Creditor’s Stand Post Auction

Source: The Hitavada      Date: 26 Mar 2018 12:20:25


By Adv. R.S. Agrawal

IN THE judgement of the case - ITC Ltd. V. Blue Coast Hotels Ltd. & Others, delivered on March 19, 2018, Justice Sharad Bobde and Justice L. Nageswara Rao at the Supreme Court have held that in this case, the creditor did not have actual possession of the secured asset, but only a constructive or symbolic possession. The transfer of the secured asset by the creditor, therefore, cannot be construed to be a complete transfer as contemplated by section 8 of the Transfer of Property Act. Further, according to the apex court, the creditor nevertheless had a right to take actual possession of the secured assets and must therefore be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement of February 25, 2015. Thus, the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass entire interest to the auction purchaser and thus remained a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

In this case, sale of a 5-star luxury hotel (property) purchased in a public auction was set aside by an order of the Bombay High Court in favour of the debtor Blue Coast Hotels Ltd. on March 23, 2016. The Bombay High Court in its judgement (impugned before the SC) has rendered a finding that there was in fact fraud and collusion between the creditor and the auction purchaser ,with the observation that, since the measures were taken in breach of all laws, the inference of manipulation and collusion cannot be ruled out. Responding to this, the Supreme Court has disagreed with this finding of the HC, stating that it fails to see how such a finding of manipulation and collusion is sustainable on account of breach of law in the present case. A risk of this kind taken up by an intending purchaser cannot lead to an inference of collusion. Mainly, the finding is based on the fact that the sale is a collusion because the auction purchaser was aware that a dispute between the parties was pending and still went ahead and made a bid for the property. It is not unusual in the sale of immovable properties to come across difficulties in finding suitable buyers for the property. The property was eventually sold on the fourth auction, and all the auctions were duly advertised.

Another fact, on the basis of which the HC has observed an inference of collusion is that the property was sold and the sale was confirmed in favour of ITC Ltd. Though a statement was made on the morning of February 23, 2015 before the Debt Recovery Tribunal (DRT) that the sale would not be confirmed till the order was passed. This seems to be recorded in the order of the DRT. However, what is overlooked is the fact that in the statement on behalf of the creditor, the creditor only agreed not to confirm the sale till 3 pm. In the absence of any finding as to what actually transpired, it is not possible for us (the apex court) to infer manipulation and collusion on this account. There is no dispute that the property was actually purchased by ITC Ltd. in pursuance of a public auction and that the entire amount of sale consideration was deposited by it. After giving its anxious consideration to the entire matter the Court found that the undisputed facts of the case were that a loan was taken by the debtor, which was not paid, the debtor did not respond to the notice of demand and made a representation which was not replied to in writing by the creditor. The creditor, however, considered the proposals for repayment of the loan as contained in the representation in the course of negotiations, which continued for a considerable amount of time. Several opportunities in fact were availed of by the debtor for the repayment of the loan after the proceedings were initiated by the secured creditor. The debtor failed to discharge its liabilities and eventually undertook that if the debtor fails to discharge the debt, the creditor would be entitled to realise the secured assets.

The question that arose for consideration before the Court was whether the Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower’s representation. In other words, whether sub-section (3A) of section 13 is mandatory or directory in nature.There seems to be a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor’s representation has not been accepted. A provision which requires reasons to be furnished must be considered as mandatory. The Court agreed with its view taken in its own decisions in the cases -Mardia Chemicals Ltd. v. Union of India - (2004) 4 SCC 311 (para 45, 47, 77 and 80), Transcore v. Union of India - (para 24 and 25) and Keshavlal Khemchand & Sons (P) Ltd. v. Union of India - (2015) 4 SCC 770. The Court also approved the similar view of the several HCs in this regard.

The Court has cited 10 circumstances, which is indicative of the fact that the creditor was induced by the debtor not to take action against them through assurances and promises. Many opportunities were granted by the creditor to the debtor to repay the debt which were all met by proposals for extension of time. Eventually, the debtor even executed “A letter of Undertaking” on November 25, 2013, acknowledging the right of IFCI to sell the assets in the case of default. In the light of this, failure to furnish reply to the representation is not of much significance and the debtor is not entitled to discretionary relief under Article 226 of the Constitution which is indeed an equitable relief.As held, the Supreme Court is of the view that non-compliance of sub-section (3A) of section 13 cannot be of any avail to the debtor whose conduct has been merely to seek time and not repay the loan as promised on several occasions.

The Supreme Court has quoted from its earlier decision in the case – State of Maharashtra v. Digambar - (1995) 4 SCC 683: “19. Power of the High Court to be exercised under Article 226 of the Constitution, if is discretionary, its exercise must be judicious and reasonable, admits of no controversy. It is for that reason, a person’s entitlement for relief from a High Court under Article 226 of the Constitution, be it against the State or anybody else even if is founded on the allegation of infringement of his legal right, has to necessarily depend upon unblameworthy conduct of the person seeking relief, and the court refuses to grant the discretionary relief to such person in exercise of such power, when he approaches it with unclean hands or blameworthy conduct.”

The apex court has also quoted from the Privy Council’s decision in the case - Lindsay Petroleum Co. v. Hurd - (1874) 5 PC 221, wherein it has been observed that “Two circumstances, always important in such cases, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as it relates to the remedy.” Therefore, the debtor is not entitled for the discretionary equitable relief under Articles 226 and 136 of the Constitution of India in the present case. Accordingly, the Supreme Court has allowed the appeals and set aside the impugned judgement of the High Court and directed the debtor and its agents to handover possession of the mortgaged properties to the auction purchaser within a period of six months from the date of this judgement along with the relevant accounts.