High Court of Kerala (23.12.2022) in Mr. Mohan Sundaram Vs. Punjab National Bank [R.C. Rev. Nos.184, 185, 191, 192 and 193 of 2015] held that;
If a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. The lease has to be determined in accordance with Section 111 of the TP Act for determination of leases.
If a tenancy under law comes into existence after the creation of a mortgage, but prior to the issuance of notice under Section 13(2) of the Sarfaesi Act, it has to satisfy the conditions of Section 65-A of the TP Act.
In any case, if any of the tenants claim that he is entitled to possession of a secured asset for a term of more than a year, it has to be supported by the execution of a registered instrument.
In the absence of a registered instrument, if the tenant relies on an unregistered instrument or an oral agreement accompanied by delivery of possession, the tenant is not entitled to possession of the secured asset for more than the period prescribed under Section 107 of the TP Act.
We are therefore of the view that the Bank would certainly fall within the scope of the expression “public institution” as contained in Section 11(7) of the Act. [ Kerala Buildings (Lease and Rent Control) Act, 1965]
A reading of the extracted provision [section 13 r/w section 17(4A)] in the SARFAESI Act would indicate beyond doubt that a secured creditor in terms of the said provision is empowered to do all that is possible for realising the secured asset. If that be so, it cannot be said that a secured creditor is not empowered to initiate proceedings for eviction of a tenant from a secured asset as part of the secured creditor’s right to realise the same.
If that be so, it cannot be said that a Bank is not entitled to institute an application for eviction of a tenant from a secured asset taken over by it invoking the provisions of the SARFAESI Act for the purpose of sale.
Excerpts of the order;
The tenants in five eviction petitions instituted under Sections 11(3) and 11(7) of the Kerala Buildings (Lease and Rent Control) Act, 1965 (the Act) by a common landlord in respect of five different premises in a commercial complex, are the petitioners in these revision petitions. The eviction petitions were tried together. The landlord in the proceedings is a public sector Bank. The Rent Control Court rejected the claim of the landlord under Section 11(3) and ordered eviction of the tenants under Section 11(7). Though the Appellate Authority took the view that the landlord in a case of this nature ought to have invoked the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), it dismissed the appeals. The tenants are aggrieved by the decisions of the authorities below and hence, these revision petitions.
# 2. The subject matter of the proceedings belonged to one Kasi Viswanathan and his brothers. They mortgaged the premises to the Bank to secure repayments of the credit facilities availed by them from the Bank. When the borrowers committed default in repaying the dues, the Bank initiated proceedings under the SARFAESI Act in respect of the premises and secured symbolic possession of the same. The eviction petitions were instituted by the Bank thereupon, stating that the Bank is a public institution; that they intend to sell the subject premises for realizing the debts due from the mortgagers; that the premises would fetch its true value only if the same is sold without encumbrances and that the tenants are, therefore, to be evicted from the premises for the said purpose. The tenants contested the proceedings mainly contending that the Bank cannot be said to be a public institution within the scope of Section 11(7) of the Act; that even if it is so, the Bank cannot be said to be the landlord of the tenants for the purpose of instituting the eviction petitions and that a tenant cannot be evicted invoking Section 11(7) for the purpose of enabling the Bank to sell the tenanted premises. As noted, the Rent Control Court ordered eviction of the tenants under Section 11(7) of the Act. In appeals, as noted, even though the Appellate Authority found that the remedy of the landlord in a case of this nature is under the provisions of the SARFAESI Act, it chose to dismiss the appeals as not maintainable.
# 3. Heard the learned counsel for the tenants as also the learned counsel for the Bank.
# 4. The learned counsel for the tenants argued persuasively that the Bank cannot be said to be a public institution within the scope of Section 11(7) of the Act and even if so, the Bank cannot be said to be the landlord of the tenants. It was also argued by the learned counsel that having regard to the object of the Act, it cannot be said that a tenant in a premises could be evicted under Section 11(7) so as to enable the landlord to sell the tenanted premises. According to the learned counsel, such a need will not fall under Section 11(7).
# 5. We have examined the contentions raised by the learned counsel for the tenants.
# 6. Before considering the question as to whether the decision of the Rent Control Court suffers from any illegality, irregularity or impropriety, it is necessary for us to consider the question whether the Appellate Authority was justified in taking the view that the eviction petitions are not maintainable. It is seen that it is in light of the decision of the Apex Court in Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd., (2014) 6 SCC 1, that the Appellate Authority took the view aforesaid.
# 7. It is seen that the pleadings of the Bank in the eviction petitions are not of the expected standard, especially in a case of this nature. The common paragraph 2 in the eviction petitions reads thus:
“As the below scheduled property was in occupation of the respondent- tenant, the petitioner- Bank as secured creditor and having stepped into the shoes of landlord (borrower), the petitioner could not avail legal remedy for evicting the respondent under the SARFAESI Act. The law contemplates that the secured creditor who has been delivered symbolic possession and has thereby stepped into the shoes of the landlord, shall evict the tenant ie respondent herein as per provisions of the BLRC act.”
Even though it is not categorically pleaded in the eviction petitions that the tenants were occupying the premises when security interest was created in respect of the same in favour of the Bank by way of mortgage, it is seen that both the Bank as also the tenants were proceeding as if the creation of security interest in respect of the premises in favour of the Bank was subject to the tenancies. It was clarified by the Apex Court in Harshad Govardhan Sondagar that in such cases, the lessee will have the right to enjoy the leased property in accordance with the terms and conditions of the lease. Paragraph 16 of the said judgment reads thus:
“16. A “secured asset” has been defined in Section 2(zc) of the SARFAESI Act to mean the property on which the security interest is created. In case of an immovable property, a security interest is created in a secured asset by way of a mortgage in favour of the secured creditor. There may be cases where before the mortgage is created in respect of an immovable property, the borrower had already leased out the immovable property in favour of a lessee either as the owner or as a person competent or authorised to transfer the immovable property in accordance with Section 7 of the Transfer of Property Act. If such a lease is made, by virtue of Section 8 of the Transfer of Property Act, the lessee will have the right to enjoy the leased property in accordance with the terms and conditions of the lease irrespective of whether a subsequent mortgagee of the immovable property has knowledge of such a lease or not.” (underline supplied)
It was also clarified by the Apex Court in the said decision that in such cases, where there is a valid lease created before the mortgage and the lease has not been determined in accordance with the provisions contained in Section 111 of the Transfer of Property Act, the authorities cannot pass an order for delivering the possession of the secured asset to the secured creditor. The relevant portion of paragraph 28 of the judgment reads thus:
“28. . . . . . . . . . . . . . . When, therefore, a lessee becomes aware of the possession being taken by the secured creditor, in respect of the secured asset in respect of which he is the lessee, from the possession notice which is delivered, affixed or published in sub-rule (1) and sub-rule (2) of Rule 8 of the Security Interest (Enforcement) Rules, 2002, he may either surrender possession or resist the attempt of the secured creditor to take the possession of the secured asset by producing before the authorised officer proof that he was inducted as a lessee prior to the creation of the mortgage or that he was a lessee under the mortgagor in accordance with the provisions of Section 65-A of the Transfer of Property Act and that the lease does not stand determined in accordance with Section 111 of the Transfer of Property Act. If the lessee surrenders possession, the lease, even if valid, gets determined in accordance with clause (f) of Section 111 of the Transfer of Property Act, but if he resists the attempt of the secured creditor to take possession, the authorised officer cannot evict the lessee by force but has to file an application before the Chief Metropolitan Magistrate or the District Magistrate under Section 14 of the SARFAESI Act and state in the affidavit accompanying the application, the name and address of the person claiming to be the lessee. When such an application is filed, the Chief Metropolitan Magistrate or the District Magistrate will have to give a notice and give an opportunity of hearing to the person claiming to be the lessee as well as to the secured creditor, consistent with the principles of natural justice, and then take a decision. If the Chief Metropolitan Magistrate or the District Magistrate is satisfied that there is a valid lease created before the mortgage or there is a valid lease created after the mortgage in accordance with the requirements of Section 65-A of the Transfer of Property Act and that the lease has not been determined in accordance with the provisions of Section 111 of the Transfer of Property Act, he cannot pass an order for delivering possession of the secured asset to the secured creditor. But in case he comes to the conclusion that there is in fact no valid lease made either before creation of the mortgage or after creation of the mortgage satisfying the requirements of Section 65-A of the Transfer of Property Act or that even though there was a valid lease, the lease stands determined in accordance with Section 111 of the Transfer of Property Act, he can pass an order for delivering possession of the secured asset to the secured creditor.” (underline supplied)
It is thereafter that Sub-section (4A) was added to Section 17 of the SARFAESI Act. The said provision reads thus:
“(4A) Where—
(i) any person, in an application under sub-section (1), claims any tenancy or leasehold rights upon the secured asset, the Debt Recovery Tribunal, after examining the facts of the case and evidence produced by the parties in relation to such claims shall, for the purposes of enforcement of security interest, have the jurisdiction to examine whether lease or tenancy,—
(a) has expired or stood determined; or
(b) is contrary to section 65-A of the Transfer of Property Act, 1882 (4 of 1882); or
(c) is contrary to terms of mortgage; or
(d) is created after the issuance of notice of default and demand by the Bank under sub-section (2) of section 13 of the Act; and
(ii) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause (i), then notwithstanding anything to the contrary contained in any other law for the time being in force, the Debt Recovery Tribunal may pass such order as it deems fit in accordance with the provisions of this Act.”
The Bank has no case that the tenancy right or leasehold rights claimed by the tenants in the secured asset would fall under any of the sub-clauses of clause (i) of sub-section (4A) of Section 17. If that be so, according to us, the view taken by the Appellate Authority that the remedy of the Bank is to invoke the mechanism provided for under Section 14 of the Act for redressal of their grievances in respect of the tenancies, is unsustainable. We are fortified in the said view by the decision of the Apex Court in Vishal N. Kalsaria v. Bank of India, (2016) 3 SCC 762. Paragraphs 29 and 37 of the said judgment read thus:
“29. When we understand the factual matrix in the backdrop of the objectives of the above two legislations, the controversy in the instant case assumes immense significance. There is an interest of the Bank in recovering the non-performing asset on the one hand, and protecting the right of the blameless tenant on the other. The Rent Control Act being a social welfare legislation, must be construed as such. A landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Control Act, more so when the two legislations, that is the Sarfaesi Act and the Rent Control Act operate in completely different fields. While the Sarfaesi Act is concerned with non-performing assets of the banks, the Rent Control Act governs the relationship between a tenant and the landlord and specifies the rights and liabilities of each as well as the rules of ejectment with respect to such tenants. The provisions of the Sarfaesi Act cannot be used to override the provisions of the Rent Control Act. If the contentions of the learned counsel for the respondent Banks are to be accepted, it would render the entire scheme of all Rent Control Acts operating in the country as useless and nugatory. Tenants would be left wholly to the mercy of their landlords and in the fear that the landlord may use the tenanted premises as a security interest while taking a loan from a bank and subsequently default on it. Conversely, a landlord would simply have to give up the tenanted premises as a security interest to the creditor banks while he is still getting rent for the same. In case of default of the loan, the maximum brunt will be borne by the unsuspecting tenant, who would be evicted from the possession of the tenanted property by the Bank under the provisions of the Sarfaesi Act. Under no circumstances can this be permitted, more so in view of the statutory protections to the tenants under the Rent Control Act and also in respect of contractual tenants along with the possession of their properties which shall be obtained with due process of law.
x x x x x x
37. It is a settled position of law that once tenancy is created, a tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act. A tenant cannot be arbitrarily evicted by using the provisions of the Sarfaesi Act as that would amount to stultifying the statutory rights of protection given to the tenant. A non obstante clause (Section 35 of the Sarfaesi Act) cannot be used to bulldoze the statutory rights vested in the tenants under the Rent Control Act. The expression “any other law for the time being in force” as appearing in Section 35 of the Sarfaesi Act cannot mean to extend to each and every law enacted by the Central and State Legislatures. It can only extend to the laws operating in the same field”.
In Bajarang Shyamsunder Agarwal v. Central Bank of India, (2019) 9 SCC 94, even though a bench consisting of three learned Judges of the Apex Court disagreed with the view taken by the Apex Court in Vishal N. Kalsaria, inasmuch as it was held therein that Section 35 of the SARFAESI Act would apply only to the laws operating in the same field, it was reiterated in Bajarang Shyamsunder Agarwal also that if a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. Paragraph 24 of the said judgment reads thus:
“24. In our view, the objective of the Sarfaesi Act, coupled with the TP Act and the Rent Act are required to be reconciled herein in the following manner:
24.1. If a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. The lease has to be determined in accordance with Section 111 of the TP Act for determination of leases. As the existence of a prior existing lease inevitably affects the risk undertaken by the bank while providing the loan, it is expected of banks/creditors to have conducted a standard due diligence in this regard. Where the bank has proceeded to accept such a property as mortgage, it will be presumed that it has consented to the risk that comes as a consequence of the existing tenancy. In such a situation, the rights of a rightful tenant cannot be compromised under the Sarfaesi Act proceedings.
24.2. If a tenancy under law comes into existence after the creation of a mortgage, but prior to the issuance of notice under Section 13(2) of the Sarfaesi Act, it has to satisfy the conditions of Section 65-A of the TP Act.
24.3. In any case, if any of the tenants claim that he is entitled to possession of a secured asset for a term of more than a year, it has to be supported by the execution of a registered instrument. In the absence of a registered instrument, if the tenant relies on an unregistered instrument or an oral agreement accompanied by delivery of possession, the tenant is not entitled to possession of the secured asset for more than the period prescribed under Section 107 of the TP Act.”
Needless to say, in a case of this nature, insofar as the premises are situated in an area covered by the Act, the mortgagee is entitled to evict the tenant only in accordance with the provisions of the Act. However, insofar as the appeals were dismissed and the Bank is entitled to contend that the findings of the Appellate Authority ought to have been in their favour on other sustainable grounds on the principle contained in Order XLI Rule 22 of the Code of Civil Procedure, we are of the view that there is no impediment in dealing with the revision petitions on merits.
# 8. Let us now deal with the contentions raised by the learned counsel for the tenants. As noted, the application for eviction is one preferred under Section 11(7) of the Act. Section 11(7) of the Act reads thus:
“11(7) Where the landlord of a building is a religious, charitable, educational or other public institution, it may if the building is needed for the purposes of the institution, apply to the Rent Control Court for an order directing the tenant to put the institution in possession of the building.”
The first contention is that the Bank cannot be said to be a “public institution” within the scope of Section 11(7). The policy underlying the statutory provision aforesaid appears to be that institutions in the nature of one referred to in the Section shall not be subjected to the restrictions imposed in terms of the provisions of the Act in the matter of seeking eviction of their tenants, if the premises is needed for the purposes of the institution. Needless to say, an institution can be said to be a “public institution” as contained in Section 11(7) of the Act, only when the said institution is one advancing an object of public good or general public utility or public interest [See Welfare Stationery and Another v. South Indian Bank Limited and Others, 2014 KHC 252]. As noted, the landlord in the case on hand is one of the few Banks established under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The said statute is one enacted by the Parliament for the acquisition and transfer of undertakings of certain banking companies having regard to their size, resource, coverage and organisation in order to control the heights of the economy and to meet progressively, and serve better, the needs of development of the economy in conformity with the national policy and objectives and for matters connected therewith or incidental thereto. Going by the provisions contained therein, the paid-up capital of Banks established under the said statute except the paid-up capital raised from public by public issue or rights issue or by issue of bonus shares or preferential allotment or private placement, are vested and allotted to the Central Government and no shareholder of such Banks, other than the Central Government, shall be entitled to exercise any voting rights in respect of any shares held by him in excess of ten per cent of the total voting rights of all shareholders. Although the general superintendence, direction and management of the affairs and business of such banks are vested in its Board of Directors, the Board of Directors of such banks are constituted by the Central Government. Section 8 of the said statute provides that such banks in the discharge of its functions be guided by such directions in regard to the matters of policy involved in public interest as the Central Government may, after consultation with the Governor of the Reserve Bank, give. In other words, the Bank is one established by an Act of Parliament, to carry on in public interest, banking business with a view to meet progressively and serve better, the needs of development of the economy in conformity with national policy. Needless to say, unlike scheduled banks, the Bank is one established in public interest for advancing an object of public good. We are therefore of the view that the Bank would certainly fall within the scope of the expression “public institution” as contained in Section 11(7) of the Act. The contention raised by the tenants in this regard, in the circumstances, is liable to be rejected and we do so.
# 9. The next question is as to the locus standi of the Bank to institute the application for eviction as a landlord. As noted, the building of which the tenanted premises are part, was a secured asset of the Bank and the same was taken over by the Bank invoking the provision contained in Section 13 of the SARFAESI Act for realising the secured asset. Sub-sections (4) and (5) of Section 13 of the SARFAESI Act read thus:
“13. Enforcement of security interest.—
x x x x x x
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:—
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt:
Provided further that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt;
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.
(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.”
As evident from the extracted provision, in case the borrower fails to discharge his liability in full within the period specified, the secured creditor is empowered to take possession of the secured assets including the right to transfer by way of lease, assignment or sale for realising the secured asset. The secured creditor is also entitled to take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset. The secured creditor is also entitled to require any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. It is also clarified in the provision that any payment made by any person referred to above to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. A reading of the extracted provision in the SARFAESI Act would indicate beyond doubt that a secured creditor in terms of the said provision is empowered to do all that is possible for realising the secured asset. If that be so, it cannot be said that a secured creditor is not empowered to initiate proceedings for eviction of a tenant from a secured asset as part of the secured creditor’s right to realise the same.
# 10. The surviving question is as to whether the Bank is entitled to seek eviction of the tenants from a secured asset taken over by the Bank for sale for realising its dues. The argument is that if only the institution needs the building to be used by it for its purpose, can it invoke Section 11(7) and that it cannot invoke the said provision for the sale of the building. As noted, Section 11(7) enables a public institution to apply to the Rent Control Court for an order directing the tenant to put the institution in possession of the building if the building is needed for the purpose of the institution. The word “purpose” means that which a person sets before himself as an object to be reached or accomplished [See Ramanatha Iyer’s Law Lexicon]. As noted, the public institution in the case on hand is a Bank governed by the provisions contained in the Banking Regulation Act, 1949. Section 5 of the said Act provides that unless there is anything repugnant in the subject or context, “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Section 6 defines the form and business in which the banking companies may engage. Clauses (f) and (g) of sub-section (1) of Section 6 reads thus:
“6. Form of business in which banking companies may engage.
(1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:–
x x x x x x x
(f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;
(g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;
x x x x x x x x
Section 9 of the Act deals with disposal of non-banking assets. Section 9 reads thus:
“9. Disposal of non-banking assets.- Notwithstanding anything contained in section 6, no banking company shall hold any immovable property howsoever acquired, except such as is required for its own use, for any period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever is later or any extension of such period as in this section provided, and such property shall be disposed of within such period or extended period, as the case may be:
Provided that the banking company may, within the period of seven years as aforesaid, deal or trade in any such property for the purpose of facilitating the disposal thereof:
Provided further that the Reserve Bank may in any particular case extend the aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interest of the depositors of the banking company.”
As evident from the extracted provision, the first proviso to Section 9 enables the banking companies to deal or trade any such property for the purpose of facilitating the disposal thereof. In the light of the statutory provisions aforesaid, it cannot be said that the sale of a security received by a Bank is not one made towards achieving its purpose. If that be so, it cannot be said that a Bank is not entitled to institute an application for eviction of a tenant from a secured asset taken over by it invoking the provisions of the SARFAESI Act for the purpose of sale. This question also, in the circumstances, is answered against the tenants.
In the light of the discussion aforesaid, the revision petitions are devoid of merits and the same are, accordingly, dismissed.
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