One of my friends who invested in a food processing company gave a property as collateral. Since the MD of the company passed away, it was taken over by another company but the bank didn't release the collateral property of my friend, inspite of sending a legal notice. The new company has been operating the factory but hasn't been paying EMI towards the term loan taken by the previous company. Now the bank has issued notice to my friend and taken symbolic possession of the property. My friend approached an advocate who filed a writ petition in Karnataka high court asking for 30 days time and also send a 2nd notice to the bank to release the bank. Are there any options available to my friend if the bank doesn't release his property as collateral and continues to take physical possession to auction the property.
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1) what were terms and conditions of takeover by another company?
2) kindly clarify
3) you have stated that your friend invested in the company . has he given any personal guarantee ?
4) bank is at liberty to auction property given as collateral security on account of non payment of loan
The property was mortgaged to the property as a collateral security.
collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms.
If your friend has invested in the company and given the property as collateral security for the term loan then the bankers may not be able to release the proeprty before the entire loan amount along with interest has not been discharged in full.
Instead of approaching the bank for release of this property, your friend may approach the new company to repay the loan in respect of the previous company and get the collateral property released.
What was the terms and conditions by the new company which took over the previous company?
He has to act fast to prevent bank from taking physical possession of the property
You need to take stay order against bank to stop them
My friend was not a director or a borrower and was merely a shareholder, whose shares were purchased by the new management. My friend didn't have any access to the bank funds/accounts as he was a passive investor residing outside India. The new management replaced one of the collateral properties which is 20 times more than the value of the term plan. Another point is the factory, the primary asset has been in production and the new company has been selling the products. The bank is not going after the factory which is much more valuable than the loan. Not sure why the bank is trying to take possession of my friend's property which is valued very less. Can the bank discriminate and go after properties they chose?
Bank can go after collateral securities to recover loan amount
remedy of your friend is to sue the company to recover the amount realised by bank on sale of his property
Your friend stood as a guarantor to the bank for the loan by providing his property as collateral security for the purpose of the loan availed by the company, then what is that preventing the bank to bring the property to auction sale if the company is not repaying the loan availed by the company.
Since your friend has voluntarily signed the laong agreement as a guarantor agreeing that he has read and understood the conditions of the loan agreement, at this stage he will be subjected to the legal procedures as prescribed in law for the purpose.
If this was a secured loan, the lender may also choose to sell the asset given as collateral to recover the loan amount.
Your friend may be advised to file a writ petition before high court contending that the action initiated by the respondent Bank under section 14 is wholly arbitrary for the reason that instead of proceeding against the primary security i.e the assets of the company, the petitioner company has resorted to taking over possession of collateral security which happens to be residential premises of one of the Directors. The Bank should first proceed against the primary security and in case the amount sought to be recovered falls short of the amount due, it is only then the Bank can proceed to take possession of the collateral security.
Thanks for the response. Yes, my friend's advocate filed a writ petition in the Karnata high court (where the factory, ie primary asset and the bank is located). Should he also file a writ petition in AP since the collateral property is located in Andhra Pradesh? For AP, the advocate is asking for Rs 1 lakh as the fees is higher in AP, he was told. Is this true?
No need to file separate writ in AP as you have already filed writ petition on Karnataka HC
Writ petition only maintainable against illegal act. Normally HC doesn't give relief in sarfesi act matter under writ jurisdiction
The lawyer fee may differ from one lawyer to another.
The cause of action and the bank taking this action is located in Karnataka, hence there is no necessity to file a similar petition before another High court seeking same relief, the AP High court may not entertain a similar petition with the same cause of action and same relief.
Hence you may put a break to your anxiety in this regard.
Just to follow up and summarize: 1. My friend was never a director and 2. Since he is an NRI he didn't sign the loan agreement, but gave Power of attorney to his cousin (who was the MD and passed away last year) 3. The new management never paid EMI for the Term loan since March 2021. The bank sent notices to the guarantors in Jan 2022, but stopped further action since the factory was running. The bank all of a sudden has sent symbolic possession only to my friend's property. 4. My friend's advocate sent 2 notices to the bank asking the bank to release his collateral due to the change in management, on which he has no trust. The bank never even responded to these 2 notices. 5. My friend's advocate filed a writ petition in HC Karnataka and said the court granted 4 weeks of stay. But the advocate didn't provide any document indicating the stay, as he claims these are oral instructions. Is this possible? 6. Can the bank discriminate in choosing the property for physical possession even though the primary asset and the new property given by the new management is valued much higher than the term loan? 7. My friend brought an interested buyer of the property to the bank asking to take over the factory. But the bank refused his request, asking them to contact the current management. The current management doesn't want to sell the factory. Can the bank refuse a interested buyer's interest? A strong collusion between the new management (he is a powerful business man with political connections) and the bank is suspected. Under these circumstances, is there any possibility for my friend to save his property where his aged parents are living?
You were suggested to file a writ petition before high court on the lines as recommended.
You have mentioned that a writ petition has already been filed in this regard.
So you may wait for the court to dispose the case.
If you suspect your lawyer's integrity you may change the lawyer.
If you have been informed that the high court has granted 4 weeks stay. then you may wait for the response from the respondent bank after which you can proceed with your grievances and grounds seeking desired relief.
The bank cannot accept the collateral security without the consent of the property owner.
Since you have given a power of attorney deed to somebody authorizing him to act on your behalf, you cannot come out with a complaint against your power agent st this stage.
You are responsible/liable for the acts of your power agent, you cannot disclaim now.
Stay is only remedy
Court would pass written orders for stay
2) bank can refuse interested buyer request
3) your remedy is to sue the bank to direct bank to proceed against principal debtor ie company and guarantors for recovery of loan