a Deed of Variation dated 8 February, 1977, the said Balwant Rai Shelley was allowed to use the said garage in the said building for storage of non-hazardous material and the lease rentals were revised in the manner provided therein.

(d) On 23 July, 1993, the said Balwant Rai Shelley expired leaving behind his last Will and testament dated 27 January, 1993. Under the said Will, Balwant Rai Shelley gave, devised and bequeathed all his right, title and interest in respect of the said property in favour of his daughter Pramila Ramnikrai Wadhwan. This Will has been probated in 1995.

(e) Many years later, in the year 2006 the said Pramila Ramnikrai Wadhwan sought permission of Respondent No.1 to further assign the leasehold rights in respect of the said property in favour of Respondent No.2, which permission was granted by Respondent No.1 by its letter dated 4 September, 2006. Pursuant to the aforesaid permission, by and under a Deed of Assignment dated 22 December, 2006, executed between said Pramila Ramnikrai Wadhwan of the one part and Respondent No.2 of the other part, the said Pramila Ramnikrai Wadhwan assigned and transferred the leasehold rights in respect of the said property in favour of Respondent No.2.

(f) In the interregnum, Respondent No.2 intended to take financial assistance for carrying out its business, and accordingly, approached Respondent No.3. It is the case of the Petitioner that in this regard, Respondent Nos.2 and 3 had a meeting on 10 October, 2006 with Respondent No.1, at which time Respondent No.3 was advised by the representative of Respondent No.1 (Mr Patil) that since only a mortgage by way of an under-lease was prohibited under the terms of the lease, a mortgage by deposit of title-deeds could be created by Respondent No.2 in favour of Respondent No.3. Accordingly, by and under a Term Loan Agreement dated 5 November 2006, Respondent No.2 availed of a loan of Rs.43.50 Crores from Respondent No.3. For securing repayment of the said loan, Respondent No.2 created a mortgage by deposit of title-deeds in respect of the leasehold interest in the said property in favour of Respondent No.3. It is the case of the Petitioner that creation of this equitable mortgage was intimated to Respondent No.1 by Respondent No.3 vide its letter dated 5 January, 2007. Thereafter, since according to Respondent No.2 the building constructed on the said property required urgent repairs, Respondent No.2, by its letter dated 8 March, 2007 informed Respondent No.1 that it would be undertaking the said repairs.

(g) Thereafter, on 2 January, 2009, Respondent No.3 once again informed Respondent No.1 about creation of the said mortgage. In response thereto, Respondent No.1 by and under their letter dated 18 February, 2009 stated that the creation of the said mortgage was without the prior sanction of Respondent No.1 and was inter alia in violation of the terms of said lease and called upon Respondent No.2 to clarify inter alia, why no prior consent was taken before creating said mortgage.

(h) In reply thereto, Respondent No.3, by its letter dated 28 February, 2009 inter alia made a reference to the meeting held on 10 October, 2006 and stated that pursuant to the said meeting, Respondent No.3 was advised that a valid mortgage by way of deposit of title-deeds could be created without the consent of Respondent No.1. It is in these circumstances, that the mortgage was created. Thereafter, another letter dated 1 March, 2009 was addressed by Respondent No.2 to Respondent No.1 inter alia stating that the said equitable mortgage was created as per the discussion and procedure suggested by the Estate Manager of Respondent No.1, namely, Mr Patil, and that the entire transaction entered into was transparent.

(i) Be that as it may, since Respondent No.2 was in arrears of the lease rentals, Respondent No.1 under their demand notice dated 23 March, 2009 called upon Respondent No.2 to make payment of the bills attached to the said letter failing which legal proceedings would be initiated against Respondent No.2. In reply thereto, Respondent No.2 informed Respondent No.1 that it shall shortly comply with the said demand notice and that they had already put a deposit of Rs.2.05 Crores towards advance rent, with Respondent No.1.

(j) Unconnected with the aforesaid demand, on 28 May, 2009 Respondent No.3 addressed a letter to Respondent No.1 and called upon Respondent No.1 to confirm having noted its lien in respect of the said property in their books and sought their co-operation in the matter. Thereafter, Respondent No.3 by and under a Deed of Assignment dated 18 August, 2009 (which was modified by a Deed of Rectification dated 2 February, 2012) along with the security interest therein, assigned the debts (along with the security interest) owed by Respondent No.2, in favour of the Petitioner.

(k) Be that as it may, by a letter dated 3 September, 2010, Respondent No.1 once again informed Respondent No.2 that it had committed breaches of the terms of said lease by creating a mortgage in favour of Respondent No.3 without the prior consent of Respondent No.1. In reply thereto, Respondent No.2 by its letter dated 29 September, 2010 informed Respondent No.1 that it was under a bonafide belief that Respondent No.1 was satisfied by the reply given by Respondent No.2 vide its letter dated 1 March, 2009. Respondent No.2, further stated that they shall comply with the conditions and sought a cure period of six months to arrange the dues owed to Respondent No.1.

(l) Since, the dues of Respondent No.1 were not paid, on 21 January, 2011, Respondent No.1 inter alia informed Respondent No.2 that since there were breaches committed by Respondent No.2, action under the PP Act would be initiated against Respondent No.2. ig As mentioned earlier, Respondent No.2 had undertaken the work of re-plastering/ repairing the said property. In these circumstances, Respondent No.1, by their letter dated 12 June, 2012 informed Respondent No.2 that the said work was done without prior approval of Respondent No.1, which also amounted to a breach of the said lease.

(m) Be that as it may, in the meanwhile, since Respondent No.2 had defaulted in servicing the loan availed of by it from Respondent No.3 (which was subseqently assigned to the Petitioner), the Petitioner initiated proceedings under the provisions of the SARFAESI Act, which finally culminated in the Petitioner taking possession of the said property on 6 August, 2012. It is the case of the Petitioner that this possession was taken pursuant to orders passed under Section 14 of the SARFAESI Act.

(n) Independent of this, since Respondent No.2 had not complied with the requisitions of Respondent No.1, by their letter dated 17 September, 2012, Respondent No.1 informed Respondent No.2 (with a copy marked to the Petitioner) that Respondent No.1 had sealed the said property. Thereafter, Respondent No.1 through their Advocates letter dated 27 September, 2012, terminated the said lease for the reasons more particularly set out therein. A copy of this termination letter was also forwarded to the Petitioner.

(o) In reply to this termination letter, the Petitioner through their Advocates letter dated 10 October, 2012, inter alia contended that in the said lease there was no restriction for creating a mortgage by deposit of title deeds, as well as for the enforcement thereof. In the said letter the Petitioner informed the 1st Respondent that the leasehold rights in the said property would be sold by the Petitioner under the SARFAESI Act. Thereafter, the 1st Respondent, by its letter dated 18 January, 2013, informed the Petitioner that the entire exercise of mortgage and the consequent action of the Petitioner was unauthorized and holding of any auction by the Petitioner to sell the leasehold rights of Respondent No.2 would be illegal and highly objectionable to Respondent No.1.

(p) Thereafter, further correspondence ensued between the parties and finally the Petitioner received the said two SCNs, both dated 18 February, 2013, issued by Respondent No.4 (Estate Officer) under the provisions of Sections 4 and 7 of the PP Act. It is in these circumstances that the termination letter dated 27 September, 2012 and these two SCNs are impugned in this Writ Petition.

(q) For the sake of completeness, we must also mention that the 1st Respondent herein had filed Writ Petition (L) No. 375 of 2013 (subsequently numbered as Writ Petition No. 502 of 2013) inter alia seeking a Mandamus against the Petitioner herein (i) to revoke the equitable mortgage; and (ii) to cancel the said Assignment Agreement dated 18 August, 2009 (entered into between Respondent No.3 and the Petitioner) and for other reliefs as more particularly set out therein. The said Writ Petition was finally disposed of by an order dated 25 March, 2013. We are not referring to this order in further detail as it does not have a bearing in deciding the issues raised before us.

6. In this factual backdrop, Mr Kamdar, learned Sr. Counsel appearing on behalf of the Petitioner, submitted that admittedly the Petitioner was an ARC as contemplated under the provisions of theSARFAESI Act. It had, by virtue of the Deed of Assignment dated 18 August, 2009, taken over the debts owed by Respondent No.2 to Respondent No.3. Since Respondent No.2 had defaulted in repaying its loans, the Petitioner had taken recourse to the provisions of the SARFAESI Act to recover its dues and pursuant to which the Petitioner had taken possession of the said property on 6 August, 2012. He submitted that the Petitioner, therefore, to recover its dues, were entitled to sell the leasehold rights in the said property and which were mortgaged in their favour, under the provisions of the SARFAESI Act.

7. Mr Kamdar submitted that the provisions of the SARFAESI Act are a code in itself. The entire mechanism of taking possession and thereafter selling the secured assets without the intervention of the Court have been provided for in the said Act. He submitted that the SARFAESI Act being a special Legislation, overrides the provisions of the PP Act. It was submitted by Mr Kamdar that if the 1st Respondent wanted to evict the Petitioner from the said property (the possession of which was with the Petitioner pursuant to the measures taken under the SARFAESI Act), the same could be done by the 1st Respondent only by approaching the DRT under Section 17 of the SARFAESI Act. The Petitioner having taken measures under the provisions of the SARFAESI Act, could not be evicted by the 1st Respondent by taking recourse to the provisions of the PP Act, was the submission. In this regard, Mr Kamdar drew our attention to the definition of the words “security interest” [section 2(zf)] to mean the right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and included any mortgage, charge, hypothecation or assignment, other than those specified in Section 31 of the SARFAESI Act. He also placed reliance on Section 17 of the Act which inter alia gives a right to any person aggrieved by any of the measures taken by the secured creditor under Section 13(4) of the SARFAESI Act, to approach the DRT. He submitted thatSection 17(3) itself provides that if the DRT, after examining the facts and circumstances, comes to the conclusion that any of the measures referred to in Section 13(4) of the SARFAESI Act are not taken in accordance with the provisions of the Act or the rules framed thereunder, the restoration of possession and or management of the secured assets can be ordered by the DRT. He submitted that Section 17(4) provides that if the DRT declares that the recourse taken by the secured creditor under Section 13(4) was in accordance with the provisions of the SARFAESI Act, then notwithstanding anything contained in any other law for the time being in force, the secured creditor would be entitled to take recourse to one or more measures specified in sub-section (4) to Section 13 of the SARFAESI Act, to recover its debt. Thereafter, he also placed reliance on Section 34 to contend that that the Civil Court was barred from entertaining any suit or proceeding, in respect of any matter which the DRT or the DRAT, was empowered by or under the Act to determine. He also placed reliance onSection 35 which inter alia stipulates that the provisions of the SARFAESI Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Placing reliance on all these provisions, Mr. Kamdar submitted that the SARFAESI Act is a code in itself and its provisions shall override the provisions of the PP Act. To put it simply, it was submission of Mr Kamdar that before the Estate Officer adjudicates the SCNs issued by him, he will have to inquire into whether the actions taken by the Petitioner underSection 13(4) of the SARFAESI Act are valid or otherwise. This adjudication, according to Mr Kamdar, can be done only by the DRT under Section 17 of the SARFAESI Act and not by the Estate Officer under the provisions of the PP Act. This being the position, according to Mr Kamdar, the Estate Officer had no jurisdiction to issue the impugned SCNs (both dated 18 February, 2013), and therefore, sought our interference under Article 226 of the Constitution of India. In support of the proposition that the provisions of the SARFAESI Act would override the provisions of the PP Act, Mr Kamdar relied upon the following decisions: