Provision of SARFAESI Act empowering DMs to attach secured assets of borrowers directory: SC

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In a relief to banks and financial institutions (FIs), the Supreme Court Thursday held 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.

Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act mandates District Magistrate to deliver possession of a secured asset within 30 days, extendable to an aggregate of 60 days upon reasons recorded in writing, to banks.

The top court was faced with the question whether the provision was directory or mandatory in nature and if the banks or FIs can be made to suffer if DMs fail to act within 60 days in taking over the secured assets of defaulting borrowers and handing them back to the banks or FIs.

A bench of Justices L Nageswara Rao, Hemant Gupta and Ajay Rastogi upheld the Kerala High Court verdict which had said that the secured creditor would be “adversely affected if the provision is construed as mandatory and not directory” as it would also delay the process of taking physical possession of assets.

Justice Gupta, writing the judgement, said the SARFAESI Act was enacted to provide a machinery for empowering banks and financial institutions, so that they may have the power to take possession of secured assets and to 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, it said.

Referring to judgements, the top 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.

The time limit is to instill a confidence in creditors that the District Magistrate will make an attempt to deliver possession as well as to impose a duty on the District Magistrate to make an earnest effort to comply with the mandate of the statute to deliver the possession within 30 days and for reasons to be recorded within 60 days, it held.

“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 judgment said. The judgement referred to a constitution Bench verdict which had held that when provisions of a law relate to performance of a public duty and if the case is such that to hold acts done in neglect of this duty as null and void would cause injustice to persons who have no control over those entrusted with the duty, the practice of the courts should be to hold such provisions as directory.