Supreme Court (29.11.2006) in M/s Transcore vs Union Of India & Anr [Appeal (civil) 3228 of 2006] held that;
There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If any one of the three elements is not there, the doctrine will not apply.
In the present case, as stated above, the NPA Act (SARFAESI) is an additional remedy to the DRT Act. (RDDB) Together they constitute one remedy and, therefore, the doctrine of election does not apply.
The doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent.
Excerpts of the order;
Mr. Soli J. Sorabjee, learned senior counsel appearing on behalf of Indian Bank, submitted that the doctrine of election does not apply to curative relief. He submitted, that a creditor is entitled to choose one or more cumulative remedies open to him, unless precluded by statutory provisions or by the doctrine of election; that in the absence of any bar, it is open to the creditor to choose one or more of the cumulative remedies. Learned senior counsel submitted that under the scheme of NPA Act, a bank/ FI is under no disability to take recourse under Section 13 of NPA Act even after it has invoked Section 19 of DRT Act. He submitted, that the object of both the sections is to recover dues; that there is no inconsistency inherent or implied in the two remedies; that the doctrine of election applies in cases of inconsistent remedies. He submitted that, in the present case, the two remedies are not inconsistent to each other. He submitted that the judgment of this Court in the case of A.P. State Financial Corporation (supra) has no application because in that case this Court has held that the State Financial Corporation Act has expressly provided for the doctrine of election. Learned counsel submitted that the doctrine of election is a doctrine evolved by courts on equity. It is based on the principle that a man shall not be allowed to approbate and reprobate. If a person has chosen a particular remedy and has intentionally relinquished another remedy, he is debarred by the doctrine of election to pursue the remedy he has intentionally given up. Learned counsel submitted that a creditor is not precluded by the doctrine of election if he makes a choice of one or more cumulative remedies available to him. The adoption of remedies under Section 19 of DRT Act and under Section 13(4) of NPA Act are not inconsistent with each other. Both the remedies recognize the existence of the same facts, on the basis of which reliefs are claimed. In the case of election of remedies a party is confined to the remedy first chosen, precluding a resort to another, because the two remedies are inconsistent with each other, and not analogous, consistent and concurrent. Learned senior counsel submitted that a creditor is not concluded by the rule of election where he merely makes a choice of one or more consistent and cumulative remedies available to him. Thus, a creditor whose claim is secured by two written obligations falling due simultaneously has a right to proceed thereafter upon either or both of them to enforce payment of the amount due. In this connection, learned senior counsel placed reliance on Corpus Juris Secundam, Vol. XXVIII, para 13; American Jurisprudence, 2d, Vol. 25 and Snell's Principles of Equity, Twenty-Eighth Edition, page 495. Learned counsel urged that the interpretation suggested by the borrowers would not subserve the object of the NPA Act which is enacted for speedy recovery of debts. If a bank/FI is compelled or mandatorily required to withdraw its application under the proviso to Section 19 of DRT Act and, thereafter, invoke NPA Act, it would face a situation where Section 13(10) would fail. It would lead to further complications which would involve questions of limitation and delay in the speedy recovery of its dues. Learned counsel urged that the conclusion drawn by the Punjab & Haryana High Court in the case of Kalyani Sales Co. v. Union of India was erroneous because it states that once the bank/FI decides to proceed under the NPA Act, that Act imposes an obligation on the bank/ FI to withdraw the O.A. under Section 19 of DRT Act.
Mr. Ranjit Kumar, learned senior counsel appearing for Indian Bank, submitted that if notice under Section 13(2) of NPA Act was only a show cause notice then Section 13(3-A) was not required. He submitted that because Section 13(2) notice constituted an action taken under the Act, Section 13(3-A) becomes necessary because it gives an opportunity to the borrower to object to the notice. Learned counsel submitted that the NPA Act deals only with secured assets whereas the DRT Act deals with both secured and non-secured assets. He submitted that a secured asset is an asset which is owned by the bank/ FI and, therefore, it can act without intervention of the court. Learned counsel urged that in certain respects, the DRT Act did not provide for the remedies, which led to the enactment of the NPA Act. In this connection, he cited the example of take over of management of the business of the borrower which is provided for only in the NPA Act and not in the DRT Act.
Shri D. Dave, learned senior counsel appearing for Indian Bank' Association (IBA) submitted, that NPA Act has to operate de hors the DRT Act; that both the Acts operate within the same scheme but the DRT Act is a general Act whereas the NPA Act is the special Act. He submitted that a bank/FI is entitled to go back to the DRT under Section 13(10) which indicates that the NPA Act is a special Act vis-`-vis the DRT Act which is the general Act. He urged that the NPA Act is amplification of DRT Act. In this connection, it is pointed out that the concept of asset reconstruction and the concept of asset management is wider than the concept of recovery of debt under the DRT Act. Our attention was invited to Section 5 of the NPA Act which refers to acquisition of rights or interest in financial assets which concept is not there in DRT Act. Learned counsel, therefore, submitted that NPA Act is a special Act and, therefore, irrespective of the pendency of litigation under the DRT Act, acquisition of interest in financial assets can take place under the NPA Act. Learned senior counsel further pointed out, that under DRT Act a debt could be secured as well as unsecured; that under Section 9(f) of the NPA Act, a reconstruction company or a securitisation company is empowered for the purposes of assets reconstruction to take possession of secured assets without prejudice to the provisions contained in any other law for the time being in force. Therefore, even a reconstruction company can enforce security interest under Section 13 of the NPA Act without being restricted by the provisions of the DRT Act. Section 9(f) is put into service to show that at every stage, Parliament has ousted the jurisdiction of the courts and DRT to get the NPA liquidated at the earliest opportunity. Learned senior counsel submitted, that Section 19 of the DRT Act concerns the procedure which has to be followed by the tribunal; that it is a procedural section and, therefore, Section 19 of DRT Act cannot confer or allow jurisdiction to be retained by the tribunal. He submitted that by Section 13(3-A), Parliament has made a conscience decision that there will be no interference from DRT/ court at any stage, therefore, it states that a borrower cannot approach DRT against communication of reasons by a bank/ FI which shows that in the matter of NPA, Parliament has ruled out intervention by courts and tribunals. Learned senior counsel submitted that calling to the borrowers for hearing, the NPA Act shall remain suspended till leave is given by DRT. This interpretation, according to the learned senior counsel, defeats the very object behind enactment of the NPA Act. Lastly, he pointed out that Section 35 of NPA Act states that the Act shall override all other laws which are inconsistent with NPA Act. Similarly, Section 37 of NPA Act states that if any law is consistent with NPA Act then the NPA Act shall be treated as an additional Act. The NPA Act is made in addition to the Companies Act, 1956, the SEBI Act, 1992, the DRT Act, 1993 as well as the Securities Contracts (Regulation) Act, 1956 and, therefore, the doctrine of election has no application in this case. Learned counsel submitted that the very object for enacting the NPA Act is to introduce banking reforms including change in the DRT Act so as to include the provisions of the NPA Act therein and, therefore, withdrawal of the O.A. is not a condition precedent for invoking NPA Act.
Shri Rajiv Shakdhar, learned senior counsel appearing for ICICI Bank Ltd. submitted that Rule 2(b) of the Security Interest (Enforcement) Rules 2002 ("2002 Rules") states that a demand notice is the notice in writing issued by a secured creditor to any borrower pursuant to Section 13(2) of the NPA Act. Reliance is placed on the said rule to show that the notice under Section 13(2) is not a mere show cause notice, that it is a demand notice similar to Section 156 of the Income Tax Act. In this connection, learned counsel submitted, that Section 22 of the NPA Act refers to default in repayment of debt on the part of the borrower plus classification of his account as NPA; that once an account is classified as NPA then the account continues to remain as NPA even if there is a part payment. Learned counsel submitted that under Rule 3 of the 2002 Rules, the service of demand notice under Section 13(2) indicates the procedure to be followed in serving such notice and if the amount mentioned in the demand notice is not paid within the stipulated period then Rule 4 provides that the Authorised Officer of a bank/ FI shall proceed to realise the amount by adopting any one or more of the measures specified in Section 13(4). These rules are relied upon to show that the notice under Section 13(2) constitute an action taken under the NPA Act. Further, he pointed out that after giving of the demand notice, the debtor is debarred from dealing with the assets, vide Section 13(13) of NPA Act. He submitted that Section 13 of NPA Act deals with secured interest whereas Section 9 of the NPA Act deals with unsecured interest. Learned counsel submitted, that there is a basic difference between suits to recover debts and suits to enforce securities; that NPA Act deals with enforcement of securities and it does not wait for debts to crystallize and, therefore, O.A. filed in the DRT will not be required to be withdrawn in the event action by way of Section 13(2) notice is taken even before 11.11.2004. The doctrine of election would not apply to the proceedings under the NPA Act and the DRT Act. It is urged, that the nature, ambit and scope of the proceedings under the two Acts are different; that the legislative purpose for conferring the power on the secured creditors to enforce its security interest by taking recourse to Section 13(4) of NPA Act without intervention of the court is to free the secured creditors of the impediments contained in Section 69 of the TP Act. A secured creditor is now empowered by virtue of Section 13 of the NPA Act to take any of the measures including sale of the secured assets without intervention of the court and notwithstanding the limitations of Section 69 of the TP Act. The power of sale of property in a suit even prior to the passing of decree has been upheld by this Court by placing reliance on Order XL Rule 1(1)(d) CPC. In the circumstance, withdrawal of O.A. cannot be made a condition precedent for taking recourse to N.PA Act.
Mr. Dhruv Mehta, learned counsel appearing on behalf of the Punjab National Bank, submitted that the doctrine of election is for banks/ FIs. and not for borrowers. The reason is that a creditor has to see his debtor, it is the right of the bank to liquidate the asset which right is unfettered once a security or interest is created in favour of the bank/FI. [See Abdul Azeez v. Punjab National Bank (2005)127CompCas514(Ker)]. Learned counsel submitted that the purpose of enacting proviso to Section 19(1) is to bring in Order XXIII CPC. Learned counsel submitted that the doctrine of election applies only in case of inconsistent remedies and not in case of additional remedies. He urged that withdrawal of an application could be a condition precedent for alternate remedy, however, it cannot be a condition precedent for taking recourse to an additional remedy. Learned counsel urged that unlike SICA, in the NPA Act, 2002 there is no proviso saving limitation, and, therefore, if the argument of the borrowers is accepted, it could lead to a situation where the banks' action under NPA Act would be time barred. In any event, NPA Act, according to the learned counsel, is a later enactment and, therefore, it shall prevail over the DRT Act.
Ms. J.S. Wad, learned counsel for Central Bank of India, has adopted the above arguments advanced on behalf of the various banks.
The heart of the matter is that NPA Act proceeds on the basis that an interest in the asset pledged or mortgaged with the bank or FI is created in favour of the bank/ FI; that the borrower has become a Debtor, his liability has crystallized and that his account with the bank/ FI (which is an asset with the bank/FI) has become sub-standard.
Value of an asset in an inflationary economy is discounted by "time" factor. A right created in favour of the bank/ FI involves corresponding obligation on the part of the borrower to see that the value of the security does not depreciate with the passage of time which occurs due to his failure to repay the loan in time.
Keeping in mind the above circumstances, the NPA Act is enacted for quick enforcement of the security. The said Act deals with enforcement of the rights vested in the bank/ FI. The NPA Act proceeds on the basis that security interest vests in the bank/FI. The NPA Act proceeds on the basis that security interest vests in the bank/FI. Sections 5 and 9 of NPA Act is also important for preservation of the value of the assets of the banks/ FIs. Quick recovery of debt is important. It is the object of DRT Act as well as NPA Act. But under NPA Act, authority is given to the banks/ FIs, which is not there in the DRT Act, to assign the secured interest to securitisation company/ asset reconstruction company. In cases where the borrower has bought an asset with the finance of the bank/ FI, the latter is treated as a lender and on assignment the securitisation company/ asset reconstruction company steps into the shoes of the lender bank/ FI and it can recover the lent amounts from the borrower.
According to Snell's Equity (Thirty-first edition) at page 777, a dual obligation could arise on the same transaction, namely, A's obligation to repay a sum of money to B or some other obligation. In such a case, B can sue A for money or for breach of the obligation. However, B will often have some security which covers the obligation of A, say, in the form of an asset over which B can exercise his rights. B may be entitled to this security either by law or by operation of common law principles or under the transaction (contract). In addition, B may acquire a personal right of action against the third party. Security over the asset (property) may be obtained by mortgage, charge, pledge, lien etc. Security in the form of right of action against a third party is known as guarantee. Broadly, there are three types of security over the asset. One is where the creditor obtains interest in the asset concerned (mortgage). Second is securities in which the rights of the creditor depends on possession of the asset (pledge/ lien). The third is charge where the creditor neither obtains ownership nor possession of the asset but the asset is appropriated to the satisfaction of the debt or obligation in question (charge). The dichotomy, which is of importance, is that more than one obligation could arise on the same transaction, namely, to repay the debt or to discharge some other obligation.
Therefore, when Section 13(4) talks about taking possession of the secured assets or management of the business of the borrower, it is because a right is created by the borrower in favour of the bank/ FI when he takes a loan secured by pledge, hypothecation, mortgage or charge. For example, when a company takes a loan and pledges its financial asset, it is the duty of that company to see that the margin between what the company borrows and the extent to which the loan is covered by the value of the financial asset hypothecated is retained. If the borrower company does not repay, becomes a defaulter and does not keep up the value of the financial asset which depletes then the borrower fails in its obligation which results in a mis- match between the asset and the liability in the books of the bank/ FI. Therefore, Sections 5 and 9 talks of acquisition of the secured interest so that the balance sheet of the bank/ FI remains clean. Same applies to immovable property charged or mortgaged to the bank/ FI. These are some of the factors which the Authorised Officer of the bank/ FI has to keep in mind when he gives notice under Section 13(2) of the NPA Act. Hence, equity, exists in the bank/FI and not in the borrower. Therefore, apart from obligation to repay, the borrower undertakes to keep the margin and the value of the securities hypothecated so that there is no mis-match between the asset-liability in the books of the bank/FI. This obligation is different and distinct from the obligation to repay. It is the former obligation of the borrower which attracts the provisions of NPA Act which seeks to enforce it by measures mentioned in Section 13(4) of NPA Act, which measures are not contemplated by DRT Act and, therefore, it is wrong to say that the two Acts provide parallel remedies as held by the judgment of the High Court in M/s Kalyani Sales Co.. As stated, the remedy under DRT Act falls short as compared to NPA Act which refers to acquisition and assignment of the receivables to the asset reconstruction company and which authorizes banks/ FIs. to take possession or to take over management which is not there in the DRT Act. It is for this reason that NPA Act is treated as an additional remedy (Section 37), which is not inconsistent with the DRT Act.
In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If any one of the three elements is not there, the doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, page 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell's Equity (Thirty-first Edition, page 119), the doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.
In our view, the judgments of the High Courts which have taken the view that the doctrine of election is applicable are erroneous and liable to be set aside.
We have already analysed the scheme of both the Acts. Basically, the NPA Act is enacted to enforce the interest in the financial assets which belongs to the bank/ FI by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of NPA Act is recovery by non-adjudicatory process. A secured asset under NPA Act is an asset in which interest is created by the borrower in favour of the bank/ FI and on that basis alone the NPA Act seeks to enforce the security interest by non-adjudicatory process. Essentially, the NPA Act deals with the rights of the secured creditor. The NPA Act proceeds on the basis that the debtor has failed not only to repay the debt, but he has also failed to maintain the level of margin and to maintain value of the security at a level is the other obligation of the debtor. It is this other obligation which invites applicability of NPA Act. It is for this reason, that Sections 13(1) and 13(2) of the NPA Act proceeds on the basis that security interest in the bank/FI; needs to be enforced expeditiously without the intervention of the court/tribunal; that liability of the borrower has accrued and on account of default in repayment, the account of the borrower in the books of the bank has become non-performing. For the above reasons, NPA Act states that the enforcement could take place by non-adjudicatory process and that the said Act removes all fetters under the above circumstances on the rights of the secured creditor.
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