Axis Bank, Retail Asset Centre v Hilal Ahmed Bhat and N. Lokadas

**“C.R.”** ## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** **THE HONOURABLE MR. JUSTICE ANIL K.NARENDRAN** **&** **THE HONOURABLE MR.JUSTICE P.G. AJITHKUMAR** **TUESDAY, THE 21[ST] DAY OF JUNE 2022 / 31ST JYAISHTA, 1944** **F.A.O. NO. 29 OF 2019** **AGAINST THE ORDER DATED 06.12.2018 IN E.A.NO.118 OF 2018 IN E.P.NO.30 OF 2017 IN O.S.NO.32 OF 2016 OF THE SUB COURT,** ## **OTTAPPALAM** ## **APPELLANT/CLAIM PETITIONER:** **M/S AXIS BANK,** **RETAIL ASSET CENTRE, 5TH FLOOR, CHICAGO PLAZA, RAJAJI ROAD, KOCHI - 682 035, REPRESENTED BY ITS LEGAL MANAGER - ANOOP JOSE, S/O.JOSE.** **BY ADV P.PAULOCHAN ANTONY** ## **RESPONDENTS/RESPONDENTS:** **1 HILAL AHMED BHAT S/O.NAZEER AHAMMED BHAT, AGED 40 YEARS, 107, MANIHAL P.O., SHUPIAN.P.S., ZAINAPORA, JAMMU AND KASHMIR - 192303.** - **2 N.LOKADAS** **S/O.SANKARAN, AGED 48 YEARS, NARIPPATTA VEEDU, MANISSERY P.O., OTTAPPALAM, PALAKKAD - 679 521.** **THIS FIRST APPEAL FROM ORDERS HAVING COME UP FOR FINAL HEARING ON 01.06.2022, THE COURT ON 21.06.2022 DELIVERED THE FOLLOWING:** 2 F.A.O.No.29 of 2019 **==> picture [45 x 11] intentionally omitted <==** ## **JUDGMENT** ## Ajithkumar, J. This is an appeal under Section 104(1) read with Order XLIII, Rule 1(j) of the Code of Civil Procedure, 1908. 2. The appellant filed E.A.No.118 of 2018 in E.P.No.30 of 2017 in O.S.No.32 of 2016 before the Sub Court, Ottapalam, seeking to lift the attachment over the petition scheduled property. The E.A. was filled invoking the provision of Order XXI, Rule 58 and Section 151 of the Code, contending that the order of attachment obtained by the 1[st] respondent in respect of the said property on the ground that he was entitled to realise from the said property the debt due to him from the 2[nd] respondent in O.S.No.32 of 2016 is not sustainable in law, since the appellant is a secured creditor. The 2[nd] respondent while availing a cash credit facility of Rs.45,00,000/-, he created an equitable mortgage in favour of the appellant by deposit of title deed. The said loan amount has become a non-performing asset, and therefore, the appellant initiated proceedings against the secured asset as 3 F.A.O.No.29 of 2019 per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). It is contended that in that circumstance, the court should not have attached the property and the appellant is entitled to get the attachment vacated. 3. The 1[st] respondent resisted the application by filing an objection. It was contended that the 2[nd] respondent defaulted the payment of the loan due to the appellant is incorrect. O.S.No.32 of 2016 was filed by him for realisation of the amount legally due to him. It is a bona fide litigation. The attachment of the property in the suit was effected on 28.03.2016. Only on 14.07.2017, the appellant took over possession of the property. The appellant has no absolute title to the property and therefore has no right to object the attachment. Even if the appellant has a right as a secured creditor, the 1[st] respondent has every right to proceed against the property subject to that right. O.P.No.1034 of 2018 filed by the appellant before this Court claiming the same right was dismissed. Accordingly, the 1[st] respondent sought to dismiss 4 F.A.O.No.29 of 2019 the application. The 2[nd] respondent remained ex parte. 4. On 14.02.2019, this appeal was admitted and notice to the respondents were ordered. Further proceedings in the execution petition were stayed initially for a period of one month. The order was extended from time to time and it is still in force. 5. Heard the learned Counsel appearing for the appellant. None of the respondents has turned up. 6. The Execution Court received Exts.A1 to A11 in evidence and after considering the case of either side dismissed the application recording the reasons as follows: “7. Points 1 & 2:- The petitioner approached this court for lifting the attachment over the schedule property on the ground that the property is mortgaged with the petitioner bank by the 2[nd] respondent who is the judgment debtor of this case. From the documents and from the case of petitioner it is clear that petitioner is only a mortgagee. The JD is the mortgagor and his right of equity of redemption is there with him. Petitioner being a mortgagee will get 1[st] charge over the property to realise the mortgage money. What can be sold for realisation of the decree in this case is the right of JD in the property. JD's right to redeem the mortgage is still there. That can be sold for in 5 F.A.O.No.29 of 2019 execution in this case. Even though there is attachment the right of petitioner will not be affected. Moreover as per the 1[st] respondent the decree holder he is ready to purchase the petition schedule property with the liability towards the petitioner. That is he is ready to purchase the right of the JD to redeem the mortgage. The petitioner has no absolute right over the property. Petitioner's right is only to get the mortgage money and the attachment will not affect the right of petitioner. In the circumstance, there is no need to lift the attachment.” 7. The learned Counsel appearing for the appellant would submit that in the light of provisions of Section 26E of the SARFAESI Act, the appellant being the secured creditor, has the priority over all other debts; even the debts due to the Government to realise the debt from the secured interest. In the light of such priority, the Sub Court, Ottapalam should not have proceeded against the property. The learned counsel would contend that the secured creditor in exercise of its prioritised charge over the property has the first right for recovery and therefore any step taken by the court against the property can be only in respect of the remainder, if any, of the assets realised by the appellant in a proceedings under Section 13 of the SARFAESI Act. 6 F.A.O.No.29 of 2019 8. In so far as the right of a secured creditor to have a priority over all other debts, including all revenue taxes, cesses and other rates payable to the Central or the State Government or local authority by virtue of the provision of the Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, there is no scope for a debate. This Court in **Travancore Devaswom Board v. Local Fund Audit [2020 (3) KLT 296]** and a Full Bench of the Madras High Court in **Assistant Commissioner (CT) v. Indian Overseas Bank [2017 (1) KLT SN 86]** held that the right of the secured creditor to realise the debt by sale of the security interest would take priority over all dues, including that in favour of the Government. 9. The Sub Court, in the impugned order, has in fact accepted the said position while observing that “the petitioner being a mortgagee will get the first charge over the property to realise the mortgage money”. The claim of the appellant is based on the contention that in the light of the priority of the secured creditor over all other debts, it has the right to first proceed against the property before any other creditor can have. On that premise, the appellant would contend that the 7 F.A.O.No.29 of 2019 attachment effected by the Court on 28.03.2016, which was after the creation of the mortgage in favour of the appellant, would not sustain in law and liable to be lifted. One of the contentions raised by the appellant in that context is that the 2[nd] respondent-mortgagor was bound to keep the schedule properties without any other lien, charge or liability until he repays the entire secured liability and gets the property released from the charge. The tenor of the said contention is that as long as the secured creditor realises the debt, either the mortgagor or any of his creditor should not proceed against the secured asset in any manner; even a court cannot have the right to proceed against such a property. 10. Section 13(2) of the SARFAESI Act empowers a secured creditor in a case where the secured debts is classified as a non-performing asset to demand by a notice in writing to discharge the liability of the debtor in full. If the debtor does not oblige the demand within the stipulated time, the secured creditor can proceed under Section 13(4) and resort to one or more of the measures mentioned therein to recover his secured debt. The measures provided for are,take over possession of secured assets, take over the 8 F.A.O.No.29 of 2019 management of the business of the borrower, appoint a manager, etc. Once the possession is taken over, the secured creditor may initiate steps for realisation of debt by having recourse to lease, assignment or sale of the secured asset. The mortgagor-debtor still has the right to pay the entire debt and get the secured assets released from the liability any time before the date of publication of notice for public auction under Section 13(8) of the SARFAESI Act. If the secured creditor after taking over possession of the property as provided in Section 13(4) of the Act, and sells it after complying with the conditions thereof, the purchaser gets title to the property free of all encumbrances as if it has been transferred by its owner, by virtue of the provisions of Section 13(6) of the SARFAESI Act. 11. In **Keechery Service Co-operative Bank Ltd. v. Sajitha Nizar @ Sajitha P. M. and others [2020 (6) KLT** **68]** , a Division Bench of this Court considered the question whether the purchaser of a secured asset from the secured creditor as per the provisions of Section 13(4) of the SARFAESI Act would be bound by the attachment made by a civil court. The Division Bench, after referring to the various 9 F.A.O.No.29 of 2019 ## decisions on the point, held: “The preponderance of judicial opinion leads to the irresistible conclusion that the sale of the mortgaged property in favour of the petitioner under Ext.P5 sale certificate under the Act is free of all encumbrances. The attachments effected subsequent to the mortgage created in favour of the bank do not affect the title and ownership of the petitioner over the subject property. Such attachments have no impact on the sale conducted under the Act and the same ceases to have any effect or fall to the ground the moment the sale is confirmed in favour of the petitioner.” 12. A similar question was considered by the Apex Court in **Shakeena and others v. Bank of India and others [2019 (11) SCALE 59]** . In that case, the secured creditor has issued a sale certificate in favour of the auction purchaser and thereafter the debtor made payment of the amount, which was sufficient to satisfy the debt due to the secured creditor. The registration of the sale certificate was taken thereafter and the purchaser had sold the property to a third party also. In the said fact situation, the Apex Court held,- “29. A fortiorari, it must follow that the appellants have failed to exercise their right of redemption in the 10 F.A.O.No.29 of 2019 manner known to law, muchless until the registration of the sale certificate on 18th September, 2007. In that view of the matter no relief can be granted to the appellants, assuming that the appellants are right in contending that as per the applicable provision at the relevant time (unamended Section 13(8) of the 2002 Act), they could have exercised their right of redemption until the registration of the sale certificate – which, indisputably, has already happened on 18th September, 2007. Therefore, it is not possible to countenance the plea of the appellants to reopen the entire auction process.” 13. The law laid down in the aforesaid decision is to the effect that once sale is confirmed as per the provisions of Section 13(8) of the Act, the purchaser would get title to the property free of all encumbrances and any attachment upon the property will not have any consequence thereafter. The principle that emanates from the aforesaid decisions is that an attachment of the secured asset after creation of a mortgage in favour of the secured creditor could be effaced once the sale is confirmed. 14. The learned counsel appearing for the appellant would contend that in the light of the provisions of Section 26E of the SARFAESI Act and Section 31B of the Recovery of 11 F.A.O.No.29 of 2019 Debts and Bankruptcy Act, the debt due to the secured creditor shall have priority over all other debts, including that of the Government, and therefore, the first right of sale is with the secured creditor. 15. In **State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others [(1995) 2 SCC 19]** , the Apex Court considered the priority of the debt due to the State, vis-a-vis, a mortgage debt. The contention raised on behalf of the bank was that there was already a mortgage when the statutory first charge came into existence and therefore the debt due to the mortgagee has the priority. The Apex Court, after referring to the provisions of Rajasthan Sales Tax Act, 1954, held that where a mortgage is created in respect of any property, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the redemption price. That does not however, mean that the property ceases to be property of the mortgagor. The title of the property remains with the mortgagor. In the light of the said position of law, the Apex Court further held that when a statutory first charge is created on the property, the properties subjected to the first 12 F.A.O.No.29 of 2019 charge is the entire property and the interest of the mortgagee is not excluded from the first charge. Accordingly, the contention of the bank was negatived. The said position of law has given way to the provisions of Section 26E of the SARFAESI Act, which was brought into the statute by the amendment with effect from 01.06.2016. 16. In **State Bank of India v. State of Kerala & others [2019 (5) KHC 330]** , a Single Bench of this Court, after referring to the earlier decisions on the topic, held,- “41. As has been extracted above, Section 26E of the SARFAESI Act provides that the debts due to any secured creditor shall be paid in priority over all other debts and all revenue, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority. Section 31B of the RDB Act takes this one step forward and elevates the right of the secured creditors to realise their debts, by sale of the secured assets, to enjoy priority and then re-affirms that such debts will be paid in priority over the revenue, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority. It is thus irrefragible and in fact, expressly conceded to by the learned Additional Advocate General that the Banks/Financial Institutions have the First Right to have their debts extinguished; but, as has been recorded 13 F.A.O.No.29 of 2019 above, the Revenue merely claims that they have right to sell the property first. This argument again is flawed because the 'First Charge' creating no right over the property, the Revenue cannot claim a First Right to proceed against it either in the face of the provisions of the SARFESI Act or RDB Act with which we are dealing in this case. In fact, on a closer look and in the ultimate analysis, the concept of 'First Charge' and 'debt being paid in priority' are fraternal twin provisions which virtually means the same - both giving the holder such rights, the benefit of selling the property and recovering their dues before any other.” 17. Relying on the said observations, the learned Counsel for the appellant would canvas for the position that the secured creditor has not only the priority to receive the debt due to it over all others, including Government, but also the right to first sell the property. On that premises, the learned Counsel contended that the attachment made by the Sub Court, Ottappalam, is liable to be lifted. The precise contention raised by the appellant on that aspect as stated in its petition filed before the Sub Court is that the 2[nd] respondent-mortgagor should have kept the schedule properties without any other lien, charge or liabilities, all time after creation of the security interest. 14 F.A.O.No.29 of 2019 18. It may be noted that as per the SARFAESI Act, any measure provided in Section 13(4) can be initiated after issuing a notice under Section 13(2), that too in respect of a declared non-performing asset. Till then the mortgagor has all the rights available to him under the provisions of the Transfer of Property Act, 1882. Going by the scheme of the SARFAESI Act, the provisions of the Act, the bar to exercise such rights shall be effective only when a security asset is proceeded against after declaring it a non-performing asset and never before. This view is sufficiently applied by sub-section (13) of Section 13 of the SARFAESI Act, which reads,- “No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.” 19. Section 35 of the SARFAESI Act deals with overriding effect for the provisions of the Act above all other laws for the time being in force. But that overriding effect is in regard to the inconsistent provisions alone. In that view of the matter, it is not able to accept the contention of the learned counsel for the appellant that once a security interest is 15 F.A.O.No.29 of 2019 created, the property cannot be subjected to any other liability, either voluntary or involuntary. The position of law is that once the process of sale of a secured asset interest as provided in Section 13(4) of the SARFAESI Act is contemplated, all liabilities upon the property, including an attachment by a court, would extinguish. It does not mean that a civil court loses its jurisdiction to attach a property in respect of which a security interest has been created in favour of a bank or a financial institution. 20. In **State Bank of India [2019 (5) KHC 330]** it was observed that the concept of 'First Charge' and 'debt being paid in priority' are fraternal twin provisions which virtually means the same - both giving the holder such rights, the benefit of selling the property and recovering their dues before any other. That observation cannot be understood as once a property is subjected to mortgage thereby became a security interest as defined in Section 2(zd) of the SARFAESI Act, no civil court can proceed against the same. The bar to create any lien, charge or liability on the property, after receipt of a notice under Section 13(2) of the Act, is only against the debtor, and not applicable to a civil court. Of 16 F.A.O.No.29 of 2019 course, despite there having an attachment by a civil court, the right of the secured creditor or his authorised representative to recourse to Section 13(4) of the SARFAESI Act, including sale of the security interest, is not affected. Once sale is confirmed, the effect of the attachment over the same by the civil court will extinguish also. We hasten to add that equity of redemption available to the mortgagor-debtor can certainly be attached and sold by a civil court as long as his right to pay off under the provisions of Section 13(8) of the SARFAESI Act subsists. In the event of sale by the civil court before such time, the auction purchaser, who steps into the shoes of the mortgagor, shall have the right of redemption as regulated by Section 13(8) of the SARFAESI Act. In view of what are stated above, we hold that the court below rightly had rejected the claim of the appellant. Hence, this appeal is devoid of any merit and is therefore dismissed. ## **Sd/-** ## **ANIL K. NARENDRAN, JUDGE** **Sd/P.G. AJITHKUMAR, JUDGE** dkr