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Tenants' Rights Under Sarfaesi Clarified!

Published on Thu, Apr 03,2014 | 21:27, Updated at Fri, Apr 04 at 11:29Source : Moneycontrol.com 

Krishnayan Sen, Partner, VERUS

 

The Supreme Court has today decided the issue about tenancy rights, under SARFAESI Act, in an elaborate judgment in Harshad Govardhan v International Asset Reconstruction Company (IARC). We appeared for the principal respondent, IARC and Kotak Mahindra Bank.  

In brief, the Supreme Court has held

 

  1. Secured Creditor cannot take possession of the secured premises from a lessee, under Section 14, where a registered lease is created prior to mortgage or when it is created after mortgage with the consent of the bank (i.e. under Section 65A of the TP Act);
  2. Civil courts (or rent courts) does not have the power to decide the said issue of valid tenancy, which will exclusively be decided by the Magistrate under Section 14 of the SARFAESI Act 2002;
  3. The Debts Recovery Tribunal, under Section 17, does not have the power to restore possession back to the lessee. Therefore, it will not be an adequate remedy;
  4. The Magistrate will give an opportunity of hearing to the alleged lessee before taking a decision under Section 14. The said order can be challenged by way of a writ before the High Court.

My immediate response to the judgment is that it may be in conflict with another recent Division Bench ruling of the Supreme Court in Standard Chartered Bank vs. Nobel Kumar & Ors.  (2013) 9 SCC 620, on two crucial aspects –

 

(i)                  The court, in Standard Chartered, held that the secured creditor may directly seek possession of the premises under Section 14 of the SARFAESI Act without pasting a Rule 8(1) [r/w Section 13(4)] notice. Therefore, in a situation where the secured creditor is not aware of any alleged tenancy, it will  directly file the Section 14 application without pasting the Rule 8(1), notice as required in today’s judgment. However, the alleged tenant would rely on today’s ruling to challenge the bank’s action as no notice under Rule 8(1) has been pasted on the walls of the premises. Harshad has not considered the situation where the Secured Creditor chooses to apply the Standard Chartered ruling, and directly applies to the Magistrate under Section 14 without pasting. There is, therefore, an obvious conflict between the two rulings.

(ii)                While both the judgments have held that Section 14 will be adjudicatory in nature –while Standard Chartered case held that the remedy from the Magistrate’s order is to approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act, Harshad Govardhan has held that the remedy is only before the High Court by way of a writ petition. This, again, is an obvious conflict.  

 

Though the Standard Chartered Bank case was extensively argued before the Supreme Court in Harshad Govardhan, the same has, unfortunately, not been referred to in today’s judgment and, therefore, it could be a case of judicial oversight and, thereby, warranting a reference of the conflicting issues to a larger bench.

 
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