The Supreme Court (“SC”) has in its judgment dated October 27, 2020 in the matter of M/s L&T Housing Finance Limited v. M/s Trishul Developers and Another [Civil Appeal No.3413 OF 2020], observed that proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”), initiated by secured creditors, could not be nullified simply on the grounds of technical defects and procedural lapses, unless significant damage was caused to the defaulter.

Facts

M/s L&T Housing Finance Limited (“Appellant”), a housing finance company established under the National Housing Bank Act, 1987, is also a notified Financial Institution by the Department of Finance (Central Government). M/s Trishul Developers (“Respondent”), is a partnership firm registered under the Partnership Act, 1932, engaged in the real estate construction business. The Respondent had approached the Appellant towards seeking financial assistance and submitted a request by an application dated May 15, 2015, for a term loan of INR 20 Crores (“Term Loan”) for the purposes of completion of its housing project, namely, Mittal Palms, Phase-I (“Project”).

Pursuant to the above, by a sanction letter dated August 7, 2015 (“Sanction Letter”), the Appellant sanctioned a Term Loan facility of INR 20 crores in favour of the Respondent for completion of the said Project. Towards availing the said credit facility, the Respondent executed a Facility Agreement dated August 11, 2015 (“Facility Agreement”) along with certain other security documents, thereby mortgaging various immovable properties and creating security interest in favour of the Appellant against the Term Loan. The Sanction Letter had the name of the Appellant, ‘L&T Finance (Home Loans)’ set out on the top right hand corner of the letterhead, and ‘L&T Housing Finance Ltd.’ with its address mentioned on the bottom left hand corner.

The Respondent subsequently defaulted on repayment of the Term Loan, following which, the Appellant served a demand notice dated December 16, 2016, on the Respondent to pay the outstanding dues within the stipulated period mentioned in the said demand notice. Since the Respondent failed to make the outstanding payment within the stipulated period, the Appellant classified the account of the Respondent as a Non Performing Asset (“NPA”) on April 15, 2017, and issued a notice of demand dated June 14, 2017, under Section 13(2) of the SARFAESI Act (“Demand Notice”), calling upon the Respondent to pay the outstanding dues of INR 16,97,54,851/- as on May 31, 2017, with future interest till actual payment, in terms of the Demand Notice, within sixty days from the date of receipt of the Demand Notice.

Upon receipt of the Demand Notice, the Respondent failed to discharge its liability and instead issued a reply dated August 8, 2017, to the Demand Notice. Consequently, the Appellant filed an application under Section 13(4) read with Section 14 of the SARFAESI Act, before the competent authority towards taking possession of the mortgaged properties and the collateral security of the Respondent. In response, the Respondent filed a securitisation application (No.76/2018) before the Debt Recovery Tribunal (“DRT”) under Section 17 of the SARFAESI Act assailing the issuance of the Demand Notice. After hearing both sides, the DRT by its order dated March 23, 2018 (“DRT Order”), set aside the Demand Notice on the ground that it had not been validly issued in the name of the Appellant, and instead the name “L&T Finance Ltd.” had been mentioned on the Demand Notice. The DRT held that since the Demand Notice was issued by another group entity of the Appellant and not the Appellant itself, who in fact was the secured creditor, and the defect not being curable after issuance of the Demand Notice, the proceedings under Section 13(4) read with Section 14 of the SARFAESI Act were not sustainable. The DRT Order was challenged by the Appellant under an appeal before the Debt Recovery Appellate Tribunal (“DRAT”) which, by its order dated April 16, 2019 (“DRAT Order”), set aside the order of the DRT. The DRAT Order was subsequently challenged by the Respondent by way of a writ petition filed before the High Court of Karnataka (“HC”). The HC, by its order dated June 27, 2019 (“HC Order”), set aside the DRAT Order and confirmed the observations of the DRT, following which, the Appellant had preferred the present appeal before the SC, against the said impugned HC Order.

Issue

Whether the Appellant could maintain proceedings under the SARFAESI Act in light of a technical defect in the application.

Arguments

Contentions raised by the Appellant:
The Appellant, inter alia, contended that the same letterhead of the Appellant was used right from the beginning of its dealings with the Respondent, including issuance of the Sanction Letter and the Demand Notice, and even in its subsequent correspondences. The Appellant argued that, only at one stage, had it due to oversight, inadvertently applied the seal of “L&T Finance Ltd.” and that it was not the case of the Respondent that the same had caused any substantial prejudice to it. In the given circumstances, the mere technical defect noticed in the Demand Notice by the DRT and relied upon in the DRT Order and subsequently confirmed by the HC in the HC Order, should not negate the proceedings which had been initiated by the Appellant in carrying out its obligations and protecting its security interest as contemplated under the provisions of the SARFAESI Act.

Contentions raised by the Respondent:
The Respondent on the other hand contended that when the salient defect had been noticed by the DRT and confirmed by the HC at the very inception of the proceedings being initiated under the SARFAESI Act, all the consequential proceedings initiated in furtherance thereof in the instant case could not be said to be in due compliance of the SARFAESI Act, and once a procedure had been prescribed by law as mandated under the SARFAESI Act, the secured creditor was under an obligation to comply with it, which in the instant case had undisputedly not been followed. The Respondent further contended that in the given circumstances, no error had been committed by the HC under its impugned HC Order, which needed to be rectified by the SC.

Observations of the Supreme Court
The SC observed that from the very inception, when the proposal of taking the Term Loan from the Appellant was furnished by the Respondent by its application dated May 15, 2015 and accepted by the Appellant by the Sanction Letter, the letterhead which was used for the purpose clearly reflected “L&T Finance (Home Loans)” on the top right hand corner of the letterhead, and “L&T Housing Finance Ltd.” with its registered office address on the bottom left hand corner, and this had been duly signed by the authorised signatory of the Respondent. Therefore, it manifested from the record that the Respondent, from the initial stage, was aware of the procedure which was being followed by the Appellant in its correspondence while dealing with its customers and that was the same practice being followed by the Appellant when another notice dated December 16, 2016 was served by it at a later stage. The Demand Notice, which in explicit terms indicated the execution of the Facility Agreement between the Appellant and the Respondent and of the default being committed by the Respondent in furtherance thereof, was served on the same pattern of the letterhead which was being ordinarily used by the Appellant in its correspondence with its customers leaving no iota of doubt that it was in reference to the non-fulfilment of the terms and conditions of the Facility Agreement executed between the parties. Even in the reply to the Demand Notice, which was served by the Respondent on August 8, 2017 under Section 13(3A) of the SARFAESI Act, no specific contention was raised with reference to the manner of correspondence between the Appellant and the Respondent and no objection was raised by the Respondent with regard to any defect in the Demand Notice.

It was further observed by the SC that when action had been taken by the competent authority as per the procedure prescribed by law and the person affected has knowledge of it, such action could not be held to be bad in law merely on account of a trivial objection, unless any substantial prejudice is caused on account of the procedural lapse as prescribed under the SARFAESI Act or the rules framed thereunder. The SC further stated that it always depended upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant damage, if any, being caused, and there could not be a straitjacket formula which could be uniformly followed in all the transactions.

The SC observed that the objection raised by the Respondent was trivial and technical in nature and the Appellant had complied with the procedure prescribed under the SARFAESI Act. At the same time, the objection raised by the Respondent in the first instance, at the stage of filing of a securitisation application before the DRT under the SARFAESI Act, was a feeble attempt which had persuaded the DRT and the HC to negate the proceedings initiated by the Appellant under the SARFAESI Act. This was unsustainable, more so, since the Respondent was unable to justify the error in the procedure being followed by the Appellant in initiating proceedings under the SARFAESI Act.

Decision of the Supreme Court
In allowing the instant appeal, the SC held the view that the submission made by the Respondent that the Demand Notice under Section 13(2) of the SARFAESI Act was served by the authorised signatory of “L&T Finance Ltd.” which was not the actual secured creditor, was wholly without substance, for the reason that “L&T Finance Ltd.” and “L&T Housing Finance Ltd.” were the companies who in their correspondence with all their customers used a common letterhead, having the same authorised signatory, and at one stage due to human error by the authorised signatory, the seal of “L&T Finance Ltd.” was affixed in place of “L&T Housing Finance Ltd.” Moreover, when that there was not any confusion in the case of the Respondent in its knowledge regarding the action being initiated in the instant case, or any substantial prejudice being caused apart from the technical objection in the Demand Notice under Section 13(2) of the SARFAESI Act or in the proceedings in furtherance thereof, no interference by the HC in its limited scope of judicial review was called for. Consequently, the SC was of the view that, the judgement of the HC was unsustainable and deserved to be set aside. Accordingly, HC Order was quashed and set aside.

Vaish Associates Advocates View:

The decision of the SC in the present case should deter loan defaulters from seeking to frustrate and delay recovery proceedings against them by secured creditors on trivial and technical grounds. This decision is supported by the logic that unless serious damage or prejudice has been caused to the defaulter under the proceedings as a result of such procedural lapse, the judiciary should not entertain such applications under Section 17 of the SARFAESI Act.

For more information please write to Mr. Bomi Daruwala at [email protected]

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