Introduction

The Hon'ble Supreme Court of India ("Supreme Court"), in its order dated 5th January, 20231, in K Sreedhar vs. M/s Raus Constructions Private Limited and Others, while accepting the appeal filed by the Auction Purchaser, quashed the order of the Hon'ble High Court for the State of Telangana at Hyderabad ("High Court") and reiterated that for the exemption under Section 31(i) of the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI") to be taken with respect to the properties being agricultural, the burden of proof will be on the borrower/ the corporate debtor to prove that such secured properties are agricultural lands and are being used for agricultural activities.

Facts

  • Raus Constructions Private Limited ("Corporate Debtor") availed credit facilities from Indian Bank ("Secured Creditor") in 2012. The Secured Creditor initiated proceedings under SARFAESI and issued demand notice to the Corporate Debtor on account of default by the Corporate Debtor.
  • Pursuant to various demand notices being sent to the Corporate Debtor, mortgagors, guarantors, a consolidated Possession Notice detailing possession of 12 items of properties was issued on 5th February, 2016 and the possession was taken on the same day. Thereafter, the secured properties including the property in question being item no. 8 ("the Property"), was put on e-auction.
  • A writ petition was filed by the Corporate Debtor against the e-auction and sought stay of all proceedings initiated by the Secured Creditor under SARFAESI and the said writ petition was dismissed by the High Court as the securitization application2 ("DRT Case") was still pending in the Debt Recovery Tribunal - I, Hyderabad ("DRT"). The DRT Case was filed by the Corporate Debtor on the basis that the Property was agricultural land and therefore could not have been subject matter of auction under the provisions of SARFAESI.
  • A fresh e-auction was conducted on 17th February, 2017 where the Property was purchased by the auction purchaser ("Auction Purchaser") and the sale certificate was issued in favour of the Auction Purchaser on 23rd March, 2017.
  • By an order dated 16th May, 2019, the DRT dismissed the DRT Case filed by the Corporate Debtor on the basis that apart from revenue records, the Corporate Debtor did not file any evidence to prove that the Property was being used for any agricultural activities and further confirmed the validity of the sale certificate in favour of the Auction Purchaser.
  • Thereafter, the Corporate Debtor filed a writ petition3 in the High Court against the order of DRT, wherein the High Court allowed the said writ petition thereby setting aside the order of DRT and the sale certificate issued in favour of the Auction Purchaser ("Impugned Order").
  • The Auction Purchaser then filed an appeal in the Supreme Court against the Impugned Order.

Contentions

It was contended before the Supreme Court on behalf of the Auction Purchaser that:

  • The Property was not being actually used for agricultural purposes and no proof was filed to prove that agricultural activities were being carried out on the Property. Hence, the High Court has erred in setting aside the sale certificate in favour of the Auction Purchaser.
  • Reliance was placed on the judgement of Supreme Court in 'ITC Limited v. Blue Coast Hotels Limited and Others' 4 and 'Indian Bank and Another vs. K. Pappireddiyar and Another' 5 wherein it was observed that merely because in the revenue records the secured properties are shown as agricultural land is not sufficient to attract Section 31(i) of SARFAESI rather the properties in question ought to be actually used as agricultural lands at the time when the security interest was created.

It was contended for the respondent as follows:

  • The Property was shown as agricultural lands in the revenue records and therefore the Property has been exempted from the provisions of Section 31(i) of SARFAESI.

Findings

The Supreme Court noted that except the revenue records, the Corporate Debtor did not file any evidence to show that agricultural work was being done in the said Property. In fact, the Secured Creditor had produced photographs reflecting that no agricultural activities were being carried out.

The Supreme Court reiterated its findings in Blue Coast Hotels Limited and Others (Supra) wherein it held that "The High Court misdirected itself in holding that the land was an agricultural land merely because it stood as such in the revenue entries, even though the application made for such conversion lies pending till date."

In the case of Blue Coast Hotels Limited and Others (Supra), it was further observed that since no security interest can be created in respect of agricultural lands and yet it was so created, goes to show that the parties did not treat the land as agricultural land and that the debtor offered the land as security on this basis.

The Supreme Court also noted that in K. Pappireddiyar and another it had held that "The classification of land in the revenue records as agricultural is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply. Whether a parcel of land is agricultural must be deduced as a matter of fact from the nature of the land, the use to which it was being put on the date of the creation of the security interest and the purpose for which it was set apart."

Conclusion

Thus, the Supreme Court quashed the Impugned Order, and also held that the High Court has materially erred in shifting the burden of proof upon the Secured Creditor to prove that the Property was not used as non-agricultural land. Thus, the Supreme Court has once again reiterated that for a land to be considered as "agricultural" and therefore exempt under Section 31 of SARFAESI, the borrower should be able to prove that the land is actually put to use as an agricultural land or agricultural activities are ongoing on such land.

Footnotes

1. Judgement dated 5th January, 2023 in Civil Appeal No. 7402 of 2022

2. SA No.171/2016 in Debt Recovery Tribunal - I, Hyderabad

3. Writ Petition No. 12081/2019 in the High Court for the State of Telangana at Hyderabad

4. (2018) 15 SCC 99

5. (2018) 18 SCC 252

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.