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Trivial mistake without grave prejudice not a sustainable stand – Supreme Court

In the case of M/S. L&T Housing Finance Limited Vs M/S. Trishul Developers and Anr. [Civil Appeal No. 3413 of 2020] Supreme Court set aside the judgement of the Karnataka High Court. The bench comprised of Justice L. Nageswara Rao, Justice Hemant Rao  and Justice Ajay Rastogi.

The appellant was a Housing Finance Company under National Housing Bank Act, 1987 and was notified as Financial Institution by the Department of Finance of the SARFAESI Act. The appellant indeed fell within the definition of secured creditor under the provisions of the SARFAESI Act and was entitled to initiate measures under the provision of the SARFAESI Act for enforcement of security interest created on the secured assets by the respondents (borrower/guarantor) in favour of the appellant (secured creditor).

The first respondent was a partnership firm registered under the Partnership Act, 1932 and was dealing in the real estate construction business as alleged and the second respondent was the partner of first respondent firm. The first respondent and its partners in carrying out its business obligations approached the appellant for seeking financial assistance and submitted a request to the appellant for term loan of Rs.20 crores for completion of its project. The appellant taking note of the request made by the respondents sanctioned Term Loan Facility to the tune of Rs. 20 crores towards completion of the project vide sanction letter by mortgaging the various immovable properties as a security for creating security interest in favour of the appellant.

It revealed from the record that the respondents at a later stage failed to maintain financial discipline and subsequently became a defaulter and because of the alleged breach of the terms and conditions of the Facility Agreement executed between the appellant (L&T Housing Finance Ltd.) and the respondents (M/s. Trishul Developers) towards completion of its project, the appellant served a demand notice to the respondents to pay the outstanding dues within the stipulated period mentioned in the demand notice.

Since the respondents failed to make their outstanding payment, under the given circumstances the appellant classified the account of the respondents as Nonperforming Assets (NPA) and sent a notice of demand under Section 13(2) of the SARFAESI Act calling upon the respondents to pay the outstanding dues of Rupees Sixteen Crores Ninety Seven Lakhs Fifty Four Thousand Eight Hundred and Fifty One Only, in terms of the notice with future interest till actual payment within sixty days from the date of the receipt of the demand notice.

Since the respondents failed to discharge their liability towards the appellant in terms of the demand notice, the appellant took further action in due compliance under Section 13(4) read with Section 14 of the SARFAESI Act and filed application before the competent authority for taking possession of the mortgaged properties and the collateral security of the respondents.

At this stage, the respondents proceeded in filing a Securitisation Application before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act assailing the issuance of demand notice under Sections 13(2) and 13(4) of the Act inter alia on various grounds. The learned Debt Recovery Tribunal vide its order set aside the demand notice on the premise that it had not been validly issued in the name of the appellant (“L&T Housing Finance Ltd.”) instead the name of the company had been mentioned as “L&T Finance Ltd.” and this defect was alleged not being curable after issuance of demand notice by another group company instead of secured creditor, held the proceedings not sustainable. The order of Debt Recovery Tribunal came to be challenged by the appellant in appeal before the Debt Recovery Appellate Tribunal (DRAT) and after the parties being heard, DRAT vide its order set aside the order of Debt Recovery Tribunal which came to be challenged by the respondents in a writ petition before the High Court of Karnataka. The High Court while setting aside the order of DRAT returned its finding in conformity with what was observed by the DRT in its order, which was the subject matter of appeal before the Supreme Court.

The appellant submitted that the proceedings initiated under the SARFAESI Act would not nullify on the mere technicality as being pointed out and the High Court without appreciating the material on record had reversed the finding returned by the DRAT in its extraordinary jurisdiction under Article 226 & 227 of the Constitution and if two views were possible, unless found to be perverse it was not justified for the High Court to reverse the finding of fact supported by the material on record and that needs interference of this Court.

Court observed that, “In the facts and circumstances, when the action has been taken by the competent authority as per the procedure prescribed by law and the person affected has a knowledge leaving no ambiguity or confusion in initiating proceedings under the provisions of the SARFAESI Act by the secured creditor, in our considered view, such action taken thereof cannot be held to be bad in law merely on raising a trivial objection which has no legs to stand unless the person is able to show any substantial prejudice being caused on account of the procedural lapse as prescribed under the Act or the rules framed thereunder still with a caveat that it always depends upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant prejudiced if any, being caused and there cannot be a straitjacket formula which can be uniformly followed in all the transactions.”

Court held that, “In our considered view, is wholly without substance for the reason that L&T Finance Ltd. and L&T Housing Finance Ltd. are the companies who in their correspondence with all its customers use a common letterhead having their self-same authorised signatory, as being manifest from the record and it is the seal being put at one stage by the authorised signatory due to some human error of ‘L&T Finance Ltd.’ in place of ‘L&T Housing Finance Ltd.’. More so, when it is not the case of the respondents that there was any iota of confusion in their knowledge regarding the action being initiated in the instant case other than the secured creditor under the SARFAESI Act for nonfulfillment of the terms and conditions of the Facility Agreement or any substantial prejudice being caused apart from the technical objection being raised while the demand notice under Section 13(2) was served under the SARFAESI Act or in the proceedings in furtherance thereof no interference by the High Court in its limited scope of judicial review was called for. Consequently, in our view, the judgment of the High Court is unsustainable and deserves to be set aside.”

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