# MIS TRANSCORE v. UNION OF INDIA AND ANR

- **Citation:** [2006] Supp. 9 S.C.R. 785
- **Court:** Supreme Court of India
- **Decided:** 2006-11-29
- **Case number:** Civil Appeal No. 3228 of2006
- **Bench:** Arijit Pasayat, S.H. Kapadia
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mis-transcore-v-union-of-india-and-anr-22171
- **Pages:** 52

## Headnote

Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002:
A
B
Section 13(4)-Recovery of Debts Due to Banks and Financial C
Institutions Act, 1993 (inserted by amending Act 30 of 2004)-Section 19(1)
first proviso-Recovery of bank dues-Recourse to 2002 Act-Withdrawal of
original application in terms of the first proviso to section 19(1)-Held: ls
not a condition precedent-Bank having elected to seek their remedy in
terms of DRT Act can still invoke 2002 Act for realizing secured assets D
without withdrawing application filed before DRT-lt's the discretion of the
Bank-Doctrine of election is not applicable-Code of Civil Procedure,
1908-0rder XXIII, Rule 1(3).
Sections 13(4), 13(8) and 17(3)-Recovery of dues by secured
creditor-Possession of secured assets of borrower under section 13(4)- E
Power of, secured creditor-Scope of-Held: 2002 Act provides for recovery
of possess ion by non-adjudicatory process-If dues of secured creditor together
with all costs, charges and expenses incurred by him are tendered to the
creditor before the date f1Xed for sale or transfer, asset shall not be sold or
transferred-Till the time of issuance of sale certificate, Authorised Officer is
like a court receiver who can take symbolic possession-Where court receiver F
finds that a third party interest is likely to be created overnight, he can take
actual possession even prior to the decree-Authorized officer under Rule 8
has greater powers than even a court receiver as security interest in the
property is. already created in favour of banks/Fis-Thus, the dichotomy
between symbolic and actual possession does not find place in the Act read G
with the Rules-Security Interest (Enforcement) Rules, 2002-Rules 8 and
9-Code of Civil Procedure, 1908-0rder XL Rule 1.
Sections 13(4), 17(1) and 40-Securitisation and Reconstructr'on of
785
H
786
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A Financial Assets and Enforcement of Security Interest (Removal Qf Dif.ficulties)
Order, 2004-Action by Banks or financial institutions under section 13(4)
against borrowers-Challenged by borrowers-Application to DRT under
section 17(1) as amended by Act 30of2004 w.ej I I. I 1.04-Ad valorem court
fee prescribed under Rule 7 of 1993 Rules-levy of-Borrower's case that
section 17(/) provides for prescribing fees for application under section
B 17(1) and since no Rule framed thereunder, after I I.I 1.2004,fees not leviab/e
under Order 2004 dated 6.4.2004, being redundant-Held: Since fees not
prescribed by Rules after I I. I 1.2004, it cannot be said that fees cannot be
levied on the basis of Order 2004 which was there prior to I I. I 1.20040rder 2004 dated 6.4.2004 does not alter the scheme of amended Act-It
C merely fills in the deficiency-Debts Recovery Tribunal (Procedure) Rules,
1993.
Bank filed original application before Debt Recovery Tribunal for
recovery of dues from the appellant company. Claim was disputed. Bank filed
an interlocutory application in the O.A. to bring the properties to sale. In
D 2003, a notice under section 13(2) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (NPA Act)
was issued. On 11.11.2004, proviso to section 19(1) of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 was inserted by amending
Act 30 of2004 that the bank or financial institution may, with the permission
E of Debts Recovery Tribunal, on an application made by it, withdraw the
application, for taking action under the NPA Act, if no such action had been
taken earlier under that Act. Thereafter, bank issued possession notice under
section 13(4) of the NPA Act read with Rule 8 of the Security Interest
(Enforcement) Rules, 2002 that since the appellant had failed to repay the
amount the bank had taken possession of the immovable properties.
F
The question which arose for consideration in these appeal were:
(i) Whether withdrawal of O.A. in terms of the first proviso to

## Text

_Characters 0–39,846 of 143,368. This is a partial read: ask again with offset=39846 for what follows._

MIS TRANSCORE
v.
UNION OF INDIA AND ANR.
NOVEMBER 29, 2006
[ARIJIT PASAYAT AND S.H. KAPADIA, JJ.]
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002:
A
B
Section 13(4)-Recovery of Debts Due to Banks and Financial C
Institutions Act, 1993 (inserted by amending Act 30 of 2004)-Section 19(1)
first proviso-Recovery of bank dues-Recourse to 2002 Act-Withdrawal of
original application in terms of the first proviso to section 19(1)-Held: ls
not a condition precedent-Bank having elected to seek their remedy in
terms of DRT Act can still invoke 2002 Act for realizing secured assets D
without withdrawing application filed before DRT-lt's the discretion of the
Bank-Doctrine of election is not applicable-Code of Civil Procedure,
1908-0rder XXIII, Rule 1(3).
Sections 13(4), 13(8) and 17(3)-Recovery of dues by secured
creditor-Possession of secured assets of borrower under section 13(4)- E
Power of, secured creditor-Scope of-Held: 2002 Act provides for recovery
of possess ion by non-adjudicatory process-If dues of secured creditor together
with all costs, charges and expenses incurred by him are tendered to the
creditor before the date f1Xed for sale or transfer, asset shall not be sold or
transferred-Till the time of issuance of sale certificate, Authorised Officer is
like a court receiver who can take symbolic possession-Where court receiver F
finds that a third party interest is likely to be created overnight, he can take
actual possession even prior to the decree-Authorized officer under Rule 8
has greater powers than even a court receiver as security interest in the
property is. already created in favour of banks/Fis-Thus, the dichotomy
between symbolic and actual possession does not find place in the Act read G
with the Rules-Security Interest (Enforcement) Rules, 2002-Rules 8 and
9-Code of Civil Procedure, 1908-0rder XL Rule 1.
Sections 13(4), 17(1) and 40-Securitisation and Reconstructr'on of
785
H
786
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A Financial Assets and Enforcement of Security Interest (Removal Qf Dif.ficulties)
Order, 2004-Action by Banks or financial institutions under section 13(4)
against borrowers-Challenged by borrowers-Application to DRT under
section 17(1) as amended by Act 30of2004 w.ej I I. I 1.04-Ad valorem court
fee prescribed under Rule 7 of 1993 Rules-levy of-Borrower's case that
section 17(/) provides for prescribing fees for application under section
B 17(1) and since no Rule framed thereunder, after I I.I 1.2004,fees not leviab/e
under Order 2004 dated 6.4.2004, being redundant-Held: Since fees not
prescribed by Rules after I I. I 1.2004, it cannot be said that fees cannot be
levied on the basis of Order 2004 which was there prior to I I. I 1.20040rder 2004 dated 6.4.2004 does not alter the scheme of amended Act-It
C merely fills in the deficiency-Debts Recovery Tribunal (Procedure) Rules,
1993.
Bank filed original application before Debt Recovery Tribunal for
recovery of dues from the appellant company. Claim was disputed. Bank filed
an interlocutory application in the O.A. to bring the properties to sale. In
D 2003, a notice under section 13(2) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (NPA Act)
was issued. On 11.11.2004, proviso to section 19(1) of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 was inserted by amending
Act 30 of2004 that the bank or financial institution may, with the permission
E of Debts Recovery Tribunal, on an application made by it, withdraw the
application, for taking action under the NPA Act, if no such action had been
taken earlier under that Act. Thereafter, bank issued possession notice under
section 13(4) of the NPA Act read with Rule 8 of the Security Interest
(Enforcement) Rules, 2002 that since the appellant had failed to repay the
amount the bank had taken possession of the immovable properties.
F
The question which arose for consideration in these appeal were:
(i) Whether withdrawal of O.A. in terms of the first proviso to section
19(1) of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (inserted by the Amending Act No.30 of 2004) is a condition precedent
G to recourse to the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
H
(ii) Whether recourse to take possession of the secured assets of the
borrower in terms of Section 13(4) of the NPA Act comprehends the power to
take actual possession of the immovable property.
-.
TRANSCORE v. U.0.1.
787
(iii) Whether ad valorem court fee prescribed under Rule 7 of the DRT A
(Procedure) Rules, 1993 is payable on an application under Section 17(1) of
the NPA Act in the absence of any rule framed under the said Act.
Allowing the Banks/Fl's appeal/I.A and dismissing the borrower's
appeal/I.A., the Court
HELD: I.I. The withdrawal of the 0.A. pending before DRT under the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is not
a pre-condition for taking recourse to Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (NPA Act).
B
It is for the bank/FI to exercise its discretion as to cases in which it may C
apply for leave and in cases where they may not apply for leave to withdraw.
[825-D-E)
1.2. The NPA Act is en'acted for quick enforcement of the security. The
Act deals with enforcement of the rights vested in the bank/ FI. The NPA Act
proceeds on the basis that security interest vests in the bank/FI. Sections 5
and 9 of NP A Act is also important for preservation of the value of the assets D
of the banks/ Fis. Quick recovery of debt is important. It is the object ofDRT
Act as well as NP A Act. But under NP A Act, authority is given to the banks/
Fis, which is not there in the DRT Act, to assign the secured interest to
securitisation company/asset reconstruction company. In cases where the
borrower has bought an asset with the finance of the bank/ FI, the latter is E
treated as a lender and on assignment the securitisation company/asset
reconstruction company steps into the shoes of the lender bank/ Fl and it can
recover the lent amounts from the borrower. [822-F-H; 823-A)
Snell's Equity Thirty-first edition p 777, referred to.
1.3. When section 13( 4) talks about taking possession of the secured
assets or management of the business of the borrower, it is because a right
is created by the borrower in favour of the bank/ FI when he takes a loan
secured by pledge, hypothecation, mortgage or charge. Equity, exists in the
bank/Fl and not in the borrower. Therefore, apart from obligation to repay,
F
the borrower undertakes to keep the margin and the value of the securities G
hypothecated so that there is no mis-match between the asset-liability in the
books of the bank/FI. This obligation is different and distinct from the
obligation to repay. It is the former obligation of the borrower which attracts
the provisions ofNPA Act which seeks to enforce it by measures mentioned
in Section 13(4) of NPA Act, which measures are not contemplated by DRT H
788
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A Act and, therefore, it is wrong to say that the two Acts provide parallel
remedies. The remedy under DRT Act falls short as compared to NPA Act
which refers to acquisition and assignment of the receivables to the asset
reconstruction company and which authorizes banks/ Fis. to take possession
or to take over management which is not there in the DRT Act. It is for this
B reason that NPA Act is treated as an additional remedy (Section 37), which is
not inconsistent with the DRT Act. (823-E-F; 824-A-D)
1.4. The NPA Act is enacted to enforce the interest in the financial
assets which belongs to the bank/FI by virtue of the contract between the
parties or by operation of common law principles or by law. The very object of
C Section 13 of NPA Act is recovery by non-adjudicatory process. A secured
ass~t under NPA Act is an asset in which interest is created by the borrower
in favour of the bank/ FI and on that basis alone the NPA Act seeks to enforce
the security interest by non-adjudicatory process. Essentially, the NPA Act
deals with the rights of the secured creditor. The NPA Act proceeds on the
basis that the debtor has failed not only to repay the debt, but he has also
D failed to maintain the level of margin and to maintain value of the security at
a level is the other obligation ,of the debtor. It is this other obligation which
invites applicability ofNPA Act. It is for this reason that Sections 13(1) and
13(2) of the NPA Act proceeds on the basis that security interest in the bank/
Fl needs to be enforced expeditiously without the intervention of the court/
E tribunal; that liability of the borrower has accrued and on account of default
in repayment, the account of the borrower in the books of the bank has become
non-performing. NP A Act states that the enforcement could take place by nonadjudicatory process and that the said Act removes all fetters under the above
circumstances on the rights of the secured creditor. (824-G-H; 825-A-D)
F
1.5. The DRT is a tribunal, it is the creature of the statute, it has no
inherent power which exists in the civil courts. Order XXIII Rule l (3) CPC
states inter a/ia that where the court is satisfied that there are sufficient
grounds for allowing the plaintiff to institute a fresh suit for the su~ject-matter
of a suit or part of a claim then the civil court may, on such terms as it thinks
fit, grant the plaintiff permission to withdraw the entire suit or such part of
G the claim with liberty to institute a fresh suit in respect thereof. Under Order
XXIII Rule l(l)(4)(b), in cases where a suit is withdrawn without the
permissim;t of the court, -the plaintiff shall be precluded for instituting any
fresh suit in respect of such subject-matter. Order XXIII Rule 2 states that
any fresh suit instituted on permission granted shall not exclude limitation
H and the plaintiff should be bound by law of limitation as if the first suit had
-"'
f
TRANSCORE v. U.Q.I.
789
not been instituted. Order XXIII Rule 3 deals with compromise of suits. It A
states that where it is proved to the satisfaction of the court that a suit has
been adjusted wholly or in part by any lawful agreement or compromise or
where the defendant satisfies the plaintiff in respect of whole or any part of
the subject-matter of the suit, the Court shall order such agreement,
compromise or satisfaction to be recorded, and shall pass a decree in B
accordance therewith. [825-D-G]
1.6. The object behind introducing the first proviso and the third proviso
to Section 19(1) of the DRT Act is to align the provisions of ORT Act, the
NPA Act and Order XX.Ill CPC. Let it be assumed that an O.A. is filed in the
DRT for recovery of an amount on a term loan, on credit facility and on c
hypothecation account. After filing of O.A., on account of non disposal of the
O.A. by the tribunal due to heavy backlog, the bank finds that one of the three
accounts has become sub-standard/ loss, in such a case the bank can invoke
the NP A Act with or without the permission of the DRT. One cannot lose sight
of the fact that even an application for withdrawal/leave takes time for its
disposal. With inflation in the economy, value of the pledged property/asset D
depreciate_ on day to day basis. If the borrower does not provide additional asset
and the value of the asset pledged keeps on falling then to that extent the
account becomes non-performing. Therefore, the bank/ Fl is required to move
under NPA Act expeditiously by taking one of the measures by Section 13(4)
of the NPA Act. Moreover, Order XXIII CPC is an exception to the common E
law principle of non-suit, hence the proviso to Section 19(1) became a
necessity. (825-H; 826-A-O]
Mardia Chemicals Ltd and Ors. v. Union of India and Ors., (2004] 4
sec 311, referred to ..
1. 7. There are three elements of election, namely, existence of two or F
more remedies; inconsistencies between such remedies and a choice of one
of them. If any one of the three elements is not there, the doctrine will not
apply. If in truth there is only one remedy, then the doctrine of election does
not apply. In the instant case, the NPA Act is an additional remedy to the ORT
Act. Together they constitute one remedy and, therefore, the doctrine of G
election does not apply. The doctrine of election of remedies is applicable only
when there are two or more co-existent remedies available to the litigants at
the time of election which are repugnant and inconsistent. In any event, there
is no repugnancy nor inconsistency between the two remedies, therefore, the
doctrine of election has no application. (824-D-F)
H
~·
790
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A
American Jurisprudence 2d, Vol. 25, p 652; Snell's Equity Thirty-first
edition p 119, referred to.
·
2.1. The word possession is a relative concept. It is not an absolute
concept. There is a conceptual distinction between securities by which the
creditor obtains ownership of or interest in the property concerned
B (mortgages) and securities where the creditor obtains neither an interest in
nor possession of the property but the property is appropriated to the
satisfaction of the debt (charges). Basically, the NPA Act deals with the former
type of securities under which the secured creditor, namely, bank/Fl obtains
interest in the property concerned. It is for this reasori that the NPA Act ousts
C the intervention of the courts/tribunals. (827-F-HJ
2.2. Section 13(4) of the NPA Act proceeds on the basis that the
borrower, who is under a liability, has failed to discharge his liability within
the period prescribed under Section 13(2), which enables the secured creditor
to take recourse to one of the measures, namely, taking possession of the
D secured assets including the right to transfer by way of lease, assignment or
sale for realizing the secured assets. Section 13(4-A) refers to the word
"possession" simpli'citer. There is no dichotomy in sub-section (4~A).
(828-A-B)
2.3. Section 17(1) of NP A Act refers to right of appeal. Section 17(3)
E states that ifthe DRT ~s an appellate authority after examining the facts and
circumstances of the case comes to the conclusion that any of the measures
under Section 13(4) taken by the secured creditor are not in accordance with
the provisions of the Act, it may by order declare that the recourse taken to
any one or more measures is invalid, and consequently, restore possession to
the borrower and can also restore management of the business of the
F borrower. Therefore, the scheme of Section 13(4) read with Section 17(3)
shows that if the borrower is dispossessed, not in accordance with the
provisions of the Act, then the DRT is entitled to put the clock back by
restoring the status quo ante. Therefore, it cannot be said that if possession
is taken before confirmation of sale, the rights of the borrower to get the
G dispute adjBdicated upon is defeated by the authorised officer taking
possession. The NPA Act provides for recovery of po~session by nonadjudicatory process, therefore, to say that the rights of the borrower would
be defeated without adjudication would be erroneous. Rule 8 deals with sale
of immovable secured assets. (828-E-H; 829~AJ
H
2.4. Under Section 13(8), if the dues of the secured creditor together
TRANSCORE v. U.0.1.
791
with all costs, charges and expenses incurred by him are tendered to the A
creditor before the date fixed for sale or transfer, the asset shall not be sold
or transferred. The costs, charges and expenses referred to in Section 13(8)
will include costs, charges and expenses which the authorised officer incurs
for preserving and protecting the secured assets till they .are sold or disposed
of in terms of Rule 8(4). Thus, Rule.8 deals with the stage anterior to the
issuance of sale certificate and delivery of possession under Rule 9. Till the B
time of issuance of sale certificate, the authorised officer is like a court
receiver under Order XL Rule 1 CPC. The court receiver can take symbolic
possession and in appropriate cases where the court receiver finds that a third
party interest is likely to be created overnight, he can take actual possession
even prior to the decree. The authorized officer under Rule 8 has greater C
powers than even a court receiver as security interest in the property is
already created in favour of the banks/Fis. That interest needs to be protected.
Therefore, Rule 8 provides that till issuance of the sale certificate under Rule
9, the authorized officer shall take such steps as he deems fit to preserve the
secured asset. It is well settled that third party interests are created overnight
and in very many cases those third parties take up the defence of being a D
bona fide purchaser for value without notice. It is these types of disputes whith
are sought to be avoided by Rule 8 read with Rule 9 of the 2002 Rules. In the
circumstances, the drawing of dichotomy between symbolic and actual
possession does not find place in the scheme of the NPA Act read with the
2002 Rules. 1829-B-FI
E
3.1. Section 17(1) of the NPA Act states inter alia that a borrower
aggrieved by action taken under Section 13(4) may make an application along
with fees, as may be prescribed to the DRT having jurisdiction in the matter.
The marginal note states that Section 17(1) is a right to appeal. The marginal
notes under section 17(1) cannot control the text and the content of Section F
17(1) which states that the borrower aggrieved by any of the measures in
Section 13(4) may make an application to the DRT. In fact, the proviso to
Section 17(1) indicates that different fees may be prescribed for making an
application by the borrower. The reason is obvious. Certain measures taken
under Section 13(4) like taking over the management of the fee vis-a-vis the
secured creditor taking possession of financial assets have to bear different G
fees. Each measure is required to be separately charged to the borrowerapplicant for which different fees could be prescribed. The said proviso
indicates that the tribunal under Section 17(1) exercises Original Jurisdiction
and, therefore, as far as the fees are concerned, the terminology of original
or appellate jurisdiction in the context of fees is irrelevant. 1831-A-D]
H
792
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A
3.2. Under the Order 2004 issued by the Central Government under
Section 40 of the NPA Act, it is provided that the fee for filing an appeal to
the DRT under Section 17(1) of NPA Act shall be mutatis mutandis as provided
for filing an application to the DRT under Rule 7 of the 1993 Rules. The
word mutatis mutandis indicates that a measure is adopted for assessing the
B fees required to be paid by the borrower when he applies by way of application
to the DRT under Section 17(1) of NP A Act challenging the action taken under
Section 13(4) of NPA Act by the secured creditor. With regard to the
submission of the borrowers that since section 17(1) ofNPAAct, as amended,
provides for prescribing fees for an application under Section 17(1) and since
no rule has been framed under the NPA Act after 11.11.2004 fees cannot be
C levied under the Order 2004 dated 6.4.2004 which, according to the borrower,
has come to an end after 11.11.2004 with the enactment of the amending Act
30 of 2004, it cannot be said that since fees have not been prescribed by the
rules after 11.11.2004, fees cannot be levied on the basis of the Order 2004
which was there prior to 11.11.2004. (831-D-GJ
D
3.3. The 2004 Order was issued with the object of supplying a deficiency,
E
namely, levy of fees. By such levy offees, the nature and scope of the NPA Act
is not altered. The 2004 Order has been issued after the enactment of NPA
Act. After the amending Act 30 of 2004, certain amendments have been made
in Section 17(1) ofNPA Act. However, the 2004 Order dated 6.4.2004 does
not, in any way, alter the scheme of the amended Act. It merely fills in the
deficiency and, therefore, the 2004 Order will continue to operate even after
the amending Act 30 of 2004 and till rules are prescribed in terms of Section
2(s) of the NPA Act. (834-C-EJ
Madeva Upendra Sinai and Ors. v. Union of India and Ors., relied on.
p
National Insurance Co. Ltd. v. Mastan and Anr., [2006) 2 scp 641 and
G
A.P. State Financial Corporation v. Mis Gar Re-Rolling Mills andAnr. (199412
sec 647, distinguished.
Mardia Chemicals Ltd. and Ors. v. Union of India and Ors., (2004) 4
sec 311, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3228 of2006.
/
;
From the Judgment and Order dated 27.7.2005 of the High Court of
Jlidicature at Madras in W.P. 1565/2005.
WITH
H
Civil Appeal Nos. 1374/06, 2841/06,3225/06,3226/06 and 908/06.
TRANSCORE v. U.0.1. [KAPADIA, J.]
793
Soli J. Sorabjee, Ranjit Kumar, C.A. Sundram, K.V. Viswanathan, Atul A
Kumar Sinha, B. Raghunath, Rajeev Kumar, Devendra Singh, Gautam Awasthi,
D. Mahesh Babu, Himanshu Munshi, Ms. J.S. Wad, Ashish Wad, Neeraj
Kumar, Arvind Gupta (for J.S. Wad & Co.), S.S. Ray, Rakhi Ray, Dhruv Mehta,
Harshvardhan Jha, Yashraj Deora and Manoj Mehta (for Mis. K.L. Mehta) for
the Appellant.
K.N." Bhatt, Rajiv Shakdhar, D. Dave, K.N. Balgopal, Ajit Pudussery,
Avinash Kumar, K. Vijayan; Rashi Malhotra, I. Bishnu (for Mis. Suresh A.
Shroff & Co.), Ramesh Singh, Nina Gupta, Ms. Shweta Chadha, Akansha,
A.K. Jaiswal, Rajesh K. Sharma, Shalu Sharma, Senthil Jagdeesan and A.P.
Mohanty for the Respondents.
Pankaj Gupta, Pramod Dayal, N.C. Sahni and Y.P. Dhingra for Intervention.
The Judgment of the Court was delivered by
B
c
KAPADIA, J. A short question of public importance arises for
determination, namely; whether withdrawal of O.A. in terms of the first proviso D
to Section 19(1) of the ORT Act, 1993 (inserted by the Amending Act No.30
of 2004) is a condition precedent to taking recourse to the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 ("NPA Act" for short).
Facts in Civil Appeal No. 3228 of 2006:
Since the above question arises in a batch of matters, for the sake of
convenience, we refer briefly to the facts in civil appeal No. 3228106, in which
Mis Transco is the appellant.
E
In March 1999, O.A. No. 354199 was filed by Indian Overseas Bank ("the F
bank") before the DRT, Chennai for recovery of dues from Mis Transcoreappellant herein. The claim was disputed. An interlocutory application was
filed by the bank in the said O.A. to bring the properties to sell. That I.A.
is pending even today.
On 6.1.2003, a notice under Section 13(2) of the NPA Act was issued. G
On 11.11.2004 the following provisos were introduced in Section 19(1) of the
DRT Act vide amending Act 30 of 2004:
"Provided that the bank or financial institution may, with the
permission of the Debts Recovery Tribunal, on an application made H
794
SUPREME COURT REPORTS (2006) SUPP. 9 S.C.R.
A
by it, withdraw the application, whether made before or after the
Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Act, 2004 for the purpose of taking action under the
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (54 of 2002), if no such action had been
taken earlier under that Act:
B
c
Provided further that any application made under the first proviso
for seeking pennission from the Debts Recovery Tribunal to withdraw
the application made under sub-section ( l) shall be dealt with by it
as expeditiously as possible and disposed of within thirty days from
the date of such application:
Provided also that in case the Debts Recovery Tribunal refuses
to grant permission for withdrawal of the application filed under this
sub-section, it shall pass such orders after recording the reasons
therefor."
D
On 8.1.2005, the said bank issued Possession Notice under Section
13(4) of the NPA.Act read with Rule 8 of the Security Interest (Enforcement)
Rules, 2002 ("2002 Rules") stating that, vide notice dated 6.1.2003, the appellant
herein (M/s Transcore) was called upon to repay an amount of Rs. 4.15 crore
(approximately) together with interest within sixty.days; that the appellant had
E failed to repay the amount; that a notice was also given to the guarantor; that
the bank had taken possession of the immovable properties mentioned in the
schedule to the Notice; and, that the appellant and the guarantor were directed
not to deal with those immovable properties. By the said Possession Notice,
the public in general were also told not to deal with the properties mentioned
in the Notice as they were subject to the charge of the bank for the aforesaid
F amount with interest and cost. The immovable properties were put to auction.
However, pending civil appeal, confirmation of auction sale had been stayed.
As far as Mis Transcore, the appellant herein, is concerned, the argument
is that the respondent-bank (Indian Overseas Bank) .::ould not have invoked
the NPA Act under the above proviso to Section 19(1) of the DRT Act
G without the prior permission of the Tribunal before whom O.A. 354/99 was
pending. The contention of the appellant is, that prior to the insertion of the
proviso on 11.11.2004, the bank had issued a show cause notice under
Section 13(2) of the NPA Act; that Notice dated 6.1.2003 was merely a show
cause notice and such a Notice did not constitute an action in terms of the
H first proviso to the said Section 19(1) of the DRT Act. Briefly, the first proviso
TRANSCORE v. U.O.I. [KAPADIA, J.)
795
states that, the bank or financial institution may, with the permission of the A
Debts Recovery Tribunal, on an application made by it, withdraw the 0.A.
made before or after the amending Act 30 of 2004 for the purpose of taking
action under the NPA Act, 2002, if no such action had been taken earlier
under that Act. The contention of the borrower is that the Notice given by
the bank on 6.1.2003 was merely a show cause notice and such notice did not
constitute "action" in terms of the said proviso. Consequently, according to
the appellant, the said bank was duty bound and obliged to make an application
B
to the ORT seeking withdrawal of O.A. No. 354/99. The appellant contends
that, in the present case, the proviso has not been complied with by the bank
and, consequently, the Possession Notice/Order issued by the authorised
officer of the bank under Section 13(4) dated 8.1.2005 was illegal and bad in C
law and liable to be set aside as the said bank could not have invoked the
NPA Act without prior permission/ leave of the ORT under the said proviso
to Section 19(1) of the ORT Act.
At this point, it may be noted that, according to the banks appearing
before us, the contention raised is, that the said proviso is an enabling D
provision; that banks and financial institutions have an independent right to
recover debts; that the purpose behind enactment of the NPA Act was to
obliterate all fetters on their right to recover the debt which earlier existed in
the form of Sections 69 and 69A of the Transfer of Property Act, 1882 ("TP
Act"), and consequently, the option lay with the banks/ Fis to invoke or not E
to invoke the NPA Act. According to the banks/Fis, they were not mandatorily
obliged to obtain the prior leave of ORT and that the said proviso is not a
condition precedent to taking recourse to the NPA Act.
What is Securitisation ?
Securitisation of credit exposures of Banks and Credit Institutions
involves a transfer of outstanding balances in Loans/Advances and packaging
into transferable and tradable securities.
Mr. Joel Telpner has succinctly defined securitisation as under:
"Securitisation is a financing tool. It involves creating, combining and
recombining of assets and securities."
Basel Accord II has considered securitisation in a broader perspective
saying: "A Traditional Securitisation is a structure where the cash flow from
F
G
an underlying pool of exposures is used to service at least two different H
796
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A stratified risk positions or trenches reflecting different degrees of credit risk.
Payments to the investors depend upon the performance of the specified
underlying exposures, as opposed to being derived from an obligation of the
entity originating those exposures".
In the context of securitisation of Standard Assets, Reserve Bank of
B India has defined securitisation as "a process by which a single performing
asset or a pool of performing assets are sold .... "
Reasons for Enactment of the NPA Act, 2002:
The NPA Act, 2002 is enacted to regulate securitisation and
C reconstruction of financial assets and enforcement of security interest and for
matters connected therewith. The NPA Act enables the banks and FI to
realise long-term assets, manage problems of liquidity, asset liability mismatch and to improve recovery of debts by exercising po~ers to take
possession of securities, sell them and thereby reduce non-performing assets
D by adopting measures for recovery and reconstruction. The NPA Act further
provides for setting up of asset reconstruction companies which are empowered
to take possession of secured assets of the borrower including the right to
transfer by way of lease, assignment or sale. The said Act also empowers the
said asset reconstruction companies to take over the management of the
business of the borrower. The constitutional validity of the said Act has been
E upheld in the case of Mardia Chemicals Ltd. and Ors. v. Union of Ii1dia and
Ors., reported in [2004) 4 SCC 311. After the judgment of this Court in Mardia
Chemicals, the amending Act 30 of 2004 was inserted. By the said Act 30 of
2004, Section 19(1) of the ORT Act was recasted simultaneously with section
13 of the NPA Act, 2002. These amendments were made in order to. enable
F the banks/Fis. to withdraw, with the permission of ORT, the o.As. made to
it, and thereafter take action under the NPA Act. In the judgment in Mardia
Chemicals (supra) this Court observed that, in cases where a secured creditor
. has taken action under Section 13(4), it would be open to the borrower to file
an application under Section 17 of the NPA Act. In the said judgment, this
Court further observed that if the borrower, after service of notice under
G Section 13(2) of the NPA Act, raises any objection or places facts for
consideration of the secured creditor, such reply to the notice must be
considered by the bank/FI with due application of mind and reasons for not
accepting the objectiqns briefly must be given to the borrower. In the said
judgment, it is further stated that the reasons so communicated shall only be
H for the purposes of information/ knowledge of the creditor and such reasons
TRANSCORE v. U.O.l. [KAPADIA, J.]
797
will not give him any right to approach the Tribunal under Section 17 of the A
NPA Act. The appellant herein (M/s Transcore) mainly relied on the said
reasons given by this Court in Mardia Chemicals (supra) in support of its
contention that the Notice dated 6.1.2003 under Section 13(2) ofNPA Act was
merely a show cause notice and it did not constitute "action" under the NPA
Act and, therefore, the said bank was obliged statutorily to apply for withdrawal B
of O.A. No. 354/99 before invoking the NPA Act.
Non-Performing Assets (NPA) is a cost to the economy. When the Act
was enacted in 2002, the NPA stood at Rs. 1.10 lac crore. This was a drag
on the economy. Basically, NPA is an account which becomes non-viable and
non-performing in terms of the guidelines given by the RBI. As stated in the C
Statement of Objects and Reasons, NPA arises on account of mis-match
between asset and liability. The NPA account is an asset in the hands of the
bank or Fl. It represents an amount receivable and realizable by the banks or
Fis. In that sense, it is an asset in the hands of the secured creditor. Therefore,
the NPA Act, 2002 was primarily enacted to reduce the non-performing assets
by adopting measures not only for recovery but also for reconstruction. D
Therefore, the Act provides for setting up of asset reconstruction companies,
special purpose vehicles, asset management companies etc. which are
empowered to take possession of secured assets of the borrower including
the right to transfer by way of lease, assignment or sale. It also provides for
realization of the secured assets. It also provides for take over of the E
management of the borrower company.
There is one more reason for enacting NPA Act, 2002. When the civil
courts failed to expeditiously decide suits filed by the banks/Fis., Parliament
enacted the DRT Act, 1993. However, the DRT did not provide for assignment
of debts to securitization companies. The secured assets also could not be F
liquidated in time. In order to empower banks or Fis. to liquidate the assets
and the secured interest, the NPA Act is enacted in 2002. The enactment of
NPA Act is, therefore, not in derogation of the ORT Act. The NPA Act
removes the fetters which were in existence on the rights of the secured
creditors. The NPA Act is inspired by the provisions of the State Financial
Corporations Act, 1951 ("SFC Act"), in particular Sections 29 and 31 thereof. G
The NPA Act proceeds on the basis that the liability of the borrower to repay
has crystallized; that. the debt has become due and that on account of delay
the account of the borrower has become sub-standard and non-performing.
The object of the ORT Act as well as the NPA Act is recovery of debt by
-non-adjudicatory process. These two enactments provide for cumulative H
798
SUPREME COURT REPORTS (2006] SUPP. 9 S.C.R.
A remedies to the secured creditors. By removing all fetters on.the rights of the
se.c.l!red creditor, he is given a right to choose one or more of the cumulative
remedies. The object behind Section 13 of the NPA Act and Section 17 r/w
Section 19 of the ORT Act is the same, namely, recovery of debt. Conceptually,
there is no inherent or implied inconsistency between the two remedies.
Therefore, as stated above, the object behind the enactment of the NPA Act
B
c
is to accelerate the process of recovery of debt and to remove deficiencies/
obstacles in the way of realisation of debt under the ORT Act by the enactment
of the NPA Act, 2002.
Analysis of the DRT Act, 1993:
The ORT Act, 1993 has been enacted to provide for the establishment
of Tribunals for expeditious adjudication and recovery of debts due to banks/
Fis.
Section 2(g) defines a 'debt' to mean any liability which is claimed as
D., dues from any person by a bank, FI or by a consortium of banks. It covers
secured, unsecured and assigned debts. It also covers debts payable under
a decree, arbitration award or under a mortgage.
Chapter III deals with jurisdiction, powers and authority of ORT. Section
17 refers to jurisdiction of ORT. Section 17 states that ORT shall exercise the
E jurisdiction, powers and authority to entertain and decide applications from
the banks and Fis. for recovery of debts due to such banks/ Fis. (emphasis
supplied). Section 19 of the Act inter alia states that where a bank or FI has
to recover any debt, it may make an application to the ORT. By amending Act
30 of2004, the three prnvisos were inserted in Section 19(1). Under the first
proviso, the bank or FI may, with the permission of the ORT, on an application
F made by it, withdraw the O.A. for the purpose of taking action under the NPA
Act, if no such action has been taken earlier under that Act. Under the
second proviso, it is further provided that, any application made for withdrawal
to the DRT under the first proviso shall be dealt with expeditiously and shall
be disposed of within thirty days from the date of such application. The
G reason is obvious. Under Section 36 of the NPA Act the bank of FI is entitled
to take steps under section 13( 4) in respect of the financial asset provided
it is made within the period of limitation prescribed under the Limitation Act,
1963. Therefore, the second proviso to Section 19(1) states that the DRT shall
decide the withdrawal application as far as possible within thirty days from
the date of application by the bank or FI. The third proviso to Section 19( I)
H states that in case the DR T refuses to grant permission/ leave for withdrawal,
TRANSCORE v. U.0.1. [KAPADIA, J.]
799
it shall give reasons thereof. Section 19( 6) provides for the defendant's claim A
to set-off against the bank's demand for a certain sum of money. Similarly,
Section 19(8) gives right to the defendant to set a counter claim. Section
19(12) empowers the ORT to make an interim order by way of injunction, stay
or attachment before judgment debarring the defendant from transferring,
alienating or otherwise deal with, or disposing of, his properties and assets. B
This can be done only with the prior permission of the ORT. Under Section
19(13), the ORT is empowered to direct the defendant to furnish security in
cases where the ORT is satisfied that the defendant is likely to dispose of the
property or cause damage to the property in order to defeat the decree which
may ultimately be passed in favour of the bank or Fl. Under Section 19(18)
the DRT is also empowered on grounds of equity to appoint a receiver of any C
property, before or after grant of certificate for recovery of debt. Under
Section 19(19), a recovery certificate issued against a company can be enforced
by the DRT which can order the property to be sold and the sale proceeds
to be distributed amongst the secured creditors in accordance with the
provisions of Section 529-A of the Companies Act, 1956 and pay the balance/
surplus, if any, to the debtor-company. Section 20 of the ORT Act provides D
·for appeal to the Appellate Tribunal. Section 21 deals with the necessity of
the applicant to pre-deposit seventy-five per cent of the amount of debt due
from him as determined by the ORT under Section 19. Section 25 refers to
modes of recovery of debts. It provides for three modes, namely, (a) attachment
and sale; (b) arrest of the defendant; and (c) appointment of a receiver for E
the management of the properties of the defendant. There are other modes
of recovery contemplated by Section 28 which states that where a certificate
has been issued by the ORT to the Recovery Officer under Section 19(7), the
Recovery Officer may, without prejudice to the modes of recovery specified
in Section 25, recover the amount of debt by any one or more of the modes
mentioned in Section 28. Section 29 of the DRT Act incorporates provisions F
of the Second and Third Schedules to the Income Tax Act, 1961.
On analysing the above provisions of the DRT Act, we find that the
said Act is a complete Code by itself as far as recovery of debt is concerned.
It provides for various modes of recovery. It incorporates even the provisions G
of the Second and Third Schedules to the Income Tax Act, 1961. Therefore,
the debt due under the recovery certificate can be recovered in various ways.
The remedies mentioned therein are complementary to each other. The DRT
Act provides for adjudication. It provides for adjudication of disputes as far
as the debt due is concerned. It covers secured as well as unsecured debts.
However, it does not rule out applicability of the provisions of the TP Act, H
~
I
800
SUPREME COURT REPORTS [2006] SUPP. 9 S.C.R.
A in particular Sections 69 and 69A ofth'at Act. Further in cases where the debt
is secured by pledge of shares or immovable properties, with the passage of
time and delay in the ORT proceedings, the value of the pledged assets or
mortgaged properties invariably falls. On account of inflation, value of the
assets in the hands of the bank/FI invariably depletes which, in tum, leads
B to asset liability mis-match.