Mere Procedural Lapse Under SARFAESI Act Cannot Make the Action Bad in Law if No Prejudice Caused: Supreme Court

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Supreme Court held that when a technical issue is alleged on procedural compliances under SARFAESI Act, it would not vitiate the proceedings unless some sustainable prejudice is caused due to the same.

Brief facts of the case

The appellant is a Housing Finance Company and a “secured creditor” under the provisions of the SARFAESI Act. The respondents are a partnership firm and a partner dealing in the real estate construction business. 

They had approached the appellant for financial help and based on the request received Term Loan Facility to the tune of Rs. 20 crores towards a project. Various immovable properties were mortgaged as security for creating interest.

The respondents soon defaulted and the appellant served a demand notice. The respondents failed again and the appellant classified the account as an NPA and sent another notice u/s 13(2) of the SARFAESI Act.

Instead of discharging their liability, they sent a reply to being conscious of the subject matter of the dispute. The letterhead used herein for the demand notice was the same as the one used when sanctioning the loan.

The appellant moved to the Debt Recovery Tribunal who dismissed the application. The ground was that it has not been validly issued in the name of the appellant L&T Housing Finance Ltd. The name of the company has been mentioned as L&T Finance Ltd as per the letterhead.

On an appeal to the DRAT, the DRT order was set aside. This order was challenged before the HC that agreed with the findings of DRT. This has now been appealed before the SC.

Arguments

The Appellant argued that the same letterhead has been used from the initial stage of correspondence until the demand notice. Both the companies, L&T Housing Finance Ltd and L&T Finance Ltd use a common letterhead. Only at one stage, due to oversight, the appellant inadvertently put the seal of the latter.

Plus, the respondents did not allege any large prejudice caused to them due to the error. Hence, a mere technical defect will not negate the proceedings.

The High Court has not appreciated the material on record and hence, it was not justified.

The Respondent argues that the salient defect has been noticed by the DRT. This was further confirmed by the High Court at the very start of the proceedings being initiated under the SARFAESI Act. Hence all the consequential proceedings initiated in furtherance thereof in the instant case cannot be said to be in due compliance with the SARFAESI Act. The appellant was under obligation to follow the procedure. Thus, no error has been committed by the High Court under its impugned judgment.

Court’s Observation

The Court observed that the respondent, from the initial stage, was aware of the procedure which is being followed by the appellant in its correspondence while dealing with its customers. This same practice was followed by the appellant when demand notice was served at a later stage. 

The demand notice explicitly indicated the execution of the Facility Agreement and the default being committed notice under Section 13(2) of the SARFAESI Act. 

The notice was served on the same pattern of the letterhead which is being ordinarily used by the appellant. There was not an iota of doubt is about the non-fulfillment of the terms and conditions of the Facility Agreement.

The reply of the respondents shows that there was no confusion on part of the respondent about the correspondence. They had tendered their justification and reason for the non-compliance. The Court further marks that at this stage no objection was raised by the respondents about the defect in compliance with the SARFAESI Act provision. 

The objects were raised for the first time before the DRT.

The Court opined that:

“When the action has been taken by the competent authority as per the procedure prescribed by law and the person affected has a knowledge leaving no ambiguity or confusion in initiating proceedings under the provisions of the SARFAESI Act by the secured credit, such action taken thereof cannot be held to be bad in law merely on raising a trivial objection which has no legs to stand unless the person can show any substantial prejudice being caused on account of the procedural lapse.”

In this case, the objections were trivial and technical and were a feeble attempt at negating the proceedings against them. They failed to justify the error in the procedure. Further, the two companies use a common letterhead having their self-same authorized signatory and the ‘non-compliance’ alleged here is due to human error. 

Court’s Order

The bench held that since the respondent did not have any confusion about the action initiated against them nor was any substantial prejudice caused to the error, no HC was wrong in interfering. Hence the impugned judgment is set aside and the appeal succeeds.

CLICK HERE TO VIEW THE JUDGEMENT.


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