Supreme Court of India · 2014
Harshad Govardhan Sondagar v. International Assets Reconstruction Co Ltd
(2014) 6 SCC 1
Court
Supreme Court of India
Bench
2-Judge Bench (A.K. Patnaik & V. Gopala Gowda JJ.)
Date
3 April 2014
Citation
(2014) 6 SCC 1
Background & Facts
The appellants in this batch of criminal appeals — Harshad Govardhan Sondagar among them — claimed to be tenants of different premises in Mumbai that the borrowers had mortgaged to different secured creditors. After the borrowers defaulted, their accounts were classified as NPAs and the borrowers did not pay within sixty days of the Section 13(2) notices, the secured creditors applied under Section 14 of the SARFAESI Act to the Chief Metropolitan Magistrate, Mumbai, to take possession of the premises. The Bombay High Court, following its earlier decision in M/s Trade Well, had held in International Assets Reconstruction Company Ltd v. Union of India that possession is taken by a non-adjudicatory process and that a tenant's remedy lies under Section 17 before the DRT.
The appellants' case was that they were not borrowers but lessees of the borrowers, entitled to remain in possession of the secured assets, and that if the High Court's view were implemented they would have to surrender possession to the Chief Metropolitan Magistrate and only then approach the DRT.
The case raised the question of how SARFAESI enforcement interacts with the rights of tenants in possession of mortgaged property who are not parties to the debt.
Key Issues Before the Court
Holdings of the Court
Holding 1 — A Lessee Under a Valid Lease Cannot Be Dispossessed
Where the lawful possession of the secured asset is with a lessee under a valid lease, “the secured creditor cannot take over possession of the secured asset until the lawful possession of the lessee gets determined” (para 15). Nothing in Section 13 provides that a lease stands determined when the secured creditor decides to take measures under it, and so long as the lease is not determined under Section 111 of the Transfer of Property Act, the lessee's possession is lawful (para 16). The secured creditor may still require the lessee to pay it the rent due to the borrower under Section 13(4)(d) (para 18).
Holding 2 — Test of a 'Valid Lease' (Section 65A TPA and Timing)
The Court laid down when a lease binds the secured creditor: (a) a lease made BEFORE the creation of the mortgage binds the mortgagee (para 11); and (b) a lease made AFTER the mortgage binds the secured creditor if the mortgage deed does not prohibit it and the lease satisfies Section 65A of the Transfer of Property Act, 1882 (para 12). But Section 13(13) of the SARFAESI Act overrides Section 65A by virtue of Section 35, so a lease made by the borrower after receiving the Section 13(2) notice, without the secured creditor's prior written consent, is not a valid lease (para 15). A lease for more than one year must be proved by a registered instrument; without one, the lessee is not entitled to possession for more than a year (para 27).
Holding 3 — Possession Only Where No Valid Lease Exists
If the lessee resists, the authorised officer “cannot evict the lessee by force” but must apply under Section 14, naming the person claiming to be lessee. The Chief Metropolitan Magistrate or District Magistrate must give that person and the secured creditor notice and a hearing and then decide. Only if there is in fact no valid lease made before the mortgage, or after it in accordance with Section 65A, or the lease stands determined under Section 111, can possession be delivered to the secured creditor (para 21). That decision can be challenged before the High Court under Articles 226 and 227 (para 22).
Holding 4 — No Section 17 Remedy for the Lessee (as Section 17(3) Then Stood); No Rent Court Injunction
The Court accepted that “any person” in Section 17(1) is wide enough to include a lessee, but held that Section 17(3), as it then stood, empowered the DRT to restore possession only to the borrower, so “there is no remedy available under Section 17 of the SARFAESI Act to the lessee to protect his lawful possession under a valid lease” (para 24). The Bombay High Court's contrary view was set aside (para 25). The rent courts under Section 33 of the Maharashtra Rent Control Act cannot grant an injunction against action under Sections 13 or 14, because of the second limb of Section 34 of the SARFAESI Act (para 26). Section 17(3) was later substituted by Act 44 of 2016 and now allows the DRT to restore possession to “the borrower or such other aggrieved person” who applied under Section 17(1).
Practical Implications
This judgment protects lawful lessees of mortgaged property while preserving the secured creditor's enforcement rights against the borrower. For secured creditors: before taking possession of tenanted property, verify whether any occupant holds under a lease that pre-dates the mortgage, or that complies with Section 65A TPA and was made before the Section 13(2) notice. The Court required the secured creditor's Section 14 application to be accompanied by an affidavit stating that the asset is not in the possession of a lessee under such a valid lease (para 18). The decisive factors are the validity and timing of the lease.
On the Court's scheme, a lessee who learns of the possession notice may resist by producing before the authorised officer proof that the lease was made before the mortgage, or under Section 65A, and has not been determined; the question is then decided by the Chief Metropolitan Magistrate or District Magistrate under Section 14 after hearing both sides (para 21). Borrowers cannot defeat enforcement by creating post-notice leases: a lease granted after the Section 13(2) notice without the secured creditor's consent is not a valid lease. Both lenders and occupants should preserve the lease deed, its registration, and proof of the date of its creation, since compliance with Section 65A TPA and the timing relative to the mortgage and the notice decide the outcome.
Relevant Statutory Provisions
Practical Application Note
If you are a secured creditor enforcing against occupied property, or a lessee in lawful possession of property that is subject to SARFAESI enforcement, our partner-led team advises on rights and strategy. The interplay between SARFAESI enforcement and a bona fide lease claim under Section 17 is fact-specific. This note is general legal information, not legal advice. Reach out to our team via WhatsApp for a confidential consultation on your specific matter.
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