Banks’ NPA pains just got worse

The Supreme Court ruling that rent laws outweigh loan recovery statutes increases banks’ bad-loans burden

Even as banks’ non-performing assets (NPAs) mount, a recent Supreme Court order is likely to add further to their misery. The apex court, in the matter of Vishal N Kalsaira vs Bank of India & Ors, has ruled that tenants 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 Act) cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act, the court observed, while holding that the securitisation law will not override various rent control laws enacted by state governments as it will leave tenants to the mercy of landlords.

“There is an interest of the bank in recovering the NPAs 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…,” the judgment stated.

The Sarfaesi Act empowers a secured creditor to take possession of the mortgaged property if the borrower fails to pay up after 60 days of the notice for default of loan repayment being served.

Rejecting the contention of the banks that the Sarfaesi Act overrides provisions of the Rent Control Act, the court said that if it were to be accepted, it would render the entire scheme of all rent control laws as “useless and nugatory since tenants would be left … 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.”

The top court also directed that enhanced rent by way of a conditional interim order shall be continued to be paid to the respective banks, which is to be adjusted towards debts of the debtors/landlords.

In this case, a rented property was mortgaged by the landlord for securing a loan from the Bank of India. When the landlord defaulted in paying dues, the bank moved the Chief Metropolitan Magistrate (CMM) under Section 14 of the Sarfaesi Act, seeking possession of the mortgaged properties. Pursuant to the civil court allowing the bank’s plea, the landlord issued notice to Kalsaira (the tenant), asking him to vacate the premises. However, the tenant moved the Court of Small Causes, Bombay, which restrained the landlord from obstructing the possession of the tenant during the pendency of the suit. The tenant also filed an intervention application seeking to stay the takeover possession of the mortgaged properties before the CMM, which dismissed his plea by holding that when the secured creditor takes action under the Sarfaesi Act to recover the possession of the properties for recovering its dues by selling the same in public auction, then it is not open for the court to grant an injunction under the rent laws.

Legal experts, however, feel that the judgment is flawed on many counts as it does not take into consideration the larger public interest. Barring lenders from proceeding under securitisation laws to evict the tenants residing in the tenanted premises which have been offered as collateral securities for loans is going to frustrate loan recovery. When the Sarfaesi Act came into force, the NPA burden stood at R1.1 lakh crore and has increased to R2.67 lakh crore at the end of March 2015 in case of PSU banks.

Lawyer Sanjay Kapur says the Supreme Court has recognised the right of an unregistered and oral tenancy. Such a right would create fetters on the right of the banks, which is conferred under Sections 13 and 14 of the Sarfaesi Act.

“With this judgment, the Sarfaesi Act would become unworkable. It is easy for the borrowers to put up bogus tenants, by producing back-dated rent receipts, thereby frustrating the entire intent and purpose of framing the Act … In case the rights of unregistered/oral tenants were considered necessary to be protected, it should have been subject to certain guiding principles/conditions, so as to make the Sarfaesi Act workable, viz. that a unregistered or oral tenancy would be accepted as valid, only where there are overwhelming documents in possession of such lessees like electricity bills, water bills, voter ID and passport to prove his possession,” Kapur says.

He further says that as per the Kalsaira case ruling, the CMM shall now be required to examine the evidence and adjudicate whether the mortgaged premises is in occupation of a tenant; the powers of the CMM under Section 14 were limited, otherwise, so far.

According to another Supreme Court lawyer R Chandrachud, the court has “overlooked the aspect that Sarfaesi Act has a public element involved”, as at the end of the day, the loans come from public money. “It misses the larger point that the landlord by merely leasing its premises does not lose other rights as he continues to be the owner of the property and still retains the right to sell and give the property as a collateral towards loan,” he says.

“As per settled legal position, judicial discipline envisages that a coordinate bench follows the decision of an earlier coordinate bench. If the coordinate bench does not agree with the principle of law enunciated by another bench, the matter may be referred only to a larger bench,” adds Kapur.

indu.bhan@expressindia.com