TITLE OF THE RESEARCH PAPER

Supreme Court decisions on Tenancy laws via-s-via SARFAESI Act, 2002

By

Name of the Student: B.Himasree

Roll No.: 18LLB033

Semester: 6th

Name of the Program: 5 year (B.A., LL.B.)

Name of the Faculty Member: P.Bayola Kiran, B.A., LL.B (Hons), LL.M (Business Laws),
PGDSEIP.

Assistant Professor

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA “, SABBAVARAM, VISAKHAPATNAM - 531035

ANDHRA PRADESH, INDIA

Date of Submission: 29 April, 2021.

 ACKNOWLEDGMENT:

I sincerely thank P.Bayola Kiran, B.A., LL.B (Hons), LL.M (Business Laws), PGDSEIP,
Assistant Professor, faculty of Law of Banking, for guiding me through the research and
helping me to complete the present research paper on “Supreme Court decisions on
Tenancy laws via-s-via SARFAESI Act, 2002”. I would also like to forward my gratitude to
my family and friends for their constant efforts and aid towards the completion of this
research.

B.HIMASREE.

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 TABLE OF CONTENTS
1. INTRODUCTION……………………………..………………………………...……4
2. HARSH GOVARDHAN SONDAGAR V. INTERNATIONAL ASSETS
RECONSTRUCTION COMPANY LTD………………….…..…………….……….7
Background of the case ……………….....……………………………………….7
Decision of the case…..………….…………….…………………………………7
Analysis …………………………………………………….…………………….8
3. TENANCIES PROTECTED UNDER RENT CONTROL STATUTES……………11
4. CONCLUSION …………...…………………………………………………………12

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 INTRODUCTION

To help the financial institutions secure assets in various ways, the Securitization and
Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 here
after referred as Act, was enacted. This act main objective was to give remedy to the problem
of NPA. It is remedy to non-performing assets or any bad assets by methods and
mechanisms. When the landlord become debtor to any financial institution and he has kept
mortgage the secured assets for such debt where the tenant/lessees are in possession. The
position of these tenant/lessees is similar to child when the parents get divorce.

The position of these tenants/lessees was effected; in order to give remedy to this kind of
issues the legislative amended the provision of SARFAESI Act, 2016. On September 1, 2016
the Enforcement of security interest and Recovery of Debts Laws and Miscellaneous
Provision (Amendment) Act, 2016 came into effect. This amendment is to amend the section
17 of SARFAESI Act. Section 17 talks about the “Application against measures to recover
secured debts”. But after amendment this was replaced with wording of “Right to Appeal”.
This amendment also inserted a sub-section (4-A) to the section 17. If a person is
tenant/lessees to the secured assets, this provisions give affect them to approach the DRT.
This Debts Recovery Tribunal shall have the jurisdiction to decide the matter.

The financial institution, as a creditor issues a notice under section 13(2) of SARFAESI Act
against the defaulter if he borrows a loan from a bank by mortgage the building, after that if
he fails to repay the loan amount with the interest. This issuing the notice is to ask them to
clear their liability within 60 days of time period. If that party does not repay, then the
financial institutions initiate the proceedings against them to get the physical possession of
the secured assets to recovery the amount.

Under section 14 of the Act, the financial institution can also approach the Magistrate. This
section gives authority to him to guide them in getting possession of the secured asset. If the
decision of the court of magistrate goes in favour of these financial institution, directing them
to take the possession to recovery the loan amount, then in such case if he assets send to be
building and the tenants would suffer by getting evicted by the premises. The tenants have to
go to court to get relief and remedy. Supreme Court and high courts of country have come
across these kinds of situations before the amendment.

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In the case of Harshad Govardhan Sondagar v. International Assets Reconstruction
Company Ltd and Ors.1, the Supreme Court observed that “the Magistrate would have
to give notice and an opportunity of hearing to the person claiming to be the lessee of a
secured creditor thereby following the Principles of Natural Justice. The Supreme Court also
observed that only after examining the legitimacy of the lease/tenancy must the Magistrate
pass the order in such cases”.

In the case of Vishal N Kalsaria v. Bank of India and Ors. 2, the Supreme Court rightly
pointed out that “if it is held that the provisions of SARFAESI Act will override the provisions
of various Rent Control Acts, then to allow a Bank to evict a tenant from the tenanted
premise, which was a secured asset of Bank, after the default on loan by the landlord and
dispense with the procedure laid down under various Rent Control Acts and the law laid
down by the courts, then the legislative powers of the State legislature are stripped and that
would amount to subverting the law enacted by the State legislature.”

In Sanjivkumar Surajprakash Aggarwal v. State Bank of India and Ors. 3, the Supreme
Court directed that “the Magistrate was to conduct an enquiry under Section 14 of the Act
involving the Appellant in that case, the tenants, and that it would be fit and fair to
adjudicate based on the Principles of Natural Justice.”

In the case of Swastyayan Agro Industries and Anr. v. Union of India and Ors., WP No.
379(W) of 2013, Calcutta High Court took the view that “the District Magistrate cannot
direct the Bank to take over the possession of Secured Asset with Police aid under Section 14
of the Act and had stated that such an act was beyond the mandate of Section 14.”

Tenants or lessees, who are residing in Karnataka was aggrieved by the decisions of lower
courts, who after going through many precedents also doesn’t consider the rights of the
tenants/lessees. These people approached Karnataka High Court for the remedy for the same.
Hence, in the case of M/s Remco Software Pvt Ltd and Ors vs. HDB Financial Services Ltd
and Ors., the court has observed high significance of this issues by precedents.

1
Harshad Govardhan Sondagar v. International Assets Reconstruction Company Ltd and Ors, 2014 6 SCC 1.
2
Vishal N Kalsaria v. Bank of India and Ors (2016) 3 SCC 762.
3
Sanjivkumar Surajprakash Aggarwal v. State Bank of India and Ors. (2016) 14 SCC 532.

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The significances laid down by the Karnataka High Court are:

 The tenant must be given notice: under section 14 of the Act, compliance of principle
of natural justice i.e., the tenants must be given notice. Under sec 13(4) of Act,
Magistrate if he gets aware of that the secured asset is been occupied then he has to
issue notice to the occupant under section 14 of the Act.
 Confirmation of validity of lease or tenancy agreement: under some circumstances
tenants are planted. If they are planted and tenants are proven it has been created after
the mortgage, notice is issued then such case they shall be evicted rightfully after the
DRT express its opinion about the agreement under section 17(4) of the Act.
 Right to be heard must be given to tenants: the magistrate in such case after filing the
affidavit by the banks shall not straight away order to deliver the possession of the
secured assets to creditors, the petitioner i.e., the tenants should be given a right to
hear their contention and claim.

Through the help of above amendment which protects the tenants’ rights it must be noted that
it must avoid wilfully default borrowers avoiding the acquisition of the mortgage he secured
assets by the financial institution.

Under section 17 of SARFAESI Act, the position of law is that the tenants have a right to
approach the Debt Recovery Tribunal. This is reiterated in the recent case
Smt. Aravindamma v. Smt. K.S. Jayalakshmammanni 4. The same was given in judicial
precedents before in the case of Mahadevaiah v. Karur Vysya Bank and Ors.

The latest amendment cleared the ambiguity regarding the status of tenancy. From now no it
will help the tenant who suffers in between the landlord and bank. From now no more the
tenants has to pay dues of his landlord.

4
Smt. Aravindamma v. Smt. K.S. Jayalakshmammanni, 2018 SCC OnLine Kar 530.

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 HARSH GOVARDHAN SONDAGAR V. INTERNATIONAL ASSETS
RECONSTRUCTION COMPANY LTD

In case of Harsh Govardhan Sondagar v. International Assets Reconstruction Company

Ltd5, one of the important case with respect to tenancy law and SARFAESI Act. The author
would like to discuss about the case in detail.

BACKGROUND OF THE CASE:

The banks have power to take the possession of secured assets and sell those assets without
approaching the Debt Recovery Tribunal. However, recovery of those secured assets shall
face many problems like Tenants, lessees. After creations of the mortgage between the bank
and borrower, these tenants are planted with the view of defraud the bank. Even after the
bank has given notice of demand also they induct the tenants in order to escape from the
liability. Under section 13(2) of SARFAESI Act the bank issues the notice to them to clear
the debt out of the default pay. This plantation of tenants make problem and it also resist the
bank to take the possession in order to recover the money out of it by selling it to recover the
loan amount with the interest. When the tenants are planted then there must be eviction notice
by the court. When the civil suit is filed it would long period of time and delay in process of
recovery occurs.

Under section 14 of SARFAESI Act, in past the bank was to approach chief magistrate to get
the order and also assistance from the magistrate in process of taking the possession of the
secured assets. But, later in period of many high courts have decided in their judgment in
aiding the tenants. It was held that under due process of law, with procedure of filing suit
after the decision by court the tenants are dispossessed. The DRT’s are already burdened with
cases pending when the suit is filed by tenants before DRT to dispose deciding on the rights
of tenants given. The tenant before DRT and again appeal to appellate tribunal defeats the
main objective of the SARFAESI Act enactment by the legislators.

DECISION OF THE COURT:

In this case the court held that the bank or financial institution facilitating the speed recovery
of the secured assets of dues to be paid to banks. Even if there are occupants quick vacant
under process they have to be dispossessed under certain kinds of tenants. The bank could
5
Harsh Govardhan Sondagar v. International Assets Reconstruction Company Ltd, (2014) 6 SCC 1.

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vacate certain kinds of tenants. They are “(a) those Tenants whose leases/tenancies have
expired or stood determined; or (b) those Tenants whose leases/tenancies are (i) contrary to
Section 65A of the Transfer of Property Act, 1882 (the TP Act) or (ii) contrary to the terms of
the mortgage; or (iii) created after the issuance of notice of default and demand by the Bank
under Section 13(2) of the SARFAESI Act. The judgment has been rendered at a time when
there is mounting criticism on the loopholes in the SARFAESI Act that have been exploited
by defaulters to the prejudice of the Banks”.

ANALYSIS:

To understand we need to divide the category of the tenants of secured assets. They can be
divided into 3 to understand better. They are classified as below:

a. Before the assets been mortgaged to the bank, the tenants residing in the said
property.
b. After the assets been mortgaged to the bank, the tenants residing in the said property
before the bank issue the notice of demand under section 13(2) of Act.
c. After the bank had issued the notice of demand to pay, the tenants who was inducted.

Firstly, let look into first classification. When the tenants inducted in the property before the
mortgage then the tenancy agreement would be valid and binding on the bank. If so, then the
rights of tenants under the Transfer of Property Act would prevail over the rights given to
bank under SARFAESI Act. In such case when the tenancy agreement is still valid or not be
expired then at that time the tenants cannot be dispossessed from the secured assets until the
tenancy be expired as per law6.

After reading above we think bank cannot proceed with physical possession and also sell the
property. However, the bank can sale the property but subject to the rights of the tenants. The
bank cannot be able to give the vacant possession of the property to the person who is
purchasing the property.

Under this category, the tenancy made may be before the mortgage by the tenants however, at
the time of bank seeking the possession that tenancy may have been expired as per the law. In
such circumstances the tenancy has no value and the tenant inducted could be evicted by
order from a magistrate who give a proper hearing the parties and pass an order.
6
V. Durga Rao, “Tenancy Rights and action under SARFAESI Act, 2002”, 02 May 2012.

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If in case the tenancy agreement it has the right given to landlord can give demand notice,
gives rights to landlord to terminate the tenancy as per the terms such case under section
13(2) of SARFAESI Act, even if the tenancy has not be expired the bank can take the
ownership rights of the landlord and the bank itself issue the demand notice and also apply to
magistrate to order for eviction after proper hearing on both the parties.

In this situation, it was held that “the Bank could avoid going to a Civil Court and obtain a
decree for possession. However, even in the above situation, if the tenancy is protected under
the provisions of any Rent Control Statute and such statute provides for recovery of
possession only by a special forum or court and only under certain circumstances, it would
follow that such a Tenant cannot be evicted by the Magistrate at the instance of the Bank and
such sale would be subject to the rights of the Tenant and the Bank would not be able to hand
over vacant possession of the property to the purchaser7”.

Secondly, let look into second classification. When the tenants inducted in the property after
the mortgage then the tenancy agreement would be again sub classified as whether according
to the section 65A of Transfer of Property Act and the terms of the tenancy are contrary to the
mortgage agreement; whether the whole is contrary to the section 65A of Transfer of
Property Act; whether the tenancy is contrary to the mortgage which restrict the landlord for
giving the secured assets for tenancy or lease the property to the third party.

To understand this we need to read section 65A of Transfer of Property Act, which provides
if the owner is in the possession of the property which is under mortgage then it should be
made in the ordinary course, it should get rents which are at reasonable amount, the said rents
should not be in advance, it should not be contrary to the terms of the mortgage.

When the tenants are been inducted after the mortgage where the tenancy agreement is not
contrary to the terms of mortgage and also not contrary to the section 65A of Transfer of
Property Act, then in such the Apex Court of India held that unless the tenancy has been
expired till then the tenants shall not be evicted from the property by the creditors bank.
Subjected to tenancy, if the bank wants to sell the property then they have to do it with the
tenants who are in possession of the property.

7
Geethanjali Kallur , “Position of a tenant when landlord becomes a defaulting debtor”, 29/04/2021.

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The Supreme Court has stated that in order for tenants to claim a lease/tenancy for a period
longer than one year, they must present a registered lease deed/tenancy instrument, as any
lease/tenancy for a period longer than one year can only be formed by a registered
document/instrument. Again, if the tenancy is not covered by any Rent Control Statute, and if
the terms of the lease permit termination by the landlord in such circumstances, and if certain
circumstances exist, the Bank could take over the borrower's ownership rights after 60 days
from the receipt by the borrower of the demand notice under Section 13(2) of the SARFAESI
Act.

Under sub category two, a lease/tenancy created after the mortgage but not in accordance
with, or contrary to the terms of, Section 65A of the TP Act, such as a lease/tenancy of a
building for a term of more than three years or for less than market rent, has been held by the
Supreme Court to be invalid, and thus in such a case, the Bank will be entitled to directly
recover vacant possession by foreclosure. If the Magistrate determines, after hearing the
Tenants, that the lease/tenancy is in violation of Section 65A of the TP Act, he will order the
police to assist in regaining custody of the land8.

However, also in such situations, the Tenants may argue that, although their leases were
originally invalid due to a violation of Section 65A of the TP Act, a monthly lease/tenancy
was created as a result of the landlord accepting rent. To cope with such claims, it would be
prudent for the Banks to give a notice to the Tenants after taking over ownership rights under
the SARFAESI Act, terminating the supposed lease/tenancy, which could be asserted with a
15-day advance notice, without regard to the Bank's argument that there is no legal
lease/tenancy at all.

Tenants inducted after the mortgage, i.e., those inducted even though the mortgage terms
exclude tenancy or lease of property, may be evicted by approaching the Magistrate to seek
recovery by dispossessing the alleged Tenants as their tenancies will then be terminated.

Thirdly, let look into third classification. When the tenants inducted in the property after the
mortgage and also after the bank has issued notice under Act. Such tenancy termed to be
invalid under the Act. Banks need not approach the civil court for order to evict the tenants
not only this they are not restrained to sell the property with the tenants as said in early

8
Geethanjali Kallur , “Position of a tenant when landlord becomes a defaulting debtor”, 29/04/2021.

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category. Bank approach the magistrate to pass order so that with the help of local police
tenants shall be evicted to recovery vacant possession.

TENANCIES PROTECTED UNDER RENT CONTROL STATUTES:

The situation was raised where leases/tenancies protected under the rent control. But,
Supreme Court indirectly dealt with this. However, it may be deduced that, in the case of
leases/tenancies formed prior to the mortgage, if they are protected by Rent Control laws,
Banks will not be able to dispose of them under the SARFAESI Act until those
leases/tenancies have expired or stood terminated according to the terms of such rent control
law. To avoid leases/tenancies being created after the mortgage has taken refuge under the
provisions of every Rent Control Statute, Banks should guarantee that the terms of the
mortgage preclude the existence of any such lease/tenancy.

For instance, if the lease/tenancy is agreed after the mortgage, then it violate the terms and
condition of mortgage. It becomes contrary to the section 65A of Transfer of property Act.
This lease/tenancy agreement becomes invalid from the beginning it made. It doesn’t get
protection under the Rent control statutes. If the tenants have been planted after the bank has
issued the notice under section 13(2) of the act, then it becomes invalid as it is being against
the Act. And hence they wouldn’t get protection under the Rent Control Statutes9.

The Magistrate under the provision of SARFAESI Act decides the matter. He has to decide
whether the tenancy created violates the section 65A of Transfer of Property or not, whether
under section 13(2) of Act issued the notice of demand. All the questions should be
considered by the magistrate. After the decision made by the magistrate, it would be binding
on the parties. The only remedy available is only filing a writ petition which is given right
under constitution of India.

CONCLUSION:

9
Geethanjali Kallur , “Position of a tenant when landlord becomes a defaulting debtor”, 29/04/2021.

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This decision of cases puts to rest any questions on whether the Bank could evict the Tenants
under the SARFAESI Act's own provisions. It certainly enhances the Banks' hands and
defends them from nefarious Borrower activities such as inducting Tenants or creating
paperwork or ante dating documents indicating a supposed lease/tenancy solely to obstruct
empty ownership and depress the selling value.

The decision is notable in that it permits eviction of tenants under the SARFAESI Act even
though they were properly and lawfully inducted in the first instance, but their
leases/tenancies have expired or been terminated by the time possession is requested by
banks. This may lead to a condition where, even if leases/tenancies are validly established or
existing, banks delay taking ownership or selling secured assets to wait until the period when
leases/tenancies, even if validly created, expire or terminate, so that they can reclaim vacant
possession and sell secured assets for a higher price.

Although the latter judgement allows for a faster recovery of possession from Tenants by the
Banks and allows for a better value to be obtained by selling secured assets after recovery of
vacant possession, which the Banks will welcome, it would have the effect of converting the
Magistrate, who is normally a judicial officer meant to administer justice, into a magistrate,
whether the rents were established after the mortgage and without violating the terms of the
mortgage, whether the property generates a fair income, or if it is in the ordinary course of
land management, and so on. The effect of turning the Magistrate into a Civil Court is
startling, and one that Parliament could not have anticipated when enacting the SARFAESI
Act. The Banks, on the other hand, would not be complaining.

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