Supreme Court Upheld Kerala High Court Judgment on SARFAESI Act stating that Secured Creditor would be "Adversely Affected"

Supreme Court Upheld Kerala High Court Judgment on SARFAESI Act stating that secured creditor would be "adversely affected 

The Supreme Court by three judges bench headed by, Hon'ble Justices L. Nageswara Rao, Hemant Gupta and Ajay Rastogi upheld the judgment passed by Division Bench of Kerala High Court which observed that Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI), mandating the District Magistrate to deliver possession of a secured asset within 30 days, which may be extended up to an aggregate of 60 days by producing the reasons for the same in writing, as a directory provision.

In a relief to banks and financial institutions (FIs), the Supreme Court observed that a provision of the SARFAESI Act empowering District Magistrates to take possession of secured assets of defaulting borrowers within 60 days period for handing them over to the lending FIs was 'directory' and not 'mandatory' in nature as banks cannot be made to suffer for the delay on the part of the government officers.

The court dealt with the issue that whether the provision was directory or mandatory in nature and if the banks or FIs could be made to suffer if District Magistrate fails to act within 60 days in taking over the secured assets of defaulting borrowers and returning them back to the banks or FIs.

The apex court noted that the enactment was meant to provide a machinery for empowering banks and financial institutions, so that they have the discretionary power to acquire possession of secured assets and sell them. The Debt Recovery Tribunals Act was first enacted to streamline the recovery of public dues but the proceedings under that law have not given desirous results and hence the SARFAESI Act was enacted, the court stated.

Section 14 of the Act provides the procedure for Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset. The proviso empowers the authority to pass suitable orders for the purpose of taking possession of the secured asset within a period of thirty days from the date of application. As per the second proviso, if no order is passed by the Chief Metropolitan Magistrate or District Magistrate within the said period of thirty days for reasons beyond his control, he may, after recording reasons in writing for the same, pass the order within such period not exceeding in the aggregate sixty days.

Referring to various judgements, the court said, "The purpose of the Act pertains to the speedy recovery of dues, by banks and financial institutions. The true intention of the Legislature is a determining factor herein. Keeping the objective of the Act in mind, the time limit to take action by the District Magistrate has been fixed to impress upon the authority to take possession of the secured assets."

However, inability to take possession within time limit does not render the District Magistrate 'Functus Officio', it said, adding that the secured creditor has no control over the District Magistrate who is exercising jurisdiction under Section 14 of the Act for public good to facilitate recovery of public dues. "Therefore, Section 14 of the Act is not to be interpreted literally without considering the object and purpose of the Act. If any other interpretation is placed upon the language of Section 14, it would be contrary to the purpose of the Act," the bench said.

"In this light, the remedy under Section 14 of the Act is not rendered redundant if the District Magistrate is unable to handover the possession. The District Magistrate will still be enjoined upon, the duty to facilitate delivery of possession at the earliest," the court observed.

Therefore, the Apex Court upheld the verdict passed by the Kerala High Court which has stated that the secured creditor would be "adversely affected if the provision is construed as mandatory and not directory in nature" as it would lead to delay in process of taking physical possession of assets.