Scope of Agricultural lands as security interest vis-à-vis SARFAESI ACT By: Jayesh Dolia, R.V.Prabhat and Ashwin Kumar super article congrats

Scope of Agricultural lands as security interest vis-à-vis SARFAESI ACT
By: Jayesh Dolia, R.V.Prabhat and Ashwin Kumar
(Jayesh Dolia is an Advocate practicing before Madras High Court. He can be reached at doliajayesh@gmail.com. R.V. Prabhat is an Advocate practicing in Delhi High Court. He can be reached at rvprabhat9@gmail.com . Ashwin Kumar is an Advocate practicing in Madras High Court. He can be reached at ashwinkumos@gmail.com )

Introduction
Whilst the RDDBFI Act had been serving as the sole recovery Law for Banks/FI in the country for a decade, as it was not efficient mode of recovery, the Union Legislature deemed it to enact the The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) commencing from 21st June, 2002. The two main salient features of the SARFAESI Act was allowing the creation of Asset Reconstruction Companies to give a chance for the defaulting companies/industry to recover and survive and not go into liquidation and enabling Banks/FI to take possession of the secured asset quickly without the permission of a Court/Tribunal. Thus, the agreeable procedural difficulty involving adjudication of debt under the RDDBFI Act was dispensed, with the SARFAESI Act being one of Executory in nature unless challenged by the aggrieved person before the Tribunal. SARFAESI Act truly serves the demand to expedite recovery process. It has also been held that the two acts are rather complementary in nature and the Bank can initiate recovery procedure under SARFAESI pending Application under the RDDBFI Act. Though the Supreme Court in Mardia Chemicals v. Union of India, (2004) 4 SCC 2371 upheld the Act, nevertheless termed Section 17 of the Act as “Draconian”.
SARFAESI & AGRICULTURAL LANDS
In a first, the Union Legislature enacted Section 31 in The SARFAESI Act wherein the provisions of the Act provided certain exceptions for application of the Act. This article will focus specifically on section 31 (i) of the Act wherein it is held that the provisions of the Act will not apply to a secured interest created in an Agricultural Land.
Sections 31(i) & 2 (zf) are reproduced here for sake of ready reference.

31. Provisions of this Act not to apply in certain cases.- The provisions of this Act shall not apply to-
    (a) …
    (h) ..
    (i) any security interest created in agricultural land;

2 (zf) : “security interest” means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;
It is pertinent to note that prior to coming into force of the SARFAESI Act, there was no specific bar on taking agricultural lands as security against debts either for agricultural loans itself or as personal guarantees of directors of a company to secure a Company-Debt, as the case may be. Banks took recourse under the RDDBFI Act to recover the dues by selling the secured assets. This provision, like many others is intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court. The plain intention of the provision is to exempt agricultural land from the provisions of the Act. In other words, the creditor cannot enforce any security interest created, if such security interest is in respect of agricultural land. The exemption thus protects agriculturists from losing their source of livelihood and income i.e. the agricultural land, under the drastic provision of the Act. It is also intended to deter the creation of security interest over agricultural land as defined in Section 2 (zf) 36. Thus, security interest on agricultural land cannot be enforced in terms of the bar under Section 31 (i) of the Act.
The world “Agriculture” or “Agricultural land” is not defined under the Act, but the Hon’ble Supreme Court and various High Courts in various cases have laid down different subjective tests to determine the issue whether a particular property is agricultural in nature. The Hon’ble Supreme Court observed that the determination of the character of the land according to the purpose for which it is meant or set apart (classification) and it is a matter to be determined on the facts of each particular case. The Hon’ble Supreme Court also opined,
“what is required to be shown is the connection with an agricultural purpose and the user and not the mere possibility of user of land by some possible future owner or possessor, for an agricultural purpose”.
Subjective Tests to determine the nature and character of the Land
Commissioner of Wealth Tax, Andhra Pradesh v. Officer-in-Charge (Court of Wards) Paigah (1976) 3 SCC 864
“What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of “assets”, but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owners or possessors, so as to connect it with an agricultural purpose, the land could not be “agricultural land” for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence.” (Emphasis Supplied)
State of Karnataka Vs Shankara Textile (1995) 1 SCC 295 held that without obtaining necessary approvals/permissions, agricultural land cannot be treated as non-agricultural land for revenue purposes.
“The mere fact that at the relevant time, the land was not used for agricultural purpose or purposes subservient thereto as mentioned in Section 2(18) of the Act or that it was used for non- agricultural purpose, assuming it to be so, would not convert the agricultural land into a non-agricultural land for the purposes either of the Revenue Act or of the Act, viz., Karnataka Land Reforms Act. To hold otherwise would defeat the object of both the Acts and would, in particular, render the provisions of Section 95(2) of the Revenue Act, nugatory.”
The scope and ambit of S. 31(i) of SARFAESI came up for consideration before the Hon’ble High Court of Kerala.
“Agricultural land” is that species of land which could be said to be either used or ordinarily used for agricultural purposes. “Agricultural land” must have a connection with an agricultural user or purpose. It is on the nature of user that the meanings of agricultural purpose' andagriculture’ become relevant. Popular and authoritative Dictionaries say that “agriculture” is the art or science relating to the practices of cultivating the land. Agriculture is the process by which human skill is expended upon land. Human labour, with or without the aid of implements, tools and machines, is employed utilising the art or science of cultivating the ground. In its good sense, it means farming, horticulture, forestry etc., including the allied pursuits, preparation of land or fields in large quantities, preparation of soil, planting of seeds, raising and harvesting of crops etc. In certain shades, agriculture also includes management of livestock etc. But primarily, it is understood as the process of putting land to use in the growing of crops by employing human skill and labour upon land. As noted above from Raja Benoy Kumar Sahas Roy (supra) , agriculture includes raising, on the land, of products which have some utility either for consumption or for trade and commerce. The term ‘agriculture’ cannot be defined or understood by the nature of the products cultivated. No such classification is conceivable unless specifically provided for, having regard to the specific need to make such classification. If such classification is to provide different consequences of a piece of statute law, including its applicability, we definitely think that such classification should be found explicit on the clear expressions in that particular statute.
The primary exercises in agriculture cannot be treated as an activity alien to agriculture, even if it relates to growing and harvesting of product or crop which goes in for consumption otherwise than as an edible item. Rubber sap is a biological product generated from the rubber trees which are grown as plantations, utilising human skill and labour, by carrying out an agricultural process starting with preparing the lands for the cultivation. Rubber saplings are generated by different modes; by germination of seeds or by botanical manipulations like grafting, budding etc. Those saplings are planted, watered, provided with manure and otherwise cared for, to grow them up. The said process is nothing but ‘agriculture’. The mere fact that the product that is ultimately taken from the rubber trees is sap that goes into processing or consumption other than as food is no intelligible criteria to say that rubber sap taken from the rubber trees is not an agricultural produce, in common parlance, or that cultivation of rubber is not agriculture and still further, that lands on which rubber is cultivated is not agricultural land.”
Therefore, the Kerala High Court after sifting through various precedents, laid down the “nature of the user” test i.e. nexus between the user and land.
Nexus between classification as “Agricultural land” and “Intended usage for Agriculture”
The question as to intended usage/actual usage of agricultural land for agriculture was placed before the Hon’ble Supreme Court in Blue Coast Hotels case.
“The purpose of enacting Section 31(i) and the meaning of the term “agricultural land” assume significance. This provision, like many others is intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court. The plain intention of the provision is to exempt agricultural land from the provisions of the Act. In other words, the creditor cannot enforce any security interest created in his favour without intervention of the Court or Tribunal, if such security interest is in respect of agricultural land. The exemption thus protects agriculturists from losing their source of livelihood and income i.e. the agricultural land, under the drastic provision of the Act. It is also intended to deter the creation of security interest over agricultural land as defined in Section 2 (zf) 36. Thus, security interest cannot be created in respect of property specified in Section 31. (Note – The debtor applied to the revenue authorities for the conversion of these lands to non-agricultural lands which is pending till date due to policy decision)
Obviously, 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 undisputed position is that the total land on which the Goa Hotel was located admeasures 182225 sq. mtrs. Of these, 2335 sq. mtrs. are used for growing vegetables, fruits, shrubs and trees for captive consumption of the hotel. There is no substantial evidence about the growing of vegetables but what seems to be on the land are some trees bearing curry leaves and coconut. This amounts to about 12.8 % of the total area.”
After examining the contents of the corporate agreement, the Supreme Court observed that the mortgage was intended to cover the entire property of the Goa Hotel; the parties themselves understood that the lands in question were not agricultural; and having regard to the use for which they were put to, and the purpose of such use, they were indeed not agricultural lands. This the Hon’ble Supreme Court had laid down law in blue coasts case that mere classification as “Agricultural lands” alone would not suffice and there should be actual proof of agricultural activity on such of those lands.
The Hon’ble Supreme Court in the case of Indian Bank vs Pappireddiar & another laid down a subjective test rule of determination of nature of the land on the basis of totality of facts of every case.
“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.”
However, the Supreme Court finally held that the Division Bench of Madras High Court has failed to adjudicate on the basic issue as to whether the land in respect of which the Security Interest was created, was Agricultural in nature. For the aforesaid reason, the Supreme Court set aside the judgment of High Court and remanded the matter back for being considered afresh.
So it can be understood that that there is no explicit bar on Banks/FI to create mortgage on an Agricultural land but just that SARFAESI proceedings shall not apply to effect recovery of debt secured by an Agricultural Land. The banks could only have “one bite at the cherry” under the RDDB Act.
It is clear that the Legislature wanted to protect the interest of the farmers and not put their livelihoods dependent on agricultural lands under stress from the extraordinary provisions of SARFAESI Act wherein lands can be taken by the Banks without the intervention of Courts. Therefore S. 31 (i) R/W S. 2 (zf) was to dissuade the banks from taking agricultural lands as security in the first place and such lands if taken as security will not amount to a “security interest” in terms of S. 2(zf) and Section 31(i) therefore SARFAESI provisions cannot be invoked at all.
What can be discerned from the above cases is that i) It is not clear as to whether the land is ‘agricultural’ by its very nature or is based on activity performed by a person; ii) What is the ‘Relevant date’ for the purposes of subjecting the land to this test of whether it is an agricultural land or not, i.e. whether the relevant date is the ‘date of creation of security interest or mortgage’ or it is ‘date on which loan account goes NPA’ or ‘date on which SARFAESI proceedings are initiated’; iii) What is decisive role of Classification of land in patta, khasra, or revenue records, iv) what is evidentiary value of the documents showing agricultural activity on land throughout the years before or after relevant time, for ex – availing of free power for the land, exemption of income under Income Tax etc.
As answers to all the above mentioned questions is fact based, it gives an opportunity to the unscrupulous borrowers as well as sometimes the banks to act contrary to the intention of the legislature. The subjective tests laid down by the Courts are not enough to protect the intent of the legislature, as time and again it is seen that unscrupulous borrowers as well as creditors use the loopholes in one way or the other to hoodwink the banks and/or deceive the bonafide buyers at the stage of recovery.
After coming into the force of Act 54 of 2002 (SARFAESI Act), the wilful defaulters or NPA account holders are taking stock defence to claim that the property offered as security is agricultural in nature and hence, is exempted from the provisions of the SARFAESI Act.
For instance, the following illustrations would show how the banks as well as unscrupulous borrowers use the subjective tests and exception to their advantage:
i) A borrower could mortgage vacant ‘agricultural land’ and take money from the banks, however, after successful mortgage, may resort to agricultural activity on the land and take the defence of exception under Section 31(i) of the SARFAESI Act, when the Bank actually forecloses the property at recovery stage.
ii) The bank may also sell a vacant land which is predominantly ‘agricultural’ in nature without mentioning it to be ‘agricultural land’, in effect bypassing the intent of the legislature to keep agricultural lands out of SARFAESI proceedings.
iii) Property which was mortgaged prior to coming into force of the SARFAESI Act, 2002, there was no inkling that there will be a bar under a new enactment for selling a particular nature of property i.e. ‘agricultural land’. The documents which the bank would have taken as security could mostly be title documents and opinion from the lawyer on the title of the property, but not with respect to the nature of property.
iv) There are cases where Banks would have taken “Agricultural Lands” for security for loans prior to 2002 and would contemplate invoking provisions of SARFAESI after coming into force of the SARFAESI Act. In many cases even the agricultural lands given as security would have lost their character as agricultural lands due to inactivity. In such cases where no farming activity had taken place for years and years, there is no question of livelihood of farmers being taken away or put under stress.
v) If the relevant date for the purposes of determining nature of agricultural land is taken to be ‘date of creation of security interest’, then if on the date of creation of security interest the land was agricultural, Section 2(zf) read with Section 31(i) of SARFAESI Act, prevents creation of such interest for the purposes of bringing an action under SARFAESI Act. On the flip side, if the relevant date is considered as the present date of bringing an action under SARFAESI Act, the borrowers may deceive by showing ongoing agricultural activity on the land despite not being the case when the land was given for mortgage.
In a recent case, the Madras High Court in Parsn Medicial Plants Pvt. Ltd. V. Indian Bank, W.P. No. 14553/2017, held that : “To ascertain the true character and the nature of the land, it must be seen whether the land has been put to use for agricultural purposes for a reasonable span of time prior to the relevant date and further whether on the relevant date the land was intended to be put to use for agricultural purposes for a reasonable span of time.”
The said case has laid down another subjective test to see whether the land was put to use for agricultural purposes for a ‘reasonable span of time prior to the relevant date’ and ‘whether on the relevant date the land was intended to be put to use for agricultural purposes for a reasonable span of time’. Therefore, again, the issue of determination of ‘relevant date’ becomes important.
Though not discussed, but an objective test to determine the relevant period for consideration whether a land is agricultural or not, can be the determination of nature of land and/or activity on the date of invocation of SARFAESI proceedings or declaration of account as NPA and also considering whether agricultural activity was being carried out for a reasonable period of time before and after such relevant date. This is more reasonable than than considering the date of creation of mortgage for determining the nature of land/activity as lot of time would have passed from that respective date and nature of activity/inactivity would provide a window of opportunity to borrowers to take advantage of loophole and escape the clutches of SARFAESI proceedings.
In light of the various judgments of Supreme Court and High Courts, it is manifest that the lack of definition of ‘agricultural land’ in SARFAESI ACT as well as lack of an objective test to determine what is agricultural land and relevant time for doing so, both the intent of the legislation ‘SARFAESI Act’ as well as the intent of the legislature in protecting livelihood of farmers are getting defeated.
As George Herbert put it– “A Good judge conceives quickly, judges slowly”. It is expected that in an appropriate case, the Hon’ble Supreme Court deals with the question on first principle basis and lays down an objective test for determining what is an ‘agricultural land’ and ‘relevant time’ of such determination, so as to bring clarity and minimise the scope of leverage provided to unscrupulous borrowers.

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