No Need for Fresh Application under Section 14 of SARFAESI Act for Restoration of Possession in Case of Illegal Trespass by Borrowers

Prashant Shinde

Partner, Kale & Shinde Associates

Partner, Kale & Shinde Associates

Partner, Kale & Shinde Associates

12-Sept-2024

12-Sept-2024

In recent years, it has become a recurring issue for secured creditors to face challenges even after obtaining possession of secured assets under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). While creditors are empowered under Section 14 of the SARFAESI Act to take possession of assets after borrowers default, a troubling trend has emerged where borrowers illegally trespass the secured assets after creditors take possession. Despite the clear provisions of the law, District Magistrates (DMs) and Metropolitan Magistrates (MMs) often refuse to assist creditors in restoring possession, arguing that they lack the authority to re-execute orders. This article aims to highlight that, contrary to common perception, secured creditors do not need to file fresh applications under Section 14 of the SARFAESI Act to regain possession. Several recent judgments from Indian courts have clarified that magistrates can re-execute their orders without requiring creditors to go through the process of filing a fresh application. This ensures the rule of law and prevents secured creditors from being unfairly burdened by repeated legal proceedings.

Legal Context: Section 14 of the SARFAESI Act

Section 14 of the SARFAESI Act empowers DMs or Chief Metropolitan Magistrates (CMMs) to assist secured creditors in taking possession of secured assets. After a default, creditors, such as banks, may apply to the DM or CMM, who in turn order the seizure of assets, ensuring creditors have control over them to recover the dues. Once the possession is granted, creditors may sell or manage the assets to settle their dues.

However, after creditors take possession, borrowers often resort to trespassing, illegally taking back the assets. In these cases, creditors approach the authorities to enforce the possession order again, but many DMs or CMMs decline to help, citing that they are functus officio (without further jurisdiction), and creditors are left with no immediate remedy except filing fresh applications under Section 14.

Judicial Precedents Clarifying the Magistrate’s Powers

1. Nashik Merchant Co-operative Bank vs. The District Collector, Jalna & Ors. (WP-10069-2022 HIGH COURT OF JUDICATURE AT BOMBAY BENCH AT AURANGABAD)

Judgment Date: February 28, 2023

In this case, the Nashik Merchant Co-operative Bank secured possession of an asset under Section 14, but the borrower forcefully re-entered the property. When the bank approached the magistrate again, the DM refused to assist, arguing that he no longer had jurisdiction after the original order was executed. However, the Bombay High Court intervened, ruling that there is no prohibition under the SARFAESI Act for the DM to re-execute the order. The court directed the DM to assist the bank in restoring possession, stating that allowing borrowers to forcibly re-enter the property would undermine the rule of law.

2. Kotak Mahindra Bank Ltd. vs. The State of Maharashtra & Ors. (WP-6805-2023 HIGH COURT OF JUDICATURE AT BOMBAY)

Judgment Date: June 30, 2023

In a similar case, Kotak Mahindra Bank regained possession of an asset through the Section 14 process, only for the borrower to retake it illegally. When the bank sought help from the DM, it was refused. The Bombay High Court once again upheld the bank’s right, clarifying that DMs or MMs have the power to enforce the possession order as long as the asset remains secured. The court pointed out that the SARFAESI Act’s intent would be defeated if magistrates refused to act on illegal trespass by borrowers. The court reiterated that a fresh application was unnecessary.


3. Bank of India vs. M/s. Maharana Electricals Pvt. Ltd. & Ors. (WP-12813-2024 HIGH COURT OF JUDICATURE AT BOMBAY)

Judgment Date: September 9, 2024

In this case, Bank of India faced a similar issue when the borrower unlawfully entered the secured property after possession had been granted to the bank. The court maintained its previous stance and reaffirmed that there is no need for creditors to file fresh applications under Section 14. The court ruled that magistrates are empowered to re-execute possession orders and ensure the rule of law is maintained by evicting trespassers.


Key Points Derived from the Judgments

1. No Need for Fresh Application: All three judgments unequivocally establish that secured creditors do not need to file a fresh application under Section 14 if borrowers illegally trespass secured assets after creditors take possession. The initial order remains valid, and the DM or MM can re-execute it without requiring a new application.

2. Magistrates’ Powers to Re-Execute Orders: The courts have clarified that DMs and MMs do not become functus officio after executing the original possession order. As long as the creditor remains entitled to the possession of the secured asset, magistrates have the duty to assist in restoring possession in case of illegal trespass by the borrower.

3. The Purpose of SARFAESI Act: The core purpose of the SARFAESI Act is to aid financial institutions in recovering dues by allowing them to take control of secured assets. If borrowers can easily retake possession of assets after the execution of Section 14 orders, the Act would be rendered ineffective. The courts have emphasized that allowing such illegal actions would lead to chaos and disregard for the rule of law.

4. Enforcement of Rule of Law: The courts, through these judgments, have upheld the sanctity of legal orders and emphasized that borrowers cannot take the law into their own hands. Magistrates are expected to uphold legal principles and not shy away from enforcing possession orders multiple times if necessary.


Magistrates’ Role in Restoring Possession

Magistrates are central to the implementation of Section 14 orders, and they must understand the scope of their powers. The above judgments make it clear that they are obligated to assist creditors in retaining possession of secured assets, even in cases of illegal trespass. Once possession is granted under Section 14, magistrates retain the authority to enforce the order as many times as needed until the asset is successfully disposed of or otherwise resolved.

Magistrates must ensure that borrowers cannot frustrate the recovery process by resorting to unlawful means. Such actions erode public confidence in the justice system and create additional hardship for secured creditors.


Conclusion

In light of the recent judgments from Indian courts, it is evident that secured creditors do not need to file fresh applications under Section 14 of the SARFAESI Act in cases where borrowers illegally trespass secured assets. Magistrates have the power and duty to re-execute their original possession orders and assist creditors in regaining control of the secured property. Secured creditors should be aware of their rights under these judgments and not be dissuaded by refusals from DMs or MMs who mistakenly claim they lack jurisdiction.

The judicial precedents affirm the rule of law and ensure that creditors are not subjected to unnecessary legal hurdles in executing their lawful rights. It is essential for secured creditors to assert their rights in such situations and ensure that magistrates are held accountable for fulfilling their statutory duties.

Prashant Shinde

Partner, Kale & Shinde Associates

Partner, Kale & Shinde Associates

12-Sept-2024

contact@kaleandshinde.com

contact@kaleandshinde.com

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