NATIONAL LAW UNIVERSITY ODISHA
BANKING LAW
TOPIC- M/s Transcore V. Union Of India
SUBMITTED UNDER THE GUIDANCE OF:
DR. DOLLY JABBAL
SUBMITTED BY:
MRITUNJAYA SINGH
ROLL NO. 23LLM018
ABSTRACT
Transcore V. Union of India (2006) is one of the significant decisions relating to the
enforcement of security interests in financial assets under the SARFAESI Act, 2002. The
precedent set in this case hugely influenced how the provisions under SARFAESI Act are to
be interpreted and on their application.
This law gave secured creditors a strong tool to force debtors to repay their outstanding
obligations. It has also made it easier to deal with the problem of non-performing assets
(NPAs), which has made the banking industry more efficient and made it easier to enforce
security interests. This is especially helpful because debt collection is notoriously difficult in
India and the judicial system is frequently thought to be burdensome and onerous.
By virtue of this Act's provisions, the secured lender is entitled to "Contingent Possession,"
which gives them the power to take back the secured asset from the borrower without the
need for a judge's participation. The borrower's interests are likewise protected under the
SARFAESI Act. For example, the creditor must notify the borrower of the default and
specify a deadline for the borrower to correct the problem before taking possession of a
secured asset. The creditor has the right to seize the asset if this criteria is not met.
The notion of "actual possession," which stipulates that a creditor should possess the asset
physically if he wants to recover the debt.
The SARFAESI Act also requires the creation of Appellate Tribunals and "DEBT
RECOVERY TRIBUNALS" (DRTs) in order to settle disagreements over the enforcement of
security interests in default situations. If there is a disagreement, this framework gives
borrowers a way to air their disappointments.
CONCEPT
The case is based on the concept of Securitisation and Reconstruction, with piling up of
NPAs and the reckless lending by the banks there was a need for a comprehensive
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mechanism to ensure the liquidity in market, since assets got struck with the debtors and the
creditors had to go through lengthy court process in order to recover their dues.
ASSET RECONSTRUCTION AND SECURITIZATION
Securitization is the process of turning an asset, or a collection of potentially unmanageable
assets, into a marketable security by applying financial engineering [Link] is "a
process through which a single performing asset or a collection of performing assets is
sold,"1 according to the Reserve Bank of India. A specialist financial organization known as
an Asset Reconstruction Company (ARC) buys bank debtors for a predetermined amount and
then launches independent operations to reclaim the remaining debts or associated securities.
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities
Interest Act, 2002 (SARFAESI Act, 2002) governs these ARCs, often referred to as asset
reconstruction firms, and they are registered with the Reserve Bank of India (RBI).
BACKGROUND
Hence Indian Legislature came with the legislation of SARFAESI Act, 2002 which provided
with a mechanism to recover the debts through the process of securitisation, without
involvement of the courts, it provided with a detailed procedure where involvement of DRT
wasn‘t required, whereas traditionally one had to go under the DRT act in order to recover
their dues.
THE RELEVANT STATUTES AND AMENDMENTS HAVE BEEN MENTIONED
BELOW:
RECOVER OF DEBTS AND BANKRUPTCY ACT (RDB/DRT ACT,
1993)
The Debt Recovery Tribunals (DRTs) have original jurisdiction, while the Debt Recovery
Appellate Tribunals (DRATs) created by this Act have appellate jurisdiction.
1
Chris Gallant, ‗What Is Securitization‘ (Investopedia, 18 Feb 2019)
<[Link] accessed 12 Sep 2023
3
The Act's Chapter III describes the DRT's jurisdictional and authority [Link]
to Section 17, the DRT has the jurisdiction to consider and make decisions regarding debt
recovery claims made by financial institutions.
According to Section 19 of the Act, a financial institution (FI) may choose to submit an
application to the DRT within its local jurisdiction in order to collect a debt. It is possible to
submit this application if:
(a) The financial institution's branch or any other office currently maintains an account for
which the debt under claim is still unpaid2
(aa) At the time the application is submitted, the defendant, or each defendant in
circumstances involving several defendants, must be physically and voluntarily dwelling,
doing business, or performing personal work for profit.
The procedures for collecting debts are outlined in “Section 25” of the act include:
(a) “Have defendant’s assets attached and sold;
(b) Have the defendant arrested; and
(c) Have a receiver appointed to handle the defendants assets.”
SECURITY INTEREST (ENFORCEMENT) RULES, 2002
The regulations that were given are outlined here:
1. In accordance with Rule 2(b), a demand notice is a document that a secured creditor sends
to a borrower in accordance with Section 13(2) of the SARFAESI Act. In line with Section
13(13) of the SARFAESI Act, this notification acts as proof that legal action has been
initiated to stop the borrower from handling the assets.
2. Certificate of selling Issuance (Rule 7): If moveable secured assets are going to be sold, the
selling price has to be in line with the conditions outlined in the public notice or decide upon
by the parties. Moveable assets have to be relisted for sale in the event of a payment failure.
2
SC, REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION ....,
[Link]
4
[Link] Possession of Real Estate (Rule 8): According to Rule 8, real estate must be
possessed by the designated official with the intention of selling it. This entails giving the
borrower a possession notice that is posted conspicuously on the property and is written in a
manner that closely complies with Appendix IV of the guidelines.
4. Fees (Rule 13): Applications submitted under Sections 17 and 18 of the Act should contain
all fees prescribed for applications and appeals as specified in Rule 13.
ENFORCEMENT OF SECURITY INTEREST AND RECOVERY OF
DEBTS LAWS (AMENDMENT) ACT, 2004
The Companies Act of 1956, the Recovery of Debts Due to Banks and Financial Institutions
Act of 1993, and the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act of 2002 are the three main pieces of law that are amended by this act.
Notably, the following changes have been made to both the DRT Act and the SARFAESI
Act:
Three new requirements were added, and they are included at the end of Section 19(1) of the
DRT Act. These prerequisites are listed below:
● First, the bank may, with the DRT's consent, withdraw the Original Application
(O.A.) it had filed to the Debt Recovery Tribunal (DRT), provided that no prior action
under the SARFAESI Act has been taken in a similar manner. The bank is allowed to
act in accordance with the SARFAESI Act because of this withdrawal.
● The second proviso reads as follows: "In addition, any application for withdrawal
made in accordance with the first proviso and filed with the Debt Recovery Tribunal
(DRT) shall be expeditiously processed and resolved within thirty days of the date of
such application."
● In Section 19(1), the third proviso stipulates that "the DRT must provide reasons in
case it declines to grant permission or leave for withdrawal."
The wording of subsection 17(1) of the SARFAESI Act had been changed aswell to
include a new clause stating that, ―if the borrower objects to any of the actions listed in
subsection (4) of Section 13, the person submitting the application—whether the borrower or
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another party—may be charged a separate fee‖. When submitting an application with the
Debt Recovery Tribunal within 45 days of the date such action was taken, the borrower in
such situations is required to pay a charge.
FACTS:
An O.A was filed by Indian Overseas Bank (reffered as "the bank") to recover debts from
M/s transcore to DRT
In this case, , the appellant, started an O.A. to pursue the recovery of SARFAESI debts from
M/s Transcore. was submitted in March 1999 to the Chennai Debt Recovery Tribunal (DRT).
The assertion was refuted. Within the previously indicated O.A., the bank filed an
interlocutory motion to move forward with the sale of the properties. Presently, this I.A. stays
open-ended.
A notice in accordance with SARFAESI Act Section 13(2) was published on June 1, 2003.
Amending act 40 of 2004 Section 19(1) of the DRT Act was amended to include the
condition, ―For the purpose of taking action under SARFAESI Act, the bank or financial
Institution may withdraw the application whether madde before or after the amendment of
2004, subject to receiving permission of the DRT”3
In addition, any application filed in compliance with the original provision requesting
permission to withdraw an application filed under sub-section (1) must get a fast response
from the Debts Recovery Tribunal, which must thereafter act upon the submission. Within
thirty days after the application date, a decision should be made.
Furthermore, in the event that the Debt Recovery Tribunal declines to authorize the
withdrawal of an application in accordance with this paragraph, it is required to issue the
relevant orders and justify its decision.
3
Transcore v. Union Of India And Another - CaseMine., (2006),
[Link]
6
In this particular instance, on January 6, 2003, the appellant, M/s Transcore, got a notice
requiring the return of an approximate sum of Rs. 4.15 crores (plus interest) within sixty
days. Sadly, the appellant was unable to fulfill this repayment commitment. In compliance
with “Rule 8 of the Security Interest (Enforcement) Rules, 2002” , the bank issued a
"Possession Notice" on January 8, 2005, in line with Section 13(4) of the SARFAESI Act,
and sent notices to the guarantor as well.
The previously stated Possession
The general public was also served with a cautionary notice warning them not to interact with
the properties listed there. The bank has the right to apply interest and other fees to the initial
sum specified, which is why this notification was sent out. An auction was to be held to sell
the real estate. It's crucial to remember that the auction's confirmation is pending the outcome
of a civil appeal. As such, the transaction has been put on hold for the time being.
ISSUES IN THIS CASE:
(i) Can banks and other financial institutions, even after choosing to pursue remedies under
the “DRT Act of 1993”, continue with the recovery of secured assets under the SARFAESI
Act of 2002 while maintaining their Original Application (O.A.) at the Debt Recovery
Tribunal (DRT) in accordance with the “DRT Act of 1993”4?
(ii) Can the authority to take “physical possession” of the borrower's secured asset be
included in the remedy offered under, “Section 13(4) of the SARFAESI Act”?
(iii) Is an application filed under “Section 17(1) of the SARFAESI Act” subject to the ad
valorem court fee specified by “Rule 7 of the DRT (Procedure) Rules, 1993”, in the absence
of any rules in the statute.
APPELLANT’S ARGUMENTS:
4
IBC Laws - Section 19 of Recovery of Debts and Bankruptcy Act, 1993, [Link]
application-to-the-tribunal/.
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1) The appellant contends that “Section 19(1)'s” proviso, which states that a bank or other
financial institution may, upon request from the Debts Recovery Tribunal, withdraw an
application, whether submitted before or after the “Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Act, 2004” in order to pursue legal action under the
SARFAESI Act, 2002, in the event that no prior action has been taken. The final step isn‘t
supposed to be the delivery of “Section 13(2)” Notice.
2) It was contended by the appellant that under “Section 13(2)” the borrower is required to
clear his dues within 60 days after the Notice is served, and if he fails in the same it entitles
the bank to leverage sub section (4) to seize the assets.
3) It was submitted that borrowers aggrieved by action of the bank under “Sectioon 13(4)”
Have relief under “Section 17(1)” which provides for fee and no fee had been prescribed so
far, and no rule had been framed on it.
4) The remedy availed is inconsistent with the Doctrine of Election
RESPONDENT'S ARGUMENTS:
1) The DRT Act's proviso to “Section 19(1)”5 acts as an enabling clause. In order to avail
“Section 13(4)” of the SARFAESI Act, the “Section 13(2)” of the act needs to be followed.
The notice mentioned under “Section 13(2)” isn‘t an ordinary show cause notice and it
outlines the further process of action
2) The borrower's account may be categorized as substandard, questionable, or a loss because
of past failures on the borrower's commitments, in which case the bank or other financial
institution will take appropriate action. Before the bank or financial institution may make use
of “Section 13(4)” of the Act, it is imperative that the requirements outlined in “Section
13(2)” be met. The creditor is permitted to take action after the two requirements are
satisfied.
5
ax Guru, Gujarat HC explains Limitation period to challenge possession under, [Link]
[Link].
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3) The charge for submitting an appeal under “Section 17(1)” of the SARFAESI Act with the
Debt Recovery Tribunal (DRT) shall be applied mutatis mutandis to the DRT. The fee to be
paid would be determined by DRT
“In Madeva Upendra Sinai & Ors V. U.O.I” it was held that the fees is supposed to have no
effect on applicability of the act, hence, it was held that “the central government is competent
to provide deficiency or causus misus if this type” The structure of the act remains the same
and the order would remain [Link] purpose of the issuing was to remedy a deficiency,
namely the failure to collect fees. Order's provisions have no bearing on the revised law's
basic framework. Since the major goal of this order is to fill in legislative gaps
“SARFAESI ACT (Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act), 2002”
The reasons for passing of the act can be stated as following; Firstly, Banks are required to
transfer the borrower's secured assets by means of assignment, lease, or sale, and to allow
asset reconstruction businesses to assume management of those assets in order to liquidate
the related security interest as well. Secondly, since the civil courts were ineffective in
lawsuits pertaining to Financial Institutions, hence the “DRT Act, 1993” was passed by the
parliament. Thirdly, as a result of the inflation an imbalance between the assets and liabilities
was created. And at last, in order to decrease the problem of “NPAs” the act introduced
recourse for for not only recovery but also reconstruction. It also provides for constitution of
asset management firms.
In the case of “Mardia Chemicals Ltd. and Others v. Union of India and Others”6 the
validity of the act was in question. It was held to be constitutionally valid by the court, after
addition of “Section 13 of SARFAESI Act in 2002”, the “Section 19(1) of DRT act” was
modified to coincide with “Section 13”. The court further said that the borrower has the right
to raise any objections after receiving notification under Section 13(2) of the SARFAESI Act,
6
India Code, ‗Securitisation and Reconstruction of financial Assets and enforcement of security Interest act‘
(India Code) <[Link] accessed 19 April 2020
9
and it is the bank's or financial institution's responsibility to address these concerns and offer
an explanation for any denials.
The court also made it clear that the creditor's explanations for any objections are limited to
what the creditor knows and is aware of. Under “Section 17 of the SARFAESI Act”, the
borrower is not permitted to utilize these justifications in a petition that they submit to the
Tribunal.
According to subsection 13(2), “a borrower's account is considered a non-performing asset
if the borrower makes any default in the repayment of secured debt. If the borrower does not
discharge his liabilities within sixty days, the secured creditor has the right to exercise all or
any of the rights outlined in subsection 13(4)”.
Under Section 13(4), the secured creditor has provision of following remedies if the borrower
defaults in fulfilling the requirements of sub section (2): “(a) take possession of the secured
assets of the borrower; (b) take over the management of the borrower's business; (c) appoint
any person, to manage the secured assets the possession of which has been taken over by the
secured creditor; (d) require at any time by notice in writing, any person who has acquired
any of the secured assets from the borrower and from whom any money is due or may
become due to the borrower, to pay the secured creditor, so much of the money as is
sufficient to pay the secured debt”. As stated in Section 17 of the SARFAESI Act, the
secured creditor may file a claim with the Debt Recovery Tribunal (DRT) to get the
outstanding balance from the borrower if the money from the sale of the secured assets are
not enough to pay off the secured creditor's debts in full. When the secured creditor's
obligations are not sufficiently satisfied by the revenues from the sale of the secured assets,
this step is required.
Section 25 of the DRT Act makes it easier to decide and settle debt-related issues, including
those involving both secured and unsecured loans. Thus, this statute does not invalidate
“Section 69 and 69A of the Transfer of Property Act”.
THE ELECTION DOCTRINE
An essential legal concept is that the aggrieved party may only select one remedy from a list
of options where those options clash and the party seeking relief has more than one option.
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Three fundamental components make up this idea of election: there must be two or more
avenues accessible for the remedy, there must be differences or conflicts between these
remedies, and a decision must be made on which cure to pursue. To be deemed relevant, the
doctrine needs to have all three components.
When there is just one remedy accessible, the doctrine cannot be availed, according to
American Jurisprudence Volume 25, Page 652. Both the Non-Performing Assets
(SARFAESI) Act and the Debt Recovery Tribunal (DRT) Act are viable remedies to the
problem at hand, however the SARFAESI Act takes a different tack. The idea of election
does not apply in this case since combining the two acts eventually results in a single remedy.
This situation does not include contradiction or compatibility between the two courses of
action, hence the concept of election is not applicable.
According to the court's determination, the ruling made in the A.P. Citizens' Bank of
America v. Gar Re-Rolling Mills and Anr. does not seem to have a direct bearing on the
current conflict. These sections, which give the Corporation two different remedies in
situations where a defaulter breaches an agreement or fails to make a repayment, are what
give rise to this discrepancy. The case in question concerns Sections 29 and 31 of the State
Financial Corporation Act, 1951, also known as the "SFC Act." Both of these sections are
applicable in the present case. The conclusion that Section 29 applies to a wider range of
scenarios than Section 31 is a result of the inclusion of the phrase "without prejudice to the
provisions of Section 29" in Section 31, which indicates that it does not alter the application
of Section 29. .
Two separate pieces of law that are pertinent to the current issue are the Debt Recovery
Tribunal (DRT) Act of 1993 and the Securitisation and Reconstruction of Financial Assets
and enforcement of Security Intrest (SARFAESI) Act of 2002. The main goal of the DRT Act
is to set up tribunals to decide cases involving debts due to banks and other financial
organizations and to collect such payments. It does not particularly concern a bank or other
financial institution assigning assets to a Securitization Company (SC) or an Asset
Reconstruction Company (ARC). On the other hand, an extra remedy is offered by the
SARFAESI Act, namely Section 37, which permits an asset reconstruction or securitization
firm to manage and reconstruct assets. There is no coverage for this extra remedy under the
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DRT Act. The integrated structures of the DRT Act and the SARFAESI Act are not the same
as the State Financial Corporation (SFC) Act. That being said, the ruling rendered by this
court in the A.P. The State Financial Corporation case relates to a distinct legal framework
and set of circumstances, hence it is not relevant in the present situation, Since the
legislations in question work well together.
Concerning “National Insurance Co. In Ltd. v. Mastan and Anr.”, the court decided that the
claimant could bring their action under the Workmen's Compensation Act of 1923 or Section
167 of the Motor Vehicles Act of 1988. This alternative becomes available when, as is not the
case in this instance, Section 167 of the Motor Vehicles Act expressly gives the claimant an
option when a claim for compensation arises because of death or bodily harm. Because it has
nothing to do with the current facts, the ruling in the previously cited case cannot be applied
here.
DEFINED SECURITY INTEREST
Any right, title, or interest—aside from those expressly mentioned in Section 31—that is not
expressly stated in Section 31 is considered a "security interest," as defined by SARFAESI
Act Section 2(zf). This covers a wide range of financial claims and rights, whether they are
related to actual or intangible assets, including mortgages, charges, hypothecations,
assignments, and other interests. Basically, under the SARFAESI Act, a "security interest" is
any right, title, or interest that does not fit into one of the precise categories listed in Section
31.
It's crucial to remember that the Transfer of Property Act's Section 69 or Section 69A
provisions are irrelevant to the enforcement of any security interest created in a secured
creditor's favor. The processes described in Section 13 of the Act can be used for the same.
A secured creditor under contract with a borrower can also designate the borrower's account
as "non-performing" or "SARFAESI" in the event that the borrower defaults or is unable to
fulfill the terms of the arrangement. Because of this categorization, the creditor is able to
pursue the outstanding debt under the SARFAESI Act in the proper manner.
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JUDGEMENT OF THE COURT:
The Court has dismissed the appeal/I.A. in this ruling. provided by the appellant in order to
acknowledge the appeal and I.A. submitted without imposing a cost order, by the banks or
other financial institutions. Furthermore, financial institutions can now file lawsuits under the
DRT Act and the SARFAESI Act simultaneously according to the ruling in this case.
The Supreme Court has ruled that the use of the SARFAESI Act does not require the
withdrawal of an application that is already ongoing before the Debt Recovery Tribunal
(DRT). The legal matter regarding the start of concurrent proceedings under the DRT Act and
the SARFAESI Act has been successfully resolved by this ruling.
RATIO OF THE JUDGMENT:
1. The requirements mentioned under Section 13(2) are the pre-requisites to avail the
remedy provide to the creditor under Section 13(4) . The bank or FI is then able to take
additional action, or seize the borrower's secured assets, provided that the requirements
outlined in Section 13(2) are met.
2. The extra provision known as the SARFAESI Act's remedy does not contradict with
the DRT.
3. It is clear from the Notice that the debtor has not complied with their responsibilities,
which is why their account has been classified as a non-performing asset .
4. Section 13(2) of the SARFAESI Act emphasizes the necessity for quick response
within the allotted term and serves as a demand notice rather than just a show-cause notice.
5. Both the debt determination and the SARFAESI categorization follow the RBI's rules.
6. Election doctrine wouldn‘t be applicable in this situation since the SARFAESI Act is
an extra remedy on top of the DRT Act. Between them, there is only one collective cure.
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7. Whether through contractual agreements or the application of common law principles,
the SARFAESI Act was created to provide banks and financial institutions with additional
protections for their rights in financial assets. The SARFAESI Act's Section 13 strives
towards non-adjudicatory recovery. A secured asset is one in which the borrower has
expressly assigned an interest to the bank/FI and the SARFAESI, as per the SARFAESI Act.
CONCLUSION:
This case settled many of ambiguities in relation to SARFAESI Act, 2002.
Firstly, it made it clear that the notice reffered under Section 13 is a notice that demands an
action and if debts are not discharged by the debtor it provides the Creditors the authority
under sub section (4) to proceed with acquisition of the asset and to go forward with the
process of recovery of dues.
It also settled the position that simultaneously proceeding can be initiated under SARFAESI
Act and DRT, since these are two separate remedies.
The progress made in this Act was important, as demonstrated by the fact that in 2002-03
when the act came into force, non-performing loans were reduced from 14% in 1999-00 to
3.8% in 2016 to 9.4% of gross advances. Recoveries in NPAs are allowed by changes to the
SARFAESI Act 2002 and open the way for banks to reclaim their unpaid sums listed in their
account books as non-performing assets7
Hence it can be said that this act has played pivotal role in shaping the Indian Banking Sector,
it was something that was really need of the time, this legislation is an example of how the
progressive statutes can benefit the creditors, it did so by making the process more
streamlined and approachable, moreover if the debtor feels that the creditor has acted unfairly
against him, he always has the recourse of DRT under Section 17.
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IMPACT OF SARFAESI ON NPA Written by Neha Singh, The Law Brigade (Publishing) Group
INTERNATIONAL JOURNAL OF LEGAL DEVELOPMENTS AND ALLIED ISSUES VOLUME 6 ISSUE 4
– ISSN 2454-1273 JULY 2020
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