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Opp Indian overseas Bank,
Gandhinagar,
Bengaluru - 560009

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Recent Judgments in Banking arena

-By Amar Gupta, Partner, Kanpur Office

  1. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act):
    1. A ‘protected Tenant’ under the Maharashtra Rent Control Act cannot be evicted by using the provisions of SARFAESI Act.

The Hon’ble Supreme Court in Vishal N. Kalsaria Vs Bank Of India and others has held that a ‘protected tenant’ under the Maharashtra Rent Control Act cannot be arbitrarily evicted by using the provisions of S.A.R.F.A.E.S.I Act as that would amount to stultifying the statutory rights of protection given to the tenant.
Facts of the Case:
Respondents No. 4 and 5 (Landlords of the impugned premises) had approached the Bank of India (respondent no. 1) (in short “the respondent Bank”) for a financial loan, which was granted against equitable mortgage of several properties belonging to them, including the property in which the appellant was allegedly a tenant. The respondent nos. 4 and 5 failed to pay the dues within the stipulated time and thus, in terms of the SARFAESI Act, their account became a non performing asset.

The respondent Bank served them notice under section 13(2) of SARFAESI Act. On failure of the respondents 4 and 5 to clear the dues within the stipulated statutory period of 60 days the respondent bank filed an application before the Chief Metropolitan Magistrate, Mumbai under section 14 of the SARFAESI Act for seeking possession of the mortgaged properties which was in actual possession of the appellant. Subsequently, the respondent No.4 (Landlord) served a notice on the appellant (Tenant), asking him to vacate the premises in which he was residing within 12 days from the receipt of the notice.

The appellant (Tenant) fearing eviction, filed a Rent Suit before the Court of Small Causes Mumbai. The Small Causes Court allowed the application and passed an interim order of injunction in favour of the appellant Tenant, restraining respondent no.4 Landlord from obstructing the possession of the appellant Tenant over the suit premises during the pendency of the suit. In view of the said order, the appellant Tenant then filed the application as an intervenor to stay the execution of the order passed by Chief Metropolitan Magistrate (CMM). The CMM subsequently dismissed the said application filed by the appellant Tenant. The CMM further held that the order passed by the Small Causes Court, Mumbai could not be said to be binding upon the respondent Bank, especially in the light of the fact that it was not a party to the proceedings.

Issues involved:
1. Whether the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 will        override the provisions of the Rent Control Act?
2. How can the rights of the ‘protected tenant’ be preserved in cases where    the debtor-landlord secures a loan by offering the leased property as a            security either to Banks or financial Institutions?
Judgment:
The Hon’ble Court observed that the SARFAESI Act, which came into force from 21.6.2002, was enacted to provide procedures to the banks to recover their collateral securities assets as provided under the provisions of Act; and from the perusal of the preamble of the Rent Control Act it is clear that the ultimate object behind the enactment of this legislation is to control and regulate the rate of rent so that unnecessary hardship is not caused to the tenant, and also to provide protection to the tenants against arbitrary and unreasonable evictions from the possession of the property.
The court further observed that there is an interest of the Bank in recovering the non-performing assets on the one hand and protecting the right of the blameless tenant on the other. A landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Control Act.     

The Hon’ble Court held that the provisions of the SARFAESI Act cannot be used to override the provisions of the Rent Control Act. Once tenancy is created, a tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act. A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act.

The Hon’ble Court directed that the amount which was in deposit pursuant to the conditional interim order towards rent should be adjusted by the concerned banks towards the debt due from the landlords / debtors and the enhanced rent shall be continued to be paid to the banks which shall also be adjusted towards debts of the landlords / debtors.

Conclusion:
From the above judgment the Hon’ble Court had made it clear that the Banks cannot arbitrarily evict the tenants who have been provided protection under the Rent Control Act. The Bank can evict such tenants only by following the provisions provided under the Rent Control Act. The Banks can however adjust the rent paid by the tenant towards the debts due from the landlord/ debtor.

 

    1. On repayment of the loan, the bank cannot withhold the documents kept in security of that loan for another loan irrespective of the fact that the other loan is procured by the same family within close blood relations.

The Hon’ble Uttarakhand High Court in Meetu Jain And Another Vs Bank of Baroda and another has held that the Bank has to return the documents on repayment of the loan. It is immaterial that other loan is secured by the same family within close blood relations. Both loans are separate and distinct.

Facts of the Case:
M/s. Mahaveer Packaging Industries, of which the petitioner No. 1 was the proprietor, obtained loan facility from respondent No.1 Bank under three heads, viz, cash credit limit, term loan-I and term loan-II, to secure the said loan obtained by the petitioners from the respondent No.1, a mortgage was created over the land/plot. The said property was in the name of petitioner no.2. However, there is a lease deed executed by petitioner no. 2 in favour of petitioner no. 1 in respect of the said property. Further a house in the name of one Mr. Amit Kumar Jain was also mortgaged. The original title deed of both the aforesaid properties and other lease deeds were deposited with the bank at the time of obtaining loan facilities in respect of the said property.

However earlier mortgage property belonging to Amit Kumar Jain was replaced with the property belonging to Rajat Kumar Jain.

The loan was taken in respect of the firm Mahaveer Packaging Industries and only the present petitioners were the borrowers/ guarantors for the said loan. The properties, as mentioned above, were mortgaged as collateral securities only for the purpose of securing the loan in question and none other. The charge over these properties was created only in respect of the aforesaid loan.
Another loan was obtained by M/s. Teerath Pushdant Pvt. Ltd. Company in which Amit Kumar Jain and Sushil Kumar Jain were the directors. The said loan was also being taken from respondent Bank. However, a different property was mortgaged to secure the loan in favour of M/s. Teerath Pushdant Pvt. Ltd. Property belonging to Smt. Sushil Kumar Jain, Amit Kumar Jain and Pushpendra Kumar Jain was mortgaged for the said loan.

On the payment of the loan amount by the petitioners, the respondent Bank refused to return the documents to the petitioners on the ground that another loan secured by the same family within close blood relations was still payable.

Issue Involved:
Whether the respondent Bank was justified in refusing to return the documents on the ground that other loan was secured by same family within close blood relation despite of the fact that the relevant loan was repaid.

Judgment:
The Hon’ble High Court held that both the loans were separate and distinct. Different properties were mortgaged under different loans. The property in question was mortgaged under the present loan which has admittedly been repaid. The said property was not mortgaged in another loan. Although the other loan still remains as payable but different properties were mortgaged against that loan. This property does not fall within the definition of ‘secured asset’ as defined under section 2 (zc) of the SARFAESI Act which means ‘the property on which the secured interest is created’. Respondent Bank was directed to return the documents to the petitioners.

Conclusion:
From the above judgment the Hon’ble Court has made it clear that the Bank cannot refuse to return the documents which are mortgaged in one loan on the ground that another loan from the same family is still payable. The Bank is duty bound to return the documents after the loan is repaid

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(2) Recovery of Debts due to Bank & Financial Institutions Act, 1993

  1. Amount of a stolen draft wrongly credited to the account of payee is not debt unless the forgery is proved and the Bank cannot approach the Tribunal for its recovery.

 

The Hon’ble Allahabad High Court in M/s. B.K. Jewelers through its proprietor Dilip Kumar Gupta vs State bank of India through its Branch Manager and others has held that unless the forgery of draft is proved, it cannot be said that the amount was a liability due on the part of petitioners. It was open to bank to initiate appropriate proceeding in common law for recovery of the amount, but not before the Tribunal.
     
Facts of the Case:
Petitioner No. 1, M/s B.K. Jewelers, (hereinafter referred to as the “Firm”) was a proprietorship firm and petitioner No.2 was the proprietor of aforesaid firm. The firm was carrying on business of Jewelry and sale purchased of gold and silver ornaments.
A current account was opened by petitioners in the name of firm with SBI and a demand draft for a sum of Rs.6,55,000/- payable in favour of firm was deposited in by petitioner No.2. It was sent for collection through local clearing to main branch of Bank and the amount of Rs.6,55,000/- was credited in the firm’s account being the proceeds of said draft. The draft amount Rs.6,55,000/- was withdrawn from current account through cheque thereafter the draft reconciliation department of the Bank at Mumbai sent a fax message to zonal office at Agra advising the aforesaid draft was procured without consideration. It was one of the stolen draft and had been encashed / cleared from Bank. Having discovered that the draft was drawn without consideration and was not a legal tender and its amount was credited in current account of petitioner no. 1 wrongly, the Bank advised the firm to refund Rs.6,55,000/-. Since amount was not refunded, the Bank filed application under section 19 of recovery of debts due to bank and Financial Institutions Act, 1993 before Debts Recovery Tribunal (hereinafter referred to as the act 1993 referred to as the “Tribunal”) for recovery of the principal amount and interest and cost, etc. 
     
Issue Involved:
Whether the amount satisfies the definition of debt as defined under section 2(g) of Act, 1993 and is recoverable under Act, 1993.
     
Judgment:
The Hon’ble High Court held that unless the forgery of draft is proved, it cannot be said that the amount was a liability due on the part of petitioners. There is a fine but sufficient distinction to take away this case from the definition of ‘debt” under section 2(g) of Act, 1993 and therefore, the proceedings before the Tribunal are not maintainable. It was open to Bank to initiate appropriate proceedings in Common Law for recovery of the amount, if any.
     
Conclusion:
From the above judgment it is clear that in cases where there is an allegation of forgery and the bank is unable to prove the same, the amount involved in the forgery does not come within the definition of ‘debt’ and therefore the proceedings before the Tribunal cannot be initiated.  The correct forum to proceed against the recovery of the amount is under the Common Law.

 (3) Negotiable Instruments Act, 1881.
(I) Even if there is sufficient fund in the account ‘stop payment instruction’ will not  preclude an action under Section 138 of the N.I Act.

      The Hon’ble Allahabad High Court in Vivek Jain vs. state of U.P. and others  has held that even if there is sufficient fund in the account, stop payment instruction will not preclude an action under Section 138 of the N.I Act by holder of the cheque.
      Facts of the Case:
Information for stop payment was given to the Bank and due to that reason the cheque in question could not be encashed. However, there was sufficient fund in the account.
      Issue Involved:
When there is sufficient fund in the account ‘instruction for stop payment’ will attract the provision of Section 138 of the N.I. Act.
      Judgment:
The Hon’ble Court held that once the cheque is issued by drawer a presumption under section 139 of the Act must follow and merely because the drawer issues a notice to the drawee or the bank for stoppage of the payment, it will not preclude an action under section 138 of the N.I. Act by holder of the cheque.
      Conclusion:
It is clear from the above judgment that it is immaterial that at the time of issuing instructions regarding ‘stop payment’, the drawer of the cheque had sufficient balance in his account. Once the cheque is dishonoured the provisions of section 138 get attracted simplicitor.  

Disclaimer: The views and opinions expressed in this article are derived from very limited and open source information. These should not be treated as advice and are only information. The client/ user may or may not utilize the same to their prudent discretion.