Benami Property Cannot Be Released From Attachment On Ground Of Bank's Security Interest: SAFEMA Tribunal

The Appellate Tribunal under SAFEMA at New Delhi has ruled that a bank's security interest under the SARFAESI Act cannot secure release of a property found to be benami from attachment under the Benami Act.

A coram of Member Balesh Kumar and Member Rajesh Malhotra while refusing to order the release of one such property, observed,

"If the proposition of the SBI is accepted then the very purpose/intent as well as the object of the Benami Act would be defeated as unscrupulous person after acquiring a Benami Property and on detection of the same will become cautious. Thereafter, in order to escape from the rigours of the PBPT, Act, they will receive financial assistance from the banks/financial institutions by mortgaging the benami properties and then intentionally default to pay back the loan amount. The said banks/secured creditor would be appealing by suggesting that they have priority over the assets/ properties and thereby, the said unscrupulous person/s would be successful in achieving their ulterior motive by not getting their illegally gotten benami properties attached under the Benami Act"

“Therefore, once the property is declared as Benami, the benamidar loses its rights over the property and the property cannot be claimed by him as his assets and the said property cannot be mortgaged against any loan facility.”, it added. 

The tribunal dismissed State Bank of India's appeal against confirmation of attachment of a flat in Gwalior. It, however, gave the bank liberty to pursue recovery from two other properties mortgaged as security and approach the Adjudicating Authority under the Benami Act if it is unable to recover its complete dues from them.

The case concerns Flat B-304 on the third floor of Blue Berry Apartment, DB City, Gwalior. The flat was purchased in the name of Surendra Kumar Agrawal, but the authorities found that Sandeep Mangal alias Sonu Mangal was the beneficial owner.

The order records that the flat was initially booked in Sandeep's name. He also handled the negotiations for its purchase. The authorities found that he made payments towards the property and its housing loan. Surendra, who stated that he earned ₹5,000–₹7,000 a month, was found to have no capacity to purchase the property.

The property was kept as an equitable mortgage and collateral security for a ₹2.28 crore term loan sanctioned by SBI to Maa Kaila Devi Developers and Hotels Pvt. Ltd. Sandeep was a director of the company.

The Initiating Officer provisionally attached the flat under the Prohibition of Benami Property Transactions Act, 1988, or PBPT Act. The Adjudicating Authority later confirmed the attachment.

SBI argued that it had not been given a proper opportunity to participate in the proceedings. It also relied on Section 26-E of the SARFAESI Act, which gives registered secured creditors priority in payment of their debts over other debts and government dues.

The bank contended that its security interest had been registered before the attachment. It therefore argued that its rights over the property should prevail.

The tribunal rejected SBI's argument on notice. It noted that the bank had itself started recovery proceedings under SARFAESI through notices dated December 3, 2018 and March 2, 2019. SBI had also sent a representation to the Initiating Officer, Approving Authority and Adjudicating Authority on April 2, 2019. The tribunal held that these actions showed the bank was aware of the ongoing adjudication proceedings.

The tribunal further recorded that the notice under Section 26(1), the reference under Section 24(5) and the relied-upon documents had been served on SBI by speed post on June 18, 2018. It therefore rejected the bank's contention that it had not received notice.

Section 26(1) requires the Adjudicating Authority, after receiving a reference under Section 24(5), to issue notice to specified persons. The notice gives them an opportunity to furnish documents, particulars, and evidence concerning the property. The provision also covers interested parties, including a banking company, and persons making a claim to the property.

The main dispute was whether the flat, despite being mortgaged to SBI as collateral security, should be released from attachment under the Benami Act.

The tribunal observed that the provisional attachment order under the Benami Act is not meant to recover any dues. It is an interim measure in a process that can ultimately result in confiscation of the property.

Section 27 deals with confiscation of property held benami. Under Section 27(3), such property can be confiscated to the Central Government. Section 27(4) further provides that a right created in the property in favour of a third person, with a view to defeat the purposes of the Benami Act, is null and void.

The tribunal rejected SBI's argument that its SARFAESI security interest should result in release of the property. It observed that accepting the bank's argument could allow a person holding benami property to mortgage it and later rely on the bank's security interest to defeat attachment under the Benami Act.

The order also examined the other securities available to SBI. The loan had been extended to Maa Kaila Devi Developers and Hotels Pvt. Ltd., while its directors had furnished personal guarantees and mortgaged two other properties with the bank.

The two properties were a commercial shop at Ashiya Plaza in Gwalior and a flat in Purushottam Vihar Colony, also in Gwalior. The tribunal observed that the properties were sufficient to recover the outstanding loans. It held that SBI should exercise its recovery rights against them first.

If SBI is unable to recover its complete outstanding dues from those properties, the tribunal gave it liberty to file its claim before the Adjudicating Authority under Section 27(2) of the Benami Act.

The tribunal accordingly dismissed SBI's appeal with the liberty set out in the order.

For Appellant: Advocate Chandrachur Bhattacharyya

For Respondents: Advocates Kanhaiya Singhal, SPP, Prasanna, Ajay Kumar and Amrita Kumari