Case Note & Summary
The petitioner, ETA Engineering Private Limited, a company engaged in HVAC and EPC contracts, had availed financial assistance from the respondent, Jammu and Kashmir Bank Limited, from 2003 to 2016. In 2016, the bank allegedly stopped cash credit and non-fund based facilities in contravention of RBI directions, leading to devolvement of bank guarantees and letters of credit worth about Rs.18.42 crore. The bank classified the petitioner's account as a non-performing asset and issued a notice under Section 13(2) of the SARFAESI Act, followed by possession notices under Section 13(4). The petitioner filed a securitisation application under Section 17 before the Debts Recovery Tribunal (DRT), which was allowed by the DRT on 11.5.2020. The bank appealed to the Debt Recovery Appellate Tribunal (DRAT), which reversed the DRT's order on 8.2.2021, holding that the securitisation application was not maintainable because the debt had been assigned to an Asset Reconstruction Company (ARC) and the borrower could not challenge the measures after assignment. The petitioner then filed a revision petition under Article 227 of the Constitution before the High Court. The High Court framed the issue of maintainability of the securitisation application after assignment. The court analyzed the provisions of the SARFAESI Act, particularly Sections 5, 13, and 17, and held that the borrower continues to be an 'aggrieved person' even after assignment, as the assignment does not affect the borrower's right to challenge the measures taken by the secured creditor. The court noted that the DRAT had erred in law by holding the application not maintainable, as the borrower's remedy under Section 17 is against the 'secured creditor', which includes the ARC after assignment. The court also observed that the borrower was not a party to the assignment and could not be deprived of its statutory remedy. Consequently, the High Court allowed the revision petition, set aside the DRAT's order, and restored the DRT's order allowing the securitisation application. The court directed the DRT to proceed with the application on merits.
Headnote
A) SARFAESI Act - Securitisation Application - Maintainability - Section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - The issue was whether a borrower can maintain a securitisation application under Section 17 after the underlying debt has been assigned to an Asset Reconstruction Company (ARC). The court held that the borrower continues to be an 'aggrieved person' and can challenge the measures taken by the bank or ARC, as the assignment does not extinguish the borrower's right to challenge the legality of the measures. The DRAT's order rejecting the application as not maintainable was set aside. (Paras 10-25) B) SARFAESI Act - Assignment of Debt - Effect on Borrower's Rights - Sections 5, 13, 17 of the SARFAESI Act, 2002 - The court examined the effect of assignment of a financial asset to an ARC under Section 5 of the SARFAESI Act. It held that the assignment does not affect the borrower's right to file a securitisation application under Section 17, as the borrower is not a party to the assignment and the remedies under the Act are available against the 'secured creditor' which includes the ARC after assignment. (Paras 15-20) C) Civil Procedure - Revision Petition - Article 227 of the Constitution of India - The court considered the scope of revision under Article 227 and held that the DRAT's order suffered from a patent error of law in holding the securitisation application not maintainable, warranting interference under Article 227. (Paras 5-8)
Issue of Consideration
Whether a securitisation application under Section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is maintainable by a borrower after the financial asset has been assigned to an Asset Reconstruction Company (ARC) and the borrower is not a party to the assignment.
Final Decision
The High Court allowed the revision petition, set aside the order of the DRAT dated 8.2.2021, and restored the order of the DRT dated 11.5.2020 allowing the securitisation application. The DRT was directed to proceed with the securitisation application on merits.
Law Points
- Securitisation Application maintainability
- Borrower's right to challenge after assignment
- Section 17 SARFAESI Act
- 2002
- Article 227 jurisdiction
- DRAT order set aside
