Supreme Court in the case of L&T Housing Finance Limited v. Trishul Developers and Another1 has held that a trivial procedural lapse will not render the entire proceeding initiated by a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 ("SARFAESI Act") bad in law unless the alleged procedural lapse causes substantial prejudice to the debtor.
L&T Housing Finance Company Ltd. (also "Secured Creditor") extended certain financial assistance to the debtor. The debtor defaulted in repayment of the amount and the account was declared as Non-Performing Asset by Secured Creditor. Subsequently, the Secured Creditor initiated securitization proceedings by issuing a demand notice under Section 13(2) of the SARFESI Act ("Demand Notice"). It is relevant to note here that Demand Notice was issued on the letter head of L&T Finance (Home Loans) which is a separate entity from the secured creditor. Seal on the said Demand Notice was also that of L&T Finance (Home Loans). On the footer of the Demand Notice however, L&T Housing Finance Company Ltd. was printed.
The debtor received the Demand Notice however, instead of repaying the dues, it issued a reply to the said Demand Notice under Section 13(3A) of the SARFASEI Act. However, in its reply it did not raise any objection with regard to misconception or confusion with regard to identity of Secured Creditor. On failure of repayment, the Secured Creditor took further action under Section 13(4) read with Section 14 of the SARFAESI Act and filed an Application before the competent authority for taking possession of the mortgaged properties. The debtor thereafter, preferred a Securitisation Application under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal ("DRT") interalia on the ground that Notice under Section 13(2) of the SARFAESI Act is defective. DRT as well as Debts Recovery Appellate Tribunal turned down this contention of the debtor and the Securitisation Application stood dismissed. At the instance of the debtor matter thereafter reached the High Court of Karnataka in Trishul Developers v. L&T Housing Finance Limited2. The High Court while holding that impugned notice was defective observed as under:
" 18. We are of the opinion that the defect in the demand notice dated 14.06.2017 goes to the root of the matter. We uphold the contention of the petitioner that as on date there is no valid demand notice issued by the secured creditor i.e., 'L&T Housing Finance Ltd'. We also hold that the petitioner is legally entitled to raise the issue of locus, dehors such issue not being raised in the reply notice issued by the petitioner to the demand notice dated 14.06.2017. Another reason for holding so is that it is possible that the petitioner did not notice the defect in name of the entity closely, moreso, because of the similarity in the two names, and once the same was noticed, the petitioner proceeded to contest the issue on the grounds stated above. The argument of the first respondent that no apparent prejudice is caused to the petitioner, cannot be countenanced for the reason that the demand notice being invalid, having not been issued by the secured creditor, a demand made by a person or legal entity who is not the secured creditor is definitely prejudicial to the interest of the petitioner.
The High Court rejected contention of the Secured Creditor that no prejudice is being caused to the borrower by the alleged lapse and held that the Demand Notice was defective as the same was issued by another entity i.e. L&T Finance which was not the secured creditor. While holding so the High Court was fully conscious of the fact that L&T Housing Finance Company Ltd. was printed on the footer of the said Demand Notice. It further held that a plea not raised by the debtor in its reply to the Demand Notice can be raised before the DRT in proceedings under Section 17 of the SARFAESI Act.
Thereafter, at the instance of Secured Creditor matter ultimately reached the Supreme Court which held that alleged lapse in the Demand Notice is a trivial procedural lapse which does not cause substantial prejudice to the borrower and thus will not vitiate proceedings initiated by the secured creditor under the SARFAESI Act. The Supreme Court observed as that:
"19. In the facts and circumstances, 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 creditor, in our considered view, 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 is able to show any substantial prejudice being caused on account of the procedural lapse as prescribed under the Act or the rules framed thereunder still with a caveat that it always depends upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant prejudiced if any, being caused and there cannot be a straitjacket formula which can be uniformly followed in all the transactions.
Court further held that,
"21. The submission made by the respondent's counsel that the notice under Section 13(2) of the Act was served by the authorised signatory of "L&T Finance Ltd." and that was not the secured creditor in the facts of the case, in our considered view, is wholly without substance for the reason that L&T Finance Ltd. and L&T Housing Finance Ltd. are the companies who in their correspondence with all its customers use a common letterhead having their self-same authorised signatory, as being manifest from the record and it is the seal being put at one stage by the authorised signatory due to some human error of 'L&T Finance Ltd.' in place of 'L&T Housing Finance Ltd.'. More so, when it is not the case of the respondents that there was any iota of confusion in their knowledge regarding the action being initiated in the instant case other than the secured creditor under the SARFAESI Act for nonfulfillment of the terms and conditions of the Facility Agreement or any substantial prejudice being caused apart from the technical objection being raised while the demand notice under Section 13(2) was served under the SARFAESI Act or in the proceedings in furtherance thereof no interference by the High Court in its limited scope of judicial review was called for. Consequently, in our view, the judgment of the High Court is unsustainable and deserves to be set aside."
The Supreme Court thus reversed the findings of the High Court and held that letter head and seal of different entity would not make the Demand Notice bad and illegal because the debtor had no confusion with regard to identity of Secured Creditor. It was persuaded to arrive at this finding due to the fact that the debtor did not take this plea in its reply under Section 13 (3A) of the SARFAESI Act and rather justified its non-compliance to the demands made in the Demand Notice.
The judgment gives much needed clarity that strict procedural compliance of the SARFAESI Act is not mandatory and that the proceedings under the SARFAESI Act can be set aside only when substantial prejudice is caused to the debtor as a result of the alleged procedural lapse, thus leaving room for human error. However, the Court made it clear that it is a factual question dependent on the facts of each case to decipher the nature of the procedural lapse and the prejudice caused, if any, as there cannot be a straightjacket formula to be followed for such cases.
Footnotes
1. (2020) 10 SCC 659
2. 2019 SCC OnLine Kar 684
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