Note: This blog only provides the views on the complicated issues under the Recovery Laws in India and no part of publication be reproduced or used without the expression persmission from the author and the views can not be taken as authoritative.

1/28/11

Civil Court’s jurisdiction in respect of SARFAESI proceedings?

The object of SARFAESI Act, 2002 is to enable the Banks to recover their dues without resorting to Civil Court for obtaining decree and consequential execution in accordance with the provisions of Civil Procedure Code. It is known fact that a proceeding initiated in a Civil Court can be prolonged unreasonably and everybody is aware of the delay in traditional courts in India. As such, in accordance with the object of providing speedy mode of recovery for the Banks in respect of secured loans, section 34 contains a Bar on Civil Courts in entertaining suits in respect of the matter in which the Bank has initiated a proceeding under SARFAESI Act, 2002. In view of many judgments of constitutional courts from time to time under Article 227 of Constitution of India, it is settled that the Civil Court has no jurisdiction to entertain any proceeding or suit in a matter in which the Bank has initiated proceedings under SARFAESI Act, 2002. However, as per the judgment rendered by the Apex Court in Mardia Chemicals Case, there can be exception and in exceptional cases the Civil Court can entertain suits in respect of the subject of the matter in which the Bank has initiated steps under the provisions of the Act. When we see the reason as to why the jurisdiction of Civil Courts are not completely barred under section 34 of the Act as per the judgment in Mardia Chemicals Case in the light of section 17, I don’t think that it is because of getting certain issues established only in ‘Trial’. There were some judgments and it is felt normally that disputed and complicated facts can only be decided by a Civil Court in a Trial. If we apply the same principle, I don’t think that the Tribunals like Debt Recovery Tribunal and Company Law Board can effectively function as intended. Nothing prevents the Tribunals in summoning witnesses and recording evidence in appropriate cases and if these procedures are made compulsory even in Tribunals, then, there will not be any difference between the Civil Court and the Tribunal. There may be cases where a third party or person is being troubled by the Bank under SARFAESI Act, 2002 and even in such cases, the legislature has intended the aggrieved to approach the Debt Recovery Tribunal only as section 17 provides a right to ‘any other person’ including borrower. There can be some other cases where genuinely the issues are to be settled by a Civil Court and complicated succession issues can be taken as an example of this kind. Though, the issue is not addressed so far straight away according to me, the courts discourage the Civil Courts in entertaining suits in respect of the matters in which the Bank has initiated proceedings under SARFAESI Act, 2002. The reason behind the scope for exceptional Civil Court’s jurisdiction should have been elaborated and it will certainly require clarification. Otherwise, there should be a complete Bar on Civil Court’s jurisdiction in respect of a SARFAESI proceeding unless the issue is relegated to the Civil Court by the Tribunal itself. It’s a very complicated issue under SARFAESI Act, 2002.

Dealing with one of such cases and holding against the Civil Court’s jurisdiction in the light of the law laid down by the Hon’ble Apex Court in Mardia Chemicals Case, the Hon’ble Bombay High Court in State Bank of India Vs. Smt.Jigishaben B.Sanghavi & Others, CDJ 2010 BHC 2688, was pleased to observe as follows:8

“20. Where as in the present case, the grievance by a third person is that: (i) There was no mortgage; (ii) There was no mortgage by the HUF; (iii) The mortgage, if any, is illegal in relation to the share alleged to be that of the HUF; and (iv) No action had been instituted against the HUF before the Tribunal; these are all grounds of challenge which, in substance, can be asserted before the Debts Recovery Tribunal. These are matters which the Debts Recovery Tribunal is empowered by or under the Act to determine. None of the grounds which are sought to be urged in the plaint fall outside the province and jurisdiction of the Debts Recovery Tribunal. Once we come to that conclusion, the necessary corollary is that recourse to proceedings in the form of a civil suit is barred by Section 34.

21. The case, however, which has been sought to be established in these proceedings on behalf of the original Plaintiffs is that the Plaintiffs have in the averments in the plaint brought their case within the purview of the exception carved out by the Supreme Court in Mardia Chemicals. Now, as we have stated earlier, in determining whether such a plea has to be accepted, the Plaint as a whole has to be read. As the Supreme Court observed in Popat and Kotecha (supra), a plaint cannot be compartmentalized or dissected, nor can the averments be read in isolation. The pleading has to be construed as a whole. In Mardia Chemicals, the Supreme Court held that “to a very limited extent, the jurisdiction of the Civil Court can also be invoked” (at para 51, page 2392). The limited exception which is carved out by the Supreme Court is where the action of the secured creditor is alleged to be fraudulent or where the claim of the secured creditor is so absurd and untenable that it would not require any probe whatsoever. Similarly, the Supreme Court held that an exception would be carved out to the extent the scope is permissible to bring an action in a Civil Court in a case involving an English mortgage. In that context, the Supreme Court reiterated the principle which was enunciated by the Madras High Court that a mortgagor can come to the Court before sale with an injunction for staying the sale if there are materials to show that the power of sale is being exercised in a fraudulent or improper manner contrary to the terms of the mortgage. But even in such a case, the pleadings in an action for restraining a sale by a mortgagee must “clearly disclose” a fraud or irregularity on the basis of which the relief is sought.

21A. These observations of the Supreme Court emphasize that the exception which is carved out is a limited exception. Like all exceptions, this exception must be strictly construed. A borrower or a third party cannot be permitted to defeat or to render nugatory the provisions of the Act merely by a stray reference to an allegation of fraud or, as in the present case, by an averment in paragraph 15 of the plaint of “a systematic fraud”. The entirety of the plaint has to be construed. Essentially, in the present case, the averments in the plaint are that: (i) The HUF was a co-owner/tenant in common of the residential flat; (ii) The Bank has taken recourse to proceedings for recovery to which the HUF was not a party; (iii) The Plaintiffs had, in the course of the recovery proceedings, raised an objection before the Recovery Officer to the tenability of the action taken by the Bank; (iv) The Bank had taken recourse to its remedy under the Securitization Act without awaiting the result of the objection raised by the Plaintiffs; (v) The action under Section 13(2) was initiated in disregard to the provisions of the Securitization Act; (vi) The mortgage executed by the Second, Third and Fourth Defendants was defective because the original Share Certificates were not with the Bank; (vii) The First Defendant had no security interest and no secured assets and, therefore, was not entitled to invoke the provisions of Subsection (4) of Section 13 against the right claimed by the HUF; (viii) A ‘systematic fraud’ was played by the First Defendant to pressurize the Plaintiffs; and (ix) There was an absence of legal necessity which would vitiate the mortgage alleged to have been created by the Second Defendant as Karta of the HUF. The reliefs which are sought in the suit have already been adverted to earlier. These averments, when construed in their entirety, would reveal that the grievance which the Plaintiffs have in the suit is in respect of the validity of the mortgage which is alleged to have been executed by the Second Defendant as Karta of the HUF and of the tenability of the action adopted by the Bank under the Securitization Act, so as to meet the interest of the HUF claimed in the residential flat. The Plaintiffs as third parties have sufficient recourse to challenge the lawfulness of the action of the Bank by invoking their remedies under Section 17. Thus, clearly within the meaning of Section 34, a suit in respect of any matter which the Tribunal is empowered by or under the provisions of Section 17 to determine is barred. The suit, therefore, in our view, was clearly barred by Section 34. The stray reference to an allegation of fraud in paragraph 15 of the Plaint is not sufficient to bring the case within the scope of the exception carved out by the Supreme Court in Mardia Chemicals.”

Note: the views expressed are my personal and a view point only.

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